<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1995
REGISTRATION NO. 33-54777
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
SEQUOIA SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3571 04-2738973
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
400 NICKERSON ROAD, MARLBOROUGH, MASSACHUSETTS 01752
(508) 480-0800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CORNELIUS P. MCMULLAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SEQUOIA SYSTEMS, INC.
400 NICKERSON ROAD
MARLBOROUGH, MASSACHUSETTS 01752
(508) 480-0800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
DAVID A. WESTENBERG, ESQ. JEREMY F. SWETT, ESQ. ROBERT WHILDEN, ESQ.
HALE AND DORR SEQUOIA SYSTEMS, INC. VINSON & ELKINS, L.L.P.
60 STATE STREET 400 NICKERSON ROAD 2500 FIRST CITY TOWER
BOSTON, MASSACHUSETTS MARLBOROUGH, MASSACHUSETTS 01752 1001 FANNIN
02109 HOUSTON, TEXAS 77002
(617) 526-6000 (713) 758-2222
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and certain
other conditions under the Merger and Stock Purchase Agreement described herein
are met or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
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- --------------------------------------------------------------------------------
<PAGE>
SEQUOIA SYSTEMS, INC.
CROSS-REFERENCE SHEET SHOWING LOCATIONS IN THE PROSPECTUS
OF THE RESPONSES TO THE ITEMS OF FORM S-4
(PURSUANT TO ITEM 501 OF REGULATION S-K)
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FORM S-4
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- -------------------------------------------
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A. INFORMATION ABOUT THE
TRANSACTION
1.Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Facing Page; Cross Reference Sheet; Outside
Front Cover Page of Proxy
Statement/Prospectus
2.Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front Cover Page of Proxy Statement/
Prospectus; Available Information; Table of
Contents
3.Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information.................. Summary; Risk Factors; Selected Historical
and Unaudited Pro Forma Financial Data;
Unaudited Pro Forma Combined Condensed
Financial Statements
4.Terms of the Transaction........ Summary; The Merger; The Merger Agreement
5.Pro Forma Financial Information. Unaudited Pro Forma Combined Condensed
Financial Data
6.Material Contacts with the
Company Being Acquired....... Summary; The Merger; The Merger Agreement;
Stock Option Agreements
7.Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters................. Not Applicable
8.Interests of Named Experts and
Counsel...................... Legal Matters; Experts
9.Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10.Information with Respect to S-3
Registrants....................... Not Applicable
11.Incorporation of Certain
Information by Reference..... Not Applicable
12.Information with Respect to S-2
or S-3 Registrants........... Available Information; Incorporation of
Certain Documents by Reference; Summary;
Sequoia Systems, Inc.; Selected Historical
and Unaudited Pro Forma Financial Data
13.Incorporation of Certain Incorporation of Certain Documents by
Information by Reference..... Reference
14.Information with Respect to
Registrants Other Than S-2 or
S-3 Registrants.............. Not Applicable
C. INFORMATION ABOUT THE COMPANY
BEING ACQUIRED
15.Information with Respect to S-3
Companies.................... Not Applicable
16.Information with Respect to S-2
or S-3 Companies............. Not Applicable
</TABLE>
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<TABLE>
<CAPTION>
FORM S-4
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- ----------------------------------------
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17.Information with Respect to
Companies Other Than S-2 or S-3
Companies...................... Available Information; Incorporation of
Certain Documents by Reference; Summary;
SPCO, Inc.; Selected Historical and
Unaudited Pro Forma Financial Data
D. VOTING AND MANAGEMENT INFORMATION
18.Information if Proxies, Consents
or Authorizations are to be
Solicited...................... Outside Front Cover Page of Proxy
Statement/ Prospectus; Incorporation of
Certain Documents by Reference; Summary;
The Meeting; The Merger; Sequoia Systems,
Inc.; Comparison of Stockholder Rights
19.Information if Proxies, Consents
or Authorizations are not to be
Solicited or in an Exchange
Offer.......................... Not Applicable
</TABLE>
<PAGE>
February 27, 1995
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Sequoia Systems, Inc. ("Sequoia"). The Special Meeting will be held at the
Radisson Inn, 75 Felton Street, Marlborough, Massachusetts on Wednesday, March
29, 1995 at 9:00 a.m.
At this important meeting, you will be asked to approve the issuance of
approximately 5,273,000 shares of Sequoia Common Stock in connection with
Sequoia's acquisition of Texas Microsystems, Inc. and certain affiliated
entities (collectively, the "TMI Group"), as described in the accompanying
Proxy Statement/Prospectus.
You will also be asked to approve an amendment to Sequoia's Restated
Certificate of Incorporation increasing the number of authorized shares of
Sequoia Common Stock from 25,000,000 shares to 35,000,000 shares.
Other matters on which your votes will be requested at the Special Meeting
are (a) the election of two Class I Directors to the Board of Directors; (b)
approval of amendments to Sequoia's 1986 Incentive Stock Option Plan and 1986
Supplemental Stock Option Plan; (c) approval of amendments to the 1993 Employee
Stock Purchase Plan; (d) approval of the 1995 Outside Directors' Stock Option
Plan; and (e) ratification of the appointment of Sequoia's independent
accountants for the fiscal year ending June 30, 1995.
The accompanying Proxy Statement/Prospectus provides a description of the
proposals to be presented at the Special Meeting and extensive information
concerning Sequoia and the TMI Group. Please give this information your careful
attention.
SEQUOIA'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TMI GROUP
TRANSACTION AND BELIEVES THAT IT IS IN THE BEST INTERESTS OF SEQUOIA AND ITS
STOCKHOLDERS. THE BOARD RECOMMENDS A VOTE FOR THE TMI GROUP TRANSACTION AND THE
OTHER PROPOSALS TO BE CONSIDERED AT THE SPECIAL MEETING. THE REASONS FOR THE
BOARD'S RECOMMENDATION AND A DESCRIPTION OF CERTAIN FACTORS THAT STOCKHOLDERS
SHOULD CONSIDER IN DECIDING HOW TO VOTE AT THE SPECIAL MEETING ARE SET FORTH IN
THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
Your vote is important regardless of the number of shares you own. Please be
sure you are represented at the meeting, whether or not you plan to attend, by
carefully reading the enclosed proxy materials and then signing, dating and
mailing the proxy card promptly. A postage-paid return envelope is enclosed for
your convenience.
Sincerely,
Francis J. Hughes, Jr.
Chairman
<PAGE>
SEQUOIA SYSTEMS, INC.
400 Nickerson Road
Marlborough, Massachusetts 01752
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
February 27, 1995
To the Stockholders of
SEQUOIA SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Sequoia Systems, Inc., a Delaware corporation ("Sequoia"), will be
held on Wednesday, March 29, 1995, at the Radisson Inn, 75 Felton Street,
Marlborough, Massachusetts 01752, commencing at 9:00 a.m., local time, for the
following purposes:
1. To approve the issuance of approximately 5,273,000 shares of Common Stock,
par value $.40 per share, of Sequoia ("Sequoia Common Stock") pursuant to
the Merger and Stock Purchase Agreement, dated as of November 9, 1994 and
amended as of February 7, 1995 and February 23, 1995, among Sequoia, Sequoia
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary
of Sequoia ("Sub"), SPCO, Inc., a Delaware corporation ("SPCO"), and
Keystone International, Inc., a Delaware corporation ("Keystone"), pursuant
to which, among other things: (a) Sub will be merged with and into SPCO,
which will be the surviving corporation, and SPCO will become a wholly-owned
subsidiary of Sequoia; (b) each outstanding share of Common Stock, par value
$.01 per share, of SPCO will be converted into the right to receive .5015674
share of Sequoia Common Stock, for an aggregate of 4,447,649 shares of
Sequoia Common Stock, subject to certain escrow obligations; (c) Sequoia
will purchase from Keystone all shares of common stock of Texas
Microsystems, Inc., a Delaware corporation ("TMI"), and Texas Micro
Electronics, Inc., a Delaware corporation, owned by Keystone in exchange for
an aggregate of 752,351 shares of Sequoia Common Stock; and (d) certain
outstanding options to purchase shares of the common stock of TMI will be
exchanged for an aggregate of approximately 73,000 shares of Sequoia Common
Stock, subject to certain escrow obligations (collectively, the "Acquisition
Proposal");
2. To approve an amendment to the Restated Certificate of Incorporation of
Sequoia increasing the number of authorized shares of Sequoia Common Stock
from 25,000,000 shares to 35,000,000 shares (the "Charter Amendment");
3. To elect Dean C. Campbell and John F. Smith as the Class I Directors on the
Board of Directors of Sequoia;
4. To approve amendments to Sequoia's 1986 Incentive Stock Option Plan and 1986
Supplemental Stock Option Plan increasing the aggregate number of shares of
Sequoia Common Stock available for issuance under such plans from 2,425,000
to 3,700,000 shares and providing that no employee may receive options for
more than 500,000 shares in any calendar year;
5. To approve amendments to Sequoia's 1993 Employee Stock Purchase Plan
increasing from 250,000 to 750,000 the number of shares available for
issuance under such plan and increasing the term of such plan for an
additional two years;
6. To approve Sequoia's 1995 Outside Directors' Stock Option Plan; and
7. To ratify the appointment by the Board of Directors of Sequoia of Coopers &
Lybrand, L.L.P. as Sequoia's independent accountants for the fiscal year
ending June 30, 1995.
<PAGE>
The Board of Directors of Sequoia has fixed the close of business on January
30, 1995 as the record date for the determination of stockholders entitled to
notice of and to vote at the Special Meeting and any adjournment or
postponement thereof.
The affirmative vote of the holders of a majority of the shares of Sequoia
Common Stock present or represented at the Special Meeting is necessary to
approve each of the matters to be considered at the Special Meeting, except
that the affirmative vote of the holders of a majority of the outstanding
shares of Sequoia Common Stock is necessary to approve the Charter Amendment
and the affirmative vote of the holders of a plurality of the votes cast is
necessary to elect the two Class I Directors, provided, in each instance, that
a quorum is present. Holders of Sequoia Common Stock are not entitled to
dissenters' appraisal rights in connection with the Acquisition Proposal.
Sequoia's 1994 Annual Report to Stockholders was mailed to all Sequoia
stockholders on or about September 23, 1994.
All stockholders are cordially invited to attend the Special Meeting in
person. However, to ensure your representation at the Special Meeting, after
you have carefully reviewed the enclosed proxy materials, you are urged to sign
and return the enclosed proxy card as promptly as possible in the enclosed
postage prepaid envelope. If you attend the meeting and desire to revoke your
proxy and vote in person, you may do so. In any event, a proxy may be revoked
at any time before its exercise in the manner specified herein.
Sincerely,
Jeremy F. Swett, Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR
PROXY AND VOTE IN PERSON. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS
EXERCISE IN THE MANNER DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS.
2
<PAGE>
PROXY STATEMENT/PROSPECTUS
----------------
SEQUOIA SYSTEMS, INC. SPCO, INC.
400 NICKERSON ROAD C/O TEXAS MICROSYSTEMS,
MARLBOROUGH, MASSACHUSETTS 01752 INC.
TEL: (508) 480-0800 5959 CORPORATE DRIVE
HOUSTON, TEXAS 77036
TEL: (713) 541-8200
PROXY STATEMENT for the and PROSPECTUS for Issuance
Special Meeting of Stockholders of
of Sequoia Systems, Inc. to be Shares of Sequoia Common
held on March 29, 1995 Stock,
$.40 par value
This Proxy Statement/Prospectus is being furnished to holders of Common
Stock, par value $.40 per share ("Sequoia Common Stock"), of Sequoia Systems,
Inc., a Delaware corporation ("Sequoia"), in connection with the solicitation
of proxies by the Board of Directors of Sequoia (the "Sequoia Board") for use
at the Special Meeting of Stockholders of Sequoia (the "Special Meeting") to be
held on Wednesday, March 29, 1995 at 9:00 a.m., local time, and at any
adjournments or postponements thereof.
This Proxy Statement/Prospectus is also being furnished to holders of Common
Stock, par value $.01 per share ("SPCO Common Stock"), of SPCO, Inc., a
Delaware corporation ("SPCO"), in connection with the solicitation of the
written consent of such stockholders (the "SPCO Written Consent") in accordance
with Section 228 of the Delaware General Corporation Law ("DGCL") by the Board
of Directors of SPCO (the "SPCO Board") relating to the Merger (as defined
herein) and the other transactions contemplated by the Merger and Stock
Purchase Agreement (the "Acquisition Agreement"), dated as of November 9, 1994
and amended as of February 7, 1995 and February 23, 1995, among Sequoia
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Sequoia ("Sub"), SPCO, and Keystone International, Inc., a Delaware corporation
("Keystone"). The Acquisition Agreement is attached hereto as Annex A and
incorporated herein by reference.
This Proxy Statement/Prospectus constitutes a prospectus of Sequoia with
respect to approximately 5,273,000 shares of Sequoia Common Stock to be issued
in exchange for (i) all outstanding shares of SPCO Common Stock in connection
with the merger of Sub with and into SPCO (the "Merger"), (ii) all unvested
options to acquire Common Stock, $.01 par value per share ("TMI Common Stock"),
of Texas Microsystems, Inc., a Delaware corporation and a majority-owned
subsidiary of SPCO ("TMI"), and (iii) all shares of (a) TMI Common Stock and
(b) Common Stock, $.01 par value per share, of Texas Micro Electronics, Inc.
("TME"), a Delaware corporation and a majority-owned subsidiary of TMI (the
"TME Common Stock"), owned by Keystone (the "Keystone Shares") (collectively,
the "Transaction"). All information contained in this Proxy
Statement/Prospectus relating to Sequoia has been supplied by Sequoia, all
information relating to SPCO, TMI and TME has been supplied by SPCO and all
information relating to Keystone has been supplied by Keystone.
See "Risk Factors" for certain information that should be considered by
stockholders of both Sequoia and SPCO. See "Glossary of Certain Defined Terms"
for definitions of certain terms used in this Proxy Statement/Prospectus.
----------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS 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.
This Proxy Statement/Prospectus, the accompanying form of proxy (for Sequoia
stockholders) and the accompanying form of SPCO Written Consent (for SPCO
stockholders) are first being mailed to the respective stockholders of Sequoia
and SPCO on or about February 27, 1995.
The date of this Proxy Statement/Prospectus is February 27, 1995.
<PAGE>
AVAILABLE INFORMATION
Sequoia is subject to the informational 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 "Commission"). The reports, proxy
statements and other information filed by Sequoia with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60601. Copies of such material also can be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549 at prescribed rates. The
Sequoia Common Stock is traded on the Nasdaq National Market. Reports and other
information concerning Sequoia can also be inspected at the offices of the
National Association of Securities Dealers, Inc., Market Listing Section, 1735
K Street, N.W., Washington, D.C. 20006.
Sequoia has filed with the Commission a Registration Statement on Form S-4
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of Sequoia Common Stock to be issued pursuant
to the Acquisition Agreement. This Proxy Statement/Prospectus does not contain
all the information set forth in the Registration Statement. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Proxy Statement/Prospectus or in
any document incorporated by reference in this Proxy Statement/Prospectus as to
the contents of any contract or other document referred to herein or therein
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 or such other document, each such statement being qualified in all
respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following Sequoia documents, heretofore filed by Sequoia with the
Commission, are incorporated by reference in this Proxy Statement/Prospectus:
1. Sequoia's Annual Report on Form 10-K for the fiscal year ended June
30, 1994, filed with the Commission on September 7, 1994, as amended by
Amendment No. 1 thereto on Form 10-K/A filed with the Commission on October
27, 1994, and as further amended by Amendment No. 2 thereto on Form 10-K/A
filed with the Commission on February 21, 1995;
2. Sequoia's Quarterly Report on Form 10-Q for the three months ended
October 2, 1994 filed with the Commission on November 16, 1994;
3. Sequoia's Quarterly Report on Form 10-Q for the three months ended
January 1, 1995 filed with the Commission on February 14, 1995; and
4. The description of Sequoia's capital stock contained in Sequoia's
Registration Statement on Form 8-A filed with the Commission on January 18,
1990.
All documents and reports subsequently filed by Sequoia pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and
to be part hereof from the date of filing of such documents or reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which 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.
2
<PAGE>
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE RELATING
TO SEQUOIA WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER OF SEQUOIA COMMON STOCK, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE,
DIRECTED TO SEQUOIA SYSTEMS, INC., 400 NICKERSON ROAD, MARLBOROUGH,
MASSACHUSETTS 01752, ATTENTION: SECRETARY (TELEPHONE NUMBER (508) 480-0800). IN
ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY REQUEST SHOULD BE MADE
BY MARCH 22, 1995. SEQUOIA'S 1994 ANNUAL REPORT TO STOCKHOLDERS WAS MAILED TO
ALL SEQUOIA STOCKHOLDERS ON OR ABOUT SEPTEMBER 23, 1994.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY SEQUOIA, SPCO, TMI, TME OR ANY OTHER
PERSON. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF SEQUOIA, SPCO, TMI OR TME SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
Sequoia, Topix and Total Availability Solutions are registered trademarks
of Sequoia.
Pick is a trademark of Pick Systems, Inc.
UNIX and Novell are registered trademarks of Novell, Inc.
Informix is a registered trademark of Informix Software, Inc.
UniData is a registered trademark of Unidata, Inc.
UniVerse is a registered trademark of VMark Software, Inc.
Oracle is a registered trademark of Oracle Corporation.
Texas Micro and Texas Microsystems are registered trademarks of TMI.
OmniRACK and XpressRack are trademarks of TMI.
3
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TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
SUMMARY................................................................... 6
RISK FACTORS.............................................................. 13
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA................ 19
COMPARATIVE PER SHARE DATA................................................ 23
MARKET PRICE INFORMATION AND DIVIDEND POLICY.............................. 24
THE MEETING............................................................... 25
General................................................................. 25
Matters To Be Considered................................................ 25
Voting at the Special Meeting; Record Date.............................. 25
Proxies................................................................. 26
SPCO Written Consent.................................................... 27
ITEM 1--APPROVAL OF THE TRANSACTION....................................... 28
Background of the Transaction........................................... 28
Reasons for the Transaction; Recommendations of the Boards of Directors. 29
Opinion of Sequoia's Financial Advisor.................................. 31
Interests of Certain Persons in the Transaction......................... 33
Intentions to Vote...................................................... 33
Certain Arrangements Regarding the Sequoia Board Following the Transac-
tion................................................................... 33
Accounting Treatment.................................................... 33
Certain Federal Income Tax Consequences................................. 34
Federal Securities Law Consequences..................................... 35
Nasdaq National Market Quotation........................................ 36
Appraisal Rights........................................................ 36
Regulatory Approvals.................................................... 36
THE ACQUISITION AGREEMENT................................................. 36
Restructuring Prior to the Transaction.................................. 36
The Transaction......................................................... 37
Conversion of Securities................................................ 37
Ownership of Sequoia After the Transaction.............................. 38
Representations and Warranties.......................................... 38
Certain Covenants....................................................... 39
Registration Rights..................................................... 39
Representation on the Sequoia Board..................................... 39
No Solicitation......................................................... 40
Non-Competition......................................................... 40
Employment and Advisory Arrangements with Messrs. Stewart and Patterson. 40
Related Matters After the Transaction................................... 40
Indemnification......................................................... 41
Escrow.................................................................. 41
Conditions.............................................................. 42
Stock Option and Benefit Plans.......................................... 43
Termination; Termination Fees and Expenses.............................. 43
Dispute Resolution...................................................... 44
Amendment and Waiver.................................................... 44
THE TMI GROUP............................................................. 45
Business of the TMI Group............................................... 45
</TABLE>
4
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<TABLE>
<CAPTION>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE TMI GROUP................................... 48
SEQUOIA SYSTEMS, INC. .................................................... 53
Business of Sequoia..................................................... 53
Directors and Executive Officers of Sequoia............................. 62
Security Ownership of Certain Beneficial Owners and Management.......... 67
Report of the Sequoia Compensation Committee............................ 68
Comparative Stock Performance........................................... 71
Certain Relationships and Related Transactions.......................... 71
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 72
Number, Classification and Removal of Directors......................... 72
Stockholder Actions and Meetings........................................ 72
Transactions with Interested Stockholders............................... 72
Approval of Certain Charter Amendments.................................. 73
DESCRIPTION OF SEQUOIA CAPITAL STOCK...................................... 73
General................................................................. 73
Sequoia Common Stock.................................................... 73
Sequoia Preferred Stock................................................. 74
Transfer Agent and Registrar............................................ 74
APPRAISAL RIGHTS OF SPCO STOCKHOLDERS..................................... 74
Written Demand for Appraisal............................................ 75
Other Procedures........................................................ 75
ITEM 2--AMENDMENT TO SEQUOIA'S RESTATED CERTIFICATE OF INCORPORATION...... 77
Board Recommendation.................................................... 77
ITEM 3--ELECTION OF DIRECTORS............................................. 77
Board and Committee Meetings............................................ 78
Board Recommendation.................................................... 79
ITEM 4--APPROVAL OF AMENDMENTS TO 1986 INCENTIVE STOCK OPTION PLAN AND
1986 SUPPLEMENTAL STOCK OPTION PLAN...................................... 79
Federal Income Tax Consequences......................................... 80
Board Recommendation.................................................... 81
ITEM 5--APPROVAL OF AMENDMENTS TO 1993 EMPLOYEE STOCK PURCHASE PLAN....... 81
Federal Income Tax Consequences......................................... 81
Board Recommendation.................................................... 82
ITEM 6--APPROVAL OF THE 1995 OUTSIDE DIRECTORS' STOCK OPTION PLAN......... 82
Federal Income Tax Consequences......................................... 82
Board Recommendation.................................................... 83
ITEM 7--RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS.............. 83
Board Recommendation.................................................... 84
LEGAL MATTERS............................................................. 84
EXPERTS................................................................... 84
STOCKHOLDER PROPOSALS..................................................... 84
ACCOMPANYING SEQUOIA REPORTS.............................................. 84
GLOSSARY OF CERTAIN DEFINED TERMS......................................... 85
INDEX TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS...... F-1
ANNEX A MERGER AND STOCK PURCHASE AGREEMENT............................... A-1
AMENDMENT NO. 1 TO MERGER AND STOCK PURCHASE AGREEMENT.............. A-77
AMENDMENT NO. 2 TO MERGER AND STOCK PURCHASE AGREEMENT.............. A-79
ANNEX B OPINION OF BROADVIEW ASSOCIATES, L.P. ............................ B-1
ANNEX C SECTION 262 OF THE DGCL........................................... C-1
ANNEX D 1995 OUTSIDE DIRECTORS' STOCK OPTION PLAN......................... D-1
</TABLE>
5
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/ Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained, or
incorporated by reference, in this Proxy Statement/Prospectus and the Annexes
hereto. Unless otherwise defined herein, capitalized terms used in this summary
have the respective meanings ascribed to them elsewhere in this Proxy
Statement/Prospectus. A glossary of certain defined terms appears under the
heading "Glossary of Certain Defined Terms". Unless the context otherwise
requires, (i) SPCO, TMI and TME are (after giving effect to the BriskHeat Spin-
Off described herein) collectively referred to in this Proxy
Statement/Prospectus as the "TMI Group", and (ii) all references herein to
Sequoia, SPCO, TMI and TME include their respective subsidiaries. Stockholders
are urged to read this Proxy Statement/Prospectus and the Annexes and other
documents attached hereto in their entirety.
THE COMPANIES
Sequoia
Sequoia designs, manufactures, markets and services highly modular and easily
expandable, totally available computer systems based on the UNIX operating
system. Sequoia systems are used primarily for on-line transaction processing
("OLTP") and in other interactive environments in which system availability,
fast response time and data integrity are critical. The principal executive
offices of Sequoia are located at 400 Nickerson Road, Marlborough,
Massachusetts 01752 and its telephone number is (508) 480-0800. See "Sequoia
Systems, Inc.".
The TMI Group
SPCO is a holding company and has no material net assets other than its TMI
Common Stock. The TMI Group is engaged in the business of manufacturing and
selling microcomputers and related products for use in harsh computing
environments such as telecommunications, data acquisition and process control.
The TMI Group's products are used in a variety of applications such as voice
mail systems, engine testing, central office telecommunications, data
acquisition process control and military applications. The principal executive
offices of the TMI Group are located at 5959 Corporate Drive, Houston, Texas
77242 and its telephone number is (713) 541-8200. See "The TMI Group".
As part of the transactions contemplated by the Acquisition Agreement, the
TMI Group and certain of its affiliates are engaging in a series of
transactions (the "Restructuring"). In connection with the Restructuring, SPCO
spun-off the Common Stock, $.01 par value per share (the "BriskHeat Common
Stock"), of BriskHeat Corporation, a Delaware corporation ("BriskHeat"), pro
rata among SPCO's stockholders on October 31, 1994 (the "BriskHeat Spin-Off'')
and, prior to the Closing (the "Closing") of the Transaction: (i) SPCO will
effect a 170-for-1 stock split (the "SPCO Stock Split"); (ii) certain
stockholders of TME will contribute their TME Common Stock to TMI; and (iii)
certain options to acquire TMI Common Stock have been or will be exercised and
the shares of TMI Common Stock issued upon such exercises will be exchanged for
an aggregate of 367,500 shares of SPCO Common Stock (the "TMI Option
Exchange").
As a result of the Restructuring, immediately prior to the Closing: (i) SPCO
will own approximately 85.53% of the outstanding capital stock of TMI; (ii) TMI
will own 85% of the outstanding capital stock of TME; (iii) Keystone will own
approximately 14.47% of the outstanding capital stock of TMI; and (iv) Keystone
will own 15% of the outstanding capital stock of TME. See "The Acquisition
Agreement--Restructuring Prior to the Transaction".
DATE AND PLACE OF THE SPECIAL MEETING
The Special Meeting will be held on Wednesday, March 29, 1995 at the Radisson
Inn, 75 Felton Street, Marlborough, Massachusetts 01752, commencing at 9:00
a.m., local time. See "The Meeting".
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STOCKHOLDERS ENTITLED TO VOTE
Holders of record of shares of Sequoia Common Stock at the close of business
on January 30, 1995 (the "Record Date") are entitled to notice of and to vote
at the Special Meeting. On the Record Date, there were 9,866,956 shares of
Sequoia Common Stock outstanding, each of which will entitle the holder thereof
to one vote on each matter to be acted upon or which may properly come before
the Special Meeting.
The SPCO Board intends to circulate the SPCO Written Consent in accordance
with Section 228 of the DGCL on or about the date of this Proxy
Statement/Prospectus to the holders of record of shares of SPCO Common Stock in
order to approve the Merger and the Acquisition Agreement. As of the date
hereof, there are 50,000 shares of SPCO Common Stock outstanding and 8,867,500
shares will be outstanding after giving effect to the SPCO Stock Split and the
TMI Option Exchange. Each outstanding share of SPCO Common Stock will entitle
the holder thereof to one vote in consenting or withholding consent to each
matter covered by the SPCO Written Consent. See "The Meeting--SPCO Written
Consent".
PURPOSES OF THE SPECIAL MEETING AND THE SPCO WRITTEN CONSENT
Special Meeting
The purpose of the Special Meeting is to consider and vote upon: (i) the
issuance of approximately 5,273,000 shares of Sequoia Common Stock pursuant to
the Acquisition Agreement (the "Acquisition Proposal"); (ii) an amendment to
Sequoia's Restated Certificate of Incorporation increasing the number of
authorized shares of Sequoia Common Stock from 25,000,000 shares to 35,000,000
shares (the "Charter Amendment"); (iii) the election of Dean C. Campbell and
John F. Smith as the Class I Directors of Sequoia (the "Director Proposal");
(iv) amendments to Sequoia's 1986 Incentive Stock Option Plan and 1986
Supplemental Stock Option Plan (collectively, the "Option Plans") increasing
the number of shares of Sequoia Common Stock available for issuance under the
Option Plans from 2,425,000 to 3,700,000 shares and providing that no employee
may receive options for more than 500,000 shares in any calendar year; (v)
amendments to Sequoia's 1993 Employee Stock Purchase Plan increasing from
250,000 to 750,000 the number of shares available for issuance under such plan
and increasing the term of such plan for an additional two years; (vi) adoption
of Sequoia's 1995 Outside Directors' Stock Option Plan (the "1995 Outside
Directors' Plan"); and (vii) the ratification of the appointment by the Sequoia
Board of Coopers & Lybrand, L.L.P. ("Coopers & Lybrand") as Sequoia's
independent accountants for the fiscal year ending June 30, 1995 (the
"Accountants Proposal"). See "The Meeting--Matters to be Considered".
SPCO Written Consent
The purpose of the SPCO Written Consent is to solicit the approval of the
holders of SPCO Common Stock to the Merger and the Acquisition Agreement. See
"The Meeting--SPCO Written Consent".
VOTES REQUIRED
Sequoia
Assuming that a quorum is present, the required votes at the Special Meeting
are as follows. The approval of the Acquisition Proposal will require the
affirmative vote of the holders of a majority of the outstanding shares of
Sequoia Common Stock present or represented at the Special Meeting. The
approval of the Charter Amendment will require the affirmative vote of a
majority of the outstanding shares of Sequoia Common Stock. The approval of the
Director Proposal will require the affirmative vote of a plurality of the votes
cast for the election of directors at the Special Meeting. The approval of the
amendments to the Option
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Plans and the 1993 Employee Stock Purchase Plan and the adoption of the 1995
Outside Directors' Plan (collectively, the "Plan Proposals") will require the
affirmative vote of the holders of a majority of the outstanding shares of
Sequoia Common Stock present or represented at the Special Meeting. The
ratification of the Accountants Proposal will require the affirmative vote of
the holders of a majority of the outstanding shares of Sequoia Common Stock
present or represented at the Special Meeting. The approval of the Charter
Amendment, the Director Proposal, the Plan Proposals and the Accountants
Proposal is not a condition to the approval of the Acquisition Proposal. See
"The Meeting--Voting at the Special Meeting; Record Date".
The By-laws of the National Association of Securities Dealers, Inc. ("NASD")
require a Nasdaq National Market issuer to obtain stockholder approval for any
transaction in connection with the acquisition of capital stock or assets of
another company if (i) the common stock to be issued in such transaction will
have voting power equal to or in excess of 20% of the voting power outstanding
before such issuance, or (ii) the number of shares to be issued is or will be
equal to or in excess of 20% of the number of shares of common stock
outstanding before such issuance. Sequoia proposes to issue approximately
5,273,000 shares of Common Stock in the Transaction, representing approximately
53.4% of its outstanding shares of Common Stock outstanding immediately prior
to the Transaction (based on 9,866,956 shares outstanding at January 31, 1995).
As a result, approval of the Transaction by Sequoia's stockholders is required.
SPCO
The approval of the Merger and the Acquisition Agreement by SPCO's
stockholders will require the written consent of the holders of a majority of
the outstanding shares of SPCO Common Stock. See "The Meeting--SPCO Written
Consent".
Effects of Abstentions and "Broker Non-Votes"
Shares of Sequoia Common Stock held by stockholders who abstain from voting
will be counted for determining the presence or absence of a quorum for the
transaction of business at the Special Meeting but will not be counted as votes
for or against the respective proposals. With respect to broker non-votes,
there is case law to the effect that such shares may be counted for determining
the presence or absence of a quorum, but should not be counted for purposes of
determining the number of shares voting with respect to the particular
proposal(s) on which the broker has expressly not voted. Accordingly, broker
non-votes will not be counted as voting shares of Sequoia Common Stock with
respect to the proposals considered at the Special Meeting. Since the Charter
Amendment requires the affirmative vote of a majority of the outstanding shares
of Sequoia Common Stock, an abstention or broker non-vote will have the same
effect as a vote against the Charter Amendment.
EFFECT OF THE TRANSACTION
Upon consummation of the Merger, pursuant to the Acquisition Agreement, (i)
Sub will be merged with and into SPCO, which will be the surviving corporation,
and SPCO will become a wholly-owned subsidiary of Sequoia, and (ii) each issued
and outstanding share of SPCO Common Stock will be converted into the right to
receive .5015674 share of Sequoia Common Stock. Stockholders of SPCO will
receive an aggregate of 4,447,649 shares of Sequoia Common Stock in the Merger.
See "The Acquisition Agreement--The Transaction" and "--Conversion of
Securities".
Simultaneously with the Merger, pursuant to the Acquisition Agreement,
Sequoia will purchase from Keystone all of the Keystone Shares in exchange for
752,351 shares of Sequoia Common Stock.
In addition, Sequoia will issue at the Effective Time (as herein defined), in
exchange for all unvested options to acquire TMI Common Stock (the "Unvested
TMI Options"), such number of shares of Sequoia Common Stock as is equal in
value, based on the closing sales price per share of Sequoia Common Stock on
the Nasdaq National Market on the date of Closing (the "Closing Date"), to the
value of the Unvested TMI Options. The value of the Unvested TMI Options will
be determined by the Black-Scholes method of option valuation on the Closing
Date. Sequoia estimates that approximately 73,000 shares of Sequoia Common
Stock will be issued in exchange for the Unvested TMI Options.
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Fractional shares of Sequoia Common Stock will not be issued in connection
with the Transaction. Persons otherwise entitled to a fractional share of
Sequoia Common Stock will be paid the value of such fraction in cash based on
the closing sales price per share of Sequoia Common Stock on the Nasdaq
National Market on the Closing Date. See "The Acquisition Agreement--The
Transaction" and "--Conversion of Securities".
Based upon the capitalization of Sequoia as of January 31, 1995 and the
expected capitalization of SPCO at the Effective Time, immediately after the
consummation of the Transaction the stockholders of SPCO, including holders of
options to acquire TMI Common Stock who participate in the TMI Option Exchange
and holders of Unvested TMI Options, will own an aggregate of approximately
29.9%, and Keystone will own approximately 5.0%, of the then outstanding shares
of Sequoia Common Stock. See "The Acquisition Agreement--Ownership of Sequoia
After the Transaction".
INDEMNIFICATION
The Acquisition Agreement provides that the stockholders of SPCO, holders of
Unvested TMI Options and Keystone (the "Indemnifying Persons") shall, jointly
and severally, indemnify and hold harmless, in the manner specified in the
Acquisition Agreement, Sequoia, the Continuing Corporation (as defined herein)
and its subsidiaries against Damages (as defined herein) arising from: (i) a
misrepresentation or breach of warranty, (ii) failure to perform any covenants
and (iii) the BriskHeat Spin-Off. See "The Acquisition Agreement--
Indemnification".
ESCROW
In order to secure the indemnification obligations of the Indemnifying
Persons, 10% of the shares of Sequoia Common Stock to be issued in the
Transaction will be held in escrow. See "The Acquisition Agreement--Escrow".
RECOMMENDATIONS; FAIRNESS OPINION
The Sequoia Board has unanimously approved the Acquisition Agreement and the
issuance of shares of Sequoia Common Stock in the Transaction and unanimously
recommends that holders of Sequoia Common Stock vote FOR the Acquisition
Proposal. In making its recommendation with respect to the Transaction, the
Sequoia Board considered, among other things, the opinion of Broadview
Associates, L.P. ("Broadview"), Sequoia's financial advisor, delivered to the
Sequoia Board in writing on November 9, 1994, to the effect that the issuance
of shares of Sequoia Common Stock in the Transaction is fair from a financial
point of view to Sequoia's stockholders.
A copy of the opinion of Broadview, which sets forth the assumptions made,
matters considered and scope of Broadview's review, is attached to this Proxy
Statement/Prospectus as Annex B and should be read in its entirety. See "Item
1--Approval of the Transaction--Opinion of Sequoia's Financial Advisor", which
also contains a description of the fees to be paid to Broadview.
The SPCO Board has unanimously approved the Acquisition Agreement and
unanimously recommends that holders of SPCO Common Stock approve the Merger and
the Acquisition Agreement. In making its recommendation, the SPCO Board did not
obtain a fairness opinion with respect to the proposed Transaction but
considered, among other things, the perceived benefits to SPCO and its
stockholders of the Merger, including enhanced liquidity with respect to such
stockholders' investment in SPCO.
For a discussion of the factors considered by the Sequoia Board and the SPCO
Board in reaching their decisions, see "Item 1--Approval of the Transaction--
Reasons for the Transaction; Recommendations of the Boards of Directors".
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INTENTIONS TO VOTE; INTERESTS OF CERTAIN PARTIES
As of January 31, 1995, directors and executive officers of Sequoia and their
affiliates may be deemed to beneficially own approximately 7.2% of the
outstanding shares of Sequoia Common Stock. Each director and executive officer
of Sequoia has advised Sequoia that he intends to vote or direct the vote of
all the shares of Sequoia Common Stock over which he has voting control FOR
approval of the Acquisition Proposal, the Charter Amendment, the Director
Proposal, the Plan Proposals and the Accountants Proposal.
As of January 31, 1995, directors and executive officers of SPCO and their
affiliates may be deemed to beneficially own 100% of the outstanding shares of
SPCO Common Stock. Each director and executive officer of SPCO has indicated
that he intends to consent to (and to cause all shares of SPCO Common Stock
over which he has voting control to consent to) approval of the Merger and the
Acquisition Agreement. Therefore, approval of the Merger and the Acquisition
Agreement by the SPCO stockholders should be considered highly likely. However,
since closing of the Transaction is subject to the fulfillment or waiver of the
conditions contained in the Acquisition Agreement, closing of the Transaction
cannot be guaranteed. See "The Acquisition Agreement--Conditions".
As part of the Transaction, W. Wayne Patterson and J. Michael Stewart,
officers and controlling stockholders of the TMI Group, will enter into
agreements with Sequoia which become effective at the Closing. See "The
Acquisition Agreement--Employment and Advisory Arrangements with Messrs.
Stewart and Patterson".
EFFECTIVE TIME OF THE TRANSACTION
It is anticipated that the Transaction will become effective as promptly as
practicable after Sequoia's stockholders approve the Acquisition Proposal and
SPCO's stockholders approve the Merger and the Acquisition Agreement and all
other conditions to the Transaction have been satisfied or waived, including
the filing of a Certificate of Merger in the State of Delaware (the "Effective
Time"). It is anticipated that, assuming all conditions are met, the
Transaction will close shortly after the Special Meeting.
DIRECTORS AND EXECUTIVE OFFICERS OF SEQUOIA AFTER THE TRANSACTION
Pursuant to the Acquisition Agreement, the Sequoia Board at the Effective
Time will consist of seven directors and, as of the Effective Time, the Sequoia
Board will elect: (i) J. Michael Stewart as a Class III director of Sequoia to
serve an initial term ending at the Annual Meeting of Stockholders of Sequoia
held after the fiscal year ending June 30, 1996; and (ii) a designee, who is
reasonably acceptable to the Sequoia Board, of W. Wayne Patterson as a Class II
director of Sequoia to serve an initial term ending at the Annual Meeting of
Stockholders held after the fiscal year ending June 30, 1995. Mr. Patterson has
not yet indicated his designation of a Sequoia Board member. See "Item 3--
Election of Directors".
Upon the Effective Time, the executive officers of Sequoia will be as
follows: Cornelius P. McMullan, President and Chief Executive Officer; Jack J.
Stiffler, Executive Vice President, Chief Technical Officer and General
Manager, Technology Business Unit; Richard B. Goldman, Vice President, Finance
and Chief Financial Officer; J. Michael Stewart, Executive Vice President;
David A. Butler, Vice President and Treasurer; Ronald J. Gellert, Vice
President and General Manager, Systems Business Unit; William C. Gould, Vice
President, Customer Service; Andrew P. Wood, Vice President, Manufacturing;
Geoffrey R. Cluett, Vice President, International; John M. Owens, Vice
President, Engineering; and Jeremy F. Swett, Vice President, General Counsel
and Secretary. See "Sequoia Systems, Inc.--Directors and Executive Officers of
Sequoia".
DIRECTORS AND EXECUTIVE OFFICERS OF THE TMI GROUP AFTER THE TRANSACTION
Upon the Effective Time, the directors of Sub (Messrs. McMullan, Goldman and
Francis J. Hughes, Jr., currently a member of the Sequoia Board) shall become
the directors of SPCO (the name of which shall be changed to Sequoia Holdings,
Inc.), and Mr. Stewart will become the President and Chief Operating Officer of
TMI. Sequoia will be entitled to designate the other directors and officers of
the TMI Group and to change such designations from time to time.
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CONDITIONS TO THE TRANSACTION
The obligations of Sequoia, SPCO and Keystone to consummate the Transaction
are subject to the satisfaction of certain conditions, including, but not
limited to: (i) obtaining requisite stockholder approvals and consents; (ii)
the number of Dissenting Shares (as defined in the Acquisition Agreement) not
exceeding 1% of the outstanding shares of SPCO capital stock; (iii) quotation
on the Nasdaq National Market of the Sequoia Common Stock to be issued pursuant
to the Acquisition Agreement; (iv) the absence of any injunction prohibiting
consummation of the Transaction; (v) the continuing accuracy of the
representations and warranties made in the Acquisition Agreement on and as of
the Effective Time; (vi) the Registration Statement of which this Proxy
Statement/Prospectus is a part having become effective in accordance with the
Securities Act; (vii) the receipt of certain opinions with respect to tax
matters; (viii) there not having occurred a material adverse change in the
business of either the TMI Group or Sequoia; and (ix) confirmation of certain
accountants' letters with respect to qualification of the Transaction as a
pooling of interests transaction. Sequoia and SPCO have agreed not to waive the
conditions described in clause (vii) above.
As of the date of this Proxy Statement/Prospectus, Sequoia has filed an
Additional Shares Listing Application with the Nasdaq National Market; neither
Sequoia nor the TMI Group is aware of any injunction relating to the
Transaction or of any change in the accuracy in their respective
representations and warranties in the Acquisition Agreement; the Registration
Statement of which this Proxy Statement/Prospectus is a part has been declared
effective by the Commission; and there has been no material adverse change in
the business of Sequoia or, to the best of Sequoia's knowledge, in the business
of the TMI Group. If the requisite stockholder approvals and consents are
obtained, Sequoia believes that all conditions to the closing of the
Transaction will be satisfied in a timely manner. See "The Acquisition
Agreement--Conditions".
TERMINATION
The Acquisition Agreement is subject to termination: (i) by mutual written
consent of Sequoia, SPCO and Keystone; (ii) at the option of either Sequoia,
Keystone or SPCO if the Transaction is not consummated before March 31, 1995;
(iii) by any party in the event that the approval of Sequoia's stockholders or
the consent of SPCO's stockholders is not obtained; and (iv) upon the
occurrence of certain other events. The March 31, 1995 deadline may be extended
by mutual agreement of Sequoia, Keystone and SPCO. In the event that Sequoia's
stockholders do not approve the Acquisition Proposal and the Acquisition
Agreement has not been terminated by Sequoia (due to SPCO's or Keystone's
uncured breach) or by mutual written consent of Sequoia, Keystone and SPCO,
Sequoia will be required to reimburse SPCO and Keystone for their respective
reasonable out-of-pocket expenses incurred in connection with the transactions
contemplated by the Acquisition Agreement, up to an aggregate of $150,000. See
"The Acquisition Agreement--Termination; Termination Fees and Expenses".
SURRENDER OF CERTIFICATES
If the Transaction becomes effective, Keystone and the holders of record of
SPCO Common Stock will be required to surrender their stock certificates in
exchange for certificates representing shares of Sequoia Common Stock and a
cash payment in lieu of fractional shares, if any. CERTIFICATES SHOULD NOT BE
SURRENDERED AT THIS TIME. See "The Acquisition Agreement--Conversion of
Securities".
APPRAISAL RIGHTS
Holders of SPCO Common Stock are entitled to dissenters' appraisal rights
under the DGCL in connection with the Merger. In accordance with the DGCL, if
the requisite stockholder consent has been obtained pursuant to the SPCO
Written Consent and assuming all other conditions have been satisfied, the
surviving corporation following the Merger is required to notify each SPCO
stockholder who did not execute the SPCO Written Consent that such stockholder
may have the right to receive payment in cash of an amount equal to the "fair
value" of such stockholder's shares of SPCO Common Stock, as determined in a
judicial
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proceeding in the Chancery Court of the State of Delaware. The procedure for
demanding and perfecting appraisal rights is summarized under the caption
"Appraisal Rights of SPCO Stockholders", and the provisions of Section 262 of
the DGCL are included as Annex C to this Proxy Statement/Prospectus. Holders of
Sequoia Common Stock are not entitled to dissenters' appraisal rights under the
DGCL in connection with the Merger because Sequoia is not a constituent
corporation in the Merger. See "Item 1--Approval of the Transaction--Appraisal
Rights".
Because Sequoia is not a constituent corporation in the Merger, its
stockholders do not possess dissenters' rights of appraisal under Delaware law.
See "The Transaction--Appraisal Rights". In the event of a challenge to the
Transaction, Sequoia intends to assert all defenses available to it under
applicable law. The execution of a proxy in favor of the Transaction by a
Sequoia stockholder would be used as a defense to any subsequent legal
challenge to the Transaction brought by such a stockholder.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be a tax-free reorganization so that no gain or
loss would be recognized by Sequoia or SPCO and no gain or loss would be
recognized by SPCO's stockholders, except in respect of cash received in lieu
of fractional shares, if any. A condition to the Transaction is that Sequoia
and SPCO receive at Closing an opinion from Arthur Andersen LLP ("Arthur
Andersen"), SPCO's independent accountants, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"), and that the BriskHeat Spin-Off
constitutes a tax-free distribution under Section 355 of the Code. In addition,
it is also a condition to the Transaction that Sequoia be advised in writing by
Coopers & Lybrand that there is a reasonable basis for SPCO to report the
BriskHeat Spin-Off as a tax-free transaction. Sequoia and SPCO have agreed not
to waive the conditions described in the preceding two sentences. In the event
that the BriskHeat Spin-Off is deemed a taxable transaction, Sequoia, as the
sole stockholder of SPCO following the Merger, would assume the resultant tax
liability. For a further discussion of certain federal income tax consequences
of the Transaction, see "Item 1--Approval of the Transaction--Certain Federal
Income Tax Consequences". See also "The Acquisition Agreement--Conditions". If
Sequoia were to assume such liability, it could, under certain circumstances,
seek indemnification from the Indemnifying Persons under the terms of the
Acquisition Agreement. See "The Acquisition Agreement--Indemnification".
ACCOUNTING TREATMENT
Both Sequoia and SPCO believe that the Transaction will qualify as a pooling
of interests for accounting and financial reporting purposes and have been so
advised by their respective independent accountants. A condition to the
Transaction is that Sequoia and SPCO receive letters from Coopers & Lybrand,
Sequoia's independent accountants, and Arthur Andersen, SPCO's independent
accountants, stating that, in their respective opinions, the Transaction will
qualify for pooling of interests treatment for accounting and financial
reporting purposes. See "Item 1--Approval of the Transaction--Accounting
Treatment" and "The Acquisition Agreement--Conditions".
REGULATORY APPROVALS
No state or federal regulatory approvals are required relating to the Merger,
the Acquisition Agreement or the Transaction, other than the effectiveness of
the Registration Statement of which this Proxy Statement/Prospectus is a part.
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Stockholder Rights" for a summary of the material
differences between the rights of holders of Sequoia Common Stock and the
rights of holders of SPCO Common Stock and TMI Common Stock.
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RISK FACTORS
The following risk factors should be considered by holders of SPCO Common
Stock in evaluating whether to approve the Merger and the Acquisition Agreement
and thereby become holders of Sequoia Common Stock and by holders of Sequoia
Common Stock in evaluating whether to approve the Acquisition Proposal. These
factors should be considered in conjunction with the other information included
and incorporated by reference in this Proxy Statement/Prospectus.
UNCERTAINTIES RELATING TO THE TRANSACTION
Management and Coordination of Operations. The Sequoia Board and the SPCO
Board have each approved the Acquisition Agreement with the expectation that
the Transaction will benefit both Sequoia and the TMI Group. See Item 1--
Approval of the Transaction--Reasons for the Transaction; Recommendations of
the Boards of Directors". Achieving the anticipated benefits of the Transaction
will depend in part upon whether the businesses of Sequoia and the TMI Group
can be managed and coordinated in an efficient and effective manner after the
Effective Time, and there can be no assurance that this will occur. Following
the Transaction, Sequoia and the TMI Group will each operate in a largely
independent manner, exposing the other to the risks inherent in decentralized
management. The difficulties of managing and coordinating the businesses of
Sequoia and the TMI Group may be increased by the geographic separation of the
organizations and their decentralized managements. The coordination of the
businesses of Sequoia and the TMI Group following the Transaction may require
the dedication of management resources which may temporarily distract attention
from the day-to-day business of the combined companies.
Transaction Costs. The TMI Group and Sequoia estimate that they will incur
direct transaction costs of approximately $2,100,000 associated with the
Transaction, which costs are being charged to operations as incurred. This
amount is a preliminary estimate only and is therefore subject to change. There
can be no assurance that Sequoia and the TMI Group will not incur additional
charges to reflect costs associated with the Transaction.
RISKS COMMON TO SEQUOIA AND THE TMI GROUP
Dependence on Key Personnel. The success of Sequoia and the TMI Group will
depend upon the continued contributions of key personnel, several of whom would
be difficult to replace. If certain of these people were to leave Sequoia or
the TMI Group, the operating results of both companies could be adversely
affected. Pursuant to the terms of its Credit Agreement with State Street Bank
and Trust Company, Sequoia is required to maintain key man life insurance on
the life of Mr. Jack J. Stiffler, Executive Vice President, Chief Technical
Officer and General Manager of Sequoia's Technology Business Unit, in the
amount of $1,000,000. The TMI Group does not currently maintain, nor intend to
acquire, insurance on the lives of any of its personnel. Furthermore,
competition for employees in the computer industry is often intense, and there
can be no assurance that Sequoia and the TMI Group will be able to attract and
retain skilled employees. Additionally, the management of both companies must
continue to motivate employees in light of organizational and structural
uncertainties in connection with the Transaction.
International Sales and Currency Exchange. Sales outside of the United States
accounted for approximately 15% and 22% of Sequoia's revenues in fiscal 1993
and 1994, respectively, and approximately 17% and 20% of the TMI Group's
revenues in fiscal 1993 and 1994, respectively. For Sequoia and the TMI Group,
sales outside the United States accounted for 14% and 19% of revenues,
respectively, during the first half of fiscal 1994, and 23% and 19% of
revenues, respectively, during the first half of fiscal 1995. Sequoia and the
TMI Group expect that sales outside of the United States will continue to
account for a significant portion of Sequoia's and the TMI Group's revenues in
future periods.
Sequoia's international customers have historically been concentrated in the
U.K., through a Sequoia subsidiary; in the Far East, where Sequoia has ongoing
licensing agreements with Samsung and Toshiba; in Australia, where Sequoia has
had a distributor; and through its own sales force in Canada. Sales in fiscal
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1994 from the U.K., the Far East, Australia and Canada comprised 7%, 8%, 3% and
2% of Sequoia's revenues, respectively. For fiscal 1993, sales from the U.K.,
the Far East, Australia and Canada comprised 6%, 3%, 2% and 4% of Sequoia's
revenues, respectively. On July 1, 1994, Sequoia acquired certain assets of its
Australian distributor and, as a result, sales in Australia increased to 14% of
revenues for the six months ended January 1, 1995 as compared to 2% of revenues
for the six months ended January 2, 1994. Sequoia's sales outside of the United
States are primarily denominated in foreign currencies. Gains and losses on the
conversion to U.S. dollars of receivables and payables arising from
international operations may contribute to fluctuations in Sequoia's results of
operations. With respect to the TMI Group, for the fiscal year ended June 30,
1994, 11% of sales were derived from Europe, predominantly the United Kingdom,
France and Germany, 3% of sales were to one distributor in Israel, and the
remaining 6% of sales outside the United States were evenly split between the
Far East and the Western Hemisphere.
Sales outside of the United States are subject to inherent risks, including
unexpected changes in regulatory requirements and tariffs, difficulties in
staffing and managing foreign operations, longer payment cycles and potentially
adverse tax consequences. In addition, the laws of certain countries relating
to the protection of proprietary rights may not protect Sequoia's and the TMI
Group's products and intellectual property rights to the same extent as do the
laws of the United States. Additionally, Sequoia's and the TMI Group's
international business may be materially and adversely affected by fluctuations
in currency exchange rates, increases in duty rates, exchange or price controls
or other restrictions on foreign currencies and difficulties in obtaining
export licenses. Sequoia's and the TMI Group's businesses have been affected,
and may continue to be affected, by lower sales levels during the summer months
in Europe.
Dependence on Distributors. Sequoia and the TMI Group sell, market and
support their respective products through value-added resellers ("VARs"),
distributors and original equipment manufacturers ("OEMs"). Sequoia and the TMI
Group believe that their respective VAR, OEM and distributor networks represent
an important part of their overall sales and distribution strategies.
Approximately 17% of Sequoia's revenue for the fiscal year ended June 30, 1994
was attributable to sales to CSC Healthcare Systems, Inc. ("CSC Healthcare").
CSC Healthcare is a wholly-owned subsidiary Computer Sciences Corporation, a
publicly traded corporation listed on the New York Stock Exchange. The loss of,
or a substantial reduction in the orders from, CSC Healthcare would have a
material adverse effect on Sequoia's results of operations. During the quarter
ended October 2, 1994, sales to two customers, CSC Healthcare and KHP Services,
Inc. ("KHP"), represented 19% and 14%, respectively, of Sequoia's revenues, and
during the quarter ended October 3, 1993, sales to one customer, CSC
Healthcare, represented 16% of Sequoia's revenues. During the quarter and six
month period ended January 1, 1995, sales to CSC Healthcare represented 22% and
21%, respectively, and sales to KHP represented 7% and 10%, respectively, of
Sequoia's revenues. While the TMI Group is not dependent on any single VAR, OEM
or distributor, the loss of, or changes in the relationship with or performance
by, several VARs, OEMs or distributors could have a material adverse effect on
the TMI Group's revenues and operating results. Furthermore, the loss of, or
changes in the relationship with or performance by, one or more international
distributors could have a material adverse effect on Sequoia's and the TMI
Group's respective revenues and operating results. Sequoia's and the TMI
Group's future revenues may be affected in part by factors which influence the
business of their direct and indirect resellers, such as the resellers'
purchasing patterns and inventory levels.
RISKS RELATING TO SEQUOIA
Need for Increased System Sales. During fiscal years 1993 and 1994 most of
Sequoia's revenue was attributable to sales of upgrades to existing customers.
In order to compete effectively in the future, Sequoia will be required to
increase its system sales to existing or new customers, which will require the
development of new systems. There can be no assurance that Sequoia will develop
such new systems, either directly or through third parties, or that if
developed such new systems will achieve market acceptance.
Need to Enlarge Installed Base. While sales of expansion systems and upgrades
to existing customers have provided a reliable source of revenues during
periods when sales of systems to new customers have been slow, such revenue
could decline significantly in the future if Sequoia fails to develop
competitively priced upgrade features and products for new and existing
customers or if Sequoia is unable to enlarge the size of its installed base.
14
<PAGE>
New Product Development. To compete effectively in the future, Sequoia will
be required to improve and enhance its current products and services and to
develop or acquire new products and services in order to respond quickly to
changing market conditions. The rapid pace of technological change will
continue to put pressure on the relative price/performance attributes of
Sequoia's products.
Sequoia is dependent on continued market acceptance of its implementation of
the Pick database product. Should demand for this product decline, a
substantial negative impact on Sequoia's financial results could result.
Sequoia has contracted with Toshiba Corporation for the development of a new
fault-tolerant computer system based on the PowerPC microprocessor. Sequoia's
future success in the fault-tolerant hardware marketplace is highly dependent
on the timely market introduction and market acceptance of such product. First
customer shipment of this product is expected to occur no earlier than late in
calendar year 1996. See "Sequoia Systems, Inc.--Business of Sequoia--Strategic
Alliances".
In conjunction with Novell, Sequoia is currently developing a fault-tolerant
software component for a future release of the UNIX operating system supplied
by Novell. Sequoia executed a Software Cooperation Agreement on April 5, 1994
with UNIX System Laboratories, a subsidiary of Novell. For the six months ended
January 1, 1995 Sequoia incurred approximately $420,000 in expenses for the
development of a fault-tolerant software component for a future release of the
UNIX operating system supplied by Novell. If Novell does not include Sequoia's
fault-tolerant software in a future release of the UNIX operating system, or if
the Novell implementation of UNIX containing the Sequoia fault-tolerant
software fails to achieve significant market acceptance, Sequoia's growth
opportunities will be diminished.
Sequoia's future success will depend in large part on the ability of current
licensees, and the willingness of future licensees, to develop products that
may be marketed and sold by Sequoia, or which provide royalty income for
Sequoia. There can be no assurance that Sequoia will be successful in obtaining
new licensees or that any such licensees will successfully develop products
that achieve market acceptance. See "Sequoia Systems, Inc.--Product
Development".
Quarterly Fluctuations in Financial Results. Sequoia generally ships products
promptly after receipt of specific purchase orders from customers and
historically has not maintained a significant backlog of orders. See "Sequoia
Systems, Inc.--Backlog". Because of the relatively high average selling price
of Sequoia's systems (approximately $445,000 in fiscal 1994) and because a
disproportionate number of purchase orders typically are received by Sequoia
toward the end of each quarter, a significant portion of Sequoia's shipments
historically have occurred near the end of each quarter, and minor timing
differences in receipt of customer orders and shipment of systems can produce
significant fluctuations in quarterly revenues and profits. Sequoia's gross
profit as a percentage of revenues is affected primarily by: (i) the relative
mix between higher margin product sales and lower margin service revenues, (ii)
the relative sales mix within product sales between higher margin system
upgrades and lower margin system sales, and (iii) the proportion of sales made
through resellers and the level of discounts offered by Sequoia to its
customers and resellers. For the foregoing reasons, Sequoia's quarterly
financial results have varied significantly in the past and Sequoia expects
that its financial results may continue to fluctuate from quarter to quarter.
Consequently, there can be no assurance that Sequoia will remain profitable on
a quarterly or annual basis in the future.
Competition. The OLTP and the broader general purpose computer markets are
highly competitive and are characterized by rapid technological change. Many of
Sequoia's existing and potential competitors have substantially greater
financial, marketing and technological resources than Sequoia. Sequoia's
principal competitors in the fault-tolerant OLTP market currently include
Tandem Computers Incorporated and Stratus Computer, Inc. In the broader general
purpose non fault-tolerant OLTP marketplace, Sequoia's primary competitors
include Hewlett-Packard Company, Sequent Computer Systems, Inc., Data General
Corporation, Digital Equipment Corporation, International Business Machines
Corporation and Pyramid Technology Corp. See "Sequoia Systems, Inc.--Business
of Sequoia--Competition". There can be no assurance that Sequoia will have the
resources necessary to compete successfully in the future.
15
<PAGE>
Volatility of Stock Price. As is frequently the case with the stock of high-
technology companies, the market price of the Sequoia Common Stock has been,
and may continue to be, volatile. Factors such as quarterly fluctuations in
results of operations, announcements of technological innovations or the
introduction of new products by Sequoia or its competitors, and macroeconomic
conditions generally, may have a significant impact on the market price of the
Sequoia Common Stock. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations, which have particularly
affected the market price for the shares of many high-technology companies and
which, on occasion, have been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the market
price of the Sequoia Common Stock. Past financial performance should not be
considered a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant effect on the trading price
of the Sequoia Common Stock in any given period. Additionally, Sequoia may not
learn of such shortfalls until late in a fiscal quarter, which could result in
an even more immediate and adverse effect on the trading price of Sequoia
Common Stock.
Reliance on Third-Party Software. Sequoia's computer systems require
application programs designed for either the Pick or UNIX operating
environments. Increased sales of Sequoia systems will depend, in part, on the
willingness of Sequoia's potential VAR and OEM customers to develop their own
application programs and the market acceptance of those programs for
commercial use. Essential for this to occur will be Sequoia's ability to
continue to offer Pick and UNIX development tools and support services, as
well as certain popular enabling technology products, including user
interfaces, interoperability features and enhanced networking capabilities.
Key Components. Sequoia purchases most of the components of its systems and
virtually all of its peripheral devices from other manufacturers. Most of the
components and peripherals used in Sequoia's systems are available from a
number of different suppliers, although Sequoia purchases certain major items
from single suppliers to achieve economies of scale. Although Sequoia believes
that alternative sources for these items could be developed in a short period
of time if required, future shortages of such components or peripherals could
result in production delays. Two key components used in Sequoia's systems for
which alternative sources are not readily available are the Motorola
microprocessors and the power supply component obtained from Elgin E/2/, Inc.
Although Sequoia attempts to obtain the Motorola microprocessors through
multiple vendors and to maintain a one-month supply of power supply
components, the inability to obtain adequate supplies of these components or
other essential components at any time would materially adversely affect
Sequoia's operations.
Dependence on Proprietary Technology. Sequoia relies principally upon its
patents, copyright protection and its trade secret program to protect its
proprietary technology. In addition, Sequoia generally enters into
confidentiality and/or license agreements with its employees, distributors,
customers and potential customers and limits access to and distribution of its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by Sequoia in this regard will be adequate to
deter misappropriation or independent third party development of its
technology. Although Sequoia believes that its products and technology do not
infringe on any existing proprietary rights of others, the use of patents to
protect software has increased, and there can be no assurance that third
parties will not assert infringement claims in the future.
Anti-Takeover Provisions. Certain provisions of Delaware law and Sequoia's
Restated Certificate of Incorporation and By-Laws may have the effect of
delaying or preventing a change in control or acquisition of Sequoia. Such
provisions include a classified Board of Directors, "blank check" preferred
stock (the terms of which may be fixed by the Sequoia Board without
stockholder approval), a prohibition on stockholder action by written consent
in lieu of a meeting, and certain procedural requirements governing
stockholder meetings. See "Comparison of Stockholder Rights".
Concentration of Voting Power. Upon completion of the Transaction Messrs.
Stewart and Patterson, together with their affiliates, will beneficially own
in the aggregate approximately 28.2% of the outstanding shares of Sequoia
Common Stock (based on the 9,866,956 shares outstanding at January 31, 1995).
This
16
<PAGE>
represents a significant concentration of voting power in a limited number of
persons and could permit Messrs. Stewart and Patterson, either acting alone or
in concert with each other or others, to influence matters requiring approval
by Sequoia's stockholders. Such voting power could also have the effect of
delaying or preventing a change in control or acquisition of Sequoia. See "The
Acquisition Agreement--Ownership of Sequoia After the Transaction".
RISKS RELATING TO THE TMI GROUP
Fluctuations in Quarterly Performance. A substantial portion of the TMI
Group's revenues in each quarter generally results from shipments during the
quarter of orders received in that quarter. The TMI Group establishes its
expenditure levels based on its expected revenues. As a result, if anticipated
sales and shipments in any quarter do not occur when expected, expenditure
levels could be disproportionately high and the TMI Group's operating results
for that quarter, and possibly future quarters, would be adversely affected.
In addition, the TMI Group's operating results may fluctuate as a result of a
number of factors, including product mix, the introduction of new products by
the TMI Group or its competitors, increased competition, changes in material
costs, shortages of components, customer discounts and the timing of orders
from and shipment to major customers.
Competition. The market for the TMI Group's products is intensely
competitive and is characterized by rapid technological change, rapid rates of
product obsolescence and the frequent introduction of competitive products,
often at lower prices and/or with greater functionality. Several of the TMI
Group's competitors are major corporations with substantially greater
financial, marketing and technological resources than those of the TMI Group
which, if they decided to do so, they could direct at the market for the TMI
Group's products. There can be no assurance that the TMI Group will have the
financial resources, technical expertise or marketing, distribution and
support capabilities to compete successfully in the future.
Key Components. The TMI Group purchases most of the components of its
products and virtually all of its peripheral devices from other manufacturers.
Most of the components and peripherals used in the TMI Group's products are
available from a number of different suppliers. Although the TMI Group
believes that alternative sources for these items could be developed in a
short period of time if required, future shortages of such components or
peripherals could result in production delays. Certain microprocessors used in
the TMI Group's products are available only from Intel Corporation and Sun
Microsystems, Inc. The inability to obtain these components and other
essential components at any time could adversely affect the TMI Group's
operations.
Reliance on Third-Party Manufacturing. The TMI Group relies primarily on two
contract manufacturers, AVEX Electronics Inc. and Kronoservices S.A. de C.V.,
for the manufacture of several high-volume components used to assemble its
products. Although such arrangement offers cost advantages to the TMI Group
and eliminates the need for the TMI Group to incur certain of the capital
expenditures associated with manufacturing, reliance on third-party
manufacturers gives the TMI Group less control over the manufacturing process
for these components than if it undertook such activities itself. Any failure
of the TMI Group's manufacturers to manufacture and deliver components as
planned, or any problems with the quality of such components, could have a
material adverse affect on the TMI Group. In addition, such manufacturers
could cease manufacturing components for the TMI Group with little notice. If
such manufacturers were to cease manufacturing the TMI Group's components, the
TMI Group would be required to arrange for alternative manufacturing sources.
Although this would be likely to result in a disruption of the TMI Group's
operations and could result in delayed shipments of the TMI Group's products,
its impact would be mitigated by the TMI Group's in-house capability and
available capacity (with moderate cost increases) to manufacture such
components.
Product Development and Technological Change. The market for the TMI Group's
products is characterized by rapidly changing technology and user needs,
requiring significant expenditures for product development. The TMI Group
believes that its future success will depend upon its ability to develop,
17
<PAGE>
manufacture and market products which meet changing user needs and which
successfully anticipate or respond to technological changes in architectural
standards on a cost-effective and timely basis. The TMI Group's failure to
develop technological improvements, to adapt its products to technological
changes or to adopt emerging industry standards would have a material adverse
effect on the TMI Group's business.
Importance of Proprietary Rights. The TMI Group's ability to compete may be
affected by its ability to protect its proprietary information. The TMI Group
also relies to some extent on technology which it obtains from others. It may
be necessary or desirable to license additional technology in the future, and
there can be no assurance that the TMI Group can obtain these licenses or other
rights on commercially reasonable terms.
18
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following selected historical financial data of Sequoia and the TMI Group
have been derived from their respective historical consolidated or combined
financial statements and should be read in conjunction with such consolidated
or combined financial statements and the notes thereto incorporated by
reference or included herein, respectively. The selected historical financial
data of the TMI Group as of and for the two years ended June 30, 1991, along
with the selected historical financial data of Sequoia and the TMI Group as of
January 1, 1995 and December 31, 1994, respectively, and for the six months
ended January 1, 1995 and January 2, 1994 and December 31, 1994 and 1993,
respectively, have been derived from the unaudited consolidated or combined
financial statements of Sequoia and the TMI Group, respectively. The selected
pro forma financial data is derived from the pro forma combined condensed
financial statements appearing elsewhere herein, which give effect to the
Transaction as a pooling of interests, and should be read in conjunction with
such pro forma statements and the notes thereto.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Transaction had been consummated, nor is it
necessarily indicative of the future operating results or financial position of
Sequoia or the TMI Group.
19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEQUOIA SYSTEMS, INC.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
---------------------------------------------- ------------------
JAN. 1, JAN. 2,
1994 1993(2) 1992(1) 1991 1990 1995 1994
-------- -------- -------- -------- -------- ---------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
Revenues............... $44,765 $ 41,019 $62,588 $58,654 $48,612 $21,849 $21,475
Income (loss) from op-
erations.............. 8,607 (26,901) (3,871) 4,651 4,839 1,441 3,845
Net income (loss)...... 8,567 (31,033) (3,940) 4,437 4,470 1,792 3,849
Net income (loss) per
share................. 0.87 (3.63) (0.48) 0.49 0.61 0.17 0.41
Weighted average number
of common and common
share equivalents out-
standing.............. 9,877 8,556 8,255 9,080 7,337 10,300 9,445
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JANUARY 1,
1994 1993 1992 1991 1990 1995
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET
DATA:
Working capital........ $20,998 $ 8,189 $31,638 $37,046 $40,703 $22,783
Total assets........... 32,810 27,971 55,290 58,124 54,857 35,079
Long-term obligations,
excluding current
portion of long term
debt and capital lease
obligations........... 190 844 501 959 395 130
Total stockholders' eq-
uity.................. 23,460 11,786 42,323 45,058 45,250 25,345
</TABLE>
TMI GROUP
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
---------------------------------------- -----------------
DEC. 31, DEC. 31,
1994(4) 1993(4) 1992 1991 1990 1994 1993
------- ------- ------- ------- ------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
Revenues............... $47,061 $40,304 $37,427 $36,066 $28,209 $24,694 $22,930
Income from operations. 2,646 1,076 524 2,306 1,816 1,611 1,324
Income (loss) before
cumulative effect of
change in accounting
principle (3)......... 1,914 (19) 292 1,217 867 935 757
Net income............. 1,914 152 292 1,217 867 935 757
Pro forma net income
per share (5)......... 0.19 0.01 0.03 0.12 0.09 0.09 0.07
Pro forma weighted
average number of
common and common
share equivalents
outstanding (5)....... 10,340 10,201 10,182 10,104 10,026 10,374 10,267
</TABLE>
20
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
TMI GROUP
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, DEC. 31,
1994 1993 1992 1991 1990 1994
-------- -------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET
DATA:
Working capital........ $ 5,282 $ 5,077 $ 6,336 $ 6,213 $ 4,971 $ 5,817
Total assets........... 17,599 18,191 13,905 16,438 12,076 19,091
Long-term obligations,
excluding current por-
tion of long-term
debt.................. 1,645 3,381 4,153 4,833 4,365 1,332
Total stockholders' eq-
uity.................. 6,024 4,058 3,930 3,629 2,411 7,091
</TABLE>
- --------
(1) See Note 1, related to certain restatements, to the notes to consolidated
financial statements included in the Sequoia Amendment No. 2 to the Annual
Report on Form 10-K for the fiscal year ended June 30, 1994 incorporated by
reference herein.
(2) Sequoia adopted Statement of Financial Accounting Standards No. 109 ("SFAS
109") effective July 1, 1993. The adoption of SFAS 109 had no impact on
Sequoia's results of operations in the fiscal year ended June 30, 1994.
(3) The TMI Group adopted SFAS 109 effective July 1, 1992. The adoption of SFAS
109 resulted in a cumulative benefit of $171,000 to the TMI Group in the
fiscal year ended June 30, 1993.
(4) During fiscal 1993, the Internal Revenue Service (the "IRS") disallowed
certain of the TMI Group's deductions. As a result, an assessment of
$346,000 was recorded in the fiscal 1993 tax provision and, as a result of
the final agreement reached with the IRS in fiscal 1994, a $215,000 benefit
was recorded in the fiscal 1994 tax provision.
(5) Pro forma net income per share and pro forma weighted average number of
common and common share equivalents outstanding are computed based on the
equivalent TMI Group shares to be exchanged in the Transaction, including
common stock equivalents. See Note 10 to the TMI Group combined financial
statements included herein.
21
<PAGE>
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
-------------------------- -----------------
JAN. 1, JAN. 2,
1994 1993 1992 1995 1994
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:(1)
Revenues........................ $91,826 $ 81,323 $100,015 $ 46,543 $ 44,405
Income (loss) from operations... 11,253 (25,825) (3,347) 3,052 5,169
Income (loss) before cumulative
effect of a change in
accounting
principles (2)................. 10,481 (31,052) (3,648) 2,727 4,606
Net income (loss)............... 10,481 (30,881) (3,648) 2,727 4,606
Net income (loss) per share..... 0.69 (2.23) (0.27) 0.18 0.31
Weighted average number of com-
mon and common share equiva-
lents
outstanding.................... 15,150 13,829 13,528 15,573 14,718
<CAPTION>
JAN. 1,
1995
--------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET
DATA:(3)
Working capital................. $ 28,599
Total assets.................... 54,170
Long-term obligations, excluding
current portion of long-term
debt and capitalized lease
obligations.................... 1,462
Total stockholders' equity...... 32,436
</TABLE>
- --------
(1) The pro forma combined statement of operations data for all periods
presented give effect to the proposed Transaction, on a pooling of
interests basis, as if it occurred at the beginning of the earliest period
presented.
(2) Sequoia and the TMI Group adopted SFAS 109 effective at the beginning of
fiscal 1993 and 1992, respectively. The adoption of SFAS 109 had no impact
on the results of operations of Sequoia and resulted in a cumulative
benefit from the change in accounting principle of $171,000 for the TMI
Group in the year of adoption.
(3) The pro forma combined balance sheet data give effect to the proposed
Transaction, on a pooling of interests basis, as if it occurred as of
January 1, 1995.
22
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain unaudited historical per share data of
Sequoia and the TMI Group and combined per share data on an unaudited pro forma
basis after giving effect to the Transaction, on a pooling of interests basis,
and after giving effect to the issuance of approximately 5,273,000 shares of
Sequoia Common Stock in the Transaction. This data should be read in
conjunction with the selected historical and pro forma financial data, the
unaudited pro forma combined condensed financial statements and notes thereto
included elsewhere in this Proxy Statement/Prospectus and the separate
historical financial statements of Sequoia and the TMI Group included or
incorporated by reference herein and notes thereto. The unaudited pro forma
combined financial data are not necessarily indicative of the operating results
that would have been achieved had the Transaction been in effect as of the
beginning of the periods presented and should not be construed as
representative of future operations. Neither Sequoia nor the TMI Group has ever
declared or paid cash dividends on its respective shares of Common Stock.
<TABLE>
<CAPTION>
COMPARATIVE PER SHARE DATA
-------------------------------------
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
-------------------- ---------------
JAN. 1, JAN. 2,
1994 1993 1992 1995 1994
----- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
SEQUOIA HISTORICAL:
Net income (loss) (1)................. $0.87 ($3.63) ($0.48) $0.17 $0.41
Book value (2)........................ $2.39 $2.58
TMI GROUP HISTORICAL:
Pro forma net income (1)(3)........... $0.19 $ 0.01 $ 0.03 $0.09 $0.07
Pro forma book value (3).............. $0.60 $0.69
PRO FORMA COMBINED--SEQUOIA AND TMI
GROUP:
Net income (loss) (4)................. $0.69 ($2.23) ($0.27) $0.18 $0.31
Book value (4)........................ $1.95 $2.15
EQUIVALENT PRO FORMA COMBINED--TMI
GROUP:
Net income (loss) (5)................. $0.35 ($1.12) ($0.14) $0.09 $0.16
Book value (5)........................ $0.98 $1.08
</TABLE>
- --------
(1) Sequoia and the TMI Group adopted SFAS 109 effective at the beginning of
fiscal 1993 and fiscal 1992, respectively. The adoption of SFAS 109 had no
impact on the results of operations of Sequoia and resulted in a cumulative
benefit from the change in accounting principle of $171,000 for the TMI
Group in the year of adoption.
(2) Historical book value per share is computed by dividing total stockholders'
equity by the number of shares of Sequoia Common Stock outstanding at the
end of the period.
(3) Pro forma net income per share is computed based on the equivalent TMI
Group shares to be exchanged in the Transaction, including common stock
equivalents. Pro forma book value per share is computed by dividing total
stockholders' equity by the equivalent TMI Group shares to be exchanged in
the Transaction. See Note 10 to the TMI Group combined financial statements
included herein.
(4) Pro forma combined net income (loss) per share is computed by dividing pro
forma net income by the Sequoia weighted average number of common and
common equivalent shares after giving effect to the approximately 5,273,000
shares of Sequoia Common Stock to be issued in connection with the
Transaction. Pro forma combined book value per share is computed by
dividing pro forma combined stockholders' equity by the number of shares of
Sequoia Common Stock after giving effect to the approximately 5,273,000
shares of Sequoia Common Stock to be issued in connection with the
Transaction. Pro forma book value per share does not reflect the exercise
of outstanding stock options.
(5) Equivalent pro forma combined net income (loss) and book value per share
are computed by multiplying the pro forma combined net income per share and
book value per share by the conversion ratio in the Merger of .5015674.
23
<PAGE>
MARKET PRICE INFORMATION AND DIVIDEND POLICY
Sequoia Common Stock is quoted on the Nasdaq National Market. There is no
public market for any class or series of SPCO capital stock.
The table below sets forth, for the fiscal quarters indicated, the reported
high and low closing sales prices of the Sequoia Common Stock on the Nasdaq
National Market, in each case based on published financial sources.
<TABLE>
<CAPTION>
SEQUOIA COMMON STOCK
---------------------
HIGH LOW
---------- ----------
<S> <C> <C>
Fiscal 1993
Quarter Ended September 27, 1992.................... $8.875 $5.000
Quarter Ended December 27, 1992..................... $7.000 $1.375
Quarter Ended March 28, 1993........................ $3.813 $1.625
Quarter Ended June 30, 1993......................... $3.000 $1.750
Fiscal 1994
Quarter Ended October 3, 1993....................... $3.500 $1.750
Quarter Ended January 2, 1994....................... $6.000 $2.750
Quarter Ended April 3, 1994......................... $6.843 $3.9375
Quarter Ended June 30, 1994......................... $5.875 $3.250
Fiscal 1995
Quarter Ended October 2, 1994....................... $5.875 $3.500
Quarter Ended January 1, 1995....................... $4.750 $3.250
Quarter Ending April 2, 1995 (through February 16,
1995).............................................. $4.375 $3.500
---------- ----------
</TABLE>
- --------
The closing sales price of Sequoia Common Stock on the Nasdaq National Market
on February 22, 1995 was $3.9375 per share. On January 31, 1995, there were
approximately 559 holders of record of Sequoia Common Stock.
Although the number of shares of Sequoia Common Stock to be issued in the
Merger is fixed at 5,200,000, the market price of Sequoia Common Stock is
subject to fluctuation; therefore, the market value of the shares of Sequoia
Common Stock that holders of SPCO Common Stock and Keystone will receive may
increase or decrease prior to the Closing. The number of shares of Sequoia
Common Stock to be issued in exchange for the Unvested TMI Options, which is
estimated to be approximately 73,000, will vary based on the market price of
Sequoia Common Stock.
Sequoia has never paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. Sequoia intends
to retain future earnings to fund the development and growth of its business.
SEQUOIA'S STOCKHOLDERS AND SPCO'S STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT
MARKET QUOTATION FOR THE SEQUOIA COMMON STOCK.
24
<PAGE>
THE MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of Sequoia
Common Stock in connection with the solicitation of proxies by the Sequoia
Board for use at the Special Meeting to be held on Wednesday, March 29, 1995,
at the Radisson Inn, 75 Felton Street, Marlborough, Massachusetts 01752,
commencing at 9:00 a.m., local time, and at any adjournment or postponement
thereof.
This Proxy Statement/Prospectus is also being furnished to holders of SPCO
Common Stock in connection with the solicitation of the written consent of
SPCO's stockholders to the Merger and the Acquisition Agreement in accordance
with Section 228 of the DGCL by the SPCO Board.
This Proxy Statement/Prospectus, the accompanying form of proxy (for the
stockholders of Sequoia) and the accompanying form of SPCO Written Consent (for
the stockholders of SPCO) are first being mailed on or about the date of this
Proxy Statement/Prospectus.
MATTERS TO BE CONSIDERED
Special Meeting
The purpose of the Special Meeting is to consider and vote upon: (i) the
issuance of approximately 5,273,000 shares of Sequoia Common Stock pursuant to
the Acquisition Agreement; (ii) an amendment to Sequoia's Restated Certificate
of Incorporation increasing the number of authorized shares of Sequoia Common
Stock from 25,000,000 shares to 35,000,000 shares; (iii) the election of two
Class I Directors of Sequoia; (iv) amendments to Sequoia's 1986 Incentive Stock
Option Plan and 1986 Supplemental Stock Option Plan increasing the number of
shares of Sequoia Common Stock available for issuance under such plans from
2,425,000 to 3,700,000 and providing that no employee may receive options for
more than 500,000 shares in any calendar year; (v) amendments to Sequoia's 1993
Employee Stock Purchase Plan increasing from 250,000 to 750,000 the number of
shares of Sequoia Common Stock available for issuance under such plan and
increasing the term of such plan for an additional two years; (vi) adoption of
Sequoia's 1995 Outside Directors' Stock Option Plan; (vii) the ratification of
the appointment by the Sequoia Board of Coopers & Lybrand as Sequoia's
independent accountants for the fiscal year ending June 30, 1995; and (viii)
such other matters as may properly be brought before the Special Meeting, or
any postponements or adjournments thereof.
SPCO Written Consent
The SPCO Board intends to seek the written consent, pursuant to Section 228
of the DGCL, of SPCO's stockholders to approve the Merger and the Acquisition
Agreement on or about the date of this Proxy Statement/Prospectus.
Board Recommendations
The Sequoia Board has unanimously approved the Acquisition Proposal, the
Charter Amendment, the Director Proposal, the Plan Proposals and the
Accountants Proposal and recommends a vote FOR approval of all such proposals.
The SPCO Board has unanimously approved the Merger and the Acquisition
Agreement and recommends that its stockholders CONSENT TO the approval of the
Merger and the Acquisition Agreement.
VOTING AT THE SPECIAL MEETING; RECORD DATE
The Sequoia Board has fixed January 30, 1995 as the record date for the
determination of the Sequoia stockholders entitled to notice of and to vote at
the Special Meeting. Accordingly, only holders of record of
25
<PAGE>
Sequoia Common Stock on the Record Date will be entitled to notice of and to
vote at the Special Meeting. As of the Record Date there were 9,866,956 shares
of Sequoia Common Stock outstanding. Each holder of record of shares of Sequoia
Common Stock on the Record Date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, at the Special Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Sequoia Common Stock entitled to vote at
the Special Meeting is necessary to constitute a quorum at the Special Meeting.
Assuming that a quorum is present, the required votes of the Special Meeting
are as follows. The approval of the Acquisition Proposal will require the
affirmative vote of the holders of a majority of the outstanding shares of
Sequoia Common Stock present or represented at the Special Meeting. The
approval of the Charter Amendment will require the affirmative vote of a
majority of the outstanding shares of Sequoia Common Stock. The approval of the
Director Proposal will require the affirmative vote of a plurality of the votes
cast for the election of directors at the Special Meeting. The approval of the
Plan Proposals and the Accountants Proposal will require the affirmative vote
of the holders of a majority of the outstanding shares of Sequoia Common Stock
present or represented at the Special Meeting. The approval of the Charter
Amendment, the Director Proposal, the Plan Proposals and the Accountants
Proposal is not a condition to the approval of the Acquisition Proposal.
The By-laws of the NASD require a Nasdaq National Market issuer to obtain
stockholder approval for any transaction in connection with the acquisition of
capital stock or assets of another company if (i) the common stock to be issued
in such transaction will have voting power equal to or in excess of 20% of the
voting power outstanding before such issuance, or (ii) the number of shares to
be issued is or will be equal to or in excess of 20% of the number of shares of
common stock outstanding before such issuance. Sequoia proposes to issue
approximately 5,273,000 shares of Common Stock in the Transaction, representing
approximately 53.4% of its outstanding shares of Common Stock outstanding
immediately prior to the Transaction (based on 9,866,956 shares outstanding at
January 31, 1995). As a result, approval of the Transaction by Sequoia's
stockholders is required.
As of January 31, 1995, directors and executive officers of Sequoia and their
affiliates may be deemed to beneficially own approximately 7.2% of the
outstanding shares of Sequoia Common Stock. Each director and executive officer
of Sequoia has advised Sequoia that he intends to vote or direct the vote of
all shares of Sequoia Common Stock over which he has voting control FOR
approval of the Acquisition Proposal, the Charter Amendment, the Director
Proposal, the Plan Proposals and the Accountants Proposal.
As of January 31, 1995, SPCO and its officers, directors and affiliates owned
no shares of Sequoia Common Stock, except that John Leonardo, an executive
officer of TMI, owned 80,000 shares of Sequoia Common Stock.
PROXIES
This Proxy Statement/Prospectus is being furnished to the stockholders of
Sequoia in connection with the solicitation of proxies on behalf of the Sequoia
Board for use at the Special Meeting.
All shares of Sequoia Common Stock which are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not revoked, will be voted at such meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such proxies will be voted:
FOR approval of the Acquisition Proposal, the Charter Amendment, the
Director Proposal, the Plan Proposals and the Accountants Proposal.
If any other matters are properly presented at the Special Meeting for
consideration the persons named in the enclosed form of proxy and acting
thereunder will have discretion to vote on such matters in accordance with
their best judgment.
26
<PAGE>
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 Sequoia, at or before the taking of the vote at the
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 Sequoia, before the taking of the vote at the
Special Meeting, or (iii) attending the Special Meeting and voting in person
(although attendance at the 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 Sequoia Systems, Inc.,
400 Nickerson Road, Marlborough, Massachusetts 01752, Attention: Secretary,
prior to the commencement of the Special Meeting.
All expenses of Sequoia's solicitation of proxies, including the cost of
preparing and mailing this Proxy Statement/Prospectus, will be borne by
Sequoia. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Sequoia in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees soliciting proxies will not be additionally compensated, but may
be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Sequoia has retained Morrow & Co., Inc. for assistance in
connection with the Special Meeting at an estimated expense of approximately
$5,500, plus reasonable out-of-pocket expenses. Arrangements will also be made
with custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and Sequoia will reimburse such persons for
reasonable expenses incurred in connection therewith.
SPCO WRITTEN CONSENT
This Proxy Statement/Prospectus is being furnished to the stockholders of
SPCO on behalf of the SPCO Board for use in connection with the SPCO Written
Consent. The expenses of obtaining the SPCO Written Consent, which are not
expected to be material, will be borne by SPCO.
The SPCO Board intends to circulate the SPCO Written Consent to the holders
of SPCO Common Stock pursuant to Section 228 of the DGCL on or about the date
of this Proxy Statement/Prospectus. As of January 31, 1995, and prior to the
SPCO Stock Split, there were 50,000 shares of SPCO Common Stock outstanding.
The purpose of the SPCO Written Consent is to solicit the approval of the
holders of SPCO Common Stock to the Merger and the Acquisition Agreement. The
approval by SPCO's stockholders of the Merger and the Acquisition Agreement
will require the affirmative consent of the holders of a majority of the
outstanding shares of SPCO Common Stock.
As of January 31, 1995, directors and executive officers of SPCO and their
affiliates may be deemed to beneficially own 100% of the outstanding shares of
SPCO Common Stock. Each director and executive officer of SPCO has indicated
his intention to consent to (and to cause all shares of SPCO Common Stock over
which he has voting control to consent to) approval of the Merger and the
Acquisition Agreement. As of January 31, 1995, Sequoia and its officers,
directors and affiliates owned no shares of SPCO Common Stock.
If the SPCO Written Consent is properly executed and returned by holders of a
majority of the outstanding shares of SPCO Common Stock, the holders of SPCO
Common Stock will have, in accordance with the DGCL, approved the Merger and
the Acquisition Agreement.
SPCO STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR SIGNED
SPCO WRITTEN CONSENTS.
27
<PAGE>
ITEM 1--APPROVAL OF THE TRANSACTION
BACKGROUND OF THE TRANSACTION
In recent years Sequoia has from time to time had discussions with other
participants in the fault-tolerant computer industry in an effort to expand
Sequoia's fault-tolerant product offerings. In the course of such discussions,
Sequoia has considered possible alliances, combinations and transactions with
various industry participants, including companies both larger and smaller than
Sequoia. In particular, Sequoia has considered product marketing alliances,
product development ventures, acquisitions and related transactions.
During this same period of time, the senior management of the TMI Group began
to consider similar strategic alliances, combinations and transactions.
In the spring of 1994, on behalf of the senior management of the TMI Group,
Needham & Co., an investment banking firm retained by the TMI Group
("Needham"), approached Sequoia and suggested a possible business combination.
Shortly thereafter, the senior management of Sequoia and the TMI Group began
discussions concerning such a possible business combination. To facilitate
these discussions, on May 9, 1994, the parties entered into a Confidentiality
Agreement under which each agreed to maintain the confidentiality of the other
party's confidential information.
On June 7, 1994, as part of a regularly scheduled meeting of the Sequoia
Board, the management of Sequoia reported to the Sequoia Board as to the status
of the discussions with the TMI Group and addressed questions and comments of
the Sequoia Board with respect to a possible business combination with the TMI
Group. The Sequoia Board authorized and instructed management to explore the
possibility of a business combination with the TMI Group and to continue
discussions with representatives of the TMI Group.
Shortly after the June 7, 1994 Sequoia Board meeting, Messrs. McMullan and
Patterson, the Chief Executive Officers of Sequoia and the TMI Group,
respectively, further discussed the possibility of considering a combination of
the two companies. Following this conversation, the senior management teams of
Sequoia and the TMI Group began to explore the feasibility of a strategic
business combination.
Following several weeks of discussions between the senior management of
Sequoia and the TMI Group, in person and by telephone, on or about July 21,
1994 the parties concluded that they could not reach agreement on the terms of
a transaction and negotiations were terminated.
The primary reasons negotiations terminated on or about July 21, 1994
concerned (i) the inability by the parties, as a result of volatility in the
price of Sequoia Common Stock, to agree as to the existence and level of
certain caps and collars on the number of shares of Sequoia Common Stock to be
issued in the Transaction, and (ii) the number of representatives on Sequoia's
Board of Directors sought by TMI Group management and the roles those
representatives would play as members of Sequoia's Board.
During early August 1994, at the suggestion of the TMI Group, representatives
of Sequoia and the TMI Group reopened negotiations. As a result of such
negotiations, it was ultimately agreed that the number of shares to be issued
in the Transaction would be fixed, that the TMI Group would be entitled to two
representatives on Sequoia's Board of Directors and that the roles to be played
by those representatives would be determined by the Sequoia Board in the
ordinary course after their election.
At a meeting of the Sequoia Board on August 18, 1994, after preliminary
discussion concerning (i) the strategic factors that supported a possible
business combination and (ii) the product line, technology and market position
of the TMI Group, the Sequoia Board authorized Mr. McMullan to continue
negotiations with the management of the TMI Group. On the same date, Sequoia
and the TMI Group entered into an agreement which obligated the TMI Group not
to solicit other acquisition offers prior to September 14, 1994 and also
included customary provisions regarding due diligence and confidentiality.
28
<PAGE>
An understanding on the general structure of a transaction was reached on
August 22, 1994. During the balance of August and September, Messrs. McMullan
and Goldman of Sequoia engaged in a series of discussions and negotiations with
Messrs. Patterson and Stewart of the TMI Group, both at meetings in Houston,
Texas and Marlborough, Massachusetts and by telephone. The parties
simultaneously conducted due diligence as to each other's business and
discussed the business, operations and technology of each company and of the
combined company that would result from a business combination, including
potential opportunities to leverage each other's business and realize economies
of scale. Sequoia delivered a first draft of a proposed Acquisition Agreement
to the TMI Group on September 2, 1994.
On October 4, 1994, as part of a special meeting of the Sequoia Board,
Sequoia's management made a presentation on the considerations related to, and
addressed questions of the Sequoia Board with respect to, a possible business
combination with the TMI Group. Specifically, management reported on the
results of its review of the technology of the TMI Group and its views
regarding the organizational structure of a combined entity. Sequoia's legal
counsel reviewed the principal terms of the proposed Acquisition Agreement and
related documents and engaged in a discussion with Sequoia Board members
concerning the directors' fiduciary duties in considering a business
combination. Broadview Associates, L.P. ("Broadview"), Sequoia's financial
advisor, reviewed the strategic rationale for, and certain financial analyses
relating to, the proposed business combination. See "Item 1--Approval of The
Transaction--Opinion of Sequoia's Financial Advisor". The Sequoia Board
authorized Sequoia's management to continue the discussions with the TMI Group
as to a possible business combination.
Negotiations between the management of Sequoia and the TMI Group continued
throughout October and early November, both as to the structure of the
transaction and the form of the Acquisition Agreement. Final agreement on the
aggregate amount of consideration to be paid by Sequoia for all outstanding
shares of SPCO Common Stock, the Unvested TMI Options and the Keystone Shares
was reached over the course of several discussions between Mr. McMullan and the
TMI Group's management (which was in contact with Keystone as well) during the
period of October 28 to November 1, 1994.
At a regularly scheduled meeting of the Sequoia Board on November 8, 1994,
Messrs. McMullan and Goldman reviewed the course of recent negotiations,
including changes to the structure of the transaction and the consideration to
be paid, and counsel summarized the status of the Acquisition Agreement and
related documents. Mr. McMullan also reviewed recent TMI Group financial data
and potential product and technology opportunities presented by a business
combination of the TMI Group and Sequoia. OnNovember 8, 1994 Broadview
delivered its oral opinion relating to the fairness of the proposed transaction
and delivered their written opinion on November 9, 1994. The Sequoia Board,
acting on the recommendation of Sequoia's management and in view of the
favorable fairness opinion of Broadview, approved the proposed Transaction,
Acquisition Agreement and related documents.
On November 9, 1994, Sequoia, Sub, SPCO and Keystone executed the Acquisition
Agreement. The Acquisition Agreement was amended as of February 7, 1995 in
order to provide that the Tax Opinion will be delivered to the TMI Group and to
make certain other minor changes. The Acquisition Agreement was further amended
as of February 23, 1995 to make receipt of the required tax opinions non-
waivable conditions.
Due to the unusual and complex structure of the TMI Group prior to the
Transaction and the desire of Sequoia to structure the Transaction in a manner
qualifying for accounting treatment as a "pooling of interests" as well as the
liability and indemnification considerations typically present in acquisition
transactions, the structual considerations were complex. The ultimate structure
of the Transaction reflected the judgment of the parties as to the best means
to implement the principal goals of the parties within the context of
negotiated financial terms.
REASONS FOR THE TRANSACTION; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Sequoia Board recommends that the stockholders of Sequoia approve the
Transaction and the Acquisition Agreement and vote FOR the approval of the
Acquisition Proposal for the reasons set forth below. The SPCO Board recommends
that the stockholders of SPCO CONSENT TO the approval of the Merger and the
Acquisition Agreement for the reasons set forth below.
29
<PAGE>
Sequoia's Reasons for the Transaction
Sequoia believes that the Transaction will benefit Sequoia in several
important ways:
First, by combining its fault-tolerant product offerings with those of the
TMI Group, Sequoia would be able to develop and subsequently offer a fault-
tolerant product line ranging from a desktop personal computer to a large
server. Sequoia believes that the broadened fault-tolerant product line
resulting from the two companies' complementary products would give Sequoia a
competitive advantage.
Second, Sequoia has identified the telecommunications industry as a desirable
market for its products. The TMI Group has achieved initial market penetration
in the telecommunications marketplace, in large part by introducing SPARC-based
computer products (based on a Reduced Instruction Set Computing Chip originally
developed by Sun) which meet Bellcore Network Equipment Building Specifications
("NEBS"). Leveraging Sequoia's computer systems and technology with that of the
TMI Group affords Sequoia the opportunity to (i) utilize the TMI Group's
technology to assist Sequoia in developing NEBS-compliant, fault-tolerant
servers, and (ii) increase each company's penetration in the telecommunications
market under the TMI Group's established brand name.
Third, the Transaction would enable Sequoia to explore the possibility of
utilizing the TMI Group's existing distribution channels to more efficiently
sell Sequoia products in Europe.
Fourth, although not a primary reason for undertaking the Transaction, the
Transaction would initially double the combined entity's size (based on fiscal
1994 revenues of Sequoia and the TMI Group), providing a critical mass which
could result in certain cost efficiencies (such as in materials procurement and
financing) and thus enabling each of the constituent entities to operate more
efficiently.
Fifth, the TMI Group possesses significant surface mount manufacturing
capabilities. Following the Transaction, Sequoia intends to consider
outsourcing certain of its manufacturing needs through the TMI Group rather
than through more expensive, unaffiliated third parties.
The Sequoia Board also considered a number of risks associated with the
Transaction prior to its approval thereof, including (i) the fact that the TMI
Group operates in the highly-competitive industrial computer market against
much larger and better financed companies, including IBM and Siemens; (ii) the
TMI Group's reliance on a limited number of suppliers and manufacturers for
certain key components; (iii) the business risks inherent in the significant
amount of international sales of the TMI Group; and (iv) the TMI Group's lack
of proprietary technology which could limit the TMI Group's protection against
existing and future competitors.
On balance, however, the Sequoia Board determined that the benefits
outweighed the potential risks and unanimously approved the Transaction.
SPCO's Reasons for the Merger
In addition to the joint benefits summarized above, the SPCO Board believes
that the following are additional reasons for stockholders of SPCO to CONSENT
TO the approval of the Merger and Acquisition Agreement:
The combination of the TMI Group and Sequoia would provide the TMI Group with
access to Sequoia's proprietary technology, particularly in the areas of fault
tolerance and data integrity, which the TMI Group believes it can utilize in
its microcomputer products. The greater financial resources made available by
the combined companies, including greater access to financial markets, and the
TMI Group's position as a unit of a publicly-traded corporation, are expected
to enhance the TMI Group's ability to sell its products to large customers in
the telecommunications market.
In addition, although not a principal reason for the Transaction, the
Transaction would provide SPCO's stockholders with increased liquidity with
respect to their investment in SPCO.
30
<PAGE>
OPINION OF SEQUOIA'S FINANCIAL ADVISOR
Sequoia retained Broadview in early 1993 to act as Sequoia's financial
advisor with respect to potential business combinations with other parties.
Broadview, an independent advisory firm, has offices in Redwood City,
California, Fort Lee, New Jersey and London, England. Broadview specializes in
mergers and acquisitions of information technology businesses. Sequoia selected
Broadview, after considering a number of competing firms, based upon
Broadview's reputation in the industry and its expertise in valuing companies
similar to the TMI Group.
Pursuant to the terms of its engagement of Broadview, Sequoia has agreed to
pay Broadview a fee based on the value of the consideration to be paid by
Sequoia in the Transaction. This fee is estimated to be between $410,000 and
$515,000, payable in cash upon the consummation of the Transaction, for
assisting Sequoia in the planning and negotiation of the financial aspects of
the Transaction, including the rendering of its opinion for which Broadview was
separately engaged in October 1994.
The amount of consideration to be paid by Sequoia in connection with the
Transaction was determined as the result of negotiations among Sequoia,
Keystone and the TMI Group. Broadview was then asked by Sequoia to determine
the fairness, from a financial point of view, of such consideration to the
stockholders of Sequoia.
Broadview delivered to the Sequoia Board its oral opinion on November 8,
1994, and its written opinion dated November 9, 1994, each to the effect that,
as of its respective date and based upon and subject to certain matters as
stated in the written opinion, the Transaction is fair to Sequoia's
stockholders from a financial point of view. Broadview relied without
independent verification upon the accuracy and completeness of all of the
financial and other information reviewed by it for purposes of its opinion. In
addition, Broadview did not make or obtain an independent evaluation or
appraisal of the assets and liabilities of Sequoia or SPCO or any of their
respective subsidiaries and was not furnished with any such evaluation or
appraisal. No limitations were imposed by Sequoia on Broadview with respect to
the investigations made or procedures followed by Broadview in rendering its
opinion. A COPY OF THE OPINION OF BROADVIEW IS ATTACHED HERETO AS ANNEX B.
STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY BROADVIEW.
In rendering its opinion, Broadview, among other things, (i) reviewed the
terms of the Acquisition Agreement; (ii) reviewed the TMI Group's combined
financial statements for the fiscal years ended June 30, 1991, 1992 and 1993
and draft combined financial statements for the fiscal year ended June 30,
1994; (iii) analyzed certain financial projections prepared by the management
of the TMI Group; (iv) reviewed certain information relating to the business,
revenue, backlog, earnings and assets of the TMI Group provided by the TMI
Group's management; (v) reviewed market research studies provided by the TMI
Group's management relating to the TMI Group and competitive trends in the
information technology ("IT") industry; (vi) analyzed both public and private
information concerning other mergers and acquisitions in the IT industry; and
(vii) participated in discussions with the management of the TMI Group
concerning the operations, business strategy, financial performance and future
prospects of the TMI Group.
Broadview assumed and relied upon, without independent verification, the
accuracy and completeness of all of the financial and other information that
was publicly available or furnished to Broadview by the TMI Group or Sequoia.
With respect to the financial projections reviewed by Broadview, Broadview
assumed that such projections were reasonably prepared and reflected the best
estimates and good faith judgments of the respective managements of the TMI
Group and Sequoia as to the future performance of the TMI Group and Sequoia.
Broadview did not make or obtain an independent appraisal or valuation of any
of the TMI Group's assets.
In preparing its opinion to the Sequoia Board, Broadview performed a variety
of financial and comparative analyses, including those described below. The
summary of such analyses does not purport to be a complete description of the
analyses underlying Broadview's opinion. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
such methods to particular circumstances.
31
<PAGE>
Accordingly, such an opinion is not readily susceptible of summary description.
Broadview believes that its fairness analysis must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion.
The following is a brief summary of Broadview's presentation to the Sequoia
Board made onNovember 8, 1994.
Broadview employed a (i) transaction comparables analysis, (ii) public
company comparables analysis, (iii) discounted cash flow analysis to determine
the value of the TMI Group, and (iv) relative contribution analysis. In
addition, Broadview identified certain factors which positively affected the
TMI Group valuation (including the TMI Group's strong market position,
telecommunications market penetration, diversified products and high growth
market segment) and other factors which negatively affected the TMI Group's
valuation (including the TMI Group's highly competitive market segment, lack of
proprietary technology and limited management infrastructure) (collectively,
the "Valuation Factors"). Each component of Broadview's analysis is summarized
below:
Transaction Comparables Analysis. Using data obtained from Broadview's
proprietary database of mergers and acquisitions in the IT industry, Broadview
compared adjusted price to revenue multipliers for seven other transactions in
the IT industry. Broadview found that the median adjusted price to revenue
multiplier was .55. Broadview then applied a 25% premium to this median to
reflect the strong market position of the TMI Group as well as its weighting of
the other Valuation Factors yielding an overall valuation of the TMI Group of
approximately $31.2 million. This valuation is greater than the estimated
consideration of approximately $20.6 million (calculated by multiplying 5.2
million shares of Sequoia Common Stock by $3.97, the 30-day average closing
price of Sequoia Common Stock as of November 8, 1994) (the "Estimated
Consideration") and therefore supports Broadview's recommendation as to the
fairness of the Transaction.
Public Company Comparables Analysis. Using publicly available information,
Broadview analyzed various financial multiples including total market
capitalization to revenue and price to earnings multiples of public companies
sharing many characteristics of the TMI Group. This analysis is designed to
demonstrate the value public markets place on companies in a given market
segment. Broadview examined ten public companies and found a median trailing
twelve-month revenue growth of 11.5%, a pre-tax margin of 8.0%, a total market
capitalization to revenue ratio of .93 and a price to earnings ratio of 15.4.
Based on these findings and its consideration of the Valuation Factors,
Broadview applied no discount or premium to the total market capitalization to
revenue or price to earnings multiples when valuing the TMI Group yielding an
overall valuation of the TMI Group of approximately $28.4 million. This
valuation is greater than the Estimated Consideration and therefore supports
Broadview's recommendation as to the fairness of the Transaction.
Discounted Cash Flow Analysis. Broadview then employed a three-year projected
free cash flow estimate from June 30, 1994 to June 30, 1997. These cash flow
analyses were based on financial projections prepared by the management of the
TMI Group and assumed discount rates between 12% and 18% and a base case of 15%
yielding an overall valuation of the TMI Group of $33.9 million. This valuation
is greater than the Estimated Consideration and therefore supports Broadview's
recommendation as to the fairness of the Transaction.
Relative Contribution Analysis. In addition, Broadview performed a relative
contribution analysis based on Sequoia's and the TMI Group's projected revenue
and operating income for the fiscal year endingJune 30, 1995. This analysis
adjusted each company's number of shares for cash and debt levels to determine
the relative contributions of each company independent of its balance sheet.
This analysis showed that the valuation of the TMI Group based on revenue and
operating income contributions is 35.3% and 27.1%, respectively, of the
combined entity. Equally weighted, these figures represent a value of 31.2%,
slightly below the agreed upon consideration of approximately 5.2 million
shares, or approximately 33.35% of the combined entity on a fully-diluted
basis. Based on this analysis, Sequoia's stockholders are giving up a slightly
more than proportionate ownership interest in the combined entity based on
relative revenue and operating income contributions. This analysis, therefore,
weakens Broadview's recommendation as to the fairness of the Transaction.
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<PAGE>
From an overall perspective, it was Broadview's opinion that the
Transactions Comparables Analysis, Public Company Comparables Analysis and
Discounted Cash Flow Analysis far outweigh the Relative Contribution Analysis,
therefore supporting Broadview's recommendation as to the fairness of the
Transaction.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the recommendation of the Sequoia Board with respect to the
Acquisition Proposal, and the recommendation of the SPCO Board with respect to
the Merger and the Acquisition Agreement, stockholders should be aware that
certain members of the management of the TMI Group and the SPCO Board have
interests in the Transaction that are in addition to the interests of
stockholders of Sequoia and SPCO generally. The SPCO Board consists of J.
Michael Stewart and W. Wayne Patterson, SPCO's principal stockholders. In
addition, Mr. Stewart will be hired by Sequoia and Mr. Patterson will enter
into an advisory agreement with Sequoia at the Effective Time. See "The
Acquisition Agreement--Employment and Advisory Arrangements with Messrs.
Stewart and Patterson". The Board of Directors of each of Sequoia and SPCO was
aware of these interests and considered them, among other matters, in
approving the Acquisition Proposal, the Merger, the Acquisition Agreement and
the transactions contemplated thereby.
INTENTIONS TO VOTE
As of January 31, 1995, directors and executive officers of Sequoia and
their affiliates may be deemed to beneficially own approximately 7.2% of the
outstanding shares of Sequoia Common Stock. Each director and executive
officer of Sequoia has advised Sequoia that he intends to vote or direct the
vote of all the outstanding shares of Sequoia Common Stock over which he has
voting control in favor of approval of the Acquisition Proposal, the Charter
Amendment, the Director Proposal, the Plan Proposals and the Accountants
Proposal.
As of January 31, 1995, directors and executive officers of SPCO and their
affiliates may be deemed to beneficially own 100% of the outstanding shares of
SPCO Common Stock. Each director and executive officer of SPCO has indicated
that he intends to consent to (and to cause all shares of SPCO Common Stock
over which he has voting control to consent to) approval of the Merger and the
Acquisition Agreement. Therefore, approval of the Merger and the Acquisition
Agreement by the SPCO stockholders should be considered highly likely.
However, since closing of the Transaction is subject to the fulfillment or
waiver of the conditions contained in the Acquisition Agreement, closing of
the Transaction cannot be guaranteed. See "The Acquisition Agreement--
Conditions".
CERTAIN ARRANGEMENTS REGARDING THE SEQUOIA BOARD FOLLOWING THE TRANSACTION
Pursuant to the Acquisition Agreement, the full Sequoia Board at the
Effective Time will consist of seven directors, one of whom shall be
designated by W. Wayne Patterson, subject to the reasonable approval of the
Sequoia Board, and the other of whom shall be J. Michael Stewart. Mr.
Patterson has not yet indicated his designation of a Sequoia Board member. See
"Item 3--Election of Directors".
Upon the Effective Time, the executive officers of Sequoia will be as
follows: Cornelius P. McMullan, President and Chief Executive Officer; Jack J.
Stiffler, Executive Vice President and Chief Technical Officer and General
Manager, Technology Business Unit; Richard B. Goldman, Vice President, Finance
and Chief Financial Officer; J. Michael Stewart, Executive Vice President;
David A. Butler, Vice President and Treasurer; Ronald J. Gellert, Vice
President and General Manager, Systems Business Unit; William C. Gould, Vice
President, Customer Service; Andrew P. Wood, Vice President Manufacturing,
Geoffrey R. Cluett, Vice President, International, John M. Owens, Vice
President, Engineering; and Jeremy F. Swett, Vice President, General Counsel
and Secretary. See "Sequoia Systems, Inc.--Directors and Executive Officers of
Sequoia".
ACCOUNTING TREATMENT
The Transaction is intended to qualify as a pooling of interests for
accounting and financial reporting purposes. Sequoia and the TMI Group have
been advised by, and will receive letters from Coopers & Lybrand, Sequoia's
independent accountants, and Arthur Andersen, the TMI Group's independent
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<PAGE>
accountants, to the effect that, the Transaction will qualify as a pooling of
interests for accounting and financial reporting purposes. Under this method of
accounting, the recorded assets and liabilities of Sequoia and the TMI Group
will be carried forward to the combined entity at their recorded amounts,
income of the combined entity will include income of Sequoia and the TMI Group
for the entire fiscal year in which the combination occurs and the reported
income of the separate companies for prior periods will be combined and
restated as income of the combined company. Consummation of the Transaction is
conditioned upon receipt of such letters at the Effective Time. See "The
Acquisition Agreement--Conditions" and "Unaudited Pro Forma Combined Condensed
Financial Statements".
The respective affiliates of Sequoia and the TMI Group will each execute
written agreements to the effect that such person will not transfer shares of
Sequoia Common Stock or SPCO Common Stock during the period beginning 30 days
preceding the Effective Time and ending on the date that Sequoia publishes
financial statements which reflect 30 days of combined operations of Sequoia
(which agreements relate to the ability of Sequoia to account for the
Transaction as a pooling of interests).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following addresses the material federal income tax considerations of the
Transaction that are applicable to holders of SPCO Common Stock. It is a
condition to the closing of the Transaction that Arthur Andersen, independent
accountants to the TMI Group, render an opinion to the effect that (i) the
Merger will constitute a "reorganization" (a "Reorganization") within the
meaning of Section 368 of the Code, and (ii) the BriskHeat Spin-Off constitutes
a tax-free transaction to SPCO and the stockholders of SPCO under Section 355
of the Code. Such opinion will be based on certain assumptions and subject to
certain qualifications and will be based on the truth and accuracy of certain
representations of Sequoia, the TMI Group and Sub, including representations in
certain certificates of the respective managements of Sequoia, the TMI Group
and Sub dated on or prior to the date of this Proxy Statement/Prospectus.
Sequoia and SPCO have agreed not to waive the condition that Arthur Andersen
render an opinion to the foregoing effect.
SPCO's stockholders should be aware that this section does not deal with all
federal income tax considerations that may be relevant to particular SPCO
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are foreign persons or who acquired their
SPCO Common Stock through stock option or stock purchase programs or in other
compensatory transactions. In addition, other than with respect to the
BriskHeat Spin-Off, the following discussion does not address the tax
consequences of transactions effectuated prior to or after the Merger (whether
or not such transactions are in connection with the Merger) including, without
limitation, the exercise of options or rights to purchase SPCO Common Stock in
anticipation of the Merger. Finally, no foreign, state or local tax
considerations are addressed herein. Accordingly, SPCO'S STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
TRANSACTION, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM.
The following discussion is based on the opinion to be rendered at Closing by
Arthur Andersen, which opinion will be based on Arthur Andersen's
interpretation of the Code, applicable Treasury Regulations, judicial authority
and administrative rulings and practice, all as then in effect. The IRS is not
precluded from adopting a contrary position. In addition, there can be no
assurance that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the Transaction
to Sequoia, the TMI Group and their respective stockholders.
Subject to the limitations and qualifications referred to herein, and as a
result of the Transaction's qualifying as a Reorganization and the BriskHeat
Spin-Off constituting a tax-free transaction, Arthur Andersen's opinion will be
to the effect that:
(a) No gain or loss will be recognized by the holders of SPCO Common
Stock upon the receipt of Sequoia Common Stock solely in exchange for such
SPCO Common Stock in the Merger (except to the extent of cash received in
lieu of fractional shares, if any).
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<PAGE>
(b) The aggregate tax basis of the Sequoia Common Stock so received by
SPCO's stockholders in the Merger (including any fractional share of
Sequoia Common Stock not actually received) will be the same as the
aggregate tax basis of the SPCO Common Stock surrendered in exchange
therefor.
(c) The holding period of the Sequoia Common Stock so received by each
SPCO stockholder in the Merger will include the period for which the SPCO
Common Stock surrendered in exchange therefor was considered to be held,
provided that the SPCO Common Stock so surrendered is held as a capital
asset at the Effective Time.
(d) Cash payments received by holders of SPCO Common Stock in lieu of a
fractional share will be treated as if such fractional share of Sequoia
Common Stock has been issued in the Merger and then redeemed by Sequoia.
(e) None of Sequoia, Sub or SPCO will recognize gain or loss solely as a
result of the Merger.
(f) The BriskHeat Spin-Off will constitute a tax-free transaction to SPCO
and its stockholders.
Neither Sequoia nor SPCO has requested a ruling from the IRS in connection
with the Transaction. The tax opinion to be rendered by Arthur Andersen at the
Closing of the Transaction neither binds the IRS nor precludes the IRS from
adopting a contrary position.
A successful IRS challenge to the Reorganization status of the Merger would
result in a SPCO stockholder recognizing gain or loss with respect to each
share of Common Stock of SPCO surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, as of the
Effective Time of the Merger, of the Sequoia Common Stock received in exchange
therefor. In such event, a stockholder's aggregate basis in the Sequoia Common
Stock so received would equal its fair market value, and the stockholder's
holding period for such stock would begin the day after the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
Sequoia Common Stock would recognize gain to the extent that such shares were
considered to be received in exchange for services or property (other than
solely SPCO Common Stock). All or a portion of such gain may be taxable as
ordinary income. Gain would also have to be recognized to the extent that a
SPCO stockholder was treated as receiving (directly or indirectly)
consideration other than Sequoia Common Stock in exchange for the stockholder's
SPCO Common Stock.
If the BriskHeat Spin-Off is deemed a taxable transaction, the TMI Group
would realize gain to the extent that the fair market value of the BriskHeat
Common Stock exceeds the TMI Group's tax basis in such shares. The tax
liability resulting from a "taxable spin-off" would be borne by Sequoia as the
sole stockholder of SPCO following the Effective Time of the Merger. If the
BriskHeat Spin-Off is taxable, the IRS could dispute the valuation of the
BriskHeat Common Stock resulting in a greater tax burden to the TMI Group and
Sequoia. The Indemnifying Persons will be required to indemnify Sequoia against
any tax liabilities resulting from the BriskHeat Spin-Off. See
"Indemnification".
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Sequoia Common Stock received by Messrs. Stewart and Patterson
and by other persons who may be deemed to be "affiliates" (as such term is
defined under the Securities Act) of SPCO prior to the Transaction may be
resold by them only in transactions permitted by the resale provisions of Rule
145 promulgated under the Securities Act (or Rule 144 promulgated under the
Securities Act in the case of such persons who become affiliates of Sequoia),
pursuant to an effective Registration Statement under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of SPCO or Sequoia generally include individuals or entities that
control, are controlled by, or are under common control with, such party and
may include certain officers and directors of such party as well as principal
stockholders of such party. The Acquisition Agreement requires SPCO to use its
best efforts to cause each of
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<PAGE>
its affiliates to execute a written agreement to the effect that such person
will not offer or sell or otherwise dispose of any of the shares of Sequoia
Common Stock issued to such person in the Transaction in violation of the
Securities Act or the rules and regulations promulgated by the Commission
thereunder. For purposes of the resale provisions of Rule 145, Sequoia has been
advised by the TMI Group that Keystone is not an affiliate of SPCO. All shares
of Sequoia Common Stock received by Keystone and other persons who are not
affiliates of SPCO or Sequoia will be freely transferable.
The Acquisition Agreement provides that Sequoia shall provide SPCO's
stockholders and Keystone with certain registration rights relating to the
shares of Sequoia Common Stock they receive in the Transaction. See "The
Acquisition Agreement--Registration Rights".
NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the Closing of the Transaction that the shares of
Sequoia Common Stock to be issued in the Transaction be approved for quotation
of the Nasdaq National Market. An Additional Shares Listing Application was
filed on February 7, 1995 for listing the shares of Sequoia Common Stock on the
Nasdaq National Market in order to satisfy this condition.
APPRAISAL RIGHTS
Holders of Sequoia Common Stock are not entitled to dissenters' appraisal
rights under the DGCL in connection with the Transaction because Sequoia is not
a constituent corporation in the Merger. Holders of SPCO Common Stock are
entitled to dissenters' appraisal rights under the DGCL. See "Appraisal Rights
of SPCO Stockholders".
REGULATORY APPROVALS
No state or federal regulatory approvals are required relating to the
Transaction, the Acquisition Agreement or the transactions contemplated thereby
other than the effectiveness of the Registration Statement of which this Proxy
Statement/Prospectus is a part.
THE ACQUISITION AGREEMENT
The following is a brief summary of the background of the Transaction and of
certain provisions of the Acquisition Agreement. Such summary is qualified in
its entirety by reference to the Acquisition Agreement. Stockholders of Sequoia
and of SPCO are urged to read the Acquisition Agreement in its entirety for a
more complete description of the Transaction.
RESTRUCTURING PRIOR TO THE TRANSACTION
As part of the transactions contemplated by this Proxy Statement/Prospectus,
the TMI Group and certain of its affiliates are undertaking the series of
transactions summarized below.
Prior to October 31, 1994, SPCO owned 50,000 shares of the issued and
outstanding shares of the Common Stock, $.01 par value per share ("BriskHeat
Common Stock"), of BriskHeat, representing 100% of the issued and outstanding
capital stock of BriskHeat. BriskHeat had no class of capital stock issued or
outstanding except for the BriskHeat Common Stock. On October 31, 1994, SPCO
effected the BriskHeat Spin-Off, pursuant to which SPCO distributed its
BriskHeat Common Stock pro rata among its stockholders. As of the date of the
execution of the Acquisition Agreement (the "Execution Date"), Messrs.
Patterson and Stewart each owned 42.5% of the TME Common Stock, and Keystone
owned 15% of the TME Common Stock.
As of the Execution Date, Messrs. Patterson and Stewart and their respective
affiliates owned, in the aggregate, 50,000 shares of SPCO Common Stock,
representing 100% of the then issued and outstanding capital stock of SPCO. As
of the Execution Date, SPCO owned 8,500,000 shares of TMI Common Stock,
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representing 85% of the issued and outstanding capital stock of TMI, and
Keystone owned 1,500,000 shares of TMI Common Stock, representing 15% of the
issued and outstanding capital stock of TMI. In addition, at the Execution
Date, there were outstanding options to purchase 965,000 shares of TMI Common
Stock (the "TMI Options"), of which 367,500 shares were exercisable at the
Execution Date and the balance were unexercisable.
Prior to the Closing of the transactions contemplated by the Acquisition
Agreement, the following transactions will be consummated in the following
sequence. First, SPCO will effect a 170-for-1 stock split with respect to the
50,000 shares of SPCO Common Stock issued and outstanding as of the Execution
Date, as a result of which there will be 8,500,000 shares of SPCO Common Stock
issued and outstanding immediately after such stock split. Second, Messrs.
Patterson and Stewart will contribute their TME Common Stock to TMI as a
capital contribution (the "TME Stock Contribution"). Third, the TMI Options, to
the extent exercisable at the Execution Date, have been or will be exercised
and the 367,500 shares of TMI Common Stock issued upon such exercise will be
contributed to SPCO in exchange for an aggregate of 367,500 shares of SPCO
Common Stock.
Immediately prior to the Closing, and after giving effect to the foregoing
transactions, (i) SPCO will own 8,867,500 shares of TMI Common Stock,
representing approximately 85.53% of the issued and outstanding capital stock
of TMI, (ii) TMI will own 85% of the issued and outstanding capital stock of
TME, (iii) Keystone will own 1,500,000 shares of TMI Common Stock, representing
approximately 14.47% of the issued and outstanding capital stock of TMI, and
(iv) Keystone will own 15% of the issued and outstanding capital stock of TME.
The Acquisition Agreement contemplates the merger of Sub with and into SPCO
(the "Merger"). In the Merger, the stockholders of record of SPCO at the
Effective Time will receive capital stock of Sequoia in exchange for all of the
issued and outstanding capital stock of SPCO. Simultaneously with the Merger,
Sequoia will (i) purchase from Keystone the Keystone Shares in exchange for
752,351 shares of Sequoia Common Stock, and (ii) issue an aggregate of
approximately 73,000 shares of Sequoia Common Stock in exchange for the
Unvested TMI Options.
At the Effective Time, and after giving effect to the Transaction and the
other transactions contemplated in the Acquisition Agreement: (i) Sequoia will
own 100% of the issued and outstanding capital stock of SPCO, approximately
14.47% of the issued and outstanding capital stock of TMI and 15% of the issued
and outstanding capital stock of TME, (ii) SPCO will own approximately 85.53%
of the issued and outstanding capital stock of TMI, and (iii) TMI will own 85%
of the issued and outstanding capital stock of TME.
THE TRANSACTION
The Acquisition Agreement provides that, following the approval of the
Acquisition Proposal by the requisite number of the stockholders of Sequoia,
and the approval of the Merger and the Acquisition Agreement by the requisite
number of the stockholders of SPCO, and the satisfaction or waiver of the other
conditions to the Transaction, Sub will be merged with and into SPCO, with SPCO
continuing as the continuing corporation (the "Continuing Corporation"), which
will be a wholly-owned subsidiary of Sequoia. The name of the Continuing
Corporation will be changed to Sequoia Holdings, Inc.
If all such conditions to the Transaction are satisfied or waived, the
Transaction will become effective upon the filing by SPCO of a duly executed
Certificate of Merger with the Secretary of State of the State of Delaware or
at such time thereafter as is provided in the Certificate of Merger.
CONVERSION OF SECURITIES
Upon consummation of the Merger each issued and outstanding share of SPCO
Common Stock (other than shares owned by SPCO as treasury stock, which will be
cancelled) will be converted into the right to receive .5015674 share of
Sequoia Common Stock. SPCO stockholders will receive an aggregate of 4,447,649
shares of Sequoia Common Stock in the Merger. Simultaneously with the Merger,
(i) Keystone will receive
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752,351 shares of Sequoia Common Stock for the Keystone Shares, and (ii) the
three holders of the Unvested TMI Options will receive an aggregate of
approximately 73,000 shares of Sequoia Common Stock.
If any person would be entitled to receive a fractional share of Sequoia
Common Stock in the Transaction, then, in lieu of such fractional share, cash
will be paid in an amount equal to the fair market value of such fractional
share of Sequoia Common Stock. Each share of Sub Common Stock issued and
outstanding immediately prior to the Effective Time will be converted into one
share of common stock of the Continuing Corporation.
At the Effective Time, the stockholders of SPCO will deliver certificates
evidencing all shares of SPCO Common Stock and Keystone will deliver
certificates representing the Keystone Shares in exchange for certificates
evidencing the shares of Sequoia Common Stock to which such holders have become
entitled, subject to escrow obligations. SPCO STOCKHOLDERS SHOULD NOT SUBMIT
THEIR CERTIFICATES DIRECTLY TO SEQUOIA.
After the Effective Time, each certificate evidencing SPCO Common Stock,
until so surrendered and exchanged, will be deemed, for all purposes, to
evidence only the right to receive the number of whole shares of Sequoia Common
Stock which the holder of such certificate is entitled to receive and the right
to receive any cash payment in lieu of a fractional share of Sequoia Common
Stock pursuant to the Acquisition Agreement. The holder of such unexchanged
certificate will not be entitled to receive any dividends or other
distributions payable by Sequoia until such holder's certificate has been
exchanged. Subject to applicable laws, such dividends and distributions,
together with any cash payment in lieu of a fractional share of Sequoia Common
Stock, will be paid, without interest.
OWNERSHIP OF SEQUOIA AFTER THE TRANSACTION
Based upon the capitalization of Sequoia as of January 31, 1995 and the
expected capitalization of the TMI Group at the Effective Time, the ownership
of Sequoia Common Stock immediately following consummation of the Transaction
will be approximately as follows:
<TABLE>
<CAPTION>
HOLDERS NUMBER OF SHARES PERCENTAGE
- ------- ---------------- ----------
<S> <C> <C>
Current Sequoia Stockholders........................ 9,866,956 65.1%
W. Wayne Patterson (1).............................. 2,131,661 14.1
J. Michael Stewart (1).............................. 2,131,661 14.1
Keystone............................................ 752,351 5.0
Former holders of vested TMI Options (2)............ 184,327 1.2
Former holders of Unvested TMI Options.............. 73,000 0.5
---------- -----
Total............................................. 15,139,956 100.0%
========== =====
</TABLE>
- --------
(1) Includes affiliates of such holder.
(2) Former holders of vested TMI Options who exercise such TMI Options and
exchange the shares of TMI Common Stock issued upon exercise for SPCO
Common Stock prior to the Effective Time.
REPRESENTATIONS AND WARRANTIES
The Acquisition Agreement contains various customary representations and
warranties relating to, among other things: (a) due organization, valid
existence and good standing of each of Sequoia, SPCO, TMI, TME and Keystone;
(b) the capital structure of each of Sequoia, SPCO, TMI and TME; (c) the
authorization, execution, delivery and enforceability of the Acquisition
Agreement, the consummation of the transactions contemplated by the Acquisition
Agreement and matters relating to each of the parties; (d) conflicts under
charters or By-laws, required consents or approvals and violations of any
instruments or law; (e) documents and financial statements of each of Sequoia
and the TMI Group and the accuracy of the information contained therein; (f)
undisclosed liabilities; (g) the absence of certain material adverse changes or
events; (h) taxes, tax returns and audits; (i) properties; (j) intellectual
property; (k) agreements, contracts and commitments; (l) litigation; (m)
environmental matters; (n) employee benefit plans; (o) compliance with laws;
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(p) eligibility of the Transaction for pooling of interests treatment; (q)
interested party transactions; and (r) the accuracy of information supplied by
Sequoia, the TMI Group and Keystone in connection with the Registration
Statement and this Proxy Statement/Prospectus.
The Acquisition Agreement provides that all representations and warranties
survive the Closing for a period of twelve months, except that: (i) certain
environmental representations made by the TMI Group survive until 36 months
after the Closing Date; (ii) certain representations made by the TMI Group with
respect to TME's license agreement with IBM survive until 18 months after the
Closing Date; and (iii) any claim based upon fraud or a willful
misrepresentation by any party survives the Closing without limitation.
CERTAIN COVENANTS
Each of the parties to the Acquisition Agreement has agreed to: (i) use its
respective best efforts to consummate the transactions contemplated by the
Acquisition Agreement; (ii) obtain all waivers, permits, consents, approvals,
or other authorizations from third parties and governmental entities necessary
for the consummation of the transactions contemplated by the Acquisition
Agreement; (iii) jointly prepare and file with the Commission under the
Exchange Act proxy materials for the purpose of soliciting proxies from Sequoia
stockholders to vote in favor of the Acquisition Proposal; (iv) use its
respective best efforts to cause the Transaction to be accounted for as a
"pooling of interests" under applicable accounting and financial reporting
rules; and (v) promptly notify the other party in writing of the occurrence of
any event or development that would (a) render any statement, representation or
warranty of any party in the Acquisition Agreement inaccurate or incomplete in
any material respect, or (b) constitute or result in a breach by any party or
failure by any party to comply with any agreement or covenant in the
Acquisition Agreement applicable to such party.
SPCO has also agreed (and to cause the TMI Group) to: (i) carry on its
business in the ordinary course of business in substantially the same manner as
previously conducted; (ii) preserve intact its current business operations;
(iii) not accelerate, amend or change the period of exercisability of options
to acquire the capital stock of SPCO and TMI; (iv) not to issue, sell, deliver
or agree to issue or deliver any stock of SPCO or any other securities or any
rights to acquire such securities; (iv) not to split, combine or reclassify any
of its capital stock; (vi) not to declare or set aside any dividends or other
distributions in respect of its capital stock; (vii) not to create or incur any
debt not currently outstanding; (viii) not to amend its charter or By-laws;
(ix) not to change in any material respect its accounting principles or
practices; and (x) not to enter into, amend, terminate or take any action (or
avoid taking action) which would violate the terms of any material agreement.
REGISTRATION RIGHTS
Sequoia has agreed to provide, subject to certain limitations, SPCO's
stockholders, the holders of Unvested TMI Options and Keystone with certain
rights to register under the Securities Act the shares of Sequoia Common Stock
issued in the Transaction. Such registration rights include (i) two demand
registrations, provided that no such demand shall be made within 12 months of
the Closing, and (ii) an unlimited number of incidental registrations. As part
of its registration rights obligations, Sequoia generally shall be responsible
for all expenses associated with preparing and filing the registration
statements for such registrations.
REPRESENTATION ON THE SEQUOIA BOARD
The Sequoia Board has agreed, effective as of the Effective Time, (i) to
elect J. Michael Stewart to serve on the Sequoia Board as a Class III director
for an initial term ending at the Annual Meeting of Stockholders of Sequoia
held after the fiscal year ending June 30, 1996 and (ii) to elect a designee of
W. Wayne Patterson, subject to the reasonable approval of the Sequoia Board, to
serve on the Sequoia Board as a Class II director for an initial term ending at
the Annual Meeting of Stockholders of Sequoia held after the fiscal year ending
June 30, 1995. Mr. Patterson has not yet indicated his designation of a Sequoia
Board member.
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NO SOLICITATION
The Acquisition Agreement provides that the TMI Group will not, directly or
indirectly, through any officer, director, employee, representative or agent
of the TMI Group, (i) solicit, initiate or encourage any inquiries or
proposals that constitute a proposal or offer for a merger, consolidation,
business combination, sale of substantial assets, sale of shares of capital
stock (including without limitation by way of a tender offer) or similar
transactions involving SPCO or any of its subsidiaries, other than the
transactions contemplated by the Acquisition Agreement, or (ii) provide any
non-public information to anyone with respect to the business, assets or
properties of the TMI Group other than as contemplated by the Acquisition
Agreement.
The TMI Group is required to promptly notify Sequoia of, and disclose all
details of, any inquiries, discussions or negotiations of the nature described
above or request for non-public information or access to its properties, books
or records.
NON-COMPETITION
Messrs. Patterson and Stewart have agreed in the Acquisition Agreement that,
for a period of five years after the Effective Time, neither of them nor any
of their affiliates will, except as an officer or employee of Sequoia or the
TMI Group, develop, manufacture, market or sell any product which competes
with any existing or proposed product manufactured, marketed, sold or under
development by Sequoia or the TMI Group at or prior to the Effective Time.
During such five-year period, Messrs. Patterson and Stewart have also agreed
not to (i) be employed by or to provide services to any competitor of Sequoia
or the TMI Group, (ii) recruit or solicit any employee, consultant or
subcontractor of Sequoia or the TMI Group, or (iii) solicit, divert or take
away the business or patronage of any clients, customers or accounts of
Sequoia or the TMI Group.
EMPLOYMENT AND ADVISORY ARRANGEMENTS WITH MESSRS. STEWART AND PATTERSON
Effective as of the Closing, Sequoia will hire Mr. Stewart as Executive Vice
President of Sequoia and as President and Chief Operating Officer of TMI. Mr.
Stewart will receive an initial annual salary of $187,500 and customary
employee benefits. Mr. Stewart will be an employee at-will of Sequoia. Mr.
Stewart has agreed to sign Sequoia's standard invention assignment and
confidentiality agreement for employees.
As of the Closing, Sequoia will enter into a one-year agreement with Mr.
Patterson pursuant to which he will render up to 75 days per year of advisory
services relating to transition arrangements, financial planning and other
organization matters for a fee of $12,500 per month. Sequoia will also
continue to provide to Mr. Patterson his current office space and secretarial
services without charge and will reimburse Mr. Patterson for reasonable and
necessary expenses. Mr. Patterson has agreed to cause TMI to sell to
BriskHeat, at the Effective Time, the automobile and office furniture
currently used by him at a purchase price equal to its book value.
RELATED MATTERS AFTER THE TRANSACTION
At the Effective Time, Sub will be merged with and into SPCO, and SPCO will
be the surviving corporation and a wholly-owned subsidiary of Sequoia.
Accordingly, each of SPCO's subsidiaries will become indirect subsidiaries of
Sequoia. Each share of the common stock of Sub issued and outstanding
immediately prior to the Effective Time will be converted into and exchanged
for one validly issued, fully paid and nonassessable share of SPCO Common
Stock. Each stock certificate of Sub evidencing ownership of any such shares
shall continue to evidence ownership of such shares of SPCO Common Stock.
Unless otherwise determined by Sequoia prior to the Effective Time, at the
Effective Time the Certificate of Incorporation of Sub, as in effect
immediately prior to the Effective Time, will be the Certificate of
Incorporation of the Continuing Corporation except the name will change to
Sequoia Holdings, Inc. The By-laws of Sub, as in effect immediately prior to
the Effective Time, will be the By-laws of the Continuing Corporation except
that the name will be changed to Sequoia Holdings, Inc.
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The directors of Sub immediately prior to the Effective Time will be the
initial directors of the Continuing Corporation, and the officers of Sub
immediately prior to the Effective Time will be the initial officers of the
Continuing Corporation, in each case until their respective successors are duly
elected or appointed and qualified. In addition, at the Effective Time, J.
Michael Stewart will become the President and Chief Operating Officer of TMI.
After the Closing, the TMI Group plans to do business as "Texas Microsystems,
a Sequoia Systems Company".
INDEMNIFICATION
The Acquisition Agreement provides that the stockholders of SPCO, holders of
Unvested TMI Options and Keystone (collectively, the "Indemnifying Persons")
shall, jointly and severally, indemnify and hold harmless Sequoia and the
Continuing Corporation from any debts, obligations, monetary damages, fines,
fees deficiencies and the like ("Damages") arising from: (i) a
misrepresentation or breach of a warranty; (ii) failure to perform a covenant
or agreement of such parties; (iii) the BriskHeat Spin-Off; (iv) any failure to
have good and marketable title to the securities conveyed; and (v) any claim by
a SPCO stockholder to appraisal, preemptive or other similar rights.
The Acquisition Agreement provides that if the Closing occurs, and subject to
the following paragraph, (i) the aggregate liability of the Indemnifying
Persons for Damages shall not exceed an amount equal to the fair market value
of the Escrow Shares (as defined below), and (ii) the Indemnifying Persons
shall not be liable unless and until, and only to the extent that, the
aggregate Damages exceed $150,000.
Notwithstanding the foregoing, the Acquisition Agreement provides that the
indemnification obligations of the Indemnifying Persons shall, with respect to
the BriskHeat Spin-Off, (i) survive until expiration of all applicable statutes
of limitation in the relevant jurisdictions of each taxing authority, and (ii)
not be subject to the $150,000 threshold specified in the preceding paragraph.
See "Item 1--Approval of the Transaction--Certain Federal Tax Consequences".
ESCROW
In order to secure the indemnification obligations of the Indemnifying
Persons under the Acquisition Agreement, 10% of the shares of Sequoia Common
Stock issued to the Indemnifying Persons in the Transaction (the "Escrow
Shares") will be held in escrow. At the Closing, Sequoia, W. Wayne Patterson,
as the Indemnification Representative of the Indemnifying Persons, and The
First National Bank of Boston (the "Escrow Agent") will enter into an Escrow
Agreement substantially in the form attached to the Acquisition Agreement (the
"Escrow Agreement"). The Indemnifying Persons will be entitled to vote their
Escrow Shares and to receive cash dividends, if any, on the Escrow Shares while
held in escrow. Any securities distributed with respect to the Escrow Shares,
whether by way of stock dividends, stock splits or otherwise, will be delivered
to the Escrow Agent and held in escrow pursuant to the Escrow Agreement.
Sequoia will be entitled to make claims for indemnification against the
Escrow Shares in accordance with the procedures established in the Escrow
Agreement and Acquisition Agreement. In the event of a dispute as to Sequoia's
entitlement to be indemnified, such dispute will be settled by binding
arbitration in Boston, Massachusetts. In the event that Sequoia prevails in a
claim for indemnification, Escrow Shares having a fair market value (based upon
the last sales price per share of the Sequoia Common Stock on the Closing Date)
will be released from escrow to Sequoia.
One-half of the Escrow Shares will be distributed to the Indemnifying Persons
on the first anniversary of the Closing and the remaining Escrow Shares will be
distributed to the Indemnifying Persons on the date on which the last
applicable statute of limitations in any relevant jurisdiction of any taxing
authority shall have expired with respect to the BriskHeat Spin-Off, except
that in the event there is on either such date a pending claim for
indemnification the Escrow Agent shall retain in escrow at least sufficient
shares to satisfy
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the pending claim. All distributions of Escrow Shares among the Indemnifying
Persons shall be made pro rata in relation to each such person's proportionate
percentage of shares of Sequoia Common Stock received in the Transaction.
The Indemnification Representative will have full authority to defend and/or
settle any claims for which the Indemnifying Persons may be required to
indemnify Sequoia. All decisions and actions by the Indemnification
Representative under the Escrow Agreement will be binding upon all Indemnifying
Persons. Sequoia, on the one hand, and the Indemnifying Persons, on the other
hand, will each pay one-half of the Escrow Agent's fees and, in general, will
share the fees and expenses of any arbitration proceeding equally. The
Indemnifying Persons will be obligated to reimburse the Indemnification
Representative for his reasonable expenses (including attorneys' fees) incurred
in connection with the performance of his duties as the Indemnification
Representative. The Escrow Agreement limits the liability of the Escrow Agent
in various ways and requires Sequoia and the Indemnifying Persons to indemnify
the Escrow Agent against certain losses, liabilities and expenses, except to
the extent resulting from the Escrow Agent's willful misconduct or negligence.
CONDITIONS
The respective obligations of Sequoia, SPCO and Keystone to effect the
Transaction and the other transactions contemplated in the Acquisition
Agreement are subject to the following conditions, among others: (a) the
Acquisition Proposal shall have been approved by the requisite percentage of
the stockholders of Sequoia and the approval of the Merger and the Acquisition
Agreement shall have been consented to by the requisite percentage of the
stockholders of SPCO; (b) the receipt of all material governmental
authorizations, consents, orders or approvals; (c) the Registration Statement
of which this Proxy Statement/Prospectus is a part shall have been declared
effective by the Commission and shall not be the subject of a stop order or
proceedings seeking a stop order; (d) no temporary restraining order,
preliminary or permanent injunction or other order shall be in effect nor shall
there be any proceeding seeking any of the foregoing that prevents, or seeks to
prevent, the consummation of the Transaction; (e) no action shall be taken, nor
any statute, rule, regulation, or order be enacted, entered, enforced or deemed
applicable to the Transaction which makes the consummation of the Transaction
illegal; (f) the receipt of letters of Coopers & Lybrand and Arthur Andersen by
Sequoia and SPCO, respectively, dated as of the date of this Proxy
Statement/Prospectus and confirmed in writing at the Effective Time, stating
that the business combination will qualify as a pooling of interests
transaction under generally accepted accounting principles (see "The
Transaction--Accounting Treatment"); (g) the receipt by Sequoia and SPCO of
certain legal opinions; (h) the receipt by Sequoia of executed agreements from
holders of Unvested TMI Option Shares agreeing to be bound by the terms of the
Escrow Agreement; (i) the approval of the shares of Sequoia Common Stock to be
issued in the Transaction for quotation on the Nasdaq National Market; (j)
receipt by Sequoia and SPCO of a written opinion from Arthur Andersen,
independent accountants of SPCO, to the effect that the Transaction will be
treated for federal income tax purposes as a Reorganization and that the
BriskHeat Spin-Off will constitute a tax-free transaction for federal income
tax purposes and Sequoia's receipt of a written opinion from Coopers & Lybrand
to the effect that there is a reasonable basis for SPCO to report the BriskHeat
Spin-Off as a tax-free transaction (see "Item 1--Approval of the Transaction--
Certain Federal Income Tax Consequences"); (k) the accuracy in all material
respects of the representations and warranties of each party set forth in the
Acquisition Agreement; and (l) the performance in all material respects of all
obligations of each party required to be performed under the Acquisition
Agreement. Sequoia and SPCO have agreed not to waive the conditions described
in clause (j) above.
In addition, Sequoia's obligations are further subject to the condition that:
(i) Sequoia shall be reasonably satisfied that the royalty payments due to IBM
pursuant to the Agreement between TME and IBM, dated as of October 1, 1993,
will not exceed a specified amount; (ii) that each of the BriskHeat Spin-Off,
the TME Stock Contribution and the TMI Option Exchange shall have occurred in a
manner acceptable to Sequoia; and (iii) Sequoia shall have received the
resignations of each director and officer of SPCO and its subsidiaries as
specified by Sequoia in writing.
As of the date of this Proxy Statement/Prospectus, Sequoia has filed an
Additional Shares Listing Application with the Nasdaq National Market; neither
Sequoia nor the TMI Group is aware of any injunction
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relating to the Transaction or of any change in the accuracy in their
respective representations and warranties in the Acquisition Agreement; the
Registration Statement of which this Proxy Statement/Prospectus is a part has
been declared effective by the Commission; and there has been no material
adverse change in the business of Sequoia or, to the best of Sequoia's
knowledge, in the business of the TMI Group. If the requisite stockholder
approvals and consents are obtained, Sequoia believes that all conditions to
the closing of the Transaction will be satisfied in a timely manner.
STOCK OPTION AND BENEFIT PLANS
Prior to the Effective Time, the TMI Options, to the extent exercisable on
the Execution Date, have been or will be exercised as part of the TMI Option
Exchange. Prior to the Effective Time, all outstanding options, warrants,
rights providing for the issuance of SPCO stock (or the stock of any other
member of the TMI Group), other than the TMI Options to the extent exercisable
on the Execution Date, will be terminated. In exchange for the Unvested TMI
Options, Sequoia shall issue such number of shares of Sequoia Common Stock as
is equal in value, based on the last sales price per share of Sequoia Common
Stock on the Nasdaq National Market on the Closing Date, to the value, based
on the Black-Scholes method of option valuation, of the Unvested TMI Options.
Sequoia currently estimates that it will issue approximately 73,000 shares of
Sequoia Common Stock in exchange for Unvested TMI Options. The actual number
of shares will be determined as of the Closing and may vary from 73,000, and
approval of the Transaction by Sequoia's stockholders will be deemed to
constitute approval of the issuance of the actual number of shares issued in
exchange for the Unvested TMI Options.
TERMINATION; TERMINATION FEES AND EXPENSES
The Acquisition Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Transaction by the stockholders of Sequoia or the SPCO
Written Consent:
(a) by mutual written consent of Sequoia, SPCO and Keystone;
(b) by either Sequoia, SPCO or Keystone if the Transaction is not
consummated by March 31, 1995, unless such date is extended by mutual
agreement of Sequoia, SPCO and Keystone (provided that the right to
terminate this Agreement under this clause shall not be available to any
party whose failure to fulfill any obligation under the Acquisition
Agreement has been the cause of or resulted in the failure of the
Transaction to occur on or before such date); or
(c) by Sequoia, SPCO or Keystone if, at the Special Meeting (including
any adjournment or postponement) or in connection with the SPCO Written
Consent, the requisite vote of the stockholders of Sequoia in favor of the
Acquisition Proposal, or the requisite consent of the stockholders of SPCO
in favor of the Merger and the Acquisition Agreement shall not have been
obtained.
In the event of any termination of the Acquisition Agreement by either
Sequoia or SPCO as provided above, the Acquisition Agreement will become void
and there will be no liability or obligation on the part of Sequoia, SPCO,
Sub, Keystone or their respective officers, directors, stockholders or
affiliates, except to the extent that such termination results from the
willful breach by a party of any of its representations, warranties, covenants
or agreements set forth in the Acquisition Agreement, provided that the
provisions relating to confidentiality of information shall survive such
termination.
The Acquisition Agreement further provides that in the event that Sequoia's
stockholders do not approve the Acquisition Proposal and the Acquisition
Agreement has not been terminated by Sequoia (due to SPCO's or Keystone's
uncured breach) or by mutual written consent of Sequoia, Keystone and SPCO,
Sequoia will promptly pay to SPCO and Keystone a termination fee equal to
SPCO's and Keystone's reasonable out-of-pocket expenses incurred in connection
with the transactions contemplated by the Acquisition Agreement from August
12, 1994 until Sequoia notifies SPCO and Keystone that such stockholder
approval has not been obtained. Such termination fee, if any, shall not exceed
an aggregate of $150,000.
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DISPUTE RESOLUTION
The Acquisition Agreement provides that disputes under the Acquisition
Agreement shall be submitted to arbitration in Boston, Massachusetts. The
prevailing party in any arbitration will be entitled to an award of its
reasonable attorneys' fees and the non-prevailing party will be obligated to
pay such fees, together with the other fees, costs and expenses of the
arbitration proceeding.
AMENDMENT AND WAIVER
The Acquisition Agreement may be amended at any time by action taken or
authorized by the respective Boards of Directors of Sequoia, SPCO and Keystone,
but after approval by the stockholders of Sequoia and SPCO of the Transaction,
no amendment may be made which by law requires further approval by such
stockholders, without such further approval. Sequoia and SPCO, by action taken
or authorized by their respective Boards of Directors after approval by their
respective stockholders, and Keystone may extend the time for performance of
the obligations of the other parties to the Acquisition Agreement, may waive
inaccuracies in the representations or warranties contained in the Acquisition
Agreement and may waive compliance with any agreements or conditions contained
in the Acquisition Agreement. However, Sequoia and SPCO have agreed not to
waive the conditions that the required tax opinions be received, and Sequoia
does not intend to waive any other material conditions to its obligations under
the Acquisition Agreement. In the event that a material condition to Sequoia's
obligation to consummate the Transaction cannot be fulfilled, Sequoia will not
waive such condition and the Transaction will not be consummated absent
resolicitation of proxies (accompanied by updated solicitation material) and a
new vote by Sequoia's stockholders.
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THE TMI GROUP
BUSINESS OF THE TMI GROUP
Corporate Structure
SPCO, which was incorporated in Delaware in 1989, is a holding company which
as of the Effective Time will have no material net assets other than shares of
capital stock of TMI. At the Effective Time, SPCO will also indirectly own
shares of capital stock of TME, which will then be a majority-owned subsidiary
of TMI. SPCO, TMI and TME are (after giving effect to the BriskHeat Spin-Off
described herein) collectively referred to herein as the "TMI Group". See "The
Acquisition Agreement--Restructuring Prior to the Transaction".
General
TMI was incorporated in Delaware in 1989. It was formed to acquire certain
assets from Keystone in a transaction which became effective May 19, 1989. TME,
incorporated in Delaware in 1991, was formed primarily to serve certain of
TMI's manufacturing needs. The TMI Group's principal executive offices are
located at 5959 Corporate Drive, Houston, Texas 77036 and its telephone number
is (713) 541-8200.
The TMI Group is engaged in the business of manufacturing and selling
microcomputers and related products designed for harsh computing environments,
such as telecommunications, data acquisition and process control. The TMI
Group's products are used in a variety of applications such as voice mail
systems, engine testing, central office telecommunications and military
applications. Its products are designed and built for high reliability, easy
maintenance and industry compatibility.
Products and Markets
From its inception, the TMI Group's growth strategy has been based on product
differentiation. Its product differentiation strategy was already in place
when, operating as a division within Keystone, it introduced its first
microcomputer in 1985. The TMI Group's first product differed from a desktop
personal computer ("PC") in that it was rack-mounted, its active components
were on a plug-in central processor unit ("CPU") rather than on a permanently
mounted motherboard, and the system was resistant to heat, shock, dust,
vibration and electromagnetic interference and radio frequency interference
(EMI/RFI). The TMI Group believes that the use of a passive backplane with a
plug-in CPU, rather than a motherboard, decreases repair time and increases
expansion capability. The TMI Group's first complete "ruggedized" PC was used
for seismic testing in remote locations. Since being introduced in 1985, the
TMI Group's ruggedized microcomputers have been used in a wide variety of
application in fields as diverse as telecommunications and heavy manufacturing.
The TMI Group has broadened its market opportunities by developing a range of
fault-tolerant features for the PC. In addition to these enhancements, the TMI
Group has focused its development efforts on products for central office
telecommunications applications based on Sun's SPARC architecture,
incorporating remote alarming and monitoring features, and mobile and vehicle
based computing. The TMI Group was awarded and recently completed a contract by
the federal government to develop prototypes of a "soldier's computer" to be
used by the military in various field applications.
The TMI Group's products primarily serve two market segments: industrial and
telecommunications. In these segments, the TMI Group's products are most
frequently used in "mission-critical" or "job-critical" applications where
reliability, availability and/or data integrity are essential to the
enterprise. The TMI Group believes that the growing need for extremely
dependable microcomputers will make "mission-critical" applications one of the
most rapidly expanding sectors of the microcomputer industry.
For the industrial market, the TMI Group's traditional business and its
substantially larger market segment, the TMI Group provides microcomputers that
operate reliably in harsh industrial environments,
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allowing microcomputers a significant role in process control, discrete
manufacturing and data acquisition. Its systems and board-level products are
used in applications that often have government-mandated requirements for up-
to-the-minute reporting of data, such as environmental safety information,
batch processing, financial data or transit monitoring.
For the telecommunications market, the central office environment has very
rigorous standards for operating equipment. Telecommunications computer systems
must comply with Bellcore's Network Equipment Building Specifications (NEBS)
specifications and standards, which include 48-volt power, heat and dust
protection, earthquake resistance, alarming and remote monitoring features.
Because of its experience in designing and building reliable rack-mounted
systems that operate under harsh conditions, the TMI Group believes that the
telecommunications industry presents significant opportunities for its
products.
Competition
The TMI Group's board-level products, rack-mounted chassis and systems
products compete in the industrial market with the products of Diversified
Technology, Industrial Computer Source and I-Bus and, to a lesser extent, IBM
and others in the United States and with Siemens A.G. and others in Europe. The
TMI Group competes in the telecommunications market with DEC, Motorola, Tandem,
Stratus and Hewlett-Packard, as well as several smaller companies.
The TMI Group believes that it competes effectively based its engineering
responsiveness to special needs and the price/performance characteristics,
SPARC architecture and flexibility of its products, helping to offset the
greater recognition and broader service and support resources of these larger
competitors.
Marketing and Sales
The TMI Group markets its products in the United States through a combination
of a direct sales organization and a group of manufacturer's representatives
that sell primarily to various resellers, including OEMs, VARs and systems
integrators.
The TMI Group sells its products outside the United States primarily through
distributors. It currently has 32 international distributors in 26 countries.
Product Development
The TMI Group's product development efforts are devoted to enhancing and
broadening its current line of products by focusing on reliability,
availability and data integrity as core features.
Manufacturing
The TMI Group manufactures low-volume board level products itself, and
contracts for high-volume components with independent manufacturers. See "Risk
Factors--Risks Relating to the TMI Group". The TMI Group's manufacturing
operations also include assembly, testing and overall quality control.
The TMI Group purchases substantially all of the peripheral devices and
components used in its systems from other manufacturers. Most of the components
and peripherals are available from a number of different suppliers, although
certain major items are procured from single sources. Although the TMI Group
has not experienced any significant problems in obtaining its required supplies
and believes that alternative sources for items could be developed quickly if
necessary, future shortages of components or peripherals could result in
production delays which might adversely affect its business. Two key components
used in its systems for which alternative sources may not be available are
Intel microprocessors and SPARC-based CPUs. Any delay or inability to obtain
these components at any time would adversely affect the TMI Group's business.
Certain of the TMI Group's products are manufactured pursuant to a patent
license from IBM under which it pays specified royalties.
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Backlog
At December 31, 1994, the TMI Group had an unfilled order backlog of
approximately $5.3 million which was subject to shipment in the subsequent
fiscal quarter.
Employees
As of December 31, 1994 the TMI Group employed 225 people, including 69 in
sales, marketing and administration, 46 in research and development and related
engineering activities, 18 in service and support and 92 in manufacturing. The
TMI Group believes that its future success will depend in part upon its
continued ability to attract and retain highly qualified managerial, technical,
selling, marketing, support and manufacturing personnel. Competition in
recruiting personnel in the TMI Group's geographic area is often intense. None
of its employees is represented by a labor union and the TMI Group considers
its employee relations to be good.
Properties
The TMI Group's principal administrative, manufacturing, marketing and sales,
warehousing and research and development facilities consist of approximately
83,428 square feet in Houston, Texas. It occupies these premises under a lease
expiring in 1998 with options to extend the lease for two additional five-year
periods. The current annual rental expense for these facilities, including
maintenance, insurance, security, utilities and taxes, is approximately
$677,000. The TMI Group also leases space in five other locations in the United
States and in two locations in Europe. These leases expire on various dates
between 1995 and 1998. The TMI Group's aggregate annual rental expense for the
fiscal year ended June 30, 1994 was approximately $713,000. See Note 7 of notes
to Combined Financial Statements for additional information regarding the TMI
Group's lease obligations.
Legal Proceedings
The TMI Group is from time to time a party to various lawsuits arising in the
ordinary course of business. The TMI Group knows of no pending litigation which
is reasonably likely to have a material adverse impact on its financial
condition or its results of operations.
Agreement with Intel Corporation
On February 1, 1995, the TMI Group acquired certain assets of Intel
Corporation ("Intel") related to Intel's OmniRACK and XpressRACK product lines
in exchange for an initial cash payment of approximately $650,000 and certain
future contingent payments. The TMI Group funded the purchase price by
borrowing under its line of credit.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TMI GROUP
RESULTS OF OPERATIONS
Years ended June 30, 1993 and 1994
REVENUES
The TMI Group's revenues increased 16.8% from $40,304,000 in the fiscal year
ended June 30, 1993 ("fiscal 1993") to $47,061,000 in the fiscal year ended
June 30, 1994 ("fiscal 1994"). The increase in revenues was primarily
attributable to increased international sales as a result of the European
economic recovery and increased penetration of the United States
telecommunications market. The TMI Group's ability to maintain or increase its
level of revenues in the future will primarily depend on the successful
introduction of new products, the continuing growth of its current markets and
the ability to expand into new market segments.
During fiscal 1993 and fiscal 1994, approximately 72% and 65%, respectively,
of the TMI Group's revenues was derived from the sale of computer systems and
peripherals and approximately 28% and 35%, respectively, was derived from the
sale of board-level products.
In fiscal 1993 and fiscal 1994, no single customer accounted for as much as
10% of the TMI Group's revenues.
Sales outside the United States during fiscal 1993 and fiscal 1994 were
$6,723,000 and $9,256,000, respectively, representing 16.7% and 19.7% of
revenues during such years. The majority of sales outside the United States
occurred in Western Europe and Asia.
GROSS MARGIN
The TMI Group's gross margin decreased from 38.9% in fiscal 1993 to 37.4% in
fiscal 1994. The margin decline was caused by a more competitive pricing policy
with respect to chassis products sold with Intel-based CPUs, by higher
discounts to some high-volume customers and, to a lesser extent, by a general
decline in margins in the microcomputer industry.
PRODUCT DEVELOPMENT EXPENSES
The TMI Group incurred product development expenses of $3,751,000 and
$3,871,000 in fiscal 1993 and fiscal 1994, respectively. While product
development expenses increased slightly in absolute terms, these expenses
decreased as a percentage of revenues from 9.3% to 8.2% primarily as a result
of increased revenues. SPARC-based product development expenses increased from
fiscal 1993 to fiscal 1994 as a percentage of total research and development
expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
From fiscal 1993 to fiscal 1994, selling, general and administrative expenses
increased 2.6% on a revenue increase of 16.8%. As a percentage of revenues,
selling, general and administrative expenses declined from 26.6% in fiscal 1993
to 23.3% in fiscal 1994. This improvement as a percentage of revenues resulted
from controlling costs while increasing revenues.
AMORTIZATION OF INTANGIBLE ASSETS
The charge for amortization of intangible assets declined from $166,000 in
fiscal 1993 to $89,000 in fiscal 1994. The intangible assets resulted from the
acquisition of certain assets from Keystone in May 1989, and the TMI Group
amortized such assets over a period of three to five years. The decrease in
amortization expense from fiscal 1993 to fiscal 1994 resulted from the full
amortization of certain of these intangible assets during such period.
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INCOME FROM OPERATIONS
The TMI Group had operating income of $2,645,000 in fiscal 1994 compared to
$1,076,000 in fiscal 1993. The increase in operating income resulted from
increasing revenues by 16.8% while controlling operating expenses to a 2.2%
increase.
INTEREST EXPENSE
The TMI Group had interest expense of $445,000 in fiscal 1994 compared to
$646,000 in fiscal 1993. This decrease was the result of the reduction of
outstanding debt and lower average interest rates. In addition, interest
expense in fiscal 1993 included $83,000 of interest paid to the IRS with
respect to additional taxes assessed in fiscal 1993 for tax years 1989, 1990
and 1991.
INCOME TAXES
The TMI Group provided for income taxes of $351,000 in fiscal 1994 and
$512,000 in fiscal 1993. During fiscal 1993, the IRS disallowed certain of the
TMI Group's deductions related to the acquisition of certain assets from
Keystone in May 1989. To cover this assessment, the fiscal 1993 income tax
provision included an additional $346,000. In fiscal 1994, the TMI Group
reached an agreement with the IRS, as a result of which the original assessment
was reduced by $215,000. Since the original assessment was expensed by the TMI
Group in fiscal 1993, the TMI Group recorded a tax benefit of $215,000 in
fiscal 1994.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
Effective July 1, 1992, the TMI Group adopted SFAS No. 109, "Accounting for
Income Taxes," which replaces SFAS No. 96. The adoption of SFAS No. 109
resulted in a benefit of $171,000 which was recorded as a cumulative effect of
change in accounting for income taxes in fiscal 1993.
Years ended June 30, 1992 and 1993
REVENUES
The TMI Group's revenues increased 7.7% from $37,427,000 in the fiscal year
ended June 30, 1992 ("fiscal 1992") to $40,304,000 in fiscal 1993. The increase
in revenues was primarily attributable to increased penetration of the
international market.
During fiscal 1992 and fiscal 1993, approximately 80% and 72%, respectively,
of the TMI Group's revenues was derived from the sale of computer systems and
peripherals and approximately 20% and 28%, respectively, was derived from the
sale of board-level products.
In fiscal 1992 and fiscal 1993, no single customer accounted for as much as
10% of the TMI Group's revenues.
Sales outside the United States during fiscal 1992 and fiscal 1993 were
$4,044,000 and $6,723,000, respectively, representing 10.8% and 16.7% of
revenues during such years. The majority of sales outside the United States
occurred in Western Europe and Asia.
GROSS MARGIN
The TMI Group's gross margin decreased from 40.3% in fiscal 1992 to 38.9% in
fiscal 1993. The margin decline was caused by its more competitive pricing
policy and, to a lesser extent, by a general decline in margins in the
microcomputer industry.
PRODUCT DEVELOPMENT EXPENSES
The TMI Group incurred product development expenses of $4,137,000 and
$3,751,000 in fiscal 1992 and fiscal 1993, respectively. Product development
expenses decreased in fiscal 1993 as a result of a reduction
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in personnel and outside services expenses for Intel-based product development,
partially offset by increased expenses for compatibility testing and SPARC-
based telecommunications product development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 6.1% in fiscal 1993
from fiscal 1992. As a percentage of revenues, selling, general and
administrative expenses remained relatively constant at 27.0% for fiscal year
1992 and 26.6% for fiscal 1993.
AMORTIZATION OF INTANGIBLE ASSETS
The charge for amortization of intangible assets declined from $323,000 in
fiscal 1992 to $166,000 in fiscal 1993. The decrease resulted from full
amortization of certain assets during fiscal 1992.
INCOME FROM OPERATIONS
The TMI Group had operating income of $1,076,000 in fiscal 1993 compared to
$524,000 in fiscal 1992. The increase in operating income resulted from a 7.7%
increase in revenues coupled with an increase in operating expenses of
approximately 1.0%.
INTEREST EXPENSE
The TMI Group had interest expense of $646,000 in fiscal 1993 compared to
$816,000 in fiscal 1992. This decrease was the result of the reduction of
outstanding debt and lower average interest rates, partially offset by $83,000
of interest paid to the IRS in fiscal 1993 for additional taxes assessed in
fiscal 1993 with respect to prior tax years.
INCOME TAXES
The TMI Group provided for income taxes of $512,000 in fiscal 1993 and a tax
benefit of $521,000 in fiscal 1992. During fiscal 1993, the IRS disallowed
certain of the TMI Group's deductions related to the acquisition of assets from
Keystone in May 1989. The TMI Group provided for $346,000 in additional taxes
in fiscal 1993 to cover this assessment. In fiscal 1992, the TMI Group
recognized the tax benefit of certain operating losses, carry forwards and
research and development tax credits.
Three and Six Months ended December 31, 1993 and 1994
REVENUES
The TMI Group's revenues increased 14.2% from $11,358,000 for the three
months ended December 31, 1993 to $12,966,000 for the three months ended
December 31, 1994. The TMI Group's revenues increased 7.7% from $22,930,000 in
the six months ended December 31, 1993 to $24,694,000 in the six months ended
December 31, 1994. This growth in revenue was attributable to increased
acceptance of TMI Group products in the telecommunications market.
For the three months ended December 31, 1993 and December 31, 1994,
approximately 61% and 59%, respectively, of the TMI Group's revenues were
derived from the sale of computer systems and peripherals and 39% and 41%
respectively from the sale of board-level products. For the six months ended
December 31, 1993 and December 31, 1994, approximately 67% and 60%,
respectively, of the TMI Group's revenues were derived from the sale of
computer systems and peripherals and 33% and 40%, respectively, were derived
from the sale of board-level products.
In the three and six months ended December 31, 1993, no single customer
accounted for as much as 10% of revenues. In the three and six months ended
December 31, 1994, one customer accounted for approximately 16% and 10%,
respectively, of revenues.
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Revenues outside the United States during the three months ended December 31,
1993 and December 31, 1994 were $2,009,000 and $2,417,000, representing 17.7%
and 18.6% of revenues during such periods. Revenues outside the United States
during the six months ended December 31, 1993 and December 31, 1994 were
$4,296,000 and $4,664,000, respectively, representing 18.7% and 18.9% of
revenues during such periods. The majority of the revenues outside the United
States arose from sales in Western Europe.
GROSS MARGIN
The TMI Group's gross margin increased from 35.8% for the three months ended
December 31, 1993 to 42.6% for the three months ended December 31, 1994, and
increased from 37.1% for the six months ended December 31, 1993 to 40.6% for
the six months ended December 31, 1994. The increases in gross margin were due
to increased volumes, improved manufacturing efficiencies from an ISO 9000
implementation program and the discontinuation of contract manufacturing by
TME. The gross margins on the contract manufacturing at TME have been
historically below the TMI Group's overall margin.
PRODUCT DEVELOPMENT EXPENSES
For the three months ended December 31, 1993 and December 31, 1994, product
development expenses were $905,000 and $1,033,000, respectively. For the six
months ended December 31, 1993 and December 31, 1994 product development
expenses were $1,856,000 and $2,152,000, respectively. The increases for the
three and six month periods ended December 31, 1994 of 14.1% and 15.9% were due
to increased expenditures for prototypes resulting from a larger number of new
product introductions in the six months ended December 31, 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 37.7% from $2,440,000
for the three months ended December 31, 1993 to $3,359,000 for the three months
ending December 31, 1994. Selling, general and administrative expenses
increased 19.6% from $5,236,000 during the six months ended December 31, 1993,
to $6,263,000 for the six months ended December 31, 1994. These increases were
primarily comprised of higher sales and marketing expenses in Europe and
increased staffing in US sales and marketing both to support a greater number
of new product introductions and to strengthen sales channels. In addition,
expenses for the pending merger with Sequoia Systems, Inc. totaled $205,000 for
the six months ended December 31, 1994.
AMORTIZATION OF INTANGIBLE ASSETS
The charge for amortization of intangible assets was $83,000 in the six
months ended December 31, 1993. There were no charges for amortization expense
in the six months ended December 31, 1994, because the intangible assets
resulting from the TMI Group's acquisition of assets from Keystone in May 1989
were fully amortized by June 30, 1994.
INCOME FROM OPERATIONS
Operating income increased from $678,000 for the three months ended December
31, 1993 to $1,134,000 for the three months ended December 31, 1994. Operating
income increased from $1,324,000 in the six months ended December 31, 1993 to
$1,611,000 in the six months ended December 31, 1994. These increases were
primarily a result of increased gross margins, partially offset by an increase
in operating expenses.
INTEREST EXPENSE
The TMI Group had interest expense of $132,000 in the six months ended
December 31, 1994 compared to $322,000 in the six months ended December 31,
1993 due to the restructuring of debt on June 7, 1994.
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INCOME TAXES
For the three and six months ended December 31, 1994, the income tax
provision increased to $363,000 from $173,000 and to $534,000 from $312,000,
respectively due to a higher effective tax rate and increased profitability.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1994, the TMI Group funded its operations primarily through
generating positive cash flow from operating activities. This positive cash
flow from operating activities continued in the six months ended December 31,
1994.
The TMI Group had working capital of $5,077,000 and $5,282,000 at June 30,
1993 and June 30, 1994, respectively. The increase in working capital at June
30, 1994 was primarily due to an increase in accounts receivable and federal
income tax receivable and a decrease in borrowings under the TMI Group's line
of credit, partially offset by a decrease in inventories. Accounts receivable
at June 30, 1994 were $509,000 higher than June 30, 1993 as a result of
increased revenues. Accounts receivable at December 31, 1994 were $8,388,000,
representing an increase of $1,031,000 from June 30, 1994.
Working capital at December 31, 1994 increased by $535,000 to $5,817,000 from
working capital at June 30, 1994, primarily due to increases in accounts
receivable and inventory partially offset by lesser increases in accounts
payable and accrued liabilities. During the six months ended December 31, 1994,
the inventory and accounts receivable increased over amounts at June 30, 1994
due to the growth in revenues.
Capital expenditures were $1,485,000 in fiscal 1993 and $822,000 in fiscal
1994, respectively. Capital expenditures in fiscal 1994 were primarily for
equipment, furniture and fixtures as well as additional leasehold improvements
resulting from the relocation of its operations. During the six months ended
December 31, 1994, capital expenditures of $394,000 were primarily for
equipment. The TMI Group expects to make capital expenditures of approximately
$800,000 primarily for engineering and manufacturing equipment and software in
the fiscal year ending June 30, 1995.
On June 7, 1994, the TMI Group borrowed $2,000,000 from the Texas Commerce
Bank under a three-year term loan. Due to the positive cash flow from operating
activities in fiscal 1994, the TMI Group utilized cash in fiscal 1994 to reduce
short-term borrowings by $1,535,000 and repay long-term debt of $3,663,000. The
TMI Group also has a revolving line of credit with Texas Commerce Bank, under
which up to $4,000,000 is available based on a percentage of accounts
receivable. At December 31, 1994, $1,705,000 was outstanding and an additional
$2,295,000 was available under the borrowing formula. The line of credit is
available to finance working capital and matures November 1, 1995. Interest is
payable monthly at the bank's prime rate plus 1/2 percent per annum. There are
various financial ratios and other restrictive covenants governing the
borrowing arrangement, the most restrictive of which requires a specified level
of profitability over a defined four quarter period. The line of credit is
collateralized by substantially all of the assets of the TMI Group and personal
guarantees of two shareholders of SPCO.
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SEQUOIA SYSTEMS, INC.
BUSINESS OF SEQUOIA
General
Sequoia designs, manufactures, markets and services highly modular and easily
expandable totally available computer systems based on the UNIX operating
system. Sequoia systems are used primarily for OLTP and other interactive
environments in which continuous system availability, fast response time and
data integrity are critical.
Sequoia was incorporated in Delaware in September 1981. Sequoia's principal
executive offices are located at 400 Nickerson Road, Marlborough, Massachusetts
01752. Its telephone number is (508) 480-0800.
Industry Background
The requirement for immediate access to data created the market for OLTP
systems. OLTP has been a requirement at many companies for years--especially
those in industries such as airline transportation and banking, where flight
reservation systems and automated teller machines have demonstrated the
competitive advantages of instant access to data to provide better service.
Many companies and industries have moved to an on-line information retrieval
environment to process large numbers of transactions. In today's business world
companies are also increasingly moving to a distributed computing environment,
employing a client/server approach to meet their needs in a multi-platform,
multi-vendor network.
The market for OLTP systems, an estimated $40 billion industry in 1994, is
expected to continue to grow at approximately 15% per year. This anticipated
growth is fueled by an increasingly complex business environment which demands
immediate response to many types of transactions and by the growing use of
computers to run all aspects of a company's business. Instant access to data
provides a greater degree of service to customers and can generate a
competitive advantage. Companies must supply instant information to their
customers; for example, information about the availability of their products
and services, specific delivery dates, ordering information and pricing
information. Availability of information can be the determining factor for
success or failure. Thus, businesses have established new information systems--
systems that are customer-focused.
Companies have been able to evolve to an on-line environment because of the
software tools and utilities that have made the easy and fast retrieval of
information a reality. Ease of use, portability of software, operating
flexibility, high performance and relational database management systems
("RDBMS") have allowed businesses to implement on-line systems. All this has
been possible because of the industry trend toward open systems.
Open systems once meant a UNIX operating environment and little more.
Companies originally moved to UNIX so they would not be tied to one particular
proprietary platform. Previously, with the majority of applications written for
a proprietary platform, any decision to move to another system required a
costly and time-consuming rewriting of applications.
Today, the term "open systems" means much more. It incorporates both hardware
and software, communications and networking connectivity, use of standard
microprocessors, peripherals and standard protocols. Businesses have embraced
open systems for more reasons than vendor independence. Open systems means
access to the latest technology, as more hardware and software products are
developed. Users have lower software and maintenance costs, as the choice among
competing vendors is much greater for an expanded choice of products and
functionality, both in hardware and software.
Continuous system availability is an increasingly important benefit to the
on-line business. Sequoia's customers are more frequently requiring total
availability to provide 24-hour access to their data. Sequoia's
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approach prevents failures from disabling the computer system, and provides on-
line service and on-line maintenance. It is important to Sequoia's traditional
customers that a computer system remain in operation even during regular
maintenance or upgrades to larger configurations. These are important features
because customers understand that even short periods of downtime can result in
reduced productivity and lost revenue.
Sequoia estimates that industry standard RDBMS account for over $4 billion in
annual sales of software and related tools. Among the leading database products
are offerings from Oracle, Informix, Sybase, VMark, Unidata and Pick Systems.
The Pick product is a flexible database that supports a wide range of
commercial business applications and has been ported by Sequoia to operate in a
UNIX environment. Sequoia has achieved significant market acceptance utilizing
its own proprietary version of the Pick database product, especially for medium
to large-sized commercial applications. Pick's market acceptance is due largely
to the ease with which it may be used in developing applications and the large
number of VARs offering Pick applications. The majority of users of Sequoia's
systems utilize the Pick relational database.
While Sequoia believes that the anticipated growth of the OLTP market,
together with the successful market penetration of its Pick database product,
will create significant business opportunities for Sequoia in the future, there
can be no assurance that the OLTP market will continue to expand or that
Sequoia's products will be able to continue to penetrate such market.
Company Strategy
Sequoia designs, manufactures and sells fault-tolerant computer systems, and
intends to offer highly available systems with selected fault-tolerant
features, while also making available its open systems technology to global
partners through licensing agreements. The objective of these licensing
agreements with larger partners is to enable the research and development
capabilities of such partners to produce expanded features that can broaden the
market for Sequoia's computer products.
Sequoia's business strategy incorporates the following key elements:
BUILDING AND INVESTING ON A STRONG FINANCIAL BASE
Sequoia's recent positive operating financial results, and focus on
conservative cash management and asset utilization, have helped to yield
increased liquidity and a strong balance sheet. Sequoia intends to increase its
investment in research and development and further expand its channels of
distribution, particularly outside the United States. In addition, Sequoia
intends to seek opportunities to form strategic alliances, including potential
acquisitions.
INCREASE THE SIZE OF THE INSTALLED BASE
Sequoia believes that it has a strong and loyal installed base of customers.
Sequoia's strategy is to nurture and grow this installed base by providing
these customers with the products and services they need to grow and succeed in
their respective businesses. Included in this strategy will be the development
of migration tools and services to assist installed customers to move to newer
Sequoia products in a seamless manner, as well as to attract new customers to
switch to Sequoia from competing vendors.
CREATING ADDITIONAL PRODUCTS, SERVICES AND PROGRAMS
Sequoia has recently introduced its new Series 500 product line, which offers
customers lower priced entry systems, and enhancements to its Series 440
system, which provide significantly improved price/performance attributes.
Sequoia has also recently announced its intention to offer highly available
systems with selected fault-tolerant features, beginning in fiscal 1996, to
users of the Pick database whose requirements do not include fully fault-
tolerant products. Sequoia also intends to provide enabling technologies that
will enhance the system value in open systems, client/server, heterogeneous
computing environments. By offering skilled consulting services, Sequoia can
provide expert capabilities to those users who face complex systems integration
and software migration issues.
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FOCUS ON A SMALL NUMBER OF TARGETED VERTICAL MARKETS
Sequoia has focused on a limited number of vertical markets. In particular,
Sequoia has developed strong customer relationships through both VAR and end-
user channels in the health care claims processing, retail distribution and
financial services markets. In order to enhance its market share, Sequoia must
attract new customers in these and other markets. The development of additional
VAR channels is crucial to the success of this strategy.
TECHNOLOGY LICENSING AND STRATEGIC PARTNERSHIPS
Sequoia's Technology Group licenses Sequoia's patented fault-tolerant
technology to companies in computer-related industries. Prospective candidates
for the licensing of Sequoia's technology are companies that desire or need
greater reliability in their computer-related hardware or software products.
These companies recognize that a growing number of their customers depend on
their products for continuous access to accurate information. Sequoia's current
licensing arrangements include Toshiba Corporation, Samsung Electronics Co.,
Ltd. and Novell, Inc.
Sequoia's long-term strategy is to enter into licensing agreements with
additional companies for the use of Sequoia's fault detection and management
software. This software, part of Sequoia's core technology, is designed to
detect and avoid hardware failures it senses within a computer system,
operating environment or network.
CUSTOMER SUPPORT, TRAINING AND PROFESSIONAL SERVICES
Sequoia's Customer Service Operation has a 24-hour, seven-day a week,
worldwide telemaintenance and support capability. Customer systems are
continuously monitored by the various support systems, as well as a specific
Account Manager. Sequoia's Automatic Fault Evaluation program automatically
reviews fault messages and opens a service call record. Sequoia also offers a
broad array of training and other professional services to assist its customers
in maximizing the return on their investment in Sequoia's products. Sequoia's
Professional Services Organization provides its customers with a variety of
analytical, design, implementation, training and other consulting services.
Product Strategy
Sequoia designs, develops and, with its strategic partners, co-develops
scalable UNIX-based fault-tolerant multiprocessing systems and has announced
plans to offer highly available systems with selected fault-tolerant features
to Pick database users beginning in fiscal 1996. Sequoia systems provide users
with an open systems environment and, in the case of those that are fully
fault-tolerant, total system availability. Sequoia fault-tolerant system
features include:
INDUSTRY STANDARD COMPATIBILITY
By using industry-standard components, operating systems, database
technologies, communications and peripheral devices and protocols, Sequoia's
systems can be integrated easily into a wide variety of computing environments
and can support new technologies and services without significant system
redesign.
MODULARITY
Sequoia systems are available in a variety of configurations that provide the
customer with flexibility in selecting the combination of memory, processing
power and peripheral devices best suited to the customer's particular needs.
EXPANDABILITY AND UPGRADEABILITY
The Sequoia architecture enables customers to expand incrementally the
processing power and capacity of their systems by adding processors, memory
elements and peripheral devices as needed. These additional resources can be
incorporated into a Sequoia fault-tolerant system while it continues operating.
System
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performance scales with each additional processor, depending on the
application, up to as many as four processors on the Series 40 and new Series
500 and up to 32 processors on the Series 400 and 440. This expandability
allows Sequoia to offer systems with a wide range of configurations, from entry
level systems cost-effectively supporting as few as 32 users to very large
systems supporting well over 2,000 users.
DIAGNOSTIC CAPABILITY
The fault detection logic built into each fault-tolerant Sequoia system
continually monitors the operation of the system and automatically communicates
any fault condition to Sequoia's support center. This remote diagnostic
capability allows for cost-effective maintenance of the system.
DATA INTEGRITY
Sequoia's fault-tolerant systems are designed to protect data in the event of
a failure through a combination of hardware features and TOPIX, Sequoia's
proprietary version of the UNIX operating system, on which all Sequoia systems
run. The hardware is designed to detect and isolate faults before data can be
corrupted. TOPIX re-configures system resources and re-starts the operations
that were in process at the time the fault occurred.
New Products
As referenced above, in addition to the new Series 500 product line, Sequoia
has recently announced its intention to offer, beginning in fiscal 1996, new
highly available systems with selected fault-tolerant features that will
provide opportunities for those Pick database users not requiring robust fault
tolerance in their systems to achieve the benefits of using Sequoia's
proprietary Pick database system. These new products will utilize industry
standard microprocessor technologies that are compatible with those being used
by Sequoia's strategic partners.
System Architecture
The architecture of Sequoia's fault-tolerant systems is designed to provide
the user with continuous and reliable computer availability and to address the
high performance requirements of computer-intensive, on-line applications.
Sequoia systems achieve fault tolerance and high performance with a tightly
coupled symmetric multiprocessing architecture consisting of multiple
processors that share memory and are managed by a single operating system.
Through this design, tasks are automatically and efficiently distributed over
all available processors, which allows the Sequoia platform to support a large
number of users and provide scalable growth.
The system's fault-tolerant hardware design, coupled with Sequoia's UNIX-
compatible operating environment, provides continuous system availability and
data integrity. If a hardware fault is detected, the faulty module is
automatically taken out of service and the operating system returns the system
to normal operation without loss of data or program continuity. If the error
was due to a transient fault, the module is returned to service. The detection,
isolation and correction of the fault all occur automatically without requiring
the user's intervention.
Products
Sequoia's current computer system product lines are the Sequoia Series 400,
Series 440, Series 40 and Series 500 products. By using industry-standard
microprocessors, Sequoia believes that it has been able to reduce the amount of
time and cost required to enhance the performance of its systems.
The Series 400 system is the successor to Sequoia's Series 100, Series 200
and Series 300 systems. The Series 400 is a complete computer system consisting
of electronics, peripherals, communications interfaces
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and system software. The Series 400 is based on the Motorola 68040
microprocessor, while the Series 100, 200 and 300 systems were based on the
Motorola 68010, 68020 and 68030 microprocessors, respectively.
The Series 440 is an advanced version of the Series 400. It contains a VME
I/O bus structure and a microprocessor with a faster clock speed.
The Series 40 product, a modified version of the Series 400, is an entry-
level system targeted at smaller computing environments. It also contains
enhancements to the I/O bus architecture. Like the larger Series 400, the
Series 40 is based on the Motorola 68040 microprocessor.
The new Series 500 is an enhanced version of the Series 40 and offers lower
priced entry to fault-tolerant systems performance as well as a number of new
operating features. It is also based on the Motorola 68040 microprocessor.
The end-user list price of a Series 400 and Series 440 ranges from
approximately $300,000 to more than $5,000,000, depending upon the
configuration. Pricing for the Series 40 starts at $140,000 and for the Series
500 starts at $86,000. Sequoia typically offers discounts from its list prices
to resellers and customers in order to meet competitive conditions.
Sequoia offers a UNIX-based operating system and utilities, database
management systems, networking communications and capabilities to support
application software.
Operating System
All Sequoia systems are based upon TOPIX, Sequoia's proprietary version of
the UNIX operating system. Although UNIX was originally developed to work with
standard uniprocessor systems, Sequoia designed TOPIX for high-performance OLTP
applications in a symmetric multiprocessor fault-tolerant environment, while
still adhering to the industry standards defined for UNIX. Compatibility with
UNIX standards is an important part of today's open systems environment and is
required by the markets Sequoia targets for sales of its products. TOPIX
complies with System V Release 3 and selected features of the System V Release
4 of UNIX. Sequoia continues to invest in further enhancements to the TOPIX
operating system.
Database Management
Sequoia's principal database offering is its own native implementation of
Pick, although Oracle and Informix also have been ported to Sequoia's systems.
The UniVerse and UniData database products, which have their origins in Pick,
are also available on Sequoia's systems.
Networking Communications
Sequoia's communications and networking products include a range of IBM, LAN,
WAN, telecommunications, X.25, TCP/IP and other industry standard protocols.
Sequoia users have the ability to link numerous computer systems and networks
together using standard communications protocols, while also being able to
customize the system for their particular needs.
Application Software
Sequoia believes that there are many programs commercially available for use
with its implementation of the Pick database, as well as for UniVerse and
UniData, which are "Pick-like" products. Many customers have created
application programs or adapted software supplied by others. Many VARs also
supply applications written exclusively for the UNIX operating environment in
their chosen vertical markets. The availability of the appropriate application
solution is a key determinant of overall solution attractiveness.
Markets and Customers
Through January 1, 1995, Sequoia has shipped more than 363 systems to more
than 210 customers worldwide. Sequoia's customer base crosses a range of
markets. In recent years Sequoia has focused its sales
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and marketing efforts in three primary markets: health care claims processing,
retail distribution and financial services.
Health maintenance organizations typically use Sequoia systems for
administrative services. Retail wholesalers and telemarketers use Sequoia
systems to support order processing and inventory control requirements.
Financial services organizations typically use Sequoia's systems to implement
customer applications such as credit card or mortgage processing.
Strategic Alliances
A key element of Sequoia's strategy is to enter into strategic alliances for
the licensing of its technology; to acquire additional technology for sale
with its systems; and to acquire additional product and distribution
capabilities. Sequoia currently has strategic alliances with Samsung
Electronics Co., Ltd. ("Samsung"), Toshiba Corporation ("Toshiba") and Novell,
Inc. ("Novell").
SAMSUNG
In July 1990, Sequoia entered into an OEM agreement and a product
development and technology license agreement with Samsung. Under the OEM
agreement, Samsung has sold Series 300 systems and Series 400 systems in
Korea. Under the product agreement, Samsung funded the joint development of
the Series 40 system, an entry-level fault-tolerant OLTP system designed to be
cost effective for between 40 and 400 users. Sequoia granted Samsung a non-
exclusive license to use existing Sequoia technology in the development of the
Series 40 system in consideration of Samsung's payment of a non-refundable
license fee of $1,500,000. Technology developed in the course of the
development of the Series 40 system is jointly owned by Sequoia and Samsung.
In September 1993, Sequoia and Samsung entered into new agreements that
expand upon and supersede the original OEM and product development and
technology license agreements. These new agreements, which have a term of five
years and may be extended by mutual agreement, are summarized below.
Sequoia has granted Samsung rights to use certain Sequoia technology in the
development of an enhanced Series 40 system and future products. Samsung has
granted Sequoia manufacturing rights for the Series 40 system and enhanced
Series 40 system and has granted Sequoia the right to OEM future products on a
most favored customer basis.
Samsung has agreed to pay Sequoia royalties with respect to its sales of
Series 40 systems (other than sales to Sequoia), and sales of future products
which are based on Sequoia's technology, subject to a credit of up to
$4,800,000 for Samsung's initial manufacturing license fee and development
costs.
Until December 31, 1995, Sequoia has the exclusive right to sell the Series
40, Series 400 and enhanced products in North America, Western Europe,
Australia and New Zealand. Either company may sell into other areas, such as
Asia, Eastern Europe, the Middle East and Africa. VARs of either company may
sell anywhere in the world without restriction.
Sequoia, at its option, may act as Samsung's maintenance provider for Series
400 and Series 40 products worldwide, except in Korea. Sequoia will be
responsible for negotiating maintenance agreements with Samsung's customers
and VARs and will provide second level hardware support and third level
support for Sequoia developed software, such as TOPIX.
TOSHIBA
Sequoia and Toshiba entered into a development, manufacturing and
distribution agreement in December 1991, subsequently amended in April 1994,
under which Sequoia and Toshiba agreed to use Sequoia technology to jointly
develop a new computer system based on SPARC. Sequoia granted Toshiba
exclusive distribution rights in Japan for this SPARC-based system and
retained exclusive rights to distribute this SPARC-based system outside of
Japan.
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In October 1994, Toshiba informed Sequoia that it had modified its
development plans and would develop a new fault-tolerant computer system based
on the PowerPC microprocessor instead of the SPARC microprocessor as had been
planned. First customer shipment of this product is expected to occur late in
calendar year 1996. See "Risk Factors--Risks Relating to Sequoia--New Product
Development".
Sequoia has granted Toshiba a non-exclusive license to use existing Sequoia
technology in the development of such systems in consideration of a non-
refundable license fee. New technology developed in the course of the
development of the systems will be jointly owned by Sequoia and Toshiba.
Sequoia has the option to manufacture such jointly-developed products or to
purchase them from Toshiba on an OEM basis. The agreement has an initial term
of five years from January 1992, with an automatic renewal period of one year
unless terminated by either party.
NOVELL
In April 1994, Sequoia signed an agreement with Novell's UNIX System
Laboratories ("USL"). Under this agreement, Sequoia will work with USL and
other USL partners to incorporate certain of Sequoia's fault-tolerant features
into future releases of Novell's microkernel-based UNIX operating system. When
completed, these future UNIX releases will be compatible, without further
modification, with Sequoia's procedures for recovering from detected hardware
and software faults. As a result, Sequoia believes that it will be able to
offer the latest UNIX releases on its products as soon as such releases become
available, thereby potentially opening new opportunities to offer selected
modules of its fault-tolerant technology to other distributors and users of
USL's UNIX products, particularly the industry leading companies in the client
server market.
Marketing and Sales
Sequoia markets its systems through a combination of its direct sales
organization, distributors and VARs.
VARs package Sequoia systems with other hardware or applications programs for
resale to end-users. Sequoia generally appoints VARs which target particular
applications or vertical markets. Sequoia expects to continue its strategy of
developing additional working relationships with VARs in key market segments.
Sequoia's North America sales organization has direct sales and support
offices in eleven major metropolitan areas, in addition to 16 VARs.
Internationally, Sequoia supports its overseas distributors and customers
through sales and support personnel based in the United States, Canada, Japan,
the United Kingdom and Australia. As of January 1, 1995, Sequoia had seven
distributors covering Belgium, France, England, Poland, Russia, Japan and
Korea.
Customer Service and Support
Sequoia systems provide immediate fault detection, isolation and correction.
These functions are designed to take place automatically, without requiring the
user's intervention and while the system continues operating. When a faulty
component is detected, the system removes the component from service, ensuring
that no corrupted data will affect the rest of the system. An electronic
message is automatically sent to Sequoia's customer support center by the
malfunctioning system to report the error condition. The system tests the
isolated component and, if the system determines that the fault is transient,
the component is added back into the system. System use is not disrupted during
the course of this activity. If the fault is determined to be permanent and is
in a field replaceable unit, a component is dispatched via overnight delivery,
and can be replaced while the system continues operating. In the event of a
permanent fault, the system assesses the remaining resources and balances the
work load among them automatically. If the replacement part cannot be installed
by the customer, Sequoia will arrange through a subcontractor to send a field
service engineer to the customer's site to install the part.
59
<PAGE>
The architecture of the Sequoia system allows Sequoia to utilize
telemaintenance to perform many of the tasks that must be performed by on-site
field service engineers for other systems. Telemaintenance, which consists of
hot-line support, system monitoring, remote diagnosis, operating system
support and downloading, is provided by Sequoia's customer support center.
Telemaintenance enables Sequoia to minimize labor costs by reducing the need
for on-site visits while maintaining a high level of support to customers.
Sequoia generally provides end-user purchasers of its systems with a 90-day
warranty. Sequoia offers a variety of service agreements to its end-user
customers and resellers for ongoing system support. Customers whose systems
are under warranty or service agreements are entitled to receive the
telemaintenance services described above as well as periodic operating system
updates. Sequoia also provides strategic planning, technology migration,
system optimization and network services to customers on a fee basis through
its Professional Services Group.
Backlog
Sequoia typically produces and maintains an inventory of sub-assemblies in
standard configurations. Upon the receipt of customers' specific purchase
orders, minor reconfigurations are made, if necessary, before shipment. This
process permits Sequoia to ship complete systems within 30 days after receipt
of purchase orders. As a result, Sequoia generally does not have significant
product sales backlog.
Manufacturing
Sequoia manufactures its Series 400, Series 440 and Series 500 systems at
its headquarters in Marlborough, Massachusetts. Sequoia's manufacturing
process consists primarily of assembly, testing and quality control. The
production of printed circuit boards is subcontracted and the boards are then
incorporated into Sequoia's systems. Sequoia produces standard subsystems
which are tailored to customers' specific configurations when purchase orders
are received. This method of manufacturing enables Sequoia to respond quickly
to customer needs while maintaining a high level of quality. Sequoia purchases
the basic system for the Series 40 product line from Samsung on an as-required
basis.
Sequoia purchases substantially all of the peripheral devices and components
used in its systems from other manufacturers. Most of the components and
peripherals are available from a number of different suppliers. Although
Sequoia has not experienced any significant problems in obtaining its required
supplies and believes that alternative sources for items could be developed
quickly if necessary, future shortages of components or peripherals could
result in production delays which might adversely affect its business.
Two key components used in Sequoia systems for which alternative sources are
not readily available are the Motorola microprocessors and the power supply
components obtained from Elgin E/2/, Inc. Although Sequoia attempts to obtain
the Motorola microprocessors through multiple vendors and to maintain a one-
month supply of power supply components, the inability to obtain adequate
supplies of these components or other essential components at any time would
have a materially adverse effect on Sequoia's business.
Product Development
Sequoia's internal product development efforts are focused on extending the
current line of products, including the enhancement of the Series 500 and
Series 440 systems. Sequoia's hardware development efforts are directed at
incorporating advances in microprocessor, memory and peripheral technologies
with lower cost packaging, while further improving the price/performance
attributes of Sequoia's systems.
In the software area, Sequoia's development efforts include the continued
development of TOPIX networking products and other enabling technology
products to run on Sequoia's systems.
Development of future products will increasingly take place in conjunction
with development partnerships such as those presently existing with Samsung,
Toshiba and Novell. Joint development of future products using Sequoia's
fault-tolerant technology is expected to be pursued through an active
licensing program.
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<PAGE>
Sequoia's future success will depend in large part on the ability of current
licensees, and the willingness of future licensees, to develop products that
may be marketed and sold by Sequoia, or which provide royalty income for
Sequoia. There can be no assurance that Sequoia will be successful in obtaining
new licensees or that any such licensees will successfully develop products
that achieve market acceptance.
Competition
Sequoia competes in the 40 user to 2,000-plus user range of the OLTP open
systems market, where total system availability is critical. Sequoia therefore
competes against other fault-tolerant companies and against a wide range of
open systems non-fault-tolerant companies which market their products as
achieving high availability. The majority of Sequoia's customers use the Pick
OA database.
In the area of fault-tolerant OLTP Systems, Sequoia's primary competitors are
Tandem Computers Incorporated and Stratus Computer, Inc. Sequoia believes that
it competes effectively in the fault-tolerant market on the basis of its system
architecture, price/performance attributes, its version of the UNIX operating
system and use of industry standard hardware and software.
In the broader general purpose non-fault-tolerant OLTP marketplace, Sequoia's
primary competitors include Hewlett-Packard, Sequent, Data General, DEC, IBM
and Pyramid.
The computer marketplace is highly competitive and is characterized by rapid
changes and improvements in technology. Many of Sequoia's competitors have
significantly greater financial, marketing and technological resources than
Sequoia. There can be no assurance that Sequoia will have the resources
necessary to compete successfully in the future.
Proprietary Rights
Sequoia owns eight United States patents and 41 foreign patents. Other United
States and foreign patent applications are pending. While Sequoia believes that
its patents provide it with protection for its products and the processes
through which its systems achieve fault tolerance, Sequoia also believes that
such patents may be of less significance to its future success than such
factors as innovation, technical skill and management ability and experience.
In addition, Sequoia relies on copyright protection and its trade secret
program to protect aspects of its proprietary technology.
Employees
As of January 1, 1995 Sequoia employed 205 people, including 66 in sales,
marketing and administration activities, 50 in research and development and
related engineering activities, 50 in customer service and 39 in manufacturing.
Sequoia believes that its future success will depend in part upon its continued
ability to attract and retain highly qualified managerial, technical, sales,
marketing, support and manufacturing personnel. Competition in recruiting
technical, marketing and sales personnel in the computer industry is often
intense. None of Sequoia's employees is represented by a labor union, and
Sequoia considers its employee relations to be good.
Certain Legal Proceedings
On May 8, 1992, the Securities and Exchange Commission notified Sequoia that
the Commission had begun an informal investigation with respect to Sequoia's
revenue recognition policies. On September 28, 1992, after receiving certain
documentation and information requested from Sequoia, the Commission notified
Sequoia that the Commission had entered a formal order of investigation with
respect to these matters. On February 16, 1995, Sequoia and the Commission
agreed to a settlement pursuant to which Sequoia consented to the issuance of
an injunction against it prohibiting future violations of certain securities
laws and regulations but is not required to pay any fines or make any other
payments.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF SEQUOIA
Directors
Sequoia's Board of Directors is divided into three classes (designated Class
I directors, Class II directors and Class III directors), with members of each
class serving for staggered three-year terms. There are currently two Class I
directors, two Class II directors and one Class III director. In all cases, the
term of a director is subject to the election and qualification of his
successor and to his earlier death, resignation or removal. Sequoia's current
Class I Directors will stand for reelection at the Special Meeting. With
respect to each director and nominee, information relating to such director's
name, age, the positions and offices held by him, principal occupation,
business experience, other directorships and the year in which he became a
director of Sequoia can be found under the caption "Item 3--Election of
Directors".
Executive Officers
Executive officers are elected by the Board of Directors annually at its
meeting immediately following the Annual Meeting of Stockholders and hold
office until the next annual meeting unless they sooner resign or are removed
from office.
The following table lists the name, age and position of the current executive
officers of Sequoia.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Cornelius P. McMullan........... 55 President and Chief Executive Officer
Jack J. Stiffler................ 60 Executive Vice President, Chief Technical
Officer and General Manager, Technology
Business Unit
Richard B. Goldman.............. 48 Vice President, Finance and Chief Financial
Officer
David A. Butler................. 50 Vice President and Treasurer
Ronald J. Gellert............... 48 Vice President and General Manager, Systems
Business Unit
William C. Gould................ 56 Vice President, Customer Service
Andrew P. Wood.................. 50 Vice President, Manufacturing
Geoffrey R. Cluett.............. 48 Vice President, International
John M. Owens................... 45 Vice President, Engineering
Jeremy F. Swett................. 51 Vice President, General Counsel and
Secretary
</TABLE>
Mr. McMullan joined Sequoia in November 1992 as Vice President, Worldwide
Sales and Strategic Accounts and was promoted to President and Chief Executive
Officer in December 1992. From November 1980 to October 1992, Mr. McMullan held
various management positions at Prime Computer, Inc. ("Prime"), most recently
as President, Commercial Systems.
Dr. Stiffler, a co-founder of Sequoia, has served as Chief Technical Officer
since Sequoia's formation in 1981 and has served as Executive Vice President
since October 1987 and General Manager, Technology Business Unit since July
1993. From 1967 to 1981, Dr. Stiffler was a consulting scientist for Raytheon
Company, a manufacturer of technology and consumer products. Dr. Stiffler is
named as an inventor under ten patents for error-control coding and computer
technology.
Mr. Goldman joined Sequoia in October 1992 as Vice President, Finance, and
Chief Financial Officer. He also served as Co-Chief Executive Officer from
October 1992 until December 1992 and Secretary from March 1993 until December
1994. Mr. Goldman was Senior Vice President and Chief Financial Officer of
Connell Limited Partnership, a diversified manufacturing group of companies,
from May 1991 until he joined
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<PAGE>
Sequoia and was Vice President of Finance, Treasurer and Chief Financial
Officer of Alliant Computer Systems, Inc. from May 1990 until May 1991. On May
26, 1992, Alliant filed for protection under Federal bankruptcy laws. Before
his association with Alliant, Mr. Goldman was employed for more than ten years
by Prime, most recently as Vice President of Finance, Administration and
Planning and Chief Financial Officer from January 1988 to October 1989.
Mr. Butler joined Sequoia in January 1988 as Vice President, Finance, Chief
Financial Officer and Treasurer and has served as Vice President and Treasurer
since August 1990. From 1986 through 1987, he was Director of Finance at
Shipley Company, Inc., a multinational specialty chemical manufacturer. From
1985 to 1986, he was Chief Financial Officer at Business Interiors, Inc., a
furniture distributor. From 1981 to 1985 he was Controller and Treasurer of
Time Share Corporation, a computer time sharing and software company.
Mr. Gellert joined Sequoia in 1987 as Director of Pick Sales and was
promoted to Vice President, Pick Sales in July 1988, to Vice President, Sales
in July 1992 and to Vice President and General Manager, Systems Business Unit
in July 1993. Prior to joining Sequoia, Mr. Gellert had been employed by The
Ultimate Corporation from 1983 through 1987, most recently as Director of
Dealer Operations, and had been in charge of the New York branch of McDonnell
Douglas Computer Corporation from 1978 to 1982.
Mr. Gould joined Sequoia in July 1991 as Vice President of Software
Engineering and has served as Vice President, Customer Service since April
1993. Prior to joining Sequoia, Mr. Gould was Vice President, Software
Engineering at Apollo Computer, Inc. from 1988 to 1991. Prior to 1988, Mr.
Gould was employed by Honeywell, Inc., most recently as Vice President,
Minicomputer Engineering from 1984 to 1988.
Mr. Wood joined Sequoia in February 1988 as Director of Materials and was
promoted to Vice President, Manufacturing in October 1993. Prior to joining
Sequoia, Mr. Wood was employed by Automatix, Inc. where he was Manager of
Purchasing from 1980 to 1984, and then Manager of Materials from 1984 to 1988.
Mr. Cluett was appointed Vice President, Business Development of Sequoia in
April 1994 and Vice President, International in July 1994. Prior to joining
Sequoia, Mr. Cluett served as a consultant to high-technology companies from
1992 to 1994. He was Vice President, General International Area & Business
Development of Prime from 1991 to 1992, following service as General Manager
for worldwide field operations of BIS Bank Systems, plc, a software company,
from 1990 to 1991. From 1976 to 1991, Mr. Cluett held various positions at
Prime, most recently Vice President, International Marketing.
Mr. Owens joined Sequoia in August 1994 as Vice President, Engineering. Mr.
Owens was Executive Vice President from 1990 to 1994 of Charles River Data
Systems, a privately held computer server company. From 1987 to 1990, Mr.
Owens worked for Encore Computer Corporation where he held positions as Vice
President, System Software Products and Vice President, Product Development.
Mr. Swett joined Sequoia as General Counsel in June 1994 and was elected
Vice President, General Counsel and Secretary in December 1994. Prior to
joining Sequoia, Mr. Swett was employed by Wyman-Gordon Company, a
manufacturer of aerospace components, as Associate General Counsel from 1992
to 1994 and as Corporate Counsel from 1980 to 1992, following several years in
counsel positions at Data General Corporation and Honeywell Inc.
Directors' Compensation
Sequoia's non-employee directors are paid a fee of $1,750 for each meeting
attended (up to a maximum of six meetings per year) and were reimbursed for
out-of-pocket expenses incurred in attending Board and Committee meetings.
Each non-employee director also received an option to purchase 2,500 shares of
Sequoia Common Stock on July 1, 1994 at an exercise price of $3.6875 per share
under Sequoia's 1990 Outside Directors' Stock Option Plan (the "1990
Directors' Plan"). The 1990 Directors' Plan has expired and a new
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<PAGE>
1995 Outside Directors' Stock Option Plan is proposed for adoption at the
Special Meeting. See "Item 6--Approval of the 1995 Outside Directors' Stock
Option Plan".
Under a consulting agreement entered into with Sequoia, Francis J. Hughes,
Jr., Sequoia's Chairman of the Board, is eligible to receive $1,000 per day for
consulting services (up to a maximum of $7,500 per month). Mr. Hughes did not
provide any consulting services nor receive any payments under this agreement
during fiscal 1994 or the first six months of fiscal 1995.
Directors who are officers or employees of Sequoia do not receive any
additional compensation for their services as directors.
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<PAGE>
Named Executive Officers' Compensation
The following table sets forth all cash and non-cash compensation for each of
the last three fiscal years awarded to or earned by the President and Chief
Executive Officer and the four other most highly compensated executive officers
of Sequoia (such five executive officers are collectively referred to herein as
the "named executive officers") whose cash compensation exceeded $100,000
during the fiscal year ended June 30, 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- -----------------------------
AWARDS PAYOUTS
--------------------- -------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) ($) SARS(#)(1) ($) ($)
- ------------------ ---- --------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cornelius P. McMullan. 1994 $206,511 $ 84,000 N/A N/A 120,000 N/A $2,690(3)
President and Chief 1993 $123,076(2) $ 36,000 N/A N/A 60,000 N/A $1,345(3)
Executive Officer 1992 N/A N/A N/A N/A N/A N/A N/A
Richard B. Goldman.... 1994 $177,384 $ 93,875 N/A N/A 20,000 N/A $2,391(3)
Vice President,
Finance 1993 $128,776(4) $ 37,500 $ 1,128(5) N/A 100,000 N/A $ 712(3)
and Chief Financial 1992 N/A N/A N/A N/A N/A N/A N/A
Officer
Jack J. Stiffler...... 1994 $177,384 $ 78,750 N/A N/A 25,000 N/A $1,043(3)
Executive Vice
President, 1993 $168,942 N/A $13,426(5) N/A 16,000 N/A $3,589(6)
Chief Technical
Officer, 1992 $166,107 $ 62,400 $41,797(5) N/A 15,000 N/A $3,980(7)
and General Manager,
Technology Business
Ronald J. Gellert..... 1994 $139,326 $103,302 N/A N/A 15,000 N/A $1,352(3)
Vice President, and
General Manager, 1993 $105,000 $ 55,500 $ 9,557 N/A 35,700 N/A $1,092(3)
Systems Business 1992 $ 90,000 $ 81,015 N/A N/A 1,000 N/A $ 270(8)
William C. Gould...... 1994 $130,210 $ 65,000 N/A N/A 15,000 N/A $1,232(3)
Vice President, 1993 $113,586 N/A $ 1,773(5) N/A 24,700 N/A $1,232(3)
Customer Service 1992 $111,280 N/A N/A N/A N/A N/A $1,035(3)
</TABLE>
- --------
(1) No stock awards or stock appreciation rights (SARs) were granted to any of
the named executive officers during fiscal years 1992, 1993 or 1994.
(2) Mr. McMullan's salary figure includes $28,461 earned as Vice President,
Worldwide Sales and Strategic Accounts from November 16, 1992 through
January 8, 1993. Mr. McMullan's 1993 annual salary as President and Chief
Executive Officer was $200,000.
(3) Represents the value of group term life insurance paid by Sequoia.
(4) Mr. Goldman's 1993 annual salary was $175,000.
(5) Represents vacation buy-out amount.
(6) Represents $3,089, the value of group term life insurance paid by Sequoia,
plus $500 for tax services.
(7) Represents $3,480, the value of group term life insurance paid by Sequoia,
plus $500 for tax services.
(8) Represents Sequoia contributions to Sequoia's defined contribution
retirement plan.
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<PAGE>
Option Grants and Exercises
The following tables summarize (i) option grants and exercises during fiscal
1994 to or by the named executive officers, and (ii) the value of the options
held by such persons at the end of fiscal 1994. No SARs were granted during
fiscal 1994.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIA-
UNDERLYING GRANTED TO EXERCISE OR TION FOR OPTION TERM(3)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
- ---- -------------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cornelius P. McMullan... 100,000 15% $2.0625 08/03/03 $ 129,710 $328,709
20,000 3% $5.50 01/28/04 $ 74,270 $183,420
Richard B. Goldman...... 20,000 3% $3.8750 12/12/03 $ 50,775 $126,757
Jack J. Stiffler........ 15,000 2% $2.0625 08/03/03 $ 19,456 $ 49,306
10,000 1.5% $4.00 06/07/04 $ 25,156 $ 63,750
Ronald J. Gellert....... 15,000 2% $2.0625 08/03/03 $ 19,456 $ 49,306
William C. Gould........ 15,000 2% $2.0625 08/03/03 $ 19,456 $ 49,306
</TABLE>
- --------
(1) Options generally become exercisable at the rate of 1/48th of the shares
subject to the option commencing on the first day of the first month
immediately following the month of grant and the first of each month
thereafter.
(2) The exercise price is equal to the fair market value of Sequoia Common
Stock on the date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option terms. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted and are not intended to
forecast future appreciation of the price of the Sequoia Common Stock. The
named executive officers will realize no gain upon the exercise of these
options without an increase in the price of the Sequoia Common Stock, which
increase will benefit all Sequoia stockholders proportionately.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS
ACQUIRED ON VALUE FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- ---- ----------- ----------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Cornelius P. McMullan... -- -- 56,415 / 123,585 $215,082 / $471,168
Richard B. Goldman...... 44,643 $172,992 8,273 / 67,084 $ 31,541 / $255,758
Jack J. Stiffler........ -- -- 75,219 / 34,550 $286,772 / $131,722
Ronald J. Gellert....... -- -- 27,056 / 29,769 $103,151 / $113,494
William C. Gould........ -- -- 21,373 / 18,327 $ 81,485 / $ 69,872
</TABLE>
- --------
(1) On February 22, 1995 the last reported sales price of Sequoia Common Stock
on the Nasdaq National Market was $3.9375 per share.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth certain information as of January 31, 1995 with
respect to the beneficial ownership of the Sequoia Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) each director and each executive officer named in
the Summary Compensation Table under the heading "Executive Compensation;" and
(iii) all directors and executive officers as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OF COMMON STOCK PERCENTAGE OF COMMON
OF 5% BENEFICIAL OWNER BENEFICIALLY OWNED (1)(2) STOCK OUTSTANDING (2)
- ---------------------- ------------------------- ---------------------
<S> <C> <C>
Hewlett-Packard Company........ 568,836(3) 5.8%
3000 Hanover Street
Palo Alto, CA 93404
<CAPTION>
DIRECTORS AND EXECUTIVE
OFFICERS
- -----------------------
<S> <C> <C>
Francis J. Hughes, Jr. ........ 305,571(4) 3.0
Dean C. Campbell............... 38,004(5) *
John F. Smith.................. 14,500(6) *
A. Theodore Engkvist........... 14,500(7) *
Cornelius P. McMullan.......... 98,873(8) *
Richard B. Goldman............. 30,387(9) *
Jack J. Stiffler............... 129,938(10) 1.3
Ronald J. Gellert.............. 43,177(11) *
William C. Gould............... 35,129(12) *
All Directors and Executive
Officers as a group (12
persons)...................... 748,654(13) 7.2%
</TABLE>
- --------
* Less than 1%
(1) The inclusion herein of any shares of Common Stock deemed beneficially
owned does not constitute an admission of beneficial ownership of those
shares by the respective stockholders. Unless otherwise indicated, each
stockholder referred to above has sole voting and investment power with
respect to the shares listed.
(2) For purposes of this table, the number of shares of Common Stock of the
Company owned by each director or executive officer is determined under
the rules of the Commission and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares of Common Stock as to
which each director or executive officer has sole or shared voting or
investment power and also any shares of Common Stock with respect to which
any options held by such director or executive officer are exercisable
within 60 days after January 31, 1995.
(3) Hewlett-Packard Company ("Hewlett-Packard") is a public company and, based
on its Annual Report on Form 10-K for the fiscal year ended October 31,
1994, its capital stock is held by approximately 72,840 stockholders, and
no stockholder, other than David Packard, William R. Hewlett, Susan P. Orr
and David Woodby Packard, holds more than 5% of Hewlett-Packard's
outstanding capital stock.
(4) Includes (i) 178,571 shares of Common Stock owned by American Research and
Development II, L.P. ("ARD") of which Mr. Hughes is a general partner (or
a general partner of a general partner), and (ii) 37,500 shares of Common
Stock issuable pursuant to stock options which are exercisable by ARD
within 60 days after January 31, 1995, as to each of which Mr. Hughes
disclaims beneficial ownership. Also includes 1,500 shares held by Mr.
Hughes and 88,000 shares of Common Stock issuable pursuant to stock
options which are exercisable by Mr. Hughes within 60 days after January
31, 1995.
(5) Comprised of 10,504 shares of Common Stock owned by Mr. Campbell and
27,500 shares of Common Stock issuable pursuant to stock options which are
exercisable by Mr. Campbell within 60 days after January 31, 1995.
(6) Comprised of 14,500 shares of Common Stock issuable pursuant to stock
options which are exercisable by Mr. Smith within 60 days after January
31, 1995.
(7) Comprised of 14,500 shares of Common Stock issuable pursuant to stock
options which are exercisable by Mr. Engkvist within 60 days after January
31, 1995.
67
<PAGE>
(8) Comprised of 820 shares of Common Stock owned by Mr. McMullan and 97,706
shares of Common Stock issuable pursuant to stock options which are
exercisable by Mr. McMullan within 60 days after January 31, 1995.
(9) Comprised of 30,387 shares of Common Stock issuable pursuant to stock
options which are exercisable by Mr. Goldman within 60 days after January
31, 1995.
(10) Comprised of 41,062 shares held by Mr. Stiffler, 390 shares owned by Mr.
Stiffler's wife (as to which Mr. Stiffler disclaims beneficial ownership)
and 87,986 shares of Common Stock issuable pursuant to stock options which
are exercisable by Mr. Stiffler within 60 days after January 31, 1995.
(11) Comprised of 1,472 shares of Common Stock owned by Mr. Gellert and 41,205
shares of Common Stock issuable pursuant to stock options which are
exercisable by Mr. Gellert within 60 days after January 31, 1995.
(12) Comprised of 2,000 shares of Common Stock owned by Mr. Gould and 32,629
shares of Common Stock issuable pursuant to stock options which are
exercisable by Mr. Gould within 60 days after January 31, 1995.
(13) Includes an aggregate of 507,488 shares of Common Stock which all
executive officers and directors have the right to acquire under
outstanding stock options exercisable within 60 days after January 31,
1995. Also includes (i) 178,571 shares of Common Stock owned by ARD of
which Mr. Hughes is a general partner (or a general partner of a general
partner) and (ii) 37,500 shares of Common Stock issuable pursuant to stock
options which are exercisable by ARD within 60 days after January 31,
1995, as to all of which Mr. Hughes disclaims beneficial ownership.
REPORT OF THE SEQUOIA COMPENSATION COMMITTEE
The Compensation Committee of the Sequoia Board (the "Compensation
Committee") is composed of non-employee directors of Sequoia. The Compensation
Committee is responsible for establishing and administering the policies which
govern both annual compensation and, in conjunction with the full Sequoia
Board, equity ownership.
This report is submitted by the Compensation Committee and addresses
Sequoia's policies for the fiscal year ended June 30, 1994 as they apply to
Cornelius P. McMullan, the President and Chief Executive Officer of Sequoia,
and all of Sequoia's executive officers other than Mr. McMullan.
Executive Compensation Philosophy
The Compensation Committee uses its compensation program to achieve the
following objectives:
. To attract and retain superior talent and reward performance.
. To align management's interest with the success of Sequoia in resolving
Sequoia's most critical strategic and operational issues by placing a
portion of cash compensation at risk in relation to management's
resolution of such issues and Sequoia's performance.
. To align management's interests with Sequoia stockholders by including
long-term equity incentives.
. To increase profitability of Sequoia and, accordingly, increase
stockholder value.
The Compensation Committee believes that the executive compensation program
provides an overall level of compensation that is competitive within the
computer industry and among companies of comparable size and complexity. For
fiscal year 1994, the key goal facing the Compensation Committee was a return
to profitability, and the at-risk elements of compensation, which include the
annual incentive and stock option plans, provided an additional incentive to
the executive officers to attain this goal in fiscal 1994.
Procedure for Establishing Compensation
Each fiscal year the Compensation Committee establishes an annual salary plan
for Sequoia's senior executive officers based on recommendations by Sequoia's
Chief Executive Officer and Director of Human Resources. In addition, the
Compensation Committee proposes an annual compensation plan for Sequoia's Chief
Executive Officer and submits it for approval to the Sequoia Board.
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The Compensation Committee believes that, based on its review of computer
industry compensation data, the base salaries of Sequoia's senior executive
officers are comparable to base salaries of senior executive officers of
similar companies in the computer industry and that Sequoia's compensation
policies must remain competitive in order for it to attract, motivate and
retain its key individuals. In determining the size and relative mix of
incentive based compensation, the Compensation Committee did not use a
consultant but based its decisions on its own assessment of the best means of
(i) remaining competitive with regard to Sequoia's compensation policies and
(ii) helping Sequoia attain certain performance goals.
Executive Officer Compensation
Sequoia's executive officers' compensation consists of base salary, annual
incentive compensation, long-term incentives in the form of stock options, and
certain benefits such as term life insurance and other plans which are
generally available to all employees of the Company.
Base Salary. Base salary compensation is set within the range of salaries of
executive officers with comparable qualifications, experience and
responsibilities at other companies in the same or similar businesses and of
comparable size and complexity as determined by the Compensation Committee
after a review of computer industry compensation data. The Compensation
Committee believes that base salary is not the primary compensation tool used
to motivate executives of Sequoia.
Annual and Long-term Incentive Compensation. Annual incentive compensation
and long-term incentive compensation are more closely tied to Sequoia's success
in achieving financial performance goals and represent the majority of total
compensation available to the executives.
Annual Incentive Compensation. Annual incentive compensation relating to
Sequoia's executive officers for the fiscal year ended June 30, 1994 was
generally tied to the achievement of (1) critical financial goals related
to profitability and, in certain cases, sales and cash position, and (2)
specific goals related to the individual executive's functional
responsibility.
Stock Options. The Compensation Committee considers an executive's past
performance in determining an award on an annual basis, and in addition the
Compensation Committee believes that the retention of an individual is of
paramount importance in the determination of stock option grants. Stock
options are granted at an option price equal to the fair market value of
Sequoia's Common Stock on the date of grant and generally vest over a four-
year period. The Compensation Committee believes that stock options provide
the most significant compensation opportunity for executives.
Benefits. Sequoia's executive officers are entitled to receive medical
and term life insurance benefits and to participate in Sequoia's 401(k)
savings plan on the same basis as other full-time employees of Sequoia,
with the exception of an additional two times base salary life insurance at
no cost. Sequoia's 1993 Employee Stock Purchase Plan, which is generally
available to all employees, including executive officers, allows
participants to purchase up to a maximum of 500 shares of Sequoia Common
Stock per offering period at a discount of 15% from the fair market value
of Sequoia Common Stock at the beginning or end of the applicable offering
period.
The amount of perquisites provided to executive officers, as determined in
accordance with the rules of the Commission relating to executive compensation,
did not exceed 10% of salary of any executive officer for the fiscal year ended
June 30, 1994.
Chief Executive Officer Compensation
During the fiscal year ended June 30, 1994, Sequoia's President and Chief
Executive Officer, Cornelius P. McMullan, participated in the programs
discussed above. The performance criteria for his annual incentive program
stressed a return to profitability and the need to position Sequoia for
significant future growth. Mr. McMullan received salary and bonus compensation
of $290,511, including base salary of $206,511 (which corresponds to an annual
salary of $210,000) as President and Chief Executive Officer and a bonus of
$84,000.
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In conformance with the compensation program specified herein, and in light of
Sequoia's performance, the Compensation Committee awarded Mr. McMullan options
to acquire 120,000 shares of Sequoia Common Stock in fiscal year 1994.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1 million paid to a corporation's chief
executive officer and four other most-highly-compensated executive officers.
Qualifying compensation will not be subject to the deduction limit if certain
requirements are met. Although Sequoia has not paid any of its executive
officers compensation over $1 million and has no plans to do so, it intends to
establish a limit on option grants to employees in a manner that complies with
the provisions of the statute. See "Item 4--Approval of Amendments to 1986
Incentive Stock Option Plan and 1986 Supplemental Stock Option Plan".
The Compensation Committee
Francis J. Hughes, Jr., Chairman
Dean C. Campbell
John F. Smith
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COMPARATIVE STOCK PERFORMANCE
The cumulative stock performance graph below compares the cumulative
shareholder return on Sequoia Common Stock for the period from March 6, 1990
through the fiscal year ended June 30, 1994 with the cumulative return on the
Nasdaq National Market (U.S. Companies) (the "Nasdaq Composite Index") and (ii)
a group consisting of publicly-traded United States companies in Sequoia's line
of business (the "Peer Group") for the same period (assuming an investment of
$100 in Sequoia Common Stock, the Nasdaq Composite Index and the Peer Group on
March 6, 1990 and reinvestment of all dividends). Measurement points are March
6, 1993 and the last trading days of Sequoia's fiscal years ended June 30,
1990, 1991, 1992, 1993 and 1994. Prior to March 6, 1990, Sequoia Common Stock
was not registered under the Securities Exchange Act of 1934, as amended.
The Peer Group consists of the following companies:
Tandem Computers Incorporated
Stratus Computer, Inc.
Sequent Computer Systems, Inc.
Pyramid Technology Corporation
[CHART APPEARS HERE]
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with Sequoia's granting of certain distribution rights to
Hewlett-Packard Company ("Hewlett-Packard") in December 1989, Sequoia and
Hewlett-Packard entered into a patent and technology licensing agreement, and
Hewlett-Packard purchased 688,836 shares of Sequoia's Series F Convertible
Preferred Stock for an aggregate purchase price of $5,800,000. These shares
automatically converted into an equal number of shares of Sequoia Common Stock
upon the closing of Sequoia's initial public offering in March 1990. As of
January 31, 1995 Hewlett-Packard holds 5.8% of the Sequoia Common Stock. In
fiscal
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1994, Sequoia received approximately $765,000 from Hewlett-Packard for the
purchase of products and services. Sequoia's sales to Hewlett-Packard during
the first six months of fiscal 1995 were not material.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of certain of the material differences between the
rights of holders of Sequoia Common Stock and the rights of holders of SPCO
Common Stock and TMI Common Stock. Since Sequoia, SPCO and TMI are each
organized under the laws of the State of Delaware, such differences arise from
differences between various provisions of the Restated Certificate of
Incorporation and By-laws of SPCO (the "SPCO Charter Documents"), the
Certificate of Incorporation and By-laws of Sequoia (the "Sequoia Charter
Documents") and the Certificate of Incorporation and By-laws of TMI (the "TMI
Charter Documents").
NUMBER, CLASSIFICATION AND REMOVAL OF DIRECTORS
The Sequoia Charter Documents provide that the number of directors of Sequoia
shall be fixed by the Board of Directors or stockholders and that any one or
more of the directors of Sequoia may be removed, with or without cause, by the
holders of at least 75% of the shares then entitled to vote on an election of
directors. Sequoia has a classified Board of Directors consisting of two Class
I Directors, two Class II Directors and one Class III Director. Pursuant to
Sequoia's By-laws, directors are elected for terms ending on the date of the
third annual meeting following the annual meeting at which any given director
is elected.
The SPCO Charter Documents and the TMI Charter Documents both provide that
the number of directors shall be fixed by the Board of Directors and that any
director may be removed from office at any time, with or without cause, by the
affirmative vote of the holders of a majority of the voting power of the then
outstanding capital stock entitled to vote generally in the election of
directors, voting together as a single class. The SPCO Charter Documents and
TMI Charter Documents do not provide for classified Boards of Directors.
STOCKHOLDER ACTIONS AND MEETINGS
The Sequoia Charter Documents provide that any action required or permitted
to be taken by the stockholders of Sequoia may be taken only at a duly called
annual or special meeting of the stockholders and may not be taken by written
consent in lieu of a meeting. The By-laws of Sequoia provide that a stockholder
must give advance written notice to Sequoia if the stockholder intends to bring
any business before a meeting of stockholders or to make nominations for the
board of directors. Sequoia's By-laws require advance notice (i) in the case of
an annual meeting, of not less than 30 days' prior to the first anniversary
date of the initial written notice of the previous year's annual meeting given
to stockholders of record on the record date for such meeting by or at the
direction of the Sequoia Board (provided that such stockholder notice is not
required to be given more than 60 days prior to an annual meeting), and (ii) in
the case of a special meeting, not more than ten days after the date of the
initial written notice of such meeting given to stockholders of record on the
record date for such meeting by or at the direction of the Sequoia Board.
The SPCO and TMI By-laws do not contain any restrictions on written consents
of stockholders or any such advance notice provisions. The SPCO and TMI By-laws
permit any action requiring a stockholder vote to be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be 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 shares entitled to vote thereon
were present and voted.
TRANSACTIONS WITH INTERESTED STOCKHOLDERS
Sequoia, as a publicly held corporation, is subject to Section 203 of the
DGCL ("Section 203"). Section 203 prevents an "Interested Stockholder" of a
corporation (generally defined to mean any beneficial owner of
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more than 15% of the corporation's voting stock) from engaging in any "Business
Combination" (as defined in Section 203) with the constituent corporation for a
period of three years following the date on which such Interested Stockholder
became an Interested Stockholder, unless: (i) before such person became an
Interested Stockholder, the Board of Directors of the corporation approved the
transaction which resulted in the Interested Stockholder becoming an Interested
Stockholder; (ii) upon consummation of the transaction which resulted in the
Interested Stockholder becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding, shares held by directors who are
also officers, and employee stock ownership plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) following the transaction which resulted in the Interested Stockholder
becoming an Interested Stockholder, the Business Combination is (x) approved by
the Board of Directors of the Corporation, and (y) authorized at a meeting of
stockholders by the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock of the corporation not then owned by the Interested
Stockholder.
SPCO and TMI are not publicly held and accordingly are not subject to Section
203 of the DGCL.
APPROVAL OF CERTAIN CHARTER AMENDMENTS
Sequoia's Restated Certificate of Incorporation requires the affirmative vote
of the holders of at least 75% of the votes which all Sequoia stockholders
would be entitled to cast at any annual election of directors to amend or
repeal, or to adopt any provision inconsistent with, certain provisions of
Sequoia's Restated Certificate of Incorporation. The provisions of Sequoia's
Restated Certificate of Incorporation subject to such 75% vote requirement
include those provisions which (i) divide Sequoia's board into three classes
serving staggered three-year terms and establish the standards for removal of
directors; (ii) prohibit stockholders from acting by written consent in lieu of
a meeting; and (iii) provide that special meetings of stockholders may be
called only by the President or the Chairman of the Board. The SPCO and TMI
Charter Documents contain no such provisions.
The foregoing summary does not purport to be a complete statement of the
rights of holders of Sequoia Common Stock, SPCO Common Stock and TMI Common
Stock under, and is qualified in its entirety by reference to, the DGCL, the
Sequoia Charter Documents, SPCO Charter Documents and the TMI Charter
Documents. See "Description of Sequoia Capital Stock" for a summary of certain
other rights relating to the Sequoia Common Stock.
DESCRIPTION OF SEQUOIA CAPITAL STOCK
GENERAL
The authorized capital stock of Sequoia presently consists of 25,000,000
shares of Sequoia Common Stock and 12,500,000 shares of Preferred Stock. The
amendment of Sequoia's Restated Certificate of Incorporation, to increase the
number of authorized shares of Sequoia Common Stock from 25,000,000 shares to
35,000,000 shares, is being proposed to stockholders of Sequoia at the Special
Meeting. See "Item 2--Amendment to Sequoia's Restated Certificate of
Incorporation". As of the date of this Proxy Statement/Prospectus, no shares of
Sequoia Preferred Stock are issued and outstanding.
The following are summaries of the terms of the Sequoia Common Stock and
Sequoia Preferred Stock. Such summaries do not purport to be complete. For a
discussion of the significant differences between the Sequoia Charter
Documents, the SPCO Charter Documents and the TMI Charter Documents, see
"Comparison of Stockholder Rights".
SEQUOIA COMMON STOCK
Holders of Sequoia Common Stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the
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shares of Sequoia Common Stock entitled to vote in any election of directors
may elect all of the directors standing for election. Holders of Sequoia Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Sequoia Board out of funds legally available therefor, subject
to any preferential dividend rights of outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of Sequoia, the holders of Sequoia
Common Stock are entitled to receive ratably the net assets of Sequoia
available after the payment of all debts, and other liabilities and subject to
the prior rights of any outstanding shares of Preferred Stock. Holders of
Sequoia Common Stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of Sequoia Common Stock are, and the shares of
Sequoia Common Stock to be issued pursuant to the Transaction will be, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Sequoia Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which Sequoia
may designate and issue in the future.
SEQUOIA PREFERRED STOCK
The Sequoia Board is authorized, subject to any limitations prescribed by
law, but without further stockholder approval, to issue shares of Preferred
Stock in one or more classes or series. Each such class or series of Preferred
Stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Sequoia
Board. The purpose of authorizing the Sequoia Board to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding voting stock of Sequoia. Sequoia has
no present plans to issue any shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Sequoia's Common Stock is The First
National Bank of Boston, P.O. Box 1865, Boston, Massachusetts 02105 (telephone
number: 617-575-2900).
APPRAISAL RIGHTS OF SPCO STOCKHOLDERS
When the Merger is effected, stockholders of SPCO who comply with the
procedures prescribed in Section 262 of the DGCL ("Section 262") will be
entitled to a judicial determination of the "fair value" of their shares
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) and to receive from SPCO payment of such fair value
in cash. Shares of SPCO Common Stock which are outstanding immediately prior to
the Effective Time and with respect to which appraisal shall have been properly
demanded in accordance with Section 262 shall not be converted into the right
to receive shares of Sequoia Common Stock in the Merger (the "Merger
Consideration") at or after the Effective Time unless and until the holder of
such shares withdraws his demand for such appraisal or becomes ineligible for
such appraisal.
Holders of Sequoia Common Stock, holders of the Unvested TMI Options and
Keystone are not entitled to appraisal rights in connection with the
Transaction.
The following is a brief summary of the statutory procedures to be followed
by a stockholder of SPCO in order to dissent from the Merger and perfect
appraisal rights under the DGCL. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262, THE TEXT OF WHICH
IS INCLUDED AS APPENDIX C OF THIS PROXY STATEMENT/PROSPECTUS. ANY SPCO
STOCKHOLDER CONSIDERING DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL
COUNSEL.
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WRITTEN DEMAND FOR APPRAISAL
A written demand for appraisal of shares of SPCO Common Stock must be
delivered to SPCO by a SPCO stockholder seeking appraisal within 20 days after
the date of mailing of this Proxy Statement/Prospectus, and such stockholder
cannot consent to the approval of the Merger and the Acquisition Agreement.
This written demand must be separate from the document pursuant to which such
stockholder withholds consent to the SPCO Written Consent. Failing to consent
to the approval of the Merger and the Acquisition Agreement will not constitute
a demand for appraisal within the meaning of Section 262.
STOCKHOLDERS ELECTING TO EXERCISE THEIR APPRAISAL RIGHTS UNDER SECTION 262
MUST NOT CONSENT TO THE APPROVAL OF THE MERGER AND THE ACQUISITION AGREEMENT.
A demand for appraisal must be executed by or for the SPCO stockholder of
record, fully and correctly, as such stockholder's name appears on the stock
certificates. If SPCO Common Stock is owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, such demand must be executed by
the fiduciary. If SPCO Common Stock is owned of record by more than one person,
as in a joint tenancy or tenancy in common, such demand must be executed by all
joint owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, he is acting as agent for the record
owner.
A record owner who holds SPCO Common Stock as a nominee for others may
exercise appraisal rights with respect to the SPCO Common Stock held for all or
less than all beneficial owners of SPCO Common Stock as to which the holder is
the record owner. In such case, the written demand must set forth the number of
shares of SPCO Common Stock covered by such demand. Where the number of shares
of SPCO Common Stock is not expressly stated, the demand will be presumed to
cover all shares of SPCO Common Stock outstanding in the name of such record
owner. Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply strictly with the
statutory requirements with respect to the delivery of written demand prior to
the execution of the SPCO Written Consent.
A SPCO stockholder who elects to exercise appraisal rights must mail or
deliver the written demand for appraisal to: Secretary, SPCO, Inc., c/o Texas
Microsystems, Inc., 5959 Corporate Drive, Houston, Texas 77036. The written
demand for appraisal should specify the stockholder's name and mailing address
and the number of shares of SPCO Common Stock covered by the demand, and should
state that the stockholder is thereby demanding appraisal in accordance with
Section 262.
OTHER PROCEDURES
Within 10 days after the Effective Time, SPCO must provide notice as to the
date of effectiveness of the Merger to all SPCO stockholders who have duly and
timely delivered demands for appraisal and who have not executed the SPCO
Written Consent (a "Dissenting Stockholder").
Within 120 days after the Effective Time, any Dissenting Stockholder is
entitled, upon written request, to receive from SPCO a statement setting forth
the aggregate number of shares not voted in favor of approving the Merger and
the Acquisition Agreement and with respect to which demands for appraisal have
been received by SPCO, and the number of holders of such shares. Such statement
must be mailed within 10 days after the written request therefor has been
received by SPCO.
Within 120 days after the Effective Date, either SPCO or any Dissenting
Stockholder may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of each share of SPCO Common Stock of all
Dissenting Stockholders. If a petition for an appraisal is timely filed, after
a hearing on such petition, the Delaware Court of Chancery will determine which
SPCO stockholders are entitled to
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appraisal rights and thereafter will appraise the shares of SPCO Common Stock
owned by such stockholders, determining the fair value of such shares,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest to be paid, if
any, upon the amount determined to be fair value. In determining fair value,
the Delaware Court of Chancery is to take into account all relevant factors. In
Weinberger v. UOP, Inc., et al., the Delaware Supreme Court discussed the
factors that could be considered in determining fair value in an appraisal
proceeding, stating that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered and that "[f]air price obviously
requires consideration of all relevant factors involving the value of a
company". The Delaware Supreme Court stated that in making this determination
of fair value, the court and the appraiser may consider "all factors and
elements which reasonably might enter into the fixing of value," including
"market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other factors which were known or which could be ascertained
as of the date of merger and which throw any light on future prospects of the
merged corporation . . . ." The Delaware Supreme Court has construed Section
262 to mean that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the
merger and not the product of speculation, may be considered". However, the
court noted that Section 262 provides that fair value is to be determined
"exclusive of any element of value arising from the accomplishment or
expectation of the merger".
Stockholders of SPCO considering whether to seek appraisal should bear in
mind that the fair value of their SPCO Common Stock determined under Section
262 could be more than, the same as or less than the value of the Merger
Consideration, and that an opinion of an investment banking firm as to fairness
from a financial point of view is not necessarily an opinion as to fair value
under Section 262. Moreover, Sequoia intends to cause SPCO to argue in any
appraisal proceeding that, for purposes thereof, the "fair value" of each share
of SPCO Common Stock is less than the value of the Merger Consideration to be
received in the Merger for shares of SPCO Common Stock.
The cost of the appraisal proceeding may be determined by the Delaware Court
of Chancery and assessed upon the parties as the Court deems equitable in the
circumstances. Upon application of a Dissenting Stockholder, the Court may
order that all or a portion of the expenses incurred by any Dissenting
Stockholder in connection with the appraisal proceeding, including without
limitation reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all shares entitled to appraisal. In the
absence of such a determination or assessment, each party bears its own
expenses.
A Dissenting Stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Date, be entitled to vote for any
purpose the SPCO Common Stock subject to such demand or to receive payment of
dividends or other distributions on such SPCO Common Stock, except for
dividends or other distributions payable to stockholders of record at a date
prior to the Effective Time.
At any time within 60 days after the Effective Time, any Dissenting
Stockholder will have the right to withdraw his demand for appraisal and to
accept the Merger Consideration. After this period, a Dissenting Stockholder
may withdraw his demand for appraisal only with the consent of SPCO. If no
petition for appraisal is filed with the Delaware Court of Chancery within 120
days after the Effective Time, Dissenting Stockholders' rights to appraisal
shall cease and they shall be entitled to receive the Merger Consideration.
Inasmuch as SPCO has no obligation to file such a petition, any SPCO
stockholder who desires such a petition to be filed is advised to file it on a
timely basis. However, no petition timely filed in the Delaware Court of
Chancery demanding appraisal shall be dismissed as to any SPCO stockholder
without the approval of the Delaware Court of Chancery, and such approval may
be conditioned upon such terms as the Delaware Court of Chancery deems just.
Failure to take any required step in connection with the exercise of
appraisal rights may result in the termination or waiver of such rights.
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ITEM 2--AMENDMENT TO SEQUOIA'S RESTATED CERTIFICATE OF INCORPORATION
At the Special Meeting, Sequoia stockholders will consider and vote upon a
proposal to amend Sequoia's Restated Certificate of Incorporation to increase
the number of authorized shares of Sequoia Common Stock from 25,000,000 to
35,000,000 shares.
Sequoia currently is authorized to issue 25,000,000 shares of Sequoia Common
Stock and 12,500,000 shares of Preferred Stock. As of January 31, 1995, there
were 9,866,956 shares of Sequoia Common Stock outstanding, 468,297 shares of
Sequoia Common Stock reserved for issuance under stock and option plans of
Sequoia and no shares of Preferred Stock outstanding. It is anticipated that
approximately 5,273,000 shares of Sequoia Common Stock will be issued in
connection with the Transaction. Based on the number of shares outstanding or
reserved for issuance as of January 31, 1995 and after giving effect to the
issuance of 5,273,000 shares of Sequoia Common Stock in the Transaction, a
total of approximately 9,391,747 shares of Sequoia Common Stock will be
unissued and not reserved for issuance. See "The Acquisition Agreement--
Conversion of Securities".
The additional shares of Sequoia Common Stock to be authorized would be
available for possible future financing and acquisition transactions, stock
dividends or splits and other corporate purposes. Having such shares available
for issuance in the future would give Sequoia greater flexibility and allow
shares of Sequoia Common Stock to be issued without the expense and delay of a
stockholders' meeting. The additional shares of Sequoia Common Stock would be
available for issuance without further action by the stockholders except as
required by applicable law or the rules of any stock exchange on which Sequoia
securities may be listed. The Nasdaq National Market, on which the Sequoia
Common Stock is listed, currently requires stockholder approval for the
issuance of additional shares in certain instances, including in connection
with acquisition transactions where the issuance of shares could result in an
increase in the number of shares of Common Stock outstanding by 20% or more.
The stockholders of Sequoia do not have preemptive rights under the Restated
Certificate of Incorporation and the stockholders of Sequoia will not have such
rights with respect to the additional authorized shares of Sequoia Common
Stock.
At the present time, Sequoia has no plans to issue shares of Sequoia Common
Stock for which authorization is being sought other than as contemplated by the
Acquisition Agreement and under Sequoia's existing and proposed stock and
option plans.
The approval of the amendment of Sequoia's Restated Certificate of
Incorporation increasing its authorized Common Stock is not being presented to
stockholders of Sequoia as part of the Acquisition Proposal and is a separate
proposal. See "Item 1--Approval of the Transaction".
BOARD RECOMMENDATION
The Sequoia Board believes that the Charter Amendment is in the best
interests of Sequoia and its stockholders and therefore recommends a vote FOR
this proposal.
ITEM 3--ELECTION OF DIRECTORS
Sequoia has a classified Board of Directors consisting of two Class I
Directors, two Class II Directors and one Class III Director. Pursuant to
Sequoia's By-laws, directors are elected for terms ending on the date of the
third annual meeting following the annual meeting at which any given director
is elected.
The persons named in the enclosed proxy will vote to elect as Class I
Directors Dean C. Campbell and John F. Smith (the "Nominees") named below,
unless the proxy is marked otherwise. Both Nominees are currently directors of
Sequoia. Sequoia has no nominating committee and all nominations are made by
the Sequoia Board.
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The Nominees have indicated their willingness to serve, if elected; however,
if either Nominee should be unable to serve, the proxies may be voted for a
substitute nominee designated by the Sequoia Board.
There are no family relationships between or among any officers or directors
of Sequoia.
The following table sets forth the name, age, length of service as a director
of each member of the Sequoia Board, including the Nominees, information given
by each concerning all positions he has held with Sequoia, his principal
occupation and business experience for the past five years and the names of
other publicly held companies of which he serves as a director:
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION, FIRST BECAME
BUSINESS EXPERIENCE AND DIRECTORSHIPS AGE A DIRECTOR
------------------------------------- --- ------------
<S> <C> <C>
NOMINEES FOR TERM EXPIRING AT ANNUAL MEETING HELD AFTER FISCAL
YEAR ENDING JUNE 30, 1997 (CLASS I DIRECTORS)
DEAN C. CAMPBELL.............................................. 44 1989
General Partner of Campbell Venture Management, L.P. Mr.
Campbell is also a director of Telco Systems Corp. and R. F.
Monolithics, Inc.
JOHN F. SMITH................................................. 59 1993
President of Mycos International, Inc., a real estate
development company, and Senior Vice President and Chief
Operating Officer (retired) of Digital Equipment Corporation.
Mr. Smith is also a director of Instron Corporation.
DIRECTORS WHOSE TERMS EXPIRE AT THE ANNUAL MEETING HELD AFTER
FISCAL YEAR ENDING JUNE 30, 1995 (CLASS II DIRECTORS)
FRANCIS J. HUGHES, JR......................................... 44 1987
General Partner (or general partner of a general partner) of
American Research and Development I L.P., II L.P. and III
L.P. Mr. Hughes is also a director of Ceramics Process
Systems Corporation, Fusion Systems Corporation and
R. F. Monolithics, Inc.
A. THEODORE ENGKVIST.......................................... 59 1994
President of ENJO Consulting, a management consulting company.
Mr. Engkvist is also a director of Cycare Systems, Inc.
DIRECTOR WHOSE TERM EXPIRES AT THE ANNUAL MEETING HELD AFTER
FISCAL YEAR ENDING JUNE 30, 1996 (CLASS III DIRECTOR)
CORNELIUS P. McMULLAN......................................... 55 1993
President and Chief Executive Officer of Sequoia.
DIRECTORS TO BE ELECTED BY THE SEQUOIA BOARD AT THE EFFECTIVE
TIME(1)
J. MICHAEL STEWART............................................ 47 -- (1)
President and Chief Operating Officer of TMI
</TABLE>
- --------
(1) Effective as of the Effective Time, the Sequoia Board has agreed to elect
J. Michael Stewart as a Class III Director of Sequoia to serve for an
initial term ending at the Annual Meeting of Stockholders of Sequoia held
after the fiscal year ending June 30, 1996 and a designee of W. Wayne
Patterson, reasonably acceptable to the Sequoia Board, as a Class II
Director to serve for an initial term ending at the Annual Meeting of
Stockholders of Sequoia held after the fiscal year ending June 30, 1995.
Mr. Patterson has not yet indicated his designation of a Sequoia Board
member. See "The Acquisition Agreement--Representation on the Sequoia
Board".
BOARD AND COMMITTEE MEETINGS
Sequoia has a standing Audit Committee which provides the opportunity for
direct contact between Sequoia's independent accountants and the Sequoia Board.
The Audit Committee has responsibility for recommending the appointment of
Sequoia's independent accountants, reviewing the scope and results of
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audits and reviewing Sequoia's internal accounting control policies and
procedures. During the fiscal year ended June 30, 1994, the Audit Committee
consisted of Messrs. Campbell, Engkvist, Hughes and Smith and held four
meetings.
Sequoia also has a standing Compensation Committee which is responsible for
establishing and administering the policies which govern both annual
compensation and, in conjunction with the full Sequoia Board, equity ownership.
During the fiscal year ended June 30, 1994, the Compensation Committee
consisted of Messrs. Campbell, Hughes and Smith and held three meetings.
The Board of Directors held nine meetings during the fiscal year ended June
30, 1994 (including consents in lieu of meeting). During fiscal 1994, each
director attended at least 75% of the total number of meetings of the Sequoia
Board and all committees of the Sequoia Board on which he served.
BOARD RECOMMENDATION
The Sequoia Board believes that the election of the Nominees is in the best
interests of Sequoia and its stockholders and therefore recommends a vote FOR
this proposal.
ITEM 4--APPROVAL OF AMENDMENTS TO 1986 INCENTIVE STOCK OPTION PLAN
AND 1986 SUPPLEMENTAL STOCK OPTION PLAN
The purpose of Sequoia's 1986 Incentive Stock Option Plan and 1986
Supplemental Stock Option Plan (collectively, the "Option Plans") is to
encourage ownership in Sequoia by officers and other employees and to provide a
further incentive to retain and motivate such officers and employees. The
Option Plans currently cover 2,425,000 shares of Sequoia's Common Stock. As of
January 31, 1995, 996,079 shares had been issued upon exercise of options
granted under the Plans, 1,227,799 shares were subject to outstanding options
and 201,122 shares were available for future option grants under the Option
Plans.
On December 13, 1994, the Sequoia Board adopted, subject to stockholder
approval, an amendment to the Option Plans increasing from 2,425,000 to
3,700,000 the number of shares available for issuance under the Option Plans.
In addition, the Sequoia Board adopted, subject to stockholder approval, an
amendment to the Option Plans limiting the number of shares for which options
may be granted to any one employee in any calendar year. Section 162(m) of the
Code disallows a tax deduction of a public corporation for certain compensation
in excess of $1 million paid in any one year to the corporation's chief
executive officer and four other most-highly compensated executive officers.
Taxable gains upon exercise of stock options, however, remain deductible to the
corporation beyond the $1 million limit if the plan under which they are
granted meets the requirements of Section 162(m). The proposed amendment would
conform the Option Plans to the requirements of Section 162(m) by limiting the
number of shares for which options may be granted to any one employee to
500,000 shares in any calendar year.
The following is a summary of the material provisions of the Option Plans.
The Option Plans are administered by the Compensation Committee of the
Sequoia Board. Subject to the limitations set forth in the Option Plans, the
Sequoia Board has authority to determine all terms and provisions under which
options are granted under the Option Plans.
All employees (including officers) and consultants of Sequoia are eligible to
receive options under the Plans. The exercise price at which shares of Sequoia
Common Stock may be purchased upon exercise of incentive stock options granted
under the Option Plans must equal at least the fair market value of the Sequoia
Common Stock on the date of grant. The exercise price of non-qualified stock
options granted under the Option Plans must equal at least 85% of the fair
market value of the Sequoia Common Stock on the date of grant. All such options
granted to date have had an exercise price equal to the fair market value of
the Sequoia Common Stock on the respective dates of grant as determined by the
Sequoia Board. Payment of the
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exercise price for any option may be made in cash, by delivery of shares of
Sequoia Common Stock, or by delivery of any other form of legal consideration
acceptable to the Compensation Committee or the Sequoia Board. All options are
nontransferable, other than by will or the laws of descent and distribution. No
option may be exercised after the date on which it terminates. All options are
exercisable during the lifetime of the optionee only while the optionee is an
employee or consultant of Sequoia or within three months after termination of
such employment or consulting (but only to the extent that the option was
exercisable on the date of termination). If the optionee dies, the deceased
optionee's heirs or executors may exercise the option within 18 months
following the death of the optionee to the extent that the option was
exercisable at the time of death. If the optionee becomes permanently disabled,
the disabled optionee may exercise the option during the one-year period
following the optionee's disablement to the extent that the option was
exercisable at the time of the optionee's disablement.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax treatment of incentive
stock options and non-qualified options. For precise advice as to any specific
transaction, an option recipient should consult his tax advisor, since tax
treatment can vary.
Incentive Stock Options
No taxable income will be recognized by the optionee upon the grant or
exercise of an incentive stock option granted under the Option Plans, and no
corresponding expense deduction will be available to Sequoia. Generally, if an
optionee holds shares acquired upon the exercise of incentive stock options
until the later of (i) two years from the grant of the option and (ii) one year
from the date of transfer of the purchased shares to him (the "Statutory
Holding Period"), any gain recognized by the optionee on a sale of the shares
will be treated as capital gain. The gain recognized upon the sale of the stock
is the difference between the option price and the sale price of the stock. The
net federal income tax effect on the holder of incentive stock options is to
defer, until the stock is sold, taxation of any increase in the stock's value
from the time of grant to the time of exercise.
If the optionee sells the stock prior to the expiration of the Statutory
Holding Period (a "disqualifying disposition"), he will realize taxable income
at ordinary income tax rates in an amount equal to the lesser of (i) the fair
market value of the stock on the date of exercise less the option price or (ii)
the amount realized on sale less the option price, and Sequoia will receive a
corresponding business expense deduction. However, special rules may apply to
an officer-optionee. Any additional gain will be treated as long-term capital
gain if the shares are held for more than one year prior to the sale and as
short-term capital gain if the shares are held for a shorter period. If the
optionee sells the stock for less than the option price, he will recognize a
capital loss equal to the difference between the sale price and the option
price. The loss will be a long-term capital loss if the shares are held for
more than one year prior to the sale and as a short-term capital loss if the
shares are held for a shorter period.
For purposes of the "alternative minimum tax" applicable to individuals, the
exercise of an incentive stock option is treated in the same manner as the
exercise of a non-qualified option. Thus, in the year of option exercise an
optionee must include the difference between the exercise price and the fair
market value of the stock on the date of exercise in alternative minimum
taxable income. The alternative minimum tax is imposed upon an individual's
alternative minimum taxable income at rates of 26% to 28%, but only to the
extent that such tax exceeds the taxpayer's regular income tax liability for
the taxable year.
Non-Qualified Options
No taxable income is recognized by the optionee upon the grant of a non-
qualified option. The optionee must recognize as ordinary income in the year in
which the option is exercised the amount by which the fair market value of the
purchased shares on the date of exercise exceeds the option price. However,
special rules may apply to an officer-optionee. Sequoia will be entitled to a
business expense deduction equal to the amount
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of ordinary income recognized by the optionee. Any additional gain or any loss
recognized upon the subsequent disposition of the purchased shares will be a
capital gain or loss, and will be a long-term gain or loss if the shares are
held for more than one year.
BOARD RECOMMENDATION
The Sequoia Board believes that these amendments to the Option Plans are in
the best interests of Sequoia and its stockholders and therefore recommends a
vote FOR this proposal.
ITEM 5--APPROVAL OF AMENDMENTS TO 1993 EMPLOYEE STOCK PURCHASE PLAN
The purpose of Sequoia's 1993 Employee Stock Purchase Plan (the "1993
Purchase Plan") is to encourage ownership in Sequoia by officers and other
employees and to provide a further incentive to retain and motivate such
officers and employees. The 1993 Purchase Plan currently covers 250,000 shares
of Sequoia Common Stock, and its current six month offering period will close
on June 30, 1995. As of January 31, 1995, 69,924 shares have been issued under
the 1993 Purchase Plan. On December 13, 1994, the Board of Directors adopted,
subject to stockholder approval, an amendment to the 1993 Purchase Plan
increasing from 250,000 to 750,000 the number of shares available for issuance
under the 1993 Purchase Plan. In addition, the Sequoia Board adopted an
amendment to the 1993 Purchase Plan adding four six-month offering periods to
such Plan commencing July 1, 1995 and ending June 30, 1997.
The following is a summary of the material provisions of the 1993 Purchase
Plan.
The 1993 Purchase Plan is administered by the Sequoia Board and currently
covers 250,000 shares of Sequoia's Common Stock (subject to adjustment for any
dividend, stock split or other relevant changes in Sequoia's capitalization).
With certain limited exceptions, all full-time employees, including officers,
employed by Sequoia for at least three months are eligible to participate in
the 1993 Purchase Plan.
The 1993 Purchase Plan consists of four consecutive offerings of 62,500
shares each. The number of shares available for an offering may be increased at
the election of the Sequoia Board by the number of shares of Common Stock, if
any, which were made available, but not purchased during an earlier offering.
Under the current 1993 Purchase Plan: the first offering commenced on July 1,
1993 and terminated on December 31, 1993; the second offering commenced on
January 1, 1994 and terminated on June 30, 1994; the third offering commenced
on July 1, 1994 and terminated on December 31, 1994; and the fourth offering
commenced on January 1, 1995 and will terminate on June 30, 1995. The proposed
amendments will add four additional six-month offering periods consecutively
after July 1, 1995.
On the first day of a designated six-month payroll deduction period (the
"Offering Period"), Sequoia grants to each eligible employee who has elected to
participate in the 1993 Purchase Plan an option to purchase shares as follows:
the employee may authorize an amount (a whole percentage from 1% to 10%) of
such employee's monetary compensation (as defined in the 1993 Purchase Plan),
to be deducted by Sequoia from such compensation during the Offering Period. On
the last day of the Offering Period, the employee is deemed to have exercised
the option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the 1993 Purchase Plan, the option price is an
amount equal to 85% of the fair market value per share of the Sequoia Common
Stock on either the first day or the last day of the Offering Period, whichever
is lower. Pursuant to the terms of the 1993 Purchase Plan, in no event may an
employee purchase more than 500 shares of Common Stock in any one Offering
Period.
FEDERAL INCOME TAX CONSEQUENCES
The 1993 Purchase Plan is intended to qualify as an "employee stock purchase
plan" as defined in Section 423 of the Code. Section 423 provides that a
participating employee does not have to pay any federal income tax when such
employee joins the 1993 Purchase Plan or when an offering ends and such
employee receives
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shares of Sequoia Common Stock. The employee is, however, required to pay
federal income tax on the difference, if any, between the price at which he
sells the shares and the price he paid for them.
If the employee has owned the shares for more than one year and disposes of
them at least two years after the date an offering commenced, he will be taxed
as described below. If the market price of the shares on the date they are
sold is equal to or less than the price paid for the shares under the 1993
Purchase Plan, the employee will incur a long-term capital loss in the amount
equal to the price paid over the sale price. If the sale price is higher than
the price paid under the 1993 Purchase Plan, such employee will have to
recognize ordinary income in an amount equal to the lesser of (i) the market
price of the shares on the date the offering commenced over the price paid or
(ii) the excess of the sale price over the price paid. Any further gain is
treated as long-term capital gain. Except as set forth below, Sequoia will
generally not be entitled to a tax deduction upon the purchase or sale of
shares under the 1993 Purchase Plan. If the employee sells the shares before
he has owned them for more than one year or before the expiration of a two-
year period commencing on the date the offering period commenced, the employee
will have to recognize ordinary income in the amount of the difference between
the option price and the market price of the shares on the date of purchase
and Sequoia will receive an expense deduction for the same amount. The
employee will recognize a capital gain or loss for the difference between the
sale price and the fair market value on the date of purchase.
BOARD RECOMMENDATION
The Sequoia Board believes that the adoption of these amendments to the 1993
Purchase Plan are in the best interests of Sequoia and its stockholders and
therefore recommends a vote FOR this proposal.
ITEM 6--APPROVAL OF THE 1995 OUTSIDE DIRECTORS' STOCK OPTION PLAN
The purpose of Sequoia's 1995 Outside Directors' Stock Option Plan (the
"1995 Outside Directors' Plan") is to encourage ownership in Sequoia by its
outside directors and to provide a further incentive for such persons to serve
as directors. The 1995 Outside Directors' Plan covers 150,000 shares of
Sequoia's Common Stock.
The following is a summary of the material provisions of the 1995 Outside
Directors' Plan. Such summary is qualified in its entirety by reference to the
1995 Outside Directors' Plan attached hereto as Annex D.
The 1995 Outside Directors' Plan provides for automatic grants of non-
qualified stock options to members of the Sequoia Board who are not employees
of Sequoia. The 1995 Outside Directors' Plan provides that (i) each person who
becomes an eligible director after June 1994 will be granted an option to
purchase 12,000 shares of Common Stock on the close of business on the date of
his initial election to the Sequoia Board, and (ii) each then eligible
director will be granted an option to purchase 2,500 shares of Common Stock on
each July 1 from July 1, 1995 through and including July 1, 1999.
The 1995 Outside Directors' Plan is administered and supervised by the
Sequoia Board. The exercise price of an option granted under the 1995 Outside
Directors' Plan must not be less than 100% of the fair market value of
Sequoia's Common Stock as of the grant date. The term of each option is ten
years, and options are immediately exercisable upon grant. Directors must
exercise their options while serving as, or within six months after ceasing to
be, a director of Sequoia. Options are not assignable except to an entity
which is a stockholder of Sequoia and with which the optionee is affiliated as
his principal occupation.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences of the options granted pursuant to the
1995 Outside Directors' Plan are the same as the federal income tax
consequences described for non-qualified stock options granted pursuant to the
Option Plans. See "Item 4--Approval of Amendments to 1986 Incentive Stock
Option and 1986 Supplemental Stock Option Plan".
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BOARD RECOMMENDATION
The Sequoia Board believes that the adoption of the 1995 Outside Directors'
Plan is in the best interests of Sequoia and its stockholders and therefore
recommends a vote FOR this proposal.
ITEM 7--RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
On August 2, 1993, the Audit Committee of Sequoia approved Coopers & Lybrand
as Sequoia's independent accountants effective for fiscal 1993, replacing
Arthur Andersen, Sequoia's former independent accountants. The change occurred
following the naming of Arthur Andersen as a defendant in certain litigation
relating to the financial results of Sequoia for fiscal years 1991 and 1992.
The Sequoia Board approved such change of independent accountants. During
fiscal years 1991 and 1992 and any subsequent interim period preceding the
change in independent accountants, there were no disagreements with Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosures or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Arthur Andersen, would have caused them to
make reference thereto in their report on the financial statements for such
years, except for disagreements with Sequoia management during the audit of the
financial statements for the year ended June 30, 1992 regarding the recognition
of revenue on certain sales transactions. Such disagreements were resolved to
the satisfaction of Arthur Andersen at the date of the issuance of their report
on Sequoia's financial statements included in Sequoia's Annual Report included
in Amendment No. 1 on Form 8 to Sequoia's 1992 10-K, dated October 14, 1992.
Subsequent to the filing of Amendment No. 1 to the Annual Report on October
14, 1992, the Sequoia Board and Arthur Andersen became aware of letter
agreements, remarketing arrangements and other information which indicated that
Sequoia had previously recorded sales to customers and certain distributors who
had been granted rights of return, remarketing rights or who were not required
to pay for certain purchases until such systems and system upgrades were resold
to end-users. As a result, Sequoia restated its financial statements for fiscal
years 1991 and 1992 and Arthur Andersen reissued its report thereon. The
revenue recognition issues giving rise to such restatements are described in
Note 1B of the Notes to the Consolidated Financial Statements of Sequoia for
fiscal 1992, as included in Sequoia's Annual Report on Form 10-K, dated
September 28, 1992, as amended by Amendment No. 2 on Form 8, dated December 10,
1992.
None of the audit reports of Arthur Andersen for any period, including the
fiscal years ended June 30, 1991 and 1992, contained an adverse opinion or
disclaimer of opinion, or was qualified or modified as to uncertainty, audit
scope or accounting principles, except that the report of Arthur Andersen dated
August 19, 1992 (except with respect to the matters discussed in Notes 1, 5 and
7, as to which the date is December 9, 1992), on Sequoia's financial statements
for the years ended June 30, 1991 and 1992 included an explanatory paragraph
regarding the impact on such financial statements of uncertainties concerning
the ability of Sequoia to continue operating as a going concern and the outcome
of several legal complaints which had been filed against Sequoia by certain
stockholders. See "Sequoia Systems, Inc.--Certain Legal Proceedings".
Subject to ratification by the stockholders, the Sequoia Board, on the
recommendation of its Audit Committee, has selected the firm of Coopers &
Lybrand as Sequoia's independent accountants for the fiscal year ending June
30, 1995.
Representatives of Coopers & Lybrand are expected to be present at the
Special Meeting. They will have the opportunity to make a statement if they
desire to do so and will also be available to respond to appropriate questions
from stockholders.
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If the stockholders of Sequoia do not ratify the selection of Coopers &
Lybrand as Sequoia's independent accountants, the selection of such accountants
will be reconsidered by the Sequoia Board.
BOARD RECOMMENDATION
The Sequoia Board believes that the ratification of the selection of Coopers
& Lybrand as Sequoia's independent accountants for the fiscal year ending June
30, 1995 is in the best interests of Sequoia and its stockholders and therefore
recommends a vote FOR this proposal.
LEGAL MATTERS
The validity of the shares of Sequoia Common Stock to be issued in connection
with the Transaction will be passed upon for Sequoia by Hale and Dorr, Boston,
Massachusetts.
EXPERTS
The consolidated balance sheets as of June 30, 1993 and 1994 and the
consolidated statements of income, cash flows and stockholders' equity for each
of the two years in the period ended June 30, 1994 of Sequoia incorporated by
reference in this Proxy Statement/Prospectus have been incorporated herein in
reliance on the report of Coopers & Lybrand, L.L.P., independent accountants,
given on the authority of that firm as experts in auditing and accounting. The
consolidated statements of operations, cash flows and stockholders' equity of
Sequoia for the year ended June 30, 1992 which are incorporated by reference in
this Proxy Statement/Prospectus have been audited by Arthur Andersen,
independent accountants, as indicated in their report with respect thereto, and
are incorporated herein in reliance upon the authority of said firm as experts
in giving said reports.
The combined financial statements of the TMI Group as of June 30, 1992, 1993
and 1994 and for the years then ended included in this Proxy
Statement/Prospectus have been audited by Arthur Andersen LLP, independent
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, Sequoia stockholders may
present proper proposals for inclusion in Sequoia's proxy statement for
consideration at the next annual meeting of Sequoia's stockholders by
submitting their proposals to Sequoia in a timely manner. In order to be
considered for inclusion in the proxy statement for Sequoia's annual meeting of
stockholders to be held after the fiscal year ending June 30, 1995, stockholder
proposals must be received by Sequoia by August 1, 1995.
ACCOMPANYING SEQUOIA REPORTS
Copies of Sequoia's (i) Annual Report on Form 10-K for the fiscal year ended
June 30, 1994, (ii) Amendment No. 1 to such annual report on Form 10-K/A, (iii)
Amendment No. 2 to such annual report on Form 10-K/A, and (iv) Quarterly Report
on Form 10-Q for the quarter ended January 1, 1995 are being delivered to
Sequoia's stockholders, SPCO's stockholders and Keystone with this Proxy
Statement/Prospectus.
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GLOSSARY OF CERTAIN DEFINED TERMS
The following defined terms are used in this Proxy Statement/Prospectus:
Accountants Proposal......... The proposed appointment of Coopers & Lybrand,
L.L.P. as Sequoia's independent accountants for
the fiscal year ending June 30, 1995.
Acquisition Agreement........ The Merger and Stock Purchase Agreement, dated
as of November 9, 1994 and amended as of
February 7, 1995, among Sequoia, Sub, SPCO and
Keystone.
Acquisition Proposal......... The proposed issuance of approximately
5,273,000 shares of Sequoia Common Stock
pursuant to the Acquisition Agreement.
Arthur Andersen.............. Arthur Andersen LLP, independent accountants to
the TMI Group.
BriskHeat.................... BriskHeat Corporation, a Delaware corporation.
BriskHeat Common Stock....... Common Stock, $.01 par value per share, of
BriskHeat.
BriskHeat Spin-Off........... The pro rata spin-off of the BriskHeat Common
Stock by SPCO among SPCO's stockholders on
October 31, 1994.
Broadview.................... Broadview Associates, L.P., Sequoia's financial
advisor.
Charter Amendment............ The proposed amendment to Sequoia's Restated
Certificate of Incorporation increasing the
number of authorized shares of Sequoia Common
Stock from 25,000,000 shares to 35,000,000
shares.
Closing...................... The Closing of the Transaction.
Closing Date................. The date of the Closing.
Code......................... Internal Revenue Code of 1986, as amended.
Commission................... Securities and Exchange Commission.
Compensation Committee....... Compensation Committee of the Sequoia Board.
Continuing Corporation....... The surviving corporation following the merger
of Sub with and into SPCO, which will be the
surviving corporation and a wholly-owned
subsidiary of Sequoia.
Conversion Ratio............. .5015674
Coopers & Lybrand............ Coopers & Lybrand, L.L.P., Sequoia's
independent accountants.
DGCL......................... Delaware General Corporation Law.
Director Proposal............ The proposed election at the Special Meeting of
Dean C. Campbell and John F. Smith as the Class
I Directors of Sequoia.
Effective Time............... The time of filing a Certificate of Merger with
the Secretary of State of the State of Delaware
relating to the Merger.
Escrow Agent................. The First National Bank of Boston, pursuant to
the terms of the Escrow Agreement.
Escrow Agreement............. The Escrow Agreement among W. Wayne Patterson,
as the Indemnification Representative of the
Indemnifying Persons, Sequoia and the Escrow
Agent.
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Escrow Shares................ 10% of the shares of Sequoia Common Stock
issued in the Transaction.
Exchange Act................. Securities Exchange Act of 1934, as amended.
Execution Date............... The date of the execution of the Acquisition
Agreement.
Indemnifying Persons......... The stockholders of SPCO, the holders of
Unvested TMI Options and Keystone.
IRS.......................... Internal Revenue Service.
Keystone..................... Keystone International, Inc., a Delaware
corporation.
Keystone Shares.............. The shares of TMI Common Stock and TME Common
Stock, collectively, owned by Keystone.
Merger....................... The proposed merger of Sub with and into SPCO.
1995 Outside Directors'
Plan........................ Sequoia's proposed 1995 Outside Directors'
Stock Option Plan.
OEMs......................... Original equipment manufacturers.
OLTP......................... On-line transaction processing.
Option Plans................. Sequoia's 1986 Incentive Stock Option Plan and
1986 Supplemental Stock Option Plan.
Pick OA...................... Pick Open Architecture.
Plan Proposals............... The proposed amendments to Sequoia's 1986
Incentive Stock Option Plan and 1986
Supplemental Stock Option Plan, the proposed
amendments to Sequoia's 1993 Employee Stock
Purchase Plan and the proposed adoption of
Sequoia's 1995 Outside Directors' Stock Option
Plan, collectively.
RDBMS........................ Relational database management systems.
Record Date.................. The close of business on January 30, 1995.
Registration Statement....... The Registration Statement filed by Sequoia
with the Commission on Form S-4 (together with
any amendments or supplements thereto).
Restructuring................ The series of transactions forming the
background of the Transaction.
Securities Act............... Securities Act of 1933, as amended.
Sequoia...................... Sequoia Systems, Inc., a Delaware corporation.
Sequoia Board................ The Board of Directors of Sequoia.
Sequoia Charter Documents.... Restated Certificate of Incorporation and the
By-laws of Sequoia, collectively.
Sequoia Common Stock......... Common Stock, par value $.40 per share, of
Sequoia.
Special Meeting.............. The Special Meeting of Stockholders of Sequoia
to be held on Wednesday, March 29, 1995 at the
Radisson Inn, 75 Felton Street, Marlborough,
Massachusetts 01752, commencing at 9:00 a.m.,
local time, and any adjournments or
postponements thereof.
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SPCO......................... SPCO, Inc., a Delaware corporation (after
giving effect to the BriskHeat Spin-Off
described herein).
SPCO Board................... The Board of Directors of SPCO.
SPCO Charter Documents....... Certificate of Incorporation and By-laws of
SPCO, collectively.
SPCO Common Stock............ Common Stock, par value $.01 per share, of
SPCO.
SPCO Written Consent......... The written consent being solicited hereby of
SPCO's stockholders pursuant to Section 228 of
the DGCL approving the Merger and the
Acquisition Agreement.
Sub.......................... Sequoia Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of
Sequoia.
TME.......................... Texas Micro Electronics, Inc., a Delaware
corporation and, at the Effective Time, a
majority-owned subsidiary of TMI.
TME Common Stock............. Common Stock, $.01 par value per share, of TME.
TME Stock Contribution....... The capital contribution to TMI of the shares
of TME Common Stock held by W. Wayne Patterson
and J. Michael Stewart.
TMI.......................... Texas Microsystems, Inc., a Delaware
corporation and a majority-owned subsidiary of
SPCO.
TMI Charter Documents........ Certificate of Incorporation and By-laws of
TMI, collectively.
TMI Common Stock............. Common Stock, $.01 par value per share, of TMI.
TMI Group.................... SPCO, TMI and TME, collectively (after giving
effect to the BriskHeat Spin-Off described
herein).
TMI Option Exchange.......... The exercise of certain options to acquire TMI
Common Stock and the exchange of the shares
issued thereupon for an aggregate of 367,500
shares of SPCO Common Stock.
TMI Options.................. Outstanding options to purchase an aggregate of
965,000 shares of TMI Common Stock, of which
367,500 shares were exercisable at the
Execution Date and the balance were
unexercisable.
Transaction.................. The issuance of approximately 5,273,000 shares
of Sequoia Common Stock in exchange for (i) all
outstanding shares of SPCO Common Stock in the
Merger, (ii) the Unvested TMI Options and (iii)
the Keystone Shares.
Unvested TMI Options......... The unvested TMI Options for which Sequoia will
issue, at the Effective Time, approximately
73,000 shares of Sequoia Common Stock.
VARs......................... Value-added resellers.
87
<PAGE>
INDEX TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Condensed Balance Sheet January 1, 1995...... F-3
Unaudited Pro Forma Combined Condensed Statements of Operations for the
Six Months Ended January 1, 1995......................................... F-4
Unaudited Pro Forma Combined Condensed Statements of Operations for the
Six Months Ended January 2, 1994......................................... F-5
Unaudited Pro Forma Combined Condensed Statements of Operations for the
Fiscal Year Ended June 30, 1994.......................................... F-6
Unaudited Pro Forma Combined Condensed Statements of Operations for the
Fiscal Year Ended June 30, 1993.......................................... F-7
Unaudited Pro Forma Combined Condensed Statements of Operations for the
Fiscal Year Ended June 30, 1992.......................................... F-8
Notes to Unaudited Pro Forma Combined Condensed Financial Statements...... F-9
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the proposed Transaction between Sequoia and the TMI Group
accounted for on a pooling of interests basis. The pro forma combined balance
sheet gives effect to the Transaction as if it had been consummated as of
January 1, 1995 (the last day of Sequoia's second fiscal quarter in the fiscal
year ending June 30, 1995). The pro forma statements of operations for the six
months ended January 1, 1995 and January 2, 1994 and each of the fiscal years
ended June 30, 1994, 1993 and 1992 give effect to the Transaction as if it had
occurred at the beginning of the earliest period presented.
These unaudited pro forma combined condensed financial statements are based
on and are prepared from the historical financial statements and the related
notes thereto of Sequoia and the TMI Group, included or incorporated by
reference in the Proxy Statement/Prospectus.
The unaudited pro forma combined condensed information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Transaction had
been consummated at the beginning of the earliest period presented, nor is it
necessarily indicative of future operating results or financial position.
F-2
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JANUARY 1, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEQUOIA TMI PRO FORMA
SYSTEMS GROUP COMBINED
------- ------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $19,614 $ 381 $19,995
Accounts receivable, net........................... 5,829 8,333 14,162
Accounts receivable from related parties........... 78 55 133
Inventories........................................ 6,293 6,765 13,058
Deferred tax asset................................. -- 771 771
Other current assets............................... 573 179 752
------- ------- -------
Total current assets............................. 32,387 16,484 48,871
Property and equipment, net........................ 2,311 2,381 4,692
Other assets....................................... 381 226 607
------- ------- -------
Total Assets..................................... $35,079 $19,091 $54,170
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term borrowings on line of credit............ $ -- $ 1,705 $ 1,705
Current maturities of long-term liabilities debt
and capital lease obligations..................... 118 667 785
Accounts payable................................... 1,401 4,700 6,101
Accrued expenses................................... 7,212 3,596 10,808
Deferred revenue................................... 873 -- 873
------- ------- -------
Total current liabilities........................ 9,604 10,668 20,272
------- ------- -------
Long term liabilities and capital lease obligation,
net of current portion.............................. 130 1,332 1,462
Stockholders' Equity................................. 25,345 7,091 32,436
------- ------- -------
Total Liabilities and Stockholders' Equity....... $35,079 $19,091 $54,170
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
F-3
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 1, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEQUOIA TMI PRO FORMA
SYSTEMS GROUP COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenues........................................... $21,849 $24,694 $46,543
Cost of Revenues................................... 9,803 14,668 24,471
------- ------- -------
Gross Profit................................... 12,046 10,026 22,072
Research and Development Expenses.................. 3,984 2,152 6,136
Selling, General and Administrative Expenses....... 6,621 6,263 12,884
------- ------- -------
Total operating expenses......................... 10,605 8,415 19,020
------- ------- -------
Income from operations........................... 1,441 1,611 3,052
------- ------- -------
Other income (expense):
Interest Income.................................. 391 -- 391
Interest Expense................................. (14) (132) (146)
Other Income (Expense)........................... 84 (10) 74
------- ------- -------
461 (142) 319
------- ------- -------
Income before provision for income taxes....... 1,902 1,469 3,371
Provision for Income Taxes......................... 110 534 644
------- ------- -------
Net income..................................... $ 1,792 $ 935 $ 2,727
======= ======= =======
Net Income Per Common and Common Share Equivalent.. $ 0.17 $ 0.18
======= =======
Weighted Average Number of Common and Common Share
Equivalents....................................... 10,300 15,573
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
F-4
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 2, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEQUOIA TMI PRO FORMA
SYSTEMS GROUP COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenues........................................... $21,475 $22,930 $44,405
Cost of Revenues................................... 8,853 14,430 23,283
------- ------- -------
Gross Profit................................... 12,622 8,500 21,122
Research and Development Expenses.................. 3,757 1,857 5,614
Selling, General and Administrative Expenses....... 5,020 5,319 10,339
------- ------- -------
Total operating expenses......................... 8,777 7,176 15,953
------- ------- -------
Income from operations........................... 3,845 1,324 5,169
------- ------- -------
Other income (expense):
Interest Income.................................. 149 -- 149
Interest Expense................................. (99) (322) (421)
Other Income..................................... (46) 67 21
------- ------- -------
4 (255) (251)
------- ------- -------
Income before provision for income taxes....... 3,849 1,069 4,918
Provision for Income Taxes......................... -- 312 312
------- ------- -------
Net Income..................................... $ 3,849 $ 757 $ 4,606
======= ======= =======
Net Income Per Common and Common Share Equivalent.. $ 0.41 $ 0.31
======= =======
Weighted Average Number of Common and Common Share
Equivalents....................................... 9,445 14,718
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
F-5
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEQUOIA TMI PRO FORMA
SYSTEMS GROUP COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenues........................................... $44,765 $47,061 $91,826
Cost of Revenues................................... 18,535 29,474 48,009
------- ------- -------
Gross Profit................................... 26,230 17,587 43,817
Research and Development Expenses.................. 7,750 3,871 11,621
Selling, General and Administrative Expenses....... 10,982 11,070 22,052
Restructuring Credit............................... (1,109) -- (1,109)
------- ------- -------
Total operating expenses......................... 17,623 14,941 32,564
------- ------- -------
Income from operations........................... 8,607 2,646 11,253
------- ------- -------
Other income (expense):
Interest Income.................................. 344 -- 344
Interest Expense................................. (115) (445) (560)
Other Income..................................... 38 64 102
------- ------- -------
267 (381) (114)
------- ------- -------
Income before provision for income taxes....... 8,874 2,265 11,139
Provision for Income Taxes......................... 307 351 658
------- ------- -------
Net Income..................................... $ 8,567 $ 1,914 $10,481
======= ======= =======
Net Income Per Common and Common Share Equivalent.. $ 0.87 $ 0.69
======= =======
Weighted Average Number of Common and Common Share
Equivalents....................................... 9,877 15,150
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
F-6
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEQUOIA TMI PRO FORMA
SYSTEMS GROUP COMBINED
-------- ------- ---------
<S> <C> <C> <C>
Revenues.......................................... $ 41,019 $40,304 $ 81,323
Cost of Revenues.................................. 22,259 24,608 46,867
-------- ------- --------
Gross Profit.................................. 18,760 15,696 34,456
Research and Development Expenses................. 11,353 3,751 15,104
Selling, General and Administrative Expenses...... 20,318 10,869 31,187
Restructuring Charge.............................. 13,990 -- 13,990
-------- ------- --------
Total operating expenses........................ 45,661 14,620 60,281
-------- ------- --------
Income (loss) from operations................... (26,901) 1,076 (25,825)
-------- ------- --------
Other income (expense):
Interest Income................................. 160 -- 160
Interest Expense................................ (371) (646) (1,017)
Other Income (Expense).......................... (46) 63 17
Provision for settlement of class action law-
suit........................................... (3,875) -- (3,875)
-------- ------- --------
(4,132) (583) (4,715)
-------- ------- --------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting method............................ (31,033) 493 (30,540)
Provision for Income Taxes........................ -- 512 512
-------- ------- --------
Net loss before cumulative effect of change in
accounting method............................ (31,033) (19) (31,052)
-------- ------- --------
Cumulative effect of change in accounting for in-
come taxes....................................... -- 171 171
-------- ------- --------
Net income (loss)............................. $(31,033) $ 152 $(30,881)
======== ======= ========
Net Income (Loss) Per Common and Common Share
Equivalent....................................... $ (3.63) $ (2.23)
======== ========
Weighted Average Number of Common and Common Share
Equivalents...................................... 8,556 13,829
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
F-7
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEQUOIA TMI PRO FORMA
SYSTEMS GROUP COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenues........................................... $62,588 $37,427 $100,015
Cost of Revenues................................... 26,152 22,353 48,505
------- ------- --------
Gross Profit................................... 36,436 15,074 51,510
Research and Development Expenses.................. 13,637 4,137 17,774
Selling, General and Administrative Expenses....... 26,670 10,413 37,083
------- ------- --------
Total operating expenses......................... 40,307 14,550 54,857
------- ------- --------
Income (loss) from operations.................... (3,871) 524 (3,347)
------- ------- --------
Other income (expense):
Interest Income.................................. 508 -- 508
Interest Expense................................. (239) (816) (1,055)
Other Income..................................... -- 63 63
------- ------- --------
269 (753) (484)
------- ------- --------
Loss before provision for income taxes and cu-
mulative...................................... (3,602) (229) (3,831)
Provision for Income Taxes......................... 338 (521) (183)
------- ------- --------
Net Income (Loss).............................. $(3,940) $ 292 $ (3,648)
======= ======= ========
Net Loss Per Common and Common Share Equivalent.... $ (0.48) $ (0.27)
======= ========
Weighted Average Number of Common and Common Share
Equivalents....................................... 8,255 13,528
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
F-8
<PAGE>
SEQUOIA SYSTEMS, INC. AND TMI GROUP
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The unaudited pro forma combined condensed financial statements reflect the
issuance of approximately 5,273,000 shares of Sequoia Common Stock in
exchange for all shares of SPCO Common Stock outstanding immediately prior
to the Effective Time, the Keystone Shares and the Unvested TMI Options. The
actual number of shares of Sequoia Common Stock to be issued for the
Unvested TMI Options pursuant to the Transaction will be based upon the fair
market value of the Sequoia Common Stock at the date of consummation of the
Transaction.
2. Total transaction costs to be incurred by Sequoia and the TMI Group in
connection with the Transaction are estimated to be approximately
$2,100,000. Except for $650,000 the effects of these costs have not been
reflected in the unaudited pro forma combined condensed financial
statements.
3. There were no material differences in accounting policies of Sequoia and the
TMI Group.
4. The unaudited pro forma combined condensed balance sheet as of January 1,
1995 reflects the exercise of 240,000 options for proceeds of $42,360, but
does not reflect the exercise of options to purchase 127,500 shares of TMI
Common Stock with proceeds estimated to be approximately $43,000 which is
expected to occur immediately prior to the Effective Time.
5. Sequoia's second fiscal quarter ended on January 1, 1995 and the TMI Group's
second fiscal quarter ended on December 31, 1994. Both Sequoia and the TMI
Group's fiscal years end on June 30.
F-9
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Boards of Directors of the Texas Microsystems Group:
We have audited the accompanying combined balance sheets of the Texas
Microsystems Group, as described in Note 1, as of June 30, 1994, 1993 and 1992,
and the related combined statements of operations, shareholders' equity and
cash flows for the years then ended. These combined financial statements are
the responsibility of the Group's management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Texas
Microsystems Group as of June 30, 1994, 1993 and 1992, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As explained in Note 2, effective July 1, 1992, the Group adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
The accompanying combined balance sheet of the Texas Microsystems Group as of
December 31, 1994, the related combined statements of operations for the six
and three-month periods ended December 31, 1994 and 1993, the related combined
statements of cash flows for the six-month periods ended December 31, 1994 and
1993, and the related combined statement of shareholders' equity as of and for
the six-month period ended December 31, 1994, were not audited by us and,
accordingly, we do not express an opinion on them.
Houston, Texas
November 30, 1994
F-10
<PAGE>
TEXAS MICROSYSTEMS GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
DECEMBER 31, ------------------------------------
1994 1994 1993 1992
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.. $ 380,894 $ 283,552 $ 239,640 $ 180,459
Accounts receivable, net of
allowance of $339,455,
$300,000, $275,000 and
$212,800, respectively.... 8,332,965 7,326,677 6,987,858 5,118,417
Receivables from affili-
ates...................... 54,810 29,979 35,802 303,840
Federal income taxes
receivable/prepaid........ -- 422,992 33,454 202,941
Inventories................ 6,765,702 6,266,447 7,312,821 6,122,850
Deferred tax asset......... 770,812 504,488 516,988 --
Prepaid expenses and other. 179,117 378,240 702,259 229,414
----------- ----------- ----------- -----------
Total current assets..... 16,484,300 15,212,375 15,828,822 12,157,921
Property and Equipment, net.. 2,380,507 2,360,649 2,264,991 1,471,243
Other assets, including
accumulated amortization of
intangible assets totaling
$693,085 and $526,745 in
1993 and 1992, respectively. 226,247 25,794 96,704 275,462
----------- ----------- ----------- -----------
Total assets............. $19,091,054 $17,598,818 $18,190,517 $13,904,626
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Short-term borrowings on
line of credit............ $ 1,705,000 $ 1,705,000 $ 3,240,000 $ 950,000
Current maturities of long-
term debt................. 666,667 666,667 732,969 642,955
Accounts payable........... 4,700,036 4,493,263 3,582,363 1,971,374
Federal income taxes pay-
able...................... 201,409 -- -- --
Accrued liabilities........ 3,344,467 2,969,420 3,185,439 2,257,810
Payable to affiliate....... 50,021 95,945 10,735 --
----------- ----------- ----------- -----------
Total current liabili-
ties.................... 10,667,600 9,930,295 10,751,506 5,822,139
Long-term Debt............... 1,332,412 1,644,945 3,381,270 4,152,800
Commitments and Contingencies
Shareholders' Equity:
SPCO, Inc., common stock,
$.01 par value, 75,000
shares authorized, 50,000
shares issued and
outstanding............... 500 500 500 500
Texas Microsystems, Inc.,
common stock, $.01 par
value, 20,000,000 shares
authorized, 10,240,000
shares issued and
outstanding, net of the
8,500,000 shares held by
SPCO, Inc................. 17,400 15,000 15,000 15,000
Texas Micro Electronics,
Inc., common stock, $.01
par value, 100 shares
authorized, issued and
outstanding, all shares
were held by SPCO, Inc.,
in 1993 and 1992.......... 1 1 -- --
Additional paid-in capital. 1,412,534 1,289,570 1,289,570 1,289,570
Retained earnings.......... 5,615,966 4,681,309 2,767,174 2,615,245
Cumulative translation ad-
justment.................. 44,641 37,198 (14,503) 9,372
----------- ----------- ----------- -----------
7,091,042 6,023,578 4,057,741 3,929,687
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity.... $19,091,054 $17,598,818 $18,190,517 $13,904,626
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
TEXAS MICROSYSTEMS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, FOR THE YEAR ENDED JUNE 30,
----------------------- ------------------------ -------------------------------------
1994 1993 1994 1993 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $24,693,723 $22,929,751 $12,966,485 $11,357,955 $47,060,861 $40,303,689 $37,426,551
Cost of Revenue......... 14,667,353 14,429,768 7,440,566 7,293,957 29,474,209 24,607,673 22,352,841
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Margin........ 10,026,370 8,499,983 5,525,919 4,063,998 17,586,652 15,696,016 15,073,710
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating Expenses......
Product development... 2,152,239 1,856,437 1,032,526 904,671 3,870,968 3,750,663 4,136,951
Marketing, selling,
general and
administrative....... 6,263,133 5,236,044 3,359,372 2,439,541 10,981,601 10,702,971 10,090,028
Amortization of
intangible assets.... -- 83,170 -- 41,585 88,715 166,340 323,010
----------- ----------- ----------- ----------- ----------- ----------- -----------
8,415,372 7,175,651 4,391,898 3,385,797 14,941,284 14,619,974 14,549,989
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from Opera-
tions.............. 1,610,998 1,324,332 1,134,021 678,201 2,645,368 1,076,042 523,721
Interest Expense........ 131,985 321,545 100,104 156,841 444,913 645,678 816,072
Other (Income) Expense,
net.................... 10,377 (66,632) (2,452) (35,732) (64,620) (62,640) (63,199)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes and
cumulative effect
of change in
accounting for
income taxes....... 1,468,636 1,069,419 1,036,369 557,092 2,265,075 493,004 (229,152)
Provision for income
tax.................... 533,979 311,993 363,439 172,579 350,940 511,580 (520,776)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting for income
taxes.................. 934,657 757,426 672,930 384,513 1,914,135 (18,576) 291,624
Cumulative effect of
change in accounting
for income taxes....... -- -- -- -- -- 170,505 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income.......... $ 934,657 $ 757,426 $ 672,930 $ 384,513 $ 1,914,135 $ 151,929 $ 291,624
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
TEXAS MICROSYSTEMS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH
PERIOD ENDED
DECEMBER 31 FOR THE YEAR ENDED JUNE 30
----------------------- -------------------------------------
1994 1993 1994 1993 1992
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............. $ 934,657 $ 757,426 $ 1,914,135 $ 151,929 $ 291,624
Adjustments to recon-
cile net income to net
cash provided (used)
by operating activi-
ties--
Depreciation........... 385,591 400,796 720,142 687,207 895,751
Amortization of intan-
gible assets.......... -- 83,170 88,715 166,340 323,010
Amortization of long-
term debt discount.... -- (33,302) 111,185 67,477 65,305
Increase (decrease) in
accrued interest
included in long-term
debt.................. 20,800 18,646 (251,211) (106,039) (102,228)
Provision for uncol-
lectible receivables.. 116,940 65,140 191,035 610 8,516
Changes in other as-
sets and liabili-
ties--
(Increase) decrease
in accounts receiv-
able................. (1,095,799) (376,777) (509,364) (1,881,625) 487,250
(Increase) decrease
in receivables from
affiliates........... (24,831) (35,802) 5,823 268,038 (209,840)
(Increase) decrease
in federal income
taxes receivable..... 422,992 (100,265) (389,538) 169,487 31,738
(Increase) decrease
in inventories....... (467,345) 755,725 1,053,956 (1,195,066) 2,033,896
(Increase) decrease
in deferred tax as-
set.................. (266,324) -- 12,500 (516,988) --
(Increase) decrease
in prepaid expenses
and other............ 202,728 355,051 338,612 (488,111) (188,081)
Increase (decrease)
in accounts payable.. 213,290 (228,931) 888,802 1,608,706 (990,475)
Increase (decrease)
in accrued liabili-
ties................. 386,406 192,406 (209,026) 961,170 85,211
Increase in federal
income taxes pay-
able................. 284,413 -- -- -- --
Increase (decrease)
in payable to affil-
iates................ (45,924) 8,340 85,210 10,735 (102,165)
Other................. (200,453) 3,734 4,575 14,541 4,885
---------- ----------- ----------- ----------- -----------
Net cash provided
(used) by operating
activities.......... 867,141 1,865,357 4,055,551 (81,589) 2,634,397
---------- ----------- ----------- ----------- -----------
Cash flows from invest-
ing activities:
Capital expenditures
for property and
equipment............. (393,763) (211,474) (821,759) (1,484,906) (723,686)
Proceeds from sale of
property and
equipment............. -- -- 2,350 -- 7,407
---------- ----------- ----------- ----------- -----------
Net cash used by in-
vesting activities.. (393,763) (211,474) (819,409) (1,484,906) (716,279)
---------- ----------- ----------- ----------- -----------
Cash flows from financ-
ing activities:
Net increase (decrease)
in short-term
borrowings............ -- (1,650,000) (1,535,000) 2,290,000 (1,810,000)
Proceeds from long-term
debt.................. -- -- 2,000,000 -- --
Repayment of long-term
debt.................. (333,333) -- (3,662,601) (642,955) --
Proceeds from exercise
of stock options...... 42,360 -- -- -- --
---------- ----------- ----------- ----------- -----------
Net cash provided
(used) by financing
activities.......... (290,973) (1,650,000) (3,197,601) 1,647,045 (1,810,000)
---------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 182,405 3,883 38,541 80,550 108,118
Cash and cash equiva-
lents at beginning of
period................. 283,552 239,640 239,640 180,459 54,979
Effect of exchange rate
changes on cash........ (85,063) 32,527 5,371 (21,369) 17,362
---------- ----------- ----------- ----------- -----------
Cash and cash equiva-
lents at end of period. $ 380,894 $ 276,050 $ 283,552 $ 239,640 $ 180,459
========== =========== =========== =========== ===========
Supplemental cash flow
disclosures:
Interest paid.......... $ 159,718 $ 88,534 $ 919,528 $ 700,034 $ 840,790
Income taxes paid (re-
ceived)............... 267,000 461,000 868,000 968,722 (366,962)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
TEXAS MICROSYSTEMS GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------------ ------------------------------------------
TEXAS TEXAS TEXAS TEXAS
MICROSYSTEMS, MICRO MICROSYSTEMS, MICRO
SPCO, INC. INC. ELECTRONICS, INC. SPCO, INC. INC. ELECTRONICS, INC.
---------- ------------- ----------------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE
30, 1991........ 50,000 1,500,000 -- $500 $15,000 $--
Net income...... -- -- -- -- -- --
Cumulative
translation
adjustment...... -- -- -- -- -- --
------ --------- --- ---- ------- ----
BALANCE, JUNE
30, 1992........ 50,000 1,500,000 -- 500 15,000 --
Net income...... -- -- -- -- -- --
Cumulative
translation
adjustment...... -- -- -- -- -- --
------ --------- --- ---- ------- ----
BALANCE, JUNE
30, 1993......... 50,000 1,500,000 -- 500 15,000 --
Net income...... -- -- -- -- -- --
Sale of Texas
Micro
Electronics,
Inc., shares
(Note 1)........ -- -- 100 -- -- 1
Cumulative
translation
adjustment...... -- -- -- -- -- --
------ --------- --- ---- ------- ----
BALANCE, JUNE
30, 1994........ 50,000 1,500,000 100 500 15,000 1
Net income (Un-
audited)........ -- -- -- -- -- --
Exercise of em-
ployee stock op-
tions (unau-
dited).......... -- 240,000 -- -- 2,400 --
Cumulative
translation
adjustment
(Unaudited)..... -- -- -- -- -- --
------ --------- --- ---- ------- ----
BALANCE,
DECEMBER 31,
1994
(UNAUDITED)..... 50,000 1,740,000 100 $500 $17,400 $ 1
====== ========= === ==== ======= ====
<CAPTION>
ADDITIONAL CUMULATIVE
PAID-IN RETAINED TRANSLATION
CAPITAL EARNINGS ADJUSTMENT TOTAL
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, JUNE
30, 1991........ $1,289,570 $2,323,621 $ -- $3,628,691
Net income...... -- 291,624 -- 291,624
Cumulative
translation
adjustment...... -- -- 9,372 9,372
---------- ---------- ----------- -----------
BALANCE, JUNE
30, 1992........ 1,289,570 2,615,245 9,372 3,929,687
Net income...... -- 151,929 -- 151,929
Cumulative
translation
adjustment...... -- -- (23,875) (23,875)
---------- ---------- ----------- -----------
BALANCE, JUNE
30, 1993......... 1,289,570 2,767,174 (14,503) 4,057,741
Net income...... -- 1,914,135 -- 1,914,135
Sale of Texas
Micro
Electronics,
Inc., shares
(Note 1)........ -- -- -- 1
Cumulative
translation
adjustment...... -- -- 51,701 51,701
---------- ---------- ----------- -----------
BALANCE, JUNE
30, 1994........ 1,289,570 4,681,309 37,198 6,023,578
Net income (Un-
audited)........ -- 934,657 -- 934,657
Exercise of em-
ployee stock op-
tions (unau-
dited).......... 122,964 -- -- 122,964
Cumulative
translation
adjustment
(Unaudited)..... -- -- 7,443 7,443
---------- ---------- ----------- -----------
BALANCE,
DECEMBER 31,
1994
(UNAUDITED)..... $1,412,534 $5,615,966 $44,641 $7,091,042
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined financial statements include the accounts of SPCO,
Inc. (a Delaware corporation), Texas Microsystems, Inc. (a Delaware corporation
85 percent owned by SPCO, Inc.), and its wholly owned subsidiaries
(collectively TMI), and Texas Micro Electronics, Inc. (TME) (a Delaware
corporation), all of which are collectively referred to as the Texas
Microsystems Group or the Group. Financial statements of the Group represent
the assets, liabilities and operations of several entities being acquired by
Sequoia Systems Inc. (Sequoia) in a business combination to be accounted for as
a pooling of interests. These combined financial statements exclude the
accounts of Briskheat Corporation (a Delaware corporation and wholly owned
subsidiary of SPCO, Inc.) and its subsidiaries (collectively Briskheat), which
are not being acquired by Sequoia. TME was a wholly owned subsidiary of SPCO,
Inc., until July 1, 1993, at which time its common stock was sold for a nominal
amount to certain shareholders of SPCO, Inc. (85 percent), and Keystone
International, Inc. (15 percent).
On November 9, 1994, the principal shareholders of the Group entered into an
agreement with Sequoia in which the shareholders of the Group will receive
shares of Sequoia common stock for their ownership interests in the entities
comprising the Group. Prior to the consummation of this agreement, SPCO, Inc.,
will distribute its common stock of Briskheat to SPCO, Inc.'s shareholders.
The Group develops, manufactures and distributes commercial and industrial
microcomputers. The Group markets its products to domestic and international
customers.
SPCO, Inc., formed TMI on May 1, 1989, to acquire (the Acquisition) the
assets of a division of Keystone Technology, Inc., a subsidiary of Keystone
International, Inc. (Keystone), in a transaction which was effective May 19,
1989. Due to Keystone's continuing economic interest (Keystone received 15
percent of TMI's common stock at the Acquisition), the Acquisition was
accounted for as a partial purchase in accordance with guidance provided by the
Emerging Issues Task Force of the Financial Accounting Standards Board. The
excess of the consideration paid over the value of the net assets acquired was
assigned to goodwill (see Note 2).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The combined unaudited financial statements for the six and three months
ended December 31, 1994 and 1993, as applicable, include all normal, recurring
adjustments which, in the opinion of management are necessary for a fair
presentation of the results of operations for such periods. The results of
operations for the six months ended December 31, 1994, are not necessarily
indicative of the actual results that will be realized for the fiscal year
ending June 30, 1995. The interim financial information provided has been
presented in accordance with the Securities and Exchange Commission's rules for
interim financial statements.
Principles of Combination
The combined financial statements include the accounts of SPCO, Inc., TMI,
and TME and, as discussed above, they do not include the accounts of Briskheat.
All significant intercompany accounts and transactions have been eliminated.
SPCO, Inc.'s investments in TMI's common stock and paid-in capital and in TME's
common stock have been eliminated in the accompanying combined financial
statements (see Note 1).
The Group's fiscal year begins on July 1 and ends on June 30 (i.e., fiscal
1994 commenced on July 1, 1993, and ended on June 30, 1994).
F-15
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenues are primarily from the sale of computer systems, peripherals and
boards. The Group recognizes revenue at the time of shipment of its products.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Group considers all highly
liquid investments with maturities of three months or less to be cash
equivalents.
Inventories
Inventories are valued at the lower of average cost or market and include
material, labor and manufacturing overhead. Allowances for excess and obsolete
items are provided as necessary. Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30
DECEMBER 31, --------------------------------
1994 1994 1993 1992
------------ ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Raw materials.................. $5,314,909 $4,037,267 $4,185,649 $4,333,619
Work in progress............... 891,629 1,485,964 2,407,563 1,609,152
Finished goods................. 559,164 743,216 719,609 180,079
---------- ---------- ---------- ----------
$6,765,702 $6,266,447 $7,312,821 $6,122,850
========== ========== ========== ==========
</TABLE>
Property and Equipment
The costs of ordinary maintenance and repairs ($65,994, $59,619 and $47,144
in 1994, 1993 and 1992, respectively) are expensed, while renewals and
betterments are capitalized. Depreciation of property and equipment is computed
for financial reporting purposes using the straight-line method over the
estimated useful lives of the assets. At June 30, 1994, 1993 and 1992, property
and equipment owned by the Group consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1994 1993 1992
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Machinery and equipment. 3-8 years $1,952,239 $1,470,746 $1,187,549
Furniture and fixtures.. 3-10 years 2,507,432 2,217,901 1,929,794
Leasehold improvements.. 2-15 years 887,803 881,846 147,835
---------- ---------- ----------
5,347,474 4,570,493 3,265,178
Less--Accumulated depre-
ciation................ 2,986,825 2,305,502 1,793,935
---------- ---------- ----------
$2,360,649 $2,264,991 $1,471,243
========== ========== ==========
</TABLE>
Other Assets
Other assets include certain costs incurred in connection with the
Acquisition which were allocated to various intangible assets. Intangible
assets are amortized over a three- to five-year period. Amortization expense
related to these intangible assets totaled $88,715, $166,340 and $323,010 for
fiscal 1994, 1993 and 1992, respectively.
F-16
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Income taxes are computed using the liability method. Deferred income tax
assets and liabilities result from temporary differences. Temporary differences
are differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years. Effective July 1, 1992, the Group adopted
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," which replaces SFAS No. 96. The benefit of adopting the
statement on the Group's financial position and results of operations of
$170,505 was recorded as a cumulative effect of change in accounting for income
taxes in the accompanying financial statements (see Note 3) in fiscal 1993.
Cash Management Program
Under the terms of the Group's revolving line of credit (described in Note
4), working capital expenditures can be funded under the line of credit if such
amounts are not funded by the Group's cash receipts. As a result, $1,762,422,
$1,530,233 and $879,855 of outstanding bank drafts are included in accounts
payable as of June 30, 1994, 1993 and 1992, respectively.
Concentration of Credit Risk and Export Sales
The Group's financial instruments that are exposed to concentrations of
credit risk consist primarily of trade accounts receivable. The Group routinely
assesses the financial strength of its customers and believes that its trade
accounts receivable exposure is limited to that provided for in the receivable
allowance balance. United States export sales to international customers
totaled $7,973,000, $6,275,000 and $3,997,000 for fiscal 1994, 1993 and 1992,
respectively. No single customer accounted for 10 percent or more of revenues
in 1994, 1993 and 1992.
3. INCOME TAXES:
SPCO, Inc., files a consolidated federal income tax return which includes the
accounts of the Group and Briskheat. SPCO, Inc., has entered into a tax-sharing
agreement with TMI, TME and Briskheat which provides that each entity calculate
its income tax provision/benefit on a separate-entity basis, except that the
recognition by an entity (other than Briskheat) of a current tax benefit is
deferred until the tax benefit can be realized in the consolidated federal
income tax return. Tax benefits generated by Briskheat are retained by SPCO,
Inc. No Briskheat tax benefits have been recognized in the accompanying
financial statements, and no net operating losses related to Briskheat exist in
the Group's tax position. The accompanying consolidated financial statements
reflect the Group's tax provision calculated in accordance with the tax-sharing
agreement. Briskheat tax provisions are not included in the accompanying
financial statements (see Note 1).
The components of income tax provision (benefit) for the fiscal years ended
June 30, 1994, 1993 and 1992, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- --------- ---------
<S> <C> <C> <C>
U.S. federal income tax--
Current.................................... $288,484 $ 805,502 $(536,224)
Deferred................................... 12,500 (346,483) --
-------- --------- ---------
300,984 459,019 (536,224)
State taxes.................................. 49,956 52,561 15,448
-------- --------- ---------
$350,940 $ 511,580 $(520,776)
======== ========= =========
</TABLE>
F-17
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of pretax income and a reconciliation of the income tax
provision (benefit) computed by applying the U.S. statutory rate to that
included in the accompanying financial statements for fiscal years ended June
30, 1994, 1993 and 1992, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Pretax income (loss)--
U.S. federal............................ $2,233,179 $ 719,006 $(311,209)
Foreign................................. 31,896 (226,002) 82,057
---------- --------- ---------
Total................................. $2,265,075 $ 493,004 $(229,152)
========== ========= =========
Taxes computed using U.S. statutory rate.. $ 770,126 $ 167,621 $ (77,912)
Tax deductions in excess of book deduc-
tions as a result of the Acquisition..... (54,010) (28,130) (17,691)
Research and development tax credit....... (105,902) (116,756) (158,787)
Adjustments to prior-year accrual......... (32,476) 100,161 (154,854)
Revenue Agent Review (RAR) adjustments.... (215,172) 345,795 --
Change in valuation allowance............. (54,571) -- --
Net change in future tax benefits not rec-
ognized.................................. -- -- (110,055)
State taxes............................... 32,971 34,690 10,196
Other..................................... 9,974 8,199 (11,673)
---------- --------- ---------
$ 350,940 $ 511,580 $(520,776)
========== ========= =========
</TABLE>
The components of the net deferred tax asset recognized in the accompanying
financial statements at June 30, 1994 and 1993, are as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Basis difference--
Provisions for bad debts and inventory allowances.... $ 401,554 $ 488,036
Accrued liabilities.................................. 227,915 196,151
Fixed asset depreciation............................. 55,749 54,367
Foreign operating loss carryforwards................. 64,170 77,905
--------- ---------
Deferred tax assets.................................... 749,388 816,459
Valuation allowance.................................... (244,900) (299,471)
--------- ---------
$ 504,488 $ 516,988
========= =========
</TABLE>
The Group's deferred tax assets are attributable to provisions for bad debts
and inventory allowances, certain accrued liabilities, depreciation and foreign
net operating loss carryforwards. The Group has recorded a valuation allowance
for the estimated amount of deferred tax assets which may not be realized.
Prior to 1993, the Group accounted for deferred income taxes under SFAS No. 96.
The Group had approximately $1,382,000 of future tax benefits at June 30, 1992,
attributable to net temporary differences which were not recognized pursuant to
the requirements of SFAS No. 96.
During fiscal 1993, the Internal Revenue Service (IRS) disallowed certain of
the Group's deductions related to the Acquisition (see Note 1) for tax
purposes. During 1994, the Group reached a final agreement with the IRS
regarding the disallowed deductions. As a result of this agreement, the
original assessment of $345,795 was reduced by $215,172. Since the original
assessment was expensed by the Group in 1993, a benefit of $215,172 has been
recorded in the 1994 tax provision.
F-18
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. DEBT:
Long-Term Debt
Long-term debt at June 30, 1994, 1993 and 1992, consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
$4,250,000 original face amount
subordinated note payable to Keystone,
extinguished in 1994..................... $ -- $3,533,871 $4,143,425
$500,000 face amount subordinated zero
coupon note payable to Keystone, dated
May 19, 1989 (less unamortized discount
of $132,832, $170,843 and $204,920,
respectively, with an effective interest
rate of 11.54%), due May 1, 1997......... 367,168 329,157 295,080
$2,000,000 term note payable to Texas
Commerce Bank, dated June 7, 1994........ 1,944,444 -- --
Accrued interest.......................... -- 251,211 357,250
---------- ---------- ----------
2,311,612 4,114,239 4,795,755
Less--Current portion of long-term debt... 666,667 732,969 642,955
---------- ---------- ----------
$1,644,945 $3,381,270 $4,152,800
========== ========== ==========
</TABLE>
Stated principal payments on outstanding long-term debt are as follows:
<TABLE>
<S> <C>
1995............ $ 666,667
1996............ 666,667
1997............ 978,278
----------
$2,311,612
==========
</TABLE>
The Group's note payable to Keystone was incurred in connection with the
Acquisition and is subordinate only to the bank term note and line of credit.
Term Loan
The term note is payable in equal monthly installments based on a three-year
amortization with the balance due on June 1, 1997. Interest on this note is due
monthly at prime plus 3/4 percent per annum (8 percent at June 30, 1994). There
are various financial ratios and other restrictive covenants governing the
borrowing arrangement. The term note is collateralized by substantially all of
TMI's assets and the personal guarantees of two shareholders of SPCO, Inc.
Line of Credit
TMI has a $4,000,000 revolving line of credit from a bank, of which
$1,705,000 had been borrowed at June 30, 1994. Borrowings under this line are
limited to a certain percent of accounts receivable, as defined. At fiscal
year-end, TMI had unused borrowing capacity under the terms of this agreement
of $2,295,000. The line of credit expires November 1, 1995, and requires
interest payable monthly at the bank's prime rate plus 1/2 percent per annum (7
3/4 percent at June 30, 1994). There are various financial ratios and other
restrictive covenants governing the borrowing arrangement. The line of credit
is collateralized by substantially all of the assets of TMI and the personal
guarantees of two shareholders of SPCO, Inc.
Average short-term borrowings outstanding during fiscal years 1994, 1993 and
1992, were $1,989,846, $1,611,154, and $2,861,250, respectively, with an
average interest rate thereon of 7.5 percent, 6.75 percent
F-19
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
and 7.9 percent, respectively. Maximum short-term borrowings at any month-end
were $2,790,000, $3,240,000 and $4,245,000 in fiscal years 1994, 1993 and 1992,
respectively.
5. RELATED-PARTY TRANSACTIONS:
Below is a summary of the transactions with related parties during fiscal
years 1994, 1993 and 1992.
<TABLE>
<CAPTION>
SPCO
MANAGEMENT BRISKHEAT
CO. KEYSTONE CORPORATION
---------- -------- -----------
<S> <C> <C> <C>
Receivables for federal tax
advances/refunds--
June 30, 1994........................... $ -- $ -- $ 29,979
June 30, 1993........................... -- -- 35,802
June 30, 1992........................... -- -- 299,662
Advances (including interest charges)--
June 30, 1992........................... 4,178 -- --
Accounts payable and other liabilities--
June 30, 1994........................... 95,945 -- --
June 30, 1993........................... 10,735 -- --
Management fees incurred--
Fiscal 1994............................. 913,544 -- --
Fiscal 1993............................. 810,333 -- --
Fiscal 1992............................. 736,853 -- --
Interest expense:
Subordinated notes payable--
Fiscal 1994........................... -- 286,815 --
Fiscal 1993........................... -- 496,320 --
Fiscal 1992........................... -- 558,077 --
</TABLE>
SPCO Management Co., an affiliated entity, pays the salaries and related
benefits of certain Group executives and receives a monthly management fee from
the Group.
6. SHAREHOLDER AGREEMENTS:
In conjunction with the Acquisition, TMI entered into a registration and
preferential purchase rights agreement (the Agreement) with its shareholders.
The Agreement provides Keystone with certain demand registration rights.
Additionally, in the event TMI issues or sells shares of common stock or other
convertible securities at an equivalent postsplit price less than $.1765, as
defined, for other than certain employee compensation programs or pro-rata
stock dividends, splits or similar transactions, Keystone has the right to
purchase, at $.0001 per share, additional shares of TMI common stock to
maintain its relative percentage ownership in TMI. The preferential purchase
right expires May 1, 1997. Both the registration and preferential purchase
rights are transferable to future beneficial owners of 5 percent or more of the
then outstanding common stock previously held by Keystone. The agreement also
restricts TMI from changing the $.01 stated par value of the common stock and
from authorizing or issuing any other class of stock. TMI's shareholders have
also entered into an agreement which provides SPCO, Inc., with the right of
first refusal to purchase the common stock held by Keystone.
7. COMMITMENTS AND CONTINGENCIES:
The Group leases office space under various operating leases expiring during
fiscal years 1995 through 1998. Minimum future rental payments total $671,289,
$647,006, $611,904 and $458,928 for fiscal years 1995,
F-20
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1996, 1997 and 1998, respectively. Rent expense totaled $791,489, $450,242 and
$342,946 for the fiscal years 1994, 1993 and 1992, respectively.
The Group is a party to a number of legal actions or claims arising in the
ordinary course of its business. In management's opinion, the Group has
adequate legal defenses, reserves and insurance coverage with respect to these
matters and does not believe that they will materially affect the Group's
operations or financial position.
8. SAVINGS PLAN:
The Group has a 401(k) savings plan which permits participants to contribute
up to 15 percent of their base compensation (as defined), each year. The Group
matches 50 percent of a participant's contribution, paying up to a maximum of 3
percent of the participant's gross pay. The Group paid matching contributions
to the plan of $126,177, $125,439 and $128,038 for fiscal years 1994, 1993 and
1992, respectively.
9. STOCK OPTIONS:
TMI has a stock option plan which provides for nonqualified stock options or
stock appreciation rights to be granted to key employees to purchase up to
1,000,000 shares of common stock. The plan provides that the option price of
the common stock to be issued be not less than the fair market value of the
common stock on the date of the grant. The options granted are as follows:
<TABLE>
<CAPTION>
OPTIONS OPTION PRICE
DATE AWARDED AWARDED PER SHARE VESTING DATE
------------ ------- ------------ ------------------------------------------------
<S> <C> <C> <C>
May 1989.......... 240,000 $.1765 100% on May 31, 1994
September 1990.... 575,000 .3500 50,000 shares on September 1, 1991, and
remainder subsequently vest based on
performance
August 1991....... 100,000 .5000 20% per year
September 1993.... 50,000 .4050 100% on September 12, 1998
</TABLE>
On November 10, 1994, the 240,000 options awarded in May 1989 were exercised.
10. PRO FORMA EARNINGS PER SHARE (UNAUDITED):
As discussed in Note 1, the accompanying financial statements reflect the
combined financial statements of several entities which have separate common
stocks outstanding; accordingly, a historical earnings per share calculation in
accordance with Accounting Principles Board Opinion No. 15, "Earnings Per
Share," has not been calculated. However, pro forma earnings per share for the
six and three-month periods ended December 31, 1994 and 1993, and the fiscal
years ended June 30, 1994, 1993 and 1992, have been made by assuming that the
relationship between the SPCO, Inc., and TMI common stocks can be constructed
for all periods presented due to the planned exchange ratio of SPCO, Inc., and
TMI common stocks for shares of Sequoia. Assumptions made in computing this pro
forma information include (a) SPCO, Inc.'s common stock will be split 170 to 1
as indicated in the merger agreement (see Note 1), (b) a Group share is
equivalent to an SPCO, Inc., common share after the stock split or a TMI common
share (total Group common shares outstanding for purposes of this pro forma
earnings per share computation are 10,000,000), (c) TME common
F-21
<PAGE>
TEXAS MICROSYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
shares have no significance for purposes of this calculation and (d) TMI's
stock options are common stock equivalents for the purpose of this calculation.
<TABLE>
<CAPTION>
THE GROUP--PRO FORMA
---------------------------
WEIGHTED AVERAGE
COMMON SHARES
AND COMMON
SHARE EQUIVALENTS EARNINGS
OUTSTANDING PER SHARE
----------------- ---------
(UNAUDITED)
<S> <C> <C>
Year ended--
June 30, 1992.................................. 10,182,411 .03
June 30, 1993.................................. 10,201,373 .01
June 30, 1994.................................. 10,340,403 .19
Six months ended--
December 31, 1993.............................. 10,267,491 .07
December 31, 1994.............................. 10,374,151 .09
Three months ended--
December 31, 1993.............................. 10,289,264 .04
December 31, 1994.............................. 10,451,849 .06
</TABLE>
F-22
<PAGE>
ANNEX A
MERGER AND STOCK PURCHASE AGREEMENT
AMONG
SEQUOIA SYSTEMS, INC.,
SEQUOIA ACQUISITION CORPORATION,
SPCO, INC.
AND
KEYSTONE INTERNATIONAL, INC.
DATED AS OF NOVEMBER 9, 1994
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PRELIMINARY STATEMENT..................................................... A-1
ARTICLE I--THE MERGER AND PURCHASE OF THE KEYSTONE SHARES
1.1 The Merger and Purchase of the Keystone Shares..................... A-2
1.2 The Closing........................................................ A-3
1.3 Actions at the Closing............................................. A-3
1.4 Additional Action.................................................. A-3
1.5 Conversion of Company Shares and Purchase of the Keystone Shares... A-3
1.6 Dissenting Shares.................................................. A-5
1.7 Options............................................................ A-5
1.8 Exchange of Certificates........................................... A-5
1.9 Dividends.......................................................... A-6
1.10 Fractional Shares.................................................. A-6
1.11 Escrow............................................................. A-6
1.12 Certificate of Incorporation....................................... A-7
1.13 By-laws............................................................ A-7
1.14 Directors and Officers............................................. A-7
1.15 No Further Rights.................................................. A-7
1.16 Closing of Transfer Books.......................................... A-7
1.17 Further Assurances................................................. A-7
ARTICLE II--REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.1 Organization, Qualification and Corporate Power.................... A-8
2.2 Capitalization..................................................... A-8
2.3 Authority.......................................................... A-8
2.4 Noncontravention................................................... A-8
2.5 Company Subsidiaries............................................... A-10
2.6 Financial Statements............................................... A-10
2.7 Absence of Certain Changes......................................... A-11
2.8 Undisclosed Liabilities............................................ A-11
2.9 Tax Matters........................................................ A-12
2.10 Tangible Assets.................................................... A-13
2.11 No Real Property................................................... A-13
2.12 Intellectual Property.............................................. A-14
2.13 Inventory.......................................................... A-15
2.14 Real Property Leases............................................... A-15
2.15 Contracts.......................................................... A-16
2.16 Accounts Receivable................................................ A-16
2.17 Powers of Attorney................................................. A-17
2.18 Insurance.......................................................... A-17
2.19 Litigation......................................................... A-17
2.20 Product Warranty................................................... A-17
2.21 Employees.......................................................... A-17
2.22 Employee Benefits.................................................. A-18
2.23 Environmental Matters.............................................. A-19
2.24 Legal Compliance................................................... A-20
2.25 Permits............................................................ A-20
2.26 Certain Business Relationships..................................... A-21
</TABLE>
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<TABLE>
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2.27 Brokers' Fees...................................................... A-21
2.28 Books and Records.................................................. A-21
2.29 Customers and Suppliers............................................ A-21
2.30 Banking Facilities................................................. A-21
2.31 Powers of Attorney................................................. A-22
2.32 Pooling............................................................ A-22
2.33 IBM License Agreement.............................................. A-22
2.34 Disclosure......................................................... A-22
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF KEYSTONE
3.1 Organization, Qualification and Corporate Power.................... A-22
3.2 Authority.......................................................... A-23
3.3 Noncontravention................................................... A-23
3.4 Title to the Keystone Shares....................................... A-23
3.5 Certain Business Relationships..................................... A-23
3.6 Brokers' Fees...................................................... A-24
3.7 Pooling............................................................ A-24
3.8 Disclosure......................................................... A-24
ARTICLE IV--REPRESENTATIONS AND WARRANTIES
OF THE BUYER AND THE TRANSITORY SUBSIDIARY
4.1 Organization....................................................... A-24
4.2 Capitalization..................................................... A-24
4.3 Authority.......................................................... A-25
4.4 Noncontravention................................................... A-25
4.5 Reports and Financial Statements................................... A-25
4.6 Absence of Material Adverse Change................................. A-26
4.7 Undisclosed Liabilities............................................ A-26
4.8 Brokers' Fees...................................................... A-26
4.9 Pooling............................................................ A-26
ARTICLE V--COVENANTS
5.1 Best Efforts....................................................... A-26
5.2 Notices and Consents............................................... A-26
5.3 Special Meeting, Prospectus/Proxy Statement and Form S-4........... A-26
5.4 Operation of Business.............................................. A-28
5.5 Interim Financial Statements....................................... A-29
5.6 Communications with Customers and Suppliers........................ A-29
5.7 Compliance with Laws............................................... A-29
5.8 Reports, Taxes..................................................... A-29
5.9 Full Access........................................................ A-30
5.10 Notice of Breaches................................................. A-30
5.11 Exclusivity........................................................ A-30
5.12 Environmental Investigation........................................ A-31
5.13 Registration Rights................................................ A-31
5.14 Board Representation............................................... A-36
5.15 Non-Competition.................................................... A-36
5.16 Pooling Accounting................................................. A-37
5.17 Affiliate Agreements............................................... A-37
</TABLE>
ii
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5.18 Nasdaq Quotation................................................. A-37
5.19 Termination of Management Fees................................... A-37
5.20 Certain Tax Returns.............................................. A-37
ARTICLE VI--CONDITIONS TO CONSUMMATION OF TRANSACTIONS
6.1 Conditions of Obligations of the Buyer and the Transitory
Subsidiary...................................................... A-38
6.2 Conditions to Obligations of the Company and Keystone............ A-40
ARTICLE VII--INDEMNIFICATION
7.1 Indemnification.................................................. A-42
7.2 Method of Asserting Claims....................................... A-42
7.3 Survival......................................................... A-43
7.4 Limitations...................................................... A-43
ARTICLE VIII--TERMINATION
8.1 Termination of Agreement......................................... A-44
8.2 Effect of Termination............................................ A-44
8.3 Termination Fee.................................................. A-45
ARTICLE IX--DEFINITIONS
................................................................ A-45
ARTICLE X--MISCELLANEOUS
10.1 Press Releases and Announcements................................. A-47
10.2 No Third Party Beneficiaries..................................... A-47
10.3 Entire Agreement................................................. A-47
10.4 Succession and Assignment........................................ A-48
10.5 Counterparts..................................................... A-48
10.6 Headings......................................................... A-48
10.7 Notices.......................................................... A-48
10.8 Governing Law.................................................... A-49
10.9 Amendments and Waivers........................................... A-49
10.10 Severability..................................................... A-49
10.11 Expenses......................................................... A-49
10.12 Specific Performance............................................. A-49
10.13 Submission to Jurisdiction....................................... A-50
10.14 Dispute Resolution; Arbitration.................................. A-50
10.15 Construction..................................................... A-51
10.16 Incorporation of Exhibits and Schedules.......................... A-51
Exhibit A--Escrow Agreement
Exhibit B--Substance of Opinion of Vinson & Elkins, L.L.P.
Exhibit C--Substance of Opinion of Porter & Hedges, L.L.P.
Exhibit D--Agreement between W. Wayne Patterson and Sequoia Systems, Inc.
Exhibit E--Employment letter between J. Michael Stewart and Sequoia Systems,
Inc.
Exhibit F--Opinion of Hale and Dorr
</TABLE>
iii
<PAGE>
MERGER AND STOCK PURCHASE AGREEMENT
AGREEMENT entered into as of November 9, 1994 by and among Sequoia Systems,
Inc., a Delaware corporation (the "Buyer"), Sequoia Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of the Buyer (the
"Transitory Subsidiary"), SPCO, Inc., a Delaware corporation (the "Company"),
and Keystone International, Inc., a Texas corporation ("Keystone"). The Buyer,
the Transitory Subsidiary, the Company and Keystone are referred to
collectively herein as the "Parties".
PRELIMINARY STATEMENT
1. At the date hereof, W. Wayne Patterson ("Patterson"), J. Michael Stewart
("Stewart") and their respective Affiliates (as defined in Section 2.15(f)
below) own, in the aggregate, 50,000 of the issued and outstanding shares of
the common stock, $.01 par value per share (the "Company Common Stock"), of the
Company, representing 100% of the issued and outstanding capital stock of the
Company. The Company has no class of capital stock issued or outstanding except
for the Company Common Stock. The Company is a holding company and, at the date
hereof, has no material net assets other than its shares of TMI Common Stock
(as defined below).
2. At the date hereof, the Company owns 8,500,000 of the issued and
outstanding shares of the common stock, $.01 par value per share (the "TMI
Common Stock"), of Texas Microsystems, Inc., a Delaware corporation ("TMI"),
representing 85% of the issued and outstanding capital stock of TMI, and
Keystone owns 1,500,000 of the issued and outstanding shares of TMI Common
Stock (the "Keystone TMI Shares"), representing 15% of the issued and
outstanding capital stock of TMI. TMI has no class of capital stock issued or
outstanding except for the TMI Common Stock. At the date hereof, there are
outstanding options to purchase 965,000 shares of TMI Common Stock (the "TMI
Options"), of which 367,500 shares are exercisable at the date hereof.
3. Prior to October 31, 1994, the Company owned 50,000 of the issued and
outstanding shares of the common stock, $.01 par value per share (the
"BriskHeat Common Stock"), of BriskHeat Corporation, a Delaware corporation
("BriskHeat"), representing 100% of the issued and outstanding capital stock of
BriskHeat. BriskHeat has no class of capital stock issued or outstanding except
for the BriskHeat Common Stock. On October 31, 1994, the Company distributed
its BriskHeat Common Stock pro rata among the Company's stockholders (the
"BriskHeat Spin-Off").
4. At the date hereof, Patterson and Stewart each own 425,000 of the issued
and outstanding shares of the common stock, $.01 par value per share (the "TME
Common Stock"), of Texas Micro Electronics, Inc., a Delaware corporation
("TME"), collectively representing 85% of the issued and outstanding capital
stock of TME, and Keystone owns 150,000 of the issued and outstanding shares of
TME Common Stock (the "Keystone TME Shares"), representing 15% of the issued
and outstanding capital stock of TME. TME has no class of capital stock issued
or outstanding except for the TME Common Stock.
5. Prior to the closing of the transactions contemplated by this Agreement
(the "Closing"), the following transactions will be consummated in the
following sequence:
(a) The Company will effect a 170-for-1 stock split with respect to the
50,000 shares of Company Common Stock issued and outstanding at the date
hereof (the "Company Stock Split"), as a result of which there will be
8,500,000 shares of Company Common Stock issued and outstanding immediately
after the Company Stock Split.
(b) Patterson and Stewart will contribute their TME Common Stock to TMI
as a capital contribution (the "TME Stock Contribution").
(c) The TMI Options, to the extent exercisable at the date hereof, will
be exercised and the 367,500 shares of TMI Common Stock issued upon such
exercise will be contributed to the Company in exchange
A-1
<PAGE>
for an aggregate of 367,500 shares of Company Common Stock (the "TMI Option
Exercise and Exchange").
6. Immediately prior to the Closing, and after giving effect to the foregoing
transactions, (i) the Company will own 8,867,500 shares of TMI Common Stock,
representing approximately 85.53% of the issued and outstanding capital stock
of TMI, (ii) TMI will own 850,000 shares of TME Common Stock, representing 85%
of the issued and outstanding capital stock of TME, (iii) Keystone will own
1,500,000 shares of TMI Common Stock, representing approximately 14.47% of the
issued and outstanding capital stock of TMI, and (iv) Keystone will own 150,000
shares of TME Common Stock, representing 15% of the issued and outstanding
capital stock of TME.
7. This Agreement contemplates the merger of the Transitory Subsidiary with
and into the Company (the "Merger"). In the Merger, the stockholders of record
of the Company ("Company Stockholders") at the Effective Time (as hereinafter
defined) will receive capital stock of the Buyer in exchange for all of the
issued and outstanding capital stock of the Company. Simultaneously with the
Merger, the Buyer will purchase from Keystone the Keystone TMI Shares and the
Keystone TME Shares (collectively, the "Keystone Shares") in exchange for
capital stock of the Buyer and will issue the Additional Buyer Shares (as
hereinafter defined) in exchange for the Unvested TMI Options (as hereinafter
defined).
8. At the Effective Time, and after giving effect to the Merger and the other
transactions described in this Preliminary Statement: (i) the Buyer will own
100% of the issued and outstanding capital stock of the Company, approximately
14.47% of the issued and outstanding capital stock of TMI and 15% of the issued
and outstanding capital stock of TME, (ii) the Company will own approximately
85.53% of the issued and outstanding capital stock of TMI, and (iii) TMI will
own 85% of the issued and outstanding capital stock of TME.
9. For purposes of this Agreement, a "Subsidiary" is any corporation with
respect to which another corporation, directly or indirectly, has the power to
vote or direct the voting of sufficient securities to elect a majority of the
directors, and the term "Company Subsidiaries" shall mean Subsidiaries of the
Company. Except as otherwise specifically provided herein, all references
herein to Company Subsidiaries shall include TMI, TMI's Subsidiaries, TME and
TME's Subsidiaries but shall not include BriskHeat and BriskHeat's
Subsidiaries. Except where the context otherwise requires, all references
herein to TMI shall include TMI's Subsidiaries, all references herein to TME
shall include TME's Subsidiaries and all references herein to BriskHeat shall
include BriskHeat's Subsidiaries.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows:
ARTICLE I
THE MERGER AND PURCHASE OF THE KEYSTONE SHARES
1.1 The Merger and Purchase of the Keystone Shares.
(a) Upon and subject to the terms and conditions of this Agreement, the
Merger of the Transitory Subsidiary with and into the Company shall occur
at the Effective Time. From and after the Effective Time, the separate
corporate existence of the Transitory Subsidiary shall cease and the
Company shall continue as the surviving corporation in the Merger (the
"Surviving Corporation"). The "Effective Time" shall be the time at which
the Company and the Transitory Subsidiary file the certificate of merger or
other appropriate documents prepared and executed in accordance with the
relevant provisions of the Delaware General Corporation Law (the
"Certificate of Merger") with the Secretary of State of the State of
Delaware. The Merger shall have the effects set forth in Section 259 of the
Delaware General Corporation Law.
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<PAGE>
(b) Upon and subject to the terms and conditions of this Agreement, and
simultaneously with the Merger, Keystone shall sell, transfer, convey,
assign and deliver to the Buyer, and the Buyer shall purchase, acquire and
accept from Keystone, the Keystone Shares.
1.2 The Closing. The Closing, including without limitation the filing of the
Certificate of Merger, shall take place at the offices of Hale and Dorr, 60
State Street, Boston, Massachusetts as soon as practicable after the
satisfaction or waiver of all conditions to the obligations of the Parties to
consummate the transactions contemplated hereby (the "Closing Date").
1.3 Actions at the Closing. At the Closing:
(a) the Company shall deliver to the Buyer and the Transitory Subsidiary
the various certificates, instruments and documents referred to in Section
6.1;
(b) Keystone shall deliver to the Buyer and the Transitory Subsidiary the
certificate referred to in Section 6.1(g)(ii);
(c) the Buyer and the Transitory Subsidiary shall deliver to the Company
and Keystone the various respective certificates, instruments and documents
referred to in Section 6.2;
(d) the Company and the Transitory Subsidiary shall file the Certificate
of Merger with the Secretary of State of the State of Delaware;
(e) the Company shall deliver to the Buyer stock certificates
representing all of the Outstanding Company Shares (as hereinafter
defined), other than certificates representing Dissenting Shares (as
hereinafter defined), and, in exchange therefor, the Buyer shall deliver to
the Company Stockholders, other than the holders of certificates
representing Dissenting Shares, certificates representing the Company
Initial Buyer Shares (as hereinafter defined) in accordance with Section
1.8;
(f) Keystone shall deliver to the Buyer stock certificates representing
the Keystone Shares duly endorsed in blank or with stock powers duly
executed by Keystone, and, in exchange therefor, the Buyer shall deliver to
Keystone certificates representing the Keystone Initial Buyer Shares (as
hereinafter defined) in accordance with Section 1.8;
(g) the Buyer, the Indemnification Representative named in the Escrow
Agreement and the Escrow Agent named in the Escrow Agreement (or another
Escrow Agent mutually agreeable to the Buyer and the Indemnification
Representative) shall execute and deliver an Escrow Agreement in the form
attached hereto as Exhibit A, with such reasonable changes therein as may
be requested by the Escrow Agent and mutually agreeable to the Buyer and
the Indemnification Representative (the "Escrow Agreement"); and
(h) the Buyer shall deposit with the Escrow Agent certificates
representing the Escrow Shares (as hereinafter defined) in accordance with
Sections 1.7(c) and 1.11.
1.4 Additional Action. The Surviving Corporation may, at any time after the
Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5 Conversion of Company Shares and Purchase of the Keystone Shares.
(a) Certain definitions:
(i) "Buyer Common Stock" shall mean the common stock, $.40 par value
per share, of the Buyer.
(ii) "Aggregate Buyer Shares" shall mean 5,200,000 shares of Buyer
Common Stock, regardless of the price per share of the Buyer Common
Stock on Nasdaq (as hereinafter defined). The number of Aggregate Buyer
Shares shall be subject to equitable adjustment in the event of any
stock split, cash or stock dividend, reverse stock split or similar
event affecting the Buyer Common Stock between the date of this
Agreement and the Effective Time.
A-3
<PAGE>
(iii) "Nasdaq" shall mean the Nasdaq National Market.
(iv) "Company Shares" shall mean shares of Company Common Stock.
(v) "Outstanding Company Shares" shall mean the aggregate number of
Company Shares outstanding at the Effective Time.
(vi) "Company Buyer Shares" shall mean the Aggregate Buyer Shares
multiplied by the Company Percentage (as hereinafter defined).
(vii) "Keystone Buyer Shares" shall mean the Aggregate Buyer Shares
multiplied by the Keystone Percentage (as hereinafter defined).
(viii) "Company Percentage" shall mean one minus the Keystone
Percentage.
(ix) "Keystone Percentage" shall mean (A) 1,500,000 divided by (B)
the Outstanding Company Shares plus 1,500,000.
(x) "Conversion Ratio" shall mean (A) the Company Buyer Shares
divided by (B) the Outstanding Company Shares.
(xi) "Initial Conversion Ratio" shall mean 0.90 multiplied by the
Conversion Ratio.
(xii) "Escrow Conversion Ratio" shall mean 0.10 multiplied by the
Conversion Ratio.
(xiii) "Keystone Initial Buyer Shares" shall mean the Initial
Conversion Ratio multiplied by the Keystone Buyer Shares.
(xiv) "Keystone Escrow Buyer Shares" shall mean the Escrow Conversion
Ratio multiplied by the Keystone Buyer Shares.
(b) At the Effective Time, each one Company Share outstanding at the
Effective Time, other than Dissenting Shares and shares held in the
Company's treasury, shall, by virtue of the Merger, be converted into (i)
that number of fully paid and nonassessable shares of Buyer Common Stock
equal to the Initial Conversion Ratio (such shares, together with the
shares issued pursuant to Section 1.6(a)(i) are, collectively, the "Company
Initial Buyer Shares") plus (ii) that number of fully paid and
nonassessable shares of Buyer Common Stock as is equal to the Escrow
Conversion Ratio (such shares, together with the shares issued pursuant to
Section 1.6(a)(ii) are, collectively, the "Company Escrow Buyer Shares"),
if and when the Company Escrow Buyer Shares are released from escrow
pursuant to the terms of the Escrow Agreement.
(c) At the Effective Time, Keystone shall sell, transfer, convey, assign
and deliver to the Buyer, and the Buyer shall purchase, acquire and accept
from Keystone, the Keystone Shares in exchange for (i) the Keystone Initial
Buyer Shares plus (ii) the Keystone Escrow Buyer Shares, if and when the
Keystone Escrow Buyer Shares are released from escrow pursuant to the terms
of the Escrow Agreement.
(d) The Company Initial Buyer Shares and the Keystone Initial Buyer
Shares shall, together with the Initial Option Shares (as defined in
Section 1.7(c) below), collectively be referred to herein as the "Initial
Shares". The Company Escrow Buyer Shares and the Keystone Escrow Buyer
Shares shall, together with the Escrow Option Shares (as defined in Section
1.7(c) below), collectively be referred to herein as the "Escrow Shares".
The Initial Shares and the Escrow Shares shall collectively be referred to
herein as the "Transaction Shares".
(e) At the Effective Time, each share of Company Common Stock held in the
Company's treasury immediately prior to the Effective Time shall be
cancelled and retired without payment of any consideration therefor.
(f) At the Effective Time, each share of common stock, $.01 par value per
share, of the Transitory Subsidiary issued and outstanding immediately
prior to the Effective Time shall be converted into and thereafter evidence
one share of common stock, $.01 par value per share, of the Surviving
Corporation.
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<PAGE>
1.6 Dissenting Shares.
(a) For purposes of this Agreement, "Dissenting Shares" means Company
Shares held as of the Effective Time by any Company Stockholder who has not
voted his or its shares in favor of the Merger and with respect to which
appraisal shall have been duly demanded and perfected in accordance with
Section 262 of the Delaware General Corporation Law and not effectively
withdrawn or forfeited prior to the Effective Time. Dissenting Shares shall
not be converted into or represent the right to receive Company Buyer
Shares, unless such Company Stockholder shall have forfeited his or its
right to appraisal under the Delaware General Corporation Law or withdrawn,
with the consent of the Company, his or its demand for appraisal. If such
Company Stockholder has so forfeited or withdrawn his or its right to
appraisal of Dissenting Shares, then, (i) as of the occurrence of such
event, such holder's Dissenting Shares shall cease to be Dissenting Shares
and shall be converted into and represent the right to receive the Company
Buyer Shares issuable in respect of such Company Shares pursuant to Section
1.5, and (ii) promptly following the occurrence of such event, the Buyer
shall deliver to such Company Stockholder his or its Company Initial Buyer
Shares and to the Escrow Agent a certificate representing such Company
Stockholder's Company Escrow Buyer Shares.
(b) The Company shall give the Buyer (i) prompt notice of any written
demands for appraisal of any Company Shares, withdrawals of such demands,
and any other instruments that relate to such demands received by the
Company and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the Delaware General
Corporation Law. The Company shall not, except with the prior written
consent of the Buyer, make any payment with respect to any demands for
appraisal of Company Shares or offer to settle or settle any such demands.
1.7 Options.
(a) Prior to the Effective Time, the TMI Options, to the extent
exercisable at the date hereof, will be exercised as part of the TMI Option
Exercise and Exchange.
(b) Prior to the Effective Time, all outstanding options, warrants,
rights, agreements or commitments, if any, other than the TMI Options to
the extent exercisable at the date hereof, to which the Company or any
Company Subsidiary is a party or which are binding upon the Company or any
Company Subsidiary providing for the issuance of any capital stock of the
Company or any Company Subsidiary shall be terminated.
(c) For purposes of this Agreement, the term "Additional Buyer Shares"
shall mean that number of fully paid and nonassessable shares of Buyer
Common Stock equal in value, based on the closing sales price per share of
Buyer Common Stock on Nasdaq on the Closing Date, to the value, based on
the Black-Scholes method of option valuation, of the TMI Options which are
not exercisable at the date hereof (the "Unvested TMI Options"). At the
Effective Time, the Unvested TMI Options shall be converted into (i) ninety
percent (90%) of the Additional Buyer Shares (the "Initial Option Shares")
plus (ii) ten percent (10%) of the Additional Buyer Shares (the "Escrow
Option Shares"), if and when the Escrow Option Shares are released from
escrow pursuant to the terms of the Escrow Agreement. Within five days
after the Closing, but effective as of the Effective Time, the Buyer shall
issue the Initial Option Shares to the holders of the Unvested TMI Options
(the "Unvested TMI Option Holders") and shall deliver to the Escrow Agent
certificates representing the Escrow Option Shares.
1.8 Exchange of Certificates.
(a) Until surrendered, each outstanding certificate or certificates
(collectively, "Certificates") which represented Company Shares or Keystone
Shares at the Effective Time shall be deemed for all corporate purposes to
evidence ownership of the Transaction Shares into which the Company Common
Stock or Keystone Shares evidenced by the Certificate(s) so surrendered
shall have been converted in accordance with Section 1.5. From and after
the Effective Time, the holders of Company Shares and Keystone Shares shall
cease to have any rights in respect of such Company Shares and Keystone
Shares and their rights shall be solely in respect of the Transaction
Shares into which the Company Shares and Keystone Shares
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<PAGE>
evidenced by the Certificate(s) so surrendered shall have been converted
(in the case of the Company Shares) or exchanged (in the case of the
Keystone Shares) in accordance with Section 1.5.
(b) If any Transaction Shares are to be issued in the name of a person
other than the person in whose name the Certificate(s) surrendered in
exchange therefor is registered it shall be a condition to the issuance of
such Transaction Shares that (i) the Certificate(s) so surrendered shall be
transferable, and shall be properly assigned, endorsed or accompanied by
appropriate stock powers, (ii) such transfer shall otherwise be proper and
(iii) the person requesting such transfer shall pay the Buyer, or its
exchange agent, any transfer or other taxes payable by reason of the
foregoing or establish to the satisfaction of the Buyer that such taxes
have been paid or are not required to be paid. Notwithstanding the
foregoing, no Party shall be liable to a holder of Company Shares or
Keystone Shares for any Transaction Shares issuable to such holder pursuant
to Section 1.5 that are delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Buyer shall
issue in exchange for such lost, stolen or destroyed Certificate the
Transaction Shares issuable in exchange therefor pursuant to Section 1.5.
The Buyer may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to provide to the Buyer an indemnity agreement against any
claim that may be made against the Buyer with respect to the Certificate
alleged to have been lost, stolen or destroyed.
1.9 Dividends. No dividends or other distributions that are payable to the
holders of record of the Buyer Common Stock as of a date on or after the
Effective Time shall be paid to former Company Stockholders or Keystone
entitled by reason of the Merger to receive Transaction Shares until such
holders surrender their Certificates in accordance with Section 1.8. Upon such
surrender, the Buyer shall pay or deliver to the persons in whose name the
certificates representing such Initial Shares are issued any dividends or
other distributions (and shall pay or deliver to the Escrow Agent any
dividends or other distributions on the Escrow Shares in accordance with the
Escrow Agreement) that are payable to the holders of record of the Buyer
Common Stock as of a date on or after the Effective Time and which were paid
or delivered between the Effective Time and the time of such surrender;
provided that no such person shall be entitled to receive any interest on such
dividends or other distributions.
1.10 Fractional Shares. No certificates or scrip representing fractional
Transaction Shares shall be issued to Keystone, former Company Stockholders or
Unvested TMI Option Holders (as defined in Section 1.7(c) below) under this
Agreement, and Keystone, former Company Stockholders and Unvested TMI Option
Holders shall not be entitled to any voting rights, rights to receive any
dividends or distributions or other rights as a stockholder of the Buyer with
respect to any fractional Transaction Shares that would otherwise be issued to
them. In lieu of fractional Transaction Shares that would otherwise be issued,
Keystone, each former Company Stockholder and each Unvested TMI Option Holder
that would have been entitled to receive a fractional Transaction Share shall
receive a cash payment equal to the value of such fractional share, based on
the closing sales price per share of Buyer Common Stock on Nasdaq on the
Closing Date.
1.11 Escrow.
(a) On the Closing Date, the Buyer shall deliver to the Escrow Agent
certificates (issued in the respective names of Keystone, the Company
Stockholders (other than the holders of Dissenting Shares) and the Unvested
TMI Option Holders) representing the Escrow Shares, as described in
Sections 1.5 and 1.7(c), for the purpose of securing certain of the
indemnification obligations of Keystone, the Company Stockholders and the
Unvested TMI Option Holders set forth in this Agreement. The Escrow Shares
shall be held by the Escrow Agent under the Escrow Agreement pursuant to
the terms hereof and thereof. The Escrow Shares shall be held as a trust
fund and shall not be subject to any lien, attachment, trustee process or
any other judicial process of any creditor of any party, and shall be held
and disbursed solely for the purposes and in accordance with the terms of
this Agreement and the Escrow Agreement.
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<PAGE>
(b) The adoption of this Agreement and the approval of the Merger by the
Company Stockholders and the execution of this Agreement by Keystone shall,
together with the approval of the Unvested TMI Option Holders as
contemplated by Section 6.1(z) below, constitute approval of the Escrow
Agreement and of all of the arrangements relating thereto, including
without limitation (i) the placement of the Escrow Shares in escrow, (ii)
the appointment of the Indemnification Representative and (iii) the
authority of the Indemnification Representative to defend and/or settle any
claims for which the Company Stockholders, the Unvested TMI Option Holders
and/or Keystone may be required to indemnify the Surviving Corporation, the
Buyer, the Subsidiaries of the Buyer (the "Buyer Subsidiaries"), the
Company and/or the Company Subsidiaries pursuant to Section 6 hereof. All
decisions and actions by the Indemnification Representative under the
Escrow Agreement shall be binding upon Keystone, all of the Unvested TMI
Option Holders and all of the Company Stockholders, and neither Keystone,
any Unvested TMI Option Holder nor any Company Stockholder shall have the
right to object, dissent, protest or otherwise contest the same.
1.12 Certificate of Incorporation. The Certificate of Incorporation of the
Surviving Corporation shall be the same as the Certificate of Incorporation of
the Transitory Subsidiary immediately prior to the Effective Time, except that
the name of the corporation set forth therein shall be changed to Sequoia
Holdings, Inc.
1.13 By-laws. The By-laws of the Surviving Corporation shall be the same as
the By-laws of the Transitory Subsidiary immediately prior to the Effective
Time, except that the name of the corporation set forth therein shall be
changed to Sequoia Holdings, Inc.
1.14 Directors and Officers. The directors of the Transitory Subsidiary shall
become the directors of the Surviving Corporation as of the Effective Time. The
officers of the Company shall remain as officers of the Surviving Corporation
after the Effective Time, retaining their respective positions, except as
specified by the Buyer pursuant to Section 6.1(l).
1.15 No Further Rights. From and after the Effective Time, neither the
Keystone Shares nor any of the Company Shares shall be deemed to be
outstanding, and holders of Certificates shall cease to have any rights with
respect thereto except as provided herein or by law.
1.16 Closing of Transfer Books. At the Effective Time, the stock transfer
books of the Company, TMI and TME shall be closed and no transfer of Company
Shares or the Keystone Shares shall thereafter be made. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged for Transaction Shares in accordance with Section 1.5,
subject to applicable law in the case of Dissenting Shares.
1.17 Further Assurances. At any time and from time to time after the Closing,
at the Buyer's request and without further consideration, Patterson, Stewart
and Keystone each shall promptly execute and deliver such instruments of sale,
transfer, conveyance, assignment and confirmation, and take all such other
action as the Buyer may reasonably request, more effectively to transfer,
convey and assign to the Buyer, and to confirm the Buyer's title to, the
Company Shares and the Keystone Shares, to put the Buyer in actual possession
and operating control of the assets, properties and business of the Company and
the Company Subsidiaries, to assist the Buyer in exercising all rights with
respect thereto and to carry out the purpose and intent of this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule attached hereto (the "Company Disclosure Schedule"). The
Company Disclosure Schedule shall be initialed by the Parties and shall be
arranged in
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sections and paragraphs corresponding to the numbered and lettered sections and
paragraphs contained in this Article II, and the disclosures in any section or
paragraph of the Company Disclosure Schedule shall qualify only the
corresponding section or paragraph in this Article II.
2.1 Organization, Qualification and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation. The Company is duly qualified to
conduct business and is in good standing under the laws of each jurisdiction in
which the nature of its businesses or the ownership or leasing of its
properties requires such qualification, except where the Company's failure to
be so qualified or in such good standing would not have a material adverse
effect on the assets, business, properties or condition (financial or
otherwise) of the Company or any Company Subsidiary and will not adversely
affect the ability of the Buyer to own and operate the Company or any Company
Subsidiary after the Closing. The Company has all requisite corporate power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. The Company has furnished to the Buyer
true and complete copies of its Certificate of Incorporation and By-laws, each
as amended and as in effect on the date hereof. The Company is not in default
under or in violation of any provision of its Certificate of Incorporation or
By-laws.
2.2 Capitalization. At the date hereof, the authorized capital stock of the
Company consists solely of 75,000 Company Shares, of which 50,000 shares are
issued and outstanding and no shares are held in the treasury of the Company,
and 25,000 shares of preferred stock, $.01 par value per share, of which no
shares are issued or outstanding or held in the treasury of the Company. The
Company Disclosure Schedule sets forth a complete and accurate list of all
stockholders of the Company at the date hereof, indicating the number of
Company Shares held by each stockholder. All of the issued and outstanding
Company Shares are, and the shares of Company Common Stock that will be issued
in the TMI Option Exercise and Exchange will be, duly authorized, validly
issued, fully paid, nonassessable and free of all preemptive rights. There are
no outstanding or authorized options, warrants, rights, agreements or
commitments to which the Company is a party or which are binding upon the
Company providing for the issuance, disposition or acquisition of any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock or similar rights with respect to the Company. There are no
agreements, voting trusts, or proxies or understandings with respect to the
voting, or registration under the Securities Act of 1933, as amended (the
"Securities Act"), of any Company Shares. All of the issued and outstanding
Company Shares were issued in compliance with applicable federal and state
securities laws.
2.3 Authority. The Company has all requisite power and authority to execute
and deliver this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement and, subject to the adoption of this
Agreement and the approval of the Merger by a majority of the votes represented
by the outstanding Company Shares entitled to vote on this Agreement and the
Merger (the "Requisite Company Stockholder Approval"), the performance by the
Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of the Company. This Agreement has been
duly and validly executed and delivered by the Company and constitutes a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms. The Indemnification Representative has all requisite
power and authority to execute and deliver the Escrow Agreement and to perform
his obligations and the obligations of the Company Stockholders, the Unvested
TMI Option Holders and Keystone thereunder. The Escrow Agreement has been (or
will be at the Closing) duly executed and delivered by the Indemnification
Representative and constitutes (or will constitute upon execution at the
Closing) a legal, valid and binding obligation of the Indemnification
Representative, the Company Stockholders, the Unvested TMI Option Holders and
Keystone, enforceable against the Indemnification Representative, the Company
Stockholders, the Unvested TMI Option Holders and Keystone in accordance with
its terms.
2.4 Noncontravention. Except for the filing of the Certificate of Merger as
required by the Delaware General Corporation Law, neither the execution and
delivery of this Agreement by the Company and
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Keystone or the execution and delivery of the Escrow Agreement by the
Indemnification Representative, nor the consummation by the Company, Keystone,
the Company Stockholders and the Unvested TMI Option Holders of the
transactions contemplated hereby and thereby, will:
(a) conflict with or violate any provision of the charter or By-laws of
the Company or of any Company Subsidiary (including BriskHeat);
(b) except for (i) the filing of the Certificate of Merger as required by
the Delaware General Corporation Law and (ii) the filing of the
Prospectus/Proxy Statement (as hereinafter defined) with the SEC (as
hereinafter defined) in accordance with the Exchange Act (as hereinafter
defined), require on the part of the Company or any Company Subsidiary
(including BriskHeat) any filing with, or any permit, authorization,
consent or approval of, any court, arbitrational tribunal, administrative
agency or commission or other federal, state, local or foreign governmental
or regulatory authority or agency (a "Governmental Entity"), except where
the failure to make any such filing or to obtain any such permit,
authorization, consent or approval, individually or in the aggregate, will
not have a material adverse effect on the assets, business, properties or
condition (financial or otherwise) of the Company or any Company Subsidiary
and will not adversely affect the ability of the Buyer to own and operate
the Company or any Company Subsidiary after the Closing;
(c) conflict with, result in a breach of, constitute (with or without due
notice or lapse of time or both) a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify or cancel, or require any notice, consent or waiver under, any
contract, lease, sublease, license, sublicense, franchise, permit,
indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest (as hereinafter defined) or other
arrangement to which the Company or any Company Subsidiary (including
BriskHeat) is a party or by which the Company or any Company Subsidiary
(including BriskHeat) is bound or to which any of their assets is subject,
except where any of the foregoing, individually or in the aggregate, will
not have a material adverse effect on the assets, business, properties or
condition (financial or otherwise) of the Company or any Company Subsidiary
and will not adversely affect the ability of the Buyer to own and operate
the Company or any Company Subsidiary after the Closing;
(d) result in the imposition of any material Security Interest upon any
assets of the Company or any Company Subsidiary;
(e) violate any order, writ, injunction or decree applicable to the
Company, any Company Subsidiary (including BriskHeat) or any of their
properties or assets; or
(f) violate any statute, rule or regulation applicable to the Company,
any Company Subsidiary (including BriskHeat) or any of their properties or
assets, except for such violations which will not, individually or in the
aggregate, have a material adverse effect on the assets, business,
properties or condition (financial or otherwise) of the Company or any
Company Subsidiary (including BriskHeat) and will not adversely affect the
ability of the Buyer to own and operate the Company or any Company
Subsidiary after the Closing.
For purposes of this Agreement, "Security Interest" means any mortgage,
pledge, security interest, encumbrance, charge or other lien (whether arising
by contract or by operation of law), other than (i) mechanic's, materialmen's
and similar liens, (ii) liens for taxes not yet due and payable or for taxes
that the taxpayer is contesting in good faith through appropriate proceedings,
(iii) liens arising under worker's compensation, unemployment insurance, social
security, retirement and similar legislation, (iv) liens on goods in transit
incurred pursuant to documentary letters of credit, (v) purchase money liens
and liens securing rental payments under capital lease arrangements, and (vi)
other liens arising in the ordinary course of business consistent with past
custom and practice (including with respect to frequency and amount) ("Ordinary
Course of Business") of the Company or any Company Subsidiary and not incurred
in connection with the borrowing of money.
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2.5 Company Subsidiaries.
(a) The Company Disclosure Schedule sets forth for each Company
Subsidiary (i) its name and jurisdiction of incorporation, (ii) the number
of shares of authorized capital stock of each class of its capital stock,
(iii) the number of issued and outstanding shares of each class of its
capital stock, the names of the holders thereof and the number of shares
held by each such holder, (iv) the number of shares of its capital stock
held in treasury, and (v) its directors and officers. Each Company
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Each
Company Subsidiary is duly qualified to conduct business and is in good
standing under the laws of each jurisdiction in which the nature of its
business or the ownership or leasing of its properties requires such
qualification, except where such Company Subsidiary's failure to be so
qualified or in such good standing would not have a material adverse effect
on the assets, business, properties or condition (financial or otherwise)
of such Company Subsidiary and will not adversely affect the ability of the
Buyer to own and operate such Company Subsidiary after the Closing. Each
Company Subsidiary has all requisite corporate power and authority to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it. The Company has delivered to the Buyer correct and
complete copies of the charter and By-laws of each Company Subsidiary, each
as amended and as in effect on the date hereof. No Company Subsidiary is in
default under or in violation of any provision of its charter or By-laws.
(b) The Company Disclosure Schedule sets forth a complete and accurate
list, at the date hereof, of (i) all stockholders of each Company
Subsidiary, indicating the number of shares of capital stock of such
Company Subsidiary held by each stockholder, and (ii) the holders of the
TMI Options, including the number of shares of TMI Common Stock subject to
each TMI Option and portion of each TMI Option which is exercisable at the
date hereof. All of the issued and outstanding shares of capital stock of
each Company Subsidiary are, and the shares of TMI Common Stock that will
be issued upon exercise of the TMI Options will be, duly authorized,
validly issued, fully paid, nonassessable and free of all preemptive
rights. There are no outstanding or authorized options, warrants, rights,
agreements or commitments to which the Company or any Company Subsidiary is
a party or which are binding on any of them providing for the issuance,
disposition or acquisition of any capital stock of any Company Subsidiary,
other than the TMI Options listed in the Company Disclosure Schedule. There
are no outstanding or authorized stock appreciation, phantom stock or
similar rights with respect to any Company Subsidiary. There are no
agreements, voting trusts, or proxies or understandings with respect to the
voting, or registration under the Securities Act, of any shares of capital
stock of any Company Subsidiary. All of the issued and outstanding shares
of capital stock of each Company Subsidiary were issued in compliance with
applicable federal and state securities laws.
(c) All shares of each Company Subsidiary that are held of record or
owned beneficially by either the Company or any Company Subsidiary are held
or owned free and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state securities laws), claims,
Security Interests, options, warrants, rights, contracts, calls,
commitments, equities and demands. The Company does not control directly or
indirectly or have any direct or indirect equity participation in any
corporation, partnership, trust or other business association which is not
a Company Subsidiary.
2.6 Financial Statements.
(a) The Company has provided to the Buyer the audited consolidated
balance sheets and statements of income, changes in stockholders' equity
and cash flows of TMI for each of the fiscal years ended June 30, 1990,
1991, 1992 and 1993, and the unaudited consolidated balance sheet and
statements of income, changes in stockholders' equity and cash flows of TMI
for the fiscal year ended June 30, 1994. Such financial statements have
been prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods covered thereby, fairly present the financial condition, results of
operations and cash flows of TMI as of the respective dates thereof and for
the periods referred to therein and are consistent with the books and
records of TMI.
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(b) The Company has provided to the Buyer the audited consolidated
balance sheets and statements of income, changes in stockholders' equity
and cash flows of BriskHeat for each of the fiscal years ended June 30,
1990, 1991, 1992, 1993 and 1994. Such financial statements have been
prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby, fairly present the financial condition,
results of operations and cash flows of BriskHeat as of the respective
dates thereof and for the periods referred to therein and are consistent
with the books and records of BriskHeat.
(c) The Company has provided to the Buyer the unaudited consolidated
balance sheets and statements of income, changes in stockholders' equity
and cash flows of the Company for each of the fiscal years ended June 30,
1992, 1993 and 1994. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby, fairly present the financial condition, results of
operations and cash flows of the Company as of the respective dates thereof
and for the periods referred to therein and are consistent with the books
and records of the Company.
(d) The Company has provided to the Buyer the unaudited pro forma
combined balance sheets and statements of income, changes in stockholders'
equity and cash flows of the Company and the Company Subsidiaries
(including TME but excluding BriskHeat) for each of the fiscal years ended
June 30, 1992, 1993 and 1994. Such financial statements have been prepared
in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby, fairly present the financial condition, results of
operations and cash flows of the Company and the Company Subsidiaries
(including TME but excluding BriskHeat) as of the respective dates thereof
and for the periods referred to therein and are consistent with the books
and records of the Company and the Company Subsidiaries (including TME but
excluding BriskHeat).
(e) The Interim Financial Statements referred to in Section 5.5 will be
prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby, will fairly present the financial condition,
results of operations and cash flows of the Company and the Company
Subsidiaries (including TME but excluding BriskHeat) as of the respective
dates thereof and for the periods referred to therein and will be
consistent with the books and records of the Company and the Company
Subsidiaries (including TME but excluding BriskHeat).
(f) The financial statements referred to in Sections 2.6(a), 2.6(b),
2.6(c) and 2.6(d) are attached to the Company Disclosure Schedule.
2.7 Absence of Certain Changes. Since June 30, 1994, (a) there has not been
any material adverse change in the assets, business, condition (financial or
otherwise) or results of operations of the Company or any Company Subsidiary,
nor has there occurred any event or development which could reasonably be
foreseen to result in such a material adverse change in the future, and (b)
neither the Company nor any Company Subsidiary has taken any of the actions set
forth in paragraphs (a) through (n) of Section 5.4.
2.8 Undisclosed Liabilities.
(a) TMI has no liability (whether known or unknown, whether absolute or
contingent, whether liquidated or unliquidated and whether due or to become
due), except for (i) liabilities shown on the consolidated balance sheet of
TMI dated June 30, 1994 referred to in Section 2.6(a) (the "Most Recent TMI
Balance Sheet"), (ii) liabilities which have arisen after June 30, 1994 in
the Ordinary Course of Business and which are not in the aggregate material
and (iii) contractual liabilities incurred in the Ordinary Course of
Business which are not required by GAAP to be reflected on the Most Recent
TMI Balance Sheet and which are not in the aggregate material.
(b) BriskHeat has no liability (whether known or unknown, whether
absolute or contingent, whether liquidated or unliquidated and whether due
or to become due), except for (i) liabilities shown on the consolidated
balance sheet of BriskHeat dated June 30, 1994 referred to in Section
2.6(b) (the "Most Recent BriskHeat Balance Sheet"), (ii) liabilities which
have arisen after June 30, 1994 in the Ordinary Course of Business and
which are not in the aggregate material and (iii) contractual liabilities
incurred in the Ordinary Course of Business which are not required by GAAP
to be reflected on the Most Recent BriskHeat Balance Sheet and which are
not in the aggregate material.
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(c) The Company has no liability (whether known or unknown, whether
absolute or contingent, whether liquidated or unliquidated and whether due
or to become due), except for (i) liabilities shown on the consolidated
balance sheet of the Company dated June 30, 1994 referred to in Section
2.6(c) (the "Most Recent Company Balance Sheet"), (ii) liabilities which
have arisen after June 30, 1994 in the Ordinary Course of Business and
which are not in the aggregate material and (iii) contractual liabilities
incurred in the Ordinary Course of Business which are not required by GAAP
to be reflected on the Most Recent Company Balance Sheet and which are not
in the aggregate material.
(d) Neither the Company nor any Company Subsidiary (including TME but
excluding BriskHeat) has any liability (whether known or unknown, whether
absolute or contingent, whether liquidated or unliquidated and whether due
or to become due), except for (i) liabilities shown on the pro forma
combined balance sheet of the Company and the Company Subsidiaries
(including TME but excluding BriskHeat) dated June 30, 1994 referred to in
Section 2.6(d) (the "Most Recent Combined Balance Sheet"), (ii) liabilities
which have arisen after June 30, 1994 in the Ordinary Course of Business
and which are not in the aggregate material and (iii) contractual
liabilities incurred in the Ordinary Course of Business which are not
required by GAAP to be reflected on the Most Recent Combined Balance Sheet
and which are not in the aggregate material.
2.9 Tax Matters.
(a) The Company and each Company Subsidiary (including BriskHeat) has
timely filed all Tax Returns (as hereinafter defined) that it was required
to file and all such Tax Returns were correct and complete in all material
respects. The Company and each Company Subsidiary (including BriskHeat) has
paid all Taxes (as hereinafter defined) that are shown to be due on any
such Tax Returns. The unpaid Taxes of the Company and each Company
Subsidiary (excluding BriskHeat) for tax periods and portions of tax
periods through June 30, 1994 do not exceed the accruals and reserves for
Taxes set forth on the Most Recent Combined Balance Sheet. The unpaid Taxes
of BriskHeat for tax periods and portions of tax periods through June 30,
1994 do not exceed the accruals and reserves for Taxes set forth on the
Most Recent BriskHeat Balance Sheet. Neither the Company nor any Company
Subsidiary (including BriskHeat) has any actual or potential liability for
any Tax obligation of any taxpayer (including without limitation any
affiliated group of corporations or other entities that included the
Company or any Company Subsidiary (including BriskHeat) during a prior
period) other than the Company and the Company Subsidiaries (including
BriskHeat). All Taxes that the Company or any Company Subsidiary (including
BriskHeat) is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the
proper Governmental Entity. For purposes of this Agreement, "Taxes" means
all taxes, charges, fees, levies or other similar assessments or
liabilities, including without limitation income, gross receipts, ad
valorem, premium, value-added, excise, real property, personal property,
sales, use, transfer, withholding, employment, payroll, profits, license,
lease, service, service use, severance, stamp, occupation, windfall
profits, customs, franchise and other taxes imposed by the United States of
America or any state, local or foreign government, or any agency thereof,
or other political subdivision of the United States or any such government,
and any interest, fines, penalties, assessments or additions to tax
resulting from, attributable to or incurred in connection with any tax or
any contest or dispute thereof. For purposes of this Agreement, "Tax
Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection
with Taxes.
(b) The Company has delivered to the Buyer correct and complete copies of
all income Tax Returns, examination reports and statements of deficiencies
assessed against or agreed to by any of the Company or any Company
Subsidiary (including BriskHeat) for the tax years ended June 30, 1989
through June 30, 1993. The income Tax Returns of the Company and the
Company Subsidiaries (including BriskHeat) have been audited by the
Internal Revenue Service or other Governmental Entity or are closed by the
applicable statute of limitations for all tax years through June 30, 1991.
No examination or audit of any Tax Returns of the Company or any Company
Subsidiary (including BriskHeat) by any Governmental Entity is currently in
progress or, to the Company's Knowledge,
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threatened or contemplated. For purposes of this Agreement, the term
"Company's Knowledge" means the knowledge or awareness of either Patterson
or Stewart after reasonable inquiry of the senior financial, operational,
manufacturing, engineering and marketing management of the Company and each
Company Subsidiary (including BriskHeat).
(c) Neither the Company nor any Company Subsidiary is a "consenting
corporation" within the meaning of Section 341(f) of the Internal Revenue
Code of 1986, as amended (the "Code"), and none of the assets of the
Company or any Company Subsidiary is subject to an election under Section
341(f) of the Code. Neither the Company nor any Company Subsidiary has been
a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(l)(A)(ii) of the Code. Except as set forth in the Company
Disclosure Schedule, neither the Company nor any Company Subsidiary
(including BriskHeat) is a party to or bound by any Tax allocation or
sharing agreement. Neither the Company nor any Company Subsidiary
(including BriskHeat) has waived any statute of limitations with respect to
Taxes or agreed to an extension of time with respect to a Tax assessment or
deficiency.
(d) Except as set forth in the Company Disclosure Schedule, neither the
Company nor any Company Subsidiary (including BriskHeat) is or has ever
been a member of an "affiliated group" of corporations (within the meaning
of Section 1504 of the Code), other than a group of which only the Company
and the Company Subsidiaries (including BriskHeat) are members. Neither the
Company nor any Company Subsidiary (including BriskHeat) has made an
election under Treasury Reg. Section 1.1502-20(g). Neither the Company nor
any Company Subsidiary (including BriskHeat) is or has been required to
make a basis reduction pursuant to Treasury Reg. Section 1.1502-20(b) or
Treasury Reg. Section 1.337(d)-2T(b).
(e) Neither the Company nor any Company Subsidiary has participated in or
cooperated with an international boycott, within the meaning of Section 999
of the Code, nor has the Company nor any Company Subsidiary had operations
which are or may hereafter become reportable under Section 999 of the Code.
There are no liens for Taxes (other than for current Taxes not yet due and
payable) upon the assets of the Company or any Company Subsidiary. Neither
the Company nor any Company Subsidiary has been a "target" or "target
affiliate" as the result of an election or deemed election under Section
338 of the Code. Neither the Company nor any Company Subsidiary has engaged
in any transaction with any member of an "affiliated group" of corporations
(within the meaning of Section 1504 of the Code) of which the Company or
any Company Subsidiary is a member which would be accounted for as a
"deferred intercompany transaction" within the meaning of Treasury
Regulation Section 1.1502-13. Neither the Company nor any Company
Subsidiary is a party to any agreement, contract, arrangement or plan that
has resulted or would result, separately or in the aggregate, in the
payment of any "excess parachute payments" within the meaning of Section
280G of the Code. Neither the Company nor any Company Subsidiary has agreed
to make or is required to make any adjustment under Section 481 of the Code
by reason of a change in accounting method or otherwise. Neither the
Company nor any Company Subsidiary has or has had a permanent establishment
in any foreign country, as defined in any applicable treaty or convention
between the United States and such foreign country. Neither the Company nor
any Company Subsidiary is a party to any joint venture, partnership or
other arrangement or contract that could be treated as a partnership for
federal income purposes.
2.10 Tangible Assets. The Company and each Company Subsidiary owns or leases
all tangible assets reasonably necessary for the conduct of its businesses as
presently conducted and as presently proposed to be conducted. Each such
tangible asset is not subject to any Security Interest, is free from material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear) and is
suitable for the purposes for which it presently is used.
2.11 No Real Property. Neither the Company nor any Company Subsidiary owns
any real property or any interest therein.
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2.12 Intellectual Property.
(a) The Company and each Company Subsidiary owns or has the right to use
all Intellectual Property (as hereinafter defined) used in the operation of
its business or reasonably necessary for the operation of its businesses as
presently proposed to be conducted. Each item of Intellectual Property
owned by or used in the operation of the business of the Company or a
Company Subsidiary at any time since July 1, 1989 will be owned or
available for use by the Surviving Corporation or such Company Subsidiary
on identical terms and conditions immediately following the Closing. The
Company and each Company Subsidiary has taken all reasonable measures to
protect the proprietary nature of each item of Intellectual Property, and
to maintain in confidence all trade secrets and confidential information,
that it owns or uses. To the Company's Knowledge, no other person or entity
has any rights to any of the Intellectual Property owned or used by the
Company or any Company Subsidiary (including BriskHeat) (except pursuant to
agreements or licenses specified in the Company Disclosure Schedule), and
no other person or entity is infringing, violating or misappropriating any
of the Intellectual Property that the Company or any Company Subsidiary
owns or uses. For purposes of this Agreement, "Intellectual Property" means
all (i) patents, patent applications, patent disclosures and all related
continuation, continuation-in-part, divisional, reissue, reexamination,
utility, model, certificate of invention and design patents, patent
applications, registrations and applications for registrations, (ii)
trademarks, service marks, trade dress, logos, trade names and corporate
names and registrations and applications for registration thereof, (iii)
copyrights and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration
thereof, (v) computer software, data and documentation, (vi) trade secrets
and confidential business information, whether patentable or unpatentable
and whether or not reduced to practice, know-how, manufacturing and
production processes and techniques, research and development information,
copyrightable works, financial, marketing and business data, pricing and
cost information, business and marketing plans and customer and supplier
lists and information, (vii) other proprietary rights relating to any of
the foregoing and (viii) copies and tangible embodiments thereof.
(b) None of the activities or business presently conducted by the Company
or any Company Subsidiary (including BriskHeat), or conducted by the
Company or any Company Subsidiary at any time within the six years prior to
the date of this Agreement, infringes or violates in any material respect,
or constitutes a misappropriation of, any Intellectual Property rights of
any other person or entity. Neither the Company nor any Company Subsidiary
(including BriskHeat) has received any complaint, claim or notice alleging
any such infringement, violation or misappropriation.
(c) The Company Disclosure Schedule identifies each patent or
registration which has been issued to the Company or any Company Subsidiary
with respect to any of its Intellectual Property, identifies each pending
patent application or application for registration which the Company or any
Company Subsidiary has made with respect to any of its Intellectual
Property, and identifies each license or other agreement pursuant to which
the Company or any Company Subsidiary has granted any rights to any third
party with respect to any of its Intellectual Property. The Company has
delivered to the Buyer correct and complete copies of all such patents,
registrations, applications, licenses and agreements (as amended to date)
and has made available to the Buyer correct and complete copies of all
other written documentation evidencing ownership of, and any claims or
disputes relating to, each such item. Except as set forth in the Company
Disclosure Schedule, with respect to each item of Intellectual Property
that the Company or any Company Subsidiary owns:
(i) the Company or such Company Subsidiary possesses all right, title
and interest in and to such item;
(ii) such item is not subject to any outstanding judgment, order,
decree, stipulation or injunction; and
(iii) neither the Company nor any Company Subsidiary has agreed to
indemnify any person or entity for or against any infringement,
misappropriation or other conflict with respect to such item.
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(d) The Company Disclosure Schedule identifies each item of Intellectual
Property used in the operation of the business of the Company or any
Company Subsidiary at any time since July 1, 1989, or that the Company or
any Company Subsidiary plans to use in the future, that is owned by a party
other than the Company or such Company Subsidiary. The Company has supplied
the Buyer with correct and complete copies of all licenses, sublicenses or
other agreements (as amended to date) pursuant to which the Company or a
Company Subsidiary uses such Intellectual Property, all of which are listed
in the Company Disclosure Schedule. Except as set forth in the Company
Disclosure Schedule, with respect to each such item of Intellectual
Property:
(i) the license, sublicense or other agreement, covering such item is
legal, valid, binding, enforceable and in full force and effect;
(ii) such license, sublicense or other agreement will continue to be
legal, valid, binding, enforceable and in full force and effect
immediately following the Closing in accordance with the terms thereof
as in effect prior to the Closing;
(iii) no party to such license, sublicense or other agreement is in
breach or default in any material respect, and no event has occurred
which with notice or lapse of time would constitute a breach or default
in any material respect or permit termination, modification or
acceleration thereunder;
(iv) the underlying item of Intellectual Property is not subject to
any outstanding judgment, order, decree, stipulation or injunction; and
(v) neither the Company nor any Company Subsidiary has agreed to
indemnify any person or entity for or against any interference,
infringement, misappropriation or other conflict with respect to such
item.
2.13 Inventory. All inventory of the Company and each Company Subsidiary,
whether or not reflected on the Most Recent Combined Balance Sheet, consists of
a quality and quantity usable and saleable in the Ordinary Course of Business,
except for obsolete items and items of below-standard quality, all of which
have been written-off or written-down to net realizable value on the Most
Recent Combined Balance Sheet. All inventories not written-off have been priced
at the lower of average cost or market. The quantities of each type of
inventory, whether raw materials, work-in-process or finished goods, are not
excessive in the present circumstances of the Company and the Company
Subsidiary.
2.14 Real Property Leases. The Company Disclosure Schedule lists and
describes briefly all real property leased or subleased to the Company or any
Company Subsidiary and lists the term of such lease, any extension and
expansion options, and the rent payable thereunder. The Company has delivered
to the Buyer correct and complete copies of the leases and subleases (as
amended to date) listed in the Company Disclosure Schedule. With respect to
each lease and sublease listed in the Company Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable and in
full force and effect;
(b) the lease or sublease will continue to be legal, valid, binding,
enforceable and in full force and effect immediately following the Closing
in accordance with the terms thereof as in effect prior to the Closing;
(c) no party to the lease or sublease is in breach or default in any
material respect, and no event has occurred which, with notice or lapse of
time, would constitute a breach or default in any material respect or
permit termination, modification, or acceleration thereunder;
(d) there are no disputes, oral agreements or forbearance programs in
effect as to the lease or sublease;
(e) neither the Company nor any Company Subsidiary has assigned,
transferred, conveyed, mortgaged, deeded in trust or encumbered any
interest in the leasehold or subleasehold;
(f) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said
facilities; and
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(g) to the Company's Knowledge, but with no independent investigation,
the owner of the facility leased or subleased has good and clear record and
marketable title to the parcel of real property, free and clear of any
Security Interest, easement, covenant or other restriction, except for
recorded easements, covenants, and other restrictions which do not impair
the use, occupancy or value of such parcel as currently used by the Company
or any Company Subsidiary, occupancy or value of the property subject
thereto.
2.15 Contracts. The Company Disclosure Schedule lists the following written
arrangements (including without limitation written agreements) to which the
Company or any Company Subsidiary is a party:
(a) any written arrangement (or group of related written arrangements)
for the lease of personal property from or to third parties providing for
lease payments in excess of $5,000 per annum;
(b) any written arrangement (or group of related written arrangements)
for the purchase or sale of raw materials, commodities, supplies, products
or other personal property or for the furnishing or receipt of services (i)
which calls for performance over a period of more than one year, (ii) which
involves more than the sum of $10,000, or (iii) in which the Company or any
Company Subsidiary has granted manufacturing rights, "most favored nation"
pricing provisions or marketing or distribution rights relating to any
products or territory or has agreed to purchase a minimum quantity of goods
or services or has agreed to purchase goods or services exclusively from a
certain party;
(c) any written arrangement establishing a partnership or joint venture;
(d) any written arrangement (or group of related written arrangements)
under which it has created, incurred, assumed, or guaranteed (or may
create, incur, assume, or guarantee) indebtedness (including capitalized
lease obligations) involving more than $5,000 or under which it has imposed
(or may impose) a Security Interest on any of its assets, tangible or
intangible;
(e) any written arrangement concerning confidentiality or non-
competition;
(f) any written arrangement involving any of the Company Stockholders or
their affiliates, as defined in Rule 12b-2 under the Exchange Act
("Affiliates");
(g) any written arrangement under which the consequences of a default or
termination could have a material adverse effect on the assets, business,
condition (financial or otherwise), results of operations or future
prospects of the Company or any Company Subsidiary;
(h) any written arrangement under which the Company or any Company
Subsidiary has any liability or obligation to pay any fees or commissions
to any broker, finder or agent with respect to the transactions
contemplated by this Agreement; and
(i) any other written arrangement (or group of related written
arrangements) either involving more than $5,000 or not entered into in the
Ordinary Course of Business.
The Company has delivered to the Buyer a correct and complete copy of each
written arrangement (as amended to date) listed in the Company Disclosure
Schedule. With respect to each written arrangement so listed: (i) the written
arrangement is legal, valid, binding and enforceable and in full force and
effect; (ii) the written arrangement will continue to be legal, valid, binding
and enforceable and in full force and effect immediately following the Closing
in accordance with the terms thereof as in effect prior to the Closing; and
(iii) no party is in breach or default in any material respect, and no event
has occurred which with notice or lapse of time would constitute a breach or
default in any material respect or permit termination, modification, or
acceleration, under the written arrangement. Neither the Company nor any
Company Subsidiary is a party to any oral contract, agreement or other
arrangement which, if reduced to written form, would be required to be listed
in the Company Disclosure Schedule under the terms of this Section 2.15.
2.16 Accounts Receivable. All accounts receivable of the Company and the
Company Subsidiaries reflected on the Most Recent Combined Balance Sheet are
valid receivables subject to no setoffs or counterclaims and are current and
collectible (within 90 days after the date on which it first became due and
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payable), net of the applicable reserve for bad debts shown on the Most Recent
Combined Balance Sheet. All accounts receivable reflected in the financial or
accounting records of the Company and the Company Subsidiaries that have arisen
since June 30, 1994 are valid receivables subject to no setoffs or
counterclaims and are collectible, net of a reserve for bad debts in an amount
proportionate to the reserve shown on the Most Recent Combined Balance Sheet.
2.17 Powers of Attorney. There are no outstanding powers of attorney executed
on behalf of the Company or any Company Subsidiary.
2.18 Insurance. The Company Disclosure Schedule sets forth the following
information with respect to each insurance policy (including fire, theft,
casualty, general liability, workers compensation, business interruption,
environmental, product liability and automobile insurance policies and bond and
surety arrangements) to which the Company or any Company Subsidiary has been a
party, a named insured, or otherwise the beneficiary of coverage at any time
within the past five years:
(a) the name of the insurer, the name of the policyholder and the name of
each covered insured;
(b) the policy number and the period of coverage;
(c) the scope (including an indication of whether the coverage was on a
claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and operate) of
coverage; and
(d) a description of any retroactive premium adjustments or other loss-
sharing arrangements.
Except as set forth in the Company Disclosure Schedule, (i) each such insurance
policy is enforceable and in full force and effect; (ii) such policy will
continue to be enforceable and in full force and effect immediately following
the Closing in accordance with the terms thereof as in effect prior to the
Closing; (iii) neither the Company nor any Company Subsidiary is in breach or
default in any material respect (including with respect to the payment of
premiums or the giving of notices) under such policy, and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default in any material respect or permit termination, modification or
acceleration, under such policy; and (iv) neither the Company nor any Company
Subsidiary has received any notice from the insurer disclaiming coverage or
reserving rights with respect to a particular claim or such policy in general.
Neither the Company nor any Company Subsidiary has incurred any loss, damage,
expense or liability covered by any such insurance policy for which it has not
properly asserted a claim under such policy.
2.19 Litigation. The Company Disclosure Schedule identifies, and contains a
brief description of, (a) any unsatisfied judgment, order, decree, stipulation
or injunction and (b) any claim, complaint, action, suit, proceeding, hearing
or investigation of or in any Governmental Entity or before any arbitrator to
which the Company or any Company Subsidiary (including BriskHeat) is a party
or, to the Company's Knowledge, is threatened to be made a party. None of the
complaints, actions, suits, proceedings, hearings or investigations set forth
in the Company Disclosure Schedule is, individually or in the aggregate, likely
to have a material adverse effect on the assets, business, condition (financial
or otherwise), results of operations or future prospects of the Company or any
Company Subsidiary (including BriskHeat).
2.20 Product Warranty. No product manufactured, sold, leased or delivered by
the Company or any Company Subsidiary is subject to any guaranty, warranty,
right of return or other indemnity beyond the applicable standard terms and
conditions of sale or lease, which are set forth in the Company Disclosure
Schedule. The Company Disclosure Schedule sets forth the aggregate expenses
incurred by the Company and the Company Subsidiaries in fulfilling their
obligations under their guaranty, warranty, right of return and indemnity
provisions during each of the fiscal years since July 1, 1989; and, to the
Company's Knowledge, such expenses will not significantly increase as a
percentage of sales in the future.
2.21 Employees. The Company Disclosure Schedule contains a list of all
employees of the Company and each Company Subsidiary, along with the position
and the annual rate of compensation of each such
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person. Each such employee has entered into a confidentiality/assignment of
inventions agreement with the Company or a Company Subsidiary, a copy of which
has previously been delivered to the Buyer. To the Company's Knowledge, no key
employee or group of employees has any plans to terminate employment with the
Company or any Company Subsidiary. Neither the Company nor any Company
Subsidiary is a party to or bound by any collective bargaining agreement, nor
has any of them experienced any strikes, grievances, claims of unfair labor
practices or other collective bargaining disputes. To the Company's Knowledge,
there is no organizational effort presently being made or threatened by or on
behalf of any labor union with respect to employees of the Company or any
Company Subsidiary.
2.22 Employee Benefits.
(a) The Company Disclosure Schedule contains a complete and accurate list
of all Employee Benefit Plans (as hereinafter defined) maintained, or
contributed to, by the Company, any Company Subsidiary or any ERISA
Affiliate (as hereinafter defined). For purposes of this Agreement,
"Employee Benefit Plan" means any "employee pension benefit plan" (as
defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")), any "employee welfare benefit plan" (as
defined in Section 3(1) of ERISA), and any other written or oral plan,
agreement or arrangement involving direct or indirect compensation,
including without limitation insurance coverage, severance benefits,
disability benefits, deferred compensation, bonuses, stock options, stock
purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation. For purposes of this
Agreement, "ERISA Affiliate" means any entity which is a member of (i) a
controlled group of corporations (as defined in Section 414(b) of the
Code), (ii) a group of trades or businesses under common control (as
defined in Section 414(c) of the Code), or (iii) an affiliated service
group (as defined under Section 414(m) of the Code or the regulations under
Section 414(o) of the Code), any of which includes the Company or a Company
Subsidiary (including BriskHeat). Complete and accurate copies of (i) all
Employee Benefit Plans which have been reduced to writing, (ii) written
summaries of all unwritten Employee Benefit Plans, (iii) all related trust
agreements, insurance contracts and summary plan descriptions, and (iv) all
annual reports filed on IRS Form 5500, 5500C or 5500R for the last five
plan years for each Employee Benefit Plan, have been delivered to the
Buyer. Each Employee Benefit Plan has been administered in all material
respects in accordance with its terms and each of the Company, the Company
Subsidiaries (including BriskHeat) and the ERISA Affiliates has in all
material respects met its obligations with respect to such Employee Benefit
Plan and has made all required contributions thereto. The Company, the
Company Subsidiaries (including BriskHeat) and all Employee Benefit Plans
are in compliance in all material respects with the currently applicable
provisions of ERISA and the Code and the regulations thereunder.
(b) Except as set forth in the Company Disclosure Schedule, there are no
investigations by any Governmental Entity, termination proceedings or other
claims (except claims for benefits payable in the normal operation of the
Employee Benefit Plans and proceedings with respect to qualified domestic
relations orders), suits or proceedings against or involving any Employee
Benefit Plan or asserting any rights or claims to benefits under any
Employee Benefit Plan that could give rise to any material liability.
(c) Except as set forth in the Company Disclosure Schedule, all the
Employee Benefit Plans that are intended to be qualified under Section
401(a) of the Code have received determination letters from the Internal
Revenue Service to the effect that such Employee Benefit Plans are
qualified and the plans and the trusts related thereto are exempt from
federal income taxes under Sections 401(a) and 501(a), respectively, of the
Code, no such determination letter has been revoked and revocation has not
been threatened, and no such Employee Benefit Plan has been amended since
the date of its most recent determination letter or application therefor in
any respect, and no act or omission has occurred, that would adversely
affect its qualification or materially increase its cost.
(d) Neither the Company, any Company Subsidiary (including BriskHeat) nor
any ERISA Affiliate has ever maintained an Employee Benefit Plan subject to
Section 412 of the Code or Title IV of ERISA.
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(e) At no time has the Company, any Company Subsidiary (including
BriskHeat) or any ERISA Affiliate been obligated to contribute to any
"multi-employer plan" (as defined in Section 4001(a)(3) of ERISA).
(f) Except as set forth in the Company Disclosure Schedule, there are no
unfunded obligations under any Employee Benefit Plan providing benefits
after termination or employment to any employee of the Company or any
Company Subsidiary (including BriskHeat) (or to any beneficiary of any such
employee), including but not limited to retiree health coverage and
deferred compensation, but excluding continuation of health coverage
required to be continued under Section 4980B of the Code and insurance
conversion privileges under state law.
(g) Except as set forth in the Company Disclosure Schedule, no act or
omission has occurred and no condition exists with respect to any Employee
Benefit Plan maintained by the Company, any of its Affiliates or any ERISA
Affiliate that would subject the Company, any Company Subsidiary (including
BriskHeat) or any ERISA Affiliate to any material fine, penalty, tax or
liability of any kind imposed under ERISA or the Code.
(h) Except as set forth in the Company Disclosure Schedule, no Employee
Benefit Plan is funded by, associated with, or related to a "voluntary
employee's beneficiary association" within the meaning of Section 501(c)(9)
of the Code.
(i) Except as set forth in the Company Disclosure Schedule, no Employee
Benefit Plan, plan documentation or agreement, summary plan description or
other written communication distributed generally to employees by its terms
prohibits the Company from amending or terminating any such Employee
Benefit Plan.
(j) The Company Disclosure Schedule discloses each: (i) agreement with
any director, executive officer or other key employee of the Company or any
Company Subsidiary (A) the benefits of which are contingent, or the terms
of which are materially altered, upon the occurrence of a transaction
involving the Company or any Company Subsidiary of the nature of any of the
transactions contemplated by this Agreement, (B) providing any term of
employment or compensation guarantee or (C) providing severance benefits or
other benefits after the termination of employment of such director,
executive officer or key employee; (ii) agreement, plan or arrangement
under which any person may receive payments from the Company or any Company
Subsidiary that may be subject to the tax imposed by Section 4999 of the
Code or included in the determination of such person's "parachute payment"
under Section 280G of the Code; and (iii) agreement or plan binding the
Company or any Company Subsidiary, including without limitation any stock
option plan, stock appreciation right plan, restricted stock plan, stock
purchase plan, severance benefit plan, or any Employee Benefit Plan, any of
the benefits of which will be increased, or the vesting of the 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.
2.23 Environmental Matters.
(a) Except as set forth in the Company Disclosure Schedule, the Company
and each Company Subsidiary (including BriskHeat) has complied in all
material respects with all applicable Environmental Laws (as hereinafter
defined). There is no pending or, to the Company's Knowledge, threatened
civil or criminal litigation, written notice of violation, formal
administrative proceeding, or investigation, inquiry or information request
by any Governmental Entity, relating to any Environmental Law involving the
Company or any Company Subsidiary (including BriskHeat). For purposes of
this Agreement, "Environmental Law" means any federal, state or local law,
statute, rule or regulation or the common law relating to the environment
or occupational health and safety, including without limitation any
statute, regulation or order pertaining to (i) treatment, storage,
disposal, generation and transportation of industrial, toxic or hazardous
substances or solid or hazardous waste; (ii) air, water and noise
pollution; (iii) groundwater and soil contamination; (iv) the release or
threatened release into the environment of industrial, toxic or hazardous
substances, or solid or hazardous waste, including without
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limitation emissions, discharges, injections, spills, escapes or dumping of
pollutants, contaminants or chemicals; (v) the protection of wildlife,
marine sanctuaries and wetlands, including without limitation all
endangered and threatened species; (vi) storage tanks, vessels and
containers; (vii) underground and other storage tanks or vessels,
abandoned, disposed or discarded barrels, containers and other closed
receptacles; (viii) health and safety of employees and other persons; and
(ix) manufacture, processing, use, distribution, treatment, storage,
disposal, transportation or handling of pollutants, contaminants, chemicals
or industrial, toxic or hazardous substances or oil or petroleum products
or solid or hazardous waste. As used above, the terms "release" and
"environment" shall have the meaning set forth in the federal Comprehensive
Environmental Compensation, Liability and Response Act of 1980 ("CERCLA").
(b) Except as set forth in the Company Disclosure Schedule, there have
been no releases of any Materials of Environmental Concern (as hereinafter
defined) into the environment at any parcel of real property or any
facility formerly or currently owned, operated, leased or controlled by the
Company or any Company Subsidiary (including BriskHeat). With respect to
any such releases of Materials of Environmental Concern, the Company or
such Company Subsidiary (including BriskHeat) has given all required
notices to Governmental Entities (copies of which have been provided to the
Buyer). To the Company's Knowledge, there have been no releases of
Materials of Environmental Concern at parcels of real property or
facilities other than those owned, operated, leased or controlled by the
Company or any Company Subsidiary (including BriskHeat) that could
reasonably be expected to have an impact on the real property or facilities
owned, operated, leased or controlled by the Company or any Company
Subsidiary (including BriskHeat). For purposes of this Agreement,
"Materials of Environmental Concern" means any chemicals, pollutants or
contaminants, hazardous substances (as such term is defined under CERCLA),
solid wastes and hazardous wastes (as such terms are defined under the
federal Resources Conservation and Recovery Act), toxic materials, oil or
petroleum and petroleum products.
(c) Set forth in the Company Disclosure Schedule is a list of all
environmental reports, investigations and audits (whether conducted by or
on behalf of the Company or any Company Subsidiary (including BriskHeat) or
a third party, and whether done at the initiative of the Company or any
Company Subsidiary (including BriskHeat) or directed by a Governmental
Entity or other third party) relating to premises currently or previously
owned or operated by the Company or any Company Subsidiary (including
BriskHeat). Complete and accurate copies of each such report, or the
results of each such investigation or audit, have been provided to the
Buyer.
(d) Set forth in the Company Disclosure Schedule is a list of all of the
solid and hazardous waste transporters and treatment, storage and disposal
facilities that have been utilized by the Company or any Company Subsidiary
(including BriskHeat). To the Company's Knowledge, no such transporter or
facility has any material environmental liability.
2.24 Legal Compliance. The Company and each Company Subsidiary, and the
conduct and operations of their respective businesses, are in compliance in all
material respects with each law (including rules and regulations thereunder) of
any federal, state, local or foreign government, or any Governmental Entity,
which (a) affects or relates to this Agreement or the transactions contemplated
hereby or (b) is applicable to the Company or such Company Subsidiary or
business, except for any violation of or default under a law referred to in the
immediately preceding clause (b) which reasonably may be expected not to have a
material adverse effect on the assets, business, condition (financial or
otherwise), results of operations or future prospects of the Company or such
Company Subsidiary.
2.25 Permits. The Company Disclosure Schedule sets forth a list of all
permits, licenses, registrations, certificates, orders or approvals from any
Governmental Entity (including without limitation those issued or required
under Environmental Laws and those relating to the occupancy or use of owned or
leased real property) ("Permits") issued to or held by the Company or any
Company Subsidiary. Such listed Permits are the only Permits that are required
for the Company and the Company Subsidiaries to conduct their respective
businesses as presently conducted or as proposed to be conducted, except for
those the absence of which
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would not have any material adverse effect on the assets, business, condition
(financial or otherwise), results of operations or future prospects of the
Company and the Company Subsidiaries. Each such Permit is in full force and
effect and, to the Company's Knowledge, no suspension or cancellation of such
Permit is threatened and there is no basis for believing that such Permit will
not be renewable upon expiration. Except as set forth in the Company Disclosure
Schedule, each such Permit will continue in full force and effect following the
Closing.
2.26 Certain Business Relationships.
(a) Except as set forth in the Company Disclosure Schedule, no Affiliate
of the Company or of any Company Subsidiary (including BriskHeat): (i) owns
any property or right, tangible or intangible, which is used in the
business of the Company or any Company Subsidiary (including BriskHeat);
(ii) has any claim or cause of action against the Company or any Company
Subsidiary (including BriskHeat); or (iii) owes any money to the Company or
any Company Subsidiary (including BriskHeat).
(b) The business and operations of BriskHeat are unrelated to the
business and operations of TMI and TME.
(c) The Company is a holding company and has no assets other than cash
and its shares of TMI Common Stock and BriskHeat Common Stock.
2.27 Brokers' Fees. Neither the Company, any Company Subsidiary nor any of
their Affiliates has any liability or obligation to pay any fees or commissions
to any broker, finder or agent, other than Needham & Company and IBK
Corporation pursuant to the agreements listed on the Company Disclosure
Schedule, with respect to the transactions contemplated by this Agreement. All
fees to be paid to Needham & Company and IBK Corporation will be paid by the
Buyer.
2.28 Books and Records. The minute books and other similar records of the
Company and each Company Subsidiary contain true and complete records of all
actions taken at any meetings of the Company's or such Company Subsidiary's
stockholders, Board of Directors or any committee thereof and of all written
consents executed in lieu of the holding of any such meeting. The books and
records of the Company and each Company Subsidiary accurately reflect in all
material respects the assets, liabilities, business, condition (financial or
otherwise) and results of operations of the Company or such Company Subsidiary
and have been maintained in accordance with good business and bookkeeping
practices.
2.29 Customers and Suppliers. To the Company's Knowledge, no unfilled
customer order or commitment obligating the Company or any Company Subsidiary
to process, manufacture or deliver products or perform services will result in
a loss to the Company or any Company Subsidiary upon completion of performance.
No purchase order or commitment of the Company or any Company Subsidiary is in
excess of normal requirements, nor are prices provided therein in excess of
current market prices for the products or services to be provided thereunder.
No material supplier of the Company or any Company Subsidiary has indicated
within the past year that it will stop, or decrease the rate of, supplying
materials, products, or services to them and no material customer of the
Company or any Company Subsidiary has indicated within the past year that it
will stop, or decrease the rate of, buying materials, products or services from
them, the cessation of which would, individually or in the aggregate, have a
material adverse effect on the assets, business, properties or condition
(financial or otherwise) of the Company or any Company Subsidiary or adversely
affect the ability of the Buyer to own and operate Company or any Company
Subsidiary after the Closing. The Company Disclosure Schedule sets forth a list
of (a) each customer that accounted for more than 1% of the consolidated
revenues of TMI during the fiscal year ended June 30, 1994 and the amount of
revenues accounted for by such customer during each such period and (b) each
supplier that is the sole supplier of any significant product or component to
the Company or a Company Subsidiary.
2.30 Banking Facilities. The Company Disclosure Schedule sets forth a true,
correct and complete list of:
(a) each bank, savings and loan or similar financial institution at which
the Company or any Company Subsidiary has an account, safety deposit box
line of credit or credit facility and the numbers
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of the accounts or safety deposit boxes maintained by the Company or any
Company Subsidiary thereat and details, including terms, of any line of
credit or credit facility; and
(b) the names of all persons authorized to draw on each such account or
to have access to any such safety deposit box facility, together with a
description of the authority (and conditions thereof, if any) of each such
person with respect thereto.
2.31 Powers of Attorney. Except as set forth on the Company Disclosure
Schedule, neither the Company nor any Company Subsidiary has any general or
special powers of attorney outstanding (whether as grantor or grantee thereof)
or has any obligation or liability (whether actual, accrued, accruing,
contingent or otherwise) as guarantor, surety, co-signer, endorser, co-maker,
indemnitor or otherwise in respect of the obligation of any person,
corporation, partnership, joint venture, association, organization or other
entity, except as endorser or maker of checks or letters of credit,
respectively, endorsed or made in the Ordinary Course of Business.
2.32 Pooling. To the Company's Knowledge, neither the Company, any Company
Subsidiary (including BriskHeat) nor any of their Affiliates has, through the
date of this Agreement, taken or agreed to take any action that would prevent
the Buyer from accounting for the transactions contemplated by this Agreement
as a "pooling of interests" in accordance with GAAP and applicable SEC rules.
2.33 IBM License Agreement. For the one-year period following the Closing
Date, royalties payable by the Company, TME and/or the Buyer to International
Business Machines Corporation ("IBM") pursuant to the Agreement dated as of
October 1, 1993 between IBM and TME, in respect of the use by the Company
and/or TME of IBM's patents licensed thereunder, will not exceed $400,000 based
on sales of $35,000,000 of central processing units and PC-compatible systems
when calculated in accordance with the method of calculating royalty payments
described in the letter of Michael Stewart dated September 22, 1994 to Frank W.
Casey of IBM and attached to the Company Disclosure Schedule.
2.34 Disclosure. No representation or warranty by the Company contained in
this Agreement, and no statement contained in the Company Disclosure Schedule
or any other document, certificate or other instrument delivered or to be
delivered by or on behalf of the Company or any Company Subsidiary (including
BriskHeat) pursuant to this Agreement, and no other statement made by the
Company or any Company Subsidiary (including BriskHeat) or any of their
representatives in connection with this Agreement, contains or will contain any
untrue statement of a material fact or omit or will omit to state any material
fact necessary, in light of the circumstances under which it was or will be
made, in order to make the statements herein or therein not misleading. To the
Company's Knowledge, the Company has disclosed to the Buyer all material
information relating to the business of the Company or any Company Subsidiary
and the transactions contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF KEYSTONE
Keystone represents and warrants to the Buyer that the statements contained
in this Article III are true and correct.
3.1 Organization, Qualification and Corporate Power. Keystone is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation. Keystone is duly qualified to conduct
business and is in good standing under the laws of each jurisdiction in which
the nature of its businesses or the ownership or leasing of its properties
requires such qualification, except where Keystone's failure to be so qualified
or in such good standing would not have a material adverse effect on the
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assets, business, properties or condition (financial or otherwise) of Keystone.
Keystone has all requisite corporate power and authority to carry on the
businesses in which it is engaged and to own and use the properties owned and
used by it.
3.2 Authority. Keystone has all requisite power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. The execution,
delivery and performance of this Agreement by Keystone and the consummation by
Keystone of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Keystone. This
Agreement has been duly and validly executed and delivered by Keystone and
constitutes a valid and binding obligation of Keystone, enforceable against
Keystone in accordance with its terms. The Escrow Agreement constitutes (or
will constitute upon execution at the Closing) a legal, valid and binding
obligation of Keystone, enforceable against Keystone in accordance with its
terms.
3.3 Noncontravention. Neither the execution and delivery of this Agreement by
Keystone, nor the consummation by Keystone of the transactions contemplated
hereby, will:
(a) conflict with or violate any provision of the charter or By-laws of
Keystone;
(b) require on the part of Keystone any filing with, or any permit,
authorization, consent or approval of, any Governmental Entity, except
where the failure to make any such filing or to obtain any such permit,
authorization, consent or approval, individually or in the aggregate, will
not have a material adverse effect on the assets, business, properties or
condition (financial or otherwise) of the Company or any Company Subsidiary
and will not adversely affect the ability of the Buyer to own and operate
the Company or any Company Subsidiary after the Closing;
(c) conflict with, result in a breach of, constitute (with or without due
notice or lapse of time or both) a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify or cancel, or require any notice, consent or waiver under, any
contract, lease, sublease, license, sublicense, franchise, permit,
indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest or other arrangement to which Keystone is a
party or by which Keystone is bound or to which any of its assets is
subject, except where any of the foregoing, individually or in the
aggregate, will not have a material adverse effect on the assets, business,
properties or condition (financial or otherwise) of the Company or any
Company Subsidiary and will not adversely affect the ability of the Buyer
to own and operate the Company or any Company Subsidiary after the Closing;
(d) result in the imposition of any material Security Interest upon any
assets of the Company or any Company Subsidiary;
(e) violate any order, writ, injunction or decree applicable to Keystone
or any of its properties or assets; or
(f) violate any statute, rule or regulation applicable to Keystone or any
of its properties or assets, except for such violations which will not,
individually or in the aggregate, have a material adverse effect on the
assets, business, properties or condition (financial or otherwise) of the
Company or any Company Subsidiary (including BriskHeat) and will not
adversely affect the ability of the Buyer to own and operate the Company or
any Company Subsidiary after the Closing.
3.4 Title to the Keystone Shares. Keystone has good, valid and marketable
title to the Keystone Shares, free and clear of all liens, encumbrances,
claims, pledges, adverse claims and charges, covenants, conditions,
restrictions, voting trust arrangements and options of any nature whatsoever.
Upon consummation of the Buyer's purchase of the Keystone Shares contemplated
hereby, the Buyer will acquire from Keystone good, valid and marketable title
to such Keystone Shares, free and clear of all liens, encumbrances, claims,
pledges, adverse claims and charges, covenants, conditions, restrictions,
voting trust arrangements and options of any nature whatsoever.
3.5 Certain Business Relationships. Neither Keystone nor any of its
Affiliates: (i) owns any property or right, tangible or intangible, which is
used in the business of the Company or any Company Subsidiary;
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(ii) has any claim or cause of action against the Company or any Company
Subsidiary; or (iii) owes any money to the Company or any Company Subsidiary.
3.6 Brokers' Fees. Neither Keystone nor any of its Affiliates has any
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
3.7 Pooling. To Keystone's knowledge, neither Keystone nor any of its
Affiliates has, through the date of this Agreement, taken or agreed to take any
action that would prevent the Buyer from accounting for the transactions
contemplated by this Agreement as a "pooling of interests" in accordance with
GAAP and applicable SEC rules.
3.8 Disclosure. No representation or warranty by Keystone contained in this
Agreement, and no statement contained in any other document, certificate or
other instrument delivered or to be delivered by or on behalf of Keystone
pursuant to this Agreement, and no other statement made by Keystone or any of
its representatives in connection with this Agreement, contains or will contain
any untrue statement of a material fact or omit or will omit to state any
material fact necessary, in light of the circumstances under which it was or
will be made, in order to make the statements herein or therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants to
the Company and Keystone that the statements contained in this Article IV are
true and correct, except as set forth in the disclosure schedule attached
hereto (the "Buyer Disclosure Schedule"):
4.1 Organization. The Buyer and each Buyer Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation. The Buyer and each Buyer Subsidiary is duly qualified to
conduct business and is in good standing under the laws of each jurisdiction in
which the nature of its business or the ownership or leasing of its properties
requires such qualification, except where the failure so to qualify or to be in
such good standing would not have a material adverse effect on the assets,
business, properties or condition (financial or otherwise) of the Buyer and the
Buyer Subsidiaries taken as a whole. The Buyer has furnished to the Company
true and complete copies of the Buyer's Certificate of Incorporation and By-
laws, each as amended and as in effect on the date hereof. The Buyer is not in
default under or in violation of any provision of its Certificate of
Incorporation or By-laws. The Transitory Subsidiary was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement and has
engaged in no other business activities.
4.2 Capitalization. The authorized capital stock of the Buyer consists solely
of 25,000,000 shares of Buyer Common Stock and 12,500,000 shares of Preferred
Stock, $.40 par value per share. As of June 30, 1994, (i) 9,811,000 shares of
Buyer Common Stock were issued and outstanding and no shares were held in
treasury, (ii) no shares of Preferred Stock were issued or outstanding, (iii)
an aggregate of 1,119,860 shares of Buyer Common Stock were reserved for future
issuance pursuant to stock options granted and outstanding under the Buyer's
1986 Incentive Stock Option Plan, 1986 Supplemental Stock Option Plan and 1990
Outside Directors' Stock Option Plan, and (iv) 250,000 shares of Buyer Common
Stock were reserved for future issuance under the Buyer's 1993 Employee Stock
Purchase Plan. There are no outstanding or authorized options, warrants,
rights, agreements or commitments to which the Buyer is a party or which are
binding upon the Buyer providing for the issuance of any of its capital stock,
other than as described in the preceding sentence or disclosed in the Buyer
Reports (as hereinafter defined). All of the Transaction Shares will be, when
issued in accordance with this Agreement, duly authorized, validly issued,
fully paid and nonassessable.
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4.3 Authority. Each of the Buyer and the Transitory Subsidiary has all
requisite power and authority to execute and deliver this Agreement and the
Escrow Agreement and to perform its respective obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Escrow
Agreement and, subject to the adoption of this Agreement and the approval of
the Merger by a majority of the votes represented by the outstanding shares of
Buyer Common Stock entitled to vote on this Agreement and the Merger (the
"Requisite Buyer Stockholder Approval"), the performance by the Buyer and the
Transitory Subsidiary of this Agreement and the Escrow Agreement and the
consummation by the Buyer and the Transitory Subsidiary of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of the Buyer and the Transitory
Subsidiary. This Agreement has been duly and validly executed and delivered by
the Buyer and the Transitory Subsidiary and constitutes a valid and binding
obligation of the Buyer and the Transitory Subsidiary, enforceable against them
in accordance with its terms. The Escrow Agreement has been (or will be at the
Closing) duly executed and delivered by the Buyer and constitutes (or will
constitute upon execution at the Closing) a legal, valid and binding obligation
of the Buyer, enforceable against the Buyer in accordance with its terms.
4.4 Noncontravention. Neither the execution and delivery of this Agreement or
the Escrow Agreement by the Buyer or the Transitory Subsidiary, nor the
consummation by the Buyer or the Transitory Subsidiary of the transactions
contemplated hereby and thereby, will:
(a) conflict or violate any provision of the charter or By-laws of the
Buyer or the Transitory Subsidiary;
(b) except for (i) the filing of the Certificate of Merger as required by
the Delaware General Corporation Law, (ii) the filing of the
Prospectus/Proxy Statement with the SEC in accordance with the Exchange Act
and (iii) the filing of the Form S-4 with the SEC in accordance with the
Securities Act, require on the part of the Buyer or the Transitory
Subsidiary any filing with, or permit, authorization, consent or approval
of, any Governmental Entity, except where the failure to make any such
filing or to obtain any such permit, authorization, consent or approval,
individually or in the aggregate, will not have a material adverse effect
on the assets, business, properties or condition (financial or otherwise)
of the Buyer;
(c) conflict with, result in breach of, constitute (with or without due
notice or lapse of time or both) a default under, result in the
acceleration of, create in any party any right to accelerate, terminate,
modify or cancel, or require any notice, consent or waiver under, any
contract, lease, sublease, license, sublicense, franchise, permit,
indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest or other arrangement to which the Buyer or
the Transitory Subsidiary is a party or by which either is bound or to
which any of their assets are subject, except where any of the foregoing,
individually or in the aggregate, will not have a material adverse effect
on the assets, business, properties or condition (financial or otherwise)
of the Company and except for the required consent from State Street Bank
and Trust Company;
(d) violate any order, writ, injunction or decree applicable to the Buyer
or the Transitory Subsidiary or any of their properties or assets; or
(e) violate any statute, rule or regulation applicable to the Buyer or
the Transitory Subsidiary or any of their properties or assets, except for
such violations which will not, individually or in the aggregate, have a
material adverse effect on the assets, business, properties or condition
(financial or otherwise) of the Buyer.
4.5 Reports and Financial Statements. The Buyer has previously furnished to
the Company complete and accurate copies, as amended or supplemented, of its
(i) Annual Report on Form 10-K for the fiscal year ended June 30, 1994,
together with all exhibits thereto, together with Amendment No. 1 thereto on
Form 10-K/A, as filed with the Securities and Exchange Commission (the "SEC"),
(ii) proxy statement relating to the Annual Meeting of Stockholders held on
January 28, 1994 and (iii) audited financial statements as of and for the
periods ended June 30, 1994 (such reports and other filings, together with any
amendments or supplements thereto, are collectively referred to herein as the
"Buyer Reports"). As of their respective dates,
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the Buyer Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The audited financial statements of the Buyer
included in the Buyer Reports (i) comply as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, (ii) have been prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered thereby
(except as may be indicated therein or in the notes thereto), (iii) fairly
present the consolidated financial condition, results of operations and cash
flows of the Buyer as of the respective dates thereof and for the periods
referred to therein, and (iv) are consistent with the books and records of the
Buyer.
4.6 Absence of Material Adverse Change. Since June 30, 1994, there has not
been any material adverse change in the assets, business, financial condition
or results of operations of the Buyer and the Buyer Subsidiaries taken as a
whole (a "Buyer Material Adverse Change"); provided, however, that the events
specified in the Buyer Disclosure Schedule under the caption "Events Deemed not
to Constitute a Buyer Material Adverse Change" shall be deemed not to
constitute a Buyer Material Adverse Change for purposes of this Section 4.6.
4.7 Undisclosed Liabilities. The Buyer and the Buyer Subsidiaries taken as a
whole do not have any liability (whether known or unknown, whether absolute or
contingent, whether liquidated or unliquidated and whether due or to become
due), except for (a) liabilities shown on the consolidated balance sheet of the
Buyer and the Buyer Subsidiaries as of June 30, 1994 (the "Buyer Balance
Sheet"), (b) liabilities which have arisen after June 30, 1994 in the Ordinary
Course of Business and (c) contractual liabilities incurred in the Ordinary
Course of Business which are not required by GAAP to be reflected on the Buyer
Balance Sheet.
4.8 Brokers' Fees. Neither the Buyer nor the Transitory Subsidiary has any
liability or obligation to pay any fees or commissions to any broker, finder or
agent, other than Broadview Associates, with respect to the transactions
contemplated by this Agreement. The fee to be paid to Broadview Associates will
be paid by the Buyer.
4.9 Pooling. To the knowledge of the Buyer, neither the Buyer nor any of its
Affiliates has, through the date of this Agreement, taken or agreed to take any
action that would prevent the Buyer from accounting for the transactions
contemplated by this Agreement as a "pooling of interests" in accordance with
GAAP and applicable SEC rules.
ARTICLE V
COVENANTS
5.1 Best Efforts. Each of the Parties shall use its best efforts, to the
extent commercially reasonable, to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement. Patterson and Stewart each agree to use his best efforts, to
the extent commercially reasonable, to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement.
5.2 Notices and Consents. Each of the Parties shall use its best efforts, to
the extent commercially reasonable, to obtain, at its expense, all such
waivers, permits, consents, approvals or other authorizations from third
parties and Governmental Entities, and to effect all such registrations,
filings and notices with or to third parties and Governmental Entities, as are
necessary to consummate the transactions contemplated by this Agreement.
5.3 Special Meeting, Prospectus/Proxy Statement and Form S-4.
(a)(i) As promptly as practicable after the date hereof, but in any event
not before all required financial statements have been prepared, the Buyer
and the Company shall jointly prepare and file with
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the SEC under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), preliminary proxy materials for the purpose of soliciting
proxies from the Buyer's stockholders to obtain the Requisite Buyer
Stockholder Approval at a special meeting of the Buyer's stockholders to be
called and held for such purpose (the "Special Meeting"). Such proxy
materials shall be in the form of a prospectus/proxy statement to be used
for the purpose of offering the Transaction Shares to the Company
Stockholders, Keystone and the Unvested TMI Option Holders and soliciting
such proxies from the Buyer's stockholders (such prospectus/proxy
statement, together with any accompanying letter to stockholders, notice of
meeting and form of proxy, shall be referred to herein as the
"Prospectus/Proxy Statement"). The Company and the Buyer shall promptly
respond to any SEC comments on the Prospectus/Proxy Statement and shall
otherwise use their best efforts to resolve as promptly as practicable all
SEC comments to the satisfaction of the SEC.
(ii) Promptly following the resolution to the satisfaction of the SEC of
all SEC comments on the Prospectus/Proxy Statement (or the expiration of
the ten-day period under Rule 14a-6(a) under the Exchange Act, if no SEC
comments are received by such date), the Buyer shall file with the SEC
under the Securities Act a Registration Statement on Form S-4 (the "Form S-
4"), which shall include the Prospectus/Proxy Statement as a part thereof.
The Buyer, with the assistance of the Company, shall promptly respond to
any SEC comments on the Form S-4 and shall otherwise use its best efforts
to cause the Form S-4 to be declared effective as promptly as practicable.
The Buyer shall also take any and all such actions as may be necessary or
as it may deem advisable for the purpose of complying with all applicable
state securities laws in connection with the offering and issuance of the
Transaction Shares; provided, however, that the Buyer shall not be required
in connection with this paragraph (ii) to qualify as a foreign corporation
or execute a general consent to service of process in any jurisdiction.
(iii) Promptly following the resolution to the satisfaction of the SEC of
all SEC comments on the Prospectus/Proxy Statement and the Form S-4, the
Buyer shall distribute the Prospectus/Proxy Statement to its stockholders
and, pursuant thereto, shall call the Special Meeting in accordance with
Delaware General Corporation Law and solicit proxies from the Buyer's
stockholders to obtain the Requisite Buyer Stockholder Approval. The
Prospectus/Proxy Statement shall include the recommendation of the Board of
Directors of the Buyer in favor of this Agreement and the Merger and the
issuance of the Transaction Shares; provided, however, that the Board of
Directors of the Buyer may withdraw such recommendation if it believes in
good faith, after consultation with its outside legal counsel, that the
withdrawal of such recommendation is necessary for it to comply with its
fiduciary duties under applicable law.
(iv) The Buyer shall comply with all applicable provisions of and rules
under the Exchange Act and all applicable provisions of the Delaware
General Corporation Law in the preparation, filing and distribution of the
Prospectus/Proxy Statement, the solicitation of proxies thereunder and the
calling and holding of the Special Meeting. Without limiting the foregoing,
the Buyer shall ensure that the Prospectus/Proxy Statement does not, as of
the date on which it is distributed to the Buyer's stockholders, the
Company Stockholders and the Unvested TMI Option Holders and as of the date
of the Special Meeting, contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading (provided that the Buyer shall not be responsible for the
accuracy or completeness of any information furnished by the Company in
writing for inclusion in the Prospectus/Proxy Statement).
(v) The Company shall comply with all applicable provisions of and rules
under the Securities Act and state securities laws in the preparation and
filing of the Form S-4. Without limiting the foregoing, the Company shall
ensure that the Form S-4 does not, as of its effective date, contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading (provided that the Company shall not be responsible for the
accuracy or completeness of any information furnished by the Buyer in
writing for inclusion in the Form S-4).
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(b) Prior to the Closing Date, and at the earliest practicable date, the
Company shall solicit written consent from its stockholders to obtain the
Requisite Company Stockholder Approval in accordance with the Delaware
General Corporation Law and the Company's By-laws. In soliciting such
consents, the Company's Board of Directors shall recommend to the Company
Stockholders that they approve the Merger and shall use its best efforts to
obtain the Requisite Company Stockholder Approval.
(c) The Buyer shall use all reasonable efforts to cause to be delivered
to the Company a "comfort" letter of Coopers & Lybrand, L.L.P., the Buyer's
independent auditors, dated a date within three business days before the
date on which the Form S-4 shall become effective and addressed to the
Company, in form reasonably satisfactory to the Company and customary in
scope and substance for letters delivered by independent public accountants
in connection with registration statements similar to the Form S-4.
(d) The Company shall use all reasonable efforts to cause to be delivered
to the Buyer a "comfort" letter of Arthur Andersen LLP, the Company's
independent auditors, dated a date within three business days before the
date on which the Form S-4 shall become effective and addressed to the
Buyer, in form reasonably satisfactory to the Buyer and customary in scope
and substance for "comfort" letters delivered by independent public
accountants in connection with registration statements similar to the Form
S-4.
5.4 Operation of Business. Except as contemplated by this Agreement,
including without limitation the transactions described in paragraph 5 of the
Preliminary Statement, during the period from the date of this Agreement to the
Effective Time, the Company shall (and shall cause each Company Subsidiary to)
conduct its operations in the Ordinary Course of Business and use all
reasonable efforts to preserve intact its current business organization, keep
its physical assets in good working condition, keep available the services of
its current officers and employees and preserve its relationships with
customers, suppliers and others having business dealings with it to the end
that its goodwill and ongoing business shall not be impaired in any material
respect. Without limiting the generality of the foregoing, prior to the
Effective Time, neither the Company nor any Company Subsidiary shall, without
the written consent of the Buyer:
(a) issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize
the issuance, sale or delivery of, or redeem or repurchase, any stock of
any class or any other securities or any rights, warrants or options to
acquire any such stock or other securities, or amend any of the terms of or
accelerate the exercisability of any TMI Options;
(b) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock;
(c) create, incur or assume any debt not currently outstanding (including
obligations in respect of capital leases), except advances in the Ordinary
Course of Business under TMI's existing line of credit with Texas Commerce
Bank National Association; assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person; or make any loans, advances or capital
contributions to, or investments in, any other person;
(d) enter into, adopt or amend any Employee Benefit Plan or any
employment or severance agreement or arrangement of the type described in
Section 2.22(j) or (except for normal increases in the Ordinary Course of
Business) increase in any manner the compensation or fringe benefits of, or
materially modify the employment terms of, its directors, officers or
employees, generally or individually, or pay any benefit not required by
the terms in effect on the date hereof of any existing Employee Benefit
Plan;
(e) acquire, sell, lease, encumber or dispose of any shares or other
equity interests in or securities of any Company Subsidiary or any
corporation, partnership, association or other business organization or
division thereof or any assets, other than purchases and sales of assets in
the Ordinary Course of Business;
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(f) amend its charter or By-laws;
(g) change in any material respect its accounting methods, principles or
practices, except insofar as may be required by a generally applicable
change in GAAP;
(h) discharge or satisfy any Security Interest or pay any obligation or
liability other than in the Ordinary Course of Business;
(i) mortgage or pledge any of its property or assets or subject any such
assets to any Security Interest;
(j) sell, assign, transfer or license any Intellectual Property, other
than in the Ordinary Course of Business;
(k) enter into, amend, terminate, take or omit to take any action that
would constitute a violation of or default under, or waive any rights
under, any material contract or agreement;
(l) make or commit to make any capital expenditure in excess of $10,000
per item;
(m) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or (ii) any of the
conditions to the Merger set forth in Article VI not being satisfied; or
(n) agree in writing or otherwise to take any of the foregoing actions.
5.5 Interim Financial Statements. As promptly as possible following the last
day of each fiscal month end after the date hereof until the Closing Date, and
in any event within 20 days after the end of each such fiscal month end, the
Company shall deliver to the Buyer the combined and combining balance sheet of
the Company and the Company Subsidiaries (including TME but excluding
BriskHeat) and the related combined and combining statements of income, changes
in stockholders' equity and cash flows of the Company and the Company
Subsidiaries (including TME but excluding BriskHeat) for the one-month period
then ended and for the period then ended since June 30, 1994 (collectively, the
"Interim Financial Statements"). The Interim Financial Statements shall be
prepared so as to present fairly, in all material respects, the combined and
combining financial condition, retained earnings, assets and liabilities of the
Company and the Company Subsidiaries (including TME but excluding BriskHeat) as
of the date thereof and the combined and combining results of operations and
cash flows of the Company and the Company Subsidiaries (including TME but
excluding BriskHeat) for the periods covered thereby in conformity with GAAP.
5.6 Communications with Customers and Suppliers.
(a) Unless instructed otherwise by the Buyer in writing, and subject to
Section 5.4 hereof, the Company shall (and shall cause each Company
Subsidiary to) continue to accept customer orders in the Ordinary Course of
Business for all products offered by the Company and the Company
Subsidiaries.
(b) From and after the Closing, the Company shall (and shall cause each
Company Subsidiary to) cooperate in communications with suppliers and
customers in connection with the change in ownership of the Company and the
Company Subsidiaries resulting from the transactions contemplated hereby.
5.7 Compliance with Laws. The Company shall (and shall cause each Company
Subsidiary (including BriskHeat) to) comply in all material respects with all
laws, rules and regulations of any federal, state, local or foreign government,
or any Governmental Entity, which are applicable to the Company or any Company
Subsidiary (including BriskHeat) and will perform and comply with all
contracts, commitments and obligations by which they are bound.
5.8 Reports, Taxes. The Company shall (and shall cause each Company
Subsidiary (including BriskHeat) to) duly and timely file all reports or
returns required to be filed with any Governmental Entity and will promptly pay
all federal, state, local and foreign taxes, assessments and governmental
charges levied
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or assessed upon the Company or any Company Subsidiary (including BriskHeat) or
any of their properties (unless contesting such in good faith and adequate
provision has been made therefor).
5.9 Full Access. The Company shall (and shall cause each Company Subsidiary
(including BriskHeat) to) permit representatives of the Buyer to have full
access (at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company and the Company Subsidiaries
(including BriskHeat) to all premises, properties, financial and accounting
records, contracts, other records and documents, and personnel, of or
pertaining to the Company and each Company Subsidiary (including BriskHeat).
Each of the Buyer and the Transitory Subsidiary (a) shall treat and hold as
confidential any Confidential Information (as hereinafter defined), (b) shall
not use any of the Confidential Information except in connection with this
Agreement, and (c) if this Agreement is terminated for any reason whatsoever,
shall return to the Company all tangible embodiments (and all copies) thereof
which are in its possession. For purposes of this Agreement, "Confidential
Information" means any confidential or proprietary information of the Company
or any Company Subsidiary (including BriskHeat) that is furnished in writing to
the Buyer or the Transitory Subsidiary by the Company or any Company Subsidiary
(including BriskHeat) in connection with this Agreement and is labelled
confidential or proprietary; provided, however, that it shall not include any
information (i) which, at the time of disclosure, is available publicly, (ii)
which, after disclosure, becomes available publicly through no fault of the
Buyer or the Transitory Subsidiary, or (iii) which the Buyer or the Transitory
Subsidiary knew or to which the Buyer or the Transitory Subsidiary had access
prior to disclosure.
5.10 Notice of Breaches. The Company shall promptly deliver to the Buyer
written notice of any event or development that would (a) render any statement,
representation or warranty of the Company in this Agreement (including the
Company Disclosure Schedule) inaccurate or incomplete in any material respect,
or (b) constitute or result in a breach by the Company of, or a failure by the
Company to comply with, any agreement or covenant in this Agreement applicable
to such party. The Buyer or the Transitory Subsidiary shall promptly deliver to
the Company written notice of any event or development that would (i) render
any statement, representation or warranty of the Buyer or the Transitory
Subsidiary in this Agreement (including the Buyer Disclosure Schedule)
inaccurate or incomplete in any material respect, or (ii) constitute or result
in a breach by the Buyer or the Transitory Subsidiary of, or a failure by the
Buyer or the Transitory Subsidiary to comply with, any agreement or covenant in
this Agreement applicable to such party. No such disclosure shall be deemed to
avoid or cure any such misrepresentation or breach.
5.11 Exclusivity.
(a) The Company shall not (and shall cause each Company Subsidiary not
to), and the Company shall use its best efforts to cause each of its
Affiliates, officers, directors, employees, representatives and agents not
to, directly or indirectly, (a) encourage, solicit, initiate, engage or
participate in discussions or negotiations with any person or entity (other
than the Buyer) concerning any merger, consolidation, sale of material
assets, tender offer, recapitalization, accumulation of Company Shares,
proxy solicitation or other business combination involving the Company, any
Company Subsidiary or any division of the Company or any Company
Subsidiary, or (b) provide any non-public information concerning the
business, properties or assets of the Company or any Company Subsidiary to
any person or entity (other than the Buyer). The Company shall immediately
notify the Buyer of, and shall disclose to the Buyer all details of, any
inquiries, discussions or negotiations of the nature described in the first
sentence of this Section 5.11(a).
(b) Keystone shall not, and Keystone shall use its best efforts to cause
each of its Affiliates, officers, directors, employees, representatives and
agents not to, directly or indirectly, (a) encourage, solicit, initiate,
engage or participate in discussions or negotiations with any person or
entity (other than the Buyer) concerning any merger, consolidation, sale of
material assets, tender offer, recapitalization, accumulation of Company
Shares, proxy solicitation or other business combination involving the
Company, any Company Subsidiary or any division of the Company or any
Company Subsidiary, or the sale of any of the Keystone Shares, or (b)
provide any non-public information concerning the business,
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properties or assets of the Company or any Company Subsidiary or the
Keystone Shares to any person or entity (other than the Buyer). Keystone
shall immediately notify the Buyer of, and shall disclose to the Buyer all
details of, any inquiries, discussions or negotiations of the nature
described in the first sentence of this Section 5.11(b).
5.12 Environmental Investigation. The Buyer shall have the right to retain a
third party to conduct an environmental investigation with respect to the
premises currently or formerly owned, occupied, leased or operated by the
Company or any Company Subsidiary (including BriskHeat) or Affiliate. The
Company shall cooperate (and cause each Company Subsidiary (including
BriskHeat) to cooperate) and shall use its best efforts to cause each related
party to cooperate in such environmental investigation. The Buyer shall bear
the cost of such environmental investigation.
5.13 Registration Rights.
(a) Certain Definitions. The following terms shall have the following
respective meanings:
"Registration Statement" means a registration statement filed by the
Company with the SEC for a public offering and sale of Common Stock
(other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any
registration statement covering only securities proposed to be issued
in exchange for securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section
5.13(f).
"Registrable Shares" means (i) the Transaction Shares and (ii) any
other shares of Buyer Common Stock issued in respect of the Transaction
Shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares
of Common Stock which are Registrable Shares shall cease to be
Registrable Shares (i) upon any sale of such Registrable Shares
pursuant to a Registration Statement or Rule 145 promulgated under the
Securities Act ("Rule 145") or (ii) upon any sale in any manner to a
person or entity which, by virtue of Section 5.13(k) of this Agreement,
is not entitled to the rights provided by this Agreement.
"Registration Rights Holders" means the Company Stockholders,
Keystone and the Unvested TMI Option Holders.
(b) Required Registrations.
(i) Commencing one year after the Closing Date, Registration Rights
Holders holding Registrable Shares may request, in writing, that the
Buyer effect the registration on Form S-3, or if the Buyer is not then
eligible to use Form S-3 for such a registration, on Form S-1, of
Registrable Shares owned by such Registration Rights Holders covering
the resale of such shares which exceeds for each such selling
Registration Rights Holder 1% of the total number of shares of Buyer
Common Stock outstanding as shown in the most recent report or
statement published by the Buyer. If the holders initiating the
registration intend to distribute the Registrable Shares by means of an
underwriting, they shall so advise the Buyer in their request. In the
event such registration is underwritten, the right of other
Registration Rights Holders to participate shall be conditioned on such
Registration Rights Holders' participation in such underwriting. Upon
receipt of any such request, the Buyer shall promptly give written
notice of such proposed registration to all Registration Rights
Holders. Such Registration Rights Holders shall have the right, by
giving written notice to the Buyer within 20 days after the Buyer
provides its notice, to elect to have included in such registration
such of their Registrable Shares as such Registration Rights Holders
may request in such notice of election; provided that if the
underwriter (if any) managing the offering determines that, because of
marketing factors, all of the Registrable Shares requested to be
registered by all Registration Rights Holders may not be included in
the offering, then all Registration Rights Holders who have requested
registration shall participate in the registration pro
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rata based upon the number of Registrable Shares which they have
requested to be so registered. Thereupon, the Buyer shall, as
expeditiously as possible, use its best efforts to effect the
registration on Form S-3 or on Form S-1, as the case may be, of all
Registrable Shares which the Buyer has been requested to so register.
(ii) The Buyer shall not be required to effect more than two
registrations pursuant to paragraph (i) above.
(iii) The Buyer shall be entitled to postpone the effective date of
such Registration Statement (and the use of the prospectus contained
therein) if the Buyer determines, in its reasonable judgment, after
consultation with counsel, that such effectiveness would require the
premature announcement of any financing, acquisition, corporate
reorganization or other material corporate transaction or development
involving Buyer which, in the Buyer's reasonable determination, would
be materially detrimental to the interests of the Buyer and its
stockholders. The postponement will be for the minimum period
reasonably required to avoid such premature disclosure. The Buyer will
promptly give the Registration Rights Holders notice of any such
postponement and will use all reasonable efforts to minimize the length
of the postponement or interruption.
(c) Incidental Registration.
(i) Whenever the Buyer proposes to file a Registration Statement
(other than pursuant to Section 5.13(b) above) at any time and from
time to time, it will, prior to such filing, give written notice to all
Registration Rights Holders of its intention to do so and, upon the
written request of Registration Rights Holders given within 20 days
after the Buyer provides such notice (which request shall state the
intended method of disposition of such Registrable Shares), the Buyer
shall use its best efforts to cause all Registrable Shares which the
Buyer has been requested by such Registration Rights Holders to
register to be registered under the Securities Act to the extent
necessary to permit their sale or other disposition in accordance with
the intended methods of distribution specified in the request of such
Registration Rights Holders; provided that the Buyer shall have the
right to postpone or withdraw any registration effected pursuant to
this Section 5.13(c) without obligation to any Registration Rights
Holder.
(ii) In connection with any registration under this Section 5.13(c)
involving an underwriting, the Buyer shall not be required to include
any Registrable Shares in such registration unless the holders thereof
accept the terms of the underwriting as agreed upon between the Buyer
and the underwriters selected by it (provided that such terms must be
consistent with this Agreement). If in the opinion of the managing
underwriter it is appropriate because of marketing factors to limit the
number of Registrable Shares to be included in the offering, then the
Buyer shall be required to include in the registration only that number
of Registrable Shares, if any, which the managing underwriter believes
should be included therein; provided that no persons or entities other
than the Buyer, the Registration Rights Holders and other persons or
entities holding registration rights relating to Buyer Common Stock
shall be permitted to include securities in the offering. If the number
of Registrable Shares to be included in the offering in accordance with
the foregoing is less than the total number of shares which the holders
of Registrable Shares have requested to be included, then the holders
of Registrable Shares who have requested registration and other holders
of securities entitled to include them in such registration shall
participate in the registration pro rata based upon their total
ownership of shares of Buyer Common Stock (giving effect to the
conversion into Buyer Common Stock of all securities convertible
thereinto). If any holder would thus be entitled to include more
securities than such holder requested to be registered, the excess
shall be allocated among other requesting holders pro rata in the
manner described in the preceding sentence.
(d) Registration Procedures. If and whenever the Buyer is required by the
provisions of this Agreement to use its best efforts to effect the
registration of any of the Registrable Shares under the Securities Act, the
Buyer shall:
(i) file with the SEC a Registration Statement with respect to such
Registrable Shares and use its best efforts to cause that Registration
Statement to become and remain effective until the earlier
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of (x) the time all Registrable Shares have been sold pursuant thereto
or otherwise; (y) the time all Registrable Shares then held by all
Registration Rights Holders could be sold within a three-month period
without a registration statement under Rule 145 or otherwise; or (z) 45
days from the date that each Registration Statement is declared
effective by the SEC;
(ii) as expeditiously as possible prepare and file with the SEC any
amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary
to keep the Registration Statement effective;
(iii) as expeditiously as possible furnish to each selling
Registration Rights Holder participating in the offering such
reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act,
and such other documents as such selling Registration Rights Holder may
reasonably request in order to facilitate the public sale or other
disposition of the Registrable Shares owned by such selling
Registration Rights Holder; and
(iv) as expeditiously as possible use its best efforts to register or
qualify the Registrable Shares covered by the Registration Statement
under the securities or "Blue Sky" laws of such states as the selling
Registration Rights Holders shall reasonably request, and do any and
all other acts and things that may be necessary or desirable to enable
the selling Registration Rights Holders to consummate the public sale
or other disposition in such states of the Registrable Shares owned by
the selling Registration Rights Holders; provided, however, that the
Buyer shall not be required in connection with this paragraph (iv) to
qualify as a foreign corporation or execute a general consent to
service of process in any jurisdiction.
If the Buyer has delivered preliminary or final prospectuses to the
selling Registration Rights Holders and after having done so the prospectus
is amended to comply with the requirements of the Securities Act, the Buyer
shall promptly notify the selling Registration Rights Holders and, if
requested, the selling Registration Rights Holders shall immediately cease
making offers of Registrable Shares and return all prospectuses to the
Buyer. The Buyer shall promptly provide the selling Registration Rights
Holders with revised prospectuses and, following receipt of the revised
prospectuses, the selling Registration Rights Holders shall be free to
resume making offers of the Registrable Shares.
(e) The Registration Rights Holders shall not make any sales of
Registrable Shares without causing the prospectus delivery requirements
under the Securities Act to be satisfied and each selling Registration
Rights Holder shall promptly advise the Buyer of any changes in the
information concerning such selling Registration Rights Holders contained
in any prospectus included in any Registration Statement. The Registration
Rights Holders acknowledge that occasionally there may be times when the
Buyer must suspend the use of the prospectus forming a part of a
Registration Statement until such time as an amendment to such Registration
Statement has been filed by the Buyer and declared effective by the SEC, or
until such time as the Buyer has filed an appropriate report with the SEC
pursuant to the Exchange Act. Without limiting the generality of the
foregoing, the Buyer shall be entitled to suspend the use of the prospectus
forming a part of such Registration Statement in any of the following
periods:
(i) any period during which the Buyer is engaged in any activity or
transaction or preparations or negotiations for any activity or
transaction ("Buyer Activity") that the Buyer desires to keep
confidential for business reasons, if the Buyer determines in good
faith that the public disclosure requirements imposed on the Buyer
under the Securities Act in connection with the Registration Statement
would require disclosure of Buyer Activity; or
(ii) any period during which the Buyer is offering or selling shares
of its capital stock pursuant to a registration statement (other than a
registration statement on Form S-4 or Form S-8, or any successor Form)
filed with the SEC under the Securities Act (with such period to begin
three weeks prior to the date established in good faith by the Buyer as
its target date for the pricing of such offering and terminate upon the
closing of (or decision to abandon) the sale of such shares).
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Each Registration Rights Holder hereby covenants that it will not offer
or sell any Registrable Shares pursuant to any prospectus during the period
commencing at the time at which the Buyer gives it notice of the suspension
of the use of said prospectus and ending at the time the Buyer gives it
notice that the Registration Rights Holders may thereafter effect sales
pursuant to said prospectus.
(f) Allocation of Expenses. The Buyer shall pay all Registration Expenses
of all registrations under this Agreement; provided, however, that if a
registration under Section 5.13(b) is withdrawn at the request of the
Registration Rights Holders requesting such registration (other than as a
result of information concerning the business or financial condition of the
Buyer which is made known to the Registration Rights Holders after the date
on which such registration was requested) and if the requesting
Registration Rights Holders elect not to have such registration counted as
a registration requested under Section 5.13(b), the requesting Registration
Rights Holders shall pay the Registration Expenses of such registration pro
rata in accordance with the number of their Registrable Shares included in
such registration. For purposes of this Section 5.13(f), the term
"Registration Expenses" shall mean all expenses incurred by the Buyer in
complying with this Agreement, including, without limitation, all
registration and filing fees, exchange listing fees, printing expenses,
fees and expenses of counsel for the Buyer and the fees, state "Blue Sky"
fees and expenses, and the expense of any special audits incident to or
required by any such registration, but excluding underwriting discounts,
selling commissions and the fees and expenses of selling Registration
Rights Holders' own counsel.
(g) Indemnification.
(i) In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, the Buyer will
indemnify and hold harmless the seller of such Registrable Shares, each
underwriter of such Registrable Shares, and each other person, if any,
who controls such seller or underwriter within the meaning of the
Securities Act or the Exchange Act against any losses, claims, damages
or liabilities, joint or several, to which such seller, underwriter or
controlling person may become subject under the Securities Act, the
Exchange Act, state securities or "Blue Sky" laws or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus
contained in the Registration Statement, or any amendment or supplement
to such Registration Statement, or arise out of or are based upon the
omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and the Buyer will reimburse such seller, underwriter and
each such controlling person for any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling person
in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Buyer will not
be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue statement
or omission made in such Registration Statement, preliminary prospectus
or final prospectus, or any such amendment or supplement, in reliance
upon and in conformity with information furnished to the Buyer, in
writing, by or on behalf of such seller, underwriter or controlling
person specifically for use in the preparation thereof.
(ii) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each seller
of Registrable Shares, severally and not jointly, will indemnify and
hold harmless the Buyer, each of its directors and officers and each
underwriter (if any) and each person, if any, who controls the Buyer or
any such underwriter within the meaning of the Securities Act or the
Exchange Act, against any losses, claims, damages or liabilities, joint
or several, to which the Buyer, such directors and officers,
underwriter or controlling person may become subject under the
Securities Act, Exchange Act, state securities or "Blue Sky" laws or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact
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contained in any Registration Statement under which such Registrable
Shares were registered under the Securities Act, any preliminary
prospectus or final prospectus contained in the Registration Statement,
or any amendment or supplement to the Registration Statement, or arise
out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was
made in reliance upon and in conformity with information relating to
such seller furnished in writing to the Buyer by or on behalf of such
seller specifically for use in connection with the preparation of such
Registration Statement, prospectus, amendment or supplement; provided,
however, that the obligations of such Registration Rights Holders
hereunder shall be limited to an amount equal to the proceeds to each
Registration Rights Holder of the Registrable Shares sold in connection
with such registration.
(iii) Each party entitled to indemnification under this Section
5.13(g) (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party
to assume the defense of any such claim or any litigation resulting
therefrom; provided, that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified
Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 5.13(g). The
Indemnified Party may participate in such defense at such party's
expense; provided, however, that the Indemnifying Party shall pay such
expense if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any
other party represented by such counsel in such proceeding. No
Indemnifying Party, in the defense of any such claim or litigation
shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect of such claim or litigation, and no Indemnified Party shall
consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party.
(h) Underwritten Offering. In the event that Registrable Shares are sold
pursuant to a Registration Statement in an underwritten offering pursuant
to Section 5.13(b), the Buyer agrees to enter into an underwriting
agreement containing customary representations and warranties with respect
to the business and operations of an issuer of the securities being
registered and customary covenants and agreements to be performed by such
issuer, including without limitation customary provisions with respect to
indemnification by the Buyer of the underwriters of such offering.
(i) Information by Holder. Each Registration Rights Holder including
Registrable Shares in any registration shall furnish to the Buyer such
information regarding such Registration Rights Holder and the distribution
proposed by such Registration Rights Holder as the Buyer may reasonably
request in connection with, and otherwise cooperate with the Buyer in the
filing of, any registration, qualification or compliance referred to in
this Agreement.
(j) Termination. All of the Buyer's obligations to register Registrable
Shares under this Agreement shall terminate on the fifth anniversary of
this Agreement.
(k) Transfers of Rights. None of the rights set forth in paragraphs (a)
through (j) of this Section 5.13 shall be transferrable without the prior
written consent of the Buyer.
(l) Company Stockholder Approval. The adoption of this Agreement and the
approval of the Merger by the Company Stockholders shall constitute
approval of the registration rights provisions contained in this Section
5.13 by the Company Stockholders and of all of the arrangements relating
thereto, including without limitation the indemnification provisions
contained in Section 5.13(g).
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5.14 Board Representation.
(a) Effective as of the Effective Time, the Board of Directors of the
Buyer shall elect, in its discretion, either Stewart or a designee of
Stewart reasonably acceptable to the Board of Directors of the Buyer (the
"Stewart Designee") as a Class III director of the Buyer to serve for an
initial term ending at the 1996 Annual Meeting of Stockholders of the
Buyer. The tenure of Stewart or the Stewart Designee shall be subject to
the provisions of the Certificate of Incorporation and By-laws of the Buyer
and the Delaware General Corporation Law.
(b) Patterson shall be entitled to nominate, subject to the reasonable
approval of the Board of Directors of the Buyer, one designee (the
"Patterson Designee") for election to the Board of Directors of the Buyer.
Effective as of the Effective Time, the Board of Directors of the Buyer
shall elect, as a Class II Director to serve for an initial term ending at
the 1995 Annual Meeting of Stockholders of the Buyer, the Patterson
Designee. The tenure of the Patterson Designee shall be subject to the
provisions of the Certificate of Incorporation and By-laws of the Buyer and
the Delaware General Corporation Law.
(c) The Buyer shall provide to each of Stewart and Patterson copies of
the monthly financial reports furnished to the Stewart Designee, if any,
and the Patterson Designee, respectively, provided that each of Stewart and
Patterson execute a confidentiality agreement relating thereto containing
customary provisions and in a form satisfactory to the Buyer.
5.15 Non-Competition.
(a) For a period of five years after the Effective Time, neither
Patterson, Stewart nor any of their respective Affiliates (including
BriskHeat) shall, except as an officer or employee of the Buyer, TMI or
TME, develop, manufacture, market or sell any product which competes with
any existing or proposed product manufactured, marketed, sold or under
development by the Company, TMI, TME or the Buyer at or prior to the
Effective Time, or otherwise engage in any business competitive with the
business of the Company, TMI, TME or the Buyer as conducted on the date
hereof or at the Effective Time. Without limiting the generality of the
foregoing, for a period of five years after the Effective Time, neither
Patterson, Stewart nor any of their respective Affiliates (including
BriskHeat) shall:
(i) be employed by, provide consulting or other services to, or
otherwise be involved with, whether as an investor or otherwise (other
than as an investor holding less than 2% of the total outstanding stock
of a publicly held company), any competitor of the Company, TMI, TME or
the Buyer;
(ii) recruit, solicit or induce, or attempt to induce, any employee,
employees, consultant, consultants, subcontractor or subcontractors of
the Company, TMI, TME or the Buyer to terminate their employment or
consulting with, or otherwise cease their relationship with, the
Company, TMI, TME or the Buyer; or
(iii) solicit, divert or take away, or attempt to divert or take
away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the
Company, TMI, TME or the Buyer.
(b) The parties hereto agree that the duration and geographic scope of
the non-competition provision set forth in this Section 5.15 are
reasonable. In the event that any court of competent jurisdiction
determines that the duration or the geographic scope, or both, are
unreasonable and that such provision is to that extent unenforceable, the
parties hereto agree that the provision shall remain in full force and
effect for the greatest time period and in the greatest area that would not
render it unenforceable. The parties intend that this non-competition
provision shall be deemed to be a series of separate covenants, one for
each and every county of each and every state of the United States of
America and each and every political subdivision of each and every country
outside the United States of America
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where this provision is intended to be effective. Patterson and Stewart
agree that damages are an inadequate remedy for any breach of this
provision and that the Buyer shall, whether or not it is pursuing any
potential remedies at law, be entitled to equitable relief in the form of
preliminary and permanent injunctions without bond or other security upon
any actual or threatened breach of this non-competition provision.
5.16 Pooling Accounting. The Buyer and the Company shall each use its best
efforts to cause the transactions contemplated by this Agreement to be
accounted for as a pooling of interests. Each of the Buyer and the Company
shall use its best efforts (i) to cause its respective Rule 145 Affiliates (as
defined in Section 5.17) not to take any action that would adversely affect the
ability of the Buyer to account for the transactions contemplated by this
Agreement as a pooling of interests and (ii) to cause its respective Rule 145
Affiliates to sign and deliver to the Buyer a customary "pooling letter" in
form and substance agreed upon by the Buyer and the Company.
5.17 Affiliate Agreements. Within two weeks after the date of this Agreement,
the Buyer and the Company will provide to each other a list of those persons
who are (or will be at the Effective Time), in the Buyer's or the Company's
respective reasonable judgment, "affiliates" of the Buyer or the Company,
respectively, within the meaning of Rule 145 (each such person who is an
"affiliate" of the Buyer or the Company within the meaning of Rule 145 is
referred to as a "Rule 145 Affiliate"). The Buyer and the Company shall provide
to each other such information and documents as the Company or the Buyer shall
reasonably request for purposes of reviewing such list and shall notify the
other party in writing regarding any change in the identity of its Rule 145
Affiliates prior to the Closing Date. The Company shall deliver to the Buyer
prior to the Effective Time an Affiliate Agreement, in form and substance
satisfactory to the Buyer and the Company, executed by each of the Rule 145
Affiliates of the Company, by which each Rule 145 Affiliate of the Company
agrees to comply with the applicable requirements of Rule 145 ("Affiliate
Agreement"). The Buyer shall be entitled to place appropriate legends on the
certificates evidencing any Buyer Common Stock to be received by such Rule 145
Affiliates of the Company in the Merger, and to issue appropriate stop transfer
instructions to the transfer agent for the Buyer Common Stock, consistent with
the terms of the Affiliate Agreements.
5.18 Nasdaq Quotation. The Buyer shall use its best efforts to cause the
Transaction Shares to be approved for quotation on Nasdaq, subject to official
notice of issuance, prior to the Closing Date.
5.19 Termination of Management Fees. Effective as of the Closing, Patterson,
Stewart and the Company, on behalf of itself and all Company Subsidiaries,
hereby terminate any and all agreements, written or oral, for the payment of
management or other fees or other payments by the Company, TMI or TME to
Patterson or Stewart or any of their Affiliates (other than under the
agreements referenced in Sections 6.1(o) and 6.1(p)).
5.20 Certain Tax Returns. If Arthur Andersen LLP renders at the Closing an
unqualified opinion to the effect that the BriskHeat Spin-Off constitutes a
tax-free transaction to the Company and the stockholders of the Company under
Section 355 of the Code, and if Coopers & Lybrand, L.L.P. determines at the
Closing that there is a reasonable basis to report the BriskHeat Spin-Off as a
tax-free transaction and so advises the Buyer and the Company in writing, then
the Buyer shall cause all Tax Returns of the Company for periods that include
the date of the BriskHeat Spin-Off to report the BriskHeat Spin-Off as a tax-
free transaction. At or prior to the Closing, Patterson and Stewart shall
supply the Buyer with copies of all appraisals and other information to be
utilized as a basis for determining the tax treatment of the BriskHeat Spin-
Off.
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ARTICLE VI
CONDITIONS TO CONSUMMATION OF TRANSACTIONS
6.1 Conditions to Obligations of the Buyer and the Transitory Subsidiary. The
obligation of each of the Buyer and the Transitory Subsidiary to consummate the
transactions contemplated by this Agreement is subject to the satisfaction of
the following conditions:
(a) Requisite Buyer Stockholder Approval. This Agreement and the Merger
shall have received the Requisite Buyer Stockholder Approval.
(b) Requisite Company Stockholder Approval; Dissenting Shares. This
Agreement and the Merger shall have received the Requisite Company
Stockholder Approval, and the number of Dissenting Shares shall not exceed
1% of the Outstanding Company Shares.
(c) Consents. The Company, the Company Subsidiaries and Keystone, on the
one hand, and the Buyer and the Buyer Subsidiaries, on the other hand,
shall have obtained all waivers, permits, consents, approvals or other
authorizations from third parties and Governmental Entities, and to effect
all such registrations, filings and notices with or to third parties and
Governmental Entities, as are necessary to consummate the transactions
contemplated by this Agreement, except where the failure to obtain or
effect any of the foregoing will not have a material adverse effect on the
assets, business, properties or condition (financial or otherwise) of the
Company, any Company Subsidiary or Keystone, will not have a material
adverse effect on the assets, business, properties or condition (financial
or otherwise) of the Buyer and the Buyer Subsidiaries taken as a whole, and
will not adversely affect the ability of the Buyer to own and operate the
Company or any Company Subsidiary after the Closing.
(d) Representations and Warranties. The representations and warranties of
the Company set forth in Article II shall be true and correct when made on
the date hereof and shall be true and correct as of the Effective Time as
if made as of the Effective Time, and the representations and warranties of
Keystone set forth in Article III shall be true and correct when made on
the date hereof and shall be true and correct as of the Effective Time as
if made as of the Effective Time, except in any case for representations
and warranties made as of a specific date, which shall be true and correct
as of such date.
(e) Agreements and Covenants. The Company, each Company Subsidiary and
Keystone shall have performed or complied with its agreements and covenants
required to be performed or complied with under this Agreement as of or
prior to the Effective Time.
(f) No Proceedings. No action, suit or proceeding shall be pending before
any Governmental Entity wherein an unfavorable judgment, order, decree,
stipulation or injunction would (i) prevent consummation of any of the
transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation or (iii) affect adversely the right of the Buyer to own,
operate or control any of the assets or operations of the Surviving
Corporation or any Company Subsidiary, and no such judgment, order, decree,
stipulation or injunction shall be in effect.
(g) Certificates.
(i) The Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (without qualification as to knowledge or
materiality or otherwise) to the effect that each of the conditions
specified in clause (b), clauses (c), (d), (e) and (f) with respect to
the Company and the Company Subsidiaries, and clauses (m), (r), (s),
(x) and (y) of this Section 6.1 is satisfied in all respects.
(ii) Keystone shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (without qualification as to knowledge or
materiality or otherwise) to the effect that each of the conditions
specified in clauses (c), (d), (e) and (f) of this Section 6.1 is
satisfied, with respect to Keystone, in all respects.
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<PAGE>
(h) Form S-4 Effective. The Form S-4 shall have become effective under
the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(i) Nasdaq. The Transaction Shares shall have been approved for quotation
on Nasdaq.
(j) Legal Opinions. The Buyer and the Transitory Subsidiary shall have
received (i) from Vinson & Elkins, L.L.P., counsel to the Company,
Patterson and Stewart, an opinion to the effect set forth in Exhibit B
attached hereto, such opinion to be satisfactory to the Buyer in form and
substance, and (ii) from Porter & Hedges, L.L.P., counsel to Keystone, an
opinion to the effect set forth in Exhibit C attached hereto, such opinion
to be satisfactory to the Buyer in form and substance.
(k) Pooling Letters. The Buyer and the Company shall have received
letters from Coopers & Lybrand, L.L.P. and Arthur Andersen LLP, each dated
the date of the Prospectus/Proxy Statement and confirmed in writing at the
Effective Time and addressed to the Buyer and the Company, stating that the
transactions contemplated by this Agreement will qualify as a "pooling of
interests" in accordance with GAAP and applicable SEC rules.
(l) Resignations. The Buyer and the Transitory Subsidiary shall have
received the resignations, effective as of the Effective Time, of each
director and officer of the Company and the Company Subsidiaries specified
by the Buyer in writing at least five business days prior to the Closing.
(m) No Material Adverse Change. From the date of this Agreement to the
Effective Time, there shall not have been any material adverse change in
the assets, business, financial condition or results of operations of the
Company or any Company Subsidiary (a "Company Material Adverse Change"),
nor shall there have occurred any event or development which could
reasonably be expected to result in a Company Material Adverse Change in
the future; provided, however, that the events specified in the Company
Disclosure Schedule under the caption "Events Deemed not to Constitute a
Company Material Adverse Change" shall be deemed not to constitute a
Company Material Adverse Change for purposes of this Section 6.1.
(n) Fairness Opinion. The Buyer shall have received the written opinion
of Broadview Associates to the effect that the terms of the Merger and the
purchase of the Keystone Shares are fair from a financial point of view to
the Buyer's stockholders.
(o) Patterson Agreement. Patterson and the Buyer shall have executed an
agreement in the form of Exhibit D attached hereto.
(p) Stewart Agreement. Stewart and the Buyer shall have executed an
employment letter in the form of Exhibit E attached hereto.
(q) Escrow Agreement. The Buyer, the Indemnification Representative and
the Escrow Agent shall have executed the Escrow Agreement.
(r) IBM License Agreement. The Buyer shall be reasonably satisfied that,
for the one-year period following the Closing Date, royalties payable by
the Company, TME and/or the Buyer to IBM pursuant to the Agreement dated as
of October 1, 1993 between IBM and TME, in respect of the use by the
Company and/or TME of IBM's patents licensed thereunder, will not exceed
$400,000 based on sales of $35,000,000 of central processing units and PC-
compatible systems when calculated in accordance with the method of
calculating royalty payments described in the letter of Michael Stewart
dated September 22, 1994 to Frank W. Casey of IBM and attached to the
Company Disclosure Schedule.
(s) Estoppel Certificate. The Company shall have used its best efforts to
obtain and deliver to the Buyer an estoppel certificate, in form and
substance satisfactory to the Buyer, from the lessor of TMI's principal
premises located at 5959 Corporate Drive, Houston, Texas (i) consenting to
the Merger, (ii) representing that it has no outstanding claims against
TMI, the Company or any Company Subsidiary under the lease for such
premises and (iii) representing that such premises are not encumbered by
any mortgage or deed of trust.
(t) BriskHeat Spin-Off. All actions taken and documents executed in
connection with the BriskHeat Spin-Off shall be satisfactory to the Buyer
in form and substance.
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<PAGE>
(u) Company Stock Split. The Company Stock Split shall have been
completed, and all actions taken and documents executed in connection with
the Company Stock Split shall be satisfactory to the Buyer in form and
substance.
(v) TME Stock Contribution. The TME Stock Contribution shall have been
completed, and all actions taken and documents executed in connection with
the TME Stock Contribution shall be satisfactory to the Buyer in form and
substance.
(w) Options. The TMI Option Exercise and Exchange shall have been
completed, and all actions taken and documents executed in connection with
the TMI Option Exercise and Exchange shall be satisfactory to the Buyer in
form and substance. All outstanding options, warrants, rights, agreements
or commitments, if any, other than the TMI Options to the extent
exercisable at the date hereof, to which the Company or any Company
Subsidiary is a party or which are binding upon the Company or any Company
Subsidiary providing for the issuance of any capital stock of the Company
or any Company Subsidiary shall have been terminated.
(x) Ownership Structure. The ownership structure of the Company, TMI and
TME shall be as set forth in paragraph 6 of the Preliminary Statement.
(y) Tax Opinion. The Buyer shall have received from Arthur Andersen LLP,
the Company's independent auditors, an unqualified opinion to the effect
that (i) the Merger and the exchange of shares contemplated hereby
constitutes a tax-free reorganization under Section 368(a) of the Code and
(ii) the BriskHeat Spin-Off constitutes a tax-free transaction to the
Company and the stockholders of the Company under Section 355 of the Code,
such opinion to be satisfactory to the Buyer in form and substance; and
Coopers & Lybrand, L.L.P. shall have advised the Buyer in writing that it
has determined that there is a reasonable basis to report the BriskHeat
Spin-Off as a tax-free transaction.
(z) Unvested TMI Option Holders. Each Unvested TMI Option Holder shall
have agreed in writing, in form and substance satisfactory to the Buyer, to
the treatment of his Unvested TMI Options as contemplated by this
Agreement.
(aa) Proceedings Satisfactory. All actions to be taken by the Company,
the Company Subsidiaries and Keystone in connection with the consummation
of the transactions contemplated hereby and all certificates, opinions,
instruments and other documents required to effect the transactions
contemplated hereby shall be reasonably satisfactory in form and substance
to the Buyer and the Transitory Subsidiary.
6.2 Conditions to Obligations of the Company and Keystone. The respective
obligations of the Company and Keystone to consummate the transactions
contemplated by this Agreement are subject to the satisfaction of the following
conditions:
(a) Requisite Buyer Stockholder Approval. This Agreement and the Merger
shall have received the Requisite Buyer Stockholder Approval.
(b) Requisite Company Stockholder Approval. This Agreement and the Merger
shall have received the Requisite Company Stockholder Approval.
(c) Consents. The Company, the Company Subsidiaries and Keystone, on the
one hand, and the Buyer, on the other hand, shall have obtained all
waivers, permits, consents, approvals or other authorizations from third
parties and Governmental Entities, and to effect all such registrations,
filings and notices with or to third parties and Governmental Entities, as
are necessary to consummate the transactions contemplated by this
Agreement, except where the failure to obtain or effect any of the
foregoing will not have a material adverse effect on the assets, business,
properties or condition (financial or otherwise) of the Company, any
Company Subsidiary or Keystone, will not have a material adverse effect on
the assets, business, properties or condition (financial or otherwise) of
the Buyer and the Buyer Subsidiaries taken as a whole, and will not
adversely affect the ability of the Buyer to own and operate the Company or
any Company Subsidiary after the Closing.
(d) Representations and Warranties. The representations and warranties of
the Buyer and the Transitory Subsidiary set forth in Article IV shall be
true and correct when made on the date hereof and
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<PAGE>
shall be true and correct as of the Effective Time as if made as of the
Effective Time, except for representations and warranties made as of a
specific date, which shall be true and correct as of such date.
(e) Agreements and Covenants. Each of the Buyer and the Transitory
Subsidiary shall have performed or complied with its agreements and
covenants required to be performed or complied with under this Agreement as
of or prior to the Effective Time.
(f) No Proceedings. No action, suit or proceeding shall be pending before
any Governmental Entity wherein an unfavorable judgment, order, decree,
stipulation or injunction would (i) prevent consummation of any of the
transactions contemplated by this Agreement or (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, and no such judgment, order, decree, stipulation or
injunction shall be in effect.
(g) Certificate. Each of the Buyer and the Transitory Subsidiary shall
have delivered to the Company and Keystone a certificate (without
qualification as to knowledge or materiality or otherwise) to the effect
that each of the conditions specified in clause (a), clause (c) with
respect to the Buyer, and clauses (d), (e), (f) and (o) of this Section 6.2
is satisfied in all respects.
(h) Form S-4 Effective. The Form S-4 shall have become effective under
the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(i) Nasdaq. The Transaction Shares shall have been approved for quotation
on Nasdaq.
(j) Pooling Letters. The Buyer and the Company shall have received
letters from Coopers & Lybrand, L.L.P. and Arthur Andersen LLP, each dated
the date of the Prospectus/Proxy Statement and confirmed in writing at the
Effective Time and addressed to the Buyer and the Company, stating that the
transactions contemplated by this Agreement will qualify as a "pooling of
interests" in accordance with GAAP and applicable SEC rules.
(k) Legal Opinion. The Company Stockholders and Keystone shall have
received from Hale and Dorr, counsel to the Buyer and the Transitory
Subsidiary, an opinion in the form attached hereto as Exhibit F.
(l) Tax Opinion. Patterson and Stewart shall have received from Arthur
Andersen LLP, the Company's independent auditors, an unqualified opinion to
the effect that (i) the Merger and the exchange of shares contemplated
hereby constitutes a tax-free reorganization under Section 368(a) of the
Code and (ii) the BriskHeat Spin-Off constitutes a tax-free transaction to
the Company and the stockholders of the Company under Section 355 of the
Code; and Coopers & Lybrand, L.L.P. shall have advised the Company in
writing that it has determined that there is a reasonable basis to report
the BriskHeat Spin-Off as a tax-free transaction.
(m) Patterson Agreement. Patterson and the Buyer shall have executed an
agreement in the form of Exhibit D attached hereto.
(n) Stewart Agreement. Stewart and the Buyer shall have executed an
employment letter in the form of Exhibit E attached hereto.
(o) No Material Adverse Change. From the date of this Agreement to the
Effective Time, there shall not have been any Buyer Material Adverse
Change, nor shall there have occurred any event or development which could
reasonably be expected to result in a Buyer Material Adverse Change in the
future; provided, however, that the events specified in the Buyer
Disclosure Schedule under the caption "Events Deemed not to Constitute a
Buyer Material Adverse Change" shall be deemed not to constitute a Buyer
Material Adverse Change for purposes of this Section 6.2(o).
(p) Proceedings Satisfactory. All actions to be taken by the Buyer and
the Transitory Subsidiary in connection with the consummation of the
transactions contemplated hereby and all certificates, opinions,
instruments and other documents required to effect the transactions
contemplated hereby shall be reasonably satisfactory in form and substance
to the Company and Keystone.
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<PAGE>
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification. The Company Stockholders, the Unvested TMI Option
Holders and Keystone, jointly and severally, shall indemnify and hold harmless
the Surviving Corporation, the Buyer, the Buyer Subsidiaries, the Company and
the Company Subsidiaries, from and against any and all debts, obligations and
other liabilities (whether absolute, accrued, contingent, fixed or otherwise,
or whether known or unknown, or due or to become due or otherwise), monetary
damages, fines, fees, penalties, interest obligations, deficiencies, losses and
expenses (including without limitation amounts paid in settlement, interest,
court costs, costs of investigators, fees and expenses of attorneys,
accountants, financial advisors and other experts, and other expenses of
litigation) ("Damages") incurred or suffered by any of the foregoing persons
indemnified hereunder or any Affiliate thereof (the "Indemnified Persons"):
(a) resulting from, relating to or constituting any misrepresentation,
breach of warranty or failure to perform any covenant or agreement of the
Company, any of the Company Stockholders or Unvested TMI Option Holders or
Keystone contained in this Agreement;
(b) resulting from any failure of any Company Stockholders to have good,
valid and marketable title to the issued and outstanding Company Shares
held by such Company Stockholders at the Effective Time, free and clear of
all liens, claims, pledges, options, adverse claims or charges of any
nature whatsoever, or any failure of any Unvested TMI Option Holders to
have good, valid and marketable title to the Unvested TMI Options held by
such Unvested TMI Option Holders at the Effective Time, free and clear of
all liens, claims, pledges, options, adverse claims or charges of any
nature whatsoever;
(c) resulting from any failure of Keystone to have good, valid and
marketable title to the Keystone Shares at the Effective Time, free and
clear of all liens, claims, pledges, options, adverse claims or charges of
any nature whatsoever;
(d) resulting from any claim by a stockholder or former stockholder of
the Company or any Company Subsidiary, or any other person, firm,
corporation or entity, seeking to assert, or based upon: (i) ownership or
rights to ownership of any shares of stock of the Company or any Company
Subsidiary; (ii) any rights of a stockholder, including any option,
dissenter's or preemptive rights or rights to notice or to vote; (iii) any
rights under the charter or By-laws of the Company or any Company
Subsidiary; or (iv) any claim that his, her or its shares were wrongfully
repurchased by the Company or any Company Subsidiary; and
(e) the BriskHeat Spin-Off (including without limitation liabilities for
Taxes).
7.2 Method of Asserting Claims.
(a) All claims for indemnification by an Indemnified Person pursuant to
this Article VII shall be made in accordance with the provisions of the
Escrow Agreement and this Agreement.
(b) If a third party asserts that an Indemnified Person is liable to such
third party for a monetary or other obligation which may constitute or
result in Damages for which such Indemnified Person may be entitled to
indemnification pursuant to this Article VII, and such Indemnified Person
reasonably determines that it has a valid business reason to fulfill such
obligation, then (i) such Indemnified Person shall be entitled to satisfy
such obligation, without prior notice to or consent from the
Indemnification Representative, (ii) such Indemnified Person may make a
claim for indemnification pursuant to this Article VII in accordance with
the provisions of the Escrow Agreement and this Agreement, and (iii) such
Indemnified Person shall be reimbursed, in accordance with the provisions
of the Escrow Agreement and this Agreement, for any such Damages for which
it is entitled to indemnification pursuant to this Article VII.
(c) The Indemnified Person shall give prompt written notification to the
Indemnification Representative of the commencement of any action, suit or
proceeding relating to a third party claim for which indemnification
pursuant to this Article VII may be sought. Within 20 days after delivery
of
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<PAGE>
such notification, the Indemnification Representative may, upon written
notice thereof to the Indemnified Person, assume control of the defense of
such action, suit or proceeding with counsel reasonably satisfactory to the
Indemnified Person, provided the Indemnification Representative
acknowledges in writing to the Indemnified Person that any damages, fines,
costs or other liabilities that may be assessed against the Indemnified
Person in connection with such action, suit or proceeding constitute
Damages for which the Indemnified Person shall be entitled to
indemnification pursuant to this Article VII. If the Indemnification
Representative does not so assume control of such defense, the Indemnified
Person shall control such defense. The party not controlling such defense
may participate therein at its own expense; provided that if the
Indemnification Representative assumes control of such defense and the
Indemnified Person reasonably concludes that the indemnifying parties and
the Indemnified Person have conflicting interests or different defenses
available with respect to such action, suit or proceeding, the reasonable
fees and expenses of counsel to the Indemnified Person shall be considered
"Damages" for purposes of this Agreement. The party controlling such
defense shall keep the other party advised of the status of such action,
suit or proceeding and the defense thereof and shall consider in good faith
recommendations made by the other party with respect thereto. The
Indemnified Person shall not agree to any settlement of such action, suit
or proceeding without the prior written consent of the Indemnification
Representative, which shall not be unreasonably withheld. The
Indemnification Representative shall not agree to any settlement of such
action, suit or proceeding without the prior written consent of the
Indemnified Person, which shall not be unreasonably withheld.
7.3. Survival. The representations, warranties, covenants and agreements of
the Company, the Company Stockholders, the Unvested TMI Option Holders and
Keystone set forth in this Agreement shall survive the Closing and the
consummation of the transactions contemplated hereby and shall not be affected
by any examination made for or on behalf of the Buyer or the knowledge of any
of the Buyer's officers, directors, stockholders, employees or agents. All
representations and warranties set forth in this Agreement shall expire twelve
months after the Closing Date, except that (i) the representations contained in
Section 2.23 relating to the generation, on-site storage or arrangement for
treatment, storage, disposal or recycling of Materials of Environmental
Concern, including but not limited to spent solder waste, by TMI and/or TME
shall survive the Closing and the consummation of the transactions contemplated
thereby and continue until 36 months after the Closing Date; (ii) the
representation contained in Section 2.33 shall survive the Closing and the
consummation of the transactions contemplated thereby and continue until 18
months after the Closing Date; and (iii) any claim based upon fraud or a
willful misrepresentation by any party shall survive the Closing without
limitation. If a claim for indemnification is made before expiration of such
periods, then (notwithstanding the expiration of such time period) the
representation, warranty, covenant or agreement applicable to such claim shall
survive until, but only for purposes of, the resolution of such claim.
7.4 Limitations.
(a) If the Closing occurs, and subject to Section 7.4(b), (i) the
aggregate liability of the Company Stockholders, the Unvested TMI Option
Holders and Keystone for Damages under this Article VII shall not exceed an
amount equal to the fair market value of the Escrow Shares, as determined
in accordance with the Escrow Agreement, and (ii) the Company Stockholders,
the Unvested TMI Option Holders and Keystone shall not be liable under this
Article VII unless and until, and only to the extent that, the aggregate
Damages exceed $150,000.
(b) Notwithstanding the foregoing Section 7.4(a), the indemnification
obligations of the Company Stockholders, the Unvested TMI Option Holders
and Keystone under Section 7.1 shall, with respect to the BriskHeat Spin-
Off, (i) survive until expiration of all applicable statutes of limitation
in the relevant jurisdictions of each taxing authority and (ii) not be
subject to the $150,000 threshold specified in Section 7.4(a). If a claim
for indemnification with respect to the BriskHeat Spin-Off is made before
expiration of the period specified in the preceding sentence, then
(notwithstanding the expiration of such time period) the indemnification
obligations of the Company Stockholders, the Unvested TMI Option Holders
and Keystone under Section 7.1 shall survive until, but only for purposes
of, the resolution of such claim.
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<PAGE>
(c) Except with respect to claims based on fraud or willful
misrepresentation, the rights of the Indemnified Persons under this Article
VII shall be the exclusive remedy of the Indemnified Persons with respect
to claims resulting from or relating to any misrepresentation, breach of
warranty or failure to perform any covenant or agreement of the Company,
the Company Stockholders, the Unvested TMI Option Holders or Keystone
contained in this Agreement.
ARTICLE VIII
TERMINATION
8.1 Termination of Agreement. The Parties may terminate this Agreement prior
to the Effective Time (whether before or after the Requisite Buyer Stockholder
Approval or the Requisite Company Stockholder Approval) with the prior
authorization of their Boards of Directors, as provided below:
(a) the Parties may terminate this Agreement by mutual written consent;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company and Keystone in the event the Company or Keystone is in breach
of any material representation, warranty, covenant or agreement contained
in this Agreement, which breach shall not have been cured, in the case of a
representation or warranty, prior to the Closing or, in the case of a
covenant or agreement, within ten business days following receipt by the
Company and Keystone of written notice of such breach from the Buyer;
(c) the Company or Keystone may terminate this Agreement by giving
written notice to the Buyer in the event the Buyer or the Transitory
Subsidiary is in breach of any material representation, warranty, covenant
or agreement contained in this Agreement, which breach shall not have been
cured, in the case of a representation or warranty, prior to the Closing
or, in the case of a covenant or agreement, within ten business days
following receipt by the Buyer of written notice of such breach from the
Company or Keystone;
(d) any Party may terminate this Agreement by giving written notice to
the other Parties at any time after the stockholders of the Buyer have
voted on whether to approve this Agreement and the Merger in the event this
Agreement and the Merger failed to receive the Requisite Buyer Stockholder
Approval;
(e) the Buyer may terminate this Agreement by giving written notice to
the Company and Keystone if the Closing shall not have occurred on or
before March 31, 1995 by reason of the failure of any condition precedent
under Section 6.1 hereof (unless the failure results primarily from a
breach by the Buyer or the Transitory Subsidiary of any representation,
warranty, covenant or agreement contained in this Agreement);
(f) the Company or Keystone may terminate this Agreement by giving
written notice to the Buyer if the Closing shall not have occurred on or
before March 31, 1995 by reason of the failure of any condition precedent
under Section 6.2 hereof (unless the failure results primarily from a
breach by the Company or Keystone of any representation, warranty, covenant
or agreement contained in this Agreement); or
(g) the Buyer may terminate this Agreement by giving written notice to
the Company and Keystone if, by the thirtieth business day after the date
of this Agreement, the Buyer has not completed to its satisfaction its due
diligence investigation of the Company (excluding the Company Subsidiaries
other than BriskHeat) and BriskHeat.
8.2 Effect of Termination. If any Party terminates this Agreement pursuant to
Section 8.1, all obligations of the Parties hereunder shall terminate without
any liability of any Party to any other Party (except for any liability of any
Party for breaches of this Agreement); provided, however, that the
confidentiality provisions contained in Section 5.9 shall survive any such
termination.
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<PAGE>
8.3 Termination Fee. In the event that the Requisite Buyer Stockholder
Approval is not obtained, and this Agreement has not been terminated pursuant
to Sections 8.1(a), 8.1(b), 8.1(e) or 8.1(g), the Buyer shall promptly pay (a)
to the Company, in full satisfaction of any and all obligations of the Buyer to
the Company, the Company Stockholders or the Unvested TMI Option Holders in
respect thereof, a termination fee equal to the Company's reasonable out-of-
pocket expenses incurred in connection with the transactions contemplated by
this Agreement from August 12, 1994 until the Buyer notifies the Company that
the Requisite Buyer Stockholder Approval has not been obtained, and (b) to
Keystone, in full satisfaction of any and all obligations of the Buyer to
Keystone in respect thereof, a termination fee equal to the Keystone's
reasonable out-of-pocket expenses incurred in connection with the transactions
contemplated by this Agreement from August 12, 1994 until the Buyer notifies
Keystone that the Requisite Buyer Stockholder Approval has not been obtained;
provided, however, that in no event shall the aggregate amount of such
termination fees exceed $150,000.
ARTICLE IX
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ -------
<S> <C>
Additional Buyer Shares.............................. 1.7(c)
Affiliate............................................ 2.15(f)
Affiliate Agreement.................................. 5.17
Aggregate Buyer Shares............................... 1.5(a)
Arbitrators.......................................... 10.14(b)
BriskHeat............................................ Preliminary Statement
BriskHeat Common Stock............................... Preliminary Statement
BriskHeat Spin-Off................................... Preliminary Statement
Buyer................................................ Introduction
Buyer Activity....................................... 5.13(e)
Buyer Balance Sheet.................................. 4.7
Buyer Common Stock................................... 1.5(a)
Buyer Disclosure Schedule............................ Article IV
Buyer Material Adverse Change........................ 4.6
Buyer Reports........................................ 4.5
Buyer Subsidiary..................................... 1.11(b)
CERCLA............................................... 2.23(a)
Certificate of Merger................................ 1.1(a)
Certificates......................................... 1.8(a)
Closing.............................................. Preliminary Statement
Closing Date......................................... 1.2
Code................................................. 2.9(c)
Company.............................................. Introduction
Company Buyer Shares................................. 1.5(a)
Company Common Stock................................. Preliminary Statement
Company Disclosure Schedule.......................... Article II
Company Escrow Buyer Shares.......................... 1.5(b)
Company Initial Buyer Shares......................... 1.5(b)
Company Material Adverse Change...................... 6.1(m)
Company Percentage................................... 1.5(a)
Company Shares....................................... 1.5(a)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ -------
<S> <C>
Company Stockholder.................................. Preliminary Statement
Company Stock Split.................................. Preliminary Statement
Company Subsidiary................................... Preliminary Statement
Company's Knowledge.................................. 2.9(b)
Confidential Information............................. 5.9
Conversion Ratio..................................... 1.5(a)
Damages.............................................. 7.1
Dissenting Shares.................................... 1.6(a)
Effective Time....................................... 1.1(a)
Employee Benefit Plan................................ 2.22(a)
Environmental Law.................................... 2.23(a)
ERISA................................................ 2.22(a)
ERISA Affiliate...................................... 2.22(a)
Escrow Agreement..................................... 1.3
Escrow Agent......................................... 1.3
Escrow Conversion Ratio.............................. 1.5(a)
Escrow Option Shares................................. 1.7(c)
Escrow Shares........................................ 1.5(d)
Exchange Act......................................... 5.3(a)
Form S-4............................................. 5.3(a)
GAAP................................................. 2.6(a)
Governmental Entity.................................. 2.4(b)
IBM.................................................. 2.33
Indemnification Representative....................... 1.3
Indemnified Party.................................... 5.13(g)
Indemnified Persons.................................. 7.1
Indemnifying Party................................... 5.13(g)
Initial Conversion Ratio............................. 1.5(a)
Initial Option Shares................................ 1.7(c)
Initial Shares....................................... 1.5(d)
Intellectual Property................................ 2.12(a)
Interim Financial Statements......................... 5.5
Keystone............................................. Introduction
Keystone Buyer Shares................................ 1.5(a)
Keystone Escrow Buyer Shares......................... 1.5(a)
Keystone Initial Buyer Shares........................ 1.5(a)
Keystone Percentage.................................. 1.5(a)
Keystone Shares...................................... Preliminary Statement
Keystone TME Shares.................................. Preliminary Statement
Keystone TMI Shares.................................. Preliminary Statement
Materials of Environmental Concern................... 2.23(b)
Merger............................................... Preliminary Statement
Most Recent BriskHeat Balance Sheet.................. 2.8(b)
Most Recent Combined Balance Sheet................... 2.8(d)
Most Recent Company Balance Sheet.................... 2.8(c)
Most Recent TMI Balance Sheet........................ 2.8(a)
Nasdaq............................................... 1.5(a)
Ordinary Course of Business.......................... 2.4(f)
Outstanding Company Shares........................... 1.5(a)
Parties.............................................. Introduction
Patterson............................................ Preliminary Statement
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ -------
<S> <C>
Patterson Designee................................... 5.14(b)
Permits.............................................. 2.25
Prospectus/Proxy Statement........................... 5.3(a)
Registrable Shares................................... 5.13(a)
Registration Expenses................................ 5.13(a)
Registration Rights Holders.......................... 5.13(a)
Registration Statement............................... 5.13(a)
Requisite Buyer Stockholder Approval................. 4.3
Requisite Company Stockholder Approval............... 2.3
Rule 145............................................. 5.13(a)
Rule 145 Affiliates.................................. 5.17
SEC.................................................. 4.5
Securities Act....................................... 2.2
Security Interest.................................... 2.4
Special Meeting...................................... 5.3(a)
Stewart.............................................. Preliminary Statement
Stewart Designee..................................... 5.14(a)
Subsidiary........................................... Preliminary Statement
Surviving Corporation................................ 1.1(a)
Taxes................................................ 2.9(a)
Tax Returns.......................................... 2.9(a)
TME.................................................. Preliminary Statement
TME Common Stock..................................... Preliminary Statement
TME Stock Contribution............................... Preliminary Statement
TMI.................................................. Preliminary Statement
TMI Common Stock..................................... Preliminary Statement
TMI Option Exercise and Exchange..................... Preliminary Statement
TMI Options.......................................... Preliminary Statement
Transaction Shares................................... 1.5(d)
Transitory Subsidiary................................ Introduction
Unvested TMI Option Holder........................... 1.7(c)
Unvested TMI Options................................. 1.7(c)
</TABLE>
ARTICLE X
MISCELLANEOUS
10.1 Press Releases and Announcements. No Party shall issue any press release
or announcement relating to the subject matter of this Agreement without the
prior written approval of the other Parties; provided, however, that any Party
may make any public disclosure it believes in good faith is required by law or
regulation (in which case the disclosing Party shall advise the other Parties
and provide them with a copy of the proposed disclosure prior to making the
disclosure).
10.2 No Third Party Beneficiaries. This Agreement shall not confer any rights
or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in
Article I concerning payment of the Company Buyer Shares are intended for the
benefit of the Company Stockholders and the provisions in Article I concerning
payment of the Additional Buyer Shares are intended for the benefit of the
Unvested TMI Option Holders.
10.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, that may have related in any way to the subject matter hereof
(other than the confidentiality letter agreement dated May 9, 1994 between the
Buyer and the Company, which shall continue in accordance with its terms).
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10.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of the other Parties; provided that the Transitory Subsidiary
may assign its rights, interests and obligations hereunder to an Affiliate of
the Buyer.
10.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
10.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a
reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
If to the Company:
c/o Texas Microsystems, Inc.
5959 Corporate Drive
Houston, Texas 77036
Attention: President
Copy to:
Robert H. Whilden, Jr., Esq.
Vinson & Elkins, L.L.P.
2500 First City Tower
1001 Fannin
Houston, Texas 77002
If to Keystone:
Keystone International, Inc.
9600 West Gulf Bank Drive
Houston, Texas 77040
Attention: Mark E. Baldwin
Copy to:
T. William Porter, Esq.
Porter & Hedges, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002
If to the Buyer or Transitory Subsidiary:
Sequoia Systems, Inc.
400 Nickerson Road
Marlborough, Massachusetts 01752
Attention: President
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Copies to:
Sequoia Systems, Inc.
400 Nickerson Road
Marlborough, Massachusetts 01752
Attention: General Counsel
David A. Westenberg, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic
mail), but no such notice, request, demand, claim, or other communication shall
be deemed to have been duly given unless and until it actually is received by
the individual for whom it is intended. Any Party may change the address to
which notices, requests, demands, claims, and other communications hereunder
are to be delivered by giving the other Parties notice in the manner herein set
forth.
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the
Commonwealth of Massachusetts.
10.9 Amendments and Waivers. The Parties may mutually amend any provision of
this Agreement at any time prior to the Effective Time with the prior
authorization of their respective Boards of Directors; provided, however, that
any amendment effected subsequent to the Requisite Buyer Stockholder Approval
shall be subject to the restrictions contained in the Delaware General
Corporation Law. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation, or breach of warranty, covenant
or agreement hereunder, whether intentional or not, shall be deemed to extend
to any prior or subsequent default, misrepresentation, or breach of warranty,
covenant or agreement hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.
10.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the expiration of the
time within which the judgment may be appealed.
10.11 Expenses. Except as set forth in the Escrow Agreement, each of the
Parties shall bear its own costs and expenses (including legal fees and
expenses) incurred in connection with this Agreement and the transactions
contemplated hereby; provided, however, that if the Merger is consummated, the
Company and the Company Subsidiaries shall incur only reasonable legal,
accounting and other fees and expenses in connection with the Merger and, in no
event, shall the Company or any Company Subsidiary incur any legal, accounting
or other fees and expenses on behalf of any Company Stockholder or Unvested TMI
Option Holder personally; any fees and expenses incurred by the Company or any
Company Subsidiary in violation of the foregoing restrictions shall be
recovered by the Buyer without regard to the provisions of Section 7.4(a).
10.12 Specific Performance. Each of the Parties acknowledges and agrees that
one or more of the other Parties would be damaged irreparably in the event any
of the provisions of this Agreement are not
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performed in accordance with their specific terms or otherwise are breached.
Accordingly, each of the Parties agrees that the other Parties shall be
entitled to an injunction or injunctions to prevent breaches of the provisions
of this Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United States or
any state thereof having jurisdiction over the Parties and the matter (subject
to the provisions of Section 10.13), in addition to any other remedy to which
it may be entitled, at law or in equity.
10.13 Submission to Jurisdiction. Each of the Parties (a) submits to the
jurisdiction of any state or federal court sitting in Boston, Massachusetts in
any action or proceeding arising out of or relating to this Agreement, (b)
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court, and (c) agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court.
Each of the Parties waives any defense of inconvenient forum to the maintenance
of any action or proceeding so brought and waives any bond, surety or other
security that might be required of any other Party with respect thereto. Any
Party may make service on another Party by sending or delivering a copy of the
process to the Party to be served at the address and in the manner provided for
the giving of notices in Section 10.7. Nothing in this Section 10.13, however,
shall affect the right of any Party to serve legal process in any other manner
permitted by law.
10.14 Dispute Resolution; Arbitration.
(a) All disputes under the Escrow Agreement shall be governed exclusively
by the provisions of the Escrow Agreement. In the event of any other
dispute between the Parties with respect to any matter covered by this
Agreement, the parties shall first use their best efforts to resolve such
dispute among themselves. If the Parties are unable to resolve the dispute
within 30 calendar days after the commencement of efforts to resolve the
dispute, the dispute shall submitted to arbitration in accordance with
Section 10.14(b) hereof.
(b)(i) Either the Buyer or the Indemnification Representative may submit
any matter referred to in Section 10.14(a) hereof to arbitration by
notifying the other Parties hereto, in writing, of such dispute. Within 10
days after receipt of such notice, the Buyer shall designate in writing one
arbitrator, the Indemnification Representative shall designate a second
arbitrator and the two arbitrators shall jointly designate a third
arbitrator (collectively, the "Arbitrators") to resolved the dispute. None
of the Arbitrators shall be an employee, consultant, officer, director or
stockholder of any of the Parties hereto or an affiliate of any Party
hereto.
(ii) Within 15 days of after the designation of the Arbitrators
hereunder, the Arbitrators, the Buyer and the Indemnification
Representative shall meet, at which time the Buyer and the Indemnification
Representative shall be required to set forth in writing all disputed
issues and a proposed ruling on each such issue.
(iii) The Arbitrators shall set a date for a hearing, which shall be no
later than 30 days after the submission of written proposals pursuant to
10.14(b)(ii) above, to discuss each of the issues identified by the Buyer
and the Indemnification Representative. Each such party shall have the
right to be represented by counsel. The arbitration shall be governed by
the rules of the American Arbitration Association; provided, that the
Arbitrators shall have sole discretion with regard to the admissibility of
evidence.
(iv) The Arbitrators shall use their best efforts to rule on each
disputed issue within 30 days after the completion of the hearings
described in Section 10.14(b)(iii) above. The determination of the
Arbitrators as to the resolution of any dispute shall be binding and
conclusive upon all parties hereto. All rulings of the Arbitrators shall be
in writing, determined by at least a majority of their number and shall be
delivered to the Parties hereto.
(v) The prevailing party in any arbitration shall be entitled to an award
of reasonable attorneys' fees incurred in connection with the arbitration.
The non-prevailing party shall pay such fees, together with the fees of the
Arbitrators and the costs and expenses of the arbitration.
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(vi) Any arbitration pursuant to this Section 10.14(b) shall be conducted
in Boston, Massachusetts. Any arbitration award may be entered in and
enforced by any court having jurisdiction thereover and the Parties hereby
consent and commit themselves to the jurisdiction of the courts of the
State of Delaware and the United States District Court for the District of
Massachusetts for purposes of the enforcement of any arbitration award.
10.15 Construction. The language used in this Agreement shall be deemed to be
the language chosen by the Parties hereto to express their mutual intent, and
no rule of strict construction shall be applied against any Party. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder,
unless the context requires otherwise.
10.16 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
date first above written.
SEQUOIA SYSTEMS, INC.
/s/ Cornelius P. McMullan
By: _________________________________
President and CEO
Title: ______________________________
SEQUOIA ACQUISITION CORPORATION
/s/ Cornelius P. McMullan
By: _________________________________
President
Title: ______________________________
SPCO, INC.
/s/ J. Michael Stewart
By: _________________________________
President
Title: ______________________________
KEYSTONE INTERNATIONAL, INC.
/s/ Mark E. Baldwin
By: _________________________________
Vice President
Title: ______________________________
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The undersigned stockholders of the Company hereby execute this Agreement for
the limited purposes of agreeing to and becoming bound by the provisions of
Sections 1.17, 5.1, 5.13, 5.14, 5.15, 5.19 and 5.20. In addition, Patterson
hereby agrees at the Closing to execute the agreement in the form of Exhibit D
attached hereto, and Stewart hereby agrees at the Closing to execute the
employment letter in the form of Exhibit E attached hereto.
/s/ W. Wayne Patterson
_____________________________________
W. WAYNE PATTERSON
/s/ J. Michael Stewart
_____________________________________
J. MICHAEL STEWART
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<PAGE>
EXHIBIT A
ESCROW AGREEMENT
This Escrow Agreement is entered into as of , 1995 among Sequoia
Systems, Inc., a Delaware corporation (the "Buyer"), W. Wayne Patterson (the
"Indemnification Representative") and The First National Bank of Boston (the
"Escrow Agent").
WHEREAS, the Buyer, a transitory subsidiary of the Buyer, SPCO, Inc., a
Delaware corporation (the "Company"), and Keystone International, Inc., a Texas
corporation ("Keystone"), have entered into a Merger and Stock Purchase
Agreement dated as of November 9, 1994 (the "Acquisition Agreement") pursuant
to which such transitory subsidiary will be merged with and into the Company
which, as the surviving corporation (the "Surviving Corporation"), will become
a wholly-owned subsidiary of the Buyer, and simultaneously the Buyer will
purchase the Keystone Shares (as defined in the Acquisition Agreement) from
Keystone.
WHEREAS, the Acquisition Agreement provides that an escrow account will be
established to secure the indemnification obligations of Keystone, the Company
Stockholders and the Unvested TMI Option Holders to the Indemnified Persons
under the Acquisition Agreement on the terms and conditions set forth herein
and in the Acquisition Agreement.
WHEREAS, the parties hereto desire to establish the terms and conditions
pursuant to which such escrow account will be established and maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not otherwise
defined shall have the meanings given them in the Acquisition Agreement.
2. Consent of Keystone, Company Stockholders and Unvested TMI Option
Holders. By virtue of the execution of the Acquisition Agreement by Keystone
and approval of the Acquisition Agreement by the Company Stockholders, together
with the approval of the Unvested TMI Option Holders as contemplated by Section
6.1(z) of the Acquisition Agreement, Keystone, the Company Stockholders and the
Unvested TMI Option Holders entitled to receive Transaction Shares pursuant to
the Acquisition Agreement have, without any further act of Keystone, any
Company Stockholder or any Unvested TMI Option Holder, consented to: (a) the
establishment of the Escrow Account (as defined below) to secure the
indemnification obligations of Keystone, the Company Stockholders and the
Unvested TMI Option Holders under Article VII of the Acquisition Agreement in
the manner set forth herein, (b) the appointment of the Indemnification
Representative as their representative for purposes of this Agreement and as
attorney-in-fact and agent for and on behalf of Keystone, each Company
Stockholder and each Unvested TMI Option Holder, and the taking by the
Indemnification Representative of any and all actions and the making of any
decisions required or permitted to be taken or made by him under this Agreement
and (c) all of the other terms, conditions and limitations in this Agreement.
3. Escrow and Indemnification.
(a) Escrow Shares. On the Closing Date, the Buyer shall deposit with the
Escrow Agent certificates for the Escrow Shares, issued in the names of
Keystone, the respective Company Stockholders (other than the holders of
Dissenting Shares, if any) and the respective Unvested TMI Option Holders. The
Buyer may from time to time deposit additional Company Escrow Shares with the
Escrow Agent pursuant to the final sentence of Section 1.6(a) of the
Acquisition Agreement. The Escrow Shares shall be held as a trust fund and
shall not be subject to any lien, attachment, trustee process or any other
judicial process of any creditor of any party hereto. The Escrow Agent agrees
to accept delivery of the Escrow Shares and to hold such Escrow Shares in an
escrow account (the "Escrow Account"), subject to the terms and conditions of
this Agreement.
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(b) Indemnification. Keystone, the Company Stockholders and the Unvested TMI
Option Holders, jointly and severally, have agreed in Article VII of the
Acquisition Agreement to indemnify and hold harmless the Indemnified Persons
from and against specified Damages. The Escrow Shares shall be security for the
indemnification obligation of Keystone, the Company Stockholders and the
Unvested TMI Option Holders, subject to the limitations, and in the manner
provided, in this Agreement and the Acquisition Agreement.
(c) Dividends, Etc. Any securities distributable to Keystone, the Company
Stockholders or the Unvested TMI Option Holders in respect of or in exchange
for any of the Escrow Shares, whether by way of stock dividends, stock splits
or otherwise, shall be delivered to the Escrow Agent, who shall hold such
securities in the Escrow Account. Such securities shall be issued in the names
of Keystone, the respective Company Stockholders (other than the holders of
Dissenting Shares) and the respective Unvested TMI Option Holders and shall be
considered Escrow Shares for purposes hereof. Any cash dividends or property
(other than securities) distributable to Keystone, the Company Stockholders or
the Unvested TMI Option Holders in respect of the Escrow Shares shall be
distributed to Keystone, the Company Stockholders and the Unvested TMI Option
Holders, respectively.
(d) Voting of Escrow Shares. Keystone, the Company Stockholders and the
Unvested TMI Option Holders shall be entitled to vote their Escrow Shares and
the Buyer shall deliver proxy materials to and accept proxies from the Escrow
Agent with respect to such Escrow Shares on the same basis as other
stockholders of the Buyer.
(e) Transferability. The respective interests of Keystone, the Company
Stockholders and the Unvested TMI Option Holders in the Escrow Shares shall not
be assignable or transferable, other than by operation of law. Notice of any
such assignment or transfer by operation of law shall be given to the Escrow
Agent and the Buyer, and no such assignment or transfer shall be valid until
such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall administer the
Escrow Account as follows:
(a) If an Indemnified Person has incurred or suffered Damages for which it is
or may be entitled to indemnification under Article VII of the Acquisition
Agreement, the Indemnified Person shall give written notice of such claim (a
"Claim Notice") to the Indemnification Representative and the Escrow Agent.
Each Claim Notice shall state the amount of claimed Damages (the "Claimed
Amount") and the basis for such claim.
(b) Within 20 days after delivery of a Claim Notice, the Indemnification
Representative shall provide to the Indemnified Person, with a copy to the
Escrow Agent, a written response (the "Response Notice") in which the
Indemnification Representative shall: (i) agree that Escrow Shares having a
Fair Market Value (as computed pursuant to Section 6 hereof) equal to the full
Claimed Amount may be released from the Escrow Account to the Indemnified
Person, (ii) agree that Escrow Shares having a Fair Market Value equal to part,
but not all, of the Claimed Amount (the "Agreed Amount") may be released from
the Escrow Account to the Indemnified Person or (iii) contest that all or any
of the Escrow Shares may be released from the Escrow Account to the Indemnified
Person. The Indemnification Representative may contest the release of Escrow
Shares having a Fair Market Value equal to all or a portion of the Claimed
Amount only based upon a good faith belief that all or such portion of the
Claimed Amount does not constitute Damages for which the Indemnified Person is
entitled to indemnification under Article VII of the Acquisition Agreement. If
no Response Notice is delivered by the Indemnification Representative within
such 20-day period, the Indemnification Representative shall be deemed to have
agreed that Escrow Shares having a Fair Market Value equal to all of the
Claimed Amount may be released to the Indemnified Person from the Escrow
Account.
(c) If the Indemnification Representative in the Response Notice agrees (or
is deemed to have agreed) that Escrow Shares having a Fair Market Value equal
to all of the Claimed Amount may be released from the Escrow Account to the
Indemnified Person, the Escrow Agent shall promptly thereafter deliver and
assign
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to the Indemnified Person such number of Escrow Shares held in the Escrow
Account which have a Fair Market Value equal to the Claimed Amount (or such
lesser number of Escrow Shares as is then held in the Escrow Account).
(d) If the Indemnification Representative in the Response Notice agrees that
Escrow Shares having a Fair Market Value equal to part, but not all, of the
Claimed Amount may be released from the Escrow Account to the Indemnified
Person, the Escrow Agent shall promptly thereafter deliver and assign to the
Indemnified Person such number of Escrow Shares held in the Escrow Account
which have a Fair Market Value equal to the Agreed Amount (or such lesser
number of Escrow Shares as is then held in the Escrow Account).
(e) If the Indemnification Representative in the Response Notice contests the
release of Escrow Shares having a Fair Market Value equal to all or part of the
Claimed Amount (the "Contested Amount"), the matter shall be settled by binding
arbitration in Boston, Massachusetts. All claims shall be settled by three
arbitrators in accordance with the Commercial Arbitration Rules then in effect
of the American Arbitration Association (the "AAA Rules"). The Indemnification
Representative and the Indemnified Person shall each designate one arbitrator
within 15 days of the delivery of the Indemnification Representative's Response
Notice contesting the Claimed Amount. The Indemnification Representative and
the Indemnified Person shall cause such designated arbitrators mutually to
agree upon and shall designate a third arbitrator; provided, however, that (i)
failing such agreement within 45 days of delivery of the Indemnification
Representative's Response Notice, the third arbitrator shall be appointed in
accordance with the AAA Rules and (ii) if either the Indemnification
Representative or the Indemnified Person fail to timely designate an
arbitrator, the dispute shall be resolved by the one arbitrator timely
designated. Keystone, the Company Stockholders and the Unvested TMI Option
Holders, on the one hand, and the Indemnified Person, on the other hand, shall
pay the fees and expenses of the arbitrators respectively designated by the
Indemnification Representative and the Indemnified Person and shall bear
equally the fees and expenses of the third arbitrator. The Indemnification
Representative and the Indemnified Person shall cause the arbitrators to decide
the matter to be arbitrated pursuant hereto within 60 days after the
appointment of the last arbitrator. The arbitrators' decision shall relate
solely to whether the Indemnified Person is entitled to receive the Contested
Amount (or a portion thereof) pursuant to the applicable terms of the
Acquisition Agreement and this Agreement. The final decision of the majority of
the arbitrators shall be furnished to the Indemnification Representative, the
Indemnified Person and the Escrow Agent in writing and shall constitute a
conclusive determination of the issue in question, binding upon the
Indemnification Representative, Keystone, the Company Stockholders, the
Unvested TMI Option Holders, the Indemnified Person and the Escrow Agent and
shall not be contested by any of them. Such decision may be used in a court of
law only for the purpose of seeking enforcement of the arbitrators' award.
After delivery of a Response Notice that the Claimed Amount is contested by the
Indemnification Representative, the Escrow Agent shall continue to hold in the
Escrow Account such number of Escrow Shares having a Fair Market Value
sufficient to cover the Contested Amount (up to the number of Escrow Shares
then available in the Escrow Account), notwithstanding the occurrence of the
First Termination Date or Second Termination Date (as defined below), until (i)
delivery of a copy of a settlement agreement executed by the Indemnified Person
and the Indemnification Representative setting forth instructions to the Escrow
Agent as to the release of Escrow Shares, if any, that shall be made with
respect to the Contested Amount or (ii) delivery of a copy of the final award
of the majority of the arbitrators setting forth instructions to the Escrow
Agent as to the release of Escrow Shares, if any, that shall be made with
respect to the Contested Amount. The Escrow Agent shall thereupon release
Escrow Shares from the Escrow Account (to the extent Escrow Shares are then
held in the Escrow Account) to the Indemnified Person in accordance with such
agreement or instructions.
5. Release of Escrow Account.
(a) For purposes of this Agreement, (i) the "First Termination Date" shall be
the first anniversary of the date of this Agreement, and (ii) the "Second
Termination Date" shall be the date on which the last applicable statute of
limitation in any relevant jurisdiction of any taxing authority shall have
expired with respect to the BriskHeat Spin-Off (as defined in the Acquisition
Agreement).
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(b) Promptly after the First Termination Date, the Escrow Agent shall
distribute to Keystone, the Company Stockholders and the Unvested TMI Option
Holders fifty percent (50%) of the Escrow Account then held in escrow.
Notwithstanding the foregoing, if an Indemnified Person has previously given a
Claim Notice which has not then been resolved in accordance with Section 4, the
Escrow Agent shall retain in escrow after the First Termination Date at least
such number of Escrow Shares having a Fair Market Value as equals the Claimed
Amount which has not then been resolved.
(c) Buyer shall give notice to the Escrow Agent of the occurrence of the
Second Termination Date. Promptly after receipt of said notice, the Escrow
Agent shall distribute to Keystone, the Company Stockholders and the Unvested
TMI Option Holders the Escrow Account then held in escrow. Notwithstanding the
foregoing, if an Indemnified Person has previously given a Claim Notice which
has not then been resolved in accordance with Section 4, the Escrow Agent shall
retain in escrow after the Second Termination Date such number of Escrow Shares
having a Fair Market Value equal to the Claimed Amount which has not then been
resolved.
(d) Concurrently with the execution of this Agreement, the Company shall
provide the Escrow Agent with a written record of the name and address of
Keystone, each Company Stockholder and each Unvested TMI Option Holders and the
number of Escrow Shares credited to his or its account, and such list shall be
attached hereto as Attachment A. Any distribution of all or a portion of the
Escrow Shares to the Keystone, Company Stockholders and Unvested TMI Option
Holders shall be made in accordance with the percentages set forth opposite
such holders' respective names on Attachment A attached hereto; provided,
however, that the Escrow Agent shall withhold the distribution of the portion
of the Escrow Shares otherwise distributable to Keystone or Company
Stockholders who have not, according to written notice provided by the Buyer to
the Escrow Agent, prior to such distribution, surrendered their respective
Certificates pursuant to the terms and conditions of the Acquisition Agreement
("Withheld Escrow Shares"); and provided further that such Attachment A shall
be appropriately revised in the event the Buyer deposits additional Company
Escrow Shares with the Escrow Agent pursuant to the final sentence of Section
1.6(a) of the Acquisition Agreement following the date of this Agreement. Any
such Withheld Escrow Shares shall be delivered to the Buyer promptly after the
Second Termination Date, and shall be delivered by the Buyer to Keystone or the
Company Stockholders to whom such shares would have otherwise been distributed
upon surrender of their respective Certificates. Distributions to Keystone, the
Company Stockholders and Unvested TMI Option Holders shall be made by mailing
stock certificates to such holders at their respective addresses shown on
Attachment A (or such other address as may be provided in writing to the Escrow
Agent by any such holder). No fractional Escrow Shares shall be distributed to
Keystone, Company Stockholders or Unvested TMI Option Holders pursuant to this
Agreement. In lieu of fractional shares that Keystone, Company Stockholders or
Unvested TMI Option Holders would otherwise be entitled to receive, Keystone
and such Company Stockholders and Unvested TMI Option Holders shall receive a
cash payment equal to the value of the such fractional share, based on the
average of the last sale prices of the Buyer Common Stock on the Nasdaq
National Market ("Nasdaq") on the Closing Date.
6. Valuation of Escrow Shares. For purposes of this Agreement, the Fair
Market Value of the Escrow Shares shall be determined based upon the closing
sales price per share of the Buyer Common Stock on Nasdaq on the Closing Date.
Buyer shall certify such closing sales price on the Closing to the Escrow
Agent.
7. Fees and Expenses.
(a) The Buyer, on the one hand, and Keystone, the Company Stockholders and
the Unvested TMI Option Holders, on the other hand, shall each pay one-half of
the fees of the Escrow Agent for the services to be rendered by the Escrow
Agent hereunder. Such fees shall be nonrefundable and paid in advance. Said
parties also agree to pay on demand Escrow Agent's costs and expenses,
including the reasonable fees and expenses of counsel to the Escrow Agent,
other than costs and expenses reimbursed pursuant to Section 8(b) hereof
incurred in connection with its duties hereafter.
(b) All reasonable expenses (including attorneys' fees) incurred by the
Indemnification Representative in connection with the performance of his duties
hereunder shall be reimbursed to the Indemnification Representative by
Keystone, the Company Stockholders and the Unvested TMI Option Holders.
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8. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any action
taken or suffered by it in reliance upon any notice, direction, instruction,
consent, statement or other documents believed by it to be genuine and duly
authorized, nor for other action or inaction except its own willful misconduct
or negligence. The Escrow Agent shall not be responsible for the validity or
sufficiency of this Agreement. The duties of the Escrow Agent shall be
determined only with reference to this Escrow Agreement and applicable laws and
Escrow Agent is not charged with knowledge of or any duties or responsibilities
in connection with any other document or agreement. In all questions arising
under the Escrow Agreement, the Escrow Agent may rely on the advice of counsel,
and for anything done, omitted or suffered in good faith by the Escrow Agent
based on such advice the Escrow Agent shall not be liable to anyone. The Escrow
Agent shall not be required to take any action hereunder involving any expense
unless the payment of such expense is made or provided for in a manner
reasonably satisfactory to it.
(b) The Buyer, Keystone, the Company Stockholders and the Unvested TMI Option
Holders hereby jointly and severally agree to indemnify the Escrow Agent for,
and hold it harmless against, any loss, liability or expense incurred without
negligence or willful misconduct on the part of Escrow Agent, arising out of or
in connection with its carrying out of its duties hereunder, including the cost
and expenses of defending itself against any claim of liability. As between
themselves, the Buyer, on the one hand, and Keystone, the Company Stockholders
and the Unvested TMI Option Holders, on the other hand, shall each be liable
for one-half of such amounts.
9. Liability and Authority of Indemnification Representative; Successors and
Assigns.
(a) The Indemnification Representative shall incur no liability with respect
to any action taken or suffered by him in reliance upon any note, direction,
instruction, consent, statement or other documents believed by him to be
genuinely and duly authorized, nor for other action or inaction except his own
willful misconduct or negligence. The Indemnification Representative may, in
all questions arising under the Escrow Agreement, rely on the advice of counsel
and for anything done, omitted or suffered in good faith by the Indemnification
Representative based on such advice, the Indemnification Representative shall
not be liable to anyone. The Indemnification Representative shall be
indemnified and held harmless by Keystone, the Company Stockholders and the
Unvested TMI Option Holders from all losses, costs and expenses which he may
incur as a result of involvement in any legal proceedings arising from the
performance of his duties hereunder.
(b) In the event of the death or permanent disability of the Indemnification
Representative, or his resignation as an Indemnification Representative, a
successor Indemnification Representative shall be elected by a majority vote of
Keystone, the Company Stockholders and the Unvested TMI Option Holders, with
Keystone and each Company Stockholder and each Unvested TMI Option Holder (or
his or her successors or assigns) to be given a vote equal to the number of
votes represented by the Transaction Shares held by Keystone or such Company
Stockholder or Unvested TMI Option Holder immediately prior to the Effective
Time. Each successor Indemnification Representative shall have all of the
power, authority, rights and privileges conferred by this Agreement upon the
original Indemnification Representative, and the term "Indemnification
Representative" as used herein shall be deemed to include any successor
Indemnification Representatives.
(c) The Indemnification Representative shall have full power and authority to
represent Keystone, the Company Stockholders and the Unvested TMI Option
Holders, and any successors to Keystone, the Company Stockholders or the
Unvested TMI Option Holders, with respect to all matters arising under this
Agreement and all action taken by any Indemnification Representative hereunder
shall be binding upon Keystone, the Company Stockholders and the Unvested TMI
Option Holders, and their successors, as if expressly confirmed and ratified in
writing by each of them. Without limiting the generality of the foregoing, the
Indemnification Representative shall have full power and authority to interpret
all of the terms and provisions of this Agreement, to compromise any claims
asserted hereunder and to authorize payments to be made with respect thereto,
on behalf of Keystone, the Company Stockholders and the Unvested TMI Option
Holders and their successors. All actions to be taken by the Indemnification
Representative hereunder shall be evidenced by, and taken upon, the written
direction of a majority thereof.
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10. Termination. This Agreement shall terminate upon the later of the Second
Termination Date or the disbursement by the Escrow Agent of all of the Escrow
Shares in the Escrow Account in accordance with this Agreement; provided that
the provisions of Sections 8 and 9 shall survive such termination.
11. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case to the address set
forth below. Any such notice, instruction or communication shall be deemed to
have been delivered two business days after it is sent by registered or
certified mail, return receipt requested, postage prepaid, or one business day
after it is sent via a reputable nationwide overnight courier service.
If to the Buyer: Copies to:
Sequoia Systems, Inc. Jeremy Swett, Esq.
400 Nickerson Road Sequoia Systems, Inc.
Marlborough, MA 01752 400 Nickerson Road
Attention: President Marlborough, MA 01752
David A. Westenberg, Esq.
Hale and Dorr
60 State Street
Boston, MA 02109
If to the Indemnification Representative:
Copy to:
W. Wayne Patterson Robert H. Whilden, Jr., Esq.
3324 Ella Lee Lane Vinson & Elkins, L.L.P.
Houston, TX 77019 2500 First City Tower
1001 Fannin
Houston, TX 77002
If to the Escrow Agent:
The First National Bank of Boston
150 Royall Street
Mail Stop 45-02-15
Canton, MA 02021
Attention: Corporate Trust Administration
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery,
telecopy or ordinary mail), but no such notice, instruction or communication
shall be deemed to have been delivered unless and until it is actually received
by the party to whom it was sent. Any party may change the address to which
notices, instructions or communications are to be delivered by giving the other
parties to this Agreement notice thereof in the manner set forth in this
Section 11.
12. Successor Escrow Agent. In the event the Escrow Agent becomes unavailable
or unwilling to continue in its capacity herewith, the Escrow Agent may resign
and be discharged from its duties or obligations hereunder by delivering a
resignation to the parties to this Escrow Agreement, not less than 30 days
prior to the date when such resignation shall take effect. The Buyer may
appoint a successor Escrow Agent without the consent of the Indemnification
Representative so long as such successor is a bank with assets of at least $500
million, and may appoint any other successor Escrow Agent with the consent of
the Indemnification Representative, which shall not be unreasonably withheld.
If, within such notice period, the Buyer provides to the Escrow Agent written
instructions with respect to the appointment of a successor
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Escrow Agent and directions for the transfer of any Escrow Account then held by
the Escrow Agent to such successor, the Escrow Agent shall act in accordance
with such instructions and promptly transfer such Escrow Account to such
designated successor. If no successor is appointed, the Escrow Agent may apply
to a court of competent jurisdiction for such appointment.
13. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and construed
in accordance with the internal laws of the Commonwealth of Massachusetts
without regard to conflict-of-law principles and shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and
assigns.
(b) Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(c) Entire Agreement. Except as set forth in the Acquisition Agreement, this
Agreement constitutes the entire understanding and agreement of the parties
with respect to the subject matter of this Agreement and supersedes all prior
agreements or understandings, written or oral, between the parties with respect
to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any breach
of any provision of this Escrow Agreement shall be effective unless in writing.
No waiver by any party of any such condition or breach, in any one instance,
shall be deemed to be a further or continuing waiver of any such condition or
breach or a waiver of any other condition or breach of any other provision
contained herein.
(e) Amendment. This Agreement may be amended only with the written consent of
the Buyer, the Escrow Agent and the Indemnification Representative.
(f) This Agreement shall become effective only upon the occurrence of the
Closing as defined in the Acquisition Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
SEQUOIA SYSTEMS, INC.
By: _________________________________
Title: ______________________________
_____________________________________
W. Wayne Patterson
THE FIRST NATIONAL BANK OF BOSTON
By: _________________________________
Title: ______________________________
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ATTACHMENT A
<TABLE>
<CAPTION>
NAME PERCENTAGE
---- ----------
<S> <C>
Keystone International, Inc.
Company Stockholders:
Unvested TMI Option Holders:
------
100.00%
</TABLE>
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EXHIBIT B
SUBSTANCE OF OPINION OF VINSON & ELKINS, L.L.P.
1. The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Company is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction in which both (i) the nature of its business or the ownership or
leasing of its properties requires such qualification and (ii) the failure to
be so qualified would have a material adverse effect upon its business or
financial condition. The Company has all requisite corporate power and
authority to carry on the business in which it is engaged and to own and use
the properties owned and used by it. The Company is not in default under or in
violation of any provision of its Certificate of Incorporation or By-laws, each
as amended to date.
2. The authorized capital stock of the Company consists solely of Company
Shares, of which 8,867,500 shares are issued and outstanding and no shares are
held in the treasury of the Company, and shares of preferred stock, $.01 par
value per share, of which no shares are issued or outstanding or held in the
treasury of the Company. All of the issued and outstanding Company Shares are
duly authorized, validly issued, fully paid, non-assessable and free of all
preemptive rights. To such counsel's knowledge, there are no outstanding or
authorized options, warrants, rights, contracts, calls, puts, rights to
subscribe, conversion rights or other agreements or commitments to which the
Company or any Company Stockholder is a party or which are binding upon the
Company or any Company Stockholder providing for the issuance, disposition or
acquisition of any capital stock of the Company. To such counsel's knowledge,
there are no agreements, voting trusts or proxies or understandings with
respect to the voting, or registration under the Securities Act, of any Company
Shares. All of the issued and outstanding Company Shares were issued pursuant
to exemptions from registration under the Securities Act and applicable state
securities laws.
3. Each Company Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation.
Each Company Subsidiary is duly qualified to conduct business and is in good
standing under the laws of each jurisdiction in which both (i) the nature of
its business or the ownership or leasing of its properties requires such
qualification and (ii) the failure to be so qualified would have a material
adverse effect upon its business or financial condition. Each Company
Subsidiary has all requisite corporate power and authority to carry on the
business in which it is engaged and to own and use the properties owned and
used by it. No Company Subsidiary is in default under or in violation of any
provision of its charter or By-laws, each as amended to date.
4. The authorized, issued and outstanding capital stock of each Company
Subsidiary is as set forth in the Company Disclosure Schedule. All of the
issued and outstanding shares of capital stock of each Company Subsidiary are
duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. To such counsel's knowledge, all shares of capital stock of
each Company Subsidiary (other than the Keystone Shares) are held at the
Effective Time of record and beneficially by the Company (or, in the case of
the TME Common Stock, by TMI), free and clear of any and all covenants,
conditions, restrictions, voting trust arrangements, liens, charges,
encumbrances, options and adverse claims or rights whatsoever (other than
restrictions under the Securities Act and state securities laws). To such
counsel's knowledge, other than the TMI Options, there are no outstanding or
authorized options, warrants, rights, contracts, calls, puts, rights to
subscribe, conversion rights or other agreements or commitments to which the
Company, any Company Subsidiary or any Company Stockholder is a party or which
are binding on any of them providing for the issuance, disposition or
acquisition of any capital stock of any Company Subsidiary. To such counsel's
knowledge, there are no agreements, voting trusts or proxies or understandings
with respect to the voting, or registration under the Securities Act, of the
capital stock of any Company Subsidiary. All of the issued and outstanding
shares of capital stock of each Company Subsidiary were issued pursuant to
exemptions from registration under the Securities Act and applicable state
securities laws. To such counsel's knowledge, the Company does not control
directly or indirectly or have any direct or indirect equity participation in
any corporation, partnership, trust, or other business association which is not
a Company Subsidiary.
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5. The Company, Stewart and Patterson have all requisite power and authority
to execute and deliver the Agreement and to perform their respective
obligations thereunder. The execution and delivery of the Agreement and the
performance of the Agreement and the consummation of the transactions
contemplated thereby have been duly and validly authorized by all necessary
corporate action (including the Requisite Company Stockholder Approval) on the
part of the Company. The Agreement has been duly and validly executed and
delivered by the Company, Stewart and Patterson and constitutes a legal, valid
and binding obligation of the Company, Stewart and Patterson, enforceable
against the Company, Stewart and Patterson in accordance with its terms,
subject to bankruptcy, insolvency and similar laws affecting the rights of
creditors generally.
6. The Indemnification Representative has all requisite power and authority
to execute and deliver the Escrow Agreement and to perform his obligations and
the obligations of the Company Stockholders and Keystone thereunder. The Escrow
Agreement has been duly authorized by the Company Stockholders. The Escrow
Agreement has been duly executed and delivered by the Indemnification
Representative and constitutes a legal, valid and binding obligation of the
Indemnification Representative and the Company Stockholders, enforceable
against the Indemnification Representative and the Company Stockholders in
accordance with its terms, subject to bankruptcy, insolvency and similar laws
affecting the rights of creditors generally.
7. Except as set forth in the Agreement (including the Exhibits and Schedules
thereto), neither the execution and delivery of the Agreement or the Escrow
Agreement, nor the consummation of the transactions contemplated thereby, (i)
conflicts with or violates any provision of the charter or By-laws of the
Company or any Company Subsidiary, (ii) to such counsel's knowledge, requires
on the part of the Company, any Company Subsidiary or any Company Stockholder
any filing with, or permit, authorization, consent or approval of, any
Governmental Entity, (iii) to such counsel's knowledge, conflicts with, results
in a breach of, constitutes (with or without due notice or lapse of time or
both) a default under, results in the acceleration of, creates in any party the
right to accelerate, terminate, modify or cancel or requires any notice,
consent or waiver under, any contract, lease, sublease, license, sublicense,
franchise, permit, indenture, agreement or mortgage for borrowed money,
instrument of indebtedness, Security Interest or other arrangement to which the
Company, any Company Subsidiary or any Company Stockholder is a party or by
which the Company, any Company Subsidiary or any Company Stockholder is bound
or to which any of their assets is subject, (iv) to such counsel's knowledge,
results in the imposition of any Security Interest upon any assets of the
Company or any Company Subsidiary or (v) to such counsel's knowledge, violates
any order, writ, injunction, decree, statute, rule or regulation applicable to
the Company, any Company Subsidiary or any Company Stockholder or any
properties or assets of the Company or any Company Subsidiary.
8. Neither the Company nor any Company Subsidiary (i) is subject to any
unsatisfied judgment, order, decree, stipulation or injunction or (ii) is a
party to or, to such counsel's knowledge, is threatened to be made a party to
any complaint, action, suit, proceeding, hearing or investigation of or in any
court or administrative agency of any federal, state, local or foreign
jurisdiction or before any arbitrator.
9. All authorizations, consents and approvals of all Governmental Entities
required in order to permit consummation by the Company, the Company
Subsidiaries and the Company Stockholders of the transactions contemplated by
the Agreement and the Escrow Agreement have been obtained.
10. Prior to or upon consummation of Merger, all outstanding warrants,
options or other rights to acquire capital stock of the Company or any Company
Subsidiary (including without limitation the TMI Options) have been cancelled
or exercised and no longer represent the right to receive capital stock of the
Company, any Company Subsidiary, the Buyer or the Transitory Subsidiary.
11. To such counsel's knowledge, each Company Stockholder at the Effective
Time has good and marketable title to the Company Shares listed as held by him
or it in the Company Disclosure Schedule or
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contemplated under the Agreement to be held by him or it at the Effective Time,
free and clear of any and all covenants, conditions, restrictions, voting trust
arrangements, liens, charges, encumbrances, options and adverse claims or
rights whatsoever (other than restrictions under the Securities Act and state
securities laws).
12. The information with respect to the Company, the Company Subsidiaries and
the Company Stockholders contained in the Registration Statement and the Proxy
Statement/Prospectus, as of the effective date of [Post-Effective] Amendment
No. , complied as to form in all material respects with all applicable
requirements of the Securities Act and the Exchange Act (except that such
counsel need express no opinion with respect to the financial statements,
schedules and other financial and statistical data included therein).
13. Upon the filing of the Certificate of Merger with the Secretary of State
of the State of Delaware, the Merger will be effective under Delaware law.
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EXHIBIT C
SUBSTANCE OF OPINION OF PORTER & HEDGES, L.L.P.
1. Keystone is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas. Keystone is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction in
which both (i) the nature of its business or the ownership or leasing of its
properties requires such qualification and (ii) the failure to be so qualified
would have a material adverse effect upon its business or financial condition.
Keystone has all requisite corporate power and authority to carry on the
business in which it is engaged and to own and use the properties owned and
used by it.
2. Keystone has all requisite power and authority to execute and deliver the
Agreement and to perform its obligations thereunder. The execution, delivery
and performance of the Agreement and the consummation of the transactions
contemplated thereby have been duly and validly authorized by all necessary
corporate action on the part of Keystone. The Agreement has been duly and
validly executed and delivered by Keystone. The Agreement and the Escrow
Agreement constitute legal, valid and binding obligations of Keystone,
enforceable against Keystone in accordance with their respective terms, subject
to bankruptcy, insolvency and similar laws affecting the rights of creditors
generally.
3. Neither the execution and delivery of the Agreement, nor the consummation
of the transactions contemplated thereby, (i) conflicts with or violates any
provision of the charter or By-laws of Keystone, (ii) to such counsel's
knowledge, requires on the part of Keystone any filing with, or permit,
authorization, consent or approval of, any Governmental Entity, (iii) to such
counsel's knowledge, conflicts with, results in a breach of, constitutes (with
or without due notice or lapse of time or both) a default under, results in the
acceleration of, creates in any party the right to accelerate, terminate,
modify or cancel or requires any notice, consent or waiver under, any contract,
lease, sublease, license, sublicense, franchise, permit, indenture, agreement
or mortgage for borrowed money, instrument of indebtedness, Security Interest
or other arrangement to which Keystone is a party or by which Keystone is bound
or to which any of its assets is subject, (iv) to such counsel's knowledge,
results in the imposition of any Security Interest upon any assets of the
Company or any Company Subsidiary or (v) to such counsel's knowledge, violates
any order, writ, injunction, decree, statute, rule or regulation applicable to
Keystone or any of its properties or assets.
4. All authorizations, consents and approvals of all Governmental Entities
required in order to permit consummation by Keystone of the transactions
contemplated by the Agreement and the Escrow Agreement have been obtained.
5. To such counsel's knowledge, Keystone at the Effective Time has good and
marketable title to the Keystone Shares, free and clear of any and all
covenants, conditions, restrictions, voting trust arrangements, liens, charges,
encumbrances, options and adverse claims or rights whatsoever (other than
restrictions under the Securities Act and state securities laws).
6. The information with respect to Keystone contained in the Registration
Statement and the Proxy Statement/Prospectus, as of the effective date of
[Post-Effective] Amendment No. , complied as to form in all material respects
with all applicable requirements of the Securities Act and the Exchange Act
(except that such counsel need express no opinion with respect to the financial
statements, schedules and other financial and statistical data included
therein).
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EXHIBIT D
AGREEMENT
THIS AGREEMENT (the "Agreement"), made this day of , 1995 is entered
into by Sequoia Systems, Inc., a Delaware corporation with its principal place
of business at 400 Nickerson Road, Marlborough, Massachusetts 01752 (the
"Buyer"), and W. Wayne Patterson, residing at 3324 Ella Lee Lane, Houston,
Texas 77019 ("Patterson").
INTRODUCTION
WHEREAS, the Buyer desires to retain the services of Patterson and Patterson
desires to perform certain services for the Buyer; and
WHEREAS, pursuant to a Merger and Stock Purchase Agreement dated as of
November 9, 1994 among the Buyer, Sequoia Acquisition Corporation, a wholly-
owned transitory subsidiary of the Buyer (the "Transitory Subsidiary"), SPCO,
Inc. (the "Company") and Keystone International, Inc. ("Keystone") (the
"Acquisition Agreement"), the Buyer is acquiring all of the issued and
outstanding capital stock of the Company through the merger of the Transitory
Subsidiary with and into the Company and is simultaneously purchasing the
Keystone Shares (as defined in the Acquisition Agreement) from Keystone. Except
where the context otherwise requires, all references to the Company shall be
deemed to include the Company's direct and indirect subsidiaries, including
without limitation Texas Microsystems, Inc., a Delaware corporation ("TMI"),
and Texas Micro Electronic, Inc., a Delaware corporation ("TME").
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
agree as follows:
1. Services. Patterson agrees to perform such business advisory and related
services to and for the Buyer as may be reasonably requested from time to time
by the Buyer, including but not limited to the services specified on Schedule A
to this Agreement (the "Services"), for up to 75 days per year during the
Advisory Period (as defined below) at mutually agreeable times and places. The
Buyer agrees to cause the Company or TMI to continue to provide to Patterson
his current office space and secretarial services, at no cost to Patterson, in
Houston, Texas in connection with the provision of Services hereunder by
Patterson.
2. Term. This Agreement shall commence on the Effective Time, as defined in
the Acquisition Agreement, and shall continue until the first anniversary of
such date (such period, as it may be sooner terminated in accordance with the
provisions of Section 4, being referred to as the "Advisory Period").
3. Compensation.
3.1 Fees. The Buyer shall pay to Patterson fees equal to twelve thousand
five hundred dollars ($12,500.00) per month during the Advisory Period,
payable in arrears on the last day of each such month, without obligation
on the part of the Buyer or Transitory Subsidiary to withhold any sums in
respect of, or make any payment whatsoever relating to, Patterson's tax
obligations to any taxing authority.
3.2 Reimbursement of Expenses. The Buyer shall reimburse Patterson for
all reasonable and necessary expenses incurred or paid by Patterson in
connection with, or related to, the performance of Services under this
Agreement. Patterson shall submit to the Buyer itemized monthly statements,
in a form satisfactory to the Buyer, of such expenses incurred in the
previous month. The Buyer shall pay to Patterson amounts shown on each such
statement within 30 days after receipt thereof. Notwithstanding the
foregoing Patterson shall not, without the prior written approval of the
Buyer: (i) incur total expenses for which reimbursement is sought in excess
of $1,000 per month; or (ii) travel outside Houston, Texas in connection
with, or related to, the performance of Services under this Agreement.
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3.3 Benefits. Patterson shall not be entitled to any benefits or
perquisites, including, without limitation, social security, unemployment,
medical or pension payments, made available to employees of the Buyer;
provided that the Buyer shall reimburse Patterson for the cost of premiums
paid or incurred by Patterson required to retain COBRA benefits provided by
the Company (or TMI) for the one-year period immediately following the
Effective Time.
3.4 Automobile and Office Furniture. Patterson and the Buyer agree that,
as part of Patterson's obligations hereunder, at the Effective Time,
Patterson shall cause TMI to sell to BriskHeat Corporation, a Delaware
corporation, the 1994 Cadillac Seville (V.I.N. No. 1G6KY5290RU838810) and
office furniture currently used by Patterson at a purchase price equal to
the respective book values of such vehicle and office furniture as of the
Effective Time.
4. Termination. This Agreement shall terminate upon the occurrence of any of
the following:
4.1 Expiration of the Advisory Period in accordance with Section 2;
4.2 At the election of the Buyer, for cause, immediately upon written
notice by the Buyer to Patterson. For the purposes of this Section 4.2,
cause for termination shall be deemed to exist upon (a) a good faith
finding by the Board of Directors of the Buyer (the "Board") of the failure
of Patterson to perform his assigned duties, dishonesty, gross negligence
or misconduct, or (b) the conviction of Patterson of, or the entry of a
pleading of guilty or nolo contendere by Patterson to, any crime involving
moral turpitude or any felony; or
4.3 Thirty days after the death or disability of Patterson. As used in
this Agreement, the term "disability" shall mean the inability of
Patterson, due to a physical or mental disability, for a period of 90 days,
whether or not consecutive, during any 360-day period to perform the
Services contemplated under this Agreement. A determination of disability
shall be made by a physician satisfactory to both Patterson and the Buyer,
provided that if Patterson and the Buyer do not agree on a physician,
Patterson and the Buyer shall each select a physician and these two
together shall select a third physician, whose determination as to
disability shall be binding on all parties.
5. Effect of Termination.
5.1 Termination for Cause or at Election of Either Party. In the event
this Agreement is terminated for cause pursuant to Section 4.2, the Buyer
shall pay to Patterson the compensation and expenses otherwise payable to
him under Section 3 through the last day of the Advisory Period.
5.2 Termination for Death or Disability. If the provision of Services by
Patterson to the Buyer hereunder is terminated by death or because of
disability pursuant to Section 4.3, the Buyer shall pay to the estate of
Patterson or to Patterson, as the case may be, the compensation which would
otherwise be payable to Patterson up to the end of the month in which the
termination of the Advisory Period because of death or disability occurs.
5.3 Survival. The provisions of Section 7 shall survive the termination
of this Agreement.
6. Cooperation. Patterson shall use his best efforts in the performance of
his obligations under this Agreement. The Buyer shall provide such access to
its information and property as may be reasonably required in order to permit
Patterson to perform his obligations hereunder. Patterson shall cooperate with
the Buyer's and the Company's personnel, shall not interfere with the conduct
of the Buyer's or the Company's business and shall observe all rules,
regulations and security requirements of the Buyer or the Company concerning
the safety of persons and property.
7. Inventions and Proprietary Information.
7.1 Inventions.
(a) All inventions, discoveries, computer programs, data, technology,
designs, innovations and improvements (whether or not patentable and
whether or not copyrightable) ("Inventions") related to
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the business of the Buyer or the Company which are made, conceived, reduced
to practice, created, written, designed or developed by Patterson, solely
or jointly with others and whether during normal business hours or
otherwise, during the Advisory Period or thereafter if resulting or
directly derived from Proprietary Information (as defined below), shall be
the sole property of the Buyer. Patterson hereby assigns to the Buyer all
Inventions and any and all related patents, copyrights, trademarks, trade
names, and other industrial and intellectual property rights and
applications therefor, in the United States and elsewhere and appoints any
officer of the Buyer as his duly authorized attorney to execute, file,
prosecute and protect the same before any government agency, court or
authority. Upon the request of the Buyer and at the Buyer's expense,
Patterson shall execute such further assignments, documents and other
instruments as may be necessary or desirable to fully and completely assign
all Inventions to the Buyer and to assist the Buyer in applying for,
obtaining and enforcing patents or copyrights or other rights in the United
States and in any foreign country with respect to any Invention.
(b) Patterson shall promptly disclose to the Buyer all Inventions and
will maintain adequate and current written records (in the form of notes,
sketches, drawings and as may be specified by the Buyer) to document the
conception and/or first actual reduction to practice of any Invention. Such
written records shall be available to and remain the sole property of the
Buyer at all times.
7.2 Proprietary Information.
(a) Patterson acknowledges that his relationship with the Buyer is one of
high trust and confidence and that in the course of his service to the
Buyer he will have access to and contact with Proprietary Information.
Patterson agrees that he will not, during the Advisory Period or at any
time thereafter, disclose to others, or use for his benefit or the benefit
of others, any Proprietary Information or Invention.
(b) For purposes of this Agreement, Proprietary Information shall mean,
by way of illustration and not limitation, all information (whether or not
patentable and whether or not copyrightable) owned, possessed or used by
the Buyer, including, without limitation, any Invention, formula, vendor
information, customer information, apparatus, equipment, trade secret,
process, research, report, technical data, know-how, computer program,
software, software documentation, hardware design, technology, marketing or
business plan, forecast, unpublished financial statement, budget, license,
price, cost and employee list that is communicated to, learned of,
developed or otherwise acquired by Patterson in the course of his service
to the Buyer.
(c) Patterson's obligations under this Section 7.2 shall not apply to any
information that (i) is or becomes known to the general public under
circumstances involving no breach by Patterson or others of the terms of
this Section 7.2, (ii) is generally disclosed to third parties by the Buyer
without restriction on such third parties, or (iii) is approved for release
by written authorization of the Board.
(d) Upon termination of this Agreement or at any other time upon request
by the Buyer, Patterson shall promptly deliver to the Buyer all records,
files, memoranda, notes, designs, data, reports, price lists, customer
lists, drawings, plans, computer programs, software, software
documentation, sketches, laboratory and research notebooks and other
documents (and all copies or reproductions of such materials) relating to
the business of the Buyer.
(e) Patterson represents that his retention hereunder with the Buyer and
his performance under this Agreement does not, and shall not, breach any
agreement that obligates him to keep in confidence any trade secrets or
confidential or proprietary information of his or of any other party or to
refrain from competing, directly or indirectly, with the business of any
other party. Patterson shall not disclose to the Buyer any trade secrets or
confidential or proprietary information of any other party.
(f) Patterson acknowledges that the Buyer from time to time may have
agreements with other persons or with the United States Government, or
agencies thereof, that impose obligations or restrictions on the Buyer
regarding inventions made during the course of work under such agreements
or regarding the confidential nature of such work. Patterson agrees to be
bound by all such obligations and restrictions that are known to him and to
take all action necessary to discharge the obligations of the Buyer under
such agreements.
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7.3 Remedies. Patterson acknowledges that any breach of the provisions of
this Section 7 shall result in serious and irreparable injury to the Buyer
for which the Buyer cannot be adequately compensated by monetary damages
alone. Patterson agrees, therefore, that, in addition to any other remedy
it may have, the Buyer shall be entitled to enforce the specific
performance of this Agreement by Patterson and to seek both temporary and
permanent injunctive relief (to the extent permitted by law) without the
necessity of proving actual damages.
8. Independent Contractor Status. Patterson shall perform all Services under
this Agreement as an "independent contractor" and not as an employee or agent
of the Buyer or the Company. Patterson is not authorized to assume or create
any obligation or responsibility, express or implied, on behalf of, or in the
name of, the Buyer or the Company or to bind the Buyer or the Company in any
manner.
9. Notices. All notices, requests, demands, claims, and other communications
hereunder shall be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed duly delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service, in each case to the intended recipient as set forth
below:
If to Patterson: Copy to:
W. Wayne Patterson Robert H. Whilden, Jr., Esq.
3324 Ella Lee Lane Vinson & Elkins, L.L.P.
Houston, Texas 77019 2500 First City Tower
1001 Fannin
Houston, Texas 77002-6760
If to the Buyer: Copies to:
Sequoia Systems, Inc. Jeremy Swett, Esq.
400 Nickerson Road Sequoia Systems, Inc.
Marlborough, MA 01752 400 Nickerson Road
Attention: President Marlborough, MA 01752
David A. Westenberg, Esq.
Hale and Dorr
60 State Street
Boston, MA 02109
Any party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic
mail), but no such notice, request, demand, claim, or other communication shall
be deemed to have been duly given unless and until it actually is received by
the individual for whom it is intended. Any party may change the address to
which notices, requests, demands, claims, and other communications hereunder
are to be delivered by giving the other Parties notice in the manner herein set
forth.
10. Pronouns. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.
11. Entire Agreement. This Agreement constitutes the entire agreement between
the parties and supersedes all prior agreements and understandings, whether
written or oral, relating to the subject matter of this Agreement.
12. Amendment. This Agreement may be amended or modified only by a written
instrument executed by both the Buyer and Patterson.
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13. Governing Law. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
14. Successors and Assigns. This Agreement shall be binding upon, and inure
to the benefit of, both parties and their respective successors and assigns,
including any corporation with which, or into which, the Buyer may be merged or
which may succeed to its assets or business, provided, however, that the
obligations of Patterson are personal and shall not be assigned by him.
15. Miscellaneous.
15.1 No delay or omission by the Buyer in exercising any right under this
Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Buyer on any one occasion shall be effective only in
that instance and shall not be construed as a bar or waiver of any right on
any other occasion.
15.2 The captions of the sections of this Agreement are for convenience
of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
15.3 In the event that any provision of this Agreement shall be invalid,
illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
SEQUOIA SYSTEMS, INC.
By: _________________________________
Title: ______________________________
-------------------------------------
W. Wayne Patterson
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SCHEDULE A
1. Provide assistance in transferring responsibilities as CEO of TMI/TME to
the CEO of Sequoia.
2. Provide assistance in transferring responsibilities for financial
management of TMI/TME to the CFO of Sequoia.
3. Develop and assist in developing and implementing a plan to communicate
the benefits of the merger to TMI/TME's employees, customer base and markets,
as well as to the investment community.
4. Direct TMI/TME's financial planning and budget activities.
5. Assist Sequoia is evaluating, qualifying and securing consolidated term
loan and revolving credit lines.
6. Assist Sequoia's CEO and CFO in assessing the proper organizational
approach and actions required to achieve operating and cost synergies between
Sequoia and TMI/TME.
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EXHIBIT E
, 1995
Mr. J. Michael Stewart
Texas Microsystems, Inc.
5959 Corporate Drive
Houston, TX 77242
Dear Michael:
On behalf of Sequoia Systems, Inc. it is my pleasure to offer you the
position of Executive Vice President of Sequoia and President of the TMI/TME
division based at TMI's headquarters in Houston, Texas, commencing with the
closing of Sequoia's acquisition of TMI/TME. Your starting salary will be
$7,211.54 (which calculates to $187,500 annually) paid bi-weekly. Your salary
will be reviewed on an annual basis. This position reports directly to me.
You will be entitled to all employee benefits, including group insurance,
employee stock purchase plan, 401(k) plan, etc., normally extended to new
Sequoia employees. Additionally, as an officer of Sequoia, you will receive an
additional executive life insurance policy of two times your base salary. You
should understand and agree that your employment is governed by the employee
policies and practices of Sequoia and that you will be an employee at will
rather than for any fixed period of time.
You will be eligible to participate in Sequoia's Officer Incentive
Compensation Plan targeted to provide additional earnings potential, dependent
on achievement of individual goals and the financial results of the new
company, on the same basis as other Sequoia officers. For FY94, such incentive
compensation was generally in the range of 30-60% of base salary.
This offer is contingent upon your completing and signing several documents,
as well as the closing of Sequoia's acquisition of TMI/TME. You must sign a
Proprietary Information and Inventions Agreement, and you should complete a
Direct Deposit form. Additionally, we will provide you with a copy of Form I-9,
which must be completed by all newly hired employees.
Please indicate your acceptance by signing and returning the copy of this
letter to me, together with the signed copy of the Proprietary Information and
Inventions Agreement.
Please call me with any particular questions regarding this offer. You may
contact Don Colanton, Director of Human Resources, for additional information
concerning Sequoia benefits.
The Board of Directors and the management team at Sequoia join me in
enthusiasm at the prospect of your joining Sequoia.
Sincerely,
Neil McMullan President & CEO
I accept your offer of employment with Sequoia Systems, Inc.
Signed: _____________________________ Date: _______________
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EXHIBIT F
[LETTERHEAD OF HALE AND DORR]
, 1995
To: Stockholders of SPCO, Inc.
5959 Corporate Drive
Houston, Texas 77036
Keystone International, Inc.
9600 West Gulf Bank Drive
Houston, Texas 77040
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 6.2(k) of the Merger and
Stock Purchase Agreement (the "Agreement") dated as of November 9, 1994 among
Sequoia Systems, Inc., a Delaware corporation (the "Buyer"), Sequoia
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary
of the Buyer (the "Transitory Subsidiary"), SPCO, Inc., a Delaware corporation
(the "Company"), and Keystone International, Inc., a Texas corporation
("Keystone"). Capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in the Agreement.
We have acted as counsel to the Buyer and the Transitory Subsidiary in
connection with the preparation, execution and delivery of the Agreement and
the Escrow Agreement dated , 1995 among the Buyer, the Indemnification
Representative named therein and the Escrow Agent named therein (the "Escrow
Agreement"), and are familiar with the proceedings taken by the Buyer and the
Transitory Subsidiary in connection therewith. As such counsel, we have
assisted in the preparation and filing with the Securities and Exchange
Commission (the "Commission") of a Registration Statement on Form S-4 (File No.
33- ), as amended by [list amendments], which became effective on ,
1995, and including as a part thereof the Proxy Statement/Prospectus, dated
, 1995, in the form contained in [Post-Effective] Amendment No. (the
"Proxy Statement/Prospectus"). The Registration Statement, as amended by all
pre-effective and post-effective amendments, is referred to herein as the
"Registration Statement".
In connection with this opinion, we have examined and relied upon the
following:
1. an executed copy of the Agreement;
2. an executed copy of the Escrow Agreement;
3. the Registration Statement;
4. the Proxy Statement/Prospectus;
5. the Buyer's Restated Certificate of Incorporation, as amended to date
(the "Buyer Certificate of Incorporation");
6. the Buyer's By-Laws, as amended to date (the "Buyer By-Laws");
7. the Certificate of Incorporation of the Transitory Subsidiary (the
"Sub Certificate of Incorporation");
8. the By-Laws of the Transitory Subsidiary (the "Sub By-Laws");
9. a certificate, dated , 1995, of the Secretary of State of the
State of Delaware certifying to the legal existence and good standing of
the Buyer in Delaware (the "Buyer Delaware Certificate");
10. a certificate, dated , 1995, of the Secretary of State of the
Commonwealth of Massachusetts certifying to the due qualification of the
Buyer in the Commonwealth of Massachusetts (the "Buyer Foreign
Certificate");
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11. a certificate, dated , 1995, of the Secretary of State of the
State of Delaware certifying to the legal existence and good standing of
the Transitory Subsidiary in Delaware (the "Sub Delaware Certificate");
12. a Certificate of the Buyer, executed on behalf of the Buyer by the
Buyer's Secretary, dated of even date herewith, certifying, among other
things, as to (a) the Buyer Certificate of Incorporation, (b) the Buyer By-
Laws and (c) certain resolutions of the Board of Directors of the Buyer
relating to the Agreement and the transactions contemplated thereby;
13. a Certificate of the Transitory Subsidiary, executed on behalf of the
Transitory Subsidiary by the Secretary of the Transitory Subsidiary, dated
of even date herewith, certifying, among other things, as to (a) the Sub
Certificate of Incorporation, (b) the Sub By-Laws and (c) certain
resolutions of the Board of Directors and sole stockholder of the
Transitory Subsidiary relating to the Agreement and the transactions
contemplated thereby; and
14. such other agreements, documents, corporate records, certificates and
materials as we have deemed necessary for the purposes of the opinions
rendered herein.
In our examination of the documents described above, we have assumed the
genuineness of all signatures, the completeness of all corporate records
provided to us, the authenticity of all documents submitted to us as originals,
the conformity to original documents of documents submitted to us as certified,
telecopied or photostatic copies, the authenticity of the originals of such
latter documents and the legal competence of all signatories to such documents.
In rendering this opinion, we have relied, as to all questions of fact
material to this opinion, upon certificates of public officials and officers of
the Buyer and the Transitory Subsidiary and upon the representations and
warranties made by the Buyer, the Transitory Subsidiary, the Company and
Keystone in the Agreement. We have not attempted to verify independently such
facts, although we know of no facts which lead us to question the accuracy of
such certificates or representations and warranties.
Any reference herein to "our knowledge," "known to us," "know" or to any
matter "coming to our attention" or any variation of any of the foregoing shall
mean the conscious awareness of the attorneys in this firm who have rendered
substantive attention to the transactions contemplated by the Agreement of the
existence or absence of any facts which would contradict our opinions set forth
below. We have not undertaken any independent investigation to determine the
existence or absence of such facts, and no inference as to our knowledge of the
existence or absence of such facts should be drawn from the fact of our
representation of the Buyer and the Transitory Subsidiary. Without limiting the
foregoing, we have not conducted a search of any computerized or electronic
databases or the dockets of any court, administrative or regulatory body,
agency or other filing office in any jurisdiction.
For purposes of this opinion, we have assumed that the Agreement has been
duly authorized, executed and delivered by the Company and Keystone, that each
of the Company and Keystone has all requisite power and authority to effect the
transactions contemplated by the Agreement, that the Escrow Agreement has been
duly authorized, executed and delivered by the Indemnification Representative
and the Escrow Agent, and that the Indemnification Representative and the
Escrow Agent have all requisite power and authority to effect the transactions
contemplated by the Escrow Agreement. We have also assumed that the Agreement
is the valid and binding obligation of the Company and Keystone, enforceable
against the Company and Keystone in accordance with its terms, and that the
Escrow Agreement is the valid and binding obligation of the Company
Stockholders, Keystone, the Indemnification Representative and the Escrow
Agent, enforceable against the Company Stockholders, Keystone, the
Indemnification Representative and the Escrow Agent in accordance with its
terms. We do not render any opinion as to the application of any federal or
state law or regulation to the power, authority or competence of the Company,
the Company Stockholders, Keystone, the Indemnification Representative or the
Escrow Agent.
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Our opinions set forth below are qualified to the extent that the validity or
enforceability of the documents referred to or of any of the rights granted to
any party pursuant thereto may be subject to or affected by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, public policy, fraudulent
conveyance or similar laws relating to or affecting the rights of creditors
generally, (ii) statutory or decisional law concerning recourse by creditors to
security in the absence of notice or hearing, (iii) duties and standards
imposed on creditors and parties to contracts, including, without limitation,
requirements of good faith, reasonableness and fair dealing, (iv) the
enforceability of remedies for breaches which are determined by a court to be
immaterial, and (v) provisions which purport to grant remedies which are wholly
disproportionate to the damages suffered or expenses incurred by a party, or
which provide that rights or remedies are not exclusive and are cumulative.
Furthermore, we express no opinion as to the availability of any equitable or
specific remedy upon any breach of such documents or any of the agreements,
documents or obligations referred to therein, or to the successful assertion of
any equitable defenses, inasmuch as the availability of such remedies or the
success of any equitable defense may be subject to the discretion of a court.
We express no opinion herein as to the enforceability of Sections 5.13(g),
5.13(h), 5.14(a) and 5.14(b) of the Agreement.
For purposes of our opinions as to the legal existence and good standing of
the Buyer and the Transitory Subsidiary expressed in the first sentence of
paragraph 1 below, we have relied solely upon the Buyer Delaware Certificate
and the Sub Delaware Certificate, respectively, and such opinions are limited
accordingly. For purposes of our opinion in the second sentence of paragraph 1
below, we have relied solely upon the Buyer Foreign Certificate, and such
opinion is limited accordingly. We express no opinion as to the tax good
standing of the Buyer or the Transitory Subsidiary.
Our opinion in paragraph 6 below is limited in that we express no opinion
with respect to any securities anti-fraud laws or fraudulent transfer laws.
In connection with our opinion expressed in paragraph 6 below, we were
advised by of the Commission by telephone on , 1995 that the
Commission had declared [Post-Effective] Amendment No. to the Registration
Statement effective as of p.m. on , 1995, but we have not yet received
written confirmation from the Commission of the effectiveness of the
Registration Statement [or of Post-Effective Amendment No. thereto].
We express no opinion concerning the treatment for tax purposes of the
transactions contemplated by the Agreement.
We express no opinion with regard to any state securities or "Blue Sky" laws.
We are opining herein only with respect to the laws of the Commonwealth of
Massachusetts, the Delaware General Corporate Law statute and the federal laws
of the United States of America as in our experience are normally applicable to
transactions of the type contemplated by the Agreement, and, with your
permission, our opinions exclude the applicability and effect of (i) any city
or county laws and (ii) antitrust and unfair competition laws. Accordingly, to
the extent that any law of any jurisdiction other than the federal laws of the
United States of America, the laws of the Commonwealth of Massachusetts or the
Delaware General Corporate Law statute governs any of the matters as to which
we express an opinion below, we have assumed, without independent investigation
and with your permission, that the law of such jurisdiction is the same as that
of the Commonwealth of Massachusetts, and we express no opinion as to whether
such assumption is reasonable.
For the purposes of this opinion, we have assumed that the facts and law
governing the performance by the parties of their respective obligations under
the Agreement and the Escrow Agreement will be identical to the facts and law
governing such performance as of the date of this opinion.
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Based upon and subject to the foregoing, we are of the opinion that:
1. Each of the Buyer and the Transitory Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware. The Buyer is qualified to conduct business in and is in
good standing as a foreign corporation under the laws of the Commonwealth
of Massachusetts. Each of the Buyer and the Transitory Subsidiary has the
corporate power and authority to carry on its business as now conducted and
to own and operate its properties in connection therewith.
2. The authorized capital stock of the Buyer consists solely of
25,000,000 shares of common stock, $.01 par value (the "Buyer Common
Stock"), and 5,000,000 shares of undesignated preferred stock, $.01 par
value. The authorized capital stock of the Transitory Subsidiary consists
of 1,000 shares of common stock, $.01 par value, of which 1,000 shares are
of record issued and outstanding. All of the issued and outstanding capital
stock of the Transitory Subsidiary is owned of record by the Buyer.
3. The Transaction Shares will be, when issued in accordance with the
Agreement, duly authorized, validly issued, fully paid and nonassessable.
4. Each of the Buyer and the Transitory Subsidiary has all requisite
power and authority to execute and deliver the Agreement and to perform its
respective obligations thereunder. The execution and delivery of the
Agreement and the consummation of the transactions contemplated thereby
have been duly and validly authorized by all necessary corporate action on
the part of the Buyer and the Transitory Subsidiary. The Agreement has been
duly and validly executed and delivered by each of the Buyer and the
Transitory Subsidiary and constitutes a valid and binding obligation of the
Buyer and the Transitory Subsidiary, enforceable against the Buyer and the
Transitory Subsidiary in accordance with its terms (other than Sections
5.13(g), 5.13(h), 5.14(a) and 5.14(b) of the Agreement, as to which we
express no opinion). The Buyer has all requisite power and authority to
execute and deliver the Escrow Agreement and to perform its obligations
thereunder. The execution and delivery of the Escrow Agreement and the
consummation of the transactions contemplated thereby have been duly and
validly authorized by all necessary corporate action on the part of the
Buyer. The Escrow Agreement has been duly and validly executed and
delivered by the Buyer and constitutes a valid and binding obligation of
the Buyer, enforceable against the Buyer in accordance with its terms.
5. Except as set forth in the Agreement (including the Exhibits and
Schedules thereto), neither the execution and delivery of the Agreement or
the Escrow Agreement, nor the consummation of the transactions contemplated
thereby, (i) conflicts with or violates any provision of the Buyer
Certificate of Incorporation, the Buyer By-Laws, the Sub Certificate of
Incorporation or the Sub By-Laws, (ii) to our knowledge, requires on the
part of the Buyer or the Transitory Subsidiary any filing with, or permit,
authorization, consent or approval of, any Governmental Entity, (iii) to
our knowledge, conflicts with, results in a breach of, constitutes (with or
without due notice or lapse of time or both) a default under, or requires
any notice, consent or waiver under, any contract, lease, sublease,
license, sublicense, franchise, permit, indenture, agreement or mortgage
for borrowed money, instrument of indebtedness or other agreement or
instrument to which the Buyer or any of its subsidiaries is a party or by
which the Buyer or any of its subsidiaries is bound or any of their
respective assets is subject and which has been filed or incorporated by
reference as an exhibit to the Registration Statement by the Buyer, (iv) to
our knowledge, violates any order, writ, injunction or decree specifically
naming the Buyer or the Transitory Subsidiary or any of their properties or
assets or (v) to our knowledge, violates any statute, rule or regulation;
provided, however, that we express no opinion as to the violation of any
statute, rule, regulation, order, writ, injunction or decree which does not
have any material adverse effect on you and does not deprive you of any
material benefit under the Agreement, and we express no opinion as to the
absence of any filing, permit, authorization, consent or approval (i) which
may be required by or otherwise applicable to the Buyer or the Transitory
Subsidiary as a result of the involvement of other parties in the
transactions contemplated by the Agreement because of the legal or
regulatory status of such other parties or because of any other facts
specifically pertaining to any of them, or (ii) which does not have any
material adverse effect on you and does not deprive you of any material
benefit under the Agreement.
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6. The Transaction Shares have been registered under the Securities Act
pursuant to the Registration Statement. The Buyer Common Stock has been
registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Shares have been authorized for listing on the
Nasdaq National Market.
7. The information with respect to the Buyer and the Transitory
Subsidiary contained in the Registration Statement and the Proxy
Statement/Prospectus, as of the effective date of [Post-Effective]
Amendment No. , complied as to form in all material respects with all
applicable requirements of the Securities Act and the Exchange Act (except
the financial statements, schedules and other financial and statistical
data included therein, as to which no opinion is expressed).
8. To our knowledge, neither the Buyer nor the Transitory Subsidiary is
(i) subject to any unsatisfied judgment, order, decree, stipulation or
injunction or (ii) party to any legal or governmental actions or
proceedings which, if adversely determined, individually or in the
aggregate, are likely to have a material adverse effect on the Buyer or its
business, financial condition or properties.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions, and we disclaim any obligation to advise you of any
change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is solely for your benefit in connection with the transactions contemplated by
the Agreement and the Escrow Agreement and may not be quoted or relied upon by
any other person or used for any other purpose without our prior written
consent.
Very truly yours,
Hale and Dorr
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ANNEX A
AMENDMENT NUMBER 1 TO
MERGER AND STOCK PURCHASE AGREEMENT
AMONG
SEQUOIA SYSTEMS, INC.,
SEQUOIA ACQUISITION CORPORATION,
SPCO, INC.
AND
KEYSTONE INTERNATIONAL, INC.
AGREEMENT entered into as of the 7th day of February, 1995 by and among
Sequoia Systems, Inc., a Delaware corporation (the "Buyer"), Sequoia
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Buyer ("Transitory Subsidiary"), SPCO, Inc., a Delaware corporation (the
"Company"), and Keystone International, Inc., a Texas corporation ("Keystone").
WHEREAS, the parties hereto are parties to a Merger and Stock Purchase
Agreement dated as of November 9, 1994 (as the same may be amended from time to
time, the "Merger Agreement") (terms not otherwise defined herein shall be
deemed to have the meaning ascribed to such term in the Merger Agreement); and
WHEREAS, the parties now desire to amend the Merger Agreement as hereinafter
set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:
1. Section 4 of the Preliminary Statement is hereby eliminated in its
entirety and replaced with the following:
4. At and as of the date hereof, Patterson and Stewart each own 42.5 of
the issued and outstanding shares of the common stock, $.01 par value per
share (the "TME Common Stock"), of Texas Micro Electronics, Inc., a
Delaware corporation ("TME") collectively representing 85% of the issued
and outstanding capital stock of TME, and Keystone owns 15 of the issued
and outstanding capital stock of shares of TME Stock (the "Keystone TME
Shares"), representing 15% of the issued and outstanding capital stock of
TME. TME has no class of capital stock issued or outstanding except for the
TME Common Stock.
2. Section 6(ii) of the Preliminary Statement is hereby deleted in its
entirety and replaced with the following:
(ii) TMI will own 85 shares of TME Common Stock, representing 85% of the
issued and outstanding capital stock of TME;
3. Section 6(iv) of the Preliminary Statement is hereby deleted in its
entirety and replaced with the following:
(iv) Keystone will own 15 shares of TME Common Stock, representing 15% of
the issued and outstanding capital stock of TME.
4. Section 6.2(1) of the Merger Agreement is hereby deleted in its entirety
and replaced with the following:
(1) Tax Opinion. The Company shall have received from Arthur Andersen
LLP, the Company's independent auditors, an unqualified opinion to the
effect that (i) the Merger and the exchange of shares
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contemplated hereby constitutes a tax-free reorganization under Section
368(a) of the Code and (ii) the BriskHeat Spin-Off constitutes a tax-free
transaction to the Company and the stockholders of the Company under
Section 355 of the Code; and Coopers & Lybrand, L.L.P. shall have advised
the Company in writing that it has determined that there is a reasonable
basis to report the BriskHeat Spin-Off as a tax-free transaction.
5. All other terms and conditions of the Merger Agreement are ratified,
confirmed and approved.
IN WITNESS WHEREOF, the undersigned have executed this Amendment Agreement as
of the date first above written.
SEQUOIA SYSTEMS, INC.
/s/ Cornelius P. McMullan
By: _________________________________
President and Chief Executive
Officer
Title: ______________________________
SEQUOIA ACQUISITION CORPORATION.
/s/ Cornelius P. McMullan
By: _________________________________
President
Title: ______________________________
SPCO, INC.
/s/ J. Michael Stewart
By: _________________________________
President
Title: ______________________________
KEYSTONE INTERNATIONAL, INC.
/s/ Mark E. Baldwin
By: _________________________________
Vice President
Title: ______________________________
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ANNEX A
AMENDMENT NUMBER 2 TO
MERGER AND STOCK PURCHASE AGREEMENT
AMONG
SEQUOIA SYSTEMS, INC.,
SEQUOIA ACQUISITION CORPORATION,
SPCO, INC.
AND
KEYSTONE INTERNATIONAL, INC.
Agreement entered into as of the 23rd day of February, 1995 by and among
Sequoia Systems, Inc., a Delaware corporation (the "Buyer"), Sequoia
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Buyer ("Transitory Subsidiary"), SPCO, Inc., a Delaware corporation (the
"Company") and Keystone International, Inc., a Texas corporation ("Keystone").
Whereas, the parties hereto are parties to a Merger and Stock Purchase
Agreement dated as of November 9, 1994, as amended as of February 7, 1995 (as
amended, the "Merger Agreement") (terms not otherwise defined herein shall be
deemed to have the meaning ascribed to such term in the Merger Agreement); and
Whereas, the parties now desire to amend the Merger Agreement as hereinafter
set forth.
Now, Therefore, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:
1. Section 6.1(y) of the Merger Agreement is hereby amended by inserting at
the end of such section the following:
"The parties agree that the foregoing conditions shall not be waived by any
party hereto."
2. Section 6.2(1) of the Merger Agreement is hereby amended by inserting at
the end of such section the following:
"The parties agree that the foregoing conditions shall not be waived by any
party hereto."
3. All other terms and conditions of the Merger Agreement are ratified,
confirmed and approved.
A-79
<PAGE>
In Witness Whereof, the undersigned have executed this Amendment Agreement as
of the date first above written.
Sequoia Systems, Inc.
/s/ Jeremy F. Swett
By: _________________________________
Title: Vice President and General
Counsel
Sequoia Acquisition Corporation
/s/ Richard B. Goldman
By: _________________________________
Title: Vice President
SPCO, Inc.
/s/ J. Michael Stewart
By: _________________________________
Title: President
Keystone International, Inc.
/s/ Mark E. Baldwin
By: _________________________________
Title: Vice President
A-80
<PAGE>
ANNEX B
SEQUOIA SYSTEMS, INC.
ACQUISITION OF TEXAS MICROSYSTEMS, INC.
FAIRNESS OPINION DOCUMENTATION
November 9, 1994
BROADVIEW ASSOCIATES, L.P.
One Bridge Plaza 555 Twin Dolphin Drive 55 Drury Lane
5th Floor Suite 570 London WC 2B 5SQ
Fort Lee, NJ 07024 Redwood City, CA 94065 England
(201) 346-9000 (415) 802-5900 (071) 836-8081
Fax: (201) 346-9191 Fax: (415) 802-5910 Fax: (071) 497-0085
<PAGE>
BROADVIEW ASSOCIATES, L.P.
BROADVIEW ASSOCIATES INC., GENERAL PARTNER
One Bridge Plaza
Fort Lee, New Jersey 07021
201 346-9000
FAX 201 3416-9191
November 9, 1994
CONFIDENTIAL
Board of Directors
Sequoia Systems, Inc.
400 Nickerson Road
Marlborough, MA 01752
Dear Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, of the consideration to be paid by Sequoia Systems, Inc. (the "Company")
to the shareholders of SPCO, Inc. ("SPCO") and to Keystone International, Inc.
("Keystone") pursuant to the Merger and Stock Purchase Agreement to be dated
and executed by November 9, 1994 (the "Agreement").
Immediately prior to the closing under the Agreement, and after giving effect
to the pre-closing transactions contemplated by the Agreement, (i) SPCO will
own approximately 85.53% of the issued and outstanding capital stock of Texas
Microsystems, Inc. ("Texas Microsystems"), (ii) Texas Microsystems will own 85%
of the issued and outstanding capital stock of Texas Micro Electronics, Inc.
("TME"), (iii) Keystone will own approximately 14.47% of the issued and
outstanding capital stock of Texas Microsystems, and (iv) Keystone will own 15%
of the issued and outstanding capital stock of TME. Except where the context
otherwise requires, all references herein to Texas Microsystems shall include
TME and Texas Microsystems' other subsidiaries.
Under the Agreement, the Company will simultaneously acquire for an aggregate
of 5.2 million shares of the Company's common stock (i) all the outstanding
shares of SPCO in a merger which is intended to qualify as a reorganization
under Section 368 of the Internal Revenue Code of 1986, as amended and (ii) all
shares of Texas Microsystems and TME held by Keystone. As of the close of
trading on November 8, 1994 these shares had an aggregate market value of
$18.85 million and represented 33.35% of the Company's common stock outstanding
on a fully-diluted basis (based on 9,836,664 common shares outstanding as of
October 2, 1994 and 554,557 common stock equivalents based on in-the-money
options and the treasury stock method). The parties intend that the
transaction, which is subject to the approval of the shareholders of the
Company and Texas Microsystems, will be treated as a pooling of interests.
Reference is made to the Agreement for a more complete description of the
transaction.
Broadview Associates specializes in mergers and acquisitions of information
technology ("IT") businesses. In this capacity, we are continually engaged in
valuing such businesses, and we maintain an extensive database of IT mergers
and acquisitions for comparative purposes. We are currently acting as financial
advisor to the Company's board of directors and will receive a fee from the
Company upon the successful conclusion of the proposed transaction.
Redwood City, CA Fort Lee, NJ London
Member, National Association of Securities Dealers, Inc.
B-1
<PAGE>
In rendering our opinion, we have, among other things:
. reviewed the terms of the Agreement and the associated exhibits in the
form of the draft dated November 9, 1994 furnished to us by your counsel
(which, for the purposes of this letter, we have assumed, with your
permission, to be identical in all material respects to the Agreement to
be executed);
. reviewed Texas Microsystems' audited financial statements for the fiscal
year ended June 30, 1994 marked Tentative and Preliminary and dated
August 12, 1994, as well as the historical financial statements of Texas
Microsystems for the fiscal years 1991-1993 as audited by Arthur
Andersen;
. analyzed forecasts of Texas Microsystems' financial performance for the
fiscal years 1995-1997 provided to us by its management;
. reviewed multi-year pro forma forecasts of the financial performance of
the Company combined with Texas Microsystems, provided to Broadview by
the managements of the Company and Texas Microsystems, to determine the
effect of the transaction on projected revenues, profits and earnings per
share compared to the Company's projections as a stand-alone entity;
. reviewed certain information relating to the business, revenue backlog,
earnings, assets, acquisitions, distributor agreements, customers,
markets and prospects provided by Texas Microsystems management;
. participated in discussions with Texas Microsystems management concerning
the operations, business strategy, financial performance and prospects
for Texas Microsystems;
. reviewed market research studies provided by Texas Microsystems and
considered the prospects of Texas Microsystems and competitive trends in
the IT industry;
. considered the recent history of Texas Microsystems and its relations
with its principal business partners;
. analyzed available information, both public and private, concerning other
companies and other mergers and acquisitions we believe to be comparable
in whole or in part to this transaction;
. conducted such other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by the Company or
Texas Microsystems. With respect to the financial projections and forecasts
examined by us, we have assumed that they were reasonably prepared and
reflected the best available estimates and good faith judgments of the
managements of Texas Microsystems and the Company as to the future performance
of Texas Microsystems and the Company, respectively. We have not made nor
obtained an independent appraisal or valuation of any of Texas Microsystems'
assets.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be paid by the Company to the shareholders of SPCO and to
Keystone pursuant to the Agreement is fair to the Company's stockholders from a
financial point of view.
This opinion speaks only as of the date hereof and may be relied upon only by
the Board of Directors of the Company and no other person. This opinion may not
be published or referred to in whole or part, without our prior written
permission, which shall not be unreasonably withheld. Broadview Associates
hereby consents to references to and the inclusion of this letter in its
entirety in the Registration Statement on Form S-4 and the Prospectus/Proxy
Statement contained therein to be prepared in connection with the proposed
transaction.
Sincerely,
BROADVIEW ASSOCIATES, L.P.
B-2
<PAGE>
CONFIDENTIAL
VALUATION CONSIDERATIONS
In reviewing the business of Texas Microsystems, Inc. ("Texas Microsystems,"
"TMI" or the "Company"), along with the current activity within the Information
Technology ("IT") Industry, we have identified the following factors which,
among others, have a material impact on valuation.
FACTORS POSITIVELY AFFECTING VALUE:
. Diversified Products--Texas Microsystems has successfully diversified its
products from those of standard computer providers thus preventing the
Company from having to compete in the commodity PC market. Unlike standard
PCs, TMI's products feature heavy gauge steel, extruded aluminum, extra
cooling fans, industrial strength plastic and can withstand temperatures over
110 degrees Fahrenheit and 95% humidity. Fault tolerant models are self
diagnosing and alarming and have redundant power supplies and peripherals.
These differentiating features have permitted Texas Microsystems to maintain
higher margins and overall profitability than the median of the computer
industry.
. Market Share--Texas Microsystems is the third largest provider of industrial
PCs worldwide behind IBM and Siemens. The Company is well known among users
of industrial computers and enjoys a considerable size advantage over the
majority of industrial computer providers. The Company commands market shares
of 13.9%, 1.8% and 13.1% in the United States, Europe and the Far East,
respectively.
. Telecommunications Market Penetration--In addition to its success in the
industrial and fault tolerant PC market, Texas Microsystems has begun to
successfully penetrate the telecommunications market for similar hardware
products. The Company has introduced SPARC computer systems which meet
Bellcore Network Equipment Building Specifications (NEBS). TMI has shipped
over 120 of these systems to telecommunications providers including AT&T and
NYNEX. The introduction of these systems has greatly increased the potential
markets for TMI products and should contribute to positive revenue growth in
the future.
. High Growth Market--The industrial PC market is growing at a healthy rate
both domestically and internationally. According to a 1993 market study by
Venture Development Corporation, the worldwide industrial PC market is
projected to grow from approximately $565 million in 1994 to $757 million in
1997. From 1992-1997 North America, Europe and the Far East are forecasted to
grow by CAGRs of 8.2%, 9.8% and 28.0%, respectively.
. Large and Referencable Installed Base--Current customers of Texas
Microsystems' products include AT&T, Fujitsu, Reuters, GM, Ford, U.S.
Robotics, GE and Boston Technology. The Company's installed base has proven
to be an excellent source of repeat business and new sales opportunities via
referrals and references.
FACTORS NEGATIVELY AFFECTING VALUE:
. Highly Competitive Market--Although not as competitive as the overall
computer industry, the industrial computer market contains numerous large and
formidable competitors including IBM and Siemens. In addition to these large
competitors, TMI also competes against smaller companies including
Diversified Technology, Industrial Computer Source, I-Bus, Kontron, and Alan
Bradley; as well as lower-price, lower-end competitors including Advantech,
Arise and Multitech.
. Lack of Significant Proprietary Technology--Unlike other vendors in the
industrial and fault-tolerant computer market, Texas Microsystems does not
rely on a substantial amount of proprietary intellectual
B-3
<PAGE>
CONFIDENTIAL
property. The Company primarily utilizes standard technology and components in
most of its products. This limits TMI's protection against existing and future
competitive pressures.
. Limited Management Infrastructure--Texas Microsystems has a board of
directors and a management team which is not as large or experienced as the
Company's publicly-traded competitors. This lack of management infrastructure
and resources could impact the future strategic direction of the firm and
limit the Company's growth prospects.
B-4
<PAGE>
CONFIDENTIAL
SUMMARY EXPLANATION OF VALUATION METHODOLOGY
The following is a summary explanation of the various sources of information
and valuation methodologies employed by Broadview Associates, L.P.
("Broadview") in valuing Texas Microsystems, Inc. ("Texas Microsystems" or the
"Company") in conjunction with rendering its Fairness Opinion regarding the
proposed acquisition:
Broadview employed a comparable transaction-based analysis, public company
comparables-based analysis and discounted cash flow (DCF) analysis to
determine the value of the Company. Each of these methodologies was equally
weighted in determining the final value of the Company because each provides
an appropriate measure of value.
TRANSACTION COMPARABLES ANALYSIS--Transaction comparables indicate the
Adjusted Price/Revenue/1/ (Adj. P/R) multiples acquirers are willing to pay
for comparable companies in a particular market segment. Broadview reviewed 7
M&A transaction comparables from 1991 through the present which represent
sellers which share many characteristics with the Company, including product
type, size, international presence, business model, management structure, et
al. Transactions were selected from Broadview's proprietary database of
published and confidential M&A transactions in the Information Technology (IT)
industry and excluded minority investments. These transactions represent
public and private sellers in the industrial and fault-tolerant computer
market. In reverse chronological order, the transactions used are the
acquisition of 1) Datawatch Corporation by Secure Systems Group; 2) Sentinel
Systems by Helionetics; 3) Rugged Digital Systems by Datametrics; 4) KMS
Industries by North Atlantic Industries; 5) Industrial Computer Source by
Dynatech; 6) Teradata Corporation by AT&T and 7) Heurikon Corporation by
Computer Products. The median Adj. P/R multiple of these transactions was
0.55. A premium of 25% was applied to the median Adj. P/R multiple of the
transaction comparables to reflect the strong market position of the Company,
as well as a careful weighting of all the other factors having a positive or
negative effect on the value of Texas Microsystems (see the attached document
titled: "Valuation Considerations"). Broadview elected to apply a premium to
the median Adj. P/R ratio rather than to apply the median from a subset of the
transaction comparables, such as a specific quartile above the median, due to
the limited size of the set of transaction comparables.
PUBLIC COMPANY COMPARABLES ANALYSIS--Total Market Capitalization/Revenue
(TMC/R) and Price/Earnings multiples of public company comparables indicate
the value public markets place on companies in a particular market segment.
Although there are a limited number of public company "pure plays" in each of
the markets in which Texas Microsystems competes, there are a number of public
company comparables which share many characteristics with the Company,
including product type, size, international presence, business model,
management structure, et al. Broadview reviewed 10 public company comparables
from a financial point of view including each company's: Trailing Twelve Month
(TTM) Revenues; Growth in TTM Revenues; TTM Pre-tax Income and Margins; TTM
Net Income; TTM EPS; Total Debt; Cash and Equivalents; Equity Market
Capitalization; Total Market Capitalization; TMC/R ratio and Price/Earnings
ratio. The public company comparables were selected from the Broadview
Barometer, a proprietary database of publicly-traded IT companies maintained
by Broadview Associates and broken down by industry segment.
- --------
/1/ The Adjusted Price/Revenue (Adj. P/R) ratio is employed in this analysis
because it allows two critical balance sheet items--cash and debt--to be
factored directly into the valuation. The formula for the Adj. P/R ratio is as
follows:
((Market Value of Equity) + (Short-Term Debt + Long-Term Debt) - (Cash and
Equivalents)) / Revenues
To determine value using this approach, the first step is to calculate the
appropriate Adj. P/R ratio for each comparable publicly-traded company and for
each acquired company. Next, the revenues of the company being valued are
multiplied by the appropriate Adj. P/Revenue ratio determined in step one.
This provides a total "entity" value which represents the company's value
based on its operating performance, i.e., excluding the effects of
capitalization. The final step is to subtract all short-term and long-term
debt from the total entity value and then add back cash and equivalents. The
result is the fair market value of the company's equity.
B-5
<PAGE>
CONFIDENTIAL
In alphabetical order, the public company comparables consisted of: Auspex
Systems, Integrated Micro Products, Netframe Systems, Parallan, Pyramid
Technology, Sequent Computer Systems, Sequoia Systems, Stratus Computer, Tandem
Computers and Tricord Systems. These comparables have a median TTM Revenue
Growth of 11.5%, Pre-tax Margin of 8.0%, TMC/R ratio of 0.93 and P/E ratio of
15.4. After a careful weighting of all the factors having a positive or
negative effect on the value of Texas Microsystems (see the attached document
titled: "Valuation Considerations"), including the illiquidity of Texas
Microsystems' privately-held shares and the strong market position of the
Company, no net discount or premium was applied to the TMC/R and P/E multiples
of the public company comparables.
DISCOUNTED CASH FLOW ANALYSIS--Broadview valued Texas Microsystems based upon
free cash flow estimates over a three year period from June 30, 1994 through
June 30, 1997. These free cash flow figures were taken from projections made by
Texas Microsystems' management team and based on growth and operating
assumptions which Texas Microsystems' management believes are reasonable and
prudent. After completing an analysis of those projections, Broadview concluded
that, in general, they were reasonable and prudent, and in certain respects
overly conservative. Specifically, planned working capital requirements and
PP&E expenditures were viewed as high and curtailed in the DCF analysis. The
residual value at the end of the terminal year was computed by applying the
median adjusted Price/Earnings multiple of the public company comparables to
Texas Microsystems' earnings in the terminal year. Discount rates of 12%-18%
were applied using a base case of 15%. After adjusting for cash and debt as of
June 30, 1994, total equity values for Texas Microsystems ranged from $31.0
million to $37.2 million, with a base case of $33.9 million. The residual value
at the end of the terminal year was also calculated as a perpetuity of cash
flow in the terminal year grown at 10%. This equates to applying a cash flow
multiple in the terminal year and yields a total equity value of $23.8 million
using a discount rate of 15%.
SUPPLEMENTAL ANALYSIS--Broadview also compared Texas Microsystems to all of
the public companies (36 in total) in the "Computer System" segment of the
Broadview Barometer. These companies have a median TTM Revenue Growth of 1.7%,
Pre-tax Margin of 2.0%, Net Margin of 1.3%, TMC/R ratio of 0.57 and P/E ratio
of 13.9. Using the maximum consideration of $26.7 million, the proposed
transaction represents a TMC/Revenue ratio of 0.58 placing it slightly above
the median of all of the publicly-traded computer companies and below the
median (at the 45th percentile) of the publicly-traded industrial and fault-
tolerant computer companies.
SUMMARY VALUATION ANALYSIS--Equally weighting Texas Microsystems' implied
valuation based on the transaction comparables analysis of $31.2, the public
company comparable analysis of $28.4 million and the discounted cash flow
analysis of $33.9 million, Broadview placed a total equity value on the Company
of $31.2 million.
Additionally, Broadview performed a relative contribution analysis based on
Sequoia's and Texas Microsystems' projected revenue and operating incomes for
FYE June 30, 1995. This analysis adjusts each company's number of shares for
cash and debt levels to determine the relative contributions of each company
independent of their respective balance sheets. This analysis showed that the
valuation of Texas Microsystems based on revenue and operating income
contributions, respectively, is 35.3% and 27.1% of the combined entity. Equally
weighted, these figures represent a value 31.2%, slightly below the agreed upon
consideration of 5.2 million shares, or approximately 33.35% of Sequoia's
Common Stock outstanding on a fully-diluted basis.
B-6
<PAGE>
ANNEX C
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S)228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)251, 252, 54, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock/1/, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice or and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) 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 (ii) held
of record by more than 2,000/2/ holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the/2/ holders of the surviving corporation as
provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 or this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation/1/, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
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 2,000/2/ holders;
c. Cash in lieu of fractional shares/3/ or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
C-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or 253
of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested, addressed
to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of the notice, demand in writing from the
surviving or resulting corporation the appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statements shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the
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<PAGE>
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rate against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a
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<PAGE>
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 262, L.
'94, eff. 7-1-94.)
C-4
<PAGE>
ANNEX D
SEQUOIA SYSTEMS, INC.
1995 OUTSIDE DIRECTORS' STOCK OPTION PLAN
1. Purpose.
The purpose of this 1995 Outside Directors' Stock Option Plan (the "Plan") of
Sequoia Systems, Inc. (the "Company") is to encourage stock ownership in the
Company by outside directors of the Company whose continued services are
considered essential to the Company's future success and to provide them with a
further incentive to remain as directors of the Company.
2. Administration.
The Board of Directors of Sequoia Systems (the "Board") shall supervise and
administer the Plan. Grants of stock options under the Plan and the amount and
nature of the options to be granted shall be automatic in accordance with
Section 5. However, all questions concerning interpretation of the Plan or any
options granted under it shall be resolved by the Board and such resolution
shall be final and binding upon all persons having an interest in the Plan.
3. Participation in the Plan.
Directors of the Company who are not employees of the Company or any
subsidiary of the Company ("outside directors") shall be eligible to receive
options under the Plan.
4. Stock Subject to the Plan.
(a) The maximum number of shares of the Company's Common Stock, par value
$.40 per share ("Common Stock"), which may be issued under the Plan shall be
150,000 shares, subject to adjustment as provided in Section 7.
(b) If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares covered by the
unexercised portion of such option shall again become available for issuance
pursuant to the Plan.
(c) All options granted under the Plan shall be non- statutory options not
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
5. Terms, Conditions and Form of Options.
Each option granted under the Plan shall be evidenced by a written agreement
in such form as the Chairman of the Board of Directors shall from time to time
approve, which agreement shall comply with and be subject to the following
terms and conditions:
(a) Option Grant Dates and Shares Subject to Option.
(i) Initial Grants. A fully-vested option to purchase 12,000 shares
of Common Stock shall be granted automatically to each person who
becomes an outside director of the Company after the date of the
Board's adoption of the Plan.
(ii) Subsequent Grants. A fully-vested option to purchase 2,500
shares of the Common Stock shall be granted automatically to each
outside director on each July 1 from July 1, 1995 through and including
July 1, 1999, provided, that he or she is an eligible director on the
date of grant of such option.
(b) Option Exercise Price. The option exercise price per share for each
option granted under the Plan shall be equal to the fair market value per
share of Common Stock on the date of grant, which shall be determined as
follows: (i) if the Common Stock is listed on the Nasdaq National Market or
<PAGE>
another nationally recognized exchange or trading system as of the date on
which a determination of fair market value is to be made, the fair market
value per share shall be deemed to be the last reported sale price per
share of Common Stock thereon on such date (or, if no such price is
reported on such date, such price on the nearest preceding date on which
such a price is reported); and (ii) if the Common Stock is not listed on
the Nasdaq National Market or another nationally recognized exchange or
trading system as of the date on which a determination of fair market value
is to be made, the fair market value per share shall be deemed to be the
book value per share of the Common Stock as of the end of the most recent
fiscal quarter preceding such date.
(c) Options Non-Transferable. Each option granted under the Plan by its
terms shall not be transferable by the optionee otherwise than by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order (as defined in the Code), and shall be exercised during the
lifetime of the optionee only by the optionee or his or her legal
representative. No option or interest therein may be transferred, assigned,
pledged or hypothecated by the optionee during his or her lifetime, whether
by operation of law or otherwise, or be made subject to execution,
attachment or similar process.
(d) Exercise Period. Each option may be exercised at any time and from
time to time, in whole or in part, prior to the tenth anniversary of the
date of grant, except that no option may be exercised more than six months
after the optionee ceases to serve as a director of the Company.
(e) Termination. Each option shall terminate, and may no longer be
exercised, on the earlier of (i) the date 10 years after the date of grant
or (ii) the date one year after the optionee ceases to serve as a director
of the Company for any reason, whether by death, resignation, removal or
otherwise.
(f) Exercise Procedure. An option may be exercised only by written notice
to the Company at its principal office accompanied by payment in cash of
the full consideration for the shares as to which the option is exercised.
(g) Exercise by Representative Following Death of Director. An optionee,
by written notice to the Company, may designate one or more persons (and
from time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the
right to exercise all or a portion of the option. If the person or persons
so designated wish to exercise any portion of the option, they must do so
within the term of the option as provided herein. Any exercise by a
representative shall be subject to the provisions of the Plan.
6. Limitation of Rights.
(a) No Right to Continue as a Director. Neither the Plan, nor the granting of
an option nor any other action taken pursuant to the Plan, shall constitute or
be evidence of any agreement or understanding, express or implied, that the
optionee shall be entitled to continue as a director for any period of time.
(b) No Stockholder Rights for Options. An optionee shall have no rights as a
stockholder with respect to the shares covered by his or her option until the
date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.
7. Adjustment Provisions for Mergers, Recapitalizations and Related
Transactions.
If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are exchanged for a different number or kind of securities of the Company or of
another entity, or (ii) additional shares or new or different shares or other
securities of the Company or of another entity are distributed with respect to
such shares of Common Stock, the Board shall make an appropriate and
proportionate adjustment in (x) the maximum number and kind of shares reserved
for issuance under the Plan, (y) the number and kind of shares or other
securities subject to then outstanding options under the Plan, and/or (z) the
price for each share subject to any then outstanding options under the Plan
(without changing the aggregate purchase price for such options), to the end
that each option shall be exercisable, for
D-2
<PAGE>
the same aggregate exercise price, for such securities as such optionholder
would have held immediately following such event if he or she had exercised
such option immediately prior to such event. No fractional shares will be
issued under the Plan on account of any such adjustments.
8. Modification, Extension and Renewal of Options.
The Board shall have the power to modify or amend outstanding options;
provided, however, that no modification or amendment may (i) have the effect of
altering or impairing any rights or obligations of any option previously
granted without the consent of the optionee, or (ii) modify the number of
shares of Common Stock subject to the option (except as provided in Section 7).
9. Termination and Amendment of the Plan.
The Board may suspend, terminate or discontinue the Plan or amend it in any
respect whatsoever; provided, however, that without approval of the
stockholders of the Company, no amendment may (i) increase the number of shares
subject to the Plan (except as provided in Section 7), (ii) materially modify
the requirements as to eligibility to receive options under the Plan, or (iii)
materially increase the benefits accruing to participants in the Plan; and
provided further that the Board may not amend the provisions of Sections 3 or
5, insofar as they relate to the amount, price and timing of options to be
granted hereunder, more frequently than once every six months, other than to
comply with changes in the Code or the rules thereunder.
10. Notice.
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.
11. Governing Law.
The Plan and all determinations made and actions taken pursuant hereto shall
be governed by the laws of the Commonwealth of Massachusetts.
12. Stockholder Approval.
The Plan is conditional upon approval by the Company's stockholders of the
Plan within one year from its date of adoption by the Board. No option under
the Plan may be exercised until such stockholder approval is obtained, and the
Plan and all options granted under the Plan shall be null and void if the Plan
is not so approved by the Company's stockholders.
As adopted by the Board on December
13, 1994.
D-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of Sequoia's Restated Certificate of Incorporation sets
forth the extent to which officers and directors of Sequoia may be indemnified
against any liabilities which they may incur in their capacities as directors
or officers of Sequoia. The Restated Certificate of Incorporation provides
that Sequoia shall, to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware, indemnify any director or
officer against any expenses, liabilities or other matters referred to in or
covered by that Section. The indemnification is not exclusive of any other
rights to which the officers or directors may be entitled under any by-law,
agreement or vote of stockholders or disinterested directors or otherwise,
continues after such person has ceased to be a director or officer and inures
to the benefit of such person's, heirs, executors and administrators. The
indemnification provided by the Restated Certificate of Incorporation
specifically includes indemnification of all officers and directors who are
deemed fiduciaries under any employee benefit plan and any action taken or
omitted by such officer or director with respect to an employee benefit plan
reasonably believed by such person to be in the interest of the participants
and beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of Sequoia.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
*2.1--Merger and Stock Purchase Agreement Among Sequoia Systems, Inc.,
Sequoia Acquisition Corporation, SPCO, Inc. and Keystone Interna-
tional, Inc., dated as of November 9, 1994.
*2.2--Amendment No. 1 to Merger and Stock Purchase Agreement Among Se-
quoia Systems, Inc., Sequoia Acquisition Corporation, SPCO, Inc.
and Keystone International, Inc. dated as of February 7, 1995.
**2.3--Amendment No. 2 to Merger and Stock Purchase Agreement Among Se-
quoia Systems, Inc., Sequoia Acquisition Corporation, SPCO, Inc.
and Keystone International, Inc. dated as of February 23, 1995.
3.1--Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's 1994 Annual Report on Form 10-K, as
amended by Form 10-K/A (File No. 0-18238)).
3.2--Amended and Restated By-Laws of the Company (incorporated by ref-
erence to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (File No. 33-33024)).
*5.1--Opinion of Hale and Dorr.
10.1--Amended Registration Rights Agreement, as amended, among the Com-
pany and certain investors (incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-1 (File No.
33-33024)).
10.2--Amended Registration Rights Agreement, as amended, among the Com-
pany and certain investors (incorporated by reference to Exhibit
10.28 to the Company's Registration Statement on Form S-1 (File No.
33-33024)).
10.3--1986 Incentive Stock Option Plan and related form of stock option
agreement (incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File No. 33-33024)).
10.4--Second Amendment to 1986 Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.42 to the Company's 1990 Annual Report
on Form 10-K (File No. 0-18238)).
10.5--1986 Supplemental Stock Option Plan and related form of stock op-
tion agreement (incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File No. 33-33024)).
10.6--Second Amendment to 1986 Supplemental Stock Option Plan (incorpo-
rated by reference to Exhibit 10.43 to the Company's 1990 Annual
Report on Form 10-K (File No. 0-18238)).
10.7--1990 Outside Director's Stock Option Plan (incorporated by refer-
ence to Exhibit 10.45 to the Company's 1990 Annual Report on Form
10-K (File No. 0-18238)).
*10.8--1993 Employee Stock Purchase Plan.
10.9--401(k) Plan of the Company (incorporated by reference to Exhibit
10.37 to the Company's Registration Statement on Form S-1 (File No.
33-33024)).
II-1
<PAGE>
10.10 --Lease dated November 23, 1983 between the Company and Metropolitan
Life Insurance Company (incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1 (File No. 33-
33024)).
10.11 --Third Amendment dated April 2, 1990 to Lease of November 23, 1983,
between the Company and Metropolitan Life Insurance Company (incor-
porated by reference to Exhibit 10.38 to the Company's 1990 Annual
Report on Form 10-K (File No. 0-18238)).
10.12 --Lease dated March 20, 1992 between the Company and Metropolitan
Life Insurance Company (incorporated by reference to Exhibit 10.14
to the Company's 1992 Annual Report on Form 10-K, Amendment No. 1
(File No. 0-18238)).
10.13 --Employment Agreement dated October 20, 1987 between the Company
and Jack J. Stiffler (incorporated by reference to Exhibit 10.16 to
the Company's Registration Statement on Form S-1 (File No. 33-
33024)).
10.14 --Pick Systems-Open Architecture License Agreement dated October 10,
1986 among the Company, Concurrent Operating Systems Technology and
Pick Systems, and assigned to the Company on February 24, 1988 (in-
corporated by reference to Exhibit 10.19 to the Company's Registra-
tion Statement on Form S-1 (File No. 33-33024)).
10.15 --Credit Agreement dated as of March 22, 1994 between the Company
and State Street Bank and Trust Company (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the Quarter Ended April 13, 1994 (File No. 0-18238)).
10.16 --Product Development and Technology License Agreement dated July
24, 1990 between the Company and Samsung Electronics Company Ltd.
(incorporated by reference to Exhibit 10.40 to the Company's 1990
Annual Report on Form 10-K (File No. 0-18238)).
10.17 --OEM Agreement dated July 24, 1990 between the Company and Samsung
Electronics Company Ltd. (incorporated by reference to Exhibit
10.41 to the Company's 1990 Annual Report on Form 10-K (File No.
18238)).
10.18 --Service Provider II Maintenance Agreement dated January 1, 1992
between the Company and Samsung Electronics Company Ltd. (incorpo-
rated by reference to Exhibit 10.45 to the Company's 1992 Annual
Report on Form 10-K, Amendment No. 1 (File No. 0-18238)).
10.19 --OEM Agreement dated September 7, 1993 between the Company and
Samsung Electronics Co., Ltd. (incorporated by reference to Exhibit
10.43 to the Company's 1993 Annual Report on Form 10-K (File No. 0-
18238)).
10.20 --Master Agreement dated September 7, 1993 between the Company and
Samsung Electronics Co., Ltd. (incorporated by reference to Exhibit
10.44 to the Company's 1993 Annual Report on Form 10-K (File No. 0-
18238)).
10.21 --Development, Manufacturing, and Distribution Agreement dated as of
December 26, 1991 between the Company and Toshiba Corporation (in-
corporated by reference to Exhibit 10.48 to the Company's 1992 An-
nual Report on Form 10-K, Amendment No. 1 (File No. 0-18238)).
10.22 --Revised Development, Manufacturing, and Distribution Agreement ex-
ecuted as of May 13, 1994 between the Company and Toshiba Corpora-
tion.
10.23 --Software Cooperation Agreement executed April 5, 1994 between the
Company and UNIX System Laboratories, Inc. (Incorporated by refer-
ence to Exhibit 10.23 to the Company's 1994 Annual Report on Form
10-K (File No. 0-18238)).
10.24 --Joint Venture Agreement dated as of September, 1991 by and among
the Company, Tricom Computer Pty. Ltd. and Sequoia Systems (Austra-
lia) Pty. Ltd., together with material exhibits (incorporated by
reference to Exhibit 10.49 to the Company's 1992 Annual Report on
Form 10-K, Amendment No. 1 (File No. 0-18238)).
II-2
<PAGE>
10.25 --International Distributorship Agreement dated October 15, 1991 by
and among the Company, Tricom Computer Pty, Ltd. and Sequoia Sys-
tems (Australia) Pty. Ltd., together with material exhibits (incor-
porated by reference to Exhibit 10.50 to the Company's 1992 Annual
Report on Form 10-K, Amendment No. 1 (File No. 0-18238)).
10.26 --Settlement Agreement and Mutual General Release dated February 1,
1993 between the Company and Ultimate Corp. (incorporated by refer-
ence to Exhibit 10.54 to the Company's 1993 Annual Report on Form
10-K (File No. 0-18238)).
10.27 --Order of Final Approval and Final Judgment and Order of Dismissal
dated September 10, 1993, of the United States District Court for
the District of Massachusetts (incorporated by reference to Exhibit
10.55 to the Company's 1993 Annual Report on Form 10-K (File No. 0-
18238)).
10.28 --Employment Agreement dated November 5, 1992, as amended January
22, 1993, between the Company and Cornelius P. McMullan (incorpo-
rated by reference to Exhibit 10.56 to Amendment No. 1 to the
Company's 1993 Annual Report on Form 10-K/A (File No. 0-18238)).
10.29 --Employment Agreement dated October 2, 1992, as amended November 7,
1992, between the Company and Richard B. Goldman (incorporated by
reference to Exhibit 10.57 to Amendment No. 1 to the Company's 1993
Annual Report on Form 10-K/A (File No. 0-18238)).
*10.30 --Escrow Agreement, dated as of February 17, 1995, among the Compa-
ny, W. Wayne Patterson and The First National Bank of Boston.
**21.1 --Subsidiaries of Sequoia.
**23.1 --Consent of Coopers & Lybrand L.L.P.
**23.2 --Consent of Arthur Andersen LLP (Boston, Massachusetts).
**23.3 --Consent of Arthur Andersen LLP (Houston, Texas).
*23.4 --Consent of Hale and Dorr (included in Exhibit 5.1).
*24.1 --Power of Attorney (included on page II-5 of Registration Statement
on Form S-4 filed February 21, 1995).
*99.1 --Form of Proxy Card of Sequoia.
*99.2 --Form of Written Consent of SPCO.
**99.3 --Consent of J. Michael Stewart.
- --------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules
ITEM 22. UNDERTAKINGS.
A. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is therefore, unenforceable in the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
B. Sequoia hereby undertakes that, for purposes of determining any liability
under the Securities Act, each filing of Sequoia's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act (and,
II-3
<PAGE>
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 this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
C. Sequoia hereby undertakes as follows:
(1) 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), Sequoia 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.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the 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 this 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.
D. Sequoia hereby undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11,
or 13 of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of responding to
the request.
E. Sequoia 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 this Registration
Statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN
OF MARLBOROUGH, COMMONWEALTH OF MASSACHUSETTS, ON THE 23RD DAY OF FEBRUARY,
1995.
Sequoia Systems, Inc.
By: /s/ Jeremy F. Swett
---------------------------------
Jeremy F. Swett
Vice President, General Counsel
and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
Cornelius P. McMullan* President, Chief February 23,
- ------------------------------------- Executive Officer 1995
CORNELIUS P. MCMULLAN and Director
(Principal
Executive Officer)
Richard B. Goldman* Vice President, February 23,
- ------------------------------------- Finance and Chief 1995
RICHARD B. GOLDMAN Financial Officer
(Principal
Financial and
Accounting Officer)
Francis J. Hughes, Jr.* Chairman of the February 23,
- ------------------------------------- Board 1995
FRANCIS J. HUGHES, JR.
Dean C. Campbell* Director February 23,
- ------------------------------------- 1995
DEAN C. CAMPBELL
A. Theodore Engkvist* Director February 23,
- ------------------------------------- 1995
A. THEODORE ENGKVIST
John F. Smith* Director February 23,
- ------------------------------------- 1995
JOHN F. SMITH
*By: /s/ Jeremy F. Swett
---------------------------
Jeremy F. Swett
as Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
*2.1--Merger and Stock Purchase Agreement Among Sequoia Systems,
Inc., Sequoia Acquisition Corporation, SPCO, Inc. and Key-
stone International, Inc., dated as of November 9, 1994.
*2.2--Amendment No. 1 to Merger and Stock Purchase Agreement Among
Sequoia Systems, Inc., Sequoia Acquisition Corporation, SPCO,
Inc. and Keystone International, Inc. dated as of February 7,
1995.
**2.3--Amendment No. 2 to Merger and Stock Purchase Agreement Among
Sequoia Systems, Inc., Sequoia Acquisition Corporation, SPCO,
Inc. and Keystone International, Inc. dated as of February
23, 1995.
3.1--Restated Certificate of Incorporation (incorporated by ref-
erence to Exhibit 3.1 to the Company's 1994 Annual Report on
Form 10-K, as amended by Form 10-K/A (File No. 0-18238)).
3.2--Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration State-
ment on Form S-1 (File No. 33-33024)).
*5.1--Opinion of Hale and Dorr.
10.1--Amended Registration Rights Agreement, as amended, among the
Company and certain investors (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form
S-1 (File No. 33-33024)).
10.2--Amended Registration Rights Agreement, as amended, among the
Company and certain investors (incorporated by reference to
Exhibit 10.28 to the Company's Registration Statement on Form
S-1 (File No. 33-33024)).
10.3--1986 Incentive Stock Option Plan and related form of stock
option agreement (incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 (File No.
33-33024)).
10.4--Second Amendment to 1986 Incentive Stock Option Plan (incor-
porated by reference to Exhibit 10.42 to the Company's 1990
Annual Report on Form 10-K (File No. 0-18238)).
10.5--1986 Supplemental Stock Option Plan and related form of
stock option agreement (incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1
(File No. 33-33024)).
10.6--Second Amendment to 1986 Supplemental Stock Option Plan (in-
corporated by reference to Exhibit 10.43 to the Company's
1990 Annual Report on Form 10-K (File No. 0-18238)).
10.7--1990 Outside Director's Stock Option Plan (incorporated by
reference to Exhibit 10.45 to the Company's 1990 Annual Re-
port on Form 10-K (File No. 0-18238)).
*10.8--1993 Employee Stock Purchase Plan.
10.9--401(k) Plan of the Company (incorporated by reference to Ex-
hibit 10.37 to the Company's Registration Statement on Form
S-1 (File No. 33-33024)).
10.10--Lease dated November 23, 1983 between the Company and Metro-
politan Life Insurance Company (incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement on Form
S-1 (File No. 33-33024)).
10.11--Third Amendment dated April 2, 1990 to Lease of November 23,
1983, between the Company and Metropolitan Life Insurance
Company (incorporated by reference to Exhibit 10.38 to the
Company's 1990 Annual Report on Form 10-K (File No. 0-
18238)).
10.12--Lease dated March 20, 1992 between the Company and Metropol-
itan Life Insurance Company (incorporated by reference to Ex-
hibit 10.14 to the Company's 1992 Annual Report on Form 10-K,
Amendment No. 1 (File No. 0-18238)).
<PAGE>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
10.13--Employment Agreement dated October 20, 1987 between the Com-
pany and Jack J. Stiffler (incorporated by reference to Ex-
hibit 10.16 to the Company's Registration Statement on Form
S-1 (File No. 33-33024)).
10.14--Pick Systems-Open Architecture License Agreement dated Octo-
ber 10, 1986 among the Company, Concurrent Operating Systems
Technology and Pick Systems, and assigned to the Company on
February 24, 1988 (incorporated by reference to Exhibit 10.19
to the Company's Registration Statement on Form S-1 (File No.
33-33024)).
10.15--Credit Agreement dated as of March 22, 1994 between the Com-
pany and State Street Bank and Trust Company (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the Quarter Ended April 13, 1994 (File No.
0-18238)).
10.16--Product Development and Technology License Agreement dated
July 24, 1990 between the Company and Samsung Electronics
Company Ltd. (incorporated by reference to Exhibit 10.40 to
the Company's 1990 Annual Report on Form 10-K (File No. 0-
18238)).
10.17--OEM Agreement dated July 24, 1990 between the Company and
Samsung Electronics Company Ltd. (incorporated by reference
to Exhibit 10.41 to the Company's 1990 Annual Report on Form
10-K (File No. 18238)).
10.18--Service Provider II Maintenance Agreement dated January 1,
1992 between the Company and Samsung Electronics Company Ltd.
(incorporated by reference to Exhibit 10.45 to the Company's
1992 Annual Report on Form 10-K, Amendment No. 1 (File No. 0-
18238)).
10.19--OEM Agreement dated September 7, 1993 between the Company
and Samsung Electronics Co., Ltd. (incorporated by reference
to Exhibit 10.43 to the Company's 1993 Annual Report on Form
10-K (File No. 0-18238)).
10.20--Master Agreement dated September 7, 1993 between the Company
and Samsung Electronics Co., Ltd. (incorporated by reference
to Exhibit 10.44 to the Company's 1993 Annual Report on Form
10-K (File No. 0-18238)).
10.21--Development, Manufacturing, and Distribution Agreement dated
as of December 26, 1991 between the Company and Toshiba Cor-
poration (incorporated by reference to Exhibit 10.48 to the
Company's 1992 Annual Report on Form 10-K, Amendment No. 1
(File No. 0-18238)).
10.22--Revised Development, Manufacturing, and Distribution Agree-
ment executed as of May 13, 1994 between the Company and
Toshiba Corporation.
10.23--Software Cooperation Agreement executed April 5, 1994 be-
tween the Company and UNIX System Laboratories, Inc. (Incor-
porated by reference to Exhibit 10.23 to the Company's 1994
Annual Report on Form 10-K (File No. 0-18238)).
10.24--Joint Venture Agreement dated as of September, 1991 by and
among the Company, Tricom Computer Pty. Ltd. and Sequoia Sys-
tems (Australia) Pty. Ltd., together with material exhibits
(incorporated by reference to Exhibit 10.49 to the Company's
1992 Annual Report on Form 10-K, Amendment No. 1 (File No. 0-
18238)).
10.25--International Distributorship Agreement dated October 15,
1991 by and among the Company, Tricom Computer Pty, Ltd. and
Sequoia Systems (Australia) Pty. Ltd., together with material
exhibits (incorporated by reference to Exhibit 10.50 to the
Company's 1992 Annual Report on Form 10-K, Amendment No. 1
(File No. 0-18238)).
<PAGE>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
10.26 --Settlement Agreement and Mutual General Release dated Febru-
ary 1, 1993 between the Company and Ultimate Corp. (incorpo-
rated by reference to Exhibit 10.54 to the Company's 1993 An-
nual Report on Form 10-K (File No. 0-18238)).
10.27 --Order of Final Approval and Final Judgment and Order of Dis-
missal dated September 10, 1993, of the United States Dis-
trict Court for the District of Massachusetts (incorporated
by reference to Exhibit 10.55 to the Company's 1993 Annual
Report on Form 10-K (File No. 0-18238)).
10.28 --Employment Agreement dated November 5, 1992, as amended Jan-
uary 22, 1993, between the Company and Cornelius P. McMullan
(incorporated by reference to Exhibit 10.56 to Amendment No.
1 to the Company's 1993 Annual Report on Form 10-K/A (File
No. 0-18238)).
10.29 --Employment Agreement dated October 2, 1992, as amended No-
vember 7, 1992, between the Company and Richard B. Goldman
(incorporated by reference to Exhibit 10.57 to Amendment No.
1 to the Company's 1993 Annual Report on Form 10-K/A (File
No. 0-18238)).
*10.30 --Escrow Agreement, dated as of February 17, 1995, among the
Company, W. Wayne Patterson and The First National Bank of
Boston.
**21.1 --Subsidiaries of Sequoia.
**23.1 --Consent of Coopers & Lybrand L.L.P.
**23.2 --Consent of Arthur Andersen LLP (Boston, Massachusetts).
**23.3 --Consent of Arthur Andersen LLP (Houston, Texas).
*23.4 --Consent of Hale and Dorr (included in Exhibit 5.1).
*24.1 --Power of Attorney (included on page II-5 of Registration
Statement on Form S-4 filed February 21, 1995).
*99.1 --Form of Proxy Card of Sequoia.
*99.2 --Form of Written Consent of SPCO.
**99.3 --Consent of J. Michael Stewart.
- --------
* Previously filed.
** Filed herewith.
<PAGE>
EXHIBIT 2.3
AMENDMENT NUMBER 2 TO
MERGER AND STOCK PURCHASE AGREEMENT
AMONG
SEQUOIA SYSTEMS, INC.,
SEQUOIA ACQUISITION CORPORATION,
SPCO, INC.
AND
KEYSTONE INTERNATIONAL, INC.
Agreement entered into as of the 23rd day of February, 1995 by and among
Sequoia Systems, Inc., a Delaware corporation (the "Buyer"), Sequoia
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Buyer ("Transitory Subsidiary"), SPCO, Inc., a Delaware corporation (the
"Company") and Keystone International, Inc., a Texas corporation ("Keystone").
Whereas, the parties hereto are parties to a Merger and Stock Purchase
Agreement dated as of November 9, 1994, as amended as of February 7, 1995 (as
amended, the "Merger Agreement") (terms not otherwise defined herein shall be
deemed to have the meaning ascribed to such term in the Merger Agreement); and
Whereas, the parties now desire to amend the Merger Agreement as hereinafter
set forth.
Now, Therefore, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:
1. Section 6.1(y) of the Merger Agreement is hereby amended by inserting at
the end of such section the following:
"The parties agree that the foregoing conditions shall not be waived by any
party hereto."
2. Section 6.2(1) of the Merger Agreement is hereby amended by inserting at
the end of such section the following:
"The parties agree that the foregoing conditions shall not be waived by any
party hereto."
3. All other terms and conditions of the Merger Agreement are ratified,
confirmed and approved.
<PAGE>
In Witness Whereof, the undersigned have executed this Amendment Agreement as
of the date first above written.
Sequoia Systems, Inc.
/s/ Jeremy F. Swett
By: _________________________________
Title: Vice President and General
Counsel
Sequoia Acquisition Corporation
/s/ Richard B. Goldman
By: _________________________________
Title: Vice President
SPCO, Inc.
/s/ J. Michael Stewart
By: _________________________________
Title: President
Keystone International, Inc.
/s/ Mark E. Baldwin
By: _________________________________
Title: Vice President
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
Subsidiary of Incorporation
---------- ----------------
Sequoia Systems Europe B.V. Holland
Sequoia Systems (UK) Limited United Kingdom
Sequoia Systems Japan Co., Ltd. Japan
Sequoia Investment Corporation Massachusetts
Sequoia Systems (Australia) Pty. Ltd. Australia
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Amendment No. 1 to the
Registration Statement on Form S-4 of our reports dated July 26, 1994, on our
audits of the consolidated financial statements and financial statement
schedules of Sequoia Systems, Inc. as of June 30, 1993 and 1994 and for the
years ended June 30, 1993 and 1994. We also consent to the reference to our
firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 23, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated August 19, 1992, on the financial
statements of Sequoia Systems, Inc. for the year ended June 30, 1992
incorporated by reference herein and to all references to our Firm included in
this registration statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 23, 1995
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated November 30, 1994, on the financial
statements of the Texas Microsystems Group as of and for the years ended June
30, 1994, 1993 and 1992, included herein and to all references to our Firm
included in this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
February 23, 1995
<PAGE>
EXHIBIT 99.3
CONSENT OF NOMINEE
I hereby consent to being named in the Proxy Statement/Prospectus forming a
part of the Registration Statement on Form S-4 (File No. 33-54777) of Sequoia
Systems, Inc. ("Sequoia") as a person to be elected as a Class III Director of
Sequoia upon the Effective Time (as defined therein).
/s/ J. Michael Stewart
_____________________________________
J. Michael Stewart
