<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by the Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NetFRAME Systems Incorporated
(Name of Registrant as Specified In Its Charter)
N/A
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.001 of Registrant
(2) Aggregate number of securities to which transaction applies:
14,148,160 shares of Common Stock./1/
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state
how it was determined): $1.00./1/
(4) Proposed maximum aggregate value of transaction: $14,144,231./1/
(5) Total fee paid: $2,829.00./1/
[ ] Fee paid previously with preliminary materials: N/A.
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[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid: $2,795.69.
(2) Form, Schedule or Registration Statement No.: Schedule 14D-1.
(3) Filing Party: Payette Acquisition Corporation and Micron
Electronics, Inc.
(4) Date Filed: June 16, 1997.
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/1/ The aggregate number of securities represents the total number of
shares of Common Stock outstanding, 6,715 shares of Common Stock
issuable pursuant to options outstanding that are exercisable for a
price of less than $1.00 per share and an estimated maximum of 163,000
shares of Common Stock issuable pursuant to the Company's 1992
Employee Stock Purchase Plan. The per unit price is based on the cash
payment to be made to holders of the Company's Common Stock and
optionees. The aggregate value of the transaction equals the sum of
(1) the $1.00 share price multiplied by the number of shares
outstanding and the number of shares estimated to be issued under the
1992 Employee Stock Purchase Plan, and (2) the product of the
difference between the $1.00 share price and the exercise prices of
the above-described options to purchase shares of the Company's Common
Stock multiplied by the respective number of such options. Based upon
such value, the fee due upon the filing of this preliminary proxy
statement is $2,829.00, of which $2,795.69 was previously paid in
connection with the filing of the Schedule 14D-1 by Payette
Acquisition Corporation and Micron Electronics, Inc. in connection
with the first step of the transaction of which the merger that is the
subject of this proxy statement is a part. Accordingly, an additional
fee of $33.31 has been paid with the filing of this proxy statement.
<PAGE>
NETFRAME SYSTEMS INCORPORATED
1545 Barber Lane
Milpitas, California 95035
August __, 1997
Dear Stockholders:
On behalf of the Board of Directors, I cordially invite you to attend a
Special Meeting of the Stockholders (the "Special Meeting") of NetFRAME Systems
Incorporated ("NetFRAME" or the "Company") to be held at the offices of
NetFRAME at 1545 Barber Lane, Milpitas, California, on August 27, 1997, at
10:00 a.m., local time.
At the Special Meeting, holders of Common Stock, par value $.001 per share
(the "Common Stock"), of NetFRAME will be asked to consider, approve and adopt
an Agreement and Plan of Merger, dated as of June 10, 1997 (the "Merger
Agreement"), among the Company, Micron Electronics, Inc., a Minnesota
corporation ("Micron"), and Payette Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Micron (the "Purchaser"),
providing for, among other things, the merger of Purchaser with and into the
Company (the "Merger"). Following the Merger, the Company will continue as the
surviving corporation (the "Surviving Corporation") and will become a wholly
owned subsidiary of Micron. A copy of the Merger Agreement is attached to the
accompanying Proxy Statement as Annex A.
The Merger will constitute the second and final step of the acquisition of
the Company by Micron. The first step was a tender offer (the "Offer") by the
Purchaser for all of the issued and outstanding shares of Common Stock and all
associated rights, including Preferred Share Purchase Rights (collectively, the
"Shares") at $1.00 per share, net to the seller in cash, without interest
thereon (the "Offer Price"). Purchaser purchased 8,775,554 Shares pursuant to
the Offer and beneficially owns approximately 62.8% of the outstanding Shares.
The affirmative vote of the holders of a majority of the Shares outstanding and
entitled to vote is necessary to approve the Merger Agreement. Purchaser owns
a sufficient number of Shares to assure approval and adoption of the Merger
Agreement and the Merger at the Special Meeting. Micron has agreed in the
Merger Agreement to vote or cause to be voted all Shares owned by it or
Purchaser in favor of the Merger and adoption of the Merger Agreement.
Accordingly, the affirmative vote of any other holders of Shares is not
required to approve the Merger Agreement and the Merger.
Upon consummation of the Merger, the Company will become a wholly owned
subsidiary of Micron and each Share not owned by Micron, Purchaser or any other
direct or indirect subsidiary of Micron (other than those Shares held in the
treasury of the Company and Shares held by stockholders who shall have demanded
and perfected any appraisal rights they may have under Delaware law) will be
automatically canceled and converted into the right to receive the Offer Price.
The Merger Agreement also provides that all of the Company's options and each
other right to acquire shares of the Company's capital stock outstanding at the
effective time of the Merger will become fully exercisable and vested. All
such options that are outstanding immediately prior to the effective time of
the Merger will be canceled at the effective time and the holders will be
entitled to receive, for each share subject to such option, an amount of cash
equal to the excess, if any, of the Offer Price over the exercise price per
share of such option, subject to any required withholding taxes.
AT MEETINGS OF THE COMPANY'S BOARD OF DIRECTORS HELD ON JUNE 8 AND 13,
1997, PRIOR TO THE COMMENCEMENT AND CONSUMMATION OF THE OFFER, THE BOARD (ALL
OF WHOSE MEMBERS WERE UNAFFILIATED WITH MICRON AND PURCHASER ON THAT DATE), BY
THE UNANIMOUS VOTE OF ALL OF THE COMPANY'S DIRECTORS, DETERMINED THAT THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER
AND THE MERGER, ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF
THE COMPANY, APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE OFFER AND THE MERGER, AND RECOMMENDED THAT STOCKHOLDERS
VOTE FOR THE ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
In addition, the Company retained the investment banking firm of Cowen &
Company ("Cowen"), as its financial advisor in connection with the Offer and
Merger. Cowen has rendered a written opinion dated June 9, 1997 to
<PAGE>
the Board of Directors of the Company to the effect that, as of such date and
subject to certain matters set forth in Cowen's opinion, the consideration to
be received by the stockholders of the Company pursuant to the Offer and the
Merger was fair, from a financial point of view, to the Company's stockholders
(other than Micron).
THE FULL TEXT OF COWEN'S WRITTEN FAIRNESS OPINION IS ATTACHED TO THE
ACCOMPANYING PROXY STATEMENT AS ANNEX B. STOCKHOLDERS ARE URGED TO READ SUCH
OPINION IN ITS ENTIRETY. COWEN'S OPINION WAS PRESENTED FOR THE INFORMATION OF
THE BOARD OF DIRECTORS IN CONNECTION WITH THEIR CONSIDERATION OF THE MERGER
AGREEMENT AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW,
OF THE CONSIDERATION TO BE RECEIVED BY HOLDERS OF SHARES (OTHER THAN MICRON)
PURSUANT TO THE OFFER AND THE MERGER. COWEN'S OPINION DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO WHETHER TO VOTE FOR THE MERGER.
Enclosed is a Notice of Special Meeting of Stockholders and a Proxy
Statement which describe, and contain other information relating to, the
Merger. You are urged to read all of these materials carefully.
A form of proxy solicited by the Company's Board of Directors is enclosed
for your convenience. Whether or not you expect to attend the Special Meeting
in person, please complete, sign and promptly return the enclosed proxy card in
the enclosed postage-prepaid envelope to assure representation of your Shares.
Executed but unmarked proxies will be voted for approval and adoption of the
Merger Agreement and the Merger. You may revoke your proxy at any time before
it has been voted, and if you attend the Special Meeting, you may vote your
Shares personally, whether or not you have previously submitted a proxy.
Promptly after the Merger, a letter of transmittal will be mailed to all
holders of Shares of record to use in surrendering their Share certificates.
Please do not send your Share certificates to Norwest Bank of Minnesota, N.A.,
the paying agent, until you receive the letter of transmittal which will
include instructions as to the procedure to be used for sending in your
certificates.
I strongly support the Merger and join with the other members of the
Company's Board of Directors in recommending it. We urge you to vote in favor
of adoption and approval of the Merger Agreement and the Merger.
For the Board of Directors,
Robert L. Puette
President and Chief Executive Officer
PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD TODAY.
2
<PAGE>
NETFRAME SYSTEMS INCORPORATED
1545 Barber Lane
Milpitas, California 95035
-----------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
-----------------------------------------------------
To the Stockholders of
NetFRAME Systems Incorporated
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders (the
"Special Meeting") of NetFRAME Systems Incorporated, a Delaware corporation
("NetFRAME" or the "Company"), will be held at the offices of NetFRAME located
at 1545 Barber Lane, Milpitas, California, on August 27, 1997 at 10:00 a.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of June 10, 1997 (the "Merger Agreement"), by and
among the Company, Micron Electronics, Inc., a Minnesota corporation
("Micron"), and Payette Acquisition Corporation, a Delaware corporation and
wholly owned subsidiary of Micron (the "Purchaser"), providing for, among other
things, the merger of Purchaser with and into the Company (the "Merger").
Following the Merger, the Company will continue as the surviving corporation
and will become a wholly owned subsidiary of Micron. In connection with the
Merger, each outstanding share of the Company's Common Stock, $.001 par value
per share, and all associated rights, including Preferred Share Purchase Rights
(collectively, the "Shares") not owned by Purchaser (other than those Shares
held in the treasury of the Company and Shares held by stockholders who shall
have demanded and perfected any appraisal rights they may have under Delaware
law) issued and outstanding immediately prior to the effective time of the
Merger will be automatically canceled and converted into the right to receive
$1.00 per share, net to the seller in cash, without interest thereon (the
"Offer Price").
2. To transact such other business as may properly come before the
Special Meeting and any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only holders of record of Shares at the close of business on July 28, 1997
are entitled to notice of and to vote at the Special Meeting or any adjournment
or postponement thereof. The affirmative vote of holders of a majority of the
outstanding Shares on the record date is required for the approval and adoption
of the Merger Agreement.
Holders of Shares who do not vote to approve the Merger Agreement and the
Merger and who comply with the requirements of Section 262 of the Delaware
General Corporation Law will be entitled, if the Merger is consummated, to
exercise appraisal rights with respect to their Shares. See Annex C to the
accompanying Proxy Statement for the text of Section 262 and "The Merger and
Related Transactions--Appraisal and Dissenters' Rights" in the accompanying
Proxy Statement for a description of the procedures to be followed to exercise
such rights.
Purchaser owns a sufficient number of Shares to approve the adoption of
the Merger Agreement without the vote of any other holders of Shares.
Purchaser will vote its Shares in favor of the adoption of the Merger
Agreement. Nevertheless, whether or not you plan to attend the Special Meeting
in person, please execute and mail the enclosed
<PAGE>
proxy in order to assure representation of your Shares. For this purpose, and
for your convenience, a postage prepaid reply envelope is enclosed. Executed
but unmarked proxies will be voted for approval and adoption of the Merger
Agreement and the Merger. You may revoke your proxy at any time before it has
been voted and, if you attend the Special Meeting, you may vote your Shares
personally, whether or not you have previously submitted a proxy.
By Order of the Board of Directors
Robert L. Puette
President and Chief Executive Officer
Milpitas, California
August __, 1997
All holders of Shares are requested to mark, date and execute the accompanying
proxy and return it promptly in the enclosed self-addressed envelope.
No postage is required if the proxy is mailed within the United States.
Do not send any share certificates with your proxy card.
2
<PAGE>
NETFRAME SYSTEMS INCORPORATED
1545 Barber Lane
Milpitas, California 95035
(408) 474-1000
-----------------------------
PROXY STATEMENT
-----------------------------
Special Meeting of Stockholders
To Be Held On August 27, 1997
This Proxy Statement is being furnished to holders of shares of Common
Stock, par value $.001 per share (the "Common Stock"), of NetFRAME Systems
Incorporated, a Delaware corporation ("NetFRAME" or the "Company"), in
connection with the solicitation of proxies on behalf of the Board of Directors
of the Company (the "NetFRAME Board") for use at the Special Meeting of
Stockholders to be held at the offices of the Company located at 1545 Barber
Lane, Milpitas, California, on August 27, 1997 at 10:00 a.m., local time, and
any and all adjournments or postponements thereof (the "Special Meeting").
This Proxy Statement, the attached Notice of Special Meeting of Stockholders
and the enclosed form of proxy are being first mailed to the Company's
stockholders on or about August __, 1997.
At the Special Meeting, stockholders of the Company entitled to notice of
and to vote at the Special Meeting will be asked to consider, approve and adopt
an Agreement and Plan of Merger, dated as of June 10, 1997 (the "Merger
Agreement"), by and among the Company, Micron Electronics, Inc., a Minnesota
corporation ("Micron"), and Payette Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Micron (the "Purchaser"),
providing for, among other things, the merger of Purchaser with and into the
Company (the "Merger"). Following the Merger, the Company will continue as the
surviving corporation (the "Surviving Corporation") and will become a wholly
owned subsidiary of Micron. A copy of the Merger Agreement is attached as
Annex A to this Proxy Statement.
The Merger is the second step in a two-part transaction, the purpose of
which is the acquisition by Micron of the entire equity interest in the
Company. The first step was a tender offer (the "Offer") commenced by the
Purchaser on June 16, 1997 for all of the issued and outstanding shares of
Common Stock and all associated rights, including Preferred Share Purchase
Rights (collectively, the "Shares"), at $1.00 per share, net to the seller in
cash, without interest thereon (the "Offer Price"). The Offer was consummated
on July 18, 1997 and Purchaser purchased 8,775,554 Shares, representing
approximately 62.8% of the outstanding Shares as of July 14, 1997.
PURCHASER OWNS A SUFFICIENT NUMBER OF SHARES TO ASSURE APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER AT THE SPECIAL MEETING. MICRON AGREED IN THE
MERGER AGREEMENT TO VOTE OR CAUSE TO BE VOTED ALL SHARES OWNED BY PURCHASER OR
MICRON IN FAVOR OF THE MERGER AGREEMENT AND THE MERGER. ACCORDINGLY, THE
AFFIRMATIVE VOTE OF THE OTHER HOLDERS OF SHARES IS NOT REQUIRED TO APPROVE THE
MERGER AGREEMENT AND THE MERGER.
Upon consummation of the Merger, the Company will become a wholly owned
subsidiary of Micron and all Shares not owned by Purchaser (other than Shares
held in the treasury of the Company and Shares held by stockholders who have
demanded and perfected any appraisal rights they may have under Delaware law)
will be automatically canceled and converted into the right to receive the
Offer Price. To receive the Offer Price, stockholders of the Company must,
after the Merger, deliver their NetFRAME stock certificates in the manner
described in this Proxy Statement. Stockholders should not send certificates
at this time. The Merger Agreement also provides that all of the Company's
options and each other right to acquire shares of the Company's capital stock
outstanding at the effective time of the Merger will become fully exercisable
and vested. All such options that are outstanding immediately prior to the
effective time of the Merger will be canceled at the effective time and the
holders will be entitled to receive, for each share subject to such option, an
amount of cash equal to the excess, if any, of the Offer Price over the
exercise price per share of such option, subject to any required withholding
taxes. All summaries and references to the Merger Agreement in this Proxy
Statement are qualified in their entirety by reference to the text of the
Merger Agreement which is attached hereto as Annex A.
<PAGE>
At meetings of the NetFRAME Board held on June 8 and 13, 1997, prior to
the commencement and consummation of the Offer, the NetFRAME Board (all of
whose members were unaffiliated with Micron and Purchaser on that date), by the
unanimous vote of all of the Company's directors, determined that the Merger
Agreement and the transactions contemplated thereby, including the Offer and
the Merger, are fair to, and in the best interests of the stockholders of the
Company, approved the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, and recommended that the
stockholders vote FOR the adoption and approval of the Merger, the Merger
Agreement and the transactions contemplated thereby. See "The Merger and
Related Transactions-- Recommendation of the NetFRAME Board; NetFRAME Reasons
for the Merger."
Holders of Shares who fully comply with the requirements of Section 262 of
the Delaware General Corporation Law (the "DGCL") will have the right to an
appraisal of their Shares pursuant to a court proceeding. Failure to take any
step in connection with the exercise of appraisal rights may result in the
termination or waiver of such rights. See "The Merger and Related
Transactions--Appraisal and Dissenters' Rights" for a statement of the rights
of dissenting holders and a fuller description of the procedures required to be
followed to enforce such rights. All references to and summaries of Section
262 of the DGCL in this Proxy Statement are qualified in their entirety by
reference to the text thereof which is attached hereto as Annex C.
It is not anticipated that any other matter will be brought before the
Special Meeting. If, however, other matters are presented, proxies will be
voted in accordance with the best judgment of the proxyholders.
Only stockholders of record at the close of business on July 28, 1997 are
entitled to notice of, and will be entitled to vote at, the Special Meeting.
Approval and adoption of the Merger Agreement requires the affirmative vote of
the holders of a majority of the Shares. Holders of Shares on the record date
will be entitled to one vote per share.
NEITHER THIS TRANSACTION NOR THE OFFER PRICE OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement is August __, 1997
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
FORWARD LOOKING STATEMENTS............................................. 6
SUMMARY
Introduction........................................................... 7
Parties to the Merger.................................................. 7
Consummation of the Offer; Change in Control........................... 8
Effective Time......................................................... 8
The Merger............................................................. 8
Exchange of Certificates............................................... 8
Date, Time and Place of Meeting of Holders of Shares................... 9
Record Date and Outstanding Shares..................................... 9
Purposes of Special Meeting; Votes Required............................ 9
Proxies, Voting and Revocation......................................... 9
Background of the Offer and the Merger................................. 9
Recommendation of the NetFRAME Board; NetFRAME Reasons for the Merger.. 11
Micron Reasons for the Merger.......................................... 11
Interests of Certain Persons........................................... 11
Source and Amount of Funds............................................. 11
Certain Effects of the Merger.......................................... 11
Accounting Treatment of the Merger..................................... 12
Conditions to the Closing; Government and Regulatory Approvals......... 12
Appointment of Directors by Purchaser.................................. 12
No Solicitation........................................................ 12
Termination and Amendment of the Merger Agreement...................... 12
Break-Up Fee........................................................... 12
Certain Federal Income Tax Consequences................................ 12
Appraisal and Dissenters' Rights....................................... 13
Micron Financial Assistance to the Company............................. 13
The Stock Option Agreement............................................. 13
The Technology License Agreement....................................... 13
Market for Shares...................................................... 13
MARKET PRICE AND DIVIDENDS............................................. 14
VOTING AND PROXIES
Date, Time and Place of Meeting of Holders of Shares................... 15
Record Date and Outstanding Shares..................................... 15
Voting Rights and Vote Required........................................ 15
Quorum; Abstentions; Broker Non-Votes.................................. 15
Proxies................................................................ 15
Solicitation of Proxies and Expenses................................... 15
THE MERGER AND RELATED TRANSACTIONS
General................................................................ 17
Consummation of the Offer; Change in Control........................... 17
Background of the Offer and the Merger................................. 17
Recommendation of the NetFRAME Board; NetFRAME Reasons for the Merger.. 20
Micron Reasons for the Merger.......................................... 21
Opinion of Financial Advisor........................................... 21
Related Transactions with Micron....................................... 25
Structure of the Transaction; Accounting Treatment of the Merger....... 26
Certain Effects of the Merger.......................................... 27
Preferred Share Rights Agreement....................................... 27
Source and Amount of Funds............................................. 27
Interests of Certain Persons........................................... 27
Financial Advisor Fees................................................. 29
Certain Federal Income Tax Consequences of the Merger.................. 29
Government and Regulatory Approvals.................................... 30
</TABLE>
3
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<TABLE>
Page
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<S> <C>
Appraisal and Dissenters' Rights....................................... 30
TERMS OF THE MERGER
Effective Time......................................................... 32
Manner and Basis of Transferring Shares; Treatment of Options.......... 32
Exchange of Certificates............................................... 32
Conduct of the Company's Business Prior to the Merger.................. 33
No Solicitation........................................................ 35
Conditions to the Merger............................................... 36
Representations and Warranties......................................... 36
Termination of the Merger Agreement.................................... 36
Break-Up Fee........................................................... 37
Post Merger Employment Benefits........................................ 37
Appointment of Directors by Purchaser.................................. 37
Waiver and Amendment of the Merger Agreement........................... 37
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA........................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview............................................................... 39
Results of Operations.................................................. 39
Business Factors....................................................... 42
Liquidity and Capital Resources........................................ 44
INFORMATION CONCERNING THE COMPANY
Products............................................................... 45
Technology............................................................. 47
Sales and Distribution................................................. 48
Customer Service and Support........................................... 49
Competition............................................................ 50
Manufacturing.......................................................... 50
Research and Development............................................... 51
Proprietary Rights..................................................... 51
Employees.............................................................. 52
Properties............................................................. 52
Legal Proceedings...................................................... 52
INFORMATION CONCERNING THE PURCHASER, MICRON AND MTI................... 53
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND PRINCIPAL
HOLDERS OF THE COMPANY'S SHARES........................................ 54
AVAILABLE INFORMATION.................................................. 56
INDEPENDENT AUDITORS................................................... 56
FUTURE STOCKHOLDER PROPOSALS........................................... 56
AUDITOR'S REPRESENTATIVES.............................................. 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
NETFRAME SYSTEMS INCORPORATED......................................... F-1
</TABLE>
4
<PAGE>
ANNEXES
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ANNEX A -- The Merger Agreement
ANNEX B -- Opinion of Cowen & Company
ANNEX C -- Section 262 of the Delaware General Corporation Law
5
<PAGE>
FORWARD LOOKING STATEMENTS
OTHER THAN STATEMENTS OF HISTORICAL FACT, STATEMENTS MADE IN THIS PROXY
STATEMENT, INCLUDING STATEMENTS AS TO THE BENEFITS EXPECTED TO RESULT FROM THE
MERGER AND AS TO FUTURE FINANCIAL PERFORMANCE AND THE ANALYSES PERFORMED BY THE
FINANCIAL ADVISOR TO THE COMPANY AND THE PROJECTIONS RELIED UPON BY SUCH
FINANCIAL ADVISOR, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS INCLUDING THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--BUSINESS
FACTORS."
Neither the Company nor Micron makes any express or implied representation
or warranty as to the attainability of the projected or estimated financial
information referenced or set forth herein under "The Merger and Related
Transactions--Opinion of Financial Advisor" or elsewhere herein or as to the
accuracy or completeness of the assumptions from which such projected or
estimated information is derived. Projections or estimations of the Company's
and Micron's future performance are necessarily subject to a high degree of
uncertainty and may vary materially from actual results. Reference is made to
the particular discussions set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Information
Concerning the Company."
6
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. Reference is made to, and this Summary is
qualified in its entirety by reference to, the full text of this Proxy
Statement, the Annexes attached hereto and the documents referred to herein,
including the Merger Agreement, a copy of which is attached as Annex A to this
Proxy Statement. Holders of Shares are urged to read this Proxy Statement and
the Annexes hereto in their entirety.
Introduction
This Proxy Statement is furnished in connection with the solicitation by
the NetFRAME Board of proxies from holders of Shares for use at the Special
Meeting. At the Special Meeting, the holders of Shares will be asked to
approve and adopt the Merger Agreement and approve the Merger. As a result of
the Merger, the Company will become a wholly owned subsidiary of Micron.
Parties to the Merger
NetFRAME. The Company is a Delaware corporation with its principal
executive offices located at 1545 Barber Lane, Milpitas, California 95035 and
the telephone number of such offices is (408) 474-1000. The Company develops,
manufactures, markets and supports a line of high-availability, clustered
network servers for local and wide area networks. The Company was one of the
first companies to offer a high-availability, open-systems server, which began
shipping commercially in December 1989. The Company's servers are
characterized by high availability, scalability and adherence to industry
standards. The Company has a worldwide installed base of over 5,500 servers
and sells its products primarily through a number of integrators and value
added resellers worldwide. See "Information Concerning the Company."
Purchaser. Purchaser, a Delaware corporation, is a newly incorporated
wholly owned subsidiary of Micron formed solely for the purpose of consummating
the Offer and the Merger. Purchaser has not carried on any activities other
than in connection with the Offer and the Merger. The principal offices of
Purchaser are located at 900 E. Karcher Road, Nampa, Idaho 83687 and its
telephone number at such location is (208) 898-3434. See "Information
Concerning the Purchaser, Micron and MTI."
Micron. Micron is a Minnesota corporation, with its principal executive
offices located at 900 E. Karcher Road, Nampa, Idaho 83687 and its telephone
number at such location is (208) 898-3434. Micron's Common Stock is traded on
the Nasdaq Stock Market under the symbol "MUEI." Micron is a provider of PC
systems through the direct sales channel worldwide. Micron's PC operations
develop, market, manufacture, sell and support a range of memory-intensive,
high performance desktop and notebook PC systems and network servers under the
Micron brand name for consumer, business, government and educational use. In
addition to its PC operations, Micron has contract manufacturing and component
recovery operations. Micron's wholly owned subsidiary, Micron Custom
Manufacturing Services, Inc. ("CMS"), is a custom contract manufacturer
specializing in the assembly of complex custom printed circuit boards, memory
modules and system level products. SpecTek, a division of Micron, processes
and markets various grades of DRAM products.
Micron Technology, Inc. ("MTI"). MTI is a Delaware corporation, with its
principal executive offices located at 8000 S. Federal Way, Boise, Idaho 83707
and its telephone number at such location is (208) 368-4000. As of May 31,
1997, MTI owned approximately 64% of the outstanding common stock of Micron.
MTI and its subsidiaries, including Micron, manufacture and market DRAMs, other
semiconductor components, personal computers, remote intelligent communications
(RIC) products and printed circuit assemblies.
7
<PAGE>
Consummation of the Offer; Change in Control
Pursuant to the Offer, Purchaser commenced a tender offer on June 16, 1997
to purchase each outstanding Share of the Company at the Offer Price. The
Offer was conditioned upon (i) there being validly tendered, and not withdrawn,
prior to the expiration of the Offer, a number of Shares constituting a
majority of the then outstanding Shares of the Company (after giving effect to
the exercise or conversion of all options, rights and securities exercisable or
convertible into voting securities at a per share price of $1.50 or less), (ii)
the expiration or termination of all waiting periods imposed under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
and (iii) the satisfaction of certain other conditions specified in the Offer.
The Offer expired on July 14, 1997 and the acquisition of Shares tendered to
Purchaser for payment was consummated on July 18, 1997, at which time 8,775,554
Shares, representing approximately 62.8% of the outstanding Shares as of such
date, were purchased by Purchaser. As a result, Purchaser owns a majority of
the Shares and the consummation of the Offer has effected a change in control
of the Company. See "The Merger and Related Transactions--Consummation of the
Offer; Change in Control."
Effective Time
The Merger will become effective as of the date and time (the "Effective
Time") that the Certificate of Merger is filed with the Secretary of State of
Delaware in accordance with the DGCL. Assuming all conditions to the Merger
are met or waived prior thereto, it is anticipated that the closing of the
Merger (the "Closing") and the Effective Time will occur as soon as practicable
after the Special Meeting.
The Merger
Pursuant to the terms of the Merger Agreement, at the Effective Time of
the Merger, Purchaser will merge with and into the Company, with the Company
being the Surviving Corporation upon the Merger and thereby becoming a wholly
owned subsidiary of Micron. In addition, each Share not owned by Purchaser
(other than those Shares held in the treasury of the Company and Shares held by
stockholders who shall have demanded and perfected any appraisal rights they
may have under the DGCL) issued and outstanding immediately prior to the
Effective Time will automatically be canceled and converted into the right to
receive the Offer Price. See "Terms of the Merger."
Upon the Effective Time of the Merger, each outstanding employee or
director stock option to purchase Shares granted pursuant to the Company's 1987
Stock Option Plan, as amended, 1992 Stock Option Plan, as amended, or 1992
Director Stock Option Plan and each other right to acquire shares of Company
capital stock (collectively, the "Options") will become fully exercisable and
vested, whether or not otherwise exercisable and vested. All Options that are
outstanding immediately prior to the Effective Time will be canceled at the
Effective Time and the holders will be entitled to receive for each share
subject to such Option an amount of cash equal to the excess, if any, of the
Offer Price over the exercise price per Share of such Option, subject to any
required withholding taxes.
Exchange of Certificates
Pursuant to the Merger Agreement, on or before the Effective Time, Micron
or Purchaser will deposit with Norwest Bank of Minnesota, N.A., the paying
agent (the "Paying Agent"), an amount of cash equal to the product of the
Shares outstanding immediately prior to the Effective Time not owned by
Purchaser (other than those Shares held in the treasury of the Company and
Shares held by stockholders who shall have demanded and perfected any appraisal
rights they may have under the DGCL) multiplied by $1.00. Promptly after the
Effective Time, the Paying Agent will send each holder of Shares of record, as
of immediately prior to the Effective Time, a letter of transmittal and
detailed instructions specifying the procedures to be followed in surrendering
certificates relating to the Shares in exchange for the Offer Price. Share
certificates should not be forwarded to the Paying Agent until receipt of the
transmittal letter. Upon the surrender of a Share certificate, the Paying
Agent will issue to the surrendering holder cash in the amount of $1.00 per
share. Following consummation of the Merger, the Paying Agent will forward
appropriate transmittal documentation to those optionees identified by the
Company who hold Options to purchase Shares with an exercise price per Share
which is less than the Offer Price, with instructions on the procedure for
obtaining an amount of cash equal to the excess of the Offer Price over such
exercise price. See "Terms of the Merger--Exchange of Certificates."
8
<PAGE>
Date, Time and Place of Meeting of Holders of Shares
The Special Meeting will be held at the Company's principal executive
offices located at 1545 Barber Lane, Milpitas, California on August 27, 1997 at
10:00 a.m., local time.
Record Date and Outstanding Shares
The NetFRAME Board has fixed the close of business on July 28, 1997 as the
record date (the "Record Date") for the determination of holders of outstanding
Shares entitled to notice of and to vote at the Special Meeting. On the Record
Date, the Company had [13,978,445] outstanding Shares held by approximately
[340] holders of record. The Shares constitute the Company's only outstanding
class of stock. See "Voting and Proxies--Record Date and Outstanding Shares."
The Company's stockholders of record on the Record Date will be entitled
to cast one vote per Share held by such stockholders, exercisable in person or
by properly executed proxy on each matter properly submitted for the vote of
the stockholders of the Company at the Special Meeting.
Purposes of Special Meeting; Votes Required
At the Special Meeting, holders of Shares will be asked to consider and
vote upon the approval and adoption of the Merger Agreement and approval of the
Merger. See "The Merger and Related Transactions." The DGCL and the Company's
Certificate of Incorporation and Bylaws, both as amended, require the
affirmative vote of the holders of a majority of the outstanding Shares to
approve the Merger Agreement and the Merger. The Shares owned by Purchaser
represent more than a majority of the outstanding Shares and are therefore
sufficient to assure approval by the holders of Shares of the Merger Agreement
without the vote of any other holder of Shares. Micron agreed in the Merger
Agreement to vote or cause to be voted all Shares owned by Purchaser or Micron
in favor of the Merger Agreement and the Merger. See "Voting and Proxies--
Voting Rights and Vote Required."
Proxies, Voting and Revocation
All eligible Shares represented by properly executed proxies will, unless
such proxies have previously been revoked, be voted at the Special Meeting, and
any adjournments or postponements thereof, in accordance with the directions on
the proxies. IF A PROXY IS DULY EXECUTED AND SUBMITTED WITHOUT DIRECTIONS, THE
SHARES WILL BE VOTED FOR THE APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
A proxy may be revoked by the person who executed it by (i) delivering to
the Secretary of the Company at 1545 Barber Lane, Milpitas, California 95035 a
written notice of revocation bearing a later date than the proxy; (ii) duly
executing a subsequent proxy; or (iii) attending the Special Meeting and voting
in person (although attendance at the Special Meeting will not, in and of
itself, constitute revocation of a proxy). See "Voting and Proxies--Proxies."
Background of the Offer and the Merger
The Company has historically manufactured and marketed high value-added,
relatively high-margin proprietary servers and related products for use with
the Novell NetWare platform. In late 1995 and during 1996, there was
unexpectedly rapid growth in demand for the Windows NT application networking
solution and, during the same period, demand for Novell NetWare as an
enterprise networking solution declined. The Company was unable to respond to
this market shift in a timely manner by developing high value-added,
differentiated product offerings, in part because the Company's proprietary
system architecture was not easily adaptable to the Windows NT platform. This
resulted in sales continually decreasing during this period. In the fall of
1996, the Company introduced a more industry standard product, accommodating
both the Novell NetWare and Microsoft Windows NT operating systems, with value-
added features for the Novell NetWare operating system and standard features
for the Microsoft Windows NT operating system. In the spring of 1997, the
Company introduced a product for use with the Windows NT platform which
incorporated value-added features. Supporting both the proprietary and
industry standard platforms and developing value-added products for
9
<PAGE>
both operating systems significantly increased the Company's operating
expenses. The inability to differentiate the Microsoft Windows NT product
offerings on the proprietary platform or the industry standard platform until
the spring of 1997 led to narrower product margins. In light of these market
and business difficulties, the NetFRAME Board considered from time to time
various alternatives with a view toward increasing stockholder value.
In September 1996, the Company retained Cowen & Company ("Cowen") to
assist with exploring the potential sale of the Company. The Company and Cowen
identified a significant number of parties whom they believed might have an
interest in acquiring the Company. From September 1996 through May 1997, the
Company, and Cowen, on the Company's behalf, contacted in excess of 20
potential acquirors of the Company to determine their level of interest in such
an acquisition. Several parties expressed interest and performed due diligence
on the Company. In addition to Micron, three of these potential acquirors
began discussions with the Company regarding a possible business combination.
In April 1997, the Company filed its annual report for its 1996 fiscal
year on Form 10-K containing the report of the Company's independent auditors,
which report contained an explanatory paragraph stating that the Company's
recurring net losses and negative cash flow raised substantial doubt about the
Company's ability to continue as a going concern. Publication of the annual
report increased customer concerns regarding the Company's viability which the
Company believes adversely affected their purchasing decisions.
On May 2, 1997, the NetFRAME Board met and discussed the status of
discussions between the Company and third parties. After a review of the
financial condition of the Company and its prospects as a going concern, the
NetFRAME Board instructed the officers of the Company to begin formulating
plans to liquidate the Company in case it failed to obtain additional financing
or discussions with third parties proved unavailing.
In late April 1997, a Company sales representative contacted Micron to
discuss a potential distribution relationship. Commencing in May 1997, and
continuing into June, Micron and the Company had additional meetings,
discussing the potential benefits of a business combination, and Micron
performed due diligence.
On June 8, 1997, Micron indicated that, subject to further due diligence
and the commitment of key executives of the Company to remain with the Company
following an acquisition, it was prepared to commence an all cash tender offer
for the Company at or slightly below $1.00 per Share, to license the Company's
technology for payments of approximately $1,500,000, and to provide the Company
with certain financial assistance following the signing of a definitive merger
agreement.
The NetFRAME Board met several times to consider Micron's proposal. The
NetFRAME Board also received Cowen's opinion that, as of the date of such
opinion, the proposed consideration to be received by holders of Shares
pursuant to the Offer and the Merger was fair, from a financial point of view,
to the stockholders of the Company (other than Micron). On June 8, 1997, the
NetFRAME Board unanimously authorized the officers of the Company to negotiate
and execute definitive agreements with Micron providing for a cash tender offer
at a price of $1.00 per share, and other related transactions contemplated by
the Merger Agreement.
Following the June 8, 1997 meeting of the Company's Board of Directors,
due diligence and finalization of the terms of definitive agreements by
representatives of the parties continued.
The morning of June 10, 1997, the Board of Directors of Micron approved
the terms of the proposed Offer and Merger and definitive agreements were
signed on behalf of Micron and the Company. On June 13, 1997, the NetFRAME
Board unanimously reconfirmed its approval of the Offer, the Merger, the Merger
Agreement and the transactions contemplated thereby and resolved to recommend
that stockholders of the Company accept the Offer and tender their Shares to
Purchaser and approve the Merger. See "The Merger and Related Transactions--
Background of the Offer and the Merger."
10
<PAGE>
Recommendation of the NetFRAME Board; NetFRAME Reasons for the Merger
The NetFRAME Board's decision to approve the Merger Agreement, the Offer,
the Merger and the transactions contemplated thereby was, among other things,
based upon its analysis of the Company's current financial condition, recent
operating results, the unavailability of alternative financing options, the
absence of competing bids to acquire the Company and management's cash flow
projections (including the working capital required to continue to operate the
Company as a going concern).
AT MEETINGS OF THE NETFRAME BOARD HELD ON JUNE 8 AND 13, 1997, PRIOR TO
THE COMMENCEMENT AND CONSUMMATION OF THE OFFER, THE NETFRAME BOARD (ALL OF
WHOSE MEMBERS WERE UNAFFILIATED WITH MICRON AND PURCHASER ON THAT DATE), BY THE
UNANIMOUS VOTE OF ALL OF THE COMPANY'S DIRECTORS, DETERMINED THAT THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND
THE MERGER, ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF THE
COMPANY, APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE OFFER AND THE MERGER, AND RECOMMENDED THAT THE
STOCKHOLDERS OF THE COMPANY VOTE FOR THE ADOPTION AND APPROVAL OF THE MERGER
AND THE MERGER AGREEMENT. See "The Merger and Related Transactions--
Recommendation of the NetFRAME Board; NetFRAME Reasons for the Merger."
Micron Reasons for the Merger
Micron has indicated that it regards the acquisition of the Company as an
opportunity to compete effectively in the larger enterprise segment of the
Fortune 1000 marketplace as Micron will gain immediate access to the Company's
advanced server technologies applicable to many large enterprise class
server/application environments such as high availability, clustering and I/O
scalability. See "The Merger and Related Transactions--Micron Reasons for the
Merger."
Interests of Certain Persons
Certain members of the Company's management and the NetFRAME Board have
certain interests in the Merger that are different from, or in addition to, the
interests in the Merger of stockholders of the Company generally. Certain
executive officers have entered into employment agreements or other
arrangements in connection with the Offer and may receive certain direct or
indirect benefits in connection with the Merger Agreement and the transactions
contemplated thereby. See "The Merger and Related Transactions--Interests of
Certain Persons."
Source and Amount of Funds
The total amount of funds required by Purchaser to consummate the Offer
and the Merger is estimated to be approximately $15.6 million, including
approximately $1.75 million to pay related fees and expenses of Purchaser and
Micron but excluding amounts payable by the Purchaser with respect to the
cashing out of Options. Purchaser will obtain all such funds from Micron.
Micron will provide such funds from its working capital. In addition, from its
working capital, Micron has provided the Company (i) $1.5 million under the
Technology License Agreement dated June 10, 1997 between the Company and
Micron, and (ii) $3.5 million in financing in accordance with the terms of the
Merger Agreement. See "The Merger and Related Transactions--Source and Amount
of Funds."
Certain Effects of the Merger
After the consummation of the Merger, holders of Shares will have no
continuing equity interest in the Company, and, therefore, will not share in
future earnings, dividends or growth, if any, of the Surviving Corporation. At
the Effective Time, each Share not owned by Purchaser (other than those Shares
held in the treasury of the Company and Shares held by stockholders who shall
have demanded and perfected any appraisal rights they may have under the DGCL)
will automatically be converted into the right to receive the Offer Price. See
"The Merger and Related Transactions--Certain Effects of the Merger."
11
<PAGE>
Accounting Treatment of the Merger
The Merger will be accounted for under the purchase method of accounting
whereby the purchase price will be allocated based on the fair value of the
assets acquired and the liabilities assumed by Micron. See "The Merger and
Related Transactions--Structure of the Transaction; Accounting Treatment of the
Merger."
Conditions to the Closing; Government and Regulatory Approvals
The consummation of the Merger is subject to the prior approval of the
Merger Agreement by the holders of a majority of the Shares and certain other
customary closing conditions. There are no federal or state regulatory
requirements which remain to be complied with in order to consummate the Merger
(other than the filing of the Certificate of Merger with the Secretary of State
of Delaware). See "The Merger and Related Transactions--Government and
Regulatory Approvals" and "Terms of the Merger--Conditions to the Merger."
Appointment of Directors by Purchaser
Pursuant to the Merger Agreement, as a result of the consummation of the
Offer, Purchaser is entitled to designate for appointment to the NetFRAME Board
a number of directors representing at least a majority of the NetFRAME Board.
If Purchaser elects to exercise such right, the Company has agreed to increase
the size of the NetFRAME Board and/or secure the resignations of current
members thereof to enable the appointment of Purchaser's designees and to cause
such designees to be elected to the NetFRAME Board. To date, Purchaser has not
availed itself of such right. See "Terms of the Merger--Appointment of
Directors by Purchaser.
No Solicitation
Pursuant to the Merger Agreement, the Company has agreed that it will not
solicit, initiate or encourage submission of any "takeover proposals" (as such
term is defined in "Terms of the Merger--No Solicitation"), or participate in
discussions or furnish to any person information with respect to a takeover
proposal. Notwithstanding this, the Company, to the extent required by
fiduciary obligations, based upon advice of independent counsel, is not
prohibited by the Merger Agreement from, among other things, furnishing
information to, or entering into discussions or negotiations with, a person or
entity in response to an unsolicited takeover proposal. See "Terms of the
Merger--No Solicitation."
Termination and Amendment of the Merger Agreement
The Merger Agreement may be terminated at any time prior to the Effective
Time by, among other things, the mutual agreement of the parties or after the
occurrence of certain events or actions by one of the parties acting
independently. The Merger Agreement may be amended by the parties at any time,
but following approval of the Merger Agreement by the holders of Shares, no
amendment may be made that requires further approval of the stockholders
without obtaining such further approval, and provided further that any
amendment following the purchase of Shares in the Offer requires the consent of
a majority of the directors of the Company then in office who were directors of
the Company on the date of the Merger Agreement (the "Continuing Directors").
See "Terms of the Merger--Termination of the Merger Agreement" and "Terms of
the Merger--Waiver and Amendment of the Merger Agreement."
Break-Up Fee
The Merger Agreement provides that if the Merger Agreement is terminated
under certain limited circumstances, Micron may be entitled to receive a break-
up fee of $750,000 from the Company. See "Terms of the Merger--Break-Up Fee."
Certain Federal Income Tax Consequences
If the Merger is consummated, the exchange of Shares by a holder for the
Offer Price to be paid in the Merger will be a taxable transaction for federal
income tax purposes and may also be a taxable transaction under applicable
state, local or foreign tax laws. Because of the complexities of the tax laws,
holders of Shares are advised to consult their own tax advisors concerning the
applicable federal, state, local, foreign and other tax consequences resulting
from the Merger. See "The Merger and Related Transactions--Certain Federal
Income Tax Consequences of the Merger."
12
<PAGE>
Appraisal and Dissenters' Rights
Under the DGCL, holders of Shares who do not vote in favor of the Merger
will be entitled to exercise appraisal rights in connection with the Merger.
Holders of Shares desiring to exercise such appraisal rights will have the
rights and duties and must follow the procedures set forth in Section 262 of
the DGCL, the full text of which is attached to this Proxy Statement as Annex
C. Holders of Shares who exercise appraisal rights must carefully follow the
procedures described therein and are urged to read Annex C in its entirety.
See "The Merger and Related Transactions--Appraisal and Dissenters' Rights."
Micron Financial Assistance to the Company
Pursuant to the Merger Agreement, Micron has agreed to provide the Company
with an aggregate of $3.5 million in financial assistance (in addition to any
amounts payable under the Technology License Agreement). Through July 22,
1997, Micron has loaned the Company $3.5 million pursuant to a secured loan
arrangement collateralized by substantially all of the Company's assets. The
loan becomes due on the earlier of (i) termination of the loan arrangement
(which Micron may effect on September 30, 1997); (ii) a breach by the Company,
or termination, of the Merger Agreement; or (iii) certain other events of
default set forth in the loan agreement. See "The Merger and Related
Transactions--Related Transactions with Micron."
The Stock Option Agreement
The Company and Micron entered into a Stock Option Agreement, concurrently
with the execution of the Merger Agreement, providing for the grant by the
Company of an irrevocable option to Micron exercisable in certain circumstances
to purchase shares of Common Stock representing a 19.9% equity stake in the
Company. As a result of the consummation of the Offer, the Stock Option
Agreement has terminated. See "The Merger and Related Transactions--Related
Transactions with Micron."
The Technology License Agreement
Concurrently with the execution of the Merger Agreement, the Company
granted Micron a nonexclusive, perpetual license to all of the Company's
technology associated with the Company's 9000 series server products and any
other Company products under any phase of development at the date of execution
of such agreement. Micron has paid the Company a one-time license fee of $1.5
million. See "The Merger and Related Transactions--Related Transactions with
Micron".
Market for Shares
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") National Market System under
the symbol "NETF." On June 9, 1997, the last trading day prior to the public
announcement of the execution of the Merger Agreement and of Purchaser's
intention to commence the Offer, the closing sales price per Share reported on
the Nasdaq Stock Market was $1.31. On August __, 1997, the last practicable
trading day before the mailing of this Proxy Statement for which information
was obtainable, the closing sales price per Share reported on the Nasdaq Stock
Market was $____.
The book value per share of the Company's Common Stock at June 30, 1997
was $0.57.
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<PAGE>
MARKET PRICE AND DIVIDENDS
The Shares are listed and principally traded on the Nasdaq Stock Market
under the symbol "NETF". The following table sets forth, for the quarters
indicated, the high and low closing sales prices per Share as reported by the
Nasdaq Stock Market.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 28, 1995:
- ----------------------------
First quarter $7.42 $5.46
Second quarter 6.13 4.58
Third quarter 7.08 5.50
Fourth quarter 6.50 5.21
Year ended December 31, 1996:
- ----------------------------
First quarter $5.71 $4.58
Second quarter 5.79 5.12
Third quarter 3.79 2.71
Fourth quarter 3.79 2.47
Year ended December 31, 1997:
- ----------------------------
First quarter $3.25 $1.25
Second quarter 2.13 0.88
Third quarter (through August __, 1997) [ ] [ ]
</TABLE>
On June 9, 1997, the last full trading day prior to the public
announcement of the execution of the Merger Agreement and of Purchaser's
intention to commence the Offer, the closing sales price per Share as reported
by the Nasdaq Stock Market was $1.31. On June 13, 1997, the last full trading
day prior to the commencement of the Offer, the closing sales price per Share
as reported by the Nasdaq Stock Market was $0.875. On August __, 1997, the
last practicable trading day prior to the mailing of this Proxy Statement for
which information was obtainable, the closing sales price per Share as reported
by the Nasdaq Stock Market was $___.
The book value per share of the Company's Shares was $2.30 at December 31,
1996 and $0.57 at June 30, 1997.
Micron intends to cause the delisting of the Shares by the Nasdaq Stock
Market and the termination of registration of the Shares pursuant to Rule 12g-4
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
following consummation of the Merger. Notwithstanding such intention,
depending upon the aggregate market value and per share price of the Shares,
the Shares may no longer meet the standards for continued inclusion in the
Nasdaq Stock Market, which require, among other things, that an issuer have at
least 200,000 publicly held shares with a market value of $1.0 million held by
at least 400 stockholders or 300 stockholders holding round lots. If these
standards are not met, quotations might continue to be published in the over-
the-counter "additional list" or in one of the "local lists" but if the number
of stockholders falls below 300, or if the number of publicly held Shares falls
below 100,000, or there is not at least two market makers for the Shares, the
rules of the National Association of Securities Dealers provide that the Shares
would no longer be "authorized" for Nasdaq reporting and Nasdaq would cease to
provide any quotations. Shares held directly or indirectly by an officer or
director of the Company, or by any beneficial owner of more than 10% of the
Shares, ordinarily will not be considered as being publicly held for this
purpose.
Stockholders of the Company
As of July 28, 1997, the Company had issued and outstanding [13,978,445]
Shares held by [340] stockholders of record. The Company estimates that there
are approximately [_____] beneficial stockholders.
Dividends
The Company has never declared or paid cash dividends on its capital
stock.
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<PAGE>
VOTING AND PROXIES
Date, Time and Place of Meeting of Holders of Shares
This Proxy Statement is being furnished to the holders of Shares as part
of the solicitation of proxies by the NetFRAME Board for use at the Special
Meeting to be held on August 27, 1997 at 10:00 a.m., local time, at the
principal executive offices of the Company at 1545 Barber Lane, Milpitas,
California.
Record Date and Outstanding Shares
The NetFRAME Board has fixed the close of business on July 28, 1997 as the
Record Date for the determination of holders of outstanding Shares entitled to
notice of and to vote at the Special Meeting. On the Record Date, the Company
had [13,978,445] outstanding Shares held by approximately [340] holders of
record. The Shares constitute the Company's only outstanding class of stock.
On or about August __, 1997, a notice of the Meeting complying with the
requirements of the DGCL and an accompanying copy of this Proxy Statement were
mailed to all stockholders of record as of the Record Date.
Voting Rights and Vote Required
Each of the Company's stockholders of record on the Record Date will be
entitled to cast one vote per Share, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
stockholders of the Company at the Special Meeting.
Pursuant to the DGCL and the Company's Certificate of Incorporation and
Bylaws, both as amended, approval and adoption of the Merger Agreement and the
transactions contemplated thereby requires the affirmative vote of a majority
of the outstanding Shares entitled to vote at the Special Meeting. Since the
required vote is based upon the number of outstanding Shares, rather than upon
the Shares actually voted, the failure by the holder of any such Shares to
submit a proxy or to vote in person at the Special Meeting (including
abstentions and "broker non-votes") will have the same effect as a vote against
approval and adoption of the Merger Agreement and the transactions contemplated
thereby.
Purchaser owns 8,775,554, or approximately 62.8%, of the outstanding
Shares, and Micron has agreed in the Merger Agreement to vote or cause to be
voted all such Shares in favor of the Merger Agreement. Accordingly, approval
of the Merger Agreement is assured without the approval of any other holder of
Shares.
Quorum; Abstentions; Broker Non-Votes
A majority, or [6,989,223] of the outstanding Shares entitled to vote at
the Special Meeting, present in person or represented by proxy, will constitute
a quorum for the transaction of business. If an executed proxy is returned and
the stockholder has specifically abstained from voting on any matter, the
Shares represented by such proxy will be considered present at the Special
Meeting for purposes of determining a quorum. If an executed proxy is returned
by a broker holding shares in street name which indicates that the broker does
not have discretionary authority as to certain Shares to vote on the Merger
Agreement, such Shares will be considered present at the meeting for purposes
of determining a quorum. Since the required vote of the stockholders is based
upon the number of outstanding Shares, abstentions and broker non-votes will
have the same effect as a vote against approval and adoption of the Merger
Agreement and the Merger.
Proxies
The Proxy Card accompanying this Proxy Statement is solicited on behalf of
the NetFRAME Board for use at the Special Meeting. All proxies that are
properly executed and received by the Company prior to the vote at the Special
Meeting, and that are not revoked, will be voted at the Special Meeting in
accordance with the instructions indicated thereon. Executed proxies, which do
not have instructions marked thereon, will be voted FOR approval and adoption
of the Merger Agreement and the Merger.
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<PAGE>
A proxy given pursuant to this solicitation may be revoked at any time
before it is exercised at the Special Meeting by (i) delivering to the
Secretary of the Company at or before the Special Meeting a written notice of
revocation bearing a later date than the proxy, (ii) duly executing a
subsequent proxy relating to the same Shares and delivering it to the Secretary
of the Company at or before 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 revocation of a proxy). Any written notice
revoking a proxy should be delivered to Secretary, NetFRAME Systems
Incorporated, 1545 Barber Lane, Milpitas, California 95035.
Please note, however, that if a stockholder's Shares are held of record by
a broker bank or other nominee and that stockholder wishes to vote at the
Special Meeting, the stockholder must bring to the Special Meeting a letter
from the broker bank or other nominee confirming that stockholder's beneficial
ownership of the Shares.
Solicitation of Proxies and Expenses
The Company will bear the entire cost of solicitation of proxies in the
enclosed form from its stockholders. Copies of solicitation material will be
furnished to brokerage houses, fiduciaries and custodians holding Shares in
their names which are beneficially owned by others to forward to such
beneficial owners. The Company, upon the request of the record holders, will
reimburse such record holders for their reasonable expenses in forwarding
solicitation material to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, facsimile or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.
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THE MERGER AND RELATED TRANSACTIONS
General
The Merger Agreement provides for the merger of Purchaser with and into
the Company. As a result of the Merger, the separate corporate existence of
Purchaser will cease and the Company will continue as the Surviving Corporation
and will become a direct wholly owned subsidiary of Micron. The Merger
Agreement provides that, as soon as practicable after the satisfaction of the
conditions to the consummation of the Merger, the Merger will be consummated
when the Certificate of Merger has been filed with the Secretary of State of
the State of Delaware. It is currently anticipated that the filing of the
Certificate of Merger will occur as soon as practicable after the Special
Meeting.
As of the Effective Time, holders of Shares will have no further ownership
interest in the Surviving Corporation. In connection with the Merger, the
holders of Shares not owned by Purchaser (other than those Shares held in the
treasury of the Company and Shares held by holders who shall have demanded and
perfected appraisal rights, if any, under Delaware law) which are issued and
outstanding immediately prior to the Effective Time will solely be entitled to
receive the Offer Price of $1.00 in cash (without interest) for each of their
Shares of record. At the Effective Time, all outstanding Options shall be
canceled and the holders thereof shall be entitled to receive for each share
subject to an Option an amount of cash equal to the excess, if any, of the
Offer Price over the exercise price per share of such Option subject to any
required withholding taxes. The consideration to be paid in the Merger is the
same consideration per Share that was paid pursuant to the Offer.
The Merger Agreement provides that the directors of Purchaser immediately
prior to the Effective Time will be the initial directors of the Surviving
Corporation and that the officers of Purchaser immediately prior to the
Effective Time will be the initial officers of the Surviving Corporation. The
Merger Agreement further provides that the Certificate of Incorporation and
Bylaws of Purchaser as in effect at the Effective Time shall be the Certificate
of Incorporation and Bylaws of the Surviving Corporation.
Consummation of the Offer; Change in Control
Purchaser commenced the Offer on June 16, 1997 to purchase each
outstanding Share of the Company at the Offer Price, net to the seller in cash
and without interest thereon. The Offer was conditioned upon (i) there being
validly tendered, and not withdrawn, prior to the expiration of the Offer a
number of Shares constituting a majority of the then outstanding Shares on a
fully diluted basis (after giving effect to the exercise or conversion of all
options, rights and securities exercisable or convertible into voting
securities at a per share price of $1.50 or less), (ii) the expiration or
termination of all waiting periods imposed upon consummation of the Offer by
the HSR Act (which periods have terminated), and (iii) the satisfaction of
certain other conditions specified in the Offer. The Offer expired at 12:00
Midnight, New York City time, on July 14, 1997, and the purchase of Shares
validly tendered to Purchaser for payment was closed on July 18, 1997, at which
time 8,775,554 Shares, representing approximately 62.8% of the outstanding
Shares as of such date, were purchased by Purchaser. As a result, Purchaser
owns a majority of the Shares and the consummation of the Offer has effected a
change in control of the Company. Purchaser owns a sufficient number of Shares
to ensure approval of the Merger Agreement and the Merger at the Special
Meeting, and has agreed to vote all such Shares in favor of the Merger
Agreement and the Merger.
Background of the Offer and the Merger
Prior Relationship with Micron. Micron's wholly owned subsidiary, CMS,
has previously provided contract assembly services for the Company. In 1994
and 1995, the Company purchased approximately $8.4 million and $10.7 million,
respectively, of products from CMS, primarily for memory intensive custom
boards. In 1996, purchases were approximately $9.5 million for customized
circuit boards and double sided memory modules. Year to date purchases through
June 30, 1997 were approximately $1.4 million, primarily for double sided
memory modules. As of July 22, 1997, outstanding trade payables owed to CMS
totaled approximately $340,000 for products ordered by the Company but not
delivered by CMS. In addition, CMS currently maintains inventory of certain
products specifically used in products manufactured on behalf of the Company.
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Background of the Merger. The Company has historically manufactured and
marketed high value-added, relatively high-margin proprietary servers and
related products for use with the Novell NetWare platform. In late 1995 and
during 1996, there was an unexpectedly rapid growth in demand for the Microsoft
Windows NT application networking solution and, during the same period, demand
for Novell NetWare as an enterprise networking solution declined. The Company
was unable to respond to this market shift in a timely manner by developing
high value-added, differentiated product offerings, in part because the
Company's proprietary system architecture was not easily adaptable to the
Microsoft Windows NT platform. This resulted in sales continually decreasing
during this period. During 1996, the Company developed a more industry
standard product that could accommodate both the Novell NetWare and Microsoft
Windows NT operating systems. This new platform was introduced in the fall of
1996 with value-added features for the Novell NetWare operating system and with
standard features for the Microsoft Windows NT operating system. In the spring
of 1997, the Company introduced a product for use with the Windows NT platform
which incorporated value-added features. Supporting both the proprietary and
industry standard platforms and developing value-added products for both
operating systems significantly increased the Company's operating expenses.
The inability to differentiate the Microsoft Windows NT product offerings on
the proprietary platform or the industry standard platform until the spring of
1997 led to narrower product margins. In light of these market and business
difficulties, the NetFRAME Board considered from time to time various
alternatives with a view toward increasing stockholder value.
On September 24, 1996, the Company retained Cowen to assist with exploring
the potential sale of the Company. At the request of the NetFRAME Board, Cowen
solicited select third parties' interest in acquiring the Company. From
September 1996 through May 1997, the Company, and Cowen, at the NetFRAME
Board's request, contacted in excess of twenty potential acquirors of the
Company to determine their level of interest in such an acquisition. Several
such parties, after executing confidentiality agreements, expressed interest
and performed due diligence on the Company.
In October 1996, following due diligence, the Company began discussions
with one of these parties ("Party 1"). These discussions failed to result in
any agreement on a possible business combination.
On January 29, 1997, after reviewing the adverse effects of the
deteriorating market for many of the Company's products on the Company's
financial condition and the Company's ability to obtain additional financing,
the NetFRAME Board instructed the officers of the Company to use all available
resources to pursue a sale of the Company or a strategic combination or
partnership.
On March 3, 1997, Robert VanNaarden, the Company's Vice President of
Worldwide Sales, contacted a third party ("Party 2") to discuss a potential
distribution arrangement. This conversation subsequently led to discussions
about potential business combinations and meetings at the Company. Party 2
conducted technical and financial due diligence in March and April 1997. On or
about April 24, 1997, the Company was informed that Party 2 was also
considering alternative acquisition strategies. On June 3, 1997, Party 2
indicated that it had decided not to pursue an acquisition of the Company.
On April 14, 1997, the Company filed its annual report on Form 10-K which
contained the report of the Company's independent auditors, which report
contained an explanatory paragraph stating that the Company's recurring net
losses and negative cash flow raised substantial doubt about the Company's
ability to continue as a going concern. Publication of the annual report
increased customer concerns regarding the Company's viability and financial
condition, which the Company believes adversely affected their purchasing
decisions.
On May 2, 1997, the NetFRAME Board met and discussed the current status of
discussions between the Company and third parties. After a review of the
financial condition of the Company and its prospects as a going concern, the
NetFRAME Board instructed the officers of the Company to begin formulating
plans to liquidate the Company, in case it failed to obtain additional
financing or discussions with third parties proved unavailing.
On May 7, 1997, Robert Puette, President and Chief Executive Officer of
the Company, spoke with a senior executive officer of another third party
("Party 3") to discuss a potential acquisition of the Company. Party 3
performed due diligence, product review and management interviews from May 14,
1997 through May 20, 1997. On May 21, 1997, Party 3 informed the Company that
it had decided not to pursue an acquisition of the Company.
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In late April 1997, David Averett, a Company sales representative,
contacted Gene Thomas, Vice President, Business Development of Micron, to
discuss a potential distribution relationship. On May 6, 1997, Paul Peterson,
Director of Engineering of Micron, and Dan Burton, Micron's Server Product
Group Manager, were provided with a demonstration of the Company's products at
an industry trade show.
From May 8, 1997 through May 15, 1997, officers of the Company and Micron
planned a meeting at the Company's offices. On May 15, 1997, Mr. Thomas and
George Minow, Director of Strategic Planning of Micron met (by telephone) with
Mr. Puette and Randy Meyer, Vice President of Business Development of the
Company. The Company presented information about the Company's products and
technology, and the parties discussed the potential benefits of a business
combination.
On May 21, 1997 and May 22, 1997, Company management and technical
personnel met with Micron at Micron's principal offices in Nampa, Idaho to
continue the due diligence process. On May 22, 1997, Joseph Daltoso, Chief
Executive Officer of Micron and Mr. Puette met to discuss the potential
strategic benefits Micron could derive from a business combination and
considered the nature of ongoing operations of the Company following an
acquisition.
On May 23, 1997, Mr. Minow called Dan McCammon, Chief Financial Officer of
the Company, Ms. Dixie Lopes, Manager, Financial Planning and Analysis of the
Company, Hitesh Shah, Product Manager of the Company, and Mr. Meyer to obtain
additional financial and product information from the Company.
From May 28, 1997 through May 30, 1997, Micron performed technical due
diligence on the Company's products at its Nampa offices. On May 29, 1997, T.
Erik Oaas, Vice President, Finance and Chief Financial Officer of Micron, Mr.
Minow and Mr. Thomas met at Micron's offices with Steven Huey, Vice President
of Marketing of the Company, Mr. Shah and a customer service engineer to
evaluate a pre-production version of the Company's next generation product. On
May 30, 1997, members of the Company's sales force made a presentation to
Micron at Micron's offices.
On May 30, 1997, Mr. Daltoso met with Mr. Puette, Mr. McCammon and Bulent
Erbilgin, Vice President of Product Development of the Company, at the
Company's offices to further discuss the merits of an acquisition and to tour
the Company's facilities. On June 4, 1997, Mr. Puette met with Mr. Daltoso and
Steven Appleton, a director of Micron, at Micron's principal offices to further
discuss the merits of a potential acquisition.
From March 1997 through May 1997, in addition to ongoing discussions with
these entities, including Micron, Mr. Puette contacted several additional
parties, including Party 1, to see if such parties had any interest in
acquiring the Company. None of these parties expressed interest in discussing
a possible business combination. During that time and through the beginning of
June 1997, Mr. Puette regularly advised the other members of the NetFRAME Board
as to the status and substance of discussions with potential acquirors and/or
business partners.
From June 5, 1997 through June 8, 1997, Micron continued to conduct legal
and financial due diligence and representatives of both companies began to
negotiate the principal terms of a potential merger agreement. On June 8,
1997, Micron indicated that, subject to further due diligence and the
commitment of key executives of the Company to remain with the Company
following an acquisition, it was prepared to commence an all cash tender offer
for the Company at or slightly below $1.00 per Share, to license the Company's
technology for payments totaling approximately $1,500,000, and to provide the
Company with certain financial assistance following the signing of a definitive
merger agreement.
The NetFRAME Board had a telephonic meeting on June 8, 1997 to consider
Micron's proposal. After discussion regarding, among other things, Micron's
proposal, the Company's current and projected financial condition, the lack of
other bidders, the receipt of Cowen's verbal opinion to the NetFRAME Board,
subsequently confirmed in writing on June 9, 1997, to the effect that, as of
such date, the proposed consideration to be received by holders of Shares
pursuant to the Offer and the Merger was fair, from a financial point of view,
to the Company's stockholders (other than Micron), and based upon a number of
factors related to both price and terms, the NetFRAME Board authorized the
officers of the Company to negotiate and execute definitive agreements with
Micron providing for a cash tender offer at a price of $1.00 per Share and the
other transactions contemplated by the Merger Agreement. In rendering its
opinion, Cowen relied, without independent verification, upon the Company's
management with respect to the accuracy and completeness of the financial and
other information furnished to it.
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Following the June 8, 1997 meeting of the Company's Board of Directors,
due diligence and finalization of the terms of the definitive agreements by
representatives of the parties continued.
On June 9, 1997, Micron entered into Employment Term Sheets with each of
Messrs. Puette, Erbilgin, Hartsfield and Huey, as described under "--Interests
of Certain Persons" below.
The morning of June 10, 1997, the Board of Directors of Micron approved
the terms of the proposed Offer and Merger, and definitive agreements were
signed on behalf of Micron and the Company.
The NetFRAME Board met again on June 13, 1997 and unanimously confirmed
its approval of the Offer, the Merger, the Merger Agreement and the
transactions contemplated thereby and resolved to recommend that stockholders
of the Company accept the Offer and tender their Shares to Purchaser and
approve the Merger.
Recommendation of the NetFRAME Board; NetFRAME Reasons for the Merger
At the June 8 and June 13, 1997 Board meetings, the NetFRAME Board
unanimously (i) approved the Offer, the Merger, the Merger Agreement and the
transactions contemplated thereby, (ii) determined that the Merger is fair to,
and in the best interests of, the stockholders of the Company, and (iii)
resolved to recommend that stockholders accept the Offer and tender their
Shares to Purchaser and approve the Merger.
The NetFRAME Board's decision to approve the Merger Agreement and the
Merger was, among other things, based upon its analysis of the Company's
current financial condition, recent operating results, the unavailability of
alternative financing options, the absence of competing bids to acquire the
Company and management's cash flow projections (including the working capital
required to continue to operate the Company as a going concern).
At the meeting of the NetFRAME Board held on June 8, 1997, the Company's
management reviewed the Company's current financial condition with the NetFRAME
Board. According to the unaudited interim financial statements prepared by
management, the Company's net losses for the five-month period ended May 31,
1997 totaled approximately $17,488,000 or $1.26 per share and the Company's
cash balances had decreased from $14,011,000 at December 31, 1996 to $146,000
at May 31, 1997. The book value of the Company had declined from $21,060,000
at March 29, 1997 to $14,672,000 at May 31, 1997, and the Company's management
reported to the NetFRAME Board that, without additional funding, the Company's
book value would likely continue to decline at similar rates. Management also
reported that sales for the second quarter of 1997 were significantly lower
than expected mainly as a result of customers' concerns as to the Company's
future viability and financial condition. The NetFRAME Board noted that
management's sales and expense forecasts and anticipated funding requirements
indicated that the Company would be unable to continue to operate as a going
concern and continue the development, manufacture and marketing of its products
without additional funding, which management advised the NetFRAME Board was
unavailable from either third parties or its current lender since, among other
things, the Company was not in compliance with certain financial convenants
under its current credit agreement. The NetFRAME Board determined that, in the
absence of the Merger, the funds to be received under the Technology License
Agreement (which is discussed below under "--Related Transactions with
Micron"), and other financial assistance to be made available to the Company by
Micron, the Company would likely be required to liquidate in the near term.
Management also informed the NetFRAME Board of its belief that, in a
liquidation, stockholders would likely receive significantly less than the
$1.00 per Share being offered by Micron.
In arriving at its decision to approve the Merger, the Merger Agreement
and the transactions contemplated thereby and to recommend acceptance of the
Offer, the NetFRAME Board also considered: (i) the proposed terms and
conditions of the Merger Agreement and Technology License Agreement, including
the amount and form of the consideration; (ii) the recent historical market
prices of the Shares; (iii) the NetFRAME Board's knowledge of the business,
operations, properties, assets and losses of the Company; (iv) the likelihood
that the proposed Offer and Merger would be consummated, including the
experience, reputation and financial condition of Micron as well as the
proposed conditions to the Offer and the Merger; (v) the risks and
uncertainties inherent in attempting to properly time and manage a liquidation;
(vi) the number of potential bidders contacted and the bidding process
employed; (vii) the fact that, pursuant to the Merger Agreement, the Company is
not prohibited from responding to any unsolicited takeover proposal (as
discussed and defined below) to acquire the Company, to the extent that the
NetFRAME Board determines in good faith, after consultation with outside
counsel, that it is necessary to do so in order to comply with its fiduciary
duties to the Company's stockholders under the DGCL; (viii) the oral opinion of
Cowen, delivered at the June 8, 1997 meeting of
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the NetFRAME Board, and subsequently confirmed in writing on June 9, 1997, to
the effect that, as of such date and subject to certain matters set forth in
Cowen's written opinion, the consideration to be received by the holders of
Shares in the Offer and the Merger was fair, from a financial point of view, to
the Company's stockholders (other than Micron).
The foregoing discussion of the information and factors considered by the
NetFRAME Board is not intended to be exhaustive but is believed to include the
material factors considered by the NetFRAME Board. In view of the wide variety
of factors considered, the NetFRAME Board did not find it practical to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered.
In light of all the factors set forth above, the NetFRAME Board resolved
unanimously to approve the Offer, the Merger, the Merger Agreement and the
transactions contemplated thereby and determined that the terms of the Offer
and the Merger are fair to, and in the best interests of, the stockholders of
the Company and resolved unanimously to recommend that stockholders of the
Company vote for approval and adoption of the Merger Agreement and the Merger.
Micron Reasons for the Merger
Micron has indicated that it regards the acquisition of the Company as an
opportunity to compete effectively in the large enterprise segment of the
Fortune 1000 marketplace as Micron will gain immediate access to the Company's
advanced server technologies applicable to many large enterprise class
server/application environments such as high availability, clustering and I/O
scalability. The Company's enterprise servers are used widely in industries
that have mission critical needs. Micron has indicated that it anticipates
that the acquisition will provide a strategic opportunity to complement
Micron's existing line of desktop, notebook and server products. Additionally,
the Company has a highly experienced sales force, both domestically and
internationally, that can be utilized to introduce a full line of Micron
products into the corporate marketplace. Micron has indicated that it intends
as soon as practicable to commence integrating certain manufacturing,
marketing, sales and purchasing functions of Micron and the Company in order to
reduce expenses and achieve other financial and operational synergies.
Opinion of Financial Advisor
Pursuant to an engagement letter dated September 24, 1996 (the "Cowen
Engagement Letter"), the NetFRAME Board retained Cowen to serve as its
financial advisor with respect to a possible sale of the Company. As part of
this assignment, Cowen was asked to render an opinion to the NetFRAME Board as
to the fairness, from a financial point of view, of the Offer Price to be
received by the holders of Shares (other than Micron) pursuant to the Offer and
the Merger. The amount of consideration for the Shares was determined through
negotiations between the Company and Micron and not pursuant to recommendations
of Cowen.
On June 8, 1997, Cowen delivered its oral opinion to the NetFRAME Board,
subsequently confirmed in writing on June 9, 1997, to the effect that, as of
such date, the Offer Price to be received by holders of Shares pursuant to the
Offer and the Merger is fair, from a financial point of view, to the
stockholders of the Company (other than Micron). The full text of the written
opinion of Cowen, dated June 9, 1997, is attached hereto as Annex B and is
incorporated by reference. Holders of Shares are urged to read the opinion in
its entirety for the assumptions made, procedures followed, other matters
considered and limits of the review by Cowen. This summary of the written
opinion of Cowen set forth herein is qualified in its entirety by reference to
the full text of such opinion. Cowen's analyses and opinion were prepared for
and addressed to the NetFRAME Board in connection with their consideration of
the Merger Agreement, and are directed only to the fairness, from a financial
point of view, of the financial terms of the Offer and the Merger and do not
constitute an opinion as to the merits of the Offer and the Merger contemplated
by the Merger Agreement or a recommendation to any holders of Shares as to how
to vote at the Special Meeting.
Cowen was selected by the NetFRAME Board as its financial advisor, and to
render an opinion to the NetFRAME Board, because Cowen is a nationally
recognized investment banking firm and because certain principals of Cowen have
substantial experience in transactions similar to the Offer and the Merger and
are familiar with the Company and its businesses. As part of its investment
banking business, Cowen is continually engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions and valuations
for corporate and other purposes. On June 4, 1992, Cowen acted as co-manager
in the initial public offering of the Company, for which Cowen
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received a customary fee. In addition, in the ordinary course of its business,
Cowen and its affiliates trade the equity securities of the Company for their
own account, and for the accounts of their customers, and accordingly, may at
any time hold a long or short position in such securities.
In arriving at its opinion, Cowen (a) reviewed the Company's consolidated
financial statements for the fiscal years ended December 31, 1994 through
December 31, 1996, the consolidated financial statements for the three-month
periods ended March 31, 1997 and March 31, 1996, and certain publicly available
filings with the Commission; (b) reviewed the Merger Agreement; (c) held
meetings and discussions with senior management of the Company to discuss the
business, operations, and future prospects of the Company; (d) reviewed the
financial projections furnished to Cowen by the senior management of the
Company, including the capital structure, sales, operating income and net
income, and other data of the Company Cowen deemed relevant; (e) analyzed the
historical cash burn rate and the projected cash flow position and cash burn
rate of the Company based upon the Company's senior management's liquidation
scenario forecast; (f) reviewed the operating and financial performance of the
Company over the last three fiscal years and compared its results with the
operating and financial performance of similar publicly traded companies; (g)
reviewed the public market valuation and trading multiples of the Company, and
compared the Company's trading multiples to the trading multiples of other
similar publicly traded companies; (h) reviewed the historical prices and
trading activity of the stock of the Company over the last twelve months, and
compared the Company's stock price performance to the stock price performance
of other similar publicly traded companies over the same time period; (i)
compared the acquisition contemplated by the Merger Agreement with the
acquisitions of other companies through similar purchase transactions,
including a comparison of the premiums paid in the acquisition contemplated by
the Merger Agreement with the premiums paid in those similar transactions; and
(j) conducted such other studies, analyses, inquiries and investigations as
Cowen deemed appropriate. At the request of the NetFRAME Board, Cowen
solicited select third parties' interest in acquiring the Company.
In rendering its opinion, Cowen relied, without independent verification,
upon the Company's senior management with respect to the accuracy and
completeness of the financial and other information furnished to it as
described above. With respect to the financial projections furnished to Cowen
by management of the Company, Cowen also assumed, with the consent of the
NetFRAME Board, that such projections were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
Company's management. Cowen did not assume any responsibility for independent
verification of such information, including financial information, nor did
Cowen make an independent evaluation or appraisal of any of the properties or
assets of the Company. Cowen also assumed that the Offer and Merger would be
consummated in a manner that complies in all respects with the applicable
provisions of the Exchange Act, and all other applicable federal and state
statutes, rules and regulations. Cowen's opinion was based on economic,
monetary, and market and other conditions existing on the date of its opinion.
It should be understood that, although developments subsequent to such date may
affect its opinion, Cowen does not have any obligation to update, revise or
reaffirm its opinion.
The following is a summary of certain financial analyses performed by
Cowen to arrive at its opinion. Cowen performed certain procedures, including
each of the financial analyses described below, and reviewed with the
management of the Company the assumptions on which such analyses were based and
other factors, including the historical and projected financial results of the
Company. No limitations were imposed by the NetFRAME Board with respect to the
investigations made or procedures followed by Cowen in rendering its opinion.
Cash Flow and Liquidity Analysis. Cowen analyzed the historical cash flow
for quarterly periods ended June 30, 1996, September 30, 1996, December 31,
1996, and March 30, 1997 and projected cash flow, provided by management, on a
bi-weekly basis for the period June 22, 1997 to August 31, 1997 and for the
week ending September 7, 1997. Cowen observed that the Company's quarterly
operating losses during the period of June 30, 1996 to March 30, 1997 depleted
the Company's cash position from $19.3 million for the quarter ended June 30,
1996 to $6.4 million for the quarter ended March 30, 1997. Cowen also
observed, as estimated by management, that the Company would have a projected
negative cash flow commencing the week of July 28, 1997 and a projected
negative cash balance of $6.9 million for the week ending September 7, 1997.
Analysis of Certain Transactions. Cowen reviewed the financial terms, to
the extent publicly available, of 25 selected transactions (collectively, the
"Selected Transactions") involving the acquisition of companies in the computer
systems industry, which were announced or completed since May 22, 1990.
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Cowen reviewed the market capitalization of common stock plus total debt
less cash and equivalents ("Enterprise Value") paid in the Selected
Transactions as a multiple of latest reported twelve-month ("LTM") revenues,
earnings before interest expense, income taxes, depreciation, and amortization
("EBITDA") and earnings before interest expense and income taxes ("EBIT") and
also examined the multiples of equity value paid in the Selected Transactions
to LTM earnings, book value and tangible assets. In addition, Cowen reviewed
the premium of the offer price over the stock prices one month prior to the
announcement date of the Selected Transactions. Cowen performed the above
analyses on both the entire list of Selected Transactions and a subset of the
Selected Transactions involving large and mid-range computer companies (the
"Selected LMR Transactions").
Such analyses on the entire list of Selected Transactions indicated that,
(i) on the basis of the Enterprise Value paid, the Selected Transactions had a
median valuation of 0.52 times LTM revenues, 9.1 times LTM EBITDA and 11.7
times LTM EBIT, and (ii) on the basis of equity value paid, the Selected
Transactions had a median valuation of 19.4 times LTM earnings, 1.71 times book
value, and 0.9 times tangible assets. In addition, the median premiums by
which offer prices exceeded the closing stock prices one month prior to the
announcement date of the Selected Transactions was 35%.
Such analyses on the Selected LMR Transactions indicated that, (i) on the
basis of the Enterprise Value paid, the Selected LMR Transactions had a median
valuation of 0.57 times LTM revenues, 4.0 times LTM EBITDA and 7.0 times LTM
EBIT, and (ii) on the basis of equity value paid, the Selected LMR Transactions
had a median valuation of 18.2 times LTM earnings, 1.18 times book value, and
1.0 times tangible assets. In addition, the median premiums by which offer
prices exceeded the closing stock prices one month prior to the announcement
date of the Selected LMR Transactions was 22%.
The corresponding multiple of LTM revenues implied by Micron's offer is
0.19 times. Cowen noted the Company's operating losses for the period. As a
result of such losses, the corresponding multiples of LTM EBITDA and LTM EBIT
implied by Micron's offer were not meaningful. The corresponding multiples of
book value and tangible assets implied by Micron's offer are 0.80 times and 0.4
times, respectively. The corresponding multiple of LTM earnings implied by
Micron's offer is not meaningful given the Company's net losses for the period.
In addition, Micron's offer represented a discount of 20% under the closing
price of the Company's Common Stock one month prior to June 7, 1997, the date
of announcement of the Offer. Because of the negative cash flow and net
operating losses of the Company on both a historical and a projected basis,
Cowen did not ascribe significance to these analyses.
Although the Selected Transactions and the Selected LMR Transactions were
used for comparison purposes, none of such transactions is directly comparable
to the Offer and the Merger, and none of the companies in such transactions are
directly comparable to the Company or Micron. Accordingly, an analysis of the
results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the companies involved and
other factors that could affect the acquisition value of such companies or the
Company.
Analysis of Certain Publicly Traded Companies. To provide contextual data
and comparative market information, Cowen compared selected historical
operating and financial ratios for the Company to the corresponding data and
ratios of certain other companies (the "Selected Companies") whose securities
are publicly traded and which Cowen deemed comparable to the Company in certain
respects. The Selected Companies were divided into two groups: (i) large and
mid-range computer companies ("LMR Companies"), and (ii) client/server computer
systems companies ("CSC Companies"). The LMR Companies included: Amdahl
Corp., Digital Equipment Corporation, Hewlett-Packard Company, International
Business Machines Corporation, Sequent Computer Systems Inc., Stratus Computer
Inc., Tandem Computers Inc., and Unisys Corp. The CSC Companies included:
Auspex Systems, Inc., Data General Corp., Silicon Graphics, Inc., and Sun
Microsystems, Inc. Such data and ratios include the Enterprise Value of such
Selected Companies as multiples of LTM revenues, EBITDA and EBIT, and the
market capitalization of common stock of such Selected Companies as a multiple
of the book value of common shareholders' equity. Cowen also examined the
ratios of the current prices of the Selected Companies to the LTM earnings per
share ("EPS"), estimated EPS for the 1997 calendar year (as estimated by
Institutional Brokers Estimating System ("IBES") and First Call) and estimated
EPS for the 1998 calendar year (as estimated by IBES and First Call) for these
Selected Companies.
Such analysis indicated that, for the LMR Companies, (i) the median values
of Enterprise Value as a multiple of LTM revenues, EBITDA and EBIT were 0.82
times, 7.0 times and 17.8 times, respectively, (ii) the median of market
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capitalization of common stock as a multiple of the book value of common
shareholders' equity was 1.85 times, and (iii) the median prices per share as a
multiple of LTM EPS and estimated EPS for the 1997 and 1998 calendar years were
28.2 times, 16.0 times and 12.3 times, respectively.
Such analysis indicated that, for the CSC Companies, (i) the median values
of Enterprise Value as a multiple of LTM revenues, EBITDA and EBIT were 0.82
times, 6.3 times and 9.8 times, respectively, (ii) the median of market
capitalization of common stock as a multiple of the book value of common
shareholders' equity was 2.01 times, and (iii) the median prices per share as a
multiple of LTM EPS and estimated EPS for the 1997 and 1998 calendar years were
13.3 times, 17.4 times and 13.9 times, respectively.
The corresponding multiple of LTM revenues implied by Micron's offer is
0.19 times. Cowen noted the Company's operating losses during the period. As
a result of such losses, the corresponding multiples of EBITDA and EBIT for the
Company implied by Micron's offer are not meaningful. The corresponding
multiple of market capitalization of common stock as a multiple of the book
value of common shareholders' equity for the Company implied by Micron's offer
is 0.80 times. The corresponding multiples of the LTM EPS and estimated EPS
for the 1997 calendar year for the Company implied by Micron's offer are not
meaningful given past and projected losses. No estimated EPS for calendar year
1998 for the Company was available. Because of the negative cash flow and net
operating losses of the Company on both a historical and a projected basis,
Cowen did not ascribe significance to these analyses.
Although the Selected Companies were used for comparison purposes, none of
such companies is directly comparable to the Company. Accordingly, an analysis
of the results of such a comparison is not purely mathematical but instead
involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the
Selected Companies and other factors that could affect the public trading value
of the Selected Companies or the Company.
Comparable Growth and Margin Analysis. Cowen analyzed the historical
median growth rates, over the periods 1993 to the present, and LTM for
revenues, EBITDA, EBIT and net income and the projected median growth rates for
net income for each of the LMR Companies and CSC Companies. Cowen also
analyzed the median EBITDA, EBIT and net income margins for each of the LMR
Companies and CSC Companies.
Such analysis indicated that, for the LMR Companies, the median growth
rates for revenues, EBITDA, EBIT and net income over the period 1993 to the
present were 3.6%, -3.4%, -8.9% and -16.3%, respectively. The projected growth
rate for net income from 1996 calendar year end to 1997 calendar year end was
36.1%, and the median EBITDA, EBIT and net income margins were 14.1%, 6.1% and
4.8%, respectively.
Such analysis indicated that, for the CSC Companies, the median growth
rates for revenues, EBITDA, EBIT and net income over the period 1993 to the
present were 30.4%, 45.6%, 62.6% and 66.9%, respectively. The projected growth
rate for net income from 1996 calendar year end to 1997 calendar year end was
27.3%, and the median EBITDA, EBIT and net income margins were 15.5%, 10.3% and
7.5%, respectively.
The corresponding growth rate in revenues for the Company was -8.7%.
Cowen noted the Company's historical and projected net operating losses. As a
result of such losses, the corresponding growth rates for EBITDA, EBIT, net
income, and projected net income for the Company were each not meaningful. The
corresponding EBITDA, EBIT and net income margins for the Company were -6.8%, -
14.5% and -13.9%, respectively.
Such analysis for the LTM period indicated that, for the LMR Companies,
the median growth rates for revenues, EBITDA, EBIT, and net income were 1.8%,
6.9%, -27.2% and -14.9%, respectively. The projected growth rate for net
income from 1996 calendar year end to 1997 calendar year end was 36.1% , and
the median EBITDA, EBIT and net income margins were 12.9%, 6.4% and 3.7%,
respectively.
Such analysis for the LTM period indicated that, for the CSC Companies,
the median growth rates for revenues, EBITDA, EBIT and net income were 25.8%,
84.5%, 46.5% and 48.7%, respectively. The projected growth rate for net income
from 1996 calendar year end to 1997 calendar year end was 27.3%, and the median
EBITDA, EBIT and net income margins were 13.4%, 7.7% and 5.7%, respectively.
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The corresponding growth rate in revenues for the Company was -11.1%.
Cowen noted the Company's historical and projected net operating losses. As a
result of such losses, the corresponding growth rates for EBITDA, EBIT, net
income and projected net income for the Company were each not meaningful. The
corresponding EBITDA, EBIT and net income margins for the Company were -41.9%,
-54.5% and -53.5%, respectively.
Stock Trading History. Cowen reviewed the historical market prices and
trading volumes of the Company Common Stock from June 6, 1996 to June 6, 1997
(the last trading day prior to the delivery of Cowen's written opinion). Cowen
also compared the Company's closing stock price with indices of the LMR
Companies and the CSC Companies. This information was presented solely to
provide the NetFRAME Board with background information regarding the stock
price of the Company over the period indicated. Cowen noted that over the
indicated periods the high and low prices for shares of Company Common Stock
were $5.75 and $1.0625, respectively, and that the average daily trading volume
of the Company Common Stock was approximately 96,697. Cowen also observed that
the Company Common Stock has traded below the indices over the period analyzed.
The summary set forth above does not purport to be a complete description
of the analyses performed by Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Cowen did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, notwithstanding the separate factors summarized above,
Cowen believes, and has advised the NetFRAME Board, that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of the Company. These analyses performed by Cowen are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty, and none of the Company, Cowen or any other
person assumes responsibility for their accuracy. As mentioned above, the
analyses supplied by Cowen and its opinion were among several factors taken
into consideration by the NetFRAME Board in making its determination to approve
the Offer and the Merger, and to recommend acceptance of the Offer and approval
of the Merger. The analyses of Cowen and its opinion should not be considered
as determinative of the decision of the NetFRAME Board to approve the Offer and
the Merger, and to recommend acceptance of the Offer and approval of the
Merger.
Pursuant to the Cowen Engagement Letter, as compensation for Cowen's
services as financial advisor, the Company agreed to pay Cowen a non-refundable
retainer fee of $50,000. In addition, if the Offer and the Merger are
consummated, Cowen will be entitled to receive an aggregate transaction fee of
$500,000 (against which fee all or part of the retainer fee that has been paid
to Cowen as of such date will be credited). Additionally, the Company has
agreed to reimburse Cowen for its out-of-pocket expenses (including the
reasonable fees and expenses of its counsel) incurred or accrued during the
period of, and in connection with, Cowen's engagement, without regard to
whether the Offer and the Merger are consummated. The Company has also agreed
to indemnify Cowen against certain liabilities, including liabilities under the
federal securities laws, relating to or arising out of services performed by
Cowen as financial advisor to the NetFRAME Board in connection with the Offer
and the Merger, unless it is finally judicially determined that such
liabilities arose out of Cowen's gross negligence or willful misconduct. The
terms of the fee arrangement with Cowen, which are customary in transactions of
this nature, were negotiated at arm's length between the Company and Cowen, and
the NetFRAME Board was aware of such arrangement, including the fact that a
significant portion of the aggregate fee payable to Cowen is contingent upon
consummation of the Offer and the Merger.
Related Transactions with Micron
Micron Financial Assistance to the Company. Pursuant to the Merger
Agreement, Micron agreed to provide the Company with $3.5 million in the
aggregate in financial assistance (in addition to any amounts payable pursuant
to the Technology License Agreement discussed below) in the form of either
secured loans, or guarantees of secured loans at such times as Micron and the
Company may determine. Micron has loaned the Company funds for working capital
purposes pursuant to a secured loan arrangement (the "Loan Agreement")
originally entered into in March 1997 between
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the Company and CIT Group/Business Credit, Inc. ("CIT"). CIT assigned to Micron
all of its rights under the Loan Agreement with the Company and related
security interests and other rights. Pursuant to the Loan Agreement, loans are
secured by substantially all of the Company's assets. The facility is an asset
based revolving credit facility to finance eligible accounts receivable and
production inventory, subject to certain net worth and other financial
covenants. At the time of the assignment, no amounts were outstanding to CIT
from the Company and the Company was unable to borrow under the facility due to
the Company's inability to comply with certain financial covenants. Micron
advanced funds to the Company under the assigned Loan Agreement pursuant to a
waiver of such financial covenants. Micron paid CIT a fee to assign the CIT
credit facility to it, which fee NetFRAME would be required to reimburse in the
event of an early termination of the Loan Agreement. The assigned Loan
Agreement provides for a maximum of $3.5 million of funding from Micron to the
Company. As of July [22,] 1997, the full $3.5 million had been loaned and was
outstanding.
The interest rate under the loan by Micron is at the prime rate in effect
at the principal offices of Chase Manhattan Bank, N.A. in New York City, New
York plus 0.50%, subject to certain adjustments. In addition, the Loan
Agreement provides for certain additional fees payable to Micron, as the lender
thereunder. The Loan Agreement sets forth certain procedures with respect to
the payment of amounts due thereunder, including the payment of interest on a
monthly basis. The loan becomes due on the earlier of (i) termination of the
Loan Agreement, (ii) a breach by the Company, or termination, of the Merger
Agreement or (iii) certain other events of default as specified in the Loan
Agreement. Micron may terminate the Loan Agreement upon certain conditions,
including upon September 30, 1997 and the occurrence of certain events of
default under the Loan Agreement or Merger Agreement. Accordingly, in any of
such instances, Micron could request immediate repayment on any loans it may
have extended to the Company and could seek to collect on such loans, including
potential foreclosure on any collateral, which foreclosure could have a
Material Adverse Effect (as defined in "Terms of the Merger--Conduct of the
Company's Business Prior to the Merger") on the Company. Until termination of
the Merger Agreement, Micron, as a creditor of the Company, has agreed not to
institute bankruptcy or insolvency proceedings against the Company. During the
term of the Merger Agreement, Micron and the Company may continue existing or
enter into additional commercial relationships. For example, the Company has
purchased from CMS, an affiliate of Micron, products and contract manufacturing
services, as described under "--Background of the Offer and the Merger" above,
and owes CMS approximately $340,000 as of July 22, 1997 for products ordered by
the Company but not yet delivered by CMS. The Company may continue to contract
for manufacturing services from CMS.
The Stock Option Agreement. In connection with the execution of the Merger
Agreement, Micron and the Company executed a Stock Option Agreement, whereby
the Company granted to Micron an irrevocable option exercisable in certain
circumstances to purchase shares of the Company's Common Stock representing a
19.9% equity stake in the Company at a per share purchase price of $1.00 (the
"Exercise Price") or, at Micron's election, by exchanging shares of Common
Stock of Micron at a rate, for each option share, of a number of shares of
Micron equal to the Exercise Price divided by the closing sale price of Micron
shares of common stock on the Nasdaq Stock Market for the trading day
immediately preceding the date of closing of the particular option exercise. As
a result of the consummation of the Offer, the Stock Option Agreement has
terminated.
The Technology License Agreement. The Company granted to Micron, and all
of its subsidiaries and affiliates, pursuant to a Technology License Agreement
(the "License Agreement") entered into concurrently with the Merger Agreement,
a nonexclusive license to all of the Company's technology associated with the
Company's 9000 series server products and any other Company products under any
phase of development on the effective date of the License Agreement. In
consideration of this grant, Micron has paid the Company a license fee of $1.5
million. The term of the License Agreement is perpetual. However, Micron may
terminate the License Agreement for any reason after 30 days from the effective
date thereof. Micron may also terminate the License Agreement in the event of
breach by the Company of any material obligation under the License Agreement
following 30 days notice and opportunity to cure. Upon termination of the
License Agreement, all rights and licenses granted to Micron terminate. In the
event that such a termination for breach by the Company occurs within five
years of the effective date of the License Agreement, the Company has agreed to
refund the full license fee to Micron upon such termination.
Structure of the Transaction; Accounting Treatment of the Merger
The acquisition of the Shares is structured as a cash merger with the
Company to be the Surviving Corporation upon the Merger to ensure that Micron
will acquire the outstanding equity ownership of the Company from all public
stockholders.
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The Merger will be accounted for by Micron under the purchase method of
accounting whereby the purchase price will be allocated based on the fair value
of the assets acquired and the liabilities assumed by Micron.
Certain Effects of the Merger
If the Merger is consummated, neither holders of Shares or options to
acquire Shares will have an opportunity to continue their equity interest in
the Company as an ongoing corporation and therefore will not have the
opportunity to share in its future earnings and potential growth, if any. At
the Effective Time, each outstanding Share, other than Shares held by
Purchaser, Shares held in the treasury of the Company and Shares held by
stockholders who shall have demanded and perfected any appraisal rights they
may have under the DGCL, will be automatically converted into the right to
receive the Offer Price.
The authorized capital of the Surviving Corporation at the Effective Time
will consist solely of 1,000 shares of Common Stock, par value $.001 per share.
At the Effective Time, all of the outstanding shares of the Surviving
Corporation will be held by Micron.
Preferred Share Rights Agreement
The Company has effected an amendment to the Preferred Share Rights
Agreement dated as of October 24, 1996 (the "Rights Agreement") entered into
between the Company and The First National Bank of Boston (the "Rights Agent")
to exclude Micron and the Purchaser and their respective Affiliates and
Associates (as such terms are defined in the Rights Agreement) from the
definition of "Acquiring Person" therein, with respect to the beneficial
ownership of the Shares which Micron, the Purchaser and/or any of their
respective Affiliates and Associates have acquired or will acquire, as a result
of the transactions contemplated by the Merger Agreement. Such amendment has
been effected by the execution of a formal amendment to the Rights Agreement by
the Company with the Rights Agent, and the filing with the Commission and
declaration of effectiveness of an amendment to the Company's Registration
Statement on Form 8-A with respect to such Rights Agreement. The Company has
further covenanted and agreed that it will take any and all action necessary to
prevent Micron, the Purchaser and their respective Affiliates and Associates
from being considered an "Acquiring Person" under the Rights Agreement, and to
prevent the occurrence of a "Distribution Date" as defined therein, as a result
of the Purchaser's acquisition of Shares upon consummation of the Offer or
Micron's or the Purchaser's acquisition of Shares, or rights to acquire same,
in connection with the Merger or otherwise pursuant to the Merger Agreement or
any of the transactions contemplated thereby.
Source and Amount of Funds
The total amount of funds required by Purchaser to consummate the Offer
and the Merger is estimated to be approximately $15.6 million, including
approximately $1.75 million to pay related fees and expenses of Micron and
Purchaser but excluding amounts payable by Purchaser with respect to the cash
out of Options. Purchaser will obtain all such funds from Micron. Micron has
provided such funds from its working capital. In addition, from its working
capital, Micron has provided the Company (i) $1.5 million under the License
Agreement, and (ii) $3.5 million in financing under the Merger Agreement.
Interests of Certain Persons
In considering the recommendation of the NetFRAME Board with respect to
the Merger Agreement, holders of Shares should be aware that certain directors
of the Company and members of the Company's management (as well as other
employees of the Company) may receive certain direct or indirect benefits in
connection with the Merger Agreement and the transactions contemplated thereby,
as described herein, that are different from, or in addition to, the interests
of holders of Shares.
Employment Agreements. The Company has entered into change of control
agreements (the "Change of Control Agreements") with the following executive
officers of the Company: Robert Puette, Bulent Erbilgin, Steven Huey, Vivian
Golub, Terry Hartsfield and Dan McCammon. Under the terms of the Change of
Control Agreements, in the event that a change of control results in any such
executive officer's involuntary termination without cause or constructive
termination within 12 months following a change in control, such executive
officer shall be entitled to the following compensation and benefits: (i) a
lump sum payment equal to (a) 12 months of pay at the employee's gross base
salary
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rate plus (b) amounts payable under any applicable target bonus; (ii) continued
health care benefits, including dependent coverage, for a period of 12 months;
and (iii) the acceleration of one half of the employee's unvested outstanding
stock options under the Company's 1992 Incentive Stock Option Plan (unless such
acceleration would make unavailable "pooling of interests" accounting treatment
of the change in control transaction and the purchase method of accounting is
not acceptable to the successor entity).
The Company has also entered into change of control agreements
("Additional Agreements") with certain key employees of the Company. Under the
terms of the Additional Agreements, in the event that a change of control
results in any such key employee's involuntary termination without cause or
constructive termination within 12 months following a change in control, such
key employee shall be entitled to the following compensation and benefits: (i)
a lump sum payment equal to (a) six months of pay at the employee's gross base
salary rate plus (b) amounts payable under any applicable target bonus; (ii)
continued health care benefits, including dependent coverage, for a period of
six months; and (iii) the acceleration of one half of the employee's unvested
outstanding stock options options under the Company's 1992 Incentive Stock
Option Plan (unless such acceleration would make unavailable "pooling
interests" accounting treatment and the purchase method of accounting is not
acceptable to the successor employer).
The term "change in control" is defined in the Change of Control
Agreements and the Additional Agreements to occur when (x) another person
becomes the direct or indirect beneficial owner of more than 50% of the
Company's securities, (y) with certain exceptions, the Company is merged or
consolidated with another company, or (z) the stockholders approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
The consummation of the transactions contemplated by the Merger Agreement
constitute a change in control for purposes of the Change of Control Agreements
and the Additional Agreements. However, Messrs. Puette, Erbilgin, Hartsfield
and Huey (the "Executive Officers") have each signed employment term sheets
with Micron. These term sheets (each an "Employment Term Sheet") provide that
the acceptance of the position proposed therein would not constitute actual or
constructive termination of employment under the terms of each Executive
Officer's Change of Control Agreement. The Change of Control Agreements will,
however, otherwise remain in effect.
The Employment Term Sheets provide for annual salary ($330,000 for Mr.
Puette; $192,000 for Mr. Erbilgin; $192,000 for Mr. Huey; and $175,000 for Mr.
Hartsfield) and contemplate payment to such persons of target bonuses (up to
$600,000 for Mr. Puette; up to $192,000 for Mr. Erbilgin; up to $192,000 for
Mr. Huey; and up to $175,000 for Mr. Hartsfield) based upon the Company's
achievement of certain financial and technological milestones through June 30,
1998, including the achievement of a significant improvement in the Company's
financial performance. The Employment Term Sheets further contemplate the grant
of stock options to such persons to purchase Micron common stock, subject to a
five year vesting schedule and with an exercise price equal to the underlying
common stock's fair market value (75,000 for Mr. Puette; 25,000 for Mr.
Erbilgin; 25,000 for Mr. Huey; and 25,000 for Mr. Hartsfield). Each such
Employment Term Sheet is conditioned, however, upon consummation of the Offer
and the approval by the Board of Directors of Micron of each such term sheet,
which has been obtained.
Mr. Hartsfield resigned from the Company effective July 11, 1997 and is
not entitled to any of the benefits provided in the Change of Control
Agreements, as described above.
Executive Bonus Plan. On May 2, 1997, the NetFRAME Board approved an
Executive Bonus Plan in order to focus the efforts of the Company's key
executives on certain strategic goals. The Executive Bonus Plan provides that,
upon the Company's partnership with a major original equipment manufacturer or
the sale of the Company and the release to manufacturing of the Company's
"Raptor 8" product, Mr. Puette will receive a bonus equal to 50% of his base
salary for the final six months of 1997 and certain Vice Presidents of the
Company, excluding Vice Presidents engaged in sales, will receive a bonus equal
to 40% of their base salaries for the first six months of 1997. The Plan also
provides for additional payments should the Company exceed other objectives.
The NetFRAME Board evaluated achievement of corporate milestones under the
Executive Bonus Plan in July 1997 and approved the payment of such bonuses,
which payments were made at the end of July 1997.
Indemnification and Insurance. The Company is party to indemnification
agreements with each person who is either a director or an executive officer of
the Company. The Company is also party to indemnification agreements with
certain key employees of the Company. The indemnification agreements generally
provide (i) for indemnification against all costs and expenses (including
attorneys' fees) actually and reasonably incurred by the indemnitee in
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connection with the investigation, defense or appeal of any threatened, pending
or completed action, suit, proceeding or alternative dispute resolution
mechanism related to the fact that such indemnitee is or was serving the
Company (or a subsidiary of the Company) as a director, officer, employee,
agent or fiduciary, or by reason of any action or inaction on the part of
indemnitee while serving in such capacity and any and all judgments, fines,
penalties and amounts paid in settlement of any claim, unless it is determined
that such indemnification is not permitted under applicable law and (ii) for
the prompt advancement of expenses to an indemnitee as well as the
reimbursement by such indemnitee of any such advances by the Company if it is
determined that the indemnitee is not entitled to such indemnification.
Indemnitees' rights under the indemnification agreements are not exclusive of
any other rights they may have under the DGCL, the Company's Certificate of
Incorporation or Bylaws, both as amended, or otherwise.
The Certificate of Incorporation of the Company, as amended to date,
limits the personal liability of directors of the Company for monetary damages
for breach of fiduciary duty and provides for indemnification of the officers,
directors and employees of the Company, in each case to the fullest extent
permitted by the DGCL. Article VI of the Bylaws of the Company also provides
for indemnification of officers and directors of the Company.
Micron has agreed to fulfill and honor and cause the Surviving Corporation
to fulfill and honor in all respects the obligations of the Company pursuant to
the above described indemnification agreements. From and after the Effective
Time, such obligations will be the joint and several obligations of Micron and
the Surviving Corporation, and Micron has assumed such obligations. The
Certificate of Incorporation and Bylaws of the Surviving Corporation will
contain those provisions with respect to indemnification and elimination of
liability for monetary damages set forth in the Certificate of Incorporation
and Bylaws of the Company, each as amended, which provisions will not be
amended, repealed or otherwise modified after the Effective Time in any manner
that would adversely affect the rights of the individuals who, immediately
prior to the Effective Time, were directors, officers, employees or agents of
the Company or its subsidiaries, unless required by law.
For at least two years from the Effective Time, Micron shall maintain in
effect the Company's current directors' and officers' insurance and
indemnification policy to the extent that it provides coverage for events
occurring prior to the Effective Time for those persons who are directors and
officers as of the date of the Merger Agreement, so long as the annual premium
would not be in excess of 150% of the last annual premium paid prior to the
date of the Merger Agreement. If the existing insurance expires, is terminated
or is canceled during such two year period, Micron will use all reasonable
efforts to cause as much insurance to be obtained as possible for the remainder
of the period for an annualized premium not in excess of the amount indicated
above, on terms and conditions no less advantageous than the existing
insurance. In lieu of maintaining the Company's current insurance, Micron may
elect to add the directors and officers of the Company as of the date of the
Merger Agreement to its own insurance policy, provided that such election does
not diminish the rights provided to such persons under the Company's existing
insurance.
Financial Advisor Fees
The Company retained Cowen as a financial advisor in connection with a
possible sale of the Company. Pursuant to the Cowen Engagement Letter, the
Company agreed to pay Cowen certain fees in connection with the provision of
such services. See "-- Opinion of Financial Advisor" above for a description of
the fee arrangement and the other terms of engagement of Cowen.
Except as set forth above, neither the Company nor any person acting on
its behalf has or currently intends to employ, retain or compensate any person
to make solicitations or recommendations to the stockholders of the Company on
its behalf with respect to the Merger.
Certain Federal Income Tax Consequences of the Merger
The receipt of cash for Shares in the Merger will be a taxable transaction
for federal income tax purposes and may also be a taxable transaction under
applicable state, local or foreign tax laws. In general, a stockholder will
recognize gain or loss for federal income tax purposes equal to the difference
between the amount of cash received in exchange for the Shares sold and such
stockholder's adjusted tax basis in such Shares. Assuming the Shares constitute
capital assets in the hands of the stockholder, such gain or loss will be
capital gain or loss. If, at the time of the Merger, the Shares then exchanged
have been held for more than one year, such gain or loss will be a long-term
capital gain or
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loss. Under current law, long-term capital gains of individuals are, under
certain circumstances, taxed at lower rates than items of ordinary income and
short-term capital gains.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
STOCKHOLDERS, INCLUDING STOCKHOLDERS WHO ACQUIRED SHARES PURSUANT TO THE
EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, INDIVIDUALS
WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN
CORPORATIONS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF
THE OFFER AND MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE
ALTERNATIVE MINIMUM TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS.
Government and Regulatory Approvals
Under the HSR Act, and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger may not be consummated until
notifications and certain information have been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. All required filings
with respect to the Merger have been made under the HSR Act and the applicable
waiting period has expired.
The FTC and the Antitrust Division frequently scrutinize the legality
under the antitrust laws of transactions such as the Merger. Despite the
expiration of the requisite waiting period under the HSR Act, at any time
before or after the consummation of the Merger, the FTC, the Antitrust
Division, state attorneys general and others could take action under antitrust
laws with respect to the Merger, including seeking to enjoin consummation of
the Merger, seeking to cause the divestiture of significant assets of Micron or
the Company or their subsidiaries or seeking to impose conditions on the
combined entities with respect to their business operations. There can be no
assurance that a challenge to the Merger on antitrust grounds will not be made,
or if such challenge is made, that Micron, Purchaser and the Company would
prevail or would not be required to terminate the Merger Agreement, to divest
certain assets, to license certain proprietary technology to third parties or
to accept other conditions in order to consummate the Merger.
Appraisal and Dissenters' Rights
Stockholders of the Company who do not vote in favor of the Merger may,
under certain circumstances and by following the procedures prescribed by the
DGCL, exercise appraisal rights and receive cash for their Shares.
If a stockholder of the Company exercises appraisal rights in connection
with the Merger under Section 262 of the DGCL ("Section 262"), any Shares of
the Company with respect to which such rights have been exercised and perfected
will not be converted into the Offer Price but instead will be converted into
the right to receive such consideration as may be determined by the Delaware
Court of Chancery (the "Court") to be due with respect to such Shares pursuant
to the laws of the State of Delaware.
The following summary of the provisions of Section 262 is not intended to
be a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached to this
Proxy Statement as Annex C and incorporated herein by reference.
Holders of record of Shares of the Company who continuously hold such
Shares through the Effective Time, who follow the procedures in Section 262
with respect to appraisal of their Shares and who have not voted in favor of
the Merger, will be entitled to have their Shares appraised by the Court and to
receive payment of the "fair value" of such shares as of the Effective Time, as
described below.
If a proposed merger for which appraisal rights are provided under Section
262 is to be submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting, must notify each of
its stockholders of record, who was such on the record date for such meeting,
that appraisal rights are available and must provide each such stockholder with
a copy of Section 262. This Proxy Statement is being sent by personal delivery
or by mail to all
30
<PAGE>
stockholders of record of the Company on or about July 28, 1997 and constitutes
notice of the appraisal rights available to such holders under Section 262. As
indicated above, a copy of the full text of Section 262 is attached hereto as
Annex C. A stockholder electing to demand appraisal of his Shares must do so by
a separate written demand as provided in Section 262 prior to the taking of the
-----
vote on the Merger at the Special Meeting. A vote against the Merger will not
constitute a demand for appraisal. A stockholder of record who elects to
exercise appraisal rights should mail or deliver his, her or its written demand
to the Company at 1545 Barber Lane, Milpitas, California 95035, Attention: The
Secretary. The demand should specify the holder's name and mailing address, the
number of Shares owned and that such holder is demanding appraisal of his, her
or its Shares. Only a holder of record of Shares of the Company (or his, her or
its duly appointed representative) is entitled to assert appraisal rights for
the Shares registered in that holder's name.
Within ten days after the effective date of the Merger, Purchaser must
notify each stockholder who has complied with Section 262 and has not voted in
favor of the Merger of the date that the Merger became effective.
Within 120 days after the Effective Time, any stockholder who has
continuously held his Shares through the Effective Time, has made a valid
written demand and has not voted in favor of approval and adoption of the
Merger Agreement and the Merger may (i) file a petition in the Court demanding
a determination of the value of Shares, and (ii) upon written request, receive
from the Company a statement setting forth the aggregate number of Shares not
voted in favor of approval and adoption of the Merger Agreement and the Merger
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such Shares. Such statement must be mailed to
the stockholder within the later of ten days after the written request therefor
has been received by the Company or within ten days after expiration of the
period for delivery of demands for appraisal.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court is required to determine the stockholders who have become
entitled to appraisal rights and to determine the "fair value" of the Shares,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, 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 is required to take into account all relevant factors and in
determining the fair rate of interest, the Court may consider the rate of
interest which the Surviving Corporation would have had to pay to borrow money
during the pendency of the proceeding. Upon application by a stockholder, the
Court may also order that all or a portion of the expenses incurred by any
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 the Shares entitled to appraisal.
Any holder of Shares who has duly demanded appraisal rights under Section
262 will not, after the Effective Time, be entitled to vote the Shares of the
Company subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions on such Shares (except dividends or other
distributions payable to stockholders of record as of a date prior to the
Effective Time).
If any holder of Shares who demands appraisal rights under Section 262
effectively withdraws or loses his, her or its right to appraisal, the Shares
of such holder will be converted into a right to receive the Offer Price as
provided in the Merger Agreement. A holder will effectively lose his right to
appraisal if he, she or it votes in favor of approval and adoption of the
Merger Agreement and the Merger, or if no petition for appraisal is filed
within 120 days after the Effective Time, or if the holder delivers to the
Company a written withdrawal of such holder's demand for an appraisal and an
acceptance of the Merger, except that any such attempt to withdraw made more
than 60 days after the Effective Time requires the written approval of the
Company. A holder of Shares may also lose his, her or its right to appraisal if
he, she or it fails to comply with the Court's direction to submit the
certificates representing such Shares to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings.
31
<PAGE>
TERMS OF THE MERGER
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Proxy Statement. This
summary is qualified in its entirety by reference to the full and complete text
of the Merger Agreement.
Effective Time
Subject to the provisions of the Merger Agreement, Micron, Purchaser and
the Company shall cause the Merger to be consummated by filing a Certificate of
Merger with the Secretary of State of the State of Delaware in accordance with
the relevant provisions of the DGCL as soon as practicable on or after the
Closing Date. The Merger shall become effective at such time as the Certificate
of Merger is duly filed with the Delaware Secretary of State, or at such other
time as Purchaser and the Company agree should be specified in the Certificate
of Merger. The Closing of the Merger will take place at 10:00 a.m. at the
offices of Fenwick & West LLP on a date to be specified by the parties, which
shall be no later than the second business day after satisfaction or waiver of
the conditions set forth in the Merger Agreement, or at such other date and
location as the parties to the Merger Agreement agree in writing. The Closing
is anticipated to occur on or about August 28, 1997.
Manner and Basis of Transferring Shares; Treatment of Options
At the Effective Time, by virtue of the Merger and without any action on
the part of the holder of any Shares or the holder of any shares of Purchaser,
each issued and then outstanding Share (other than any Shares held in the
treasury of the Company, or owned by Purchaser, Micron or any other subsidiary
of Micron and any Shares which are held by stockholders who have not voted in
favor of the Merger or consented thereto in writing and who shall have demanded
properly in writing appraisal for such Shares in accordance with the DGCL)
shall be automatically converted into the right to receive the Offer Price, in
cash, without interest.
Pursuant to the Merger Agreement, each share of common stock, par value
$.001 per share, of Purchaser issued and outstanding immediately prior to the
Effective Time shall be converted into and become one share of Common Stock of
the Surviving Corporation.
At the Effective Time, the outstanding Options shall become fully
exercisable and vested. All Options that are outstanding immediately prior to
the Effective Time shall be canceled and shall terminate at the Effective Time
and the holders thereof shall be entitled to receive, for each share subject to
such Option, an amount of cash equal to the excess, if any, of the Offer Price
over the exercise price per share of such Option subject to any required
withholding taxes.
The Company's 1992 Employee Stock Purchase Plan (the "Stock Purchase
Plan") shall be terminated on the earlier of July 31, 1997 or the Effective
Time. If terminated at the Effective Time, the Company shall take such actions
as are necessary to cause the "Exercise Date" (as such term is used in the
Stock Purchase Plan) applicable to the then current Offering Period (as such
term is used in the Stock Purchase Plan) to be changed to the last trading day
on which the Common Stock is traded on the Nasdaq Stock Market immediately
prior to the Effective Time (the "Final Exercise Date"); provided that such
change in the Exercise Date shall be conditioned on the consummation of the
Merger. On the Final Exercise Date, the funds credited as of such date under
the Stock Purchase Plan within each participant's payroll withholdings account
shall be deemed applied to the purchase of whole shares of the Common Stock in
accordance with the terms of the Stock Purchase Plan, and each Share of Common
Stock issuable as a result thereof shall be deemed outstanding and converted
into the right to receive the Offer Price in the Merger pursuant to the terms
of the Merger Agreement.
Exchange of Certificates
As soon as is reasonably practicable after the Effective Time, the Paying
Agent will mail to each person who was a stockholder of record immediately
prior to the Effective Time a letter of transmittal with instructions to be
used by such stockholder for surrendering share certificates in exchange for
the Offer Price. Upon surrender of the share certificate(s) and delivery of a
duly executed letter of transmittal to the Paying Agent, the holder of such
certificate(s) shall be entitled to receive the Offer Price in relation to each
Share represented by such certificate(s). In the event of a
32
<PAGE>
transfer of ownership of Shares which is not registered in the transfer records
of the Company, payment may be made to a person other than the person in whose
name the surrendered certificate is registered, if such certificate is properly
endorsed for transfer and the person requesting payment discharges any transfer
or other tax required by reason of payment of the Offer Price to a person other
than the registered holder. No interest will be paid or will accrue on the cash
payable upon the surrender of any share certificate. CERTIFICATES SHOULD NOT BE
SURRENDERED BY THE HOLDERS OF SHARES OF THE COMPANY UNTIL SUCH HOLDERS RECEIVE
THE LETTER OF TRANSMITTAL FROM THE PAYING AGENT.
Following the consummation of the Merger, the Paying Agent will forward
appropriate transmittal documentation to those optionees identified by the
Company who hold Options to purchase Shares with an exercise price per Share
which is less than the Offer Price, with instructions on the procedure for
obtaining an amount of cash equal to the excess of the Offer Price over such
exercise price.
Conduct of the Company's Business Prior to the Merger
Pursuant to the Merger Agreement, the Company has covenanted and agreed to
carry on the businesses of the Company and its subsidiaries in the ordinary
course and to use its reasonable efforts in light of its current financial
condition to preserve intact their current business organization, to keep
available the services of their current officers and employees and to preserve
relations with distributors, licensors, contractors, customers, suppliers,
lenders, employees and others having business dealings with any of them.
In addition, except as permitted by the terms of the Merger Agreement,
neither the Company nor any of its subsidiaries will do any of the following,
without the prior written consent of Micron:
(a) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock (other than by any wholly
owned subsidiary of the Company to its parent, or, in the case of less than
wholly owned subsidiaries, as required by agreements existing as of the date of
the Merger Agreement), split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for, shares of its capital stock or purchase, redeem or
otherwise acquire any shares of its capital stock or any of its subsidiaries or
any other securities thereof or any rights, warrants or options to acquire any
such shares or other securities;
(b) issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities (other than the issuance of the shares
pursuant to the exercise of Options outstanding on the date of the Merger
Agreement and in accordance with their present terms and pursuant to the
Employee Stock Purchase Plan);
(c) amend its Certificate of Incorporation, By-laws or other charter
documents;
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, joint venture, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets that individually or in the aggregate are material to the
Company and its subsidiaries taken as a whole, except purchases of inventory in
the ordinary course of business consistent with past practice;
(e) sell, lease, license, mortgage or otherwise encumber or subject to any
pledge, claim, charge, encumbrance, security interest or lien or otherwise
dispose of any of its properties or assets (including intellectual property),
except in the ordinary course of business consistent with past practice;
(f) incur any indebtedness for borrowed money, or draw down on any credit
facility or arrangement, or guarantee any such indebtedness of another person,
issue or sell any debt securities or warrants or other rights to acquire any
debt securities, or guarantee any debt securities of another person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the economic
effect of any of the foregoing or make any loans, advances or capital
contributions to, or investments in, any other person, other than to the
Company or any direct or indirect wholly owned subsidiary of the Company;
33
<PAGE>
(g) make or agree to make any new capital expenditure or expenditures
which individually is in excess of $25,000 or which in the aggregate are in
excess of $100,000;
(h) make any material tax election or settle or compromise any income or
franchise tax liability;
(i) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction (x)
of liabilities or obligations the failure of which to satisfy would have a
Material Adverse Effect (as described below) on the Company, (y) of liabilities
and obligations to employees, and (z) in the ordinary course of business
consistent with past practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of the Company
included in the documents filed with the Commission or incurred since the date
of such financial statements in the ordinary course of business consistent with
past practice;
(j) except as expressly contemplated by the Merger Agreement, enter into,
modify, amend or terminate any contract or agreement binding on the Company or
any subsidiary or waive, release or assign any rights or claims thereunder
other than contracts or agreements involving purchase of inventory and supplies
or sales of products in the ordinary course of business and other than
discounting of accounts receivable to obtain prompt collection;
(k) terminate or lay off any employees, other than for cause consistent
with past practice and Company policy;
(l) except as otherwise contemplated by the Merger Agreement, adopt or
amend in any material respect any employee benefit or employee stock purchase
or employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees other than in the ordinary
course of business, consistent with past practice, or change in any material
respect any management policies or procedures, or otherwise alter or commit to
any compensation, benefit or severance or change of control arrangement for or
with any officer or employee or enter into any related or interested party
transaction of a nature that would be required to be disclosed in filings with
the Commission;
(m) grant or provide any severance or termination pay to any officer or
employee except payments under the WARN Act or similar law or regulation, after
first consulting with Parent, or, after prior written notice to Micron that are
in amounts consistent with the Company's policies and past practices, are made
pursuant to written plans or agreements outstanding, or policies existing, on
the date of the Merger Agreement or are made pursuant to arrangements
previously disclosed to Micron in writing;
(n) voluntarily take actions to liquidate or dissolve the Company or to
take advantage of bankruptcy or other creditor protection laws;
(o) institute any litigation or other proceeding other than in connection
with the Merger Agreement or any of the transactions contemplated thereby;
(p) take any action that might cause or constitute a breach of any
representation or warranty made by the Company in the Merger Agreement; or
(q) authorize any of, or commit or agree to take any of, the above
described actions.
Furthermore, the Company and Micron have agreed not to, and not to permit
any of their respective subsidiaries to, knowingly and willfully, take
deliberate action that would cause any of their representations and warranties
set forth in the Merger Agreement to become untrue with respect to the Company,
in such a manner, as would have a Material Adverse Effect on the Company or,
with respect to Micron, in any material respect as of the date when made, or
that would cause any of the conditions to the Merger not to be satisfied.
"Material Adverse Change" and "Material Adverse Effect" mean, when used in
connection with the Company, any change or effect that is materially adverse to
the Company's business, properties, assets, financial condition or results of
operations, excluding those changes, effects and developments that result from
(i) the announcement or pendency of the Offer, (ii) general economic
conditions, or (iii) conditions affecting the industry in which the Company
competes.
34
<PAGE>
From the date of the Merger Agreement until the Effective Time, the
Company will, and will cause its subsidiaries to, afford the officers,
employees, accountants, counsel, financial advisors and other representatives
of Micron, reasonable access during normal business hours to their properties,
books, contracts, commitments, personnel and records and shall furnish or
promptly make available to Micron a copy of each report, schedule, registration
statement and other document filed by it during such period pursuant to the
requirements of federal or state securities laws, and all other information
concerning its business, properties and personnel as Micron may reasonably
request.
The Merger Agreement provides that, subject to its terms and conditions,
each of the parties thereto agrees to use all reasonable best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, and to use
its reasonable best efforts to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable the transactions
contemplated by the Merger Agreement (including consummation of the Offer and
the Merger). Among other things, the Merger Agreement specifies the following
actions: (i) obtaining all necessary waivers, consents and approvals from third
parties; (ii) obtaining all necessary consents, approvals, waivers, actions and
no actions from any federal, state or local government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity"), and the
making of all necessary registrations and filings and the taking of all
reasonable steps as may be necessary to obtain an approval or waiver from, or
to avoid an action or proceeding by, a Governmental Entity; (iii) defending any
lawsuits or other legal proceedings challenging the Merger Agreement or the
consummation of the transactions contemplated thereby; and (iv) the execution
and delivery of any additional instruments necessary to consummate the
transactions contemplated by the Merger Agreement. In particular, the Company
has agreed to take all action necessary to ensure that no state takeover
statute or similar statute or regulation becomes applicable to the Merger, the
Merger Agreement or any other transaction contemplated by the Merger Agreement.
Furthermore, the Company has agreed that if any state takeover statute or
similar statute or regulation becomes applicable to such transactions, it will
take all action necessary to ensure that the Merger, the Merger Agreement and
the transactions contemplated thereby may be consummated as promptly as
practicable on the terms contemplated by the Merger Agreement and otherwise to
minimize the effect of such statute or regulation on such transactions.
No Solicitation
The Company has agreed that, until the earlier of the Effective Time or
termination of the Merger Agreement, neither the Company, its subsidiaries, nor
their respective officers, directors, employees, representatives, investment
bankers, attorneys or other advisors will directly or indirectly, (i) solicit,
initiate or encourage the submission of any takeover proposal or (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or enter into any agreement with
respect to, or take any other action to facilitate any inquiries or the making
of any proposal that constitutes, or may reasonably be expected to lead to, any
takeover proposal. A "takeover proposal" is defined to mean any proposal for a
merger or other business combination involving the Company or any of its
Significant Subsidiaries (as defined in Section 1-02 of Regulation S-X) or any
proposal, offer or tender offer to acquire (including without limitation by
license) in any manner, directly or indirectly, an equity interest in, not less
than 10% of the outstanding voting securities of, or assets representing not
less than 10% of the annual revenues of, the Company or any of its Significant
Subsidiaries, other than the transactions contemplated by the Merger Agreement.
The Company has also agreed that it will immediately cease any and all existing
activities, discussions or negotiations with any parties conducted prior to the
date of the Merger Agreement with respect to any takeover proposal. Pursuant to
the Merger Agreement, the Company will promptly advise Micron orally and in
writing of any request for information or of any takeover proposal, or any
inquiry with respect to or which is expected to lead to any takeover proposal,
the material terms and conditions of such request, takeover proposal or
inquiry, and the identity of the person making any such takeover proposal or
inquiry. The Company has also agreed to keep Micron informed of the status and
material terms of any such request, takeover proposal or inquiry.
Notwithstanding the above described provisions, the Company may, to the
extent required by fiduciary obligations under applicable law as advised by
independent counsel, in response to an unsolicited takeover proposal received
after the date of the Merger Agreement, participate in discussions or
negotiations with, or furnish information with respect to the Company pursuant
to a confidentiality agreement in reasonably customary form, to any person. If,
following the receipt of an unsolicited takeover proposal, the NetFRAME Board
determines in good faith, based on the advice of its outside financial
advisors, that such takeover proposal is more favorable to the Company's
stockholders than the Merger (a "Superior Proposal"), then the Company may
terminate the Merger Agreement, subject to payment of a break up fee to Micron,
as discussed below. Thereafter, the NetFRAME Board may accept and enter into
any Agreement
35
<PAGE>
with respect to such Superior Proposal, and may approve or recommend such
Superior Proposal and in connection therewith, withdraw or modify its approval
or recommendation of the Merger Agreement or the Merger. The provisions
described above do not prohibit the Company or its Board of Directors from (i)
taking, and disclosing to the Company's stockholders, a position with respect
to a takeover proposal pursuant to Rules 14d-9 and 14e-2(a) under the Exchange
Act, or (ii) making any disclosure to the Company's stockholders that, in the
judgment of the NetFRAME Board or the Company, is required under applicable
law.
Conditions to the Merger
Under the Merger Agreement, the respective obligations of each party to
effect the Merger are subject to the satisfaction or waiver on or prior to the
Effective Time of the following conditions:
(a) the Merger shall have been approved and adopted by the requisite
vote of the stockholders of the Company;
(b) any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated;
(c) the Offer shall have been consummated; and
(d) no temporary restraining order, preliminary or permanent
injunction, judgment or other order, decree or ruling nor any statute, rule,
regulation or executive order shall be in effect which would (i) make the
acquisition or holding by Micron or its affiliates of Shares or shares of
common stock of the Surviving Corporation illegal or otherwise prevent the
consummation of the Merger, (ii) prohibit Micron's or Purchaser's ownership or
operation of, or compel Micron or Purchaser to dispose of, or hold separate,
all or a material portion of the business or assets of Purchaser, the Company
or any subsidiary thereof, (iii) compel Micron, Purchaser or the Company to
dispose of, or hold separate, all or a material portion of the business or
assets of Micron or any of its subsidiaries or the Company or any of its
subsidiaries, (iv) impose material limitations on the ability of Micron or
Purchaser or their affiliates effectively to exercise full ownership and
financial benefits of the Surviving Corporation, or (v) impose any material
condition to the Merger Agreement or the Merger which would be materially
adverse to Micron.
In addition, the obligations of Micron and Purchaser to effect the Merger
are further subject to (i) the accuracy of the Company's representations and
warranties at the time of the Merger Agreement in all material respects, except
with respect to inaccuracies that have since been cured; (ii) the performance
in all material respects by the Company of all obligations under the Merger
Agreement, except to the extent that the aggregate effect of the failure would
not have a Material Adverse Effect or was attributable to Micron; and (iii) the
absence of a Material Adverse Change in the Company and its subsidiaries as a
whole or an event that is highly probable to result in a Material Adverse
Change, except for changes primarily due to employee attrition, and
disregarding operating losses incurred in the ordinary course.
Representations and Warranties
The Merger Agreement contains various customary representations and
warranties of the parties thereto including representations by the Company as
to the absence of certain changes or events concerning the Company's business,
compliance with law, taxes, litigation, employee benefit plans, real property
and leases, intellectual property, environmental matters and material
contracts.
Termination of the Merger Agreement
Due to the consummation of the Offer, Micron and Purchaser may only
terminate the Agreement with the mutual consent of the Company.
The Merger Agreement may be terminated by the Company, and the Merger and
other transactions contemplated thereby may be abandoned, at any time prior to
the Effective Time, notwithstanding any requisite approval and adoption of the
Merger Agreement and the Merger by the stockholders of the Company, (a) if any
Governmental Entity shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting
36
<PAGE>
the Merger and such order, decree, ruling or other action shall have become
final and nonappealable; or (b) if the NetFRAME Board determines that there is
a Superior Proposal, as described above.
Break-Up Fee
The Merger Agreement provides that the Company shall pay to Micron in same
or next day funds an amount equal to $750,000 in the event of the Company
entering into an agreement with respect to a Superior Proposal.
Post Merger Employment Benefits
Employees of the Company who become employed by Micron or any controlled
subsidiary thereof after the Effective Time will either, to the extent
permitted under the terms of the Company's employee benefit plans, continue to
be eligible to participate in such plans, if and for so long as continued, or
become eligible to participate in the same standard employee benefit plans as
are generally available to similarly situated Micron employees.
Appointment of Directors by Purchaser
Pursuant to the Merger Agreement, following consummation of the Offer,
Micron and Purchaser are entitled to designate a number of directors,
representing at least a majority of the members of the NetFRAME Board, to be
appointed or elected to the NetFRAME Board. The Company agreed to increase the
size of the NetFRAME Board and/or secure the resignations of such number of its
existing directors as is necessary to enable such designees to be elected to
the NetFRAME Board and to cause such designees to be so elected. Purchaser has
not yet availed itself of its rights to designate any representative to the
NetFRAME Board.
Waiver and Amendment of the Merger Agreement
The Merger Agreement may be amended by an instrument in writing signed by
the parties at any time before or after obtaining stockholders' approval,
provided that, following stockholder approval, no amendments can be made which
require further approval by the Company's stockholders without obtaining such
further approval. Furthermore, any amendment following the consummation of the
Offer requires the consent of a majority of the Continuing Directors.
The parties to the Merger Agreement may extend the time for the
performance of obligations or other acts of the other parties, waive
inaccuracies in the representations and warranties contained in the Merger
Agreement or any document delivered pursuant thereto or waive compliance with
any of the agreements or conditions contained in the Merger Agreement subject
to the same restrictions.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Proxy Statement. The
consolidated statement of operations data for each of the three years in the
period ended December 31, 1996 and the consolidated balance sheet data at
December 31, 1995 and 1996 are derived from consolidated financial statements
of the Company which have been audited by Ernst & Young LLP, independent
auditors, and are included elsewhere in this Proxy Statement. Ernst & Young
LLP's report on the consolidated financial statements for the year ended
December 31, 1996, which appears elsewhere herein, includes an explanatory
paragraph as to the substantial doubt about the Company's ability to continue
as a going concern, as described in Note 1 of Notes to Consolidated Financial
Statements. The consolidated statement of operations data for each of the two
years in the period ended December 31, 1993 and the consolidated balance sheet
data at December 31, 1994, 1993 and 1992 are derived from audited consolidated
financial statements not included herein. The consolidated statement of
operations data set forth below with respect to the six month periods ended
June 30, 1997 and June 30, 1996 and the consolidated balance sheet data at June
30, 1997 are derived from, and are qualified by reference to, the unaudited
consolidated financial statements of the Company included elsewhere in this
Proxy and should be read in conjunction with those financial statements and
related notes thereto. The unaudited financial statements include all normal
recurring adjustments that the Company considers necessary for a fair
presentation of its financial position and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year Ended December 31,(1) June 30,(1)
--------------------------------------------------------- -------------------------
1996 1995 1994 1993 1992 1997 1996
---- ---- ---- ---- ----- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue........................... $74,349 $76,434 $89,135 $66,935 $39,051 $ 19,984 $38,879
Operating income (loss)............... (29,034)(5) (7,785)(2) 4,988 6,680(4) 3,106 (24,387)(6) (8,270)
Net income (loss)..................... (27,984)(5) (8,052)(2)(3) 5,745 7,223(4) 3,249 (24,154)(6) (7,637)
Net income (loss) per share........... $(2.04)(5) $ (0.60)(2)(3) $0.42 $0.53(4) $0.29 $ (1.73)(6) $(0.56)
Number of shares used in computing
per share amounts................... 13,729 13,498 13,630 13,625 11,182 13,952 13,645
<CAPTION>
December 31,(1)
----------------------------------------------------------- June 30,
1996 1995 1994 1993 1992 1997(1)
---- ---- ---- ---- ---- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital....................... $20,226 $47,687 $56,639 $54,271 $47,458 $ 1,277
Total assets.......................... 50,309 71,698 76,971 69,743 56,065 22,670
Notes payable and capital lease
obligations.......................... -- -- 69 354 1,032 2,000
Total stockholders' equity............ $31,798 $59,194 $66,381 $59,359 $50,398 $ 8,007
</TABLE>
- --------------------
(1) The Company maintains a fifty-two/fifty-three week fiscal year cycle. For
convenience, the statement of operations and balance sheet data have been
titled as ending on the last day of the applicable calendar period. See
Note 2 of Notes to Consolidated Financial Statements and Note 1 of Notes to
Condensed Consolidated Financial Statements.
(2) Includes a charge of $1.4 million or $0.10 per share associated with the
write-off of application software and related costs in connection with a
decision to discontinue a management information system upgrade. (See Note
2 of Notes to Consolidated Financial Statements).
(3) Includes a charge of $2.2 million or $0.16 per share resulting from a
settlement of the class action lawsuit.
(4) Includes a charge of $1.6 million or $0.11 per share associated with the
purchase of in-process research and development technology.
(5) Includes a charge of $2.5 million or $0.18 per share for excess and
obsolete inventory associated with the NF8500 products.
(6) Includes a charge of $1.3 million or $0.09 per share related to the
write-off of leasehold improvements with respect to the Company's
consolidation of facilities.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company has historically manufactured and marketed proprietary servers
and related products for use with Novell NetWare. In late 1995 and during
1996, demand for the Microsoft Windows NT application networking solution grew
rapidly and, during the same period, demand for Novell NetWare as an enterprise
networking solution declined. During this period, and for the six months ended
June 30, 1997, the Company's net revenue was adversely affected by its
inability to respond to this market shift in a timely manner and by lower sales
of its older technology. During these periods, the Company's net revenue and
gross margin were further adversely affected as a result of its efforts to
increase demand for its products by reducing end-user list prices for certain
components. In addition, in the six months ended June 30, 1997, the Company's
net revenue was also adversely affected as a result of customer concerns
regarding the Company's financial viability and financial condition. During
the second half of fiscal 1996 and the first half of 1997, gross margin was
also adversely affected as a result of increased costs and provisions related
to the transition from the NF8500 product line to the NF9000 product line. The
Company's research and development expenses increased during these periods,
both in absolute dollars and as a percentage of net revenue, as the Company
continued to invest in research and development for the NF9000 product line.
The Company's lower net revenue and higher operating expense reduced the
Company's working capital from $47.7 million at December 31, 1995 to $1.3
million at June 30, 1997.
In connection with Purchaser's and Micron's review of the Company and in
the course of their negotiations with the Company, the Company provided Micron
and the Purchaser with certain business and financial information which Micron
and Purchaser believe is not publicly available. Specifically, the Company
provided the Purchaser and Micron with information regarding its severe
liquidity and cash needs, including the possibility that the Company may be
forced to liquidate absent an immediate and substantial cash infusion or
acquisition of the Company. The Company also shared certain internal
forecasts, assuming consummation of the Merger and based upon receiving funding
from operating as a subsidiary of Micron, achieving certain manufacturing and
purchasing synergies with Micron, as well as pursuing a marketing and sales
model synergistic with Micron, and thereby reducing its operating costs.
Projections as to the Company's financial results on a stand-alone basis were
not utilized by Purchaser or Micron, as any such stand-alone projections were
not viewed as meaningful given the serious questions as to the Company's
viability as a stand-alone entity and the possibility of immediate liquidation
of the Company absent an acquisition or substantial cash infusion.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net revenue represented by certain line items from the Company's consolidated
statement of operations:
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------- ----------------
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.............................. 67.9 51.7 47.4 92.9 57.2
----- ----- ----- ------ -----
Gross profit................................. 32.1 48.3 52.6 7.1 42.8
Operating expenses:
Research and development................... 21.9 16.2 12.6 40.3 19.4
Selling, general and administrative........ 49.2 42.3 34.4 88.8 44.6
----- ----- ----- ------ -----
Total operating expenses................. 71.1 58.5 47.0 129.1 64.0
----- ----- ----- ------ -----
Operating income (loss)...................... (39.0) (10.2) 5.6 (122.0) (21.2)
Interest and other income, net............... 1.4 (0.7) 1.3 1.1 1.6
----- ----- ----- ------ -----
Income (loss) before income taxes............ (37.6) (10.9) 6.9 (120.9) (19.6)
Provision (benefit) for income taxes......... -- (0.4) 0.5 -- --
----- ----- ----- ------ -----
Net income (loss)............................ (37.6) (10.5) 6.4 (120.9) (19.6)
===== ===== ===== ====== =====
</TABLE>
39
<PAGE>
Years Ended December 31, 1996, 1995 and 1994
Net Revenue
Net revenue was $74.3 million in 1996, $76.4 million in 1995 and $89.1
million in 1994, reflecting decreases of 2.7% in 1996 from 1995 and 14.2% in
1995 from 1994. The Company believes that customer expectations of its next-
generation products coupled with more intense price competition on older
products were the primary causes of the decrease in net revenue for 1996, when
compared to 1995. In addition, the Company experienced higher-than-normal
turnover in the sales management staff in 1996, when compared to 1995 and 1994,
which the Company believes caused an adverse effect to net revenue for 1996.
In the first quarter of 1995, the Company adopted a "component based" pricing
system and lowered list prices of certain components as part of an on-going
pricing strategy intended to increase demand for the Company's products and
increase its market share. These changes lowered the average selling prices of
the Company's products in 1995.
Export net revenue decreased to approximately 8.8% of net revenue in 1996,
as compared to approximately 15.0% of net revenue in 1995. Export net revenue
remained relatively constant as a percentage of net revenue in 1995 when
compared to 1994. The decrease in export net revenue in 1996 was due to a
combination of factors including significant turnover of international sales
staff and shipment delays pending secured financing from certain international
customers. See Note 4 of Notes to Consolidated Financial Statements.
The Company recognizes revenue upon shipment of product and records
allowances for estimated uncollectible accounts and sales returns. In 1996,
the Company recorded an increase in estimated uncollectible accounts and sales
return allowances.
Gross Profit
Gross profit represents net revenue less cost of revenue. Cost of revenue
consists primarily of the costs of material, labor and overhead, warranty
expenses, customer service expenses, provisions for excess and obsolete
inventory, software royalties, and amortization of capitalized software. Gross
margin for 1996 was 32.1% as compared to gross margins of 48.3% for 1995 and
52.6% for 1994. The decreases in gross margins in 1996 and 1995 were primarily
due to the increase in reserves for potential excess or obsolete inventory and
the reduction of end-user list prices of certain of the components the Company
sells as part of its on-going pricing strategy noted above. In addition, gross
margin for 1996 was negatively impacted by increased provisions for warranty
expenses related to the NF8500 products and continuing price pressure from the
Company's competitors. Customer service expenses included in cost of sales
increased approximately $1.1 million in absolute dollars in 1995 as compared to
1994. The increase was due primarily to the establishment of domestic parts
bank inventories.
Research and Development
Research and development expenses increased 31.7% to $16.3 million in 1996
from $12.4 million in 1995, and 10.4% in 1995 from $11.2 million in 1994 and
represented 21.9%, 16.2%, and 12.6% of net revenues for 1996, 1995 and 1994,
respectively. The increase in spending in 1996 when compared to 1995 was
primarily due to the development of the Company's new generation NF9000 series
server and included increases in product prototype expenses, consulting and
recruiting expenses. The increase in 1995 compared to 1994, was primarily due
to higher depreciation and amortization and consulting expenses which were
partially offset by lower product prototype and seminar expenses.
The Company records software development costs in accordance with
Statement of Financial Accounting Standards No. 86 ("FAS 86"). To the extent
that the Company capitalizes its product development costs, the effect is to
defer such costs to future periods. Product development and support expenses
may fluctuate annually depending in part upon the number and status of internal
software development projects. See Note 2 of Notes to Consolidated Financial
Statements.
Selling, General and Administrative
Sales and marketing expenses increased 19.4% to $30.4 million in 1996 from
$25.4 million in 1995 and remained flat in 1995 when compared to $25.5 million
in 1994 and represented 40.8% of net revenue in 1996 compared
40
<PAGE>
to 33.3% and 28.6% in 1995 and 1994, respectively. The increase in sales and
marketing expenses in 1996 when compared to 1995 resulted primarily from
increases in headcount at the end of 1995 and the beginning of 1996, as well as
costs related to a reduction in force, a specific bad debt provision, increased
advertising and product promotions for the Company's introduction of the
NF9000. Spending in 1995 was relatively flat with 1994.
General and administrative expenses decreased 9.1% to $6.3 million in 1996
from $6.9 million in 1995 and increased 32.5% in 1995 when compared to $5.2
million in 1994, and represented 8.4%, 9.0%, and 5.8% of net revenues for 1996,
1995 and 1994, respectively. The decrease in expenses in 1996, when compared
to 1995 is primarily due to a one-time charge recorded in 1995 of $1.4 million
associated with the write-off of application software and the related costs in
connection with a decision to discontinue a proprietary management system
software upgrade. Exclusive of the write-off, spending increased 13.5% in 1996
when compared to 1995 primarily due to salaries and salary-related expenses and
legal fees, partially offset by lower consulting expenses. The increase in
1994 was consistent with the increase in net revenue and consisted primarily of
increased headcount and professional service expenses. Additionally, in 1994
the increase was related to increased fees for the implementation of
application software packages and for retirement benefits for an executive
officer.
Interest and Other Income, Net
Interest and other income, net, increased in 1996 when compared to 1995.
This increase was due primarily to a charge in 1995 of $2.2 million resulting
from the settlement of a class action lawsuit against the Company. This was
offset slightly by lower interest income earned in 1996 due to lower cash
balances. Interest and other income, net, excluding the charge related to the
class action settlement, increased in absolute dollars in 1995 as compared to
1994 primarily due to higher average interest rates.
Income Taxes
The Company's effective provision (benefit) rate was 0%, (3%) and 6% for
1996, 1995 and 1994, respectively. The rates for 1996 and 1995 were less than
the statutory rate of 34% due to limitations imposed under Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes"
for currently recognizing a financial statement benefit for the year's net
operating loss. The tax rate for 1994 was less than the statutory rate of 34%
due to the utilization of net operating loss and research and development tax
credit carryforwards. At December 31, 1996, the Company had numerous tax loss
and tax credit carryovers which expire in years 2008 through 2011. See Note 6
of Notes to Consolidated Financial Statements.
Six Months Ended June 30, 1997 and 1996
Net Revenue
Net revenue for the six months ended June 30, 1997 was $20.0 million, a
48.6% decrease from net revenue of $38.9 million for the six months ended June
30, 1996. This decrease was primarily due to lower unit volumes for the
Company's server products, aggressive competitive pricing actions taken by the
Company and customer concerns regarding the Company's financial viability and
financial condition. Export net revenue decreased 32% in absolute dollars to
$2.5 million for the six months ended June 30, 1997 from $3.7 million for the
six months ended June 30, 1996. As a percent of net revenue, export net
revenue increased to 12.5% of net revenue in the six months ended June 30, 1997
from 9.5% of net revenue in the six months ended June 30, 1996. The Company
reduced its international sales force during the six months ended June 30, 1997
and experienced shipment delays pending secured financing from certain
international customers. This may adversely impact the Company's future export
revenues. In the six months ended June 30, 1997, when compared to the
corresponding period of 1996, the Company experienced a higher rate of sales
returns. While the Company has recorded allowances for estimated sales returns
and uncollectible accounts, there can be no assurance that such estimates
regarding allowances will be adequate.
Gross Profit
Gross margins were 7.1% for the six months ended June 30, 1997 as compared
to 42.8% for the corresponding period in 1996. The decrease in gross margin was
primarily due to a lower level of net revenue, continued pricing competition
and increased provisions for excess and obsolete inventory related to the
Company's product transition.
41
<PAGE>
Research and Development
Research and development expense increased 6.8% to $8.1 million for the
six months ended June 30, 1997 from $7.5 million for the six months ended June
30, 1996. This increase in research and development expense was primarily due
to higher consulting and product prototype expenses incurred in connection with
the Company's introduction of the NF9000 product line.
Selling, General and Administrative
Selling, general and administrative expense increased 2.1% to $17.7
million for the six months ended June 30, 1997 from $17.4 million for the six
months ended June 30, 1996. Such expenses increased primarily as a result of
higher allowances for uncollectible accounts, as well as costs related to
reductions in force effected by the Company and associated with the disposal of
capital assets, offset primarily by lower commission expense related to lower
net revenue, and lower salaries and headcount related expenses. See Note 8 of
Notes to Condensed Consolidated Financial Statements.
Interest and Other Income, Net
Interest and other income, net, decreased for the six months ended June
30, 1997 compared to the corresponding period of 1996 due primarily to lower
interest income earned as a result of lower cash balances. In addition, the
Company incurred financing fees associated with an asset based revolving credit
facility the Company secured in March 1997.
Income Taxes
The Company recorded no provision for income taxes for the six months
ended June 30, 1997 and 1996. For the six months ended June 30, 1997 and 1996,
the Company recognized no tax benefit associated with the net operating losses
for such periods due to uncertainty regarding the Company's ability to generate
future taxable income. As a result of the consummation of the Offer, the
Company experienced a change in ownership which may limit its use of its net
operating losses in the future.
Business Factors
The Company has experienced significant reductions in net revenue during
the past six quarters as a result of its inability to respond to increased
demand for Microsoft Windows NT compliant servers and diminished demand for the
Company's older technology which primarily supported the Novell NetWare
platform. The Company also believes that its deteriorating financial
condition raised concerns among customers regarding the Company's financial
viability and financial condition which, in turn, further decreased demand for
its products. On June 8, 1997 the Board of Directors approved the Offer and
the Merger after considering, among other things, the Company's financial
condition and prospects. At its meeting, the Board determined that, in the
absence of the Merger, the funds to be received under the License Agreement and
other financial assistance to be made available to the Company by Micron, the
Company would likely be unable to continue to operate as a going concern. The
Company believes that its future results of operations and financial condition
will be dependent, among other things, on the level of financial and other
assistance provided by Micron to the Company and on the Company's ability to
leverage its relationship with Micron and its affiliates to increase sales and
reduce costs.
As a result of the Merger, the management of Micron and the Company will
evaluate whether, and the extent to which, integration, reconfiguration or
other modification of the Company's and Micron's separate businesses is
appropriate following the Merger. There can be no assurance that such
integration, reconfiguration or other modification, if any, will be
accomplished in a timely, efficient and effective manner. The failure to retain
key personnel as a result of the Offer and the Merger could have a material
adverse effect on employee morale and on the Company's business and operating
results. Furthermore, there can be no assurance that the anticipated benefits
associated with the Merger will be realized including but not limited to
increased purchasing power, manufacturing efficiencies, integration of
products, technology and operations, opportunities for broadened product
offerings and economies associated with the provision of certain administrative
support functions by Micron.
42
<PAGE>
The Company began customer shipments of the NF9000 in the fourth quarter
of 1996. While sales of the NF9000 product line are expected to represent a
majority of revenue in 1997, cumulative sales of the line of NF9000 products to
date have been limited due to the recent introduction of the NF9000 product
line, the Company's efforts to sell existing inventories of its line of NF8500
products, customer concerns regarding the Company's financial viability and
financial condition and the transition of the Company's value added resellers
("VARs") to selling the newer NF9000 product. Even though the Company is
optimistic about the prospects of its newly announced products, unless the
NF9000 products are sold in sufficient volume, including products developed and
released in 1997, the Company does not anticipate significant revenue growth or
a return to profitability.
The Company generally fills orders shortly after receipt from customers
and, therefore, backlog at the beginning of a fiscal period represents only a
small percentage of the product sales anticipated in that period. Further, a
substantial portion of the Company's net revenue in each quarter generally
results from orders received during the last few weeks of that quarter. The
absence of significant backlog and the concentration of sales at the end of the
quarter impairs the Company's ability to forecast and to control expense,
production and inventory levels. If anticipated shipments in any quarter do
not occur or are delayed, expenditure levels could be disproportionately high,
and the Company's operating results for that quarter would be materially
adversely affected.
The Company operates in a rapidly changing and highly competitive
marketplace and, as a result, believes it is critical to continue to increase
its investment in research and development activities in order to maintain its
competitive position. There can be no assurance that any research or
development efforts will be successfully completed or that future products will
be available on a timely basis or achieve market acceptance. In addition, any
delay in the introduction or shipment of new products by the Company or the
introduction or shipment of new products by the Company's competitors, could
have a materially adverse effect on the Company's operating results. In
addition, the Company's operating results may fluctuate as a result of a number
of other factors, including variation in the size and timing of individual
sales, the timing of introduction and the market acceptance of new and enhanced
versions of the Company's products, the mix of products sold, changes in
pricing policies by the Company, variation in the mix of sales by distribution
channel, mix in international and domestic sales, end users' capital spending
cycles, changes in pricing policies by the Company's competitors or its
suppliers and the availability and cost of key components.
The Company's primary means of distribution is currently through VARs,
system integrators and distributors. The Company currently intends, however,
to increase direct sales efforts and reduce reseller discounts. The Company's
business, financial condition or operating results could be adversely affected
if reduced reseller discounts or increased direct sales activity damages the
Company's relationships with its VARs or reduces VAR efforts to sell the
Company's products. The Company's business, financial condition or operating
results could also be adversely affected if the Company's increased direct
sales efforts are not successful or in the event that the generally weak
financial condition of its VARs and system integrators worsens to the point
that it affects their ability to sell or pay for the Company's products. The
Company recently segregated the number of VARs with which it does business
between those authorized to resell and support all of the Company's products
and those limited to the resale and support of the Company's products prior to
the NF9000. The Company is continuing its evaluation of its distribution
channels. Any changes could result in fluctuations in net revenue, gross
margins and/or operating expenses. The Company cannot at this time determine
the ultimate effect of these or other future distribution channel modification
efforts on the Company's future operating results. See Note 4 of Notes to
Consolidated Financial Statements.
In 1996 and the first half of 1997, the majority of the products sold by
the Company utilized operating systems provided by Novell and Microsoft. Any
problems in the use of these operating systems by end users could adversely
affect the Company's sales. The Company has a source code license and software
distribution agreement with Novell, which expires by its terms on October 24,
1997, pursuant to which the Company is entitled to resell IntraNetware. The
agreement also provides for Novell to share certain technical information with
the Company concerning IntraNetware, which has assisted the Company in the
development and marketing of its products. Novell has no obligation to
continue to provide similar information in the future, and if Novell were to
stop sharing technical information with the Company or were to favor
competitors, the Company's business could be materially adversely affected.
The Company's products include certain components that are currently
available only from single sources or limited sources. Any availability
limitations, interruptions in supplies or price increases relative to these
components could materially adversely affect the Company's business, financial
condition and operating results.
43
<PAGE>
Liquidity and Capital Resources
In 1996, the Company used $14.3 million of cash in operating activities
which consisted primarily of a net loss of $28.0 million, offset by $8.2
million in amortization and depreciation, a decrease in accounts receivable of
$2.4 million, an increase of $2.9 million in accounts payable and an increase
of $3.1 million in accrued liabilities. The Company used $13.7 million of
cash in operating activities in the six months ended June 30, 1997 which
consisted primarily of a net loss of $24.2 million and a decrease in accounts
payable of $3.3 million, offset in part by a decrease in accounts receivable of
$9.6 million and depreciation and amortization expense of $4.5 million.
The Company used cash of $3.8 million in 1996 and $493,000 in the six
months ended June 30, 1997 in investing activities for the purchase of capital
equipment for internal purposes. The Company currently plans purchases of
capital equipment of approximately $1.5 million for the remainder of 1997,
which will either be purchased or internally-developed equipment, and will be
used for research and development, demonstration purposes and test equipment.
Notwithstanding the Company's current plans, the Company's ability to purchase
capital equipment is currently restricted under the Merger Agreement. Actual
capital expenditures could also materially differ from those expressed in the
preceding forward-looking statement as a result of the Merger and are dependent
on many other factors, including, the level of financial and other assistance
received from Micron, changes in management, the ability of the Company to
achieve its planned revenues and collections to generate the cash necessary to
fund capital expenditures and the continued use of current capital assets
without the need of replacement due to obsolescence, destruction or technology
changes. The Company has no material commitments for the purchase of capital
equipment. See Notes 5 and 8 of Notes to Consolidated Financial Statements.
The Company generated cash of $588,000 in 1996 in financing activities
from the issuance of Common Stock and generated cash of $2.4 million in the
first six months of 1997, primarily from the proceeds of a note payable to
Micron.
At June 30, 1997, the Company had cash and cash equivalents of
approximately $2.2 million, of which $2.0 million represented amounts borrowed
from Micron under the Company's revolving credit facility, discussed below. In
March 1997, the Company obtained an asset based revolving credit facility with
the CIT Group/Business Credit, Inc., Los Angeles, CA, to finance eligible
accounts receivable and production inventory up to a maximum of $15.0 million,
subject to certain net worth and other financial covenants. On June 23, 1997,
this credit facility was assigned to Micron and, in connection with such
assignment, the maximum loan amount was changed to $3.5 million. As of July
[22], 1997, the Company has borrowed $3.5 million under the credit facility,
and Micron had no obligation to loan additional funds under the credit
facility. See "The Merger and Related Transactions--Related Transactions with
Micron" and Note 8 of Notes to Consolidated Financial Statements.
The Company has continued to experience significant operating and net
losses and declining cash balances in the first half of fiscal 1997. The
Company's net losses for the six months ended June 30, 1997 totaled
approximately $24.2 million, or $1.73 per Share, and the Company's working
capital declined from $20.2 million at December 31, 1996 to $1.3 million at
June 30, 1997. On June 8, 1997 the Board of Directors approved the Offer and
the Merger after considering, among other things, the Company's financial
condition and prospects. At its meeting, the Board determined that, in the
absence of the Merger, the funds to be received under the License Agreement and
other financial assistance to be made available to the Company by Micron, the
Company would likely be unable to continue to operate the Company as a going
concern. At such meeting, the Board approved the Offer, the Merger, the Merger
Agreement and the transactions contemplated thereby. The Company believes that
it its ability to continue to operate as a going concern is dependent on the
successful consummation of the Merger and continued financial assistance from
Micron. See Note 8 of Notes to Consolidated Financial Statements.
44
<PAGE>
INFORMATION CONCERNING THE COMPANY
The Company develops, manufactures, markets and supports a broad line of
high-availability, clustered network servers for local and wide area networks.
NetFRAME was one of the first companies to offer a high-availability open-
systems server and began shipping commercial volumes in December 1989.
NetFRAME servers are characterized by high availability, scalability and
adherence to industry standards. NetFRAME servers, combined with NetFRAME
value added software, provide a high degree of availability which minimizes
downtime resulting from hardware and software failures, system growth and
maintenance. NetFRAME servers are scalable, enabling customers to add network
connections as the number of users and applications on a local area network
grows. This protects customers' investments in their servers and related
products, while enabling them to respond to changing business conditions by
adding new users and new applications. The Company's servers are compatible
with industry standard network operating systems, including Novell's
IntraNetware and Microsoft's Windows NT.
NetFRAME currently has a worldwide installed base of over 5,500 servers.
NetFRAME sells its products through a number of integrators and VARs worldwide.
The Company was incorporated in Delaware on March 26, 1992 to succeed the
business of a California corporation named "NetFRAME Systems Incorporated" that
was incorporated in August 1987. In addition, NetFRAME International
Incorporated was incorporated in Delaware in 1995 to support international
sales offices and is a wholly owned subsidiary of the Company.
NetFRAME and the NetFRAME logo are registered trademarks, and MultiSpan,
MPSA, Live-Logic, Live-Drive and Maestro are trademarks of NetFRAME Systems
Incorporated. Other product names mentioned herein may be trademarks and/or
registered trademarks of their respective companies.
Products
NF9000 Product Family
NetFRAME's NF9000 servers, first introduced in October 1996, utilize
industry standard architecture employing the widely-used PCI bus, and comply
with the I\\2\\O intelligent I/O standard that the Company was highly
instrumental in establishing in the early part of 1996. The Company believes
that its NF9000 servers significantly broaden the range of customers who will
benefit from the traditional NetFRAME benefits of availability, scalability,
reliability, data security and performance, while requiring access to industry
standard peripherals. The Company continues to provide support for the
industry's leading PC-based networking operating systems. The Company no
longer actively markets or sells its NF8500 family of servers or earlier server
products.
The Company's server products support a variety of communications
standards, including Ethernet, Token Ring, FDDI, TCP/IP and SCSI-II. NetFRAME
servers currently interconnect DOS, Windows, Windows NT and Macintosh personal
computers, computers supplied by International Business Machines Corporation
("IBM") and IBM-compatible vendors. Additionally, NetFRAME servers
interconnect with workstations supplied by Sun Microsystems, Inc. and other
UNIX workstation vendors. NetFRAME servers are scalable to provide
expandability within a specific model and upgradeability between various
models. With the NF9000 product, customers can plug in additional Pentium Pro
processor modules and standard memory modules and can select from a wide range
of standard PCI cards and additional peripherals. These expansion
characteristics allow NetFRAME products to deliver sustained value over a long
period of time and provide organizations with the flexibility to easily and
cost effectively manage changing network computing needs. This strategy
protects a customer's server investment.
The NF9000 product line is based on Intel's Pentium Pro processor. It is
designed to maximize uptime, availability, scalability and manageability on a
cost-effective, PC-compatible platform running Microsoft NT and Novell
IntraNetware. The NF9016 can scale in place to support a four-way SMP
(symmetric multiprocessing) complex, up to sixteen intelligent PCI I/O cards,
2GB of memory and over a terabyte of on-line storage. In July 1997, the
Company
45
<PAGE>
introduced the NF9008 server, which features a quad-processor Pentium Pro
platform and eight individually hot pluggable PCI card slots, and designed for
remote office, application server and mid-size business environments.
The NF9000 product line features NetFRAME's unique triple-peer PCI bus
design. Using system architecture experience gained from NetFRAME's MPSA
design, the Company has created a high-throughput, scalable PCI-based server,
providing an aggregate I/O bus bandwidth of 400MB/sec. One of the keys to the
triple-peer PCI design is the isolation of slower speed system services from
performance-sensitive disk and network I/O traffic. Known as critical element
solution, NetFRAME dedicates one of the three PCI buses to basic system
services, such as BIOS, VGA controller, keyboard controller, mouse controller
and real-time clock. These elements are required to provide complete PC
compatibility but run at ISA bus speed, limiting the sustained throughput of
its PCI bus to 2MB/sec. Since other PC servers support only a dual-PCI bus
design, the bandwidth of one of the two buses is typically used for these
network services, leaving only a single PCI bus dedicated to performance-
critical network and disk I/O dedicated to high speed devices. As a result,
the NF9000 product line is able to offer two high-bandwidth PCI buses, or
266MB/sec, of truly usable I/O throughput - double that of a typical PC server.
At the same time, because the NF9000 product line design is based on standard
PCI buses, customers still benefit from the availability of a wide range of
off-the-shelf PCI interface cards.
In addition to offering a triple-peer PCI bus architecture, NetFRAME has
incorporated industry-standard intelligent I/O I\\2\\O technology. The NF9000
product line is based on a split driver I/O model that separates the host
operating system portion of the I/O driver from the portion that controls the
specific device. The I\\2\\O specification was designed to facilitate
intelligent I/O subsystems, with support for message-passing between multiple
independent processors. By relieving the host processor complex of interrupt
intensive I/O tasks required by the various layers of a driver architecture,
the NF9000's intelligent I/O architecture improves I/O performance.
NetFRAME also introduced new Fault Isolation Canister technology with the
NF9016. This enables users to 'hot plug' PCI buses and cards, without shutting
down the system. The NF9000 product line is one of the world's first platforms
to offer a hot pluggable PCI interface. In addition, the NF9000 product line
fully supports hot replaceable disk drives, power supplies and fans.
The NF9000 product line also incorporates NetFRAME's IntraPulse
technology, a fully self-contained distributed monitoring and diagnostic
system. Previously, self-monitoring subsystems have only been found on
mainframe and minicomputer systems. Unlike the basic SNMP (Simple Network
Management Protocol) system monitoring software that is available with some
Pentium Pro servers, IntraPulse has its own embedded processors, software,
internal network and power system. Where a system monitoring application that
runs on the host operating system will simply fail when that server begins to
experience problems or fails, IntraPulse will continue to operate and provide
the system administrator with critical system information, regardless of the
operational status of the server. This level of functionality is key for
enterprise-class server applications, where continuous availability and 24-hour
access are quickly becoming standard requirements.
The NF9016 contains nine dedicated IntraPulse processors, each responsible
for monitoring one of the system's primary subsystems. IntraPulse monitors the
NF9000's main processor board, the system interface, the backplane chassis
controller, the Fault Isolation Canister and the remote interface card.
Additionally, IntraPulse maintains a system recorder, which records all system
traffic in 128KB of NVRAM (Non-Volatile RAM) arranged as a circular queue.
With real-time date and time referencing, the system recorder enables system
administrators to re-construct system activity by accessing the log.
Atypical entry level configuration of the NF9000 product line comprises
one Pentium Pro host processor, one Ultra-Wide SCSI bus, one 10/100 Ethernet
interface, 64MB of ECC memory, 4.3GB of storage, CD-ROM, electronics and
storage power supplies, IntraPulse and NetFRAME's Maestro system management
software.
In December 1996, NetFRAME introduced the NF9000is, a bundled hardware and
software intranet solution based on the NF9000. Software included the SamePage
Groupware Suite from WebFlow Corporation, and the Build-IT visual application
assembly environment from Wallop Software, combined with the second generation
of NetFRAME's Ready, Intranet, Go! software, and pre-installed, pre-configured
versions of a number of leading intranet software applications, including the
Microsoft Windows NT Server, Microsoft Internet Information Server (IIS),
Microsoft
46
<PAGE>
FrontPage authoring and Web site management software, Adobe Acrobat and the
Excite search engine. The Company no longer actively markets or sells the
NF9000is.
Other Product Developments
In June 1996, NetFRAME introduced the ClusterStore 9000, a new mass
storage subsystem for NetFRAME servers. The rackmount storage subsystem
provides storage capacity of up to 378GB, while offering the continuous
availability and simplified management that NetFRAME users have come to expect.
Storage options were further enhanced with the introduction, in August 1996, of
the ClusterRAID 9000. This storage subsystem provides a RAID 5 hardware
implementation designed to offer industry-leading performance and reliability.
By increasing server storage capacity and reducing storage costs, NetFRAME
makes it easy for corporations to effectively manage increasing volumes of
network data.
In October 1996, the Company announced ClusterData, sophisticated
clustering software that supports a range of server and storage redundancy and
scalability options. ClusterData provides server failover among multiple
IntraNetware systems without the need for a hot standby system. ClusterData
uses Novell's industry-leading Netware Directory Services (NDS) to enable
IntraNetware users to build high-performance, highly reliable network serving
environments by clustering multiple servers on a network. There can be no
assurance that the Company will be able successfully to complete development
of, and introduce, this product.
Certain Product Risks
The Company derives substantially all of its net revenue from the sale of
its servers, related expansion products and software. These products are
expected to continue to account for substantially all of the Company's net
revenue. As a result, a reduction in demand for these products due to
increased competition or a general decline in the market for network servers
would have a material adverse effect on the Company.
Moreover, the market for network server products is new and developing.
Although the Company believes there has been market acceptance for PC based
file servers, a central feature of the Company's business strategy is to also
promote broad acceptance of PC based servers for enterprise wide client/server,
messaging and intranet applications. While the Company believes that its
servers offer significant advantages for application serving, there can be no
assurance that PC based servers will be widely adopted for this purpose. The
adoption of PC based servers for application serving by organizations,
particularly those which have historically relied upon minicomputers,
mainframes and specialized network communication devices for these needs,
generally requires the acceptance of a new data processing strategy, which
relies more heavily on the use of networks and distributed processing
technologies. Organizations that have already invested substantial resources
in other computer equipment and technologies may be particularly reluctant to
adopt a new data processing strategy that may make their existing equipment
obsolete. The adoption of the Company's servers for more advanced functions
will depend heavily on the development of enabling technologies by third
parties, primarily application software designed to operate on a server, and on
the availability, cost and performance of alternative technologies. It is
therefore difficult to predict with any assurance the future growth rate and
size of this market. There can be no assurance that the market for PC based
servers as application servers will develop, that necessary enabling
technologies will be developed by third parties or even that there will be
continued market acceptance of the Company's servers as file servers.
Technology
The Company has developed an architecture which fully supports industry
standard PCI bus and I\\2\\O, first introduced on the NF9000 platform. This
architecture, which is optimized for high throughput network computing,
combines the high levels of performance and reliability found in minicomputers
and mainframes with the compatibility and cost advantages of personal computers
and workstations.
Several features of NetFRAME's new architecture contribute to its
performance, availability, and manageability advantages:
47
<PAGE>
- Multiprocessor Enabling Software. The Company's value added software
allows industry standard network operating systems to run without modification
on NetFRAME servers. The software enables NetFRAME's multiprocessor based
hardware to interface with IntraNetware and Windows NT Server operating system
software.
- System Availability. Features such as ECC memory, parity checking on all
data paths and automatic processor restart reduce downtime due to component
failure and transient errors. NetFRAME's unique hot-pluggable PCI technology
allows customers to swap key system components without affecting system
operation and impacting users. System availability is further enhanced through
IntraPulse, a self diagnosis system that monitors all primary subsystems.
Where a system monitoring application that runs on the host operating system
will simply quit when that server begins to experience problems or fails,
IntraPulse will continue to operate and provide the system administrator with
critical system information, regardless of the operational status of the
server.
- Scalability. NetFRAME servers can be upgraded with additional
processors, memory, adapters, disk storage and peripherals. This is key in
enabling customers to protect their investment in their systems by making
additional resources available as new users or more demanding applications are
added. Adherence to the PCI bus standard provides customers with a broad range
of options from multiple suppliers.
- Industry Standard Microcomputer Components and Software. NetFRAME
servers use industry standard microprocessor components (such as Intel Pentium
Pro processors) and operate with standard network operating system and
application software. This approach offers the combined advantages of an
advanced architecture and lower cost commodity components and software.
- Manageability and Ease of Maintenance. The NetFRAME server architecture
provides a structured method of internal communications between various
hardware and software elements in the system. This approach has allowed
NetFRAME to develop highly functional software that improves the manageability
and ease of maintenance of the system through error tracking, error reporting
and hardware and software control independent of the operating system. The
Company's Maestro Cluster Management Software allows system administrators to
dynamically manage and configure all resources in a ClusterServer. Maestro
enables customers to reconfigure the system, make changes to the operating
system and add users and storage, without interrupting network users.
- Clustering. ClusterData provides server failover among multiple systems
without the need for a hot standby system. Unlike many current fault-tolerant
technologies, where a second system simply waits in standby mode, ClusterData
enables each system to act both as the primary server for its own users and as
a backup server. This approach maximizes the customer's investment in
computing resources, as each server in the cluster is responsible for a set of
users and workload, while transparently providing backup for other servers in
the cluster.
Sales and Distribution
The Company's products are sold through the Company's direct sales force
and through VARs around the world. These VARs provide sales, service, support
and integration functions on behalf of the Company. The Company currently
intends to increase direct sales efforts and reduce reseller discounts. The
Company's business, financial condition or operating results could be adversely
affected if reduced reseller discounts or increased direct sales damages the
Company's relationships with its VARs or reduces VAR efforts to sell the
Company's products.
NetFRAME's indirect channel strategy has been to develop a world-class VAR
channel, capable of ensuring excellent customer satisfaction with NetFRAME
network servers, in business-critical networking environments. The Company's
objective is to continue to partner with a limited number of highly qualified
network and systems integrators capable of integrating and supporting NetFRAME
systems. In 1996, the Company developed the NetFRAME Systems Provider (NSP)
Program which includes NetFRAME's best channel partners. The NSPs are the
principal sales, service, and support channel for NetFRAME systems. The NSPs
have demonstrated a commitment to ongoing investment in the infrastructure
needed to sell and support NetFRAME installations, through strong sales and
technical proficiency throughout the NetFRAME product line. NSPs are well
versed in NetFRAME's architectural direction and can develop and present
complex network solutions to corporate customers. NSPs have core sales and
pre-sales technical capabilities in NetFRAME systems. In support of its NSPs,
as of June 30, 1997, NetFRAME maintained a field organization of over 25 sales
managers and 11 pre-sales systems engineers worldwide. International resellers
provide spare parts, service and support for the entire NetFRAME product line.
See Note 4 of Notes to Consolidated Financial Statements.
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<PAGE>
In 1996, 1995 and 1994, and for the six months ended June 30, 1997, the
Company's export revenue represented 9%, 15%, 16% and 12.5%, respectively, of
the Company's net revenue. The Company reduced its international sales force
during the six months ended June 30, 1997 and experienced shipment delays
pending secured financing from certain international customers. This may
adversely impact the Company's ability to increase or maintain international
revenues. Export revenue is subject to the risks associated with
international operations, including currency exchange fluctuations, tariff
regulations and requirements for export licenses, particularly with respect to
the export of certain technology, which licenses may on occasion be delayed or
difficult to obtain.
The Company's agreements with its NSPs and VARs (collectively the
"Resellers") do not provide for any right of unsold product returns without
prior approval. However, from time to time, the Company may accept the return
of unsold products from a particular Reseller in order to preserve its
relationship with the Reseller. In connection with the introduction by the
Company of the new NF9000 product line, the Company has recently experienced a
higher level of requests for returns of the NF8500 products. The Company's
agreements with its Resellers also do not require them to offer the Company's
products exclusively and may be terminated without cause. No assurance can be
given that any Reseller will continue to offer the Company's products. In
addition, many of the Company's Resellers are privately owned firms and some
are not well capitalized. The Company is dependent on the viability and
financial stability of its Resellers, which are in turn substantially dependent
upon the growth of the personal computer and networking industries. The
Company could be adversely affected if significant numbers of such Resellers
stopped distributing the Company's products, requested returns of NF8500
products, or chose to emphasize the products of the Company's competitors.
While the Company has recorded and continues to record allowances for estimated
sales returns, there can be no assurance that such allowances will be adequate.
Customer Service and Support
The Company believes that customer service and support is an important
competitive factor in the computer networking market. In May 1997, the Company
sold its spare parts inventory and assigned technical support contracts for
NF100/300, NF200/400, NF250/450 and NF8400/8500 servers in the United States to
DecisionOne Corporation. This provided the Company with the opportunity to
team with a national service provider in order to improve customer service and
the cost efficiency of service delivery.
Currently, the Company provides service and spare parts options through
DecisionOne Corporation and a combination of VARs, international resellers and
its own support organization. In 1996, the Company introduced the NetFRAME
Methodology for Accountability through Partnership (NMAP), a structured program
for providing the highest levels of customer support primarily through the
reseller channel. The Company will no longer accept NMAP orders but will honor
existing NMAP agreements.
NetFRAME generally warrants its products to be free of defects in
materials and workmanship for a period of one year. The Company currently
intends, however, to extend its product warranty to three years.
49
<PAGE>
Competition
The Company faces substantial competition from the manufacturers of
several different product types. Manufacturers of personal computers and
workstations promote the high-end of their product lines as network servers.
Established companies in this market include Compaq Computer Corporation, Data
General Corporation, Dell Computers Incorporated, IBM, Sun Microsystems, Inc.
and other manufacturers of personal computers and workstations. Manufacturers
such as Digital Equipment Corporation, Hewlett-Packard Company, IBM, and
Sequent promote some of their minicomputers and mainframes as being appropriate
for use as network servers. The Company anticipates greater competition from
Advanced Logic Research, which was recently acquired by Gateway 2000 Inc. As
the Company promotes the adoption of its ClusterServers for more advanced
functions, the Company may also experience greater competition from both
minicomputer and mainframe manufacturers and manufacturers of specialized
network communication devices than it has in the past. In addition,
manufacturers of personal computers, workstations, minicomputers or mainframes
could develop and introduce server products similar to those of the Company.
Most of the Company's current and potential competitors have substantially
greater name recognition, more financial, technical, and marketing resources,
and a much larger installed base than the Company. There can be no assurance
that the Company will have the financial resources, technical expertise, or
marketing, distribution and support capabilities to compete successfully in the
future. Competitive pressures have reduced the average selling price of some
of the Company's products in each of the last three years. With the
introduction of the NF9000 product line, which incorporates more industry
standard components, the Company expects to continue to face competitive
pricing pressures relative to such components which are available from a number
of established manufacturers. In addition, the Company is continuing to lower
the end-user list price of certain of the components the Company sells. The
Company has made these changes to its price list as part of an on-going pricing
strategy intended to increase demand for the Company's products and increase
its market share. Further competitive pressures could reduce market acceptance
of the Company's products and result in additional price reductions and
increases in expenses that could adversely affect the Company's business,
operating results or financial condition.
The principal competitive factors in the market for the Company's products
include compatibility with industry standards, compatibility with other
vendors' networking products, high availability, price/performance,
reliability, ease of use, scalability and technical support. In 1996 and the
first half of 1997, the Company encountered increased competition with respect
to each of these factors. In order to meet the challenges of technological
change and respond to its competitors' innovations, the Company must continue
to promptly and cost-effectively introduce new products and enhance existing
products. There can be no assurance that the Company will be able to
successfully introduce new products or enhance its existing products.
Manufacturing
NetFRAME performs final assembly and testing of its products in its
facility in Milpitas, California. NetFRAME utilizes subcontractors, including
Micron Custom Manufacturing Services, Inc., a wholly-owned subsidiary of Micron
("CMS"), for all major subassembly manufacturing, including all printed circuit
board assemblies. NetFRAME has a comprehensive testing and qualification
program to ensure that all subassemblies meet the Company's specification
standards before going into final assembly and testing. The Company performs
functional testing of all major subassemblies and tests all systems on
operational networks in high temperature (40-C(Degree)) burn-in ovens for 48
hours. The Company may continue existing or enter into additional commercial
relationships with Micron and CMS.
Certain components used in the Company's products, including
microprocessors, particularly Intel's Pentium Pro, certain other integrated
circuits and power modules, are presently available from single sources, and
certain other components are available from limited sources. In addition,
certain of the Company's subassemblies are manufactured by a single third party
vendor and the Company plans to further subcontract and outsource its major
subassemblies. The inability to develop alternative sources for sole or
limited source components or to obtain sufficient components, or the loss of a
key subassembly manufacturer, could result in delays or reductions in product
shipments which would adversely affect the Company's operating results.
In 1995, NetFRAME received ISO 9002 certification for its Milpitas
manufacturing facility. ISO 9002 is a universally accepted set of standards
that define quality assurance levels and provide quality management guidance
for manufacturing. Certification is granted after extensive reviews of a
company's quality infrastructure by third party auditors.
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<PAGE>
Research and Development
The Company invests considerable resources in research and development.
In 1996, 1995, 1994 and the six month period ended June 30, 1997, research and
development expenses were $16.3 million, $12.4 million $11.2 million and $8.1
million, respectively. These are net of capitalized software development
costs. All of the Company's research and development costs related to hardware
are expensed as incurred. Software development costs are recorded in
accordance with FAS 86. Approximately $170,000, $830,000 and $1.0 million
relating to capitalized software remained in Other Assets as of December 31,
1996, 1995 and 1994, respectively. None of such costs remained in Other Assets
as of June 30, 1997. See Note 2 of Notes to Consolidated Financial Statements.
The Company believes that technical leadership is essential to its success and
expects that it will continue to spend substantial funds on research and
development.
The market for the Company's products is characterized by rapidly changing
technology and user needs that require significant expenditures for timely
product development. The Company believes that its future success will depend
upon its ability to develop, manufacture and market products that meet changing
user needs, maintain technological leadership, and successfully anticipate or
respond to technological changes in hardware and software standards on a cost-
effective and timely basis. There can be no assurance that any research and
development efforts will be successfully completed or that future products will
be available on a timely basis or achieve market acceptance. In addition, the
Company is dependent on the development by third parties of enabling
technologies, such as client/server, database and communication software. The
Company's failure to develop the modifications necessary to allow its servers
to run future versions of industry standard operating systems or to develop new
products or technological improvements, the unavailability of third party
enabling technology or the Company's inability to adopt emerging industry
standards would have a material adverse effect on the Company's business.
Proprietary Rights
The Company regards its servers as proprietary and relies primarily on a
combination of copyright, trademark, trade secret laws, employee and third
party nondisclosure agreements, and other intellectual property protection
methods to protect its products and technology. The Company has approximately
12 provisional patent applications pending but does not hold any patents.
While the Company's ability to compete is affected by its ability to protect
its proprietary information, the Company is of the opinion that, in view of the
rapid pace of technological change in the industry, the combination of
technical experience and innovative skills of its engineers is as important to
its business as the legal protection of its proprietary information. However,
the failure of the Company to effectively protect its trade secrets and other
proprietary information, including the absence of issued patents, could have an
adverse affect on the Company's business. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States.
The Company licenses certain network operating system and application
software from third party developers for sublicense by NetFRAME with its
systems. The Company also licenses certain software programs from third party
developers and incorporates them in the Company's software products.
Generally, such agreements grant to the Company non-exclusive, worldwide
licenses with respect to the subject programs. While it may be necessary or
desirable in the future to obtain licenses relating to sublicensed application
software and incorporated technology from other parties, the Company believes
that it could obtain this technology or similar technology on commercially
reasonable terms from a number of licensors. However, there can be no
assurance that the Company will be able to obtain this technology or similar
technology on commercially reasonable terms. Also, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products or that any such
assertions may not require the Company to enter into royalty arrangements or
result in costly litigation.
The Company has granted to Micron and its affiliates, pursuant to the
License Agreement entered into concurrently with the Merger Agreement, a
nonexclusive license to all of the Company's technology associated with the
Company's NF9000 product line and any other Company products under development
on the effective date of the License Agreement.
51
<PAGE>
Employees
As of June 28, 1997, the Company employed 189 individuals, of whom 45 were
employed in research and development, 87 in sales and marketing, 27 in
manufacturing and 30 in administration and finance. The Company believes that
its future success will depend, in part, on its ability to attract and retain
highly skilled technical, marketing and management personnel. This is
particularly important in the areas of product design and development, where
competition for skilled personnel, particularly in the computer and networking
industry is intense. To the extent that the Company is unable to attract and
retain skilled employees as needed, the Company's business, financial condition
and operating results could be materially adversely affected. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
Properties
The Company's principal administrative, product development, manufacturing
and marketing facilities are located in a 85,000 square foot facility in
Milpitas, California. The facility is leased under a lease agreement which
expires in September 2002. The Company leases additional sales support offices
throughout the United States in major metropolitan areas. The Company also
leases sales support offices internationally in the metropolitan areas of
Beijing, Sydney and Toronto. These offices are leased for various terms
ranging from monthly to two-year terms. The Company believes that its existing
facilities should be adequate for its needs in the foreseeable future. See
Notes 5 and 8 of Notes to Consolidated Financial Statements.
Legal Proceedings
On June 6, 1996, the Company was named as a defendant in a case brought by
one of its value added resellers, Data Systems Network Corp. (DSN). The
complaint alleges that NetFRAME breached its spare parts agreement as well as
other agreements, interfered with DSN's business and committed fraud through
misrepresentation relative to such agreements. The complaint requests an
unspecified amount in damages, costs, interest and attorneys' fees. In
addition, the Company has filed a counterclaim against DSN for payment of
certain overdue receivables. The Company believes that it has meritorious
defenses and intends to vigorously defend itself.
On April 22, 1997, the Company was named as a defendant in an action filed
in the Circuit Court for Cook County, Illinois in connection with an alleged
agreement whereby Network Reliability Corp. was to have provided certain
marketing and sales services on behalf of the Company. The complaint, which
was later removed to the United States District Court for the Northern District
of Illinois, alleges two causes of action, breach of contract and deceptive
trade practices, arising out of the Company's alleged agreement to pay the
plaintiff a commission on certain orders which the plaintiff would allegedly
help obtain for the Company. The complaint requests $300,000 in actual damages
and additional damages of $1,000,000. There has not been any discovery or
motion practice in the case. The Company believes that it has meritorious
defenses and intends to vigorously defend itself.
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these
matters, including DSN and Network Reliability Corp., will not have a material
adverse effect on its financial position, results of operations or cash flows.
52
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INFORMATION CONCERNING PURCHASER,
MICRON AND MTI
Purchaser. Purchaser is a newly incorporated Delaware corporation
organized in connection with the Offer and the Merger and has not carried on
any activities other than in connection with the Offer and the Merger. The
principal offices of Purchaser are located at 900 E. Karcher Road, Nampa,
Idaho 83687, and its telephone number at such location is (208) 893-3434.
Purchaser is a direct wholly owned subsidiary of Micron.
Until immediately prior to the time that Purchaser purchased Shares
pursuant to the Offer, Purchaser did not have any significant assets or
liabilities or engage in activities other than those incident to its formation
and capitalization and the transactions contemplated by the Offer and the
Merger. As part of purchasing the Shares, Micron provided Purchaser sufficient
funds to accomplish the Offer. Because Purchaser is newly formed and has
minimal assets and capitalization, no meaningful financial information
regarding Purchaser is available.
Micron. Micron is a Minnesota corporation, with its principal office at
900 E. Karcher Road, Nampa, Idaho 83687 and its telephone number at such
location is (208) 898-3434. Micron's common stock is traded on the Nasdaq
Stock Market under the symbol "MUEI." Micron is a provider of PC systems
through the direct sales channel worldwide. Micron's PC operations develop,
market, manufacture, sell and support a range of memory-intensive, high
performance desktop and notebook PC systems and network servers under the
Micron brand name for consumer, business, government and educational use. In
addition to its PC operations, Micron has contract manufacturing and component
recovery operations. Micron's wholly owned subsidiary, CMS, is a custom
contract manufacturer specializing in the assembly of complex custom printed
circuit boards, memory modules and system level products. SpecTek, a division
of Micron, processes and markets various grades of DRAM products.
MTI. MTI is a Delaware corporation, with its principal office at 8000 S.
Federal Way, P.O. Box 6, Boise, Idaho 83707 and its telephone number at such
location is (208) 368-4000. Micron is majority owned by MTI. As of May 31,
1997, MTI owned approximately 64% of the outstanding common stock of Micron.
MTI and its subsidiaries, including Micron, manufacture and market DRAMs, other
semiconductor components, personal computers, remote intelligence
communications (RIC) products and printed circuit assemblies.
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SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND
PRINCIPAL HOLDERS OF THE COMPANY'S SHARES
The following table sets forth as of the Record Date the beneficial
ownership of the Shares of the Company for the following individuals: (i) each
person or entity who is known by the Company to be the beneficial owner of more
than five (5) percent of the Shares; (ii) each of the Company's directors;
(iii) the Company's Chief Executive Officer and each of the Company's four
other highest paid officers, determined as of the 1996 fiscal year of the
Company (the "Named Officers"); and (iv) all current directors and executive
officers as a group.
<TABLE>
<CAPTION>
Shares Percent
Beneficially Beneficially
Name Owned(#)(1) Owned
- ---- ------------ ------------
<S> <C> <C>
Principal Stockholders
Micron Electronics, Inc./Payette Acquisition Corporation................... 8,775,554 62.8%
900 E. Karcher Road
Nampa, Idaho 83687
Directors
Edward R. Kozel(2)(10)..................................................... 10,000 *
Robert L. Puette(3)(10).................................................... 227,417 1.6%
Gordon E. Eubanks(4)(10)................................................... 40,000 *
Named Officers
Marty DiPietro(5)(10)...................................................... -- *
Steven Huey(6)(10)......................................................... 32,500 *
Terry Hartsfield(7)(10).................................................... 40,250 *
Bulent Erbilgin(8)(10)..................................................... 25,646 *
All directors and executive officers as a group(9)(10) (8 persons)......... 459,904 3.3%
</TABLE>
----------------------
* Less than 1%.
(1) The number and percentage of Shares beneficially owned is calculated under
the rules of the Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Such calculation
is required by Rule 13d-3 under the Exchange Act. Under this rule,
beneficial ownership includes any Shares as to which the individual has
sole or shares voting power or investment power and also any Shares which
the individual has the right to acquire within 60 days of July [21], 1997
through the exercise of any stock option or other right. Unless otherwise
indicated in the footnotes, each person has sole voting and investment
power (or shares such power with his or her spouse) with respect to the
Shares shown as beneficially owned.
(2) Includes 10,000 Shares purchasable under stock options that are exercisable
within 60 days of July [21], 1997, subject to earlier termination upon
consummation of the Merger.
(3) Includes 227,417 Shares purchasable under stock options that are
exercisable within 60 days of July [21], 1997, subject to earlier
termination upon consummation of the Merger.
(4) Includes 40,000 Shares purchasable under stock options that are exercisable
within 60 days of July [21], 1997, subject to earlier termination upon
consummation of the Merger.
(5) Mr. DiPietro resigned as Vice President, Operations in April 1997.
(6) Includes 32,500 Shares purchasable under stock options that are exercisable
within 60 days of July [21], 1997, subject to earlier termination upon
consummation of the Merger.
(7) Includes 40,270 Shares purchasable under stock options that are exercisable
within 60 days of July [21], 1997. Mr. Hartsfield resigned as Vice
President of Customer Satisfaction effective July 11, 1997 and his options
will expire on August 10, 1997 unless exercised prior to such time.
(8) Includes 25,646 Shares purchasable under stock options that are exercisable
within 60 days of July [21], 1997, subject to earlier termination upon
consummation of the Merger.
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<PAGE>
(9) Includes 458,884 Shares purchasable under stock options that are
exercisable within 60 days of July [21], 1997, subject to earlier
termination upon consummation of the Merger, of which 30,625 Shares are
purchasable within 60 days of July [21], 1997 under stock options held by
Dan McCammon, Chief Financial Officer of the Company. Mr. McCammon is
subject to an employment agreement with the Company which provides, among
other things, that, vesting under his stock options are to be accelerated
with respect to one-half of the unvested shares in the event that Mr.
McCammon is involuntarily terminated without good cause or is
constructively terminated within twelve months following a change in
control. Mr. McCammon has not waived his rights to acceleration which may
occur in connection with the change of control effected as a result of the
consummation of the Offer. This potential acceleration of vesting is not
reflected herein.
(10) Upon consummation of the Merger all options shall become fully vested and
exercisable. At such time, all options shall terminate and the holders
thereof shall be entitled to an amount of cash equal to the excess, if
any, of $1.00 over the exercise price per share of the options. As of July
18, 1997, Ms. Vivian Golub, Vice President of Human Resources, held an
option to purchase 250 shares at an exercise price of $.60 per share. No
other officer of the Company currently holds options exercisable at less
than $1.00 per share.
Pursuant to the consummation of the Offer on July 18, 1997, Purchaser has
acquired a majority of the Shares of the Company, and, accordingly, a change in
control of the Company has been effected as a result. See "The Merger and
Related Transactions--Consummation of the Offer; Change in Control."
55
<PAGE>
AVAILABLE INFORMATION
The Company and Micron are each subject to the informational requirements
of the Exchange Act, and, in accordance therewith, file reports and other
information with the Commission. The Proxy Statement, the annexes, exhibits
and schedules forming a part thereof and the reports and other information
filed by the Company and Micron with the Commission in accordance with the
Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
may also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition,
certain of the documents filed by the Company and Micron with the Commission
are available through the Commission's Electronic Data Gathering and Retrieval
System ("EDGAR") at http://www.sec.gov. The Common Stock of the Company and
the common stock of Micron are listed on The Nasdaq Stock Market and reports or
other information concerning the Company and Micron may be inspected at the
offices of the National Association of Securities Dealers, Inc. located at 9513
Key West Avenue, Rockville, Maryland 20850. After the consummation of the
Merger, the Company will no longer file reports, proxy statements or other
information with the Commission or The Nasdaq Stock Market.
Statements made in this Proxy Statement concerning the contents of any
contract or other document are not necessarily complete. With respect to each
contract or other document filed as an annex to the Proxy Statement, reference
is hereby made to that annex for a more complete description of the matter
involved and each such statement is hereby qualified in its entirety by such
reference.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31,
1996, included in this Proxy Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph with respect to the substantial doubt as to the Company's
ability to continue as a going concern) appearing elsewhere herein.
FUTURE STOCKHOLDER PROPOSALS
To be brought before an annual meeting of the Company, stockholder
proposals must be timely received at the executive offices of the Company, and
must meet the other requirements of the rules of the SEC relating to
stockholders' proposals and of the Company's Bylaws. In the event the Merger
is not consummated and the Company holds a 1997 Annual Meeting, the Company
will so notify its stockholders of such meeting, including the date by which
stockholder proposals must be received at the Company's executive offices in
order to be considered for inclusion in the proxy materials related to such
meeting. Such date will be set in a reasonable amount of time before
solicitation of any such proxies is made.
AUDITOR'S REPRESENTATIVES
It is expected that representatives of Ernst & Young LLP, the Company's
independent auditors, will be present at the Special Meeting where they will
have an opportunity to respond to appropriate questions of the Company's
stockholders and to make a statement if they so desire.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF NETFRAME SYSTEMS INCORPORATED
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... F-3
Consolidated Statements of Operations for each of the three fiscal
years in the period ended December 31, 1996......................... F-4
Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended December 31, 1996......................... F-5
Consolidated Statement of Stockholders' Equity for each
of the three fiscal years in the period ended December 31, 1996..... F-6
Notes to the Consolidated Financial Statements........................ F-7
Unaudited Condensed Consolidated Balance Sheet as of June 30, 1997.... F-17
Unaudited Condensed Consolidated Statements of Operations for the
six month periods ended June 30, 1997 and 1996...................... F-18
Unaudited Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1997 and 1996..................... F-19
Notes to Unaudited Condensed Consolidated Financial Statements........ F-20
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The NetFRAME Board and Stockholders
NetFRAME Systems Incorporated
We have audited the accompanying consolidated balance sheets of NetFRAME
Systems Incorporated as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NetFRAME Systems Incorporated at December 31, 1996 and 1995, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 of Notes to Consolidated Financial Statements, the
Company's recurring net losses and negative cash flow raise substantial doubt
about its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 1 of Notes to Consolidated Financial
Statements. The 1996 consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ERNST & YOUNG LLP
San Jose, California
January 23, 1997
F-2
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,011 $ 18,340
Short-term investments -- 13,304
Accounts receivable, net of
allowance for doubtful accounts
of $2,168 and $1,638 in 1996
and 1995, respectively 14,203 16,623
Inventories 9,741 10,680
Other current assets 782 1,244
-------- --------
Total current assets 38,737 60,191
Property and equipment, net 9,930 9,823
Other assets, net 1,642 1,684
-------- --------
Total assets $ 50,309 $ 71,698
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,236 $ 6,374
Accrued compensation and benefits 4,461 2,866
Accrued warranty 1,721 1,003
Deferred revenue 2,037 1,532
Other accrued liabilities 1,056 729
-------- --------
Total current liabilities 18,511 12,504
Commitments and contingencies
Stockholders' equity:
Preferred stock, 2,000,000 shares
($.001 par value) authorized,
none issued and outstanding
Common stock, 20,000,000 shares
($.001 par value) authorized,
13,835,000 and 13,602,000
issued and outstanding in
1996 and 1995, respectively 14 14
Additional paid-in capital 73,156 72,568
Accumulated deficit (41,372) (13,388)
-------- --------
Total stockholders' equity 31,798 59,194
-------- --------
Total liabilities and
stockholders' equity $ 50,309 $ 71,698
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net revenue $ 74,349 $76,434 $89,135
Cost of revenue 50,489 39,545 42,216
-------- ------- -------
Gross profit 23,860 36,889 46,919
Operating expenses:
Research and development 16,294 12,368 11,206
Selling, general and administrative 36,600 32,306 30,725
-------- ------- -------
Total operating expenses 52,894 44,674 41,931
-------- ------- -------
Operating income (loss) (29,034) (7,785) 4,988
Interest and other income 1,215 1,753 1,319
Interest and other expense (165) (2,297) (168)
-------- ------- -------
Income (loss) before income taxes (27,984) (8,329) 6,139
Provision (benefit) for income taxes -- (277) 394
-------- ------- -------
Net income (loss) $(27,984) $(8,052) $ 5,745
======== ======= =======
Net income (loss) per share $ (2.04) $ (0.60) $ 0.42
Number of shares used in computing per 13,729 13,498 13,630
share amounts
</TABLE>
See accompanying notes.
F-4
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash flows (in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM (REQUIRED FOR)
OPERATING ACTIVITIES:
Net income (loss) $(27,984) $ (8,052) $ 5,745
Items not requiring the current use of
cash:
Stock compensation expense - 66 151
Loss on disposal of capital assets 77 1,827 -
Deferred taxes - 1,367 (720)
Depreciation and amortization 8,249 5,512 4,336
Changes in items affecting operations:
Accounts receivable 2,420 8,235 (6,892)
Inventories (3,547) (3,159) (3,368)
Other current assets 462 (591) (123)
Accounts payable 2,862 1,281 707
Accrued liabilities 3,145 1,748 (1,406)
-------- --------- --------
Cash generated from (required for)
operating activities (14,316) 8,234 (1,570)
-------- --------- --------
CASH FLOWS FROM (REQUIRED FOR)
INVESTING ACTIVITIES:
Acquisitions of property and equipment (3,805) (6,109) (5,128)
Other assets (100) (1,044) (716)
Purchase of available-for-sale
securities (35,500) (149,800) (35,100)
Sale of available-for-sale securities 48,804 148,300 26,100
Purchase of held-to-maturity securities - (6,241) (24,501)
Maturity of held-to-maturity securities - 15,600 28,123
-------- --------- --------
Cash generated from (required for)
investing activities 9,399 706 (11,222)
-------- --------- --------
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Proceeds from short-term borrowings - - 1,048
Repayment of short-term borrowings - (1,048) -
Payments on capital lease obligations - (70) (285)
Payments on stockholders' notes
receivable - (14) 1
Issuance of common stock 588 784 1,125
-------- --------- --------
Cash generated from (required for)
financing activities 588 (348) 1,889
-------- --------- --------
Net increase (decrease) in cash and
cash equivalents (4,329) 8,592 (10,903)
Cash and cash equivalents at the
beginning of the period 18,340 9,748 20,651
-------- --------- --------
Cash and cash equivalents at the end of
the period $ 14,011 $ 18,340 $ 9,748
======== ========= ========
SUPPLEMENTAL DISCLOSURES:
Other noncash charges:
Capitalization of assets through
inventory transfers 2,124 2,029 2,799
Reclassification of inventory to
other assets 2,362 - -
Cash paid during the period for:
Interest - 4 135
Income taxes 25 76 1,771
</TABLE>
See accompanying notes.
F-5
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Additional Stockholders' Deferred Total
Stock Paid-In Accumulated Notes Stock Stockholders'
Shares Amount Capital Deficit Receivable Compensation Equity
------ ------ ---------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 13,609 $13 $70,575 $(11,081) $(15) $(133) $ 59,359
Stock compensation expense related to
vesting of options - - 84 - - - 84
Amortization of deferred stock
compensation - - - - - 67 67
Payments, interest, and forgiveness on
notes receivable from stockholders - - - - 1 - 1
Issuance of common stock under stock
plans 326 - 1,125 - - - 1,125
Net income - - - 5,745 - - 5,745
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 13,395 13 71,784 (5,336) (14) (66) 66,381
Amortization of deferred stock
compensation - - - - - 66 66
Payments, interest, and forgiveness on
notes receivable from stockholders - - - - 14 - 14
Issuance of common stock under stock
plans 207 1 784 - - - 785
Net loss - - - (8,052) - - (8,052)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 13,602 14 72,568 (13,388) - - 59,194
Issuance of common stock under stock
plans 233 - 588 - - - 588
Net loss - - - (27,984) - - (27,984)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 13,835 $14 $73,156 $(41,372) $ - $ - $ 31,798
========================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of NetFRAME Systems Incorporated
(the Company) for the year ended December 28, 1996, have been prepared on a
going concern basis. The Company has approximately $14.0 million of cash and
cash equivalents at December 31, 1996, and has recently entered into an asset
based revolving credit facility (see Note 8) to provide additional capital.
However, the fiscal 1996 net loss of $28.0 million and the resulting $14.3
million of cash used in fiscal 1996 to fund operations coupled with the
continuing competitive industry conditions indicates that management must take
certain actions to continue operations with existing capital resources. These
actions include: timely introduction of products currently under development;
expanding distribution channels to increase revenue; and outsourcing certain
business operations and further streamlining the Company's infrastructure to
reduce product and operating costs. Specifically, the Company is negotiating
with third party distributors and resellers with substantially greater
resources to market, support and distribute its products. In addition, the
Company is negotiating to consolidate certain corporate facilities and has
taken measures to reduce its workforce. In the event the Company is unable to
generate sufficient cash from operations or obtain necessary financing from
other sources, management will be required to sharply curtail certain of its
existing business operations. (See Note 8).
2. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Consolidation
The Company develops, manufactures, markets and supports a broad line of
high availability, clustered network servers for local and wide area networks.
These network servers are distributed worldwide primarily through value added
resellers (VARs) and systems integrators.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, NetFRAME International
Incorporated and NetFRAME Foreign Sales Corporation. All significant
intercompany accounts and transactions have been eliminated.
Reclassification
Certain reclassifications have been made to prior year amounts to conform
with the 1996 presentation.
Fiscal Year
The Company maintains a fifty-two/fifty-three week fiscal year cycle.
Fiscal years 1996, 1995 and 1994 ended on December 28, 1996, December 30, 1995,
and December 31, 1994, respectively. For convenience, the accompanying
consolidated financial statements have been titled as ending on the last day of
the calendar period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Cash Equivalents
The Company considers all highly liquid investments with minimum yield risks
and maturities of less than 90 days at time of purchase to be cash equivalents.
F-7
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments
The Company invests its excess cash in available-for-sale high quality
debt and equity instruments. Available-for-sale securities are stated at fair
market value, with unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in
interest income.
On November 15, 1995, the FASB staff issued a special report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that Special Report,
the Company chose to reclassify securities from held to maturity to available-
for-sale. At the date of the transfer the amortized cost of those securities
was $18,624,000 and the unrealized loss (gain) was $4,000, which is included in
shareholders' equity (income).
Inventories
Inventories are stated at the lower of standard cost (which approximates
first in, first out) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Raw materials $2,729 $ 1,954
Work in process 2,673 2,411
Finished goods 4,339 6,315
------ -------
$9,741 $10,680
====== =======
</TABLE>
Capitalization of Software Development Costs
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost
of Computer Software to Be Sold, Leased, or Otherwise Marketed". At December
31, 1996 and 1995, $171,000 and $828,000, respectively, of capitalized software
development costs, net of accumulated amortization, are included in other
assets. Amortization expense related to capitalized software development
costs, which was included in cost of revenue, was $808,000 and $644,000 for the
years ended December 31, 1996 and 1995, respectively.
F-8
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the assets (one to five years). Property and
equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
Equipment $ 25,176 $ 20,418
Furniture and fixtures 1,702 1,450
Leasehold improvements 3,171 2,778
-------- --------
30,049 24,646
Less accumulated depreciation and (20,119) (14,823)
amortization -------- --------
$ 9,930 $ 9,823
======== ========
</TABLE>
In the first quarter of 1995, the Company wrote-off $1.4 million of
application software and related costs in connection with a decision to
discontinue a management system upgrade.
Revenue Recognition
The Company generally recognizes revenue and accrues related estimated
royalty, warranty and sales returns provisions upon product shipment.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (FAS 109) "Accounting for Income Taxes".
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, (APB 25) "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Net Income (Loss) Per Share
Net income per share is based upon the weighted average number of
outstanding shares of common stock, and dilutive common stock equivalents from
the exercise of stock options and warrants (using the treasury stock method).
Common stock equivalents from stock options and warrants are excluded from the
computation if their effect is anti-dilutive.
Net loss per share is based upon the weighted average number of
outstanding shares of common stock.
F-9
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial
instruments. The amounts reported for cash and cash equivalents approximate
the fair value due to their short maturities. Investment securities are
reported at their estimated fair value based on quoted market prices.
At December 31, 1996, available-for-sale securities consisted of
commercial paper with a carrying value and estimated value of $10,600,000.
These securities had a contractual maturity of less than one year and were
classified as cash equivalents.
The following is a summary of available-for-sale securities at December
31, 1995:
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Auction preferred stock $10,500 $ - $ - $10,500
Commercial paper 18,624 - (4) 18,620
------- ---------- --------- -------
$29,124 $ - $ (4) $29,120
======= ========= ========= =======
</TABLE>
4. CONCENTRATION OF CREDIT RISK, OTHER CONCENTRATION AND RISKS AND GEOGRAPHIC
DATA
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of investments in cash
equivalents, short-term investments and trade receivables. The Company invests
in cash equivalents and short-term investments, primarily in money-market
securities, auction preferred stock, commercial paper, and corporate notes.
The Company is exposed to credit risks in the event of default by the issuer to
the extent of the amount recorded on the balance sheet. The Company performs
on-going credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses, and
such losses have been within management's expectations.
The Company derives a substantial portion of its revenue from sales to
VARs and systems integrators. Trade accounts receivable from VARs and systems
integrators was approximately $13.0 million at December 31, 1996. The
concentration of credit risk with respect to trade accounts receivable from
VARs and systems integrators is limited due to the number and geographic
dispersion of such customers. No single VAR or system integrator accounted for
more than 8% of trade accounts receivable at December 31, 1996.
The Company's products include certain components that are currently
available only from single sources or limited sources. Any availability
limitations, interruptions in supplies or price increases relative to these
components could adversely affect the Company's financial results.
The Company is currently undergoing a product transition. Management has
developed a program to liquidate inventory of the older products and believes
that it has appropriately valued the inventory. At this time, management
cannot estimate a range of amounts of loss that could occur if the program is
not successful.
The Company recently segregated the number of VARs with which it does
business between those authorized to resell and support all of the Company's
products and those limited to the resell and support of the Company's products
prior to the NF9000. Management is actively working to collect the outstanding
balances and believes no additional reserves are necessary. At this time,
management cannot estimate a range of amounts of loss that could occur if the
collections efforts are not successful.
F-10
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Export sales represent sales to the Company's customers primarily
throughout Europe and Asia Pacific. Sales by the Company to customers in
different geographic areas, expressed as a percentage of net revenue, for the
periods ended were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Europe 3.7% 7.0% 7.0%
Asia Pacific 5.1% 8.0% 5.9%
Other -% -% 2.7%
---- ---- ----
8.8% 15.0% 15.6%
==== ==== ====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its principal facilities under non-cancelable operating
leases that expire in September 2002. In addition to its principal facilities,
the Company also leases several sales support offices worldwide.
Future minimum payments under non-cancelable operating leases with initial
terms of one year or more consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1997 $1,619
1998 1,487
1999 1,553
2000 1,585
2001 1,661
Thereafter 1,263
------
Total minimum lease payments $9,168
======
</TABLE>
Total rent expense was approximately $1,955,000, $1,936,000, and
$1,516,000, for the years ended December 31, 1996, 1995 and 1994, respectively.
Contingencies
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on its financial position, results of
operations or cash flows.
F-11
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INCOME TAXES
The provision (benefit) for income taxes for years ended December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
Federal:
<S> <C> <C> <C>
Current $ - $(1,010) $ 766
Deferred - 733 (720)
----- ------- -----
- (277) 46
State:
Current - - 348
----- ------- -----
Total $ - $ (277) $ 394
==== ======= =====
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
by applying the federal statutory income tax rate to income before taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income tax computed at federal $(9,043) $(2,915) $2,087
statutory rate
State taxes, net of federal benefit - - 230
Nonuse (use) of net operating loss 9,043 2,638 (467)
Benefit of R&D credit utilized - - (406)
Adjustment to valuation allowance - - (971)
Other - - (79)
------- ------- ------
$ - $ (277) $ 394
======= ======= ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforward $ 13,709 $ 4,453
Capitalized research and development 1,472 695
Accruals and reserves not currently deductible 1,284 1,134
Research and AMT credit carryforwards 2,826 2,466
Accounts receivable reserve 1,100 834
Inventory valuation differences 580 1,158
Accrued commission 292 93
Depreciation 334 -
-------- -------
Total deferred tax assets 21,597 10,833
Valuation allowance (21,236) (9,967)
-------- -------
Total net deferred tax assets 361 866
Deferred tax liabilities:
Depreciation - (227)
Capitalized software (70) (348)
-------- -------
Total net deferred taxes $ 291 $ 291
======== =======
</TABLE>
The valuation allowances at December 31, 1996 and 1995 include $2,580,000
attributable to stock option deductions, the benefit of which will be credited
to paid-in capital when realized.
F-12
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $39,000,000 and $6,000,000, respectively, and
federal and state research and development credit carryforwards of
approximately $2,700,000 expiring in 2008 through 2011. In addition, the
Company had federal alternative minimum tax credit carryforwards of
approximately $330,000 that will not expire. No restriction on the
availability to utilize tax credit carryforwards is currently anticipated.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
7. EMPLOYEE STOCK AND SAVINGS PLANS
Stock Option Plans
The Company has various stock option plans (the "Option Plans") under
which officers, employees, non-employee directors and consultants may be
granted qualified and non-qualified options to purchase shares of the Company's
authorized but unissued Common Stock. Options are generally priced at the fair
market value of the stock on the date of grant and vest ratably over two to
five years from the date of grant. Options currently expire no later than ten
years from date of grant.
On January 15, 1997, the Company offered to reprice 1992 stock options
granted to employees using a closing market value on that date of $2.625.
Options totaling 1,813,051 shares were repriced. On February 7, 1995, the
Company offered to reprice 1992 stock options granted to employees using a
closing market value on that date of $5.875. Options totaling 1,252,700 shares
were repriced.
At December 31, 1996 and 1995, 4,609,442 and 4,459,442 shares,
respectively, were reserved for issuance upon exercise of stock options. A
summary of activity under all option plans is as follows (in thousands except
weighted average exercise price amounts):
<TABLE>
<CAPTION>
Weighted Average
Shares Number of Shares Exercise Price of
Available Subject to Options
for Grant Options Outstanding Outstanding
--------- ------------------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1993 199 1,462
Shares authorized 1,700 -
for issuance
Options granted (880) 880
Options canceled 195 (195)
Options exercised - (256)
Plan shares expired (13) -
------ ------
Balance at December 31, 1994 1,201 1,891
Shares authorized 100 -
for issuance
Options granted (2,172) 2,172
Options canceled 1,596 (1,596)
Options exercised - (84)
Plan shares expired (9) -
------ ------
Balance at December 31, 1995 716 2,383
Shares authorized 150 -
for issuance
Options granted (1,504) 1,504 $4.41
Options canceled 1,471 (1,471) 6.49
Options exercised - (112) 1.13
Plan shares expired (12) -
------ ------ -----
Balance at December 31, 1996 821 2,304 $5.24
====== ======
</TABLE>
F-13
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ -------------------------------------
Weighted Average Weighted
Number Remaining Average Number Weighted
of Shares Contractual Life Exercise of Shares Average
Range of Exercise at 12/31/96 (Years) Price Exercisable Exercise Price
- ------------------- ----------- ----------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$6.00 - $10.00 446 7.5 $7.54 263 $8.53
$5.00 - $5.99 1,242 8.8 5.30 418 5.58
$2.00 - $4.99 575 9.5 3.63 57 3.88
$0.20 - $1.99 41 4.1 1.27 41 1.27
</TABLE>
At December 31, 1996, outstanding options to purchase 780,000 shares were
exercisable (of which 292 shares would be subject to repurchase if such options
were exercised).
Stock Purchase Plan
In 1992, the 1992 Employee Stock Purchase Plan ("ESPP") was approved. As
of December 31, 1996, 800,000 shares were reserved for issuance. The ESPP
provides that substantially all employees may purchase stock at 85% of its fair
market value on certain specified dates via payroll deductions. During the
years ended December 31, 1996 and 1995, 120,563 and 123,607 shares,
respectively, were issued under this plan.
Stock-Based Compensation
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for awards granted by the Company after December
31, 1994 as if the Company had accounted for its stock-based awards to
employees under the fair value method of FAS 123. The fair value of the
Company's stock-based awards to employees was estimated using a Black-Scholes
option pricing model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
requires the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock-based awards to employees
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-
based awards to employees. The fair value of the Company's stock-based awards
to employees was estimated assuming no expected dividends and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected life (years) 3.5 3.5 0.7 0.6
Expected volatility 0.75 0.73 0.70 0.65
Risk-free interest rate 5.78 - 6.48 5.20 - 7.09 5.50 - 5.60 5.60 - 6.15
(percent)
</TABLE>
F-14
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For pro forma purposes, the estimated fair value of the Company's stock-
based awards to employees is amortized over the options' vesting period (for
options) and the six to nine month purchase period (for stock purchases under
the ESPP). The Company's pro forma information follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net loss As reported $(27,984) $ (8,052)
Pro forma (29,777) (10,982)
Net loss per share As reported $ (2.04) $ (0.60)
Pro forma (2.17) (0.81)
</TABLE>
Because FAS 123's pro forma disclosure requirements are applicable only to
the Company's awards granted subsequent to December 31, 1994, its pro forma
effect will not be fully reflected until approximately 1998.
The weighted-average fair value of stock options granted during fiscal
1996 and 1995 was $2.50 and $3.10 per share, respectively. The weighted-
average fair value of the employee stock purchase plans granted during fiscal
1996 and 1995 was $1.60 and $1.80 per share, respectively.
Defined Contribution Plan
The NetFRAME Systems Incorporated Savings and Investment Plan (the "Plan")
is a defined contribution plan that covers all U.S. employees who have at least
three months of service with the Company. Employees can contribute up to 15%
of their eligible compensation through payroll deductions. The Company
contributes to the employee's account by matching the greater of $0.25 for
every employee dollar contributed up to a maximum of 5% of the employee's
eligible compensation or a percentage of the Company's after-tax profit as
determined by the NetFRAME Board. Total contributions made by the Company to
the Plan for the years ended December 31, 1996, 1995 and 1994 were
approximately $120,000, $150,000 and $170,000 respectively.
8. SUBSEQUENT EVENTS (unaudited)
In March 1997, the Company obtained an asset based revolving credit
facility with the CIT Group/Business Credit, Inc., Los Angeles, CA (CIT) to
finance eligible accounts receivable and production inventory up to a maximum
of $15.0 million, subject to certain net worth and other financial covenants.
Borrowings under the asset based revolving credit facility with CIT, which by
its terms allowed for termination by CIT on March 26, 2000, accrue interest at
a rate equal to prime plus one-half percent (.50%). On June 23, 1997, the
credit facility was assigned to Micron Electronics, Inc. pursuant to which,
among other things, the maximum borrowings provided for thereunder were
decreased to $3.5 million and the date on which Micron may terminate the
facility, absent certain other conditions, was changed to September 30, 1997.
As of July 22, 1997, the Company had borrowed the full $3.5 million available
under the credit facility, and Micron had no obligation to loan additional
funds thereunder.
In May 1997, the Company canceled its lease on one of its principal
administrative, product development, manufacturing and marketing facilities.
As a result, the Company reduced its commitments under this operating lease by
approximately $4.3 million and will receive a termination payment of $272,000
from the landlord. In connection with the cancellation of the operating lease,
the Company recorded a $1.3 million charge related to the write-off of
leasehold improvements.
On June 10, 1997, the Company entered into an Agreement and Plan of Merger
with Micron Electronics Inc. (Micron) and Payette Acquisition Corporation, a
wholly owned subsidiary of Micron (Payette). In connection with that
agreement, Payette made a tender offer to purchase all of the Company's issued
and outstanding shares of common stock and all associated rights at a price per
share of $1.00 in cash. On July 18, 1997, Payette acquired approximately 62.8%
of the Company's outstanding common stock in connection with the closing of the
tender offer. Pursuant to a stockholder meeting to be held in August 1997, the
merger of Payette with and into the Company is expected to be approved and any
shares of the Company's common stock not tendered and purchased pursuant to the
tender offer will be canceled and converted into the right to receive $1.00 per
share in cash, subject to appraisal rights. The Company believes that its
F-15
<PAGE>
ability to continue to operate as a going concern is dependent on the
successful consummation of the Merger and continued financial assistance from
Micron.
F-16
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
June 30, 1997
--------------
(unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,209
Accounts receivable, net of allowance for doubtful 4,612
accounts of $1,753
Inventories 8,319
Other current assets 800
--------
Total current assets 15,940
Property and equipment, net 5,670
Other assets, net 1,060
--------
Total assets $ 22,670
========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Notes payable $ 2,000
Accounts payable 5,922
Other accrued liabilities 6,741
--------
Total current liabilities 14,663
Stockholders' equity:
Preferred stock, 2,000,000 shares ($.001 par value) authorized,
none issued and outstanding --
Common stock, 20,000,000 shares ($.001 par value) authorized,
13,978,445 issued and outstanding 14
Additional paid-in capital 73,519
Accumulated deficit (65,526)
--------
Total stockholders' equity 8,007
--------
Total liabilities and stockholders' equity $ 22,670
========
</TABLE>
See accompanying notes.
F-17
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, 1997 June 30, 1996
------------- -------------
(unaudited)
<S> <C> <C>
Net revenue $ 19,984 $38,879
Cost of revenue 18,571 22,235
-------- -------
Gross profit 1,413 16,644
Operating expenses:
Research and development 8,063 7,544
Selling, general and administrative expenses 17,737 17,370
-------- -------
Total operating expenses 25,800 24,914
-------- -------
Operating loss (24,387) (8,270)
Interest and other income, net 233 633
-------- -------
Loss before income taxes (24,154) (7,637)
Benefit for income taxes -- --
-------- -------
Net loss $(24,154) $(7,637)
-------- -------
Net loss per share $ (1.73) $ (0.56)
======== =======
Number of shares used in computing
per share amounts 13,952 13,645
======== =======
</TABLE>
See accompanying notes.
F-18
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash flows (in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
June 30, 1997 June 30, 1996
-------------- --------------
(unaudited)
<S> <C> <C>
CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES:
Net loss $(24,154) $ (7,637)
Items not requiring the current use of cash:
Loss on disposal of capital assets 1,511 297
Depreciation and amortization 4,513 3,684
Changes in items affecting operations:
Accounts receivable 9,591 (269)
Inventories (967) 195
Other current assets (18) 436
Accounts payable (3,314) 874
Accrued liabilities (831) (408)
-------- --------
Cash generated from (required for) operating activities (13,669) (2,828)
-------- --------
CASH FLOWS FROM (REQUIRED FOR) INVESTING ACTIVITIES:
Acquisitions of property and equipment (493) (3,939)
Other assets (4) (2,132)
Purchase of available-for-sale securities -- (40,106)
Sale of available-for-sale securities -- 49,410
-------- --------
Cash generated from (required for) investing activities (497) 3,233
-------- --------
CASH FLOWS FROM (REQUIRED FOR) FINANCING ACTIVITIES:
Issuance of common stock 363 565
Proceeds from note payable from Micron 2,000 --
-------- --------
Cash generated from (required for) financing activities 2,363 565
Net increase (decrease) in cash and cash equivalents (11,802) 970
Cash and cash equivalents at the beginning of the period 14,011 18,340
-------- --------
Cash and cash equivalents at the end of the period $ 2,209 $ 19,310
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 210 $ --
Income taxes $ 15 $ 10
</TABLE>
See accompanying notes.
F-19
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission but do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements and should, therefore, be read in conjunction with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended December 31, 1996 included in the Annual Report on Form 10-K.
The accompanying statements include all normal recurring adjustments which the
Company believes necessary for a fair presentation of the statements. The
interim operating results are not necessarily indicative of the results for the
full year.
The Company maintains a fifty-two/fifty-three week fiscal year cycle. The
second quarters of fiscal 1997 and 1996 ended on June 28, 1997 and June 29,
1996, respectively. For convenience, the accompanying condensed consolidated
financial statements have been titled as ending on the last day of the calendar
quarter.
2. BASIS OF PRESENTATION
The consolidated financial statements of NetFRAME Systems Incorporated
(the Company) for the six months ended June 30, 1997, have been prepared on a
going concern basis. The Company had approximately $2.2 million of cash and
cash equivalents at June 30, 1997, of which $2.0 million represented amounts
borrowed from Micron under the Company's revolving credit facility (see
Note 7). As of July 22, 1997, the Company had borrowed the full $3.5 million
available under the credit facility, and Micron has no obligation to loan
additional funds thereunder. The Company's net losses for the six months ended
June 30, 1997 totaled approximately $24.2 million. The Company believes that
its ability to continue to operate as a going concern is dependent on the
successful consummation of the Merger and continued financial assistance from
Micron.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw materials $2,633 $2,729
Work in process 791 2,673
Finished goods 4,895 4,339
------ ------
$8,319 $9,741
====== ======
</TABLE>
4. CONTINGENCIES
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on its financial position, results of
operations or cash flows.
5. PROVISION (BENEFIT) FOR INCOME TAXES
The Company provides for income tax expense (or benefit) during interim
reporting periods based upon an estimate of the annual effective tax rate. The
rate of tax (benefit) is less than the federal statutory rate of 35% due to
the limitations controlling the timing for realization of net operating losses
and tax credits (which may carryforward to partially offset future income
taxes) established by the Statement of Financial Accounting Standards No. 109
(FAS 109), "Accounting for Income Taxes".
F-20
<PAGE>
6. NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of
outstanding shares of common stock.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (FAS 128), "Earnings Per Share", which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
Company's common stock equivalent share for the six months ended June 30, 1997
and 1996 were antidilutive and accordingly, there is expected to be no impact
on primary income per share. The Company has not yet determined what the
impact of FAS 128 will be on the calculation of fully diluted earnings per
share.
7. CREDIT FACILITY
In March 1997, the Company obtained an asset based revolving credit
facility with the CIT Group/Business Credit, Inc., Los Angeles, CA, to finance
eligible accounts receivable and production inventory up to a maximum of $15.0
million, subject to certain net worth and other financial covenants. Borrowings
under the asset based revolving credit facility with CIT, which by its terms
allowed for termination by CIT on March 26, 2000, accrue interest in an amount
equal to prime plus one-half percent (0.50%). On June 23, 1997, this credit
facility was assigned to Micron Electronics, Inc. (see Note 9) pursuant to
which, among other things, the maximum borrowings provided for thereunder were
decreased to $3.5 million and the date on which Micron may terminate the
facility, absent certain other conditions, was changed to September 30, 1997.
As of July 22, 1997, the Company had borrowed the full $3.5 million available
under the credit facility, and Micron had no obligation to loan additional
funds thereunder.
8. CANCELLATION OF LEASE
In May 1997, the Company canceled its lease on one of its principal
administrative, product development, manufacturing and marketing facilities.
As a result, the Company reduced its commitments under this operating lease by
approximately $4.3 million and will receive a termination payment of $272,000
from the landlord. In connection with the cancellation of the operating lease,
the Company recorded a $1.3 million charge related to the write-off of
leasehold improvements.
9. PLAN OF MERGER AGREEMENT
On June 10, 1997, the Company entered into an Agreement and Plan of Merger
with Micron Electronics Inc. (Micron) and Payette Acquisition Corporation, a
wholly owned subsidiary of Micron (Payette). In connection with that
agreement, Payette made a tender offer to purchase all of the Company's issued
and outstanding shares of common stock and all associated rights at a price per
share of $1.00 in cash. On July 18, 1997, Payette acquired approximately 62.8%
of the Company's outstanding common stock in connection with the closing of the
tender offer. Pursuant to a stockholder meeting to be held in August 1997, the
merger of Payette with and into the Company is expected to be approved and any
shares of the Company's common stock not tendered and purchased pursuant to the
tender offer will be canceled and converted into the right to receive $1.00 per
share in cash, subject to appraisal rights. The Company believes that its
ability to continue to operate as a going concern is dependent on the
successful consummation of the Merger and continued financial assistance from
Micron.
F-21
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
MICRON ELECTRONICS, INC.
PAYETTE ACQUISITION CORPORATION
NETFRAME SYSTEMS INCORPORATED
Dated: June 10, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - THE OFFER..........................................................1
1.1 The Offer...........................................................1
1.2 Company Actions.....................................................3
ARTICLE II - THE MERGER........................................................4
2.1 The Merger..........................................................4
2.2 Closing.............................................................5
2.3 Effective Time......................................................5
2.4 Effects of the Merger...............................................5
2.5 Certificate of Incorporation and By-laws............................5
2.6 Directors...........................................................5
2.7 Officers............................................................5
ARTICLE III - EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES.........................................6
3.1 Effect on Capital Stock.............................................6
3.2 Exchange of Certificates............................................7
ARTICLE IV - REPRESENTATIONS AND WARRANTIES....................................9
4.1 Representations and Warranties of the Company.......................9
4.2 Representations and Warranties of Parent and Sub...................24
ARTICLE V - COVENANTS RELATING TO CONDUCT OF BUSINESS.........................26
5.1 Conduct of Business................................................26
5.2 No Solicitation....................................................28
ARTICLE VI - ADDITIONAL AGREEMENTS............................................30
6.1 Stockholder Approval; Preparation of Proxy Statement...............30
6.2 Access to Information; Confidentiality.............................31
6.3 Best Efforts; Notification.........................................31
6.4 Stock Plans........................................................32
6.5 Post Merger Employment Benefits; Severance.........................33
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
6.6 Indemnification, Exculpation and Insurance.........................33
6.7 Directors..........................................................34
6.8 Fees and Expenses..................................................35
6.9 Public Announcements...............................................36
6.10 Stock Option Agreement.............................................36
6.11 Preferred Share Rights Agreement...................................36
6.12 Parent Financial Assistance........................................36
6.13 Technology License Agreement.......................................36
ARTICLE VII - CONDITIONS PRECEDENT............................................37
7.1 Conditions to Each Party's Obligation to Effect the Merger.........37
7.2 Conditions to Parent's and Sub's Obligation to Effect the Merger...37
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER..............................38
8.1 Termination........................................................38
8.2 Effect of Termination..............................................39
8.3 Amendment..........................................................39
8.4 Extension; Waiver..................................................39
8.5 Procedure for Termination, Amendment, Extension or Waiver..........40
ARTICLE IX - GENERAL PROVISIONS...............................................40
9.1 Nonsurvival of Representations and Warranties......................40
9.2 Notices............................................................40
9.3 Definitions........................................................41
9.4 Interpretation.....................................................42
9.5 Counterparts.......................................................42
9.6 Entire Agreement; No Third-Party Beneficiaries.....................42
9.7 Governing Law......................................................42
9.8 Assignment.........................................................42
9.9 Enforcement........................................................43
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
EXHIBITS
Exhibit A: Offer
Exhibit B: Stock Option Agreement
Exhibit C: Parent Financial Assistance
Exhibit D: Technology License Agreement
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of June 10, 1997 among MICRON
ELECTRONICS, INC., a Minnesota corporation ("Parent"), PAYETTE ACQUISITION
------
CORPORATION, a Delaware corporation and a wholly owned subsidiary of Parent
("Sub"), and NETFRAME SYSTEMS INCORPORATED, a Delaware corporation (the
---
"Company").
-------
WHEREAS, in furtherance of the acquisition of the Company by Parent on the
terms and subject to the conditions set forth in this Agreement, Parent proposes
to cause Sub to make a tender offer (as it may be amended from time to time as
permitted under this Agreement, the "Offer") to purchase all the issued and
-----
outstanding shares of Common Stock, par value $0.001 per share, of the Company
and all associated rights (the "Company Common Stock"), at a price per share of
--------------------
the Company Common Stock of not less than $1.00 net to the seller in cash and
without interest thereon (such price, as may hereafter be increased, the "Offer
-----
Price"), subject to reduction for any applicable federal backup or other
- -----
applicable withholding or stock transfer taxes, upon the terms and subject to
the conditions set forth in this Agreement, and the Board of Directors of the
Company has approved the Offer and has resolved to recommend that the Company's
stockholders accept the Offer;
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have approved the Offer and the merger of Sub into the Company, as set forth
below (the "Merger"), upon the terms and subject to the conditions set forth in
------
this Agreement, whereby each issued and outstanding share of the Company Common
Stock, other than shares owned directly or indirectly by Parent or the Company
and Dissenting Shares (as defined in Section 3.1(e)), will be converted into the
right to receive the Offer Price;
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Offer and the Merger and also to prescribe various conditions to the Offer and
the Merger; and
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE OFFER
---------
1.1 The Offer.
---------
(a) Subject to the provisions of this Agreement, Sub shall, and Parent
shall cause Sub to, within five business days after and including the public
announcement (on the date hereof or the following day) of the execution of this
Agreement, commence (within the meaning of Rule 14d-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) the Offer. The
------------
obligation of Sub to, and of Parent to cause Sub to, commence the Offer and
accept for payment, and
<PAGE>
pay for, any shares of the Company Common Stock tendered pursuant to the Offer
shall be subject to the conditions set forth in Exhibit A and to the terms and
---------
conditions of this Agreement. Sub expressly reserves the right unilaterally to
waive any conditions to the Offer (other than (without the Company's prior
written consent) the Minimum Tender Condition, as defined on Exhibit A), to
increase the price per Share payable in the Offer, to extend the duration of
the Offer, or to make any other changes in the terms and conditions of the
Offer; provided, however, that no such change may be made which decreases the
price per Share payable in the Offer, reduces the maximum number of Shares to
be purchased in the Offer, imposes conditions to the Offer in addition to those
set forth in Exhibit A, changes the form of consideration payable in the Offer,
or amends any other material terms of the Offer in a manner materially adverse
to the Company's stockholders, and provided, further, that the Offer may not,
without the Company's prior written consent, be extended beyond July 14, 1997
except for a period or periods not to exceed 22 days in the aggregate beyond
July 14, 1997 as necessary to provide time to satisfy the conditions set forth
in Exhibit A, and except that Sub may extend the Offer for up to 5 business
days, if as of July 14, 1997, there shall not have been tendered at least
ninety percent (90%) of the outstanding Shares so that the Merger could be
effected without a meeting of the Company's stockholders in accordance with
applicable provisions of the Delaware General Corporation Law ("DGCL").
----
Subject to the terms and conditions of this Agreement and the Offer (including,
if the Offer is extended or amended, the terms and conditions of any such
extension or amendment), Sub shall, and Parent shall cause Sub to, accept for
payment, and pay for, all shares of the Company Common Stock validly tendered
and not withdrawn pursuant to the Offer that Sub becomes obligated to accept
for payment, and pay for, pursuant to the Offer as soon as practicable after
the expiration of the Offer. Sub agrees that if all of the conditions set
forth in Exhibit A are not satisfied on any scheduled expiration date of the
Offer then, provided that (i) all such conditions are reasonably capable of
being satisfied prior to August 5, 1997 and (ii) no takeover proposal shall
have been publicly announced and not withdrawn at such time, Sub shall extend
the Offer from time to time until all such conditions are satisfied or waived,
provided that Sub shall not be required to extend the Offer beyond August 5,
1997.
(b) On the date of commencement of the Offer, Parent and Sub shall
file with the Securities and Exchange Commission (the "SEC") a Tender Offer
---
Statement on Schedule 14D-1 with respect to the Offer, which shall contain an
offer to purchase and a related letter of transmittal and summary advertisement
(such Schedule 14D-1 and the documents included therein pursuant to which the
Offer will be made, together with any supplements or amendments thereto, the
"Offer Documents"). Parent and Sub agree that the Offer Documents shall comply
---------------
as to form in all material respects with the Exchange Act, and the rules and
regulations promulgated thereunder and the Offer Documents, on the date first
published, sent or given to the Company's stockholders, shall not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that no representation is made by Parent or Sub with respect to information
supplied by the Company specifically for inclusion in the Offer Documents. Each
of Parent, Sub and the Company agrees promptly to correct any information
provided by it for use in the Offer Documents if and to the extent that such
information shall have become false or misleading in any material respect, and
each of Parent and Sub further agrees to take all steps
-2-
<PAGE>
necessary to amend or supplement the Offer Documents and to cause the Offer
Documents as so amended or supplemented to be filed with the SEC and to be
disseminated to the Company's stockholders, in each case as and to the extent
required by applicable Federal securities laws. The Company and its counsel
shall be given a reasonable opportunity to review the Offer Documents and all
amendments and supplements thereto prior to their filing with the SEC or
dissemination to stockholders of the Company. Parent and Sub agree to provide
the Company and its counsel any comments Parent, Sub or their counsel may
receive from the SEC or its staff with respect to the Offer Documents promptly
after the receipt of such comments including a copy of such comments that are
made in writing.
(c) Parent shall provide or cause to be provided to Sub on a timely
basis the funds necessary to accept for payment, and pay for, any shares of the
Company Common Stock that Sub becomes obligated to accept for payment, and pay
for, pursuant to the Offer.
1.2 Company Actions.
---------------
(a) The Company hereby approves of and consents to the Offer and
represents that the Board of Directors of the Company, at a meeting duly called
and held, duly and unanimously adopted resolutions approving this Agreement, the
Offer and the Merger, determining that the terms of the Offer and the Merger are
fair to, and in the best interests of, the Company's stockholders and
recommending that the Company's stockholders accept the Offer and tender their
shares pursuant to the Offer and approve and adopt this Agreement and the
Merger. The Company represents that its Board of Directors has received the
opinion of Cowen & Company that the proposed consideration to be received by the
holders of shares of the Company Common Stock pursuant to the Offer and the
Merger is fair to such holders from a financial point of view, and a complete
and correct signed copy of such opinion will be promptly delivered by the
Company to Parent. The Company hereby consents to the inclusion in the Offer
Documents of the recommendation of the Company's Board of Directors described in
the first sentence of this Section 1.2(a) and will use all reasonable efforts to
obtain the consent of Cowen & Company to the inclusion in the Schedule 14D-9 of
a copy of the written opinion referred to in the preceding sentence. The
Company has been advised by each of its directors and executive officers that
each such person intends to tender all shares (other than shares, if any, held
by such person which if tendered, could cause such person to incur liability
under the provisions of Section 16(b) of the Exchange Act) of the Company Common
Stock held by such person pursuant to the Offer.
(b) On the date the Offer Documents are filed with the SEC, the
Company shall file with the SEC a Solicitation/Recommendation Statement on
Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as amended from
time to time, together with all exhibits, amendments and supplements thereto as
well as the Information Statement required pursuant to Section 14(f) under the
Exchange Act, collectively the "Schedule 14D-9") containing the recommendation
--------------
described in paragraph (a) and shall mail the Schedule 14D-9 to the stockholders
of the Company. The Company agrees that the Schedule 14D-9 shall comply as to
form in all material respects with the requirements of the Exchange Act and the
rules and regulations promulgated thereunder and, on
-3-
<PAGE>
the date filed with the SEC and on the date first published, sent or given to
the Company's stockholders, shall not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by the Company with respect to information supplied by
Parent or Sub specifically for inclusion in the Schedule 14D-9. Each of the
Company, Parent and Sub agrees promptly to correct any information provided by
it for use in the Schedule 14D-9 if and to the extent that such information
shall have become false or misleading in any material respect, and the Company
further agrees to take all steps necessary to amend or supplement the Schedule
14D-9 and to cause the Schedule 14D-9 as so amended or supplemented to be filed
with the SEC and disseminated to the Company's stockholders, in each case as
and to the extent required by applicable Federal securities laws. Parent and
its counsel shall be given a reasonable opportunity to review the Schedule
14D-9 and all amendments and supplements thereto prior to their filing with the
SEC or dissemination to stockholders of the Company. The Company agrees to
provide Parent and its counsel any comments the Company or its counsel may
receive from the SEC or its staff with respect to the Schedule 14D-9 promptly
after the receipt of such comments including a copy of such comments that are
made in writing.
(c) In connection with the Offer, the Company shall cause its transfer
agent promptly to furnish Sub with mailing labels containing the names and
addresses of the record holders of the Company Common Stock as of a record date
and of those persons becoming record holders subsequent to such date, together
with copies of all lists of stockholders, security position listings and, to the
extent reasonably requested, computer files and other information in the
Company's possession or control regarding the beneficial owners of the Company
Common Stock, and shall furnish to Sub such information and assistance
(including updated lists of stockholders, security position listings and
computer files) as Parent may reasonably request in communicating the Offer to
the Company's stockholders. Subject to the requirements of applicable law, and
except for such steps as are necessary to disseminate the Offer Documents and
any other documents necessary to consummate the Merger, Parent and Sub and their
agents shall hold in confidence the information contained in any such labels,
listings and files, will use such information only in connection with the Offer
and the Merger and, if this Agreement shall be terminated, will, upon request,
deliver, and will use their best efforts to cause their agents to deliver, to
the Company all copies of such information then in their possession or control.
ARTICLE II
THE MERGER
----------
2.1 The Merger. Upon the terms and subject to the conditions set forth
----------
in this Agreement, and in accordance with the DGCL, Sub shall be merged with and
into the Company at the Effective Time (as defined in Section 2.3). Following
the Effective Time, the separate corporate existence of Sub shall cease and the
Company shall continue as the surviving corporation (the "Surviving
---------
Corporation") and shall succeed to and assume all the rights and obligations of
- -----------
Sub in
-4-
<PAGE>
accordance with the DGCL. Notwithstanding the foregoing, Parent may elect at
any time prior to the Merger to merge the Company with and into Sub instead of
merging Sub into the Company as provided above; provided, however, that the
-------- -------
Company shall not be deemed to have breached any of its representations,
warranties, covenants or agreements set forth in this Agreement solely by
reason of such election. In such event, the parties agree to execute an
appropriate amendment to this Agreement in order to reflect the foregoing and,
where appropriate, to provide that Sub shall be the Surviving Corporation and
will continue under the name "NetFRAME Systems Incorporated". At the election
of Parent, any direct or indirect subsidiary (as defined in Section 9.3) of
Parent may be substituted for Sub as a constituent corporation in the Merger.
In such event, the parties agree to execute an appropriate amendment to this
Agreement in order to reflect the foregoing.
2.2 Closing. The closing of the Merger will take place at 10:00 a.m. on
-------
a date to be specified by the parties, which shall be no later than the second
business day after satisfaction or waiver of the conditions set forth in Article
VII (the "Closing Date"), at the Palo Alto, California offices of Fenwick &
------------
West, counsel to Parent and Sub, unless another date of place is agreed to in
writing by the parties hereto. Parent agrees to close the Merger as soon as
practicable following consummation of the Offer subject to Sections 7.1 and 7.2
hereof.
2.3 Effective Time. Subject to the provisions of this Agreement, as soon
--------------
as practicable on or after the Closing Date, the parties shall file a
certificate of merger or other appropriate documents (in any such case, the
"Certificate of Merger") executed in accordance with the relevant provisions of
---------------------
the DGCL and shall make all other filings or recordings required under the DGCL.
The Merger shall become effective at such time as the Certificate of Merger is
duly filed with the Delaware Secretary of State, or at such other time as Sub
and the Company shall agree should be specified in the Certificate of Merger
(the time the Merger becomes effective being hereinafter referred to as the
"Effective Time").
--------------
2.4 Effects of the Merger. The Merger shall have the effects set forth in
---------------------
Section 259 of the DGCL.
2.5 Certificate of Incorporation and By-laws. The certificate of
----------------------------------------
incorporation and by-laws of the Sub as in effect at the Effective Time shall
be the certificate of incorporation and by-laws of the Surviving Corporation
until thereafter changed or amended as provided therein or by applicable law.
2.6 Directors. The directors of Sub immediately prior to the Effective
---------
Time shall be the directors of the Surviving Corporation, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
2.7 Officers. The officers of the Sub immediately prior to the Effective
--------
Time shall be the officers of the Surviving Corporation, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
-5-
<PAGE>
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
------------------------------------------------------------
CORPORATIONS; EXCHANGE OF CERTIFICATES
--------------------------------------
3.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
-----------------------
Merger and without any action on the part of the holder of any shares of the
Company Common Stock or any shares of capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of
--------------------
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the Surviving
Corporation.
(b) Cancellation of Treasury Stock and Parent Owned Stock. Each
-----------------------------------------------------
share of the Company Common Stock that is owned by the Company or by any
subsidiary of the Company and each share of the Company Common Stock that is
owned by Parent, Sub or any other subsidiary of Parent shall automatically be
canceled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
(c) Conversion of the Company Common Stock. Subject to Section
--------------------------------------
3.1(d), each issued and outstanding share of the Company Common Stock (other
than shares to be canceled in accordance with Section 3.1(b)) shall be
converted into the right to receive from the Surviving Corporation in cash,
without interest, the Offer Price (the "Merger Consideration"). As of the
--------------------
Effective Time, all such shares of the Company Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares of the
Company Common Stock shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration, without interest.
(d) Treatment of Options. Options to purchase Company Common Stock
--------------------
will be treated as provided in Section 6.4 hereof.
(e) Shares of Dissenting Stockholders. Notwithstanding anything in
---------------------------------
this Agreement to the contrary, any issued and outstanding shares of the
Company Common Stock held by a person (a "Dissenting Stockholder") who objects
----------------------
to the Merger and complies with all the provisions of the DGCL concerning the
right of holders of the Company Common Stock to dissent from the Merger and
require appraisal of their shares of the Company Common Stock "Dissenting
----------
Shares") shall not be converted as described in Section 3.1(c) but shall become
- ------
the right to receive such consideration as may be determined to be due to such
Dissenting Stockholder pursuant to the laws of the State of Delaware. If,
after the Effective Time, such Dissenting Stockholder withdraws his demand for
appraisal or fails to perfect or otherwise loses his right of appraisal, in any
case pursuant to the DGCL, his shares of the Company Common Stock shall be
deemed to be converted as of the Effective Time into the right to receive the
Merger Consideration. The Company shall give Parent (i) prompt notice of any
demands for appraisal of shares of the Company Common Stock
-6-
<PAGE>
received by the Company and (ii) the opportunity to participate in and direct
all negotiations and proceedings with respect to any such demands. The Company
shall not, without the prior written consent of Parent, make any payment with
respect to, or enter into a binding settlement agreement or make a written
offer to settle, any such demands.
3.2 Exchange of Certificates.
------------------------
(a) Paying Agent. Prior to the Effective Time, Parent shall select
------------
a bank or trust company to act as paying agent (the "Paying Agent") for the
------------
payment of the Merger Consideration upon surrender of certificates representing
the Company Common Stock.
(b) Parent To Provide Funds. Parent shall take all steps necessary
-----------------------
to enable and cause the Surviving Corporation to provide to the Paying Agent on
a timely basis, as and when needed after the Effective Time, funds necessary to
pay for the shares of the Company Common Stock as part of the Merger pursuant
to Section 3.1.
(c) Exchange Procedure. As soon as reasonably practicable after the
------------------
Effective Time, the Paying Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of the Company Common Stock (the "Certificates")
------------
whose shares were converted into the right to receive the Merger Consideration
pursuant to Section 3.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Paying Agent and
shall be in a form and have such other provisions as Parent may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Paying Agent or to such other agent or
agents as may be appointed by Parent, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Paying Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor the Merger Consideration, and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of the
Company Common Stock which is not registered in the transfer records of the
Company, payment may be made to a person other than the person in whose name
the Certificate so surrendered is registered, if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the person
requesting such payment shall pay any transfer or other taxes required by
reason of the payment to a person other than the registered holder of such
Certificate or establish to the satisfaction of the Surviving Corporation that
such tax has been paid or is not applicable. Until surrendered as contemplated
by this Section 3.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration. No interest will be paid or will accrue on the cash
payable upon the surrender of any Certificate.
(d) No Further Ownership Rights in the Company Common Stock. All
-------------------------------------------------------
cash paid upon the surrender of Certificates in accordance with the terms of
this Article III shall be deemed to have been paid in full satisfaction of all
rights pertaining to the shares of the Company Common
-7-
<PAGE>
Stock theretofore represented by such Certificates, and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of the Company Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Paying Agent for
any reason, they shall be canceled and exchanged as provided in this Article
III.
(e) Failure to Timely Surrender; No Liability. Promptly following
-----------------------------------------
the date that is one year after the Effective Date, the Paying Agent shall
return to the Surviving Corporation all Merger Consideration and other cash,
property and instruments in its possession relating to the transactions
described in this Agreement, and the Paying Agent's duties shall terminate.
Thereafter, each holder of a Certificate formerly representing a Share may
surrender such Certificate to the Surviving Corporation and (subject to
applicable abandoned property, escheat and similar laws) receive in exchange
therefor the Merger Consideration (without interest thereon). Notwithstanding
the foregoing, the Surviving Corporation shall be entitled to receive from time
to time all interest or other amounts earned with respect to any cash deposited
with the Paying Agent as such amounts accrue or become available. If any
Certificates shall not have been surrendered prior to seven years after the
Effective Time (or immediately prior to such earlier date on which any payment
pursuant to this Article III would otherwise escheat to or become the property
of any Governmental Entity (as defined in Section 4.1(d))), the cash payment in
respect of such Certificate shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interests of any person previously entitled thereto. None of Parent, Sub,
the Company or the Paying Agent shall be liable to any person in respect of any
cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(f) Withholding Taxes. The right of any person to receive any
-----------------
payment or consideration pursuant to this Agreement and the transactions
contemplated herein shall be subject to any applicable requirements with
respect to the withholding of Taxes.
(g) Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
certificates evidencing shares of the Company Common Stock shall have been
lost, stolen or destroyed, the Paying Agent shall pay to such holder the Merger
Consideration required pursuant to Section 3.1, in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof with such assurances as the Paying Agent, in its
discretion and as a condition precedent to the payment of the Merger
Consideration, may reasonably require of the holder of such lost, stolen or
destroyed certificates.
(h) Supplementary Action. If at any time after the Effective Time,
--------------------
any further assignments or assurances in law or any other things are necessary
or desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of either the Company or Sub,
or otherwise to carry out the provision of this Agreement, the officers and
directors of the Surviving Corporation are hereby authorized and empowered, in
the name of and on behalf of the Company and Sub, to execute and deliver any
and all things necessary or proper to vest or to
-8-
<PAGE>
perfect or confirm title to such property or rights in the Surviving
Corporation, and otherwise to carry out the purposes and provisions of this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
4.1 Representations and Warranties of the Company. Except as set forth on
---------------------------------------------
the Disclosure Schedule delivered by the Company to Parent prior to the
execution of this Agreement (the "Company Disclosure Schedule"), the Company
---------------------------
represents and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. The Company and
------------------------------------------
each of its subsidiaries is a corporation or partnership duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized and has the requisite corporate or partnership power and
authority to carry on its business as now being conducted. The Company and
each of its subsidiaries is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed individually or in the aggregate would not have a
Material Adverse Effect on the Company. The Company has made available to
Parent complete and correct copies of its certificate of incorporation and
bylaws and the certificates of incorporation and by-laws or other
organizational documents of its Significant Subsidiaries, in each case as
amended to the date of this Agreement. For purposes of this Agreement, a
"Significant Subsidiary" means any subsidiary of the Company that constitutes a
significant subsidiary within the meaning of Rule 1-02 of Regulation S-X of the
SEC.
(b) Subsidiaries. The Company Disclosure Schedule lists each
------------
subsidiary of the Company. All the outstanding shares of capital stock of each
such subsidiary have been validly issued and are fully paid and nonassessable
and (except as may be required by foreign jurisdictions) are owned by the
Company, by another subsidiary of the Company or by the Company and another
such subsidiary, free and clear of all pledges, claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens"). Except for the capital stock of its subsidiaries, the
-----
Company does not own, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, joint venture or other
entity.
(c) Capital Structure. The authorized capital stock of the Company
-----------------
consists of 20,000,000 shares of the Company Common Stock par value $.001 per
share and 2,000,000 shares of preferred stock, par value $.001 per share
("Company Preferred Stock"). At the close of business on June 6, 1997, (i)
-----------------------
13,978,445 shares of the Company Common Stock and no shares of Company
Preferred Stock were issued and outstanding, (ii) no shares of the Company
Common Stock were held by the Company in its treasury, (iii) 3,101,722 shares
of the Company Common Stock were
-9-
<PAGE>
reserved for issuance upon exercise of outstanding Employee Stock Options (as
defined in Section 6.4). Except as set forth above, at the close of business
on June 6, 1997, no shares of capital stock or other voting securities of the
Company were issued, reserved for issuance or outstanding. There are no
outstanding stock appreciation rights which were not granted in tandem with a
related Employee Stock Option. All outstanding shares of capital stock of the
Company are, and all shares which may be issued will be, when issued, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes or other indebtedness
of the Company having the right to vote (or convertible into, or exchangeable
for, securities having the right to vote) on any matters on which stockholders
of the Company may vote. Except as set forth above, as of the date of this
Agreement, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which the Company or any of its subsidiaries is a party or by which any of them
is bound obligating the Company or any of its subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other voting securities of the Company or of any of its subsidiaries
or obligating the Company or any of its subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. As of the date of this Agreement, there
are no outstanding contractual obligations (i) of the Company or any of its
subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of the Company or any of its subsidiaries or (ii) of the Company to vote
or to dispose of any shares of the capital stock of any of its subsidiaries.
Except as set forth in the Company Disclosure Schedule, no employee is a party
to a change in control agreement with the Company and such Schedule identifies
those change in control agreements that provide for 12-month severance packages
and those that provide for 6-month severance packages.
(d) Authority; Noncontravention. The Company has all the requisite
---------------------------
corporate power and authority to enter into this Agreement and, subject to, if
required by law, approval of the Merger by an affirmative vote of the holders
of a majority of the outstanding shares of the Company Common Stock (the
"Company Stockholder Approval"), to consummate the transactions contemplated by
----------------------------
this Agreement. The execution and delivery of this Agreement by the Company
and the consummation by the Company of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate action on the
part of the Company, subject to the Company Stockholder Approval, if such
approval is required by law. This Agreement has been duly 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 (except
as enforcement hereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium and similar laws, both state and federal, affecting
the enforcement of creditors' rights or remedies in general as from time to
time in effect or (ii) the exercise by courts of equity powers). The execution
and delivery of this Agreement do not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or to loss
of a material benefit under, or result in the creation of any Lien upon any of
the properties or assets of the Company or any of its subsidiaries under (i)
the certificate of incorporation or by-laws of the Company or the comparable
-10-
<PAGE>
charter or organizational documents of any of its subsidiaries, (ii) any loan
or credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to the Company
or any of its Significant Subsidiaries or their respective properties or assets
or (iii) any governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to the Company or any of its Significant Subsidiaries
or their respective properties or assets, other than, in the case of clause
(ii) or (iii), any such conflicts, violations, defaults, rights or Liens that
individually or in the aggregate would not (x) have a Material Adverse Effect
on the Company (provided however that for this purpose any breach of a covenant
not to compete or similar contractual restriction binding on Company shall be
deemed to have a Material Adverse Effect on the Company except to the extent
that the breach results from Parent or its affiliates being engaged in
activities other than development, marketing and manufacture of personal
computers or integrated circuits), (y) materially impair the ability of the
Company to perform its obligations under this Agreement, (z) prevent the
consummation of any of the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Federal, state or local government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity"), is required
-------------------
by or with respect to the Company or any of its subsidiaries in connection with
the execution and delivery of this Agreement by the Company or the consummation
by the Company of the transactions contemplated by this Agreement, except for
(1) the filing of a pre merger notification and report form by the Company
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"),
-------
(2) the filing with the SEC and the National Association of Securities Dealers,
Inc. of (A) the Schedule 14D-9, (B) a proxy statement relating to the Company
Stockholder Approval, if such approval is required by law (as amended or
supplemented from time to time, the "Proxy Statement"), and (C) such reports
---------------
under Section 13(a) of the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated by this Agreement, (3) the
filing of the Certificate of Merger with the Delaware Secretary of State and
appropriate documents with the relevant authorities of other states in which
the Company is qualified to do business and (4) such other consents, approvals,
orders, authorizations, registrations, declarations and filings as would not
individually or in the aggregate (A) have a Material Adverse Effect on the
Company, (B) materially impair the ability of the Company to perform its
obligations under this Agreement or (C) prevent or have a material adverse
effect on the ability of the parties to consummate any of the transactions
contemplated by this Agreement. Section 4.1(d) of the Company Disclosure
Schedule lists all material consents, waivers and approvals under any of the
Company's or any of its subsidiaries' agreements, contracts, licenses or leases
required to be obtained in connection with the consummation of the transactions
contemplated hereby.
(e) SEC Documents; Financial Statements. The Company has filed in a
-----------------------------------
timely manner all required reports, schedules, forms, statements and other
documents with the SEC since September 30, 1994. All such required reports,
schedules, forms, statements and other documents filed by the Company with the
SEC (including those that the Company may file subsequent to the date hereof)
are referred to herein as the "SEC Documents". As of their respective dates,
-------------
the SEC Documents complied in all material respects with the requirements of
the Securities Act of 1933, as
-11-
<PAGE>
amended (the "Securities Act") or the Exchange Act, as the case may be, and the
--------------
rules and regulations of the SEC promulgated thereunder applicable to such SEC
Documents, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except to the extent
that information contained in any SEC Document has been revised or superseded
by a later Filed SEC Document (as defined in Section 4.1(g)), none of the SEC
Documents contains any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
SEC Documents, including those filed after the date hereof until the Closing,
comply or will comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared or will be prepared in accordance with
generally accepted accounting principles (except, in the case of unaudited
statements, as provided in the last sentence of this Section 4.1(e) and fairly
present or will fairly present in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal recurring year-end audit adjustments). Except as set forth in the SEC
Documents or as contemplated by this Agreement, since the date of the most
recent consolidated balance sheet included in the SEC Documents until the date
hereof neither the Company nor any of its subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by generally accepted accounting principles ("GAAP") to be set forth
----
on a consolidated balance sheet of the Company and its consolidated
subsidiaries which are, individually or in the aggregate, material to the
business, results of operations or financial condition of the Company and its
subsidiaries taken as a whole, except liabilities (i) provided for in the most
recent consolidated balance sheet included in the SEC Documents, or (ii)
incurred since the date of such balance sheet in the ordinary course of
business consistent with past practices. Interim financial statements or
summaries and accounting books and records prior to the date of consummation of
the Offer are prepared on a basis consistent with those employed in the most
recent audited financial statement and, except with respect to footnote
disclosure, are prepared in accordance with GAAP.
(f) Information Supplied. None of the information supplied or to be
--------------------
supplied by the Company specifically for inclusion or incorporation by
reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the
information to be filed by the Company in connection with the offer pursuant to
Rule 14f-1 promulgated under the Exchange Act (the "Information Statement") or
---------------------
(iv) the Proxy Statement, will, in the case of the Offer Documents, the
Schedule 14D-9 and the Information Statement, at the respective times the Offer
Documents, the Schedule 14D-9 and the Information Statement are filed with the
SEC or first published, sent or given to the Company's stockholders, or, in the
case of the Proxy Statement, at the time the Proxy Statement is first mailed to
the Company's stockholders or at the time of the Stockholders Meeting (as
defined in Section 6.1(a)), contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
-12-
<PAGE>
circumstances under which they are made, not misleading. The Schedule 14D-9,
the Information Statement and the Proxy Statement will comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder, except that no representation or warranty is made by
the Company with respect to statements made or incorporated by reference
therein based on information supplied by Parent or Sub specifically for
inclusion or incorporation by reference therein.
(g) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the SEC Documents filed and publicly available prior to the date of this
Agreement (the "Filed SEC Documents"), since the date of the most recently
-------------------
audited financial statements included in the Filed SEC Documents, the Company
has conducted its business only in the ordinary course, and up to the date of
this Agreement there has not been (i) any Material Adverse Change affecting the
Company, (ii) any declaration, setting aside or payment of any dividend or
other distribution (whether in cash, stock or property) with respect to any of
the Company's capital stock, (iii) any split, combination or reclassification
of any of its capital stock or any issuance or authorization of any issuance of
any other securities in respect of, in lieu of or in substitution for shares of
its capital stock, (iv) (x) any granting by the Company or any of its
subsidiaries to any executive officer of the Company or any of its subsidiaries
of any increase in compensation, except in the ordinary course of business
consistent with prior practice and except for the bonuses described in Schedule
4.1(g) or as was required under employment agreements in effect as of the date
of the most recent audited financial statements included in the Filed SEC
Documents, (y) any granting by the Company or any of its subsidiaries to any
such executive officer of any increase in severance or termination pay, except
as was required under any employment, severance or termination agreements in
effect as of the date of the most recent audited financial statements included
in the Filed SEC Documents, or (z) any entry by the Company or any of its
subsidiaries into any employment, severance or termination agreement with any
such executive officer, (v) any damage, destruction or loss, whether or not
covered by insurance, that has or could reasonably be expected to have a
Material Adverse Effect on the Company, (vi) any change in accounting methods,
principles or practices by the Company materially affecting its assets,
liabilities or business, except insofar as may have been required by a change
in generally accepted accounting principles, or (vii) any material revaluation
of any of the Company's assets, including, without limitation, writing down the
value of capitalized inventory or writing off accounts receivable, other than
in the ordinary course consistent with past practice.
(h) Intellectual Property.
---------------------
(i) The Company and its subsidiaries own, or are licensed or
otherwise possess legally enforceable rights to use all patents, trademarks,
trade names, service marks, copyrights, and any applications therefor,
maskworks, net lists, schematics, technology, know-how, trade secrets,
inventory, ideas, algorithms, processes, computer software programs or
applications (in both source code and object code form), and tangible or
intangible proprietary information or material ("Intellectual Property") that
---------------------
are material to the business of the Company and its subsidiaries as currently
conducted or as proposed to be conducted by the Company and its subsidiaries.
-13-
<PAGE>
(ii) The Company Disclosure Schedule lists (i) all patents and
patent applications and all registered and unregistered trademarks, trade names
and service marks, registered copyrights, which the Company considers to be
material to its business and included in the Intellectual Property, including
the jurisdictions in which each such Intellectual Property right has been
issued or registered or in which any application for such issuance and
registration has been filed, (ii) all material licenses, sublicenses, and other
agreements as to which the Company is a party and pursuant to which any person
other than the Company is authorized to use any Intellectual Property (other
than end-user licenses in the Company's current standard form provided or made
available to Parent's counsel), and (iii) all material licenses, sublicenses
and other agreements as to which the Company is a party and pursuant to which
the Company is authorized to use any third party patents, trademarks or
copyrights, including software ("Third Party Intellectual Property Rights")
----------------------------------------
which are incorporated in, are, or form a part of any Company product that is
material to its business.
(iii) To the Company's and its counsel's knowledge, there is no
material unauthorized use, disclosure, infringement or misappropriation of any
Intellectual Property rights of the Company or any of its subsidiaries, any
trade secret material to the Company or any of its subsidiaries, or any
Intellectual Property right of any third party to the extent licensed by or
through the Company or any of its subsidiaries, by any third party, including
any employee or former employee of the Company or any of its subsidiaries. To
the Company's and its counsel's knowledge, no Company Intellectual Property or
product or service of the Company is subject to any proceeding or outstanding
decree, order, judgment, agreement, or stipulation restricting in any manner
the use, transfer, or licensing thereof by the Company, or which may affect the
validity, use or enforceability of such Company Intellectual Property. Neither
the Company nor any of its subsidiaries has entered into any agreement to
indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions contained in
purchase orders arising in the ordinary course of business.
(iv) The Company is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its obligations
under this Agreement, in material breach of any license, sublicense or other
agreement relating to Company Intellectual Property or Third Party Intellectual
Property Rights or its ability to exploit its products.
(v) (i) Since January 1, 1995, the Company has not been sued in
any suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party, (ii) since January 1, 1995, the
Company has not brought any action, suit or proceeding for infringement of
Intellectual Property or breach of any license or agreement involving
Intellectual Property against any third party and (iii) no material action,
suit or proceeding involving any material Intellectual Property is currently
pending or overtly threatened, nor to the Company's knowledge is there any
reasonable basis therefor. The manufacture, marketing, licensing or sale of
the Company's products does not, to the Company's knowledge, infringe any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party.
-14-
<PAGE>
(vi) The Company has not received notice from any third party
that the operation of the business of the Company or any act, product or
service of the Company, infringes or misappropriates any Third Party
Intellectual Property Rights or constitutes unfair competition or trade
practices under the laws of any jurisdiction, any of which would reasonably
likely result in a material liability to the Company.
(vii) Except as set forth in Section 4.1(h) of the Company
Disclosure Schedule, to the knowledge of the Company as of the date hereof, no
Person has previously infringed or misappropriated or is infringing or
misappropriating any Company Intellectual Property.
(viii) Except as set forth in Section 4.1(h) of the Company
Disclosure Schedule, there have been, and are, no claims asserted against the
Company or, to its knowledge as of the date hereof, against any customer of the
Company, related to any product or service of the Company.
(ix) All current and former employees and consultants of the
Company have signed a confidentiality/nondisclosure and invention assignment
agreement, in substantially the form(s) attached to the Company Disclosure
Schedule. To the Company's knowledge, no such current or former employees or
consultants of the Company have violated any such agreement or otherwise
misappropriated any trade secrets of the Company or of any third party. The
Company does not believe it is or will be necessary to utilize any inventions,
trade secrets or proprietary information of any of its employees made prior to
their employment by the Company, except for inventions, trade secrets or
proprietary information that have been assigned to the Company.
(x) The Company has taken all reasonable and appropriate steps
to protect and preserve the confidentiality of all Intellectual Property not
otherwise protected by patents, or patent applications or copyright
("Confidential Information"). All use, disclosure or appropriation of
------------------------
Confidential Information owned by the Company by or to a third party has been
pursuant to the terms of a written agreement between the Company and such third
party. All use, disclosure or appropriation of the Company of Confidential
Information not owned by the Company has been pursuant to the terms of a
written agreement between the Company and the owner of such Confidential
Information, or is otherwise lawful, except where the failure to be lawful
would not have a Material Adverse Effect on the Company.
(i) Litigation. Except as disclosed in the Filed SEC Documents, as
----------
of the date of this Agreement, there is no suit, action or proceeding pending
or threatened against the Company or any of its subsidiaries, nor is their any
reasonable basis therefor, that individually or in the aggregate could
reasonably be expected to (i) have a Material Adverse Effect on the Company,
(ii) challenge or seek to enjoin or seek damages with respect to the Company's
entering into and performing this Agreement or that impair the ability of the
Company to perform its obligations under this Agreement or (iii) prevent the
consummation of any of the transactions contemplated by this Agreement, nor is
there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator
-15-
<PAGE>
outstanding against the Company or any of its subsidiaries having, or which is
reasonably likely to have, any effect referred to in the foregoing clause (i),
(ii) or (iii) above.
(j) Absence of Changes in Benefit Plans. Except as disclosed in the
-----------------------------------
Filed SEC Documents, since the date of the most recent audited financial
statements included in the Filed SEC Documents, there has not been any adoption
or amendment in any material respect by the Company or any of its subsidiaries
of any collective bargaining agreement or any bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other plan, arrangement or understanding
(whether or not legally binding) providing benefits to any current or former
employee, officer or director of the Company or any of its subsidiaries.
Except as disclosed in the Filed SEC Documents, there exist no employment,
consulting, severance, termination or indemnification agreements, arrangements
or understandings between the Company or any of its subsidiaries and any
current or former employee, officer or director of the Company or any of its
subsidiaries as to which there is or could be aggregate liability on the part
of the Company or any of its subsidiaries in excess of $50,000.
(k) ERISA Compliance.
----------------
(i) With respect to each material employee benefit plan,
program, arrangement and contract (including, without limitation, any "employee
benefit plan" as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) maintained or contributed to by the
-----
Company or any trade or business (a "Company Affiliate") which is under common
-----------------
control with the Company within the meaning of Section 414 of the Internal
Revenue Code of 1986, as amended (the "Code") (such plans, programs,
----
arrangements and contracts being herein collectively referred to as the
"Company Employee Plans"), the Company has made available to Parent a true and
----------------------
complete copy of, to the extent applicable, (i) such Company Employee Plan,
(ii) the most recent annual report (Form 5500), (iii) each trust agreement
related to such Company Employee Plan, (iv) the most recent summary plan
description for each Company Employee Plan for which such a description is
required, (v) the most recent actuarial report relating to any Company Employee
Plan subject to Title IV of ERISA and (vi) the most recent United States
Internal Revenue Service ("IRS") determination letter issued with respect to
---
any Company Employee Plan.
(ii) Each Company Employee Plan which is intended to be
qualified under Section 401(a) of the Code has received a favorable
determination from the IRS covering the provisions of the Tax Reform Act of
1986 stating that such Company Employee Plan is so qualified and nothing has
occurred since the date of such letter that could reasonably be expected to
affect the qualified status of such plan. Each Company Employee Plan has been
operated in all material respects in accordance with its terms and the
requirements of applicable law. Neither the Company nor any Company Affiliate
has incurred or is reasonably expected to incur any material liability under
Title IV of ERISA in connection with any Company Employee Plan. All
contributions due from the Company or any Company Affiliate with respect to any
Company Employee Plan have
-16-
<PAGE>
been made or accrued on the Company's financial statements, and no further
contributions will be due or will have accrued thereunder as of the Effective
Date, except contributions that are consistent with the Employee Plans and past
practices of the Company. The group health plans, as defined in Section
4980B(g) of the Code, that benefit employees of the Company and Company
Affiliates are in material compliance with the continuation coverage
requirements of subsection 4980B of the Code. There are no outstanding
violations of Section 4980B of the Code with respect to any Company Employee
Plan, covered employees or qualified beneficiaries which would have a Material
Adverse Effect on the Company.
(iii) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment compensation,
golden parachute, bonus or otherwise) becoming due to any director or employee
of the Company or any of its subsidiaries from the Company or any of its
subsidiaries, under any Company Employee Plan or otherwise, (ii) materially
increase any benefits otherwise payable under any Company Employee Plan or
otherwise or (iii) result in the acceleration of the time of payment or vesting
of any such benefits, except as provided in Section 6.4 hereof.
(iv) The Company has made available to Parent a list of all
employees of the Company and of any of its subsidiaries and their salaries as
of the date of this Agreement.
(l) Taxes.
-----
(i) The Company and each of its subsidiaries, and any
consolidated, combined, unitary or aggregate group for Tax (as such term is
defined below) purposes of which the Company or any of its subsidiaries is or
has been a member has timely filed all Returns (as such term is defined below)
required to be filed by it (other than those that are not, individually or in
the aggregate, material), has paid all Taxes shown thereon to be due and has
provided adequate accruals in all material respects in accordance with GAAP in
its financial statements for any Taxes that have not been paid, whether or not
shown as being due on any returns. In addition, (i) no material claim for
unpaid Taxes has become a lien against the property of the Company or any of
its subsidiaries or is being asserted against the Company or any of its
subsidiaries, (ii) no audit of any Tax Return of the Company or any of its
subsidiaries is being conducted by a Tax authority (A) as of the date of this
Agreement and (B) which, through the Effective Date, has had and could
reasonably be expected to have a Material Adverse Effect on the Company and its
subsidiaries, (iii) no extension of the statute of limitations on the
assessment of any Taxes has been granted by the Company or any of its
subsidiaries and is currently in effect (A) as of the date of this Agreement
and (B) which, through the Effective Date, has had and could reasonably be
expected to have a Material Adverse Effect on the Company and its subsidiaries.
As used herein "Taxes" shall mean all Taxes of any kind, including, without
limitation, those on or measured by or referred to as income, gross receipts,
sales, use, ad valorem, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, value added,
property or windfall profits taxes, customs, duties or similar fees,
assessments or charges of any kind whatsoever, together with any interest and
any penalties,
-17-
<PAGE>
additions to tax or additional amounts imposed by any governmental authority,
domestic or foreign. As used herein, "Return" shall mean any return, report or
statement required to be filed with any governmental authority with respect to
Taxes.
(m) No Excess Parachute Payments. Any amount that could be received
----------------------------
(whether in cash or property or the vesting of property) as a result of any of
the transactions contemplated by this Agreement by any employee, officer or
director of the Company or any of its affiliates who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation Section
1.280G-1) under any employment, severance or termination agreement, other
compensation arrangement or Benefit Plan currently in effect would not be
characterized as an "excess parachute payment" (as such term is defined in
Section 280G(b)(1) of the Code). There is no agreement, contract or
arrangement to which the Company or any of its subsidiaries is a party that may
result in the payment of any amount that would not be deductible pursuant to
Sections 280G, or to the knowledge of the Company, 162(m) or 404 of the Code.
(n) Compliance with Applicable Laws.
-------------------------------
(i) The Company and each of its subsidiaries has in effect all
Federal, state, local and foreign governmental approvals, authorizations,
certificates, filings, franchises, licenses, notices, permits and rights
("Permits") necessary for it to own, lease or operate its properties and assets
-------
and to carry on its business as now conducted, and there has occurred no
default under any such Permit, except for the lack of Permits and for defaults
under Permits which individually or in the aggregate would not have a Material
Adverse Effect on the Company. Except as disclosed in the Filed SEC Documents,
the Company and its subsidiaries are in compliance with all applicable
statutes, laws, ordinances, rules, orders and regulations of any Governmental
Entity, except for noncompliance which individually or in the aggregate would
not have a Material Adverse Effect on the Company.
(ii) The Company and its subsidiaries are, and have been, and
each of the Company's former subsidiaries, while subsidiaries of the Company,
was in compliance with all applicable Environmental Laws except for
noncompliance which individually or in the aggregate would not have a Material
Adverse Effect on the Company. The term "Environmental Laws" means any
------------------
Federal, state or local statute, code, ordinance, rule, regulation, policy,
guideline, permit, consent, approval, license, judgment, order, writ, decree,
directive, injunction or other authorization, including the requirement to
register underground storage tanks, relating to: (A) Releases (as defined
below) or threatened Releases of Hazardous Material (as defined below) into the
environment, including into ambient air, soil, sediments, land surface or
subsurface, buildings or facilities, surface water, ground water,
publicly-owned treatment works, septic systems or land; or (B) the generation,
treatment, storage, disposal, use, handling, manufacturing, transportation or
shipment of Hazardous Material.
(iii) During the period of ownership or operation by the
Company and its subsidiaries of any of their respective current or previously
owned or leased properties, there have
-18-
<PAGE>
been no Releases of Hazardous Material in violation of Environmental Laws in,
on, under or affecting such properties or, to the knowledge of the Company, any
surrounding site, and none of the Company or its subsidiaries have disposed of
any Hazardous Material or any other substance in a manner that could reasonably
be anticipated to lead to a Release in violation of Environmental Laws, except
in each case for those which individually or in the aggregate would not have a
Material Adverse Effect on the Company. Prior to the period of ownership or
operation by the Company and its subsidiaries of any of their respective
currently or previously owned or leased properties, to the knowledge of the
Company, there were no Releases of Hazardous Material in, on, under or
affecting any such property or any surrounding site, except in each case for
those which individually or in the aggregate would not have a Material Adverse
Effect on the Company. The term "Release" has the meaning set forth in 42
-------
U.S.C. (S) 9601(22). The term "Hazardous Material" means (1) hazardous
------------------
materials, pollutants, contaminants, constituents, medical or infectious
wastes, hazardous wastes and hazardous substances as those terms are defined in
the following statutes and their implementing regulations: the Hazardous
Materials Transportation Act, 49 U.S.C. (S) 1801 et seq., the Resource
------
Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq., the Comprehensive
------
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act, 42 U.S.C. (S) 9601 et seq., the
------
Clean Water Act, 33 U.S.C. (S) 1251 et seq., the Toxic Substances Control Act,
------
15 U.S.C. (S) 2601 et seq., and the Clean Air Act, 42 U.S.C. (S) 7401 et seq.,
------ ------
(2) petroleum, including crude oil and any fractions thereof, (3) natural gas,
synthetic gas and any mixtures thereof, (4) asbestos and/or asbestos containing
material, (5) radon and (6) PCBs, or materials or fluids containing PCBs.
(o) State Takeover Statutes. The Board of Directors of the Company
-----------------------
has approved the Offer, the Merger and this Agreement and such approval is
sufficient to render inapplicable to the Offer, the Merger and the transactions
contemplated by this Agreement the provisions of Section 203 of the DGCL. To
the Company's knowledge, no other state takeover statute or similar statute or
regulation applies or purports to apply to the Offer, the Merger, this
Agreement, or any of the transactions contemplated by this Agreement, except to
the extent California law applies by operation of Section 2115 of the
California General Corporation Law.
(p) Brokers; Schedule of Fees and Expenses. No broker, investment
--------------------------------------
banker, financial advisor or other person, other than Cowen & Company, the fees
and expenses of which will be paid by the Company, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission, nor to any
fee that is contingent on closing of the transactions contemplated hereby or
that is based on a percentage of the transaction value, in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company.
(q) Opinion of Financial Advisor. The Company has received the
----------------------------
opinion of Cowen & Company, dated the date of this Agreement, to the effect
that, as of such date, the consideration to be received in the Offer and the
Merger by the Company's stockholders is fair to the Company's stockholders from
a financial point of view, and a signed copy of such opinion will promptly be
delivered to Parent.
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<PAGE>
(r) Contracts, Debt Instruments.
---------------------------
(i) Set forth on the Company Disclosure Schedule is (x) a list of
all loan or credit agreements, notes, bonds, mortgages, indentures and other
agreements and instruments pursuant to which any indebtedness of the Company or
any of its subsidiaries in an aggregate principal amount in excess of $250,000
is outstanding or may be incurred and (y) the respective principal amounts
currently outstanding thereunder. For purposes of this Agreement, "indebtedness"
shall mean, with respect to any person, without duplication, (A) all obligations
of such person for borrowed money, or with respect to deposits or advances of
any kind to such person, (B) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (C) all obligations of such person
upon which interest charges are customarily paid, (D) all obligations of such
person under conditional sale or other title retention agreements relating to
property purchased by such person, (E) all obligations of such person issued or
assumed as the deferred purchase price of property or services (excluding
obligations of such person to creditors for raw materials, inventory, services
and supplies incurred in the ordinary course of such person's business), (F) all
capitalized lease obligations of such person, (G) all obligations of others
secured by any lien on property or assets owned or acquired by such person,
whether or not the obligations secured thereby have been assumed, (H) all
obligations of such person under interest rate or currency hedging transactions
(valued at the termination value thereof), (I) all letters of credit issued for
the account of such person (excluding letters of credit issued for the benefit
of suppliers to support accounts payable to suppliers incurred in the ordinary
course of business) and (J) all guarantees and arrangements having the economic
effect of a guarantee of such person of any indebtedness of any other person.
(ii) Neither the Company nor any of its subsidiaries is in
violation of or in default under (nor does there exist any condition which upon
the passage of time or the giving of notice would cause such a violation of or
default under) (i) its charter or by-laws, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, lease, permit, concession, franchise, license
or any other contract, agreement, arrangement or understanding to which it is a
party or by which it or any of its properties or assets is bound, (iii) any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company or any of its subsidiaries, except for immaterial violations or defaults
pertaining to Intellectual Property related matters or other violations or
defaults that individually or in the aggregate would not have a Material Adverse
Effect on the Company.
(iii) Neither the Company nor any of its subsidiaries is a party
to or is bound by: (A) any agreement of indemnification or guaranty not entered
into in the ordinary course of business other than indemnification agreements
between the Company or any of its subsidiaries and any of its officers or
directors; (B) any agreement, contract or commitment currently in force relating
to the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise; or (C) any material joint marketing or
development agreement.
-20-
<PAGE>
(s) Certain Agreements. Except as set forth on the Company Disclosure
------------------
Schedule, the Company and its subsidiaries are not, as of the date hereof
(except as to (iii) below), parties to or subject to any agreement which falls
within any of the following classifications:
(i) any employment, deferred compensation, bonus or consulting
contract requiring payments in excess of $50,000 by the Company or any
subsidiary;
(ii) any distributorship, sales, marketing, advertising,
brokerage, licensing, dealership, representative or agency relationship
requiring payment by the Company or any subsidiary;
(iii) any contract or agreement that restricts or materially
impairs the Company or any subsidiary from carrying on its business as now
conducted or any part thereof or from competing in any line of business with any
person, corporation or other entity or that grants any exclusive license or
distribution rights;
(iv) any collective bargaining agreement or other such contract
or agreement with any labor organization;
(v) any lease of personal property requiring rental payments of
$250,000 or more throughout its term and having a term of one year or more,
whether as lessor or lessee;
(vi) any mortgage, pledge, conditional sales contract, security
agreement, option, or any other similar agreement with respect to any interest
of the Company or any subsidiary in personal property;
(vii) any stock purchase, stock option, stock bonus, stock
ownership, profit sharing, group insurance, bonus, deferred compensation,
severance pay, pension, retirement, savings or other incentive, change in
control, welfare or employee plan or material agreement providing benefits to
any present or former employees, officers or directors of the Company or any of
its subsidiaries;
(viii) any agreement to acquire equipment or commitment to make
capital expenditures by the Company or any subsidiary of $150,000 or more;
(ix) any agreement for the sale of any properties or assets, or
for the grant of any preferential right to purchase any such properties or
assets or which requires the consent of any third party to the transfer and
assignment of any such properties or assets, other than in the ordinary course
of business in connection with the Company sale of properties or assets;
(x) any agreement for the borrowing of any money by the Company
or any subsidiary;
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<PAGE>
(xi) any agreement requiring the Company to indemnify any current
or former officer, director, employee or agent; or
(xii) except in the ordinary course of business, any other
agreement of any other kind which involves future payments or receipts or
performance of services or delivery of items, requiring payments of $25,000 or
more to or by the Company or any subsidiary.
(t) Title to Properties.
-------------------
(i) The Company and each of its subsidiaries has good and
marketable title to, or valid leasehold interests in, all its material
properties and assets except for such as are no longer used or useful in the
conduct of its businesses or as have been disposed of in the ordinary course of
business and except for defects in title, easements, restrictive covenants and
similar encumbrances or impediments that individually or in the aggregate would
not materially interfere with its ability to conduct its business as currently
conducted. All such material properties and assets, other than properties and
assets in which the Company or any of its subsidiaries has leasehold interests,
are free and clear of all Liens, except for Liens that individually or in the
aggregate would not materially interfere with the ability of the Company and its
subsidiaries to conduct business as currently conducted.
(ii) The Company and each of its subsidiaries has complied in all
material respects with the terms of all material leases to which it is a party
and under which it is in occupancy, and all such leases are in full force and
effect. The Company and each of its subsidiaries enjoys peaceful and undisturbed
possession under all such material leases.
(u) Labor Matters. Except as set forth in the Company Disclosure
-------------
Schedule, or as would not have a Material Adverse Effect on the Company as of
the date hereof (a) the Company and its subsidiaries are operating and have
operated the business in compliance in all material respects with all applicable
laws relating to the business respecting employment and employment practices,
terms and conditions of employment and wages and hours, including the
Immigration Reform and Control Act ("IRCA"), the Worker Adjustment and
----
Retraining Notification Act of 1988 ("WARN Act"), any such applicable laws
--------
respecting employment discrimination, equal opportunity, affirmative action,
employee privacy, wrongful or unlawful termination, workers' compensation,
occupational safety and health requirements, labor/management relations and
unemployment insurance, the Family and Medical Leave Act or related matters, and
the Company and its subsidiaries are not engaged in and have not engaged in any
unlawful practice relating to the business under such applicable laws, or in any
unfair labor practice relating to the business; (b) no Governmental Entity has
given the Company or any of its subsidiaries written notice regarding any
pending charge, audit, claim, complaint, investigation or review by or before
any Governmental Entity concerning or requesting in writing to explain any
possible conflicts with or violations of any such laws relating to the business
by the Company or such subsidiary or in connection with the operation of the
business, nor, to the knowledge of the Company, is any such investigation
threatened or pending, nor, to the knowledge of the Company, has any such
investigation occurred
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<PAGE>
during the last two years; (c) there is no labor strike, dispute, slowdown or
stoppage actually pending or, to the knowledge of Company, threatened against or
affecting the business, and neither the Company nor any subsidiary has
experienced any work stoppage or other material labor difficulty relating to the
business in the last two years; (d) to the knowledge of the Company, no union
representation question or union organizational activity exists respecting
employees and, to the Company's knowledge, no one has petitioned within the last
two years, and no one is now petitioning, for union representation of any
employees; (e) there exists no collective bargaining agreement or other contract
or agreement relating to the business with any labor union or association
representing any employee, and no collective bargaining agreement affecting
employees is currently being negotiated; (f) the Company and its subsidiaries
are in material compliance with all obligations under all Company Employee Plans
and all employment contracts and are not delinquent in payments to any employees
for any wages, salaries, commissions, bonuses or other compensation for any
services performed by them relating to the business or amounts required to be
reimbursed to such employees. Except as set forth in the Company Disclosure
Schedule, as of the date hereof, there are no pending or, to the knowledge of
the Company, threatened proceedings, actions or suits of any nature nor to the
knowledge of the Company is there any basis therefor (i) under or alleging
violation of IRCA, WARN or any law respecting employment discrimination, equal
opportunity, affirmative action, employee privacy, wrongful or unlawful
termination or demotion, sexual and other harassment, workers' compensation,
occupational safety and health requirements, labor/management relations
(including any grievances or arbitration proceeding arising out of or under any
collective bargaining agreements) and unemployment insurance, or matters
involving any employee; (ii) relating to alleged unlawful employment practices
or unfair labor practices involving any employee (or the equivalent thereof
under any law); or (iii) relating to alleged breaches of any of the Company
Employee Plans. To Company's knowledge as of the date hereof, no employee of the
Company has in any material respect violated any employment contract,
confidentiality agreement, patent disclosure agreement or noncompetition
agreement between such employee and any former employer of such employee due to
such employee being employed by the Company or any of its subsidiaries or
disclosing to the Company or any of its subsidiaries trade secrets or
proprietary information of any such employer. As of the date hereof, no employee
of the Company or any of its subsidiaries has given notice to the Company or any
of its subsidiaries, nor do the executive officers of the Company otherwise have
knowledge as of the date hereof that any employee intends to terminate his or
her employment with the Company or any of its subsidiaries.
(v) Preferred Share Rights Agreement. The Company's Board of Directors
--------------------------------
has duly authorized and approved an amendment to that certain Preferred Share
Rights Agreement between the Company and The First National Bank of Boston (the
"Rights Agent") dated as of October 24, 1996 (the "Rights Agreement") to exclude
------------ ----------------
Parent and Sub and their respective Affiliates and Associates (as such terms are
defined under the Rights Agreement) from the definition of "Acquiring Person"
therein, with respect to the beneficial ownership of shares of the Company
Common Stock which Parent, Sub and/or any of their respective Affiliates and
Associates have hereby obtained the right to acquire, or will acquire, as a
result of the transactions contemplated by this Agreement, including but not
limited to the Offer, the Merger or the Stock Option Agreement (as defined in
Section 6.11 hereof), or any other agreement or transaction involving Parent,
Sub
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<PAGE>
and/or any of their respective Affiliates and Associates that has been approved
by the Board of Directors of the Company prior to such acquisition. Upon
execution of such amendment by the Rights Agent, such amendment will be in full
force and effect. The Company's Board of Directors has duly authorized and
approved the execution of this Agreement and the consummation of the
transactions contemplated by this Agreement, including but not limited to the
Offer, the Merger and the Stock Option Agreement, and has determined that the
terms of the Offer and of the Merger as well as the transactions contemplated
hereby and thereby are fair to and in the best interests of the Company and its
stockholders.
4.2 Representations and Warranties of Parent and Sub. Parent and Sub
------------------------------------------------
represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent and Sub
------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated and has the requisite
corporate power and authority to carry on its business as now being conducted.
Each of Parent and Sub is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed individually or in the aggregate would not have a material adverse
effect on Parent.
(b) Authority; Noncontravention. Parent and Sub have all requisite
---------------------------
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Parent and Sub and the consummation by Parent and Sub of the
transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of Parent and Sub. This Agreement has
been duly executed and delivered by Parent and Sub and constitutes a valid and
binding obligation of each such party, enforceable against each such party in
accordance with its terms (except as enforcement hereof may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium and similar laws, both state
and federal, affecting the enforcement of creditors' rights or remedies in
general as from time to time in effect or (ii) the exercise by courts of equity
powers). No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation by Parent or Sub, as the case may be, of any of
the transactions contemplated by this Agreement, except for (1) the filing of a
pre-merger notification and report form under the HSR Act, (2) the filing with
the SEC of (A) the Offer Documents and (B) such reports under Sections 13(a),
13(d) and 16(a) of the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated by this Agreement, (3) the filing of
the Certificate of Merger with the Delaware Secretary of State and appropriate
documents with the relevant authorities of other states in which the Company is
qualified to do business and (4) such other consents, approvals, orders,
authorizations, registrations, declarations and filings as would not
individually or in the aggregate (A) have a material adverse effect on Parent,
(B) impair the ability of
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<PAGE>
Parent and Sub to perform their respective obligations under this Agreement or
(C) prevent the consummation of any of the transactions contemplated by this
Agreement.
(c) Information Supplied. None of the information supplied or to be
--------------------
supplied by Parent or Sub specifically for inclusion or incorporation by
reference in the Offer Documents, the Schedule 14D-9, the Information Statement
or the Proxy Statement will, in the case of the Offer Documents, the Schedule
14D-9 and the Information Statement, at the respective times the Offer
Documents, the Schedule 14D-9 and the Information Statement are filed with the
SEC or first published, sent or given to the Company's stockholders, or, in the
case of the Proxy Statement, at the date the Proxy Statement is first mailed to
the Company's stockholders or at the time of the Stockholders Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Offer Documents will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
promulgated thereunder, except that no representation or warranty is made by
Parent or Sub with respect to statements made or incorporated by reference
therein based on information supplied by the Company specifically for inclusion
or incorporation by reference therein.
(d) Brokers. No broker, investment banker, financial advisor or other
-------
person, other than Montgomery Securities, the fees and expenses of which will be
paid by Parent, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions contemplated
by this Agreement based upon arrangements made by or on behalf of Parent or Sub.
(e) Financing. Parent has funds sufficient to consummate the Offer and
---------
the Merger on the terms contemplated by this Agreement, and at the expiration of
the Offer and the Effective Time, Parent and Sub will have available all the
funds necessary for the acquisition of all shares of Common Stock pursuant to
the Offer and to perform their respective obligations under this Agreement,
including without limitation payment in full for all shares of Common Stock
validly tendered or outstanding at the Effective Time.
(f) Litigation. Except as disclosed in documents filed with the SEC by
----------
Parent, as of the date of this Agreement, there is no suit, action or proceeding
pending or, to the knowledge of Parent, threatened against Parent or any of its
subsidiaries that individually or in the aggregate could reasonably be expected
to (i) impair the ability of Parent or Sub to perform their obligations under
this Agreement or (ii) prevent the consummation of any of the transactions
contemplated by this Agreement, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against
Parent or any of its subsidiaries having, or which is reasonably likely to have,
any effect referred to in the foregoing clause (i) or (ii) above.
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<PAGE>
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
-----------------------------------------
5.1 Conduct of Business.
-------------------
(a) Conduct of Business by the Company. The Company shall, and shall
----------------------------------
cause its subsidiaries to, carry on its and their respective businesses in the
ordinary course and use its reasonable efforts in light of its current financial
condition to preserve intact their current business organizations, to keep
available the services of their current officers and employees and to preserve
relationships with distributors, licensors, contractors, customers, suppliers,
lenders, employees and others having business dealings with any of them. Without
limiting the generality of the foregoing, except as may be expressly permitted
by other provisions of this Agreement, or as may be agreed to in writing by
Parent, the Company shall not, and shall not permit any of its subsidiaries to:
(i) (x) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly owned subsidiary of
the Company to its parent, in the case of less than wholly owned subsidiaries,
as required by agreements existing on the date of this Agreement, (y) split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or (z) purchase, redeem or otherwise acquire any
shares of capital stock of the Company or any of its subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such shares
or other securities;
(ii) issue, deliver, sell, pledge or otherwise encumber any
shares of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities (other than the issuance of
the Company Common Stock upon the exercise of Employee Stock Options and
Director Stock Options outstanding on the date of this Agreement and in
accordance with their present terms) and pursuant to the Company's Employee
Stock Purchase Plan;
(iii) amend its certificate of incorporation, by-laws or other
comparable charter or organizational documents;
(iv) acquire or agree to acquire (x) by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture, association
or other business organization or division thereof or (y) any assets that
individually or in the aggregate are material to the Company and its
subsidiaries taken as a whole, except purchases of inventory in the ordinary
course of business consistent with past practice;
-26-
<PAGE>
(v) sell, lease, license, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its properties or assets
(including Intellectual Property), except for sales, leases, licenses, or
encumbrances of its properties or assets in the ordinary course of business
consistent with past practice;
(vi) (x) incur any indebtedness for borrowed money or draw down
on any credit facility or arrangement or guarantee any such indebtedness of
another person, issue or sell any debt securities or warrants or other rights to
acquire any debt securities of the Company or any of its subsidiaries, guarantee
any debt securities of another person, enter into any "keep well" or other
agreement to maintain any financial statement condition of another person or
enter into any arrangement having the economic effect of any of the foregoing or
(y) make any loans, advances or capital contributions to, or investments in, any
other person, other than to the Company or any direct or indirect wholly owned
subsidiary of the Company;
(vii) make or agree to make any new capital expenditure or
expenditures which individually is in excess of $25,000 or which in the
aggregate are in excess of $100,000;
(viii) make any material tax election or settle or compromise any
income or franchise tax liability;
(ix) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction (x) of
liabilities or obligations the failure of which to satisfy would have a Material
Adverse Effect on the Company, (y) liabilities and obligations to employees and
(z) in the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the notes
thereto) of the Company included in the Filed SEC Documents or incurred since
the date of such financial statements in the ordinary course of business
consistent with past practice in accordance with the terms of this Section 5.1;
(x) except as expressly contemplated hereby, enter into, modify,
amend or terminate any contract or agreement binding on the Company or any
subsidiary or waive, release or assign any rights or claims thereunder other
than contracts or agreements involving purchase of inventory and supplies or
sales of products in the ordinary course of business and other than discounting
of accounts receivable to obtain prompt collection;
(xi) terminate or lay off any employees, other than for cause
consistent with past practice and Company policy.
(xii) except as otherwise contemplated by this Agreement adopt or
amend in any material respect any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees other than in the
-27-
<PAGE>
ordinary course of business, consistent with past practice, or change in any
material respect any management policies or procedures, or otherwise alter or
commit to any compensation, benefit or severance or change of control
arrangement for or with any officer or employee of the Company or enter into any
related or interested party transaction of a nature that would be required to be
disclosed in SEC filings.
(xiii) grant or provide any severance or termination pay to any
officer or employee except payments under the WARN Act or similar law or
regulation after first consulting with Parent, or that meet the following three
criteria: (A) the payments are in amounts consistent with the Company's policies
and past practices, (B) the payments are made pursuant to written plans or
agreements outstanding, or policies existing, on the date hereof and (C) the
payments are made pursuant to arrangements described in the Company Disclosure
Schedule and only after prior written notice to Parent;
(xiv) voluntarily take actions to liquidate or dissolve the
Company or to take advantage of bankruptcy or other creditor protection laws;
(xv) institute any litigation or other proceeding other than in
connection with this Agreement or any of the transactions contemplated hereby;
(xvi) take any action that might cause or constitute a breach of
any representation or warranty made by the Company in this Agreement; or
(xvii) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) Other Actions. The Company and Parent shall not, and shall not
-------------
permit any of their respective subsidiaries to, knowingly and willfully, take
deliberate action that would cause (i) any of the representations and warranties
of such party set forth in this Agreement to become untrue in (x) such a manner
as would have a Material Adverse Effect on the Company (in the case of the
Company) or (y) in any material respect (in the case of Parent) as of the date
when made or (ii) any of the conditions to the Offer set forth in Exhibit A or
---------
any of the conditions to the Merger not being satisfied (subject to the
Company's right to take action consistent with Section 5.2).
5.2 No Solicitation.
---------------
(a) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement in accordance with its terms,
the Company shall not, nor shall it permit any of its subsidiaries to, nor shall
it authorize or permit any officer, director or employee of, or any investment
banker, attorney or other advisor or representative of, the Company or any of
its subsidiaries to, directly or indirectly, (i) solicit, initiate or encourage
the submission of any takeover proposal or (ii) participate in any discussions
or negotiations regarding, or furnish to any person any information with respect
to, or enter into any agreement with respect to, or take any other
-28-
<PAGE>
action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any takeover proposal;
provided, however, that to the extent required by fiduciary obligations under
- -------- -------
applicable law as advised by independent counsel, the Company may, in response
to a takeover proposal which was not solicited after the date of this Agreement,
participate in discussions or negotiations with, or furnish information with
respect to the Company pursuant to a confidentiality agreement in reasonably
customary form, to any person. The Company, its subsidiaries, officers,
directors, employees, investment bankers, attorneys and other agents and
representatives will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted previously regarding a
takeover proposal. Without limiting the foregoing, it is understood that any
violation of the restrictions set forth in the preceding two sentences by any
officer or director of the Company or any investment banker or attorney of the
Company or any of its subsidiaries, shall be deemed to be a breach of this
Section 5.2(a) by the Company. For purposes of this Agreement, "takeover
--------
proposal" means any proposal for a merger or other business combination
- --------
involving the Company or any of its Significant Subsidiaries or any proposal,
offer or tender offer to acquire (including without limitation by license) in
any manner, directly or indirectly, an equity interest in, not less than 10% of
the outstanding voting securities of, or assets representing not less than 10%
of the annual revenues of the Company or any of its Significant Subsidiaries,
other than the transactions contemplated by this Agreement.
(b) Following the receipt of an unsolicited takeover proposal which,
subject to the provisions of Section 5.2(a) hereof, the Company's Board of
Directors may respond to and if the Company's Board of Directors determines in
good faith, based on the advice of its outside financial advisors, that such
takeover proposal is more favorable to the Company's stockholders than the Offer
and the Merger (a "Superior Proposal"), then the Company may terminate this
-----------------
Agreement under Section 8.1(c) and shall pay the amounts payable under Section
6.8 within 2 business days and thereafter accept and enter into any Agreement
with respect to such Superior Proposal, and the Board of Directors of the
Company may approve or recommend (and, in connection therewith withdraw or
modify its approval or recommendation of the Offer, this Agreement or the
Merger). Nothing contained in this Section 5.2(b) shall prohibit the Company or
its Board of Directors from (i) taking, and disclosing to the Company's
stockholders, a position with respect to a takeover proposal pursuant to Rules
14d-9 and 14e-2(a) under the Exchange Act or (ii) making any disclosure to the
Company's stockholders that, in the judgment of the Board of Directors or the
Company is required under applicable law.
(c) In addition to the obligations of the Company set forth in
paragraph (b) above, the Company shall promptly advise Parent orally and in
writing of any request for information or of any takeover proposal, or any
inquiry with respect to or which is expected to lead to any takeover proposal,
the material terms and conditions of such request, takeover proposal or inquiry,
and the identity of the person making any such takeover proposal or inquiry. The
Company will keep Parent informed of the status and material terms of any such
request, takeover proposal or inquiry.
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<PAGE>
ARTICLE VI
ADDITIONAL AGREEMENTS
---------------------
6.1 Stockholder Approval; Preparation of Proxy Statement.
----------------------------------------------------
(a) If Company Stockholder Approval is required by law, the Company
will, at Parent's request, as soon as practicable following the expiration of
the Offer, duly call, give notice of, convene and hold a meeting of its
stockholders (the "Stockholders Meeting") for the purpose of obtaining the
--------------------
Company Stockholder Approval. If able to do so, Parent shall cause the Company
to comply with its obligations under Section 6.1(a) and Section 6.1(b). Subject
to the provisions of Section 5.2(b), the Company will, through its Board of
Directors, recommend to its stockholders that the Company Stockholder Approval
be given. Notwithstanding the foregoing, if Sub or any other subsidiary of
Parent shall acquire at least 90% of the outstanding shares of the Company
Common Stock, the parties shall, at the request of Parent, take all necessary
and appropriate action to cause the Merger to become effective as soon as
practicable after the expiration of the Offer without a Stockholders Meeting in
accordance with Section 253 of the DGCL. Without limiting the generality of the
foregoing, the Company agrees that its obligations pursuant to the first
sentence of this Section 6.1(a) shall not be affected by (i) the commencement,
public proposal, public disclosure or communication to the Company of any
takeover proposal or (ii) the withdrawal or modification by the Board of
Directors of the Company of its approval or recommendation of the Offer, this
Agreement or the Merger, except that such obligations shall terminate if this
Agreement is terminated.
(b) If the Company Stockholder Approval is required by law, the
Company will, at Parent's request, as soon as practicable following the
expiration of the Offer, prepare and file a preliminary Proxy Statement with the
SEC and will use its best efforts to respond to any comments of the SEC or its
staff and to cause the Proxy Statement to be mailed to the Company's
stockholders as promptly as practicable after responding to all such comments to
the satisfaction of the staff. The Company will notify Parent promptly of the
receipt of any comments from the SEC or its staff and of any request by the SEC
or its staff for amendments or supplements to the Proxy Statement or for
additional information and will supply Parent with copies of all correspondence
between the Company or any of its representatives, on the one hand, and the SEC
or its staff, on the other hand, with respect to the Proxy Statement or the
Merger. If at any time prior to the Stockholders Meeting there shall occur any
event that should be set forth in an amendment or supplement to the Proxy
Statement, the Company will promptly prepare and mail to its stockholders such
an amendment or supplement. The Company will not mail any Proxy Statement, or
any amendment or supplement thereto, to which Parent reasonably objects.
(c) Parent agrees to cause all shares of the Company Common Stock
purchased pursuant to the Offer and all other shares of the Company Common Stock
owned by Sub or any other subsidiary of Parent to be voted in favor of the
Company Stockholder Approval.
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<PAGE>
6.2 Access to Information; Confidentiality. The Company shall, and shall
--------------------------------------
cause each of its subsidiaries to, afford to Parent, and to Parent's officers,
employees, accountants, counsel, financial advisers and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to all their respective properties, books, contracts,
commitments, personnel and records and, during such period, the Company shall,
and shall cause each of its subsidiaries to, furnish or make available promptly
to Parent (a) a copy of each report, schedule, registration statement and other
document filed by it during such period pursuant to the requirements of Federal
or state securities laws and (b) all other information concerning its business,
properties and personnel as Parent may reasonably request. Except as required by
law, Parent will hold, and will cause its officers, employees, accountants,
counsel, financial advisers and other representatives and affiliates to hold,
any confidential information in accordance with the Confidentiality Agreement
between Parent and the Company (the "Confidentiality Agreement").
-------------------------
6.3 Best Efforts; Notification.
--------------------------
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
use its reasonable best efforts to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Offer, the Merger and
the other transactions contemplated by this Agreement, including (i) the
obtaining of all necessary actions or non actions, waivers, consents and
approvals from Governmental Entities and the making of all necessary
registrations and filings (including filings with Governmental Entities, if any)
and the taking of all reasonable steps as may be necessary to obtain an approval
or waiver from, or to avoid an action or proceeding by, any Governmental Entity,
(ii) the obtaining of all necessary consents, approvals or waivers from third
parties, including but not limited to those set forth in Section 4.1(d) of the
Company Disclosure Schedule, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of any of the transactions contemplated by this Agreement,
including seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed and (iv) the execution
and delivery of any additional instruments necessary to consummate the
transactions contemplated by, and to fully carry out the purposes of, this
Agreement. In connection with and without limiting the foregoing, the Company
and its Board of Directors shall (A) take all action necessary to ensure that no
state takeover statute or similar statute or regulation is or becomes applicable
to the Offer, the Merger, this Agreement or any of the other transactions
contemplated by this Agreement and (B) if any state takeover statute or similar
statute or regulation becomes applicable to the Offer, the Merger, this
Agreement, or any other transaction contemplated by this Agreement, take all
action within its power and authority necessary to ensure that the Offer, the
Merger and the other transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Offer, the Merger and the other transactions contemplated by this Agreement.
Notwithstanding anything to the contrary set forth in this Section 6.3(a), the
Board of Directors of
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<PAGE>
the Company shall not be prohibited from taking any action consistent with by
Section 5.2(a) or 5.2(b), subject to Parent's rights set forth in Section 5.2(b)
and in Section 5.2(c).
(b) The Company shall give prompt notice to Parent, and Parent shall
give prompt notice to the Company, of (i) any representation or warranty made by
it contained in this Agreement (x) so as to have a Material Adverse Effect on
the Company (in the case of the Company) or (y) in any material respect (in the
case of Parent) or (ii) the failure by it to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement; provided, however, that no such
-------- -------
notification shall affect the representations, warranties, covenants, or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
6.4 Stock Plans.
-----------
(a) Stock Option Plans
------------------
(i) At the Effective Time each outstanding employee or director
stock option (each, an "Employee Stock Option") to purchase shares of Company
---------------------
Common Stock heretofore granted pursuant to the Company's 1987 Stock Option
Plan, as amended, 1992 Stock Option Plan, as amended or 1992 Director Stock
Option Plans and each other right to acquire shares of Company capital stock
(collectively, "Options") shall become fully exercisable and vested, whether or
-------
not otherwise exercisable and vested. All Options that are outstanding
immediately prior to the Effective Time shall be canceled at the Effective Time
and the holders thereof shall be entitled to receive, for each share subject to
such Option, an amount of cash equal to the excess, if any, of the Offer Price
over the exercise price per Share of such Option subject to any required
withholding taxes.
(ii) Each of the Options shall terminate as of the Effective
Time.
(b) 1992 Stock Purchase Plan. The Company's 1992 Employee Stock
------------------------
Purchase Plan (the "Company Stock Purchase Plan") shall be terminated on the
---------------------------
earlier of July 31, 1997 or the Effective Time. If terminated at the Effective
Time, the Company shall take such actions as are necessary to cause the
"Exercise Date" (as such term is used in the Company Stock Purchase Plan)
applicable to the then current Offering Period (as such term is used in the
Company Stock Purchase Plan) to be changed to the last trading day on which the
Company Common Stock is traded on the Nasdaq National Market immediately prior
to the Effective Time (the "Final Company Exercise Date"); provided that such
---------------------------
change in the Exercise Date shall be conditioned on the consummation of the
Merger. On the Final Company Exercise Date, the funds credited as of such date
under the Company Stock Purchase Plan within each participant's payroll
withholdings account shall be deemed applied to the purchase of whole shares of
the Company Common Stock in accordance with the terms of the Company Stock
Purchase Plan, and the shares of Company Common Stock issuable as a result
thereof shall be deemed outstanding and converted to Merger Consideration in the
Merger pursuant to the terms of this Agreement.
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<PAGE>
6.5 Post Merger Employment Benefits; Severance. Employees of the Company
------------------------------------------
who become employed by Parent or any controlled subsidiary thereof after the
Effective Time will either to extent permitted under the terms of such Employee
Benefit Plans continue to be eligible to participate in the Company's Employee
Benefit Plans, if and for so long as continued, or become eligible to
participate in the same standard employee benefit plans as are generally
available to similarly situated employees of Parent. The Company shall take all
commercially reasonable efforts in light of the Company's current financial
condition to induce its employees to remain employed by the Company at least
through the Effective Time.
6.6 Indemnification, Exculpation and Insurance.
------------------------------------------
(a) From and after the Effective Time, the Parent will fulfill and
honor and will cause the Surviving Corporation to fulfill and honor in all
respects the obligations of the Company pursuant to any indemnification
agreements between the Company and any of its subsidiaries and their respective
directors and officers (the "Indemnified Parties") existing prior to the date
-------------------
hereof; Parent acknowledges that indemnity agreements are currently in force
with each of the Company's directors and officers and agrees not to challenge
the validity of such agreements. From and after the Effective Time, such
obligations shall be the joint and several obligations of Parent and the
Surviving Corporation and, by executing this Agreement, Parent hereby assumes
such obligations. The Certificate of Incorporation and Bylaws of the Surviving
Corporation will contain the provisions with respect to indemnification and
elimination of liability for monetary damages set forth in the Certificate of
Incorporation and Bylaws of the Company, which provisions will not be amended,
repealed or otherwise modified from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who, immediately prior to
the Effective Time, were directors, officers, employees or agents of the Company
or its subsidiaries, unless such modification is required by law.
(b) Parent will to cause to be maintained for a period of not less
than two (2) years from the Effective Time the Company's current directors' and
officers' insurance and indemnification policy to the extent that it provides
coverage for events occurring prior to the Effective Time (the "D&O Insurance")
-------------
for all persons who are directors and officers of the Company on the date of
this Agreement, so long as the annual premium therefor would not be in excess of
150% of the last annual premium paid prior to the date of this Agreement (the
"Maximum Premium"). If the existing D&O Insurance expires, is terminated or
---------------
canceled during such two year period, Parent will use all reasonable efforts to
cause to be obtained as much D&O Insurance as can be obtained for the remainder
of such period for an annualized premium not in excess of the Maximum Premium,
on terms and conditions no less advantageous than the existing D&O insurance. In
lieu of maintaining the Company's current D&O insurance, Parent may elect to add
the directors and officers of the Company on the date of this Agreement to its
own insurance policy, provided that such election does not diminish the rights
provided to such persons under the Company's existing D&O Insurance.
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<PAGE>
(c) This Section 6.6 will survive any termination of this Agreement
and the consummation of the Merger at the Effective Time is intended to benefit
the Company, the Surviving Corporation and the persons who are or were
directors, officers, employees and agents of the Company or its subsidiaries on
or prior to the Effective Time, and will be binding on all successors and
assigns of the Parent or the Surviving Corporation.
(d) In the event that Parent or the Surviving Corporation or any of
their successors or assigns consolidates with or merges into any other person
and shall not be the continuing or surviving corporations or entities of such
consolidation or merger, then and in each such case, proper provisions shall be
made so that the successors and assigns of the Parent or the Surviving
Corporation shall assume the obligations of the Parent or the Surviving
Corporation, as the case may be, set forth in this Section 6.6.
(e) The provisions of this Section 6.6 are intended to be for the
benefit of, and shall be enforceable by, each indemnified party and such party's
heirs and representatives.
6.7 Directors. Promptly upon the acceptance for payment of, and payment
---------
for, any shares of the Company Common Stock by Sub pursuant to the Offer, and
provided that the Minimum Tender Condition has been satisfied, Sub shall be
entitled to designate for appointment or election to the Company's Board of
Directors, upon written notice to Company, such number of persons so that the
designees of Sub constitute the same percentage (but in no event less than a
majority) of the Company's Board of Directors (rounded up to the next whole
number) as the percentage of Shares acquired in connection with the Offer. The
Company shall, upon Sub's request, promptly increase the size of the Board of
Directors and/or secure the resignations of such number of directors as is
necessary to enable Sub's designees to be elected to the Board of Directors and
shall cause Sub's designees to be so elected. Subject to applicable law, the
Company shall take all action requested by Parent necessary to effect any such
election, including mailing to its stockholders the Information Statement
containing the information required by Section 14(f) of the Exchange Act and
Rule 14f-1 promulgated thereunder, and the Company agrees to make such mailing
with the mailing of the Schedule 14D-9 (provided that Sub shall have provided to
the Company on a timely basis all information required to be included in the
Information Statement with respect to Sub's designees). Following the election
or appointment of Sub's designees pursuant to this Section 6.7, and prior to the
Effective Time, any amendment or termination of this Agreement, extension for
the performance or waiver of the obligations or other acts of Parent or Sub or
waiver of the Company's rights hereunder, shall require the concurrence of a
majority of the Company's directors (or the concurrence of the director, if
there is only one remaining) then in office who are directors of the Company on
the date hereof, or are directors (other than directors designated by Sub in
accordance with this Section 6.7) designated by such persons or person to fill
any vacancy (the "Continuing Directors"). Notwithstanding the foregoing, Parent
--------------------
will take all actions in its power required to maintain on the Company's Board
at least one Continuing Director at all times after the consummation of the
Offer and until the Effective Time.
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<PAGE>
6.8 Fees and Expenses.
-----------------
(a) Except as provided below in this Section 6.8, all fees and
expenses incurred in connection with the Offer, the Merger, this Agreement and
the transactions contemplated by this Agreement shall be paid by the party
incurring such fees or expenses, whether or not the Offer or the Merger is
consummated.
(b) The Company shall pay, or cause to be paid, in same or next day
funds to Parent, $750,000 (the "Expense Fee"):
-----------
(i) upon demand (unless this Agreement is terminated by the
Company and Parent or Sub shall have failed to perform, in any manner that
adversely affects the Company or its stockholders, any of its obligations under
this Agreement) if this Agreement is terminated pursuant to Section 8.1(b)(i) as
a result of the failure of any condition set forth in clause (i), (ii) or (iv)
of paragraph (d) of Exhibit A or in paragraph (e) or (f) of Exhibit A or
pursuant to Section 8.1(d)(i), (ii) or (iv);
(ii) upon demand, (unless this Agreement is terminated by the
Company and Parent or Sub shall have failed to perform, in any manner that
adversely affects the Company or its stockholders, any of its obligations under
this Agreement), if (x) at any time on or after the date of this Agreement until
twelve (12) months following the termination of this Agreement, any person or
"group" (within the meaning of Section 13(d)(3) of the Exchange Act) (other than
Parent or any of its affiliates) shall have acquired, or entered into an
agreement (the transaction contemplated by which is subsequently consummated)
related to acquisition of (including without limitation by license), directly or
indirectly, the Company, assets representing more than 50% of the fair market
value of the Company's assets or more than 50% of the shares of the Company
Common Stock then outstanding, and (y)(A) on or after the date of this
Agreement, and prior to expiration of the Offer (or after expiration of the
Offer but prior to expiration of a Concurrent Proposal) any person or group
shall have made a takeover proposal which shall have been publicly announced and
(B) this Agreement shall have been terminated pursuant to Section 8.1(b)(i) or
Section 8.1(d). For purposes of this Section 6.8(b)(ii), "Concurrent Proposal"
shall mean any takeover proposal that is made and not subsequently withdrawn
prior to the expiration of the Offer or earlier termination of this Agreement;
or
(iii) concurrently with the Company entering into any agreement
with respect to any superior proposal in accordance with Section 5.2(b), unless
this Agreement is terminated by the Company and Parent or Sub shall have failed
to perform in any manner that adversely affects the Company or its stockholders,
any of its obligations under this Agreement.
(c) Payment of the amounts described in this Section 6.8 shall not be
in lieu of damages incurred in the event of willful breach of this Agreement.
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<PAGE>
6.9 Public Announcements. Parent and Sub, on the one hand, and the
--------------------
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review, comment upon and concur with, any
press release or other public statements with respect to the transactions
contemplated by this Agreement, including the Offer and the Merger, and shall
not issue any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national market system.
The parties agree that the initial press release to be issued with respect to
the transactions contemplated by this Agreement shall be in the form heretofore
agreed to by the parties.
6.10 Stock Option Agreement. Concurrently with the execution of this
----------------------
Agreement, the Company shall deliver to Parent an executed Stock Option
Agreement in the form of Exhibit B attached hereto (the "Stock Option
------------
Agreement"). The Company agrees to fully perform its obligations under the
- ---------
Stock Option Agreement.
6.11 Preferred Share Rights Agreement. The Company hereby covenants and
--------------------------------
agrees to effect the amendment of the Rights Agreement, described in Section
4.1(v) hereof, by executing a formal amendment thereto with the Rights Agent and
filing an amendment to the Company's Registration Statement on Form 8-A, and
having such amendment declared effective by the SEC with respect to such Rights
Agreement as soon as possible, and in no event later than five days, after the
date of this Agreement; and further covenants and agrees that it shall take any
and all action necessary to prevent Parent, Sub and their respective Affiliates
and Associates from being considered an "Acquiring Person" under the Rights
Agreement, and to prevent the occurrence of a "Distribution Date," as defined
therein, as a result of Sub's acquisition of Company Common Stock upon
consummation of the Offer or Parent's or Sub's acquisition of Company Common
Stock, or rights to acquire same, in connection with the Merger or otherwise
pursuant to this Agreement or any of the transactions or documents contemplated
hereby, including without limitation pursuant to the Offer, the Merger or the
Stock Option Agreement, or any other agreement involving Parent, Sub or any
Affiliate or Associate thereof approved by the Board of Directors of the
Company.
6.12 Parent Financial Assistance. Parent agrees to provide financial
---------------------------
assistance to the Company on and subject to the terms set forth in Exhibit C.
6.13 Technology License Agreement. Concurrently with the execution of
----------------------------
this Agreement, the Company and Parent shall enter into the Technology License
Agreement in the form of Exhibit D attached hereto (the "Technology License
--------- ------------------
Agreement").
- ---------
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<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT
--------------------
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Effective Time of the following
conditions:
(a) Company Stockholder Approval. If required by applicable law,
----------------------------
the Company Stockholder Approval shall have been obtained.
(b) HSR. To the extent required under applicable law, any waiting
---
period (and any extension thereof) applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(c) Consummation of the Offer. Shares shall have been purchased
-------------------------
pursuant to the Offer.
(d) No Injunctions or Restraints. No statute, rule, regulation,
----------------------------
executive order, decree, temporary restraining order, preliminary or permanent
injunction, judgment or other order or ruling issued by any court of competent
jurisdiction or other Governmental Entity or other legal restraint or
prohibition shall be in effect which would (i) make the acquisition or holding
by Parent or its affiliates of Company Common Stock or Common Stock of the
Surviving Corporation illegal or otherwise prevent the consummation of the
Merger, (ii) prohibit Parent's or Sub's ownership or operation of, or compel
Parent or Sub to dispose of or hold separate, all or a material portion of the
business or assets of Purchaser, the Company or any subsidiary thereof, (iii)
compel Parent, Sub or the Company to dispose of or hold separate all or a
material portion of the business or assets of Parent or any of its subsidiaries
or the Company or any of its subsidiaries, (iv) impose material limitations on
the ability of Parent or Sub or their affiliates effectively to exercise full
ownership and financial benefits of the Surviving Corporation, or impose any
material condition to this Agreement or the Merger which would be materially
adverse to Parent.
7.2 Conditions to Parent's and Sub's Obligation to Effect the Merger. The
----------------------------------------------------------------
respective obligations of Parent and Sub to effect the Merger are subject to the
satisfaction or waiver on or prior to the Effective Time of the following
conditions:
(a) the representations and warranties of the Company set forth in
this Agreement shall have been true and correct in all material respects as of
the date of the Agreement except for such inaccuracies as have been cured;
(b) (x) the Company shall have performed in all material respects each
of its obligations under this Agreement required to be performed by it prior to
expiration of the Offer; and (y) the Company shall have performed in all
material respects each of its obligations under this
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<PAGE>
Agreement, to the extent such performance is under the control of the officers
of the Company who were not appointed following the consummation of the Offer,
required to be performed by it following expiration of the Offer, except in
cases of clauses (x) and (y) to the extent that (i) the aggregate effect of the
failure of such performance does not result in a Material Adverse Effect with
respect to the Company, alter the terms of the Merger or materially adversely
affect Parent or (ii) the failure of such performance is attributable to any
action or inaction of Parent or Company directors appointed at Parent's request;
and
(c) there shall not have occurred since the date of this Agreement any
Material Adverse Change in the Company and its subsidiaries taken as a whole or
any event that is highly probable to result in a Material Adverse Change in the
Company and its subsidiaries taken as a whole, excluding for these purposes any
changes that consist primarily of or result primarily from employee attrition,
and disregarding for these purposes operating losses incurred in the ordinary
course.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
8.1 Termination. This Agreement may be terminated at any time prior to the
-----------
Effective Time, whether before or after approval of matters presented in
connection with the Merger by the stockholders of the Company (provided,
however, that if Shares are purchased pursuant to the Offer, Parent may not in
any event terminate this Agreement):
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company;
(i) if (w) as the result of the failure of any of the conditions
set forth in Exhibit A to this Agreement, Sub shall have failed to commence the
---------
Offer in the time required by this Agreement or (x) as a result of the failure
of any of the conditions set forth in Exhibit A to this Agreement the Offer
---------
shall have terminated or expired in accordance with its terms (as extended, if
required, pursuant to the last sentence of Section 1.1(a)) without Sub having
accepted for payment any shares of the Company Common Stock pursuant to the
Offer or (y) Sub shall not have accepted for payment any shares of the Company
Common Stock pursuant to the Offer on or prior to August 5, 1997; provided,
--------
however, that the right to terminate this Agreement pursuant to clauses (w) or
- -------
(x) above of this Section 8.1(b)(i) shall not be available to any party whose
failure to perform any of its obligations under this Agreement results in the
failure of any such condition or if the failure of such condition results from
facts or circumstances that constitute a breach of representation or warranty
under this Agreement by such party; or
(ii) if any Governmental Entity shall have issued an order,
decree or ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the acceptance
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<PAGE>
for payment of, or payment for, shares of the Company Common Stock pursuant to
the Offer or the Merger and such order, decree or ruling or other action shall
have become final and nonappealable; or
(c) by the Company in accordance with the provisions of Section 5.2,
provided that the Company shall pay within 2 business days after termination to
the Parent the entire Expense Fee under Section 6.8;
(d) by the Parent in the event that (i) the Board of Directors of the
Company or any committee thereof shall have failed to recommend the Offer, the
Merger or this Agreement, including any failure to include such recommendation
in the Schedule 14D-9, or shall have so resolved; (ii) the Board of Directors of
the Company or any committee thereof shall have withdrawn or modified (including
without limitation by amendment of the Company's Schedule 14D-9) in a manner
adverse to Parent or Sub its approval or recommendation of the Offer, the Merger
or this Agreement, shall have approved or recommended any takeover proposal,
shall have authorized the redemption or amendment of the Rights Agreement after
the Company has received a takeover proposal or shall have resolved to do any of
the foregoing; (iii) the Company shall have entered into any letter of intent,
acquisition agreement or similar agreement with respect to any superior proposal
in accordance with Section 5.2(b) of this Agreement or the Board of Directors or
any committee thereof shall have resolved to do so; or (iv) the Board of
Directors of the Company or any committee thereof upon a request to reaffirm the
Company's approval or recommendation of the Offer, the Merger or this Agreement,
shall have failed to do so within two business days after such request is made
or shall have so resolved.
8.2 Effect of Termination. In the event of termination of this Agreement
---------------------
by either the Company or Parent as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of Parent, Sub or the Company, other than the provisions of Section
5.2(b), the last sentence of Section 6.2, Section 6.8, this Section 8.2 and
Article IX, except to the extent that such termination results from the willful
and material breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
8.3 Amendment. This Agreement may be amended by the parties at any time
---------
before or after obtaining the Company Stockholder Approval, if required by law;
provided, however, that after any such approval, there shall not be made any
- -------- -------
amendment that by law requires further approval by such stockholders without the
further approval of such stockholders; and provided further that any amendment
following the purchase of shares pursuant the Offer shall require the consent of
a majority of the Continuing Directors. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.
8.4 Extension; Waiver. At any time prior to the Effective Time, the
-----------------
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
8.3, waive
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<PAGE>
compliance with any of the agreements or conditions contained in this Agreement.
Any agreement on the part of a party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of those rights.
8.5 Procedure for Termination, Amendment, Extension or Waiver. A
---------------------------------------------------------
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of Parent, Sub or the
Company, action by its Board of Directors or the duly authorized designee of its
Board of Directors; provided, however, that in the event that Sub's designees
-------- -------
are appointed or elected to the Board of Directors of the Company as provided in
Section 6.7, after the acceptance for payment of shares of the Company Common
Stock pursuant to the Offer and prior to the Effective Time, the affirmative
vote of the Continuing Directors shall be required by the Company to (i) amend
or terminate this Agreement by the Company, (ii) exercise or waive any of the
Company's rights or remedies under this Agreement or (iii) extend the time for
performance of Parent's and Sub's respective obligations under this Agreement.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1 Nonsurvival of Representations and Warranties. None of the
---------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time or, in the case of
the Company, shall survive the acceptance for payment of, and payment for,
shares of the Company Common Stock by Sub pursuant to the Offer. This Section
9.1 shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
9.2 Notices. All notices, requests, claims, demands and other
-------
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Parent or Sub, to
Micron Electronics, Inc.
900 East Karcher Road
Nampa, ID 83687
Attention: Chief Financial Officer
with copies to: the General Counsel
at the same address
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<PAGE>
Fenwick & West LLP
Two Palo Alto Square
Suite 700
Palo Alto, CA 94306
Fax: (415) 494-1417
Attention: Dennis R. DeBroeck, Esq.
David W. Healy, Esq.
(b) if to the Company, to
NetFRAME Systems Incorporated
1545 Barber Lane
Milpitas, CA 95035
Attention: Chief Financial Officer
Wilson Sonsini Goodrich & Rosati
650 Page Mill Rd.
Palo Alto, CA 94304-1050
Telephone: 415-493-9300
Facsimile: 415-493-6811
Attention: Larry W. Sonsini, Esq.
Marty Korman, Esq.
9.3 Definitions. For purposes of this Agreement:
-----------
(a) an "affiliate" of any person means another person that directly
---------
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "Material Adverse Change" or "Material Adverse Effect" means,
----------------------- -----------------------
when used in connection with the Company, any change or effect that is
materially adverse to the Company's business, properties, assets, financial
condition or results of operations, excluding those changes, effects and
developments that result from (i) the announcement or pendency of the Offer,
(ii) general economic conditions or (iii) conditions affecting the industry in
which the Company competes.
(c) "person" means an individual, corporation, partnership, joint
------
venture, association, trust, unincorporated organization or other entity;
(d) a "subsidiary" of any person means another person, an amount of
----------
the voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting
-41-
<PAGE>
interests, 50% or more of the equity interests of which) is owned directly or
indirectly by such first person;
(e) "superior proposal" has the meaning assigned thereto in Section
-----------------
5.2(b); and
(f) "takeover proposal" has the meaning assigned thereto in Section
-----------------
5.2(a).
9.4 Interpretation. When a reference is made in this Agreement to an
--------------
Article, a Section, Exhibit or Schedule, such reference shall be to an Article
or a Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." The words "hereof," "herein" and "thereunder"
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement. All
terms defined in this Agreement shall have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto unless otherwise
defined herein. The definitions contained in this Agreement are applicable to
the singular as well as the plural forms of such terms and to the masculine as
well as to the feminine and neuter genders of such term. References to a person
are also to its permitted successors and assigns.
9.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
9.6 Entire Agreement; No Third-Party Beneficiaries. This Agreement and the
----------------------------------------------
Confidentiality Agreement constitute the entire agreement, and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter of this Agreement and except for the
provisions of Sections 6.4 and 6.6, are not intended to confer upon any person
other than the parties and the Company's stockholders any rights or remedies
hereunder.
9.7 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflict of laws thereof.
9.8 Assignment. Neither this Agreement nor any of the rights, interests or
----------
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any of or all its rights, interests and obligations under this
Agreement to Parent or to any direct or indirect wholly owned subsidiary of
Parent, but no such assignment shall relieve Sub and Parent of any of its
obligations under this Agreement. This Agreement will be binding upon, inure to
the benefit of, and be enforceable by, the parties and their respective
successors and assigns.
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<PAGE>
9.9 Enforcement. The parties agree that irreparable damage would occur
-----------
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court and (c) agrees that it will not bring any
action relating to this Agreement or any of the transactions contemplated by
this Agreement in any court other than a Federal or state court sitting in the
State of Delaware.
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<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
PARENT: MICRON ELECTRONICS, INC.
By: /s/ T. Erik Oaas
-------------------------------
Name:
Title:
SUB: PAYETTE ACQUISITION CORPORATION
By: /s/ T. Erik Oaas
-------------------------------
Name:
Title:
THE COMPANY: NETFRAME SYSTEMS INCORPORATED
By: /s/ Robert L. Puette
-------------------------------
Name:
Title:
***AGREEMENT AND PLAN OF MERGER SIGNATURE PAGE***
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<PAGE>
EXHIBIT A
Offer
-----
Notwithstanding any other term of the Offer or this Agreement, Sub shall
not be required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-l(c) under the Exchange Act (relating
to Sub's obligation to pay for or return tendered shares of the Company Common
Stock after the termination or withdrawal of the Offer), to pay for any shares
of the Company Common Stock tendered pursuant to the Offer unless (i) there
shall have been validly tendered and not withdrawn prior to the expiration of
the Offer that number of shares of the Company Common Stock which would, upon
consummation of the Offer, then represent at least a majority of the Fully
Diluted Shares (the "Minimum Tender Condition") and (ii) any waiting period
------------------------
under the HSR Act applicable to the purchase of shares of the Company Common
Stock pursuant to the Offer shall have expired or been terminated. The term
"Fully Diluted Shares" means all outstanding securities entitled generally to
--------------------
vote in the election of directors of the Company on a fully diluted basis, after
giving effect to the exercise or conversion of all options, rights and
securities exercisable or convertible into such voting securities, but only to
the extent that any such options, rights or securities are exercisable or
convertible into such voting securities at a per share price of $1.50 or less,
and specifically excluding any shares that are or may become issuable pursuant
to the Stock Option Agreement. Furthermore, notwithstanding any other term of
the Offer or this Agreement, Sub shall not be required to accept for payment or,
subject as aforesaid, to pay for any shares of the Company Common Stock not
theretofore accepted for payment or paid for, and may terminate or amend the
Offer, if, upon the scheduled expiration date of the Offer (as extended, if
required, pursuant to the last sentence of Section 1.1(a)) and before the
acceptance of such shares for payment or the payment therefor, any of the
following conditions exists and is continuing:
(a) there shall be pending any suit, action or proceeding brought by
or on behalf of any Governmental Entity (or the staff of the Federal Trade
Commission or the staff of the Antitrust Division of the Department of Justice
shall have recommended the commencement of such), any shareholder of Company or
any other person or party directly or indirectly (i) challenging the acquisition
by Parent or Sub of any shares of the Company Common Stock, seeking to restrain
or prohibit the making or consummation of the Offer or the Merger or the
performance of any of the other transactions contemplated by this Agreement, or
alleging, (on grounds that Sub reasonably and in good faith determines are
reasonably likely to result in financial exposure to the Company in excess of
available insurance coverage and/or proceeds), that any such acquisition or
other transaction relates to, involves or constitutes a violation by the Company
or its directors of federal securities law or applicable corporate statutes or
principles, (ii) seeking to prohibit or limit the ownership or operation by the
Company, Parent or any of their respective subsidiaries of a material portion of
the business or assets of the Company and its subsidiaries, taken as a whole, or
Parent and its subsidiaries, taken as a whole, or to compel the Company or
Parent to dispose of or hold separate any material portion of the business or
assets of the Company and its subsidiaries, taken as a whole, or Parent and its
subsidiaries, taken as a whole, as a result of the Offer or any of the other
transactions contemplated by this Agreement, (iii) seeking to impose material
limitations on the
-45-
<PAGE>
ability of Parent or Sub to acquire or hold, or exercise full rights of
ownership of, any shares of the Company Common Stock accepted for payment
pursuant to the Offer including without limitation the right to vote the Company
Common Stock accepted for payment by it on all matters properly presented to the
stockholders of the Company, (iv) seeking to prohibit Parent or any of its
subsidiaries from effectively managing or controlling in any material respect
the business or operations of the Company and its subsidiaries taken as a whole,
(v) which is likely to result in a material diminution in the value of the
Company or (vi) seeking to impose a material condition to the Offer, Merger or
Agreement which would be materially adverse to Parent;
(b) there shall be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated or deemed applicable to the
Offer or the Merger, or any other action shall be taken by any Governmental
Entity or court, other than the application to the Offer or the Merger of
applicable waiting periods under the HSR Act, that is reasonably likely to
result, in any of the consequences referred to in clauses (i) through (vi) of
paragraph (a) above;
(c) there shall have occurred since the date of this Agreement any
Material Adverse Change in the Company and its subsidiaries taken as a whole or
any event that is reasonably likely to result in a Material Adverse Change in
the Company and its subsidiaries taken as a whole;
(d) (i) the Board of Directors of the Company or any committee thereof
shall have failed to recommend the Offer, the Merger or this Agreement,
including any failure to include such recommendation in the Schedule 14D-9, or
shall have so resolved; (ii) the Board of Directors of the Company or any
committee thereof shall have withdrawn or modified (including without limitation
by amendment of the Company's Schedule 14D-9) in a manner adverse to Parent or
Sub its approval or recommendation of the Offer, the Merger or this Agreement,
shall have approved or recommended any takeover proposal shall have authorized
the redemption or amendment of the Rights Agreement after the Company has
received any takeover proposal or shall have so resolved, (iii) the Company
shall have entered into any letter of intent, acquisition agreement or similar
agreement with respect to any superior proposal in accordance with Section
5.2(b) of this Agreement or the Board of Directors or any committee thereof
shall have resolved to do so, or (iv) the Board of Directors of the Company or
any committee thereof upon a request to reaffirm the Company's approval or
recommendation of the Offer, the Merger or this Agreement, shall have failed to
do so within two business days after such request is made or shall have so
resolved;
(e) any of the representations and warranties of the Company set forth
in this Agreement shall have failed to be true and correct in any material
respect as of the date of the Agreement or shall have ceased to be true and
correct in any material respect at any time thereafter;
(f) the Company shall have breached or failed to perform in any
material respect any obligation or to comply in any material respect with any
agreement or covenant of the Company to be performed or complied with by it;
(g) this Agreement shall have been terminated in accordance with its
terms;
-46-
<PAGE>
(h) any bankruptcy proceedings shall have been instituted with respect
to the Company and not dismissed;
which, in the reasonable good faith judgment of Sub or Parent, in any such case,
and regardless of the circumstances giving rise to any such condition (other
than any action or inaction by Parent or any of its subsidiaries which
constitutes a breach of this Agreement), makes it inadvisable to proceed with
such acceptance for payment or payment.
The foregoing conditions are for the sole benefit of Sub and Parent and
their respective affiliates and may be asserted by Sub or Parent regardless of
the circumstances giving rise to such condition (other than any action or
inaction by Parent or any of its subsidiaries which constitutes a breach of this
Agreement) or may be waived (except for the Minimum Tender Condition) by Sub and
Parent in whole or in part at any time and from time to time in their sole
discretion. The failure by Parent, Sub or any other affiliate of Parent at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right, the waiver of any such right with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances and each such right shall be deemed an ongoing right that may be
asserted at any time and from time to time prior to the expiration of the Offer.
-47-
<PAGE>
Exhibit B
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of June 9, 1997 (the "Agreement") is
entered into by and between NetFRAME Systems Incorporated, a Delaware
corporation ("Target"), and Micron Electronics, Inc., a Minnesota corporation
("Acquiror"). Capitalized terms used in this Agreement but not defined herein,
and other terms defined in the Merger Agreement (as defined below) and used in
this Agreement but not defined herein, shall have the meanings ascribed thereto
in the Merger Agreement (as defined below).
RECITALS
--------
WHEREAS, concurrently with the execution and delivery of this Agreement,
Acquiror, Target and Payette Acquisition Corporation, a Delaware corporation and
a wholly-owned subsidiary of Acquiror ("Merger Sub"), are entering into an
Agreement and Plan of Merger (the "Merger Agreement"), which provides that,
among other things, upon the terms and subject to the conditions thereof,
Acquiror and Merger Sub will make a tender offer (the "Offer") for shares of
Common Stock of Target, and, following consummation of such Offer, Merger Sub
will be merged with and into Target (the "Merger"); and
WHEREAS, as a condition to Acquiror's willingness to enter into the Merger
Agreement, Acquiror has requested that Target agree, and Target has so agreed,
to grant to Acquiror an option to acquire shares of Target's Common Stock,
$0.001 par value, upon the terms and subject to the conditions set forth herein;
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option. Target hereby grants to Acquiror an irrevocable
---------------
option (the "Option") to acquire up to a number of shares of the Common Stock,
$0.001 par value, of Target ("Target Shares") equal to 19.9% of the issued and
outstanding shares as of the first date, if any, upon which an Exercise Event
(as defined in Section 1(a) below) shall occur (the "Option Shares"), in the
manner set forth below (i) by paying cash at a price of $1.00 per share (the
"Exercise Price") and/or, at Acquiror's election, (ii) by exchanging therefor
shares of the Common Stock, par value $0.01 per share, of Acquiror ("Acquiror
Shares") at a rate (the "Exercise Ratio"), for each Option Share, of a number of
Acquiror Shares equal to the Exercise Price divided by the closing sale price of
Acquiror Shares on the Nasdaq National Market for the trading day immediately
preceding the date of the Closing (as defined below) of the particular Option
exercise.
2. Exercise of Option; Maximum Proceeds.
------------------------------------
(a) For all purposes of this Agreement, an "Exercise Event" shall have
occurred (i) immediately prior to the earlier of (A) the failure of the Board of
Directors of Target or any committee thereof to recommend the Offer, the Merger
or the Merger Agreement, including any
<PAGE>
failure to include such recommendation in the Schedule 14D-9, or its resolution
to that effect, (B) the withdrawal or modification by the Board of Directors of
Target or any committee thereof (including without limitation by amendment of
the Company's Schedule 14D-9), in a manner adverse to Acquiror or Merger Sub,
of the approval or recommendation by such Board or committee of the Offer, the
Merger or the Merger Agreement, or resolution to take such action, (C) the
approval or recommendation of any takeover proposal by the Board of Directors
of Target or any committee thereof, or resolution to take such action, (D) the
redemption or amendment of the Rights Agreement by the Board of Directors of
Target or any committee thereof after the Target has received a takeover
proposal, or resolution to take such action, (E) the execution by the Company
of an agreement (other than a Confidentiality Agreement) with respect to any
Superior Proposal in accordance with Section 5.2(b) of Merger Agreement or
resolution of the Board of Directors of Target or any committee thereof to do
so or (F) the failure, upon a request of Acquiror, to reaffirm Target's
approval or recommendation of the Offer, the Merger or the Merger Agreement,
within two business days after such request is made, or resolution to that
effect, (ii) immediately prior to the consummation of a tender or exchange
offer by a person other than Acquiror for 50% or more of any class of Target's
capital stock, or (iii) immediately prior to the time at which all of the
events specified in Section 6.8(b)(x) and (y) of the Merger Agreement shall
have occurred.
(b) Acquiror may deliver to Target a written notice (an "Exercise
Notice") specifying that it wishes to exercise and close a purchase of Option
Shares upon the occurrence of an Exercise Event and specifying the total number
of Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of Target shall
have taken any of the actions described in Section 2(a)(i) hereof, (ii) upon
the commencement of a tender or exchange offer by a person other than Acquiror
for 50% or more of any class of Target's capital stock (and/or during any time
which such a tender or exchange offer remains open or has been consummated) or
(iii) at any time following the occurrence of each of the events specified in
Section 6.8(b)(x) and (y) of the Merger Agreement (the events specified in
clauses (i), (ii) or (iii) of this sentence being referred to herein as a
"Conditional Exercise Event"). At any time after delivery of an Exercise
Notice, unless such Exercise Notice is withdrawn by Acquiror, the closing of a
purchase of Option Shares (a "Closing") specified in such Exercise Notice shall
take place at the principal offices of Target upon the occurrence of an
Exercise Event or at such later date prior to the termination of the Option as
may be designated by Acquiror in writing. In the event that no Exercise Event
shall occur prior to termination of the Option, such Exercise Notice shall be
void and of no further force and effect.
(c) The Option shall terminate upon the earliest of (i) the
consummation of the Offer for, and purchase of shares representing, in excess
of 50% of the outstanding Common Stock of Target, (ii) 12 months following the
termination of the Merger Agreement pursuant to Article VIII thereof if a
Conditional Exercise Event shall have occurred on or prior to the date of such
termination, and (iii) the date on which the Merger Agreement is terminated if
no Conditional Exercise Event shall have occurred on or prior to such date of
termination; provided, however, that if the Option is exercisable but cannot
-------- -------
be exercised by reason of any applicable government order or because the
waiting period related to the issuance of the Option Shares under the HSR Act
shall not have expired or been terminated, then the Option shall not terminate
until the tenth business day after such impediment to exercise shall have been
removed or shall have become final and not subject to appeal. Notwithstanding
the foregoing, the Option may not be exercised if (i) Acquiror
2
<PAGE>
shall have breached in any material respect any of its covenants or agreements
contained in the Merger Agreement or (ii) the representations and warranties of
Acquiror contained in the Merger Agreement shall not have been true and correct
in all material respects on and as of the date when made.
(d) If Acquiror receives in the aggregate pursuant to Section 6.8(b)
of the Merger Agreement together with proceeds in connection with any sales or
other dispositions of Option Shares or this Option (by virtue of Section 7
hereof or otherwise) and any dividends received by Acquiror declared on Option
Shares, more than the sum of (x) $1.5 million plus (y) the Exercise Price
multiplied by the number of Target Shares purchased by Acquiror pursuant to the
Option, then all proceeds to Acquiror in excess of such sum shall be remitted
by Acquiror to Target.
3. Conditions to Closing. The obligation of Target to issue Option Shares
---------------------
to Acquiror hereunder is subject to the conditions that (a) any waiting period
under the HSR Act applicable to the issuance of the Option Shares hereunder
shall have expired or been terminated; (b) all material consents, approvals,
orders or authorizations of, or registrations, declarations or filings with, any
Federal, state or local administrative agency or commission or other Federal,
state or local governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting or
otherwise restraining such issuance shall be in effect. It is understood and
agreed that at any time during which Acquiror shall be entitled to deliver to
Target an Exercise Notice, the parties will use their respective best efforts to
satisfy all conditions to Closing, so that a Closing may take place as promptly
as practicable, and in any event, upon the occurrence of an Exercise Event.
4. Closing. At any Closing, (a) Target shall deliver to Acquiror a single
-------
certificate in definitive form representing the number of Target Shares
designated by Acquiror in its Exercise Notice, such certificate to be registered
in the name of Acquiror and to bear the legend set forth in Section 10 hereof,
against delivery of (b) payment by Acquiror to Target of the aggregate purchase
price for the Target Shares so designated and being purchased by delivery of (i)
a certified check or bank check and/or, at Acquiror's election, (ii) a single
certificate in definitive form representing the number of Acquiror Shares being
issued by Acquiror in consideration therefor (based on the Exercise Ratio), such
certificate to be registered in the name of Target and to bear the legend set
forth in Section 10 hereof.
5. Representations and Warranties of Target. Target represents and
----------------------------------------
warrants to Acquiror that (a) Target is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder; (b) the execution and delivery of this Agreement by
Target and consummation by Target of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Target and
no other corporate proceedings on the part of Target are necessary to authorize
this Agreement or any of the transactions contemplated hereby; (c) this
Agreement has been duly executed and delivered by Target and constitutes a
legal, valid and binding obligation of Target and, assuming this Agreement
constitutes a legal, valid and binding obligation of Acquiror, is enforceable
against Target in accordance with its terms, except as enforceability may be
limited by bankruptcy and
3
<PAGE>
other laws affecting the rights and remedies of creditors generally and general
principles of equity; (d) except for any filings required under the HSR Act,
Target has taken all necessary corporate and other action to authorize and
reserve for issuance and to permit it to issue upon exercise of the Option, and
at all times from the date hereof until the termination of the Option will have
reserved for issuance, a sufficient number of unissued Target Shares for
Acquiror to exercise the Option in full and will take all necessary corporate
or other action to authorize and reserve for issuance all additional Target
Shares or other securities which may be issuable pursuant to Section 9(a) upon
exercise of the Option, all of which, upon their issuance and delivery in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable; (e) upon delivery of the Target Shares and any other
securities to Acquiror upon exercise of the Option, Acquiror will acquire such
Target Shares or other securities free and clear of all material claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by Acquiror; (f) the execution and delivery of this
Agreement by Target do not, and the performance of this Agreement by Target
will not, (i) violate the Certificate of Incorporation or Bylaws of Target,
(ii) conflict with or violate any order applicable to Target or any of its
subsidiaries or by which they or any of their property is bound or affected or
(iii) result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give rise to
any right of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or encumbrance on any property or assets of Target or
any of its subsidiaries pursuant to, any contract or agreement to which Target
or any of its subsidiaries is a party or by which Target or any of its
subsidiaries or any of their property is bound or affected, except, in the case
of clauses (ii) and (iii) above, for violations, conflicts, breaches, defaults,
rights of termination, amendment, acceleration or cancellation, liens or
encumbrances which would not, individually or in the aggregate, have a Material
Adverse Effect on Target; (g) the execution and delivery of this Agreement by
Target does not, and the performance of this Agreement by Target will not,
require any consent, approval, authorization or permit of, or filing with, or
notification to, any Governmental Entity except pursuant to the HSR Act; and
(h) any Acquiror Shares acquired pursuant to this Agreement will not be
acquired by Target with a view to the public distribution thereof and Target
will not sell or otherwise dispose of such shares in violation of applicable
law or this Agreement.
6. Representations and Warranties of Acquiror. Acquiror represents and
------------------------------------------
warrants to Target that (a) Acquiror is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Minnesota and has
the corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder; (b) the execution and delivery of this Agreement by
Acquiror and the consummation by Acquiror of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Acquiror and no other corporate proceedings on the part of Acquiror are
necessary to authorize this Agreement or any of the transactions contemplated
hereby; (c) this Agreement has been duly executed and delivered by Acquiror and
constitutes a legal, valid and binding obligation of Acquiror and, assuming this
Agreement constitutes a legal, valid and binding obligation of Target, is
enforceable against Acquiror in accordance with its terms, except as
enforceability may be limited by bankruptcy and other laws affecting the rights
and remedies of creditors generally and general principles of equity; (d) except
for any filings required under the HSR Act, Acquiror has taken (or will in a
timely manner take) all necessary corporate and other action in connection with
any exercise of the Option; (e) upon delivery of the Acquiror Shares to Target
in consideration of any acquisition of Target Shares pursuant hereto, Target
will acquire such Acquiror Shares free and clear of all material claims, liens,
charges, encumbrances and security interests of any kind or
4
<PAGE>
nature whatsoever, excluding those imposed by Target; (f) the execution and
delivery of this Agreement by Acquiror do not, and the performance of this
Agreement by Acquiror will not, (i) violate the Certificate of Incorporation or
Bylaws of Acquiror, (ii) conflict with or violate any order applicable to
Acquiror or any of its subsidiaries or by which they or any of their property
is bound or affected or (iii) result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give rise to any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the property or assets of Acquiror or any of its subsidiaries pursuant to, any
contract or agreement to which Acquiror or any of its subsidiaries is a party
or by which Acquiror or any of its subsidiaries or any of their property is
bound or affected, except, in the case of clauses (ii) and (iii) above, for
violations, conflicts, breaches, defaults, rights of termination, amendment,
acceleration or cancellation, liens or encumbrances which would not,
individually or in the aggregate, have a Material Adverse Effect on Acquiror;
(g) the execution and delivery of this Agreement by Acquiror does not, and the
performance of this Agreement by Acquiror will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Entity except pursuant to the HSR Act; and (h) any Target Shares
acquired upon exercise of the Option will not be acquired by Acquiror with a
view to the public distribution thereof and Acquiror will not sell or otherwise
dispose of such shares in violation of applicable law or this Agreement.
7. Certain Rights.
--------------
(a) Acquiror Put. Acquiror may deliver to Target a written notice (a
------------
"Put Notice") at any time during which Acquiror may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by Acquiror
pursuant thereto, at the price set forth in subparagraph (ii) below (as limited
by subparagraph (iii) below) (the "Put"). At any time after delivery of a Put
Notice, unless such Put Notice is withdrawn by Acquiror, the closing of the Put
(the "Put Closing") shall take place at the principal offices of Target upon
the occurrence of an Exercise Event or at such later date prior to the
termination of the Option as may be designated by Acquiror in writing. In the
event that no Exercise Event shall occur prior to termination of the Option,
such Put Notice shall be void and of no further force and effect.
(i) The difference between the "Market/Tender Offer Price" for
Target Shares as of the date Acquiror gives notice of its intent to exercise
its rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any takeover proposal which
was made prior to such date and not terminated or withdrawn as of such date and
(B) the highest closing sale price of Target Shares on the Nasdaq National
Market during the 20 trading days ending on the trading day immediately
preceding such date) and the Exercise Price, multiplied by the number of Target
Shares purchasable pursuant to the Option, but only if the Market/Tender Offer
Price is greater than the Exercise Price. For purposes of determining the
highest price offered pursuant to any takeover proposal which involves
consideration other than cash, the value of such consideration shall be equal
to the higher of (x) if securities of the same class of the proponent as such
consideration are traded on any national securities exchange or by any
registered securities association, a value based on the closing sale price or
asked price for such securities on their principal trading market on such date
and (y) the value ascribed to such
5
<PAGE>
consideration by the proponent of such takeover proposal or if no such value is
ascribed, a value determined in good faith by the Board of Directors of Target.
(ii) The Exercise Price paid by Acquiror for Target Shares
acquired pursuant to the Option plus the difference between the Market/Tender
----
Offer Price and such Exercise Price (but only if the Market/Tender Offer Price
is greater than the Exercise Price) multiplied by the number of Target Shares
so purchased. If Acquiror issued Acquiror Shares in connection with any
exercise of the Option, the Exercise Price in connection with such exercise
shall be calculated as set forth in the last sentence of Section 1 as if
Acquiror had exercised its right to pay cash instead of issuing Acquiror
Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above,
pursuant to this Section 7 Target shall not be required to pay Acquiror in
excess of an aggregate of (x) $1.5 million plus (y) the Exercise Price paid by
----
Acquiror for Target shares acquired pursuant to the Option minus (z) any
-----
amounts paid to Acquiror by Target pursuant to Section 6.8(b) of the Merger
Agreement.
(b) Redelivery of Acquiror Shares. If Acquiror has acquired Target
-----------------------------
Shares pursuant to exercise of the Option by the issuance and delivery of
Acquiror Shares, then Target shall, if so requested by Acquiror, in fulfillment
of its obligation pursuant to the first clause of Section 7(a)(ii) with respect
to the Exercise Price paid in the form of Acquiror Shares only, redeliver the
certificate(s) for such Acquiror Shares to Acquiror, free and clear of all
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, other than those imposed by Acquiror.
(c) Payment and Redelivery of Option or Shares. At the Put Closing,
------------------------------------------
Target shall pay the required amount to Acquiror in immediately available funds
(and Acquiror Shares, if applicable) and Acquiror shall surrender to Target the
Option and the certificates evidencing the Target Shares purchased by Acquiror
pursuant thereto, and Acquiror shall represent and warrant that such shares are
then free and clear of all claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever, other than those imposed by Target.
(d) Target Call. If Acquiror has acquired Option Shares pursuant to
-----------
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "Exercise Date") and no takeover proposal with respect
to Target has been consummated at any time after the date of this Agreement and
prior to the date one year following such Exercise Date (nor has Target entered
into a definitive agreement or letter of intent with respect to such a takeover
proposal which agreement or letter of intent remains in effect at the end of
such year), then, at any time after the date one year following such Exercise
Date and prior to the date 18 months following such Exercise Date, Target may
require Acquiror, upon delivery to Acquiror of written notice, to sell to Target
any Target Shares held by Acquiror as of the day that is ten business days after
the date of such notice, up to a number of shares equal to the number of Option
Shares acquired by Acquiror pursuant to exercise of the Option in connection
with such Exercise Date. The per share purchase price for such sale (the
"Target Call Price") shall be equal to the Exercise Price, plus an amount equal
to seven percent (7.0%) of the Exercise Price per annum, compounded annually,
since the applicable Exercise Date, less any dividends paid on the Target Shares
to be purchased by Target pursuant to this Section 7(d). The closing of any
sale of Target Shares pursuant to this Section 7(d) shall take place at the
principal offices of Target at a time and on a
6
<PAGE>
date designated by Target in the aforementioned notice to Acquiror, which date
shall be no more than 20 and no less than 12 business days from the date of
such notice. The Target Call Price shall be paid in immediately available
funds, provided that, in the event Acquiror has acquired Option Shares pursuant
--------
to exercise of the Option by issuance and delivery of Acquiror Shares, at the
option of Target, the Target Call Price for part or all of any purchase of
Target Shares pursuant to this Section 7(d), up to a number of such shares
equal to the number of Option Shares acquired by Acquiror by issuance and
delivery of Acquiror Shares, shall be paid by delivery of a number of Acquiror
Shares equal to the Target Call Price divided by the closing sale price of
Acquiror Shares on the Nasdaq National Market for the trading day immediately
preceding the date of the Exercise Date on which the Option Shares to be
purchased by Target pursuant to this Section 7(d) were originally issued to
Acquiror.
(e) Restrictions on Transfer. Until the termination of the Option,
------------------------
Target shall not sell, transfer or otherwise dispose of any Acquiror Shares
acquired by it pursuant to this Agreement.
8. Registration Rights.
-------------------
(a) Following the termination of the Merger Agreement, each party
hereto (a "Holder") may by written notice (a "Registration Notice") to the
other party (the "Registrant") request the Registrant to register under the
Securities Act all or any part of the shares acquired by such Holder pursuant
to this Agreement (the "Registrable Securities") in order to permit the sale or
other disposition of such shares by Holder; provided, however, that any such
-------- -------
Registration Notice must relate to at least 100,000 shares of Common Stock of
the Registrant (as adjusted for splits, etc.) and that any rights to require
registration hereunder shall terminate with respect to any shares that may be
sold pursuant to Rule 144(k) under the Securities Act. The Registrant shall
have the option exercisable by written notice delivered to the Holder within
ten business days after the receipt of the Registration Notice, irrevocably to
agree to purchase all or any part of the Registrable Securities for cash at a
price (the "Option Price") equal to the product of (i) the number of
Registrable Securities so purchased and (ii) the per share average of the
closing sale prices of the Registrant's Common Stock on the Nasdaq National
Market for the 20 trading days immediately preceding the date of the
Registration Notice. Any such purchase of Registrable Securities by the
Registrant hereunder shall take place at a closing to be held at the principal
executive offices of the Registrant or its counsel at any reasonable date and
time designated by the Registrant in such notice within ten business days after
delivery of such notice. The payment for the shares to be purchased shall be
made by delivery at the time of such closing of the Option Price in immediately
available funds.
(b) If the Registrant does not elect to exercise its option to
purchase pursuant to Section 8(a) with respect to all Registrable Securities,
the Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
- -------- -------
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of material
non-public information which it reasonably believes would be detrimental to be
disclosed at such time and, in the written opinion
7
<PAGE>
of counsel to such Registrant, such information would have to be disclosed if a
registration statement were filed at that time; (B) such Registrant is required
under the Securities Act to include audited financial statements for any period
in such registration statement and such financial statements are not yet
available for inclusion in such registration statement; or (C) such Registrant
determines, in its reasonable judgment, that such registration would interfere
with any financing, acquisition or other material transaction involving the
Registrant. If consummation of the sale of any Registrable Securities pursuant
to a registration hereunder does not occur within 180 days after the filing
with the SEC of the initial registration statement therefor, the provisions of
this Section 8 shall again be applicable to any proposed registration, it being
understood that neither party shall be entitled to more than an aggregate of
two effective registration statements hereunder. The Registrant shall use all
reasonable efforts to cause any Registrable Securities registered pursuant to
this Section 8 to be qualified for sale under the securities or blue sky laws
of such jurisdictions as the Holder may reasonably request and shall continue
such registration or qualification in effect in such jurisdictions; provided,
--------
however, that the Registrant shall not be required to qualify to do business in,
- -------
or consent to general service of process in, any jurisdiction by reason of this
provision.
(c) The registration rights set forth in this Section 8 are subject
to the condition that the Holder shall provide the Registrant with such
information with respect to such Holder's Registrable Securities, the plan for
distribution thereof, and such other information with respect to such Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all material facts
required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at
the Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may
reasonably require. In connection with any registrations, the Holder and the
Registrant agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type with the underwriters participating in such offering.
(e) Indemnification.
---------------
(i) The Registrant will indemnify the Holder, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter of the
Registrant's securities, with respect to any registration, qualification or
compliance which has been effected pursuant to this Agreement, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading, or any violation by the Registrant of any rule or
regulation promulgated under the
8
<PAGE>
Securities Act applicable to the Registrant in connection with any such
registration, qualification or compliance, and the Registrant will reimburse
the Holder and, each of its directors and officers and each person who controls
the Holder within the meaning of Section 15 of the Securities Act, and each
underwriter for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Registrant will not be liable in
any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in conformity
with written information furnished to the Registrant by such Holder or director
or officer or controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its
directors and officers and each underwriter of the Registrant's securities
covered by such registration statement and each person who controls the
Registrant within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement (or
alleged statement) of a material fact contained in such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Holder of any rule or regulation promulgated under the Securities Act
applicable to the Holder in connection with any such registration,
qualification or compliance, and will reimburse the Registrant, such directors,
officers or control persons or underwriters for any legal or any other expenses
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Registrant by the
Holder for use therein, provided that in no event shall any indemnity under
this Section 8(e) exceed the gross proceeds of the offering received by the
Holder.
(iii) Each party entitled to indemnification under this Section
8(e) (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 (whose approval shall not be unreasonably withheld), and 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 the Indemnified Party by 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, 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 8(e) unless the failure to give
such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action. 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 to such claim or
9
<PAGE>
litigation. No Indemnifying Party shall be required to indemnify any
Indemnified Party with respect to any settlement entered into without such
Indemnifying Party's prior consent (which shall not be unreasonably withheld).
9. Adjustment Upon Changes in Capitalization; Rights Plans.
-------------------------------------------------------
(a) In the event of any change in the Target Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option, the Exercise Ratio and the
Exercise Price shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction so that Acquiror shall
receive, upon exercise of the Option, the number and class of shares or other
securities or property that Acquiror would have received in respect of the
Target Shares if the Option had been exercised immediately prior to such event
or the record date therefor, as applicable.
(b) The Board of Directors of Target shall have duly authorized and
approved the amendment to Target's Rights Agreement to exclude Acquiror and its
Affiliates and Associates from the definition of "Acquiring Person" therein,
with respect to, among other things, the beneficial ownership of shares of
Target Common Stock which Acquiror, or its Affiliates and Associates, have
acquired or have the right to acquire pursuant to this Agreement. Target shall
take any and all action necessary to ensure that (i) such amendment is executed
by the Company and the Rights Agent and becomes effective within five days of
the date hereof, (ii) neither Acquiror, nor its Affiliates or Associates,
becomes an "Acquiring Person" as a result of Acquiror's rights or actions under
this Agreement and (iii) a "Distribution Date" as defined therein, does not
occur as a result of Acquiror's rights or actions under this Agreement.
10. Restrictive Legends. Each certificate representing Option Shares
-------------------
issued to Acquiror hereunder, and each certificate representing Acquiror Shares
delivered to Target at a Closing, shall include a legend in substantially the
following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE.
11. Listing and HSR Filing. Target, upon the request of Acquiror, shall
----------------------
promptly file an application to list the Target Shares to be acquired upon
exercise of the Option for quotation on the Nasdaq National Market and shall use
its best efforts to obtain approval of such listing as soon as practicable.
Acquiror, upon the request of Target, shall promptly file an application to list
the Acquiror Shares issued and delivered to Target pursuant to Section 1 for
quotation on the Nasdaq National Market and shall use its best efforts to obtain
approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto shall promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of Justice
all required premerger notification and report forms and other documents and
exhibits required to be filed under the HSR Act to permit the acquisition of the
Target Shares subject to the Option at the earliest possible date.
12. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this
10
<PAGE>
Agreement, express or implied, is intended to confer upon any person other than
the parties hereto and their respective successors and permitted assigns any
rights or remedies of any nature whatsoever by reason of this Agreement. Any
shares sold by a party in compliance with the provisions of Section 8 shall,
upon consummation of such sale, be free of the restrictions imposed with
respect to such shares by this Agreement and any transferee of such shares
shall not be entitled to the rights of such party. Certificates representing
shares sold in a registered public offering pursuant to Section 8 shall not be
required to bear the legend set forth in Section 10.
13. Specific Performance. The parties recognize and agree that if for any
--------------------
reason any of the provisions of this Agreement are not performed in accordance
with their specific terms or are otherwise breached, immediate and irreparable
harm or injury would be caused for which money damages would not be an adequate
remedy. Accordingly, each party agrees that in addition to other remedies the
other party shall be entitled to an injunction restraining any violation or
threatened violation of the provisions of this Agreement. In the event that any
action shall be brought in equity to enforce the provisions of the Agreement,
neither party will allege, and each party hereby waives the defense, that there
is an adequate remedy at law.
14. Entire Agreement. This Agreement and the Merger Agreement (including
----------------
the appendices thereto) constitute the entire agreement between the parties with
respect to the subject matter hereof and supersede all other prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof.
15. Further Assurances. Each party will execute and deliver all such
------------------
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
16. Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect. In
the event any Governmental Entity of competent jurisdiction holds any provision
of this Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
17. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Target, to:
NetFRAME Systems Incorporated
1545 Barber Lane
Milpitas, CA 95035
Attn: President and Chief Executive Officer
Fax: (408) 474-4048
11
<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Larry W. Sonsini, Esq.
Marty Korman, Esq.
(b) if to Acquiror, to:
Micron Electronics, Inc.
900 East Karcher Road
Nampa, Idaho 83687
Attn: President and Chief Executive Officer
Fax: (208) 893-7411
with a copy to:
Fenwick & West LLP
Two Palo Alto Square, Suite 700
Palo Alto, California 94306
Attn: Dennis R. DeBroeck, Esq.
David W. Healy, Esq.
18. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State.
19. Counterparts. This Agreement may be executed in two counterparts,
------------
each of which shall be deemed to be an original, but both of which, taken
together, shall constitute one and the same instrument.
20. Expenses. Except as otherwise expressly provided herein or in the
--------
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses.
21. Amendments; Waiver. This Agreement may be amended by the parties
------------------
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
22. Assignment. Neither of the parties hereto may sell, transfer, assign
----------
or otherwise dispose of any of its rights or obligations under this Agreement or
the Option created hereunder to any other person, without the express written
consent of the other party, except that the rights and obligations hereunder
shall inure to the benefit of and be binding upon any successor of a party
hereto.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
NetFRAME Systems Incorporated
By: /s/ ROBERT L. PUETTE
---------------------------------------------
Name: Robert L. Puette
Title: President and Chief Executive Officer
Micron Electronics, Inc.
By: /s/ T. ERIK OAAS
---------------------------------------------
Name: T.Erik Oaas
Title: Executive Vice President and
Chief Financial Officer
13
<PAGE>
EXHIBIT C
Parent Financial Assistance
---------------------------
Provided that (i) the Company has not breached this Agreement, (ii) Parent
is not entitled to terminate this Agreement pursuant to Section 8.1(d) hereof,
and (iii) this Agreement has not been terminated, Parent agrees to provide the
Company with $3.5 million in the aggregate in financial assistance (in addition
to any amounts payable pursuant to the Technology License Agreement) in the form
of either secured loans or guarantees of secured loans, at times as Parent and
the Company may determine. Subject to the foregoing such financial assistance
will be provided pursuant to such funding schedule as agreed upon by Parent and
the Company based upon the Company's financial needs as agreed to by the Parent.
At the request of Parent, the Company agrees to use its best efforts to assign
or assist in the assignment of all loans, contracts, agreements, security
interests, UCC filings and other rights of CIT Group/Business Credit, Inc. that
relate to or are with the Company. Until termination of this Agreement, Parent,
as a creditor of Parent shall not institute bankruptcy or insolvency proceedings
against the Company.
1
<PAGE>
EXHIBIT D
Technology License Agreement
This Technology License Agreement (the "Agreement"), dated June 10, 1997
(the "Effective Date"), is made between NetFRAME Systems Incorporated, a
Delaware corporation ("NetFRAME"), and Micron Electronics, Inc., a Minnesota
corporation, and all of its subsidiaries and other affiliates ("Micron").
RECITALS
Whereas, NetFRAME owns or has rights to certain computer hardware,
software, related documentation and other technology; and
Whereas, Micron wishes to have irrevocable nonexclusive rights to, among
other things, use, market and distribute such hardware, software, related
documentation and other technology worldwide, and NetFRAME wishes to grant such
irrevocable rights to Micron.
Now, Therefore, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, NetFRAME and Micron agree as
follows:
1. DEFINITIONS.
1.1 Intellectual Property Rights. "Intellectual Property Rights" means
----------------------------
patent rights (including but not limited to rights in patent applications or
disclosures and rights of priority), copyright rights (including but not limited
to rights in audiovisual works and moral rights), trademark and trade dress
rights, trade secret rights, know-how, and any other intellectual property
rights recognized by the law of each applicable jurisdiction.
1.2 NetFRAME Technology. "NetFRAME Technology" means, as of the
-------------------
Effective Date, all of the following which are associated with or incorporated,
in any way and to any extent, in NetFRAME's 9000 series server products and any
other products under any phase of development, including without limitation,
hardware and software products (collectively, the "NetFRAME Products"), or is
otherwise necessary or required for Micron to exercise any and all of the rights
granted to it hereunder and to build working products substantially similar to
the NetFRAME Products without undue development time and expense: all computer
software (in object code and fully-commented or fully-annotated source code
versions), documentation, diagrams, schematics, functional specifications,
designs, know-how and other technology, including, without limitation, any works
in progress and the technology described by NetFRAME in Exhibit A, and all
---------
Intellectual Property Rights therein, and including any modifications, upgrades,
revisions or additions thereto as required pursuant to Section 5.1(b); provided,
however, that the term "NetFRAME Technology" shall not include any Intellectual
Property Rights of third parties which are licensed to NetFRAME but which
NetFRAME has no authority, after exercising its best efforts as provided in
Section 7.2, to transfer, sublicense or otherwise convey.
<PAGE>
2. LICENSE GRANT. NetFRAME hereby grants to Micron a nonexclusive,
worldwide, royalty-free, fully paid-up, irrevocable, non-executory license to
use, make, have made, copy, have copied, reproduce, modify, create derivative
works based upon, publish, publicly display and perform, distribute, transmit,
promote, market, sell products incorporating the NetFRAME Technology (or any
part thereof), and otherwise exploit in any manner subject to the terms and
conditions herein the NetFRAME Technology or any portion thereof, in any form.
3. DELIVERY. NetFRAME will deliver to Micron, within ten (10) business days
of Micron's request (and in any event, no later that thirty (30) days from the
Effective Date), a full set of all tangible items containing and/or comprised of
NetFRAME Technology, to the extent developed and existing, and in the manner
constituted, on the date of Delivery (the "Deliverables"), including, without
limitation, to the extent available, fully-commented or fully-annotated source
code versions of all software existing on the Effective Date (the "Delivery").
In addition, NetFRAME will deliver to Micron, on an ongoing basis: (i) updates,
upgrades, new versions, modifications and other enhancements to the NetFRAME
Technology as each phase of development is completed, pursuant to Section 5.1
below; and (ii) within ten (10) business days of Micron's request, any tangible
items containing and/or comprised of NetFRAME Technology which were
inadvertently or otherwise not delivered with the Delivery.
4. PAYMENTS.
4.1 License Fee. In consideration of the rights granted to Micron in
-----------
Section 2 hereof, Micron will pay to NetFRAME the one-time license fee of One
Million, Five Hundred Thousand Dollars ($1,500,000.00).
4.2 Payment Terms. Micron will pay the one-time license fee to NetFRAME
-------------
as follows: (a) Seven Hundred Fifty Thousand Dollars ($750,000.00) on the
Effective Date; and (b) Seven Hundred Fifty Thousand Dollars ($750,000.00)
within three (3) days of Delivery. Delivery shall be deemed to have been made
at such time, and on such date, as the Deliverables are deposited with a common
carrier at NetFRAME's headquarters in Milpitas, California for overnight
delivery to Micron.
4.3 Taxes. All amounts payable under this Agreement are exclusive of all
-----
sales, use, value-added, withholding, and other taxes and duties.
5. MAINTENANCE, SUPPORT, AND TRAINING.
5.1 Maintenance. For the period starting on the Effective Date and
-----------
continuing for a period no less that five (5) years from the Effective Date and
for so long thereafter as NetFRAME provides comparable services to any of its
customers, NetFRAME will provide to Micron, for no additional consideration, the
following maintenance services, which shall be delivered to Micron prior to
delivery to any NetFRAME customers:
(a) error corrections for the NetFRAME Technology in accordance with
NetFRAME's standard maintenance and support policies and procedures; and
(b) updates, upgrades, modifications, new versions and other
enhancements to the NetFRAME Technology. Provided however, that if NetFRAME
determines in good faith that a development project will be terminated and
products related to that project will not be provided to its customers, NetFRAME
shall not be obligated to provide Micron with updates,
2
<PAGE>
upgrades, modifications, new versions and other enhancements related to that
project.
5.2 Support and Training. For the period starting on the Effective Date
--------------------
and continuing for a period no less that five (5) years from the Effective Date
and for so long thereafter as NetFRAME provides comparable services to any of
its customers, NetFRAME will provide to Micron, for no additional consideration
(except for reimbursement of travel and lodging expenses, as necessary, and as
otherwise noted in this Section 5.2), the following maintenance:
(a) full-time access to NetFRAME's "hot-line" for inquiries from
Micron relating to the NetFRAME Technology;
(b) training in accordance with NetFRAME's standard training policies
and procedures (such training to be provided at NetFRAME's standard hourly rate
therefor to the extent the hours of training time so provided in any calendar
month exceed an aggregate of ten (10) hours); and;
(c) to the extent, and within five (5) days of each request therefor
by Micron, engineering support and any other technical support related to the
NetFRAME Technology (such support to be provided at NetFRAME's standard hourly
rate therefor to the extent the hours of support time so provided in any
calendar month exceed an aggregate of ten (10) hours).
6. CONFIDENTIALITY.
6.1 Obligations. Micron agrees that it will not disclose the NetFRAME
-----------
Technology or other confidential technical information disclosed to it by
NetFRAME (collectively, "Confidential Information") to any third party except as
reasonably required in the exercise of the rights granted hereunder or as
otherwise permitted in this Agreement; and that it will take all reasonable
measures to maintain the confidentiality of all Confidential Information in its
possession or control, which will in no event be less than the measures it uses
to maintain the confidentiality of its own information of similar importance.
However, Micron may disclose Confidential Information: (i) pursuant to the order
or requirement of, or in connection with proceedings before, a court,
administrative agency, or other governmental body; and (ii) on a confidential
basis to its legal and/or financial advisors. Micron acknowledges that NetFRAME
will suffer irreperable harm if Micron violates the provisions of this Section
6.1.
6.2 Exceptions. Notwithstanding the foregoing, "Confidential
----------
Information" shall not include information that: (i) is or becomes generally
known to the public through no breach of any confidentiality obligation; (ii) is
known to Micron at the time of disclosure by NetFRAME without violation of any
confidentiality restriction and without any restriction on Micron's further use
or disclosure; (iii) is independently developed by Micron without any use of
NetFRAME's Confidential Information, which can be demonstrated by Micron with
contemporaneous documentation; or (iv) is disclosed by NetFRAME to any third
party without restrictions of confidentiality.
6.3 Source Code. Notwithstanding Section 6.1 above, as to any of
-----------
NetFRAME's source code delivered to Micron hereunder ("Source Code"), Micron
shall not disclose such Source Code to any third party without the prior written
consent of NetFRAME (which NetFRAME shall not unreasonably withhold) and the
execution of an agreement between that third party and NetFRAME regarding
protection of the Source Code (which NetFRAME shall
3
<PAGE>
not unreasonably delay).
7. PROPRIETARY RIGHTS.
7.1 NetFRAME's Ownership. The NetFRAME Technology and all Intellectual
--------------------
Property Rights therein are and will remain the sole and exclusive property of
NetFRAME and its licensors, if any.
7.2 NetFRAME's Obligations Regarding Third-Party Technology. NetFRAME
-------------------------------------------------------
will use best efforts to obtain all required consents and all necessary property
rights from NetFRAME's third party licensors for Micron to exercise any and all
of the rights granted to it in this Agreement.
7.3 Micron's Duties. Micron will use commercially reasonable efforts to
---------------
protect NetFRAME's Intellectual Property Rights in the NetFRAME Technology, but
not less than the efforts that NetFRAME uses to protect its own confidential
information.
7.4 Trademarks. NetFRAME hereby grants to Micron the right to use the
----------
NetFRAME trademarks and trade names associated with the NetFRAME Products in
Micron's marketing, distribution and sale of server products substantially
similar to the NetFRAME Products. In so doing, Micron will comply with
NetFRAME's then-existing reasonable trademark usage policies and procedures.
7.5 Third Party Infringement. NetFRAME shall have the sole right to
------------------------
assert claims against third parties for infringement or misappropriation of
Intellectual Property Rights in the NetFRAME Technology; provided however, that
----------------
if NetFRAME does not pursue such claims within a reasonable period of time,
NetFRAME shall so notify Micron promptly, and Micron shall have the right to
assert claims against such third parties, and NetFRAME shall give Micron
reasonable assistance in connection therewith.
8. WARRANTY.
8.1 Power and Authority, Enforceability. NetFRAME warrants to Micron
-----------------------------------
that it has sufficient right and authority to enter into this Agreement and to
grant to Micron all licenses and rights that NetFRAME grants under this
Agreement, and, with respect to technology owned by third parties, either has
sufficient rights to sublicense such technology to Micron as of the Effective
Date, or will obtain such rights pursuant to Section 7.2. Upon execution by the
parties, this Agreement will constitute a legal, valid and binding obligation of
NetFRAME enforceable against NetFRAME in accordance with its terms.
8.2 Solvency; No Bankruptcy Proceedings. NetFRAME and each of NetFRAME's
-----------------------------------
subsidiaries and affiliates, taken both individually and together as a group,
are Solvent on the Effective Date (as defined below). No petition has been
filed by or against NetFRAME for relief under any applicable bankruptcy,
insolvency or similar law; no decree or order for relief has been entered in
respect of NetFRAME, voluntary or involuntary, under any such law; and, no
receiver liquidator, sequestrator, trustee, custodian or other officer has been
appointed with attachment, execution or similar process has been ordered,
executed or filed against NetFRAME or any of its assets or properties. NetFRAME
has not made any assignment for the benefit of creditors and does not reasonably
expect to take any such action. NetFRAME does not currently intend to file for
protection under any bankruptcy or insolvency law. As used herein, the term
"Solvent"
4
<PAGE>
means, with respect to any entity on a particular date, that on such date: (a)
the fair market value of the property of such entity is greater than the total
amount of liabilities, including contingent liabilities, of such entity; (b) the
present fair salable value of the assets of such entity is no less than the
amount that will be required to pay the probable liability of such entity on its
debts as they become absolute and matured; (c) such entity does not intend to,
and does not believe that it will, incur debts or liabilities beyond such
entity's ability to pay as such debts and liabilities mature; and (d) such
entity is not engaged in a business or transaction, and is not about to engage
in a business or transaction, for which such entity's property would constitute
an unreasonably small capital.
8.3 No Violations. The execution, delivery and performance of this
-------------
Agreement by NetFRAME do not and will not: (a) breach, violate, or conflict with
the certificate of incorporation or bylaws of NetFRAME, both as amended to date;
(b) to the best of NetFRAME's knowledge, conflict with or violate any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
applicable to NetFRAME or to the NetFRAME Technology; (c) to the best of
NetFRAME's knowledge, result in any material breach or violation of, or
constitute a default (or event which with the giving of notice or lapse or time,
or both, would become a breach, violation or default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument to which NetFRAME or any affiliate of
NetFRAME is a party or is bound or by which any part of NetFRAME Technology is
bound or affected, if any such event would result in a material adverse affect
on NetFRAME; or (d) to the best of NetFRAME's knowledge, result in the creation
of any encumbrance of the NetFRAME Technology, or any part thereof.
8.4 All Required Consents Obtained. All consents required by NetFRAME to
------------------------------
enter into and to fully perform all of its obligations under this Agreement,
including any consents required under any revolving credit or security
agreements with its lenders (including but not limited to agreements between
NetFRAME and CIT Group/Business Credit, Inc.) have been obtained by NetFRAME.
The execution of this Agreement by NetFRAME and the full performance of this
Agreement by NetFRAME will not require any unobtained consent, approval,
authorization or other action by, or filing with or notification to, any court
or governmental or regulatory authority.
8.5. Warranties True and Correct. NetFRAME warrants that all of the
---------------------------
warranties it makes in this Agreement are true and correct in all material
respects, and the parties agree and acknowledge that Micron has materially
relied on all such warranties in entering into this Agreement.
8.6 Warranty Disclaimer. The warranties set forth in this Section 8 are
-------------------
in lieu of any other warranties, express or implied, and NetFRAME hereby
disclaims the implied warranties of merchantability and fitness for a particular
purpose.
9. INDEMNITY.
9.1 Infringement Indemnity
----------------------
5
<PAGE>
(a) Duty to Indemnify and Defend.
----------------------------
(i) NetFRAME will indemnify Micron against, and will defend or settle
at NetFRAME's own expense, any action or other proceeding brought against Micron
to the extent that it is based on a claim that the use of the NetFRAME
Technology (other than technology provided by third parties which is unmodified
by NetFRAME) as licensed in this Agreement infringes any Intellectual Property
Right of any third party and/or that the NetFRAME Technology incorporates any
misappropriated trade secrets.
(ii) NetFRAME will pay any and all costs, damages, and expenses
(including but not limited to reasonable attorneys' fees) awarded against Micron
in any such action or proceeding attributable to any such claim.
(iii) NetFRAME will have the exclusive right to control the defense of
any such action or proceeding, and Micron shall give NetFRAME prompt notice of
any such action or proceeding and shall provide to NetFRAME reasonable
assistance in connection therewith.
(iv) NetFRAME shall be relieved of its obligations under this Section
9.1(a) to indemnify Micron against a claim of infringement is based on: (A)
modifications to the NetFRAME Technology made by any party other than NetFRAME
or its agents; or (B) combination of NetFRAME Technology with technology of any
party other than NetFRAME, the extent that such infringement would not have
occurred but for such modification or combination.
(b) Injunctions. If Micron's use of any NetFRAME Technology under the
-----------
terms of this Agreement is, or in NetFRAME's opinion is likely to be, enjoined
due to the type of infringement or misappropriation specified in subsection
(a)(i) above, then NetFRAME will either:
(i) procure for Micron the right to continue using such NetFRAME
Technology under the terms of this Agreement; or
(ii) replace or modify such NetFRAME Technology so that they are
noninfringing and substantially equivalent in function to the enjoined NetFRAME
Technology; or
(iii) if options (i) and (ii) above cannot be accomplished despite the
best efforts of NetFRAME, then NetFRAME will refund to Micron the license fee.
This Section 9.1 sets forth Micron's sole remedy for any claim relating to
Intellectual Property Rights of third parties.
9.2 General Indemnity. Each party (the "Indemnitor") will indemnify the
-----------------
other party (the "Indemnitee") against, and will defend or settle at
Indemnitor's own expense, any action or other proceeding brought against
Indemnitee to the extent that it is based on a claim arising out of or in
connection with this Agreement. Indemnitor will pay any and all costs, damages,
and expenses (including but not limited to reasonable attorneys' fees) awarded
against Indemnitee in any such action or proceeding attributable to any such
claim; provided however, that Indemnitor will have the exclusive right to
control the defense of any such action or proceeding, and Indemnitee shall give
Indemnitor prompt notice of any such action or proceeding and shall
6
<PAGE>
provide to Indemnitor reasonable assistance in connection therewith.
10. TERM AND TERMINATION.
10.1 Term. The term of this Agreement will begin on the Effective Date
----
and will continue in perpetuity, unless earlier terminated by Micron pursuant to
Section 10.
10.2 Termination for Convenience. Micron may terminate this Agreement,
---------------------------
at any time after thirty (30) days from the Effective Date have elapsed, for any
reason by written notice to NetFRAME.
10.3 Termination for Cause; Refund. Micron may terminate this Agreement at
-----------------------------
any time for cause in the event that NetFRAME breaches any material obligation
hereunder, and such breach remains uncured thirty (30) days after Micron's
notice to NetFRAME of the same, or such longer period of time approved by Micron
as reasonably necessary in consideration of the nature of the breach and
NetFRAME's attempts to cure (which approval shall not be unreasonably withheld).
In the event of a termination under this Section 10.3 within five (5) years of
the Effective Date: (a) the license granted in Section 2 herein shall terminate;
and (b) NetFRAME will refund to Micron the entire license fee of One Million
Five Hundred Thousand Dollars ($1,500,000) within ten (10) business days of such
termination.
10.4 Survival. The rights and obligations of the parties contained in
--------
Section 6 (Confidentiality), 9 (Indemnity), 10 (Term and Termination), 12
(Limitations of Liability) and 13 (General) will survive any termination of this
Agreement.
10.5 Effect of Termination. Upon the termination of this Agreement, the
---------------------
following provisions, as well as any other applicable provisions in this
Agreement, shall take effect: (a) the rights and licenses granted to Micron
under this Agreement shall automatically terminate; (b) all sublicenses granted
to end users shall continue in effect according to their terms and conditions;
(c) within ten (10) days after termination, Micron shall return to NetFRAME all
NetFRAME Technology, in whatever media and form, and shall destroy all copies of
the NetFRAME Technology in its possession.
11. COMPLIANCE WITH LAW.
Each party agrees to comply with all applicable laws, rules, and
regulations in connection with its activities under this Agreement, including
all relevant export laws and regulations of the United States.
12. LIMITATION OF LIABILITY.
In no event will either party's liability to the other for any any special,
incidental, or consequential damages, whether based on breach of contract, tort
(including negligence), product liability, or otherwise, exceed One Million Five
Hundred Thousand Dollars ($1,500,000).
7
<PAGE>
13. GENERAL.
13.1 Assignment. This Agreement will bind and inure to the benefit of
----------
each party's permitted successors and assigns. Neither party may assign this
Agreement, in whole or in part, without the other party's written consent, which
consent will not be unreasonably withheld; provided however, that Micron may
-------- -------
assign this Agreement in connection with a merger, corporate reorganization or
sale of all or substantially all of its assets (other than any such assignment
to a direct competitor of NetFRAME). Any attempt to assign this Agreement
without such consent will be null and void.
13.2 Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the laws of the State of California applicable to agreements
entered into, and to be performed entirely, within California between California
residents. Any suit hereunder will be brought solely in the federal or state
courts in the Northern District of California and the parties hereby submit to
the personal jurisdiction thereof.
13.3 Severability. If any provision of this Agreement is found invalid
------------
or unenforceable, that provision will be enforced to the maximum extent
permissible, and the other provisions of this Agreement will remain in force.
13.4 Notices. All notices under this Agreement will be deemed given when
-------
delivered personally, sent by confirmed facsimile transmission, or sent by
certified or registered U.S. mail or nationally-recognized express courier,
return receipt requested, to the address shown below or as may otherwise be
specified by either party to the other in accordance with this Section 13.4.
13.5 Independent Contractors. The parties to this Agreement are
-----------------------
independent contractors. There is no relationship of partnership, joint
venture, employment, franchise, or agency between the parties. Neither party
will have the power to bind the other or incur obligations on the other's behalf
without the other's prior written consent.
13.6 Waiver. No failure of either party to exercise or enforce any of
------
its rights under this Agreement will act as a waiver of those or any other
rights hereunder.
8
<PAGE>
13.7 Entire Agreement. This Agreement and its exhibits are the complete
----------------
and exclusive agreement between the parties with respect to the subject matter
hereof, superseding and replacing any and all prior agreements, communications,
and understandings (both written and oral) regarding such subject matter. This
Agreement may only be modified, or any rights under it waived, by a written
document executed by both parties.
The parties have caused this Agreement to be executed by their duly-
authorized representatives as of the Effective Date.
NetFRAME Systems Incorporated Micron Electronics, Inc.
By: /s/ Robert L. Puette By: /s/ T. Erik Oaas
-------------------------------------- --------------------------------
Robert L. Puette T. Erik Oaas
President and Chief Executive Officer Executive Vice President, Finance
Chief Financial Officer
Address for Notice: Address for Notice:
1545 Barber Lane 900 East Karcher Road
Milpitas, California 95305 Nampa, Idaho 83687
9
<PAGE>
EXHIBIT A
NetFRAME Technology
-------------------
The NF 9016 Product:
The NF 9016 is a 4-way SMP Pentium Pro based, 16 PCI slot, rack mount server
with continuous availability features. The 16 PCI slots are hot swapable in
groups of 4 PCI cards for both Intranetware 1.0 and NT 4.0. Those 16 PCI slots
are hot add capable for Intranetware 1.0.
The NF 9008 Product:
The NF 9008 is a 4-way SMP Pentium Pro based, 8 PCI slot, rack mount server with
continuous availability features. The 8 PCI slots are individually hot for both
Intranetware 1.0 and NT 4.0. Those 16 PCI slots are hot add capable for
Intranetware 1.0.
Multispan
Multispan is a networking software that allows for load sharing of network
traffic over 2 LAN adapters for FDDI, Ethernet, and Tokenring for both
Intranetware 1.0 and NT 4.0. The software also has a failover functionality by
recognizingfailure and automatically filing over the traffic on the remaining
network adapters.
ClusterData
Clusterdata is a NetWare (NDS based) volume failover product that utilizes dual-
ported SCSI disks. It relies on path replication and allows for load
distribution of a down server.
ClusterCache
ClusterCache is a distributed caching software that provides Coherent and
persistent caching on demand across a LAN or a WAN for NT 4.0.
10
<PAGE>
ANNEX B
[LOGO OF COWEN APPEARS HERE]
June 9, 1997
Board of Directors
NetFRAME Systems Incorporated
1545 Barber Lane
Milpitas, CA 95035
Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
Common Stock, par value $0.001 per share of NetFRAME Systems Incorporated (the
"Company"), of the financial terms of the Transaction (as hereinafter defined)
with Micron Electronics, Inc. ("Micron Electronics"). For the purposes of this
opinion, the "Transaction" means the transaction described below pursuant to
that Agreement and Plan of Merger among the Company, Micron Electronics, and a
subsidiary ("Merger Sub") of Micron Electronics dated June 10, 1997 (the
"Agreement").
As more specifically set forth in the Agreement, and subject to certain
terms and conditions thereof, Micron Electronics has agreed to make a tender
offer through Merger Sub to purchase all the issued and outstanding shares of
Common Stock, $0.001 par value per share, of the Company ("Company Common
Stock") at a price of $1.00 per share in cash. Thereafter, Merger Sub will be
merged with and into the Company, and each share of Company Common Stock not
acquired by Micron Electronics pursuant to the tender offer will be converted
into the right to receive $1.00 in cash.
In the ordinary course of its services, Cowen & Company ("Cowen") is
regularly engaged in the valuation and pricing of businesses and their
securities and in advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed the Company's consolidated financial statements for the fiscal
years ended December 31, 1994 through December 31, 1996 and the
consolidated financial statements for the three month periods ended
March 31, 1997 and March 31, 1996 and certain publicly available
filings with the Securities and Exchange Commission;
(2) reviewed the Agreement;
(3) held meetings and discussions with senior management of the Company to
discuss the business, operations, and future prospects of the Company;
(4) reviewed financial projections furnished to us by the senior management
of the Company, including the capital structure, sales, operating
income and net income, and other data of the Company we deemed
relevant;
(5) analyzed the historical cash burn rate and the projected cash flow
position and cash burn rate of the Company based upon the Company's
senior management's liquidation scenario forecast;
(6) reviewed the operating and financial performance of the Company over
the last three fiscal years and compared its results with the operating
and financial performance of similar publicly traded companies;
COWEN & COMPANY
FOUR EMBARCADERO CENTER, SUITE 1200, SAN FRANCISCO, CA 94111-5994, TEL (415)
646-7200
MEMBER ALL PRINCIPAL EXCHANGES
<PAGE>
NetFRAME Systems Incorporated
June 9, 1997
Page 2 of 2
(7) reviewed the public market valuation and trading multiples of the
Company, and compared the Company's trading multiples to the trading
multiples of other similar publicly traded companies;
(8) reviewed the historical prices and trading activity of the stock of the
Company over the last twelve months, and compared the Company's stock
price performance to the stock price performance of other similar
publicly traded companies over the same time period;
(9) compared the acquisition contemplated by the Agreement with the
acquisitions of other companies through similar purchase transactions,
including a comparison of the premiums paid in the acquisition
contemplated by the Agreement with the premiums paid in those similar
transactions; and
(10) conducted such other studies, analysis, inquiries and investigations
as we deemed appropriate.
At the request of the Company, Cowen solicited select third parties'
interest in acquiring the Company.
On June 6, 1997, the closing price of the Company's common stock in the last
transaction reported by the NASDAQ was $1.25 per share.
In rendering our opinion, we relied upon the Company's senior management
with respect to the accuracy and completeness of the financial and other
information furnished to us as described above. With respect to the financial
projections furnished to us by management of the Company, we also have
assumed, with your consent, that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
Company's management. We have not assumed any responsibility for independent
verification of such information, including financial information, nor have we
made an independent evaluation or appraisal of any of the properties or assets
of the Company. We also have assumed that the tender offer and related merger
will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Exchange Act of 1934, as amended, and
all other applicable federal and state statutes, rules and regulations. Our
opinion is based on economic, monetary, and market and other conditions
existing on the date hereof.
We have acted as financial advisor to the Board of Directors of the Company
in connection with the transaction contemplated by the Agreement and will
receive a fee for our services. In the past, Cowen and its affiliates have
provided financing services for the Company and have received fees for the
rendering of these services. In addition, in the ordinary course of its
business, Cowen trades the equity securities of the Company for its own
account and for the accounts of its customers, and, accordingly, Cowen or its
affiliates may at any time hold a long or short position in such securities.
On the basis of our review and analysis, as described above, it is our
opinion as investment bankers that, as of the date hereof, the consideration
to be received by holders of Company Common Stock (other than Micron
Electronics) pursuant to the tender offer and the merger is fair, from a
financial point of view, to the stockholders of the Company.
This letter is for the information of the Board of Directors only in
connection with their consideration of the Agreement and may not be disclosed
to any other party, referred to or used for any other purpose without our
prior written consent. This letter does not constitute a recommendation to any
shareholder as to whether to sell their shares in the offer pursuant to the
Agreement.
Very truly yours,
/s/ Cowen & Company
Cowen & Company
<PAGE>
ANNEX C
SECTION 262
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
Section 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 Section 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 Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 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, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of 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 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 stockholders of
the surviving corporation as provided in subsection (f) of Section 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 Sections 251, 252, 254, 257, 258, 263 and 264 of 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, 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 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
<PAGE>
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 Section 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) 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 an 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 subsection (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 Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or series
of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after
the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within twenty days
after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's 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 such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that
if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either
2
<PAGE>
notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is
given; provided that, if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior
to the effective date, the record date shall be the close of business on
the day next preceding the day on which the notice is given.
(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 statement 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 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
3
<PAGE>
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 rata 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 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.
4
<PAGE>
NetFRAME SYSTEMS INCORPORATED
1545 Barber Lane
Milpitas, California 95035
Proxy for Special Meeting of Stockholders
August 27, 1997
The undersigned stockholder of NetFRAME Systems Incorporated, a Delaware
corporation (the "Company"), hereby appoints Robert L. Puette and
______________, and each of them singly, with full power of attorney and power
of substitution, to represent the undersigned at the Special Meeting of
Stockholders of the Company, to be held on August 27, 1997, at 10:00 a.m., and
at any adjournment or postponement thereof, and to vote all shares of Common
Stock of the Company held of record by the undersigned on July 28, 1997 and
which the undersigned is entitled to vote upon the matters set forth in the
Notice of Special Meeting of Stockholders, dated August __, 1997, and
accompanying Proxy Statement, dated August __, 1997, receipt of which is
hereby acknowledged.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL IN
ITEM 1. THIS PROXY WILL BE VOTED AS SPECIFIED OR, WHERE NO DIRECTION IS
GIVEN, WILL BE VOTED FOR THE PROPOSAL IN ITEM 1. A VOTE TO TRANSACT SUCH
OTHER BUSINESS AS MAY BE PROPERLY TAKEN UNDER ITEM 2 WILL BE VOTED IN
ACCORDANCE WITH THE JUDGMENT OF THE PERSONS HEREINBEFORE NAMED AS ATTORNEYS.
STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING OF STOCKHOLDERS MAY VOTE IN
PERSON EVEN THOUGH THEY HAVE PREVIOUSLY MAILED THIS PROXY. PLEASE DATE, SIGN
AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED PRE-PAID PRE-ADDRESSED
ENVELOPE.
PLEASE VOTE AND SIGN ON THE OTHER SIDE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side)
<PAGE>
(1) APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER DATED AS OF JUNE
10, 1997 BY AND AMONG THE COMPANY, MICRON ELECTRONICS, INC., A MINNESOTA
CORPORATION, AND PAYETTE ACQUISITION CORPORATION, A DELAWARE CORPORATION
AND WHOLLY OWNED SUBSIDIARY OF MICRON ELECTRONICS, INC., AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING A MERGER PURSUANT TO WHICH
PAYETTE ACQUISITION CORPORATION WOULD BE MERGED WITH AND INTO THE COMPANY.
[_] FOR [_] AGAINST [_] ABSTAIN
(2) SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
POSTPONEMENTS OR ADJOURNMENTS OF THE SPECIAL MEETING.
[_] FOR [_] AGAINST [_] ABSTAIN
The undersigned stockholder may revoke this proxy at any time before it
is voted by filing with the Secretary of the Company either an instrument
revoking the proxy or a duly executed proxy bearing a later date, or by
attending the Special Meeting of the Stockholders and voting in person.
PLEASE DATE AND SIGN EXACTLY AS NAME APPEARS
ON SHARE CERTIFICATES
IMPORTANT: Please date this Proxy and sign
exactly as your name(s) appear(s) hereon. If
stock is held jointly, each owner should
sign. If signing as attorney, executor,
administrator, trustee, guardian or other
fiduciary, please give your full title as
such. If a corporation, please sign in
corporate name by President or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.
Dated:
--------------------------------------
--------------------------------------------
Signature(s) of Stockholder or
Authorized Representative
