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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
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/ / Preliminary Proxy Statement / / CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
Penril DataComm Networks, Inc.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Bay Networks, Inc.*
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of filing fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(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):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/X/ Fee paid previously with preliminary materials.
/ / 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) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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* The Proxy Statement also contains the Prospectus of Bay Networks, Inc.
("Bay"). Accordingly, Bay is the Registrant with respect to the Form S-4
Registration Statement filed under the Securities Act of 1933 on October 16,
1996 to register the shares of Bay Common Stock to be issued pursuant to the
Plan and Agreement of Merger to which the Proxy Statement relates.
<PAGE> 2
PENRIL DATACOMM NETWORKS, INC.
1300 QUINCE ORCHARD BLVD.
GAITHERSBURG, MARYLAND 20878
October 21, 1996
Dear Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders of
Penril DataComm Networks, Inc. ("Penril") to be held on November 15, 1996 at
9:00 a.m. (local time) at 1201 Quince Orchard Blvd., Gaithersburg, Maryland.
At this Special Meeting, you will be asked to consider and vote upon a
proposal (the "Proposal") to approve and adopt (i) the Plan and Agreement of
Merger dated as of June 16, 1996, as amended on August 5, 1996 (the "Merger
Agreement"), among Bay Networks, Inc., a Delaware corporation ("Bay"), Beta
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Bay
("Merger Sub"), and Penril and (ii) the distribution and transfer by Penril of
all of the outstanding capital stock of Access Beyond, Inc., a Delaware
corporation and newly-formed, wholly-owned subsidiary of Penril ("Access
Beyond") to the shareholders of Penril ("Shareholders"), as a dividend.
Pursuant to the Merger Agreement, Merger Sub will be merged with and into
Penril (the "Merger"), and Penril will become a wholly-owned subsidiary of Bay.
Pursuant to the Merger, Bay will acquire the modem business conducted by Penril.
In the Merger, Bay will exchange $10 payable in Bay's common stock according to
an exchange value determined by averaging Bay's closing stock prices over a
specified period prior to closing, for each share of Penril's common stock, all
as more fully described in the attached Proxy Statement/Prospectus. As a
condition of and in order to facilitate the Merger, immediately prior thereto,
Penril will transfer and contribute all assets and liabilities of Penril and
each of its subsidiaries (other than of Penril International, Ltd. and Penril
DataComm, Ltd.) relating to its remote access products business, and
substantially all of its other businesses and assets, other than its assets and
liabilities relating to its modem business, to Access Beyond, and will
distribute and transfer to Shareholders all the outstanding capital stock of
Access Beyond (the "Spin-off Transaction").
The Merger and the Spin-off Transaction are intended to be tax-free to
Shareholders for United States federal income tax purposes.
You should read carefully the accompanying Notice of Special Meeting of
Shareholders and the Proxy Statement/Prospectus for details of the Merger, the
Spin-off Transaction and additional related information.
PENRIL'S BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AND THE SPIN-OFF
TRANSACTION ARE FAIR TO, AND IN THE BEST INTERESTS OF, PENRIL AND ITS
SHAREHOLDERS, IN THEIR CAPACITY AS SHAREHOLDERS, HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE SPIN-OFF TRANSACTION AND UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND
THE SPIN-OFF TRANSACTION.
The affirmative vote of the holders of a majority of the outstanding shares
of common stock of Penril is necessary to approve the Proposal. Failure of the
Proposal to be approved by Shareholders will result in the abandonment and
termination of both the Merger and the Spin-off Transaction.
Holders of shares of common stock of Penril do not have rights of appraisal
under Delaware law in connection with the Merger.
WE URGE YOU TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS
SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN
PERSON AND REGARDLESS OF THE NUMBER OF SHARES WHICH YOU MAY OWN. YOU MAY, OF
COURSE, ATTEND THE SPECIAL MEETING AND VOTE IN PERSON EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD.
Sincerely,
/s/ Henry David Epstein
HENRY DAVID EPSTEIN
CHIEF EXECUTIVE OFFICER,
CHAIRMAN OF THE BOARD
and PRESIDENT
<PAGE> 3
PENRIL DATACOMM NETWORKS, INC.
1300 QUINCE ORCHARD BLVD.
GAITHERSBURG, MARYLAND 20878
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 15, 1996
To the Shareholders of
PENRIL DATACOMM NETWORKS, INC.
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Penril DataComm Networks, Inc., a Delaware corporation ("Penril"),
will be held on Friday, November 15, 1996, at 9:00 a.m. (local time) at 1201
Quince Orchard Blvd., Gaithersburg, Maryland, for the following purposes:
1. To consider and vote upon a single proposal (the "Proposal"):
(a) to approve the transfer and contribution of Penril's and each of
its subsidiaries' (other than Penril International, Ltd., a United States
Virgin Islands corporation, and Penril DataComm, Ltd., a United Kingdom
corporation (collectively, the "Modem Subsidiaries")) remote access
products business and substantially all of their other businesses, assets
and liabilities unrelated to Penril's modem business (the "Modem Business")
to Access Beyond, Inc., a Delaware corporation and newly-formed, wholly-
owned subsidiary of Penril ("Access Beyond"), and the distribution and
transfer to Penril shareholders ("Shareholders") of all of the outstanding
capital stock of Access Beyond (the "Spin-off Transaction"); and
(b) to approve and adopt the Plan and Agreement of Merger dated as of
June 16, 1996, as amended on August 5, 1996 (the "Merger Agreement"), among
Penril, Bay Networks, Inc., a Delaware corporation ("Bay"), and Beta
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Bay ("Merger Sub"), and the transactions contemplated thereby. Pursuant to
the Merger Agreement, Merger Sub will be merged with and into Penril (the
"Merger") and Penril will become a wholly-owned subsidiary of Bay. In the
Merger, each outstanding share of common stock, par value $.01 per share,
of Penril ("Penril Common Stock") (other than shares owned beneficially by
Bay or Merger Sub and other than shares held by Penril as treasury shares,
all of which will be automatically cancelled without consideration) will be
converted into the right to receive the number of shares of common stock,
par value $.01 per share, of Bay ("Bay Common Stock") as is equal to the
"Conversion Ratio" as defined herein, determined by dividing $10.00 by the
average closing price for Bay Common Stock on the New York Stock Exchange
for a specified period prior to closing on the terms and subject to the
conditions set forth in the Merger Agreement, all as more fully described
in the accompanying Proxy Statement/Prospectus. A copy of the Merger
Agreement is attached as Annex I to the accompanying Proxy
Statement/Prospectus; and
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
THE PROPOSAL TO APPROVE THE SPIN-OFF TRANSACTION AND THE MERGER WILL BE
VOTED UPON AS A SINGLE PROPOSAL. FAILURE OF THE PROPOSAL TO BE APPROVED BY
SHAREHOLDERS WILL RESULT IN THE ABANDONMENT AND TERMINATION OF BOTH THE MERGER
AND THE SPIN-OFF TRANSACTION.
Shareholders of record of Penril at the close of business on October 11,
1996, the record date for the Special Meeting, are entitled to notice of, and to
vote at, the Special Meeting and any adjournment or postponement thereof. Penril
has retained MacKenzie Partners, Inc., a proxy solicitation firm, for assistance
in connection with the Special Meeting. The list of Shareholders entitled to
vote at the Special Meeting will be available for examination for ten days prior
to the Special Meeting at the principal executive offices of Penril, 1300 Quince
Orchard Boulevard, Gaithersburg, Maryland 20878.
The affirmative vote of the holders of a majority of the outstanding shares
of Penril Common Stock is necessary to approve the Proposal.
<PAGE> 4
Holders of Penril Common Stock will not be entitled to appraisal rights as
a result of the Merger. Under Delaware law, appraisal rights are unavailable to
holders of Penril Common Stock because Penril Common Stock was, on the record
date, designated as a Nasdaq National Market security by the National
Association of Securities Dealers, Inc. and will be converted into Bay Common
Stock, which on the effective date of the Merger will be listed on the New York
Stock Exchange. See "The Merger -- No Appraisal Rights" in the accompanying
Proxy Statement/Prospectus.
THE BOARD OF DIRECTORS OF PENRIL HAS DETERMINED THAT THE SPIN-OFF
TRANSACTION AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, PENRIL AND
ITS SHAREHOLDERS, IN THEIR CAPACITY AS SHAREHOLDERS, HAS UNANIMOUSLY APPROVED
THE SPIN-OFF TRANSACTION AND THE MERGER AND UNANIMOUSLY RECOMMENDS A VOTE FOR
THE APPROVAL AND ADOPTION OF THE PROPOSAL.
All Shareholders are cordially invited to attend the Special Meeting in
person. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, YOU ARE
URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT AS
PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
By Order of the Board of Directors
/s/ Richard D. Margolis
RICHARD D. MARGOLIS
SECRETARY
Gaithersburg, Maryland
October 21, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN
THE PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED AT
THE SPECIAL MEETING.
------------------
DO NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD. IF THE
MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR STOCK CERTIFICATES.
<PAGE> 5
PENRIL DATACOMM NETWORKS, INC.
PROXY STATEMENT
------------------
BAY NETWORKS, INC.
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders
("Shareholders") of common stock ("Penril Common Stock"), par value $.01 per
share, of Penril DataComm Networks, Inc., a Delaware corporation ("Penril"), in
connection with the solicitation of proxies by the Board of Directors of Penril
(the "Penril Board") for use at a Special Meeting of Shareholders, to be held on
Friday, November 15, 1996 at 9:00 a.m. (local time) at 1201 Quince Orchard
Blvd., Gaithersburg, Maryland, and at any adjournments or postponements thereof
(the "Special Meeting").
At the Special Meeting, Shareholders will be asked to consider and vote
upon a single proposal (the "Proposal") to (i) approve the transfer and
contribution (the "Transfer") of Penril's and all of its subsidiaries' (other
than Penril International, Ltd. and Penril DataComm, Ltd. (collectively, the
"Modem Subsidiaries")) remote access product business, together with related
assets, liabilities, and all other businesses and assets and substantially all
of the liabilities unrelated to Penril's modem business (the "Modem Business")
to Access Beyond, Inc., a newly-formed, wholly-owned subsidiary of Penril
("Access Beyond"), and the distribution (the "Distribution") to Shareholders of
record as of the Spin-off Record Date (defined below) of all of the outstanding
capital stock of Access Beyond (the "Spin-off Transaction"); and (ii) approve
and adopt the Plan and Agreement of Merger dated as of June 16, 1996, as amended
on August 5, 1996 (the "Merger Agreement"), among Penril, Bay Networks, Inc., a
Delaware corporation ("Bay"), and Beta Acquisition Corp., a Delaware corporation
and a wholly-owned subsidiary of Bay ("Merger Sub"), and the transactions
contemplated thereby. A copy of the Merger Agreement is attached hereto as Annex
I. In the event the Merger is not consummated due to the lack of shareholder
approval, the license agreement between Penril and Bay, granting Bay the right
to use certain key modem technology of Penril will become effective without
further action or consideration on the part of any party. See "Risk
Factors -- Risks Relating to Penril -- Failure to Consummate Merger; License
Rights".
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED CAREFULLY BY SHAREHOLDERS IN CONSIDERING WHETHER TO
VOTE FOR THE APPROVAL AND ADOPTION OF THE PROPOSAL.
THIS PROXY STATEMENT/PROSPECTUS MAY CONTAIN ESTIMATES, PROJECTIONS AND
OTHER FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
TRENDS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN THIS PROXY
STATEMENT/PROSPECTUS AND THOSE CONTAINED IN OTHER FILINGS OF BAY AND PENRIL,
THAT COULD CAUSE ACTUAL RESULTS TO VARY FROM THOSE PROJECTED. SHAREHOLDERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH ARE
BASED ONLY ON CURRENT JUDGMENTS AND CURRENT KNOWLEDGE.
Pursuant to the Merger Agreement, Merger Sub will be merged with and into
Penril (the "Merger") and Penril as the surviving corporation in the Merger will
become a wholly-owned subsidiary of Bay. In the Merger, each outstanding share
of Penril Common Stock (other than shares owned beneficially by Bay or Merger
Sub, and other than shares held by Penril as treasury shares, all of which will
be automatically cancelled without consideration) will be converted into the
right to receive the number of shares of common stock, par value $.01 per share,
of Bay ("Bay Common Stock") equal to the "Conversion Ratio". The "Conversion
Ratio" means the number determined by dividing (i) $10.00 by (ii) the Bay
Exchange Price. The "Bay Exchange Price" means the average of the closing prices
of Bay Common Stock on the New York Stock Exchange ("NYSE") for the five (5)
consecutive trading days immediately preceding the second
<PAGE> 6
business day immediately preceding the "Closing Date". The "Closing Date" means
such mutually agreeable date as soon as practicable after the date on which all
of the conditions to the obligations of the parties to consummate the
transactions contemplated by the Merger have been satisfied or waived (where
permissible). Options to purchase Penril Common Stock granted under Penril's
1986 Incentive Plan, Penril's 1995 Long-Term Incentive Plan and Penril's
Non-Employee Directors' Stock Option Plan ("Penril Options") outstanding as of
the Effective Time (defined below, see "Summary -- The Merger and the Merger
Agreement -- Effective Time of the Merger") will be assumed by Bay and converted
into options to acquire shares of Bay Common Stock, on the terms and subject to
the conditions and adjustments set forth in the Merger Agreement and in the
award agreements pursuant to which such options were awarded, as more fully
described in this Proxy Statement/Prospectus.
No fractional shares of Bay Common Stock will be issued in the Merger.
Except as provided below with respect to Penril Options, in lieu of any such
fractional shares, each holder of Penril Common Stock who otherwise would be
entitled to receive a fractional share of Bay Common Stock pursuant to the
Merger will be paid an amount in cash equal to such fractional interest
multiplied by the Bay Exchange Price. In calculating the conversion of any
outstanding Penril Options, any fraction resulting from such calculation shall
be rounded up or down to the nearest whole number of shares, or, in the case of
..5, to the nearest odd number.
Pursuant to the Spin-off Transaction, Shareholders of record at the close
of business on the record date to be set by the Penril Board of Directors in
connection with the Spin-off Transaction, which is expected to be on or
immediately after the date on which Shareholders approve the Proposal (the
"Spin-off Record Date"), will be entitled to receive one share of common stock,
par value $.01 per share, of Access Beyond ("AB Common Stock") for each share of
Penril Common Stock held by such Shareholders of record on the Spin-off Record
Date. No fractional shares of AB Common Stock will be issued in connection with
the Spin-off Transaction. See "The Spin-off Transaction".
THE NUMBER OF SHARES OF BAY COMMON STOCK TO BE RECEIVED BY SHAREHOLDERS IN
THE MERGER WILL BE BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR
TO THE CLOSE OF BUSINESS ON THE SECOND BUSINESS DAY IMMEDIATELY PRECEDING THE
CLOSING DATE. Each share of Penril Common Stock will be converted into the
number of shares of Bay Common Stock as is equal to the Conversion Ratio. The
number of shares of Bay Common Stock will depend upon the Bay Exchange Price,
which establishes the Conversion Ratio. BECAUSE THE BAY EXCHANGE PRICE AND THE
CONVERSION RATIO AS OF THE CLOSING DATE ARE NOT DETERMINABLE AS OF THE DATE OF
THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL MEETING, THE
EXACT NUMBER OF SHARES OF BAY COMMON STOCK TO BE RECEIVED IN EXCHANGE FOR THE
OUTSTANDING PENRIL COMMON STOCK IS NOT CURRENTLY DETERMINABLE. Had the Merger
been consummated on October 15, 1996, the Bay Exchange Price would have been
$24.375, and each share of Penril Common Stock outstanding would have been
converted into 0.41 shares of Bay Common Stock. The closing price of Bay Common
Stock on that date, as reported on the NYSE-Composite Tape, was $20.875 per
share. In fact, the Bay Exchange Price is likely to be greater than or less than
$24.375, and the price at which Bay Common Stock will be trading on the NYSE on
and after the Effective Time is likely to be greater than or less than the Bay
Exchange Price.
This Proxy Statement/Prospectus does not contain all the information set
forth in the Registration Statement on Form S-1 filed by Access Beyond with the
Securities and Exchange Commission (the "Commission") in connection with the
Spin-off Transaction. Certain information relating to the Spin-off Transaction
is set forth in the Prospectus of Access Beyond which is attached as Annex II
hereto (the "Access Beyond Prospectus").
This Proxy Statement/Prospectus also constitutes the prospectus of Bay,
with respect to up to 7,000,000 shares of Bay Common Stock to be issued in
connection with the Merger, which Proxy Statement/Prospectus is part of a
Registration Statement on Form S-4 filed by Bay with the Commission. Bay Common
Stock is traded on the NYSE under the symbol "BAY". On October 15, 1996, the
closing price for Bay Common Stock as reported on the NYSE -- Composite Tape was
$20.875 per share. See "The Merger Agreement -- Terms of the Merger."
Holders of record of shares of Penril Common Stock at the close of business
on October 11, 1996, the record date for the Special Meeting, are entitled to
notice of and to vote at the Special Meeting. The Spin-off
2
<PAGE> 7
Transaction and the Merger will be voted upon together as a single proposal by
Shareholders. The consummation of the Merger and the Spin-off Transaction are
subject to various conditions, including the approval of the Proposal by holders
of a majority of the outstanding shares of Penril Common Stock.
Holders of shares of Penril Common Stock do not have rights of appraisal
under Delaware law in connection with the Merger.
All information contained in this Proxy Statement/Prospectus with respect
to Penril or Access Beyond prior to the Merger or with respect to Access Beyond
after the Spin-off Transaction has been provided by Penril and Access Beyond.
All information contained in this Proxy Statement/Prospectus with respect to Bay
has been provided by Bay. All information contained in the Access Beyond
Prospectus, attached hereto as Annex II, has been provided by Access Beyond.
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THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------
THIS PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORM OF PROXY ARE
FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT OCTOBER 22, 1996.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS OCTOBER 21, 1996.
3
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TABLE OF CONTENTS
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AVAILABLE INFORMATION................................................................. 8
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 9
SUMMARY............................................................................... 10
The Companies.................................................................... 10
The Special Meeting.............................................................. 12
The Spin-off Transaction......................................................... 12
The Merger and the Merger Agreement.............................................. 13
Interests of Certain Persons in the Merger....................................... 16
Risk Factors..................................................................... 18
Surrender of Certificates........................................................ 18
Shareholder Rights............................................................... 19
Recent Developments Concerning Bay............................................... 19
RISK FACTORS.......................................................................... 20
Risks Relating to Penril......................................................... 20
Risks Relating to the Merger..................................................... 20
Risks Relating to Bay............................................................ 21
Risks Relating to Access Beyond.................................................. 24
Risks Relating to Tax Treatment of the Merger and the Spin-off Transaction....... 25
SELECTED HISTORICAL FINANCIAL DATA.................................................... 27
COMPARATIVE PER SHARE DATA............................................................ 29
COMPARATIVE MARKET PRICE INFORMATION.................................................. 30
THE SPECIAL MEETING................................................................... 30
General; Date and Place of the Special Meeting................................... 30
Purpose of the Special Meeting................................................... 31
Shareholders Entitled to Vote; Requisite Approval................................ 31
Proxies.......................................................................... 31
BACKGROUND OF THE SPIN-OFF TRANSACTION AND THE MERGER................................. 32
THE SPIN-OFF TRANSACTION.............................................................. 33
Terms of the Spin-off Transaction................................................ 33
Indemnification Obligations...................................................... 33
Non-Competition/Confidentiality.................................................. 34
Employee Benefit Matters......................................................... 34
Penril Options................................................................... 34
THE MERGER............................................................................ 35
Recommendation of the Penril Board; Penril's Reasons for the Merger.............. 35
Bay's Reasons for the Merger..................................................... 35
Opinion of Financial Advisor to the Penril Board................................. 36
Interests of Certain Persons in the Merger....................................... 38
Employee Benefits................................................................ 41
Management and Operations of Penril after the Merger............................. 41
Anticipated Accounting Treatment................................................. 41
Regulatory Approvals............................................................. 41
Resale of Bay Stock; Affiliates.................................................. 41
New York Stock Exchange Listing.................................................. 42
No Appraisal Rights.............................................................. 42
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THE MERGER AGREEMENT.................................................................. 43
The Merger....................................................................... 43
Effective Time................................................................... 43
Terms of the Merger.............................................................. 43
Surrender and Payment............................................................ 45
Representations and Warranties................................................... 46
Conduct of Business by Penril Pending the Merger................................. 46
Certain Covenants................................................................ 47
Exclusivity...................................................................... 48
Indemnification.................................................................. 48
Conditions....................................................................... 49
Termination; Effect of Termination............................................... 50
Amendment........................................................................ 52
PROFORMA FINANCIAL INFORMATION OF BAY................................................. 53
INFORMATION CONCERNING BAY............................................................ 55
Business......................................................................... 55
Networking Solutions............................................................. 56
Products......................................................................... 56
Sales Channels................................................................... 58
Customers and Backlog............................................................ 59
Customer Support, Service and Warranty........................................... 59
Research and Development......................................................... 59
Manufacturing.................................................................... 59
Competition...................................................................... 60
Proprietary Rights and Licenses.................................................. 60
Employees........................................................................ 61
Properties....................................................................... 61
Legal Proceedings................................................................ 61
Management....................................................................... 62
Stock Ownership of Certain Beneficial Owners and Management...................... 65
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 66
Risk Factors That May Affect Future Results...................................... 70
Merger Sub....................................................................... 73
UNAUDITED PROFORMA FINANCIAL STATEMENTS OF ACCESS BEYOND.............................. 73
Proforma Balance Sheet........................................................... 73
Proforma Statement of Operations................................................. 74
DESCRIPTION OF PENRIL AND ACCESS BEYOND............................................... 77
Penril........................................................................... 77
Access Beyond.................................................................... 77
Discontinued Operations.......................................................... 79
Properties....................................................................... 79
Legal Proceedings................................................................ 80
Suppliers........................................................................ 81
Patents, Copyrights And Licenses................................................. 81
Backlog.......................................................................... 82
Competition...................................................................... 83
Employees........................................................................ 83
</TABLE>
5
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<TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PENRIL AND ACCESS BEYOND........................................................... 83
General Business Developments.................................................... 83
New Accounting Pronouncements.................................................... 84
Results of Operations............................................................ 84
Liquidity and Capital Resources.................................................. 88
FINANCIAL INFORMATION FOR THE MODEM BUSINESS TO BE SOLD............................... 89
DESCRIPTION OF BAY CAPITAL STOCK...................................................... 93
Common Stock..................................................................... 94
Preferred Stock.................................................................. 94
Stockholder Rights Plan.......................................................... 94
OWNERSHIP OF PENRIL COMMON STOCK...................................................... 95
DESCRIPTION OF ACCESS BEYOND CAPITAL STOCK............................................ 97
Authorized Capital Stock......................................................... 97
AB Common Stock.................................................................. 97
Preferred Stock.................................................................. 98
COMPARISON OF RIGHTS OF HOLDERS OF BAY CAPITAL STOCK AND PENRIL CAPITAL STOCK......... 98
Business Combinations............................................................ 98
State Takeover Legislation....................................................... 99
Amendments to Charters........................................................... 100
Amendments to Bylaws............................................................. 100
Redemption of Capital Stock...................................................... 101
Shareholder Action............................................................... 101
Special Shareholder Meetings..................................................... 101
Number, Election and Removal of Directors........................................ 102
Vacancies........................................................................ 102
Indemnification of Directors and Officers........................................ 102
Limitation of Personal Liability of Directors.................................... 103
COMPARISON OF RIGHTS OF HOLDERS OF PENRIL CAPITAL STOCK AND ACCESS BEYOND CAPITAL
STOCK................................................................................. 103
Business Combinations............................................................ 103
Amendments to Charters........................................................... 104
Amendments to By-laws............................................................ 104
Redemption of Capital Stock...................................................... 105
Shareholder Action............................................................... 105
Special Shareholder Meetings..................................................... 105
Number and Election of Directors................................................. 105
Anti-Takeover Provisions......................................................... 106
Indemnification of Directors and Officers........................................ 106
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 107
General.......................................................................... 107
Consequences of Proposed Transaction............................................. 107
Consequences of the Transfer and the Distribution to Penril, Access Beyond and
Shareholders.................................................................... 108
Consequences of the Merger to Penril, Bay and Shareholders....................... 109
</TABLE>
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LEGAL MATTERS......................................................................... 110
EXPERTS............................................................................... 110
SHAREHOLDER PROPOSALS................................................................. 110
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1
ANNEXES
I. Plan and Agreement of Merger, as amended
II. Access Beyond Prospectus
III. Form of Indemnification Agreement
IV. Opinion of Broadview Associates LLC
V. Perpetual License Agreement
VI. License Agreement
</TABLE>
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<PAGE> 12
AVAILABLE INFORMATION
Penril and Bay are each (and, following the Spin-off Transaction, Access
Beyond will be) subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file (and, in the case of Access Beyond, following the Spin-off
Transaction will file) reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed by Penril
and Bay (and, following the Spin-off Transaction, to be filed by Access Beyond)
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such information also can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The Commission's web site can be
accessed at http://www.sec.gov. Penril Common Stock is quoted on The Nasdaq
Stock Market ("Nasdaq"). Such reports, proxy statements and other information
filed by Penril can also be inspected at the offices of the National Association
of Securities Dealers, Inc., Market Listing Section, 1735 K Street, N.W.,
Washington, DC 20006. Bay Common Stock is listed on the NYSE. Such reports,
proxy statements and other information filed by Bay can also be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Access Beyond
has applied to have AB Common Stock listed for trading on Nasdaq. Following the
Spin-off Transaction, such reports, proxy statements and other information to be
filed by Access Beyond can also be inspected at the offices of the National
Association of Securities Dealers, Inc., Market Listing Section, 1735 K Street,
N.W., Washington, DC 20006.
Bay has filed with the Commission a Registration Statement on Form S-4
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
of which this Proxy Statement/Prospectus is a part, with respect to the shares
of Bay Common Stock to be issued pursuant to the Merger Agreement. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Proxy Statement/Prospectus or in any document incorporated by reference in this
Proxy Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or attached as an annex hereto or such
other document, each such statement being qualified in all respects by such
reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, UPON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO: (I) IN THE CASE OF
DOCUMENTS RELATING TO PENRIL OR ACCESS BEYOND, PENRIL DATACOMM NETWORKS, INC.,
1300 QUINCE ORCHARD BLVD., GAITHERSBURG, MARYLAND 20878, (TELEPHONE NUMBER (301)
417-0552), ATTENTION: RICHARD D. ROSE, OR VIA THE INTERNET AT [email protected],
OR (II) IN THE CASE OF DOCUMENTS RELATING TO BAY, BAY NETWORKS, INC., 4401 GREAT
AMERICA PARKWAY, SANTA CLARA, CALIFORNIA 95052-8185 (TELEPHONE NUMBER (408)
988-2400), ATTENTION: SECRETARY. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
REQUESTED DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY REQUESTS SHOULD BE MADE
PRIOR TO NOVEMBER 8, 1996.
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<PAGE> 13
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document previously filed by Penril with the Commission is
incorporated by reference in this Proxy Statement/Prospectus:
(a) Penril's Annual Report on Form 10-K for the fiscal year ended July
31, 1996 (File No. 1-7886).
The following documents previously filed by Bay with the Commission are
incorporated by reference in this Proxy Statement/Prospectus:
(a) Bay's Annual Report on Form 10-K for the fiscal year ended June
30, 1996 (File No. 0-19366); and
(b) the description of Bay Common Stock contained in Bay's
Registration Statements filed pursuant to Section 12 of the Exchange Act
and any amendment or report filed for the purpose of updating those
descriptions.
All documents and reports subsequently filed by Penril or Bay pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the date of the Special Meeting shall
also be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and to be part hereof from the date of filing of each such
document or report. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other document subsequently filed with the
Commission which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not, except as so modified or superseded, be deemed to
constitute a part of this Proxy Statement/Prospectus.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY PENRIL, BAY OR ANY OTHER PERSON. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF PENRIL OR BAY SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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<PAGE> 14
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This summary does not contain a complete
description of all material information relating to the Merger, the Spin-off
Transaction and the transactions related thereto. Reference is made to, and this
summary is qualified in its entirety by, the more detailed information and
financial statements and notes thereto contained, or incorporated by reference,
in this Proxy Statement/Prospectus and the Annexes hereto. Unless otherwise
defined herein, capitalized terms used in this summary have the respective
meanings ascribed to them elsewhere in this Proxy Statement/Prospectus.
Shareholders are urged to read this Proxy Statement/Prospectus and the Annexes
hereto in their entirety. Unless the context otherwise requires, the references
to Bay include its subsidiaries.
All share and per share data for Bay in this Proxy Statement/Prospectus
reflect the three-for-two stock split of Bay Common Stock, in the form of a
stock dividend, effective November 24, 1995. References to Bay's fiscal year are
for the period ended June 30 and references to Penril's and Access Beyond's
fiscal years are for the period ended July 31.
THE COMPANIES
Penril. Penril, together with its wholly-owned subsidiaries, develops and
markets access devices which enable local, remote or mobile users to access
network resources located at remote sites, control sites or any other point in
the network. Penril possesses various technologies needed for a network access
solution including: remote local area network ("LAN") access, high performance
modems and modem channel banks, bridges and routers, host access from
asynchronous terminals and multiplexors for efficient access to a wide area
network ("WAN"). Penril, through two of its wholly-owned subsidiaries, Penril
International, Ltd., a United States Virgin Islands corporation, and Penril
DataComm, Ltd., a United Kingdom corporation (collectively, the "Modem
Subsidiaries"), has a worldwide modem business involving the development and
marketing of data communications network systems and the sale of modems and
modem technology (the "Modem Business"). In the event the Proposal receives the
requisite vote of Shareholders, all of Penril's remote access products business,
together with related liabilities, and all other businesses and assets and
related liabilities of Penril unrelated to the Modem Business (collectively, the
"Remote Access Business") will be transferred to Access Beyond immediately prior
to the Merger. See "Description of Penril and Access Beyond -- Penril." In July,
1995, the Penril Board decided to focus more of Penril's resources on its main
business of data communications and therefore determined to treat its
subsidiary, Technipower, Inc. ("Technipower"), a manufacturer of uninterruptible
power supplies and power regulating equipment, as a discontinued operation. On
October 11, 1996, Penril sold the assets of Technipower, for $4.3 million.
Penril received approximately $1.5 million in cash on that date, with the
remaining $2.8 million being due, pursuant to the agreement, on or prior to
December 31, 1996. The proceeds from the sale of Technipower will become
additional capital of Access Beyond and all liabilities related to Technipower
which otherwise would be obligations of Penril will, from and after the Spin-off
Transaction, be obligations of Access Beyond. Another wholly-owned subsidiary of
Penril, Electro-Metrics, Inc. ("EMI"), specializes in the production of
sophisticated high frequency electronic instrumentation equipment. The Penril
Board determined to sell EMI and therefore EMI has been classified as a
discontinued operation. Penril is in the process of selling EMI. However, it is
unlikely that EMI will be sold prior to consummation of the Spin-off
Transaction. In the event that EMI is not sold prior to consummation of the
Spin-off Transaction, all of the assets and liabilities of EMI will be
transferred by Penril to Access Beyond as part of the Remote Access Business in
the Spin-off Transaction. See "Description of Penril and Access
Beyond -- Discontinued Operations."
The Modem Business develops, markets and sells modems and modem technology
worldwide. In the Merger, Bay will acquire the Modem Business, including the
Modem Subsidiaries, and will assume substantially all assets and liabilities of
Penril and the Modem Subsidiaries associated with the Modem Business, subject to
certain indemnification obligations of Access Beyond. See "The Spin-off
Transaction -- Indemnification Obligations."
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<PAGE> 15
Penril is a Delaware corporation incorporated in September, 1971. Penril's
principal executive offices are located at 1300 Quince Orchard Blvd.,
Gaithersburg, Maryland 20878, and its telephone number is (301) 417-0552. See
"Description of Penril and Access Beyond -- Penril."
Bay. Bay develops, manufactures, markets and supports a comprehensive line
of data networking products and services, including high-speed routers,
switches, intelligent hubs, remote and internet access solutions and
sophisticated management software providing network design and configuration
solutions. These products enable end users to build or enhance their data
network systems, including all levels from small local area networks to large
enterprise-wide information infrastructures.
In October 1994, SynOptics Communications, Inc. ("SynOptics") and Wellfleet
Communications, Inc. ("Wellfleet") effected a strategic combination of the two
companies through the merger of a wholly-owned subsidiary of Wellfleet with and
into SynOptics (the "Combination"). In connection with the Combination,
Wellfleet changed its name to Bay Networks, Inc. On May 15, 1995, Bay acquired
Centillion Networks, Inc., a leading provider of Token Ring and Token
Ring-to-ATM switching products.
On December 15, 1995, Bay acquired Xylogics, Inc. ("Xylogics"), a
technology and market leader in enterprise remote access, offering remote users
and offices transparent corporate-wide access to networking resources. On March
13, 1996, Bay acquired all of the outstanding shares of Performance Technology,
Inc., a privately held company headquartered in San Antonio, Texas and a leader
in developing LAN-to-internet access technology, providing small offices and
small-to-medium-sized businesses easy, secure access to the internet. On March
31, 1996, Bay acquired substantially all of the net assets of Armon Networking,
Ltd., headquartered in Tel Aviv, Israel, a technology developer of RMON-based
distributed analysis tools and multi-segment LAN probes. See "Information
Concerning Bay -- Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 to the Consolidated Financial Statements
of Bay included herein.
On September 24, 1996, Bay acquired all of the outstanding shares of
LANcity Corporation ("LANcity"), a provider of advanced cable modem technology,
for $59.0 million. The acquisition was accounted for as a purchase. Based on
estimates, Bay allocated $42.6 million of the purchase price to in-process
research and development, which was charged to expense upon the closing of the
transaction.
Bay's products connect and interconnect multiple types of LANs, comprised
of computer equipment from the same or different manufacturers, to form an
internetworked system. These products connect computers to form LANs,
interconnect LANs located in a single facility and, through WAN connections, may
connect LANs dispersed around the world. The internetworking of these networks
enables computer users operating different types of equipment in different
locations to communicate, exchange data and share other computing resources.
Bay is a Delaware corporation incorporated in May, 1986. Bay's principal
offices are located at 4401 Great America Parkway, Santa Clara, California
95054, and its telephone number is (408) 988-2400. See "Information Concerning
Bay."
Merger Sub. Merger Sub is a Delaware corporation recently formed by Bay
for the sole purpose of facilitating the Merger. Merger Sub is a wholly-owned
subsidiary of Bay with no assets (other than those received in connection with
its initial capitalization) or liabilities (other than those incurred in
connection with its incorporation and the Merger Agreement). In the event the
Merger is consummated, Merger Sub will merge with and into Penril and will cease
to exist as a separate entity. The principal offices of Merger Sub are located
at 4401 Great America Parkway, Santa Clara, California 95054, and its telephone
number is (408) 988-2400. See "Information Concerning Bay -- Merger Sub."
Access Beyond. Access Beyond, a wholly-owned subsidiary of Penril, was
recently formed by Penril solely for the purpose of effecting the Spin-off
Transaction. In the event the Proposal is approved by the required vote of
Shareholders, Penril will, immediately prior to the Merger, transfer the Remote
Access Business and all other businesses not related to its Modem Business to
Access Beyond, and Access Beyond will assume all of Penril's liabilities
associated with the Remote Access Business as well as certain other liabilities.
Following the Spin-off Transaction, Access Beyond will be an independent public
company engaged
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<PAGE> 16
principally in the Remote Access Business. Access Beyond is a Delaware
corporation, its principal executive offices are located at 1300 Quince Orchard
Boulevard, Gaithersburg, Maryland 20878, and its telephone number is (301)
921-8600. See "Description of Penril and Access Beyond -- Access Beyond." The
term "Access Beyond," as used herein, refers to the Remote Access Business prior
to the Spin-off Transaction and to Access Beyond, Inc. after the Spin-off
Transaction.
THE SPECIAL MEETING
Date and Place of the Special Meeting. The Special Meeting will be held on
Friday, November 15, 1996 at 9:00 a.m. (local time), at 1201 Quince Orchard
Blvd., Gaithersburg, Maryland 20878. See "The Special Meeting -- General; Date
and Place of the Special Meeting."
Purpose of the Special Meeting. The purpose of the Special Meeting is to
consider and vote upon the Proposal to approve the Spin-off Transaction and the
Merger. See "The Special Meeting -- Purpose of the Special Meeting."
Shareholders Entitled to Vote; Requisite Approval. Holders of record of
shares of Penril Common Stock at the close of business on October 11, 1996, are
entitled to notice of and to vote at the Special Meeting. At that date, there
were 11,917,687 shares of Penril Common Stock outstanding, each of which will be
entitled to one vote on each matter to be acted upon at the Special Meeting. The
affirmative vote of holders of a majority of the outstanding shares of Penril
Common Stock is required for the approval of the Proposal. At the Special
Meeting, although abstentions and broker non-votes will be counted for purposes
of determining the presence of a quorum, abstentions and broker non-votes will
have the same effect as a vote against the Proposal with respect to determining
whether the Proposal has received the requisite number of affirmative votes. See
"The Special Meeting -- Shareholders Entitled to Vote; Requisite Approval."
Recommendation of the Penril Board. The Penril Board has unanimously
approved the Spin-off Transaction, the Merger and the other transactions related
thereto (the "Transactions") and believes that the Transactions are in the best
interests of Penril and its shareholders, in their capacity as shareholders. THE
PENRIL BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL. For
a detailed description of the factors considered by the Penril Board and the
reasons for its approval of the Transactions see "The Merger -- Recommendation
of the Penril Board; Penril's Reasons for the Merger".
THE SPIN-OFF TRANSACTION
Immediately prior to the Merger, Penril will transfer to Access Beyond as a
capital contribution, all of Penril's right, title and interest in the Remote
Access Business (including substantially all of the assets and corresponding
liabilities of Penril and its subsidiaries other than those relating to the
Modem Business). In exchange for the contribution of the Remote Access Business,
Access Beyond will transfer to Penril, and Penril will distribute and transfer
to its shareholders, all of the outstanding capital stock of Access Beyond. Each
holder of shares of Penril Common Stock as of the Spin-off Record Date will
receive one share of AB Common Stock for every one share of Penril Common Stock.
See "The Spin-off Transaction -- Terms of the Spin-off Transaction." Access
Beyond and Penril will enter into an indemnification agreement (the
"Indemnification Agreement") pursuant to which Access Beyond will indemnify and
hold Penril, its directors, officers, employees, agents and affiliates harmless
from substantially all costs, expenses, losses, damages and liabilities incurred
or suffered by Penril, its directors, officers, employees, agents or affiliates
resulting from or attributable to (i) the operation of Access Beyond from and
after the Spin-off Transaction, (ii) any claim, suit or other type of proceeding
based upon the operation of Penril prior to the Merger other than those based
upon, arising out of or in connection with (a) the Modem Business, (b) the
Merger, (c) the Merger Agreement, (d) the solicitation of proxies relating to
the approval of the Merger and other transactions relating to the Merger, or (e)
the tax consequences of the Spin-off Transaction, but including any claim, suit
or other type of proceeding based upon, arising out of, or in connection with
the sale of all or substantially all of the assets or business of any of
Penril's subsidiaries, including Technipower (but excluding the Modem
Subsidiaries), (iii) any claim, suit or other type of proceeding relating to the
termination of employment of
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<PAGE> 17
certain employees of Penril, and (iv) and any claim, suit or other type of
proceeding based upon, arising out of, or in connection with any information
concerning Access Beyond in this Proxy Statement/Prospectus or in the Access
Beyond Prospectus that was furnished by Penril and/or Access Beyond for
inclusion in this Proxy Statement/Prospectus or in the Access Beyond Prospectus;
and Penril will indemnify and agree to hold Access Beyond, its directors,
officers, employees, agents and affiliates harmless from substantially all
costs, expenses, losses, damages and liabilities incurred or suffered by Access
Beyond, its directors, officers, employees, agents or affiliates resulting from
or attributable to (i) the operation of Penril from and after the Spin-off
Transaction (ii) any claim, suit or other type of proceeding based upon the
operation of the Modem Business prior to the Merger and (iii) any claim, suit or
other type of proceeding relating to the Merger, the Merger Agreement, the
solicitation of proxies relating to approval of the Merger and other
transactions relating to the Merger (other than those referred to in (iv) above)
or the tax consequences of the Spin-off Transaction. The form of Indemnification
Agreement is attached as Annex III to this Proxy Statement/Prospectus.
The consummation of the Spin-off Transaction is subject to the satisfaction
or waiver (where permissible) of certain conditions including, but not limited
to, approval of the Proposal by holders of the requisite number of shares of
Penril Common Stock; the absence of any stop order suspending the effectiveness
of the Registration Statement on Form S-1 filed by Access Beyond to register its
shares of common stock (the "Access Beyond Registration Statement"); the absence
of any stop order suspending the effectiveness of the Registration Statement on
Form S-4 filed by Bay of which this Proxy Statement/Prospectus is a part; and
transfer of a license for intellectual property, software and technical know-how
pursuant to the terms of a technology license agreement to be executed between
Penril and Access Beyond.
THE MERGER AND THE MERGER AGREEMENT
General. Pursuant to the Merger Agreement, Merger Sub will be merged with
and into Penril and Penril, which will then consist only of the Modem Business,
will become a wholly-owned subsidiary of Bay. A copy of the Merger Agreement is
attached hereto as Annex I.
In the Merger, each outstanding share of Penril Common Stock (other than
shares owned beneficially by Bay or Merger Sub, and other than shares held in
Penril's treasury, all of which will be automatically cancelled without
consideration) will be converted into the number of shares of Bay Common Stock
as is equal to the "Conversion Ratio." The "Conversion Ratio" means the number
determined by dividing (i) $10.00 by (ii) the Bay Exchange Price. The "Bay
Exchange Price" means the average of the closing prices of Bay Common Stock on
the NYSE for the five (5) consecutive trading days immediately preceding the
second business day immediately preceding the Closing Date. Each Penril Option
outstanding at the Effective Time will be assumed by Bay and immediately after
the Effective Time will be deemed to constitute, without any action on the part
of the holder thereof, an option to acquire, as of the Effective Time, Bay
Common Stock on the same terms and conditions as were applicable under each such
Penril Option at the Effective Time. The number of shares of Bay Common Stock
that the holder of a Penril Option at the Effective Time will be entitled to
receive, upon notice of exercise and tender of the exercise price, is equal to
the number of shares of Penril Common Stock subject to the unexercised portion
of the Penril Option multiplied by the Conversion Ratio (with any fraction
resulting from such multiplication to be rounded up or down to the nearest whole
number or, in the case of .5, to the nearest odd number). The exercise price per
share of each Bay Option will be equal to the exercise price of the Penril
Option divided by the Conversion Ratio.
No fractional shares of Bay Common Stock will be issued in the Merger. In
lieu of any such fractional shares, each holder of Penril Common Stock who
otherwise would be entitled to receive a fractional share of Bay Common Stock
pursuant to the Merger will be paid an amount in cash equal to such fractional
interest multiplied by the Bay Exchange Price. See "The Merger
Agreement -- Terms of the Merger."
THE NUMBER OF SHARES OF BAY COMMON STOCK TO BE RECEIVED BY SHAREHOLDERS IN
THE MERGER WILL BE BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR
TO THE CLOSE OF BUSINESS ON THE SECOND BUSINESS DAY IMMEDIATELY PRECEDING THE
CLOSING DATE. Each share of Penril Common Stock will be converted into the
number of shares of Bay Common Stock as is equal to the Conversion Ratio. The
number of shares of Bay
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<PAGE> 18
Common Stock will depend upon the Bay Exchange Price, which establishes the
Conversion Ratio. BECAUSE THE BAY EXCHANGE PRICE AND THE CONVERSION RATIO AS OF
THE CLOSING DATE ARE NOT DETERMINABLE AS OF THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL MEETING, THE EXACT NUMBER
OF SHARES OF BAY COMMON STOCK TO BE RECEIVED IN EXCHANGE FOR THE OUTSTANDING
PENRIL COMMON STOCK IS NOT CURRENTLY DETERMINABLE. Had the Merger been
consummated on October 15, 1996, the Bay Exchange Price would have been $24.375,
and each share of Penril Common Stock outstanding would have been converted into
0.41 shares of Bay Common Stock. The closing price of Bay Common Stock on that
date, as reported on the NYSE-Composite Tape, was $20.875 per share. In fact,
the Bay Exchange Price may be greater than or less than $24.375, and the price
at which Bay Common Stock is likely to be trading on the NYSE on and after the
Effective Date is likely to be greater than or less than the Bay Exchange Price.
See "The Merger Agreement -- Terms of the Merger."
Based upon the capitalization of Bay and Penril as of October 15, 1996, the
latest practicable date prior to the date hereof, assuming the Conversion Ratio
is 0.41 and assuming the subsequent exercise in full of all outstanding Penril
Options outstanding as of that date, the shareholders and option holders of
Penril will own approximately 2.54% of the outstanding shares of Bay Common
Stock immediately following consummation of the Merger.
Recommendation of the Penril Board; Penril's Reasons for the Merger. The
Penril Board has determined that the Merger and Spin-off Transaction are fair
to, and in the best interests of, Penril and its shareholders, in their capacity
as shareholders, has unanimously approved the Merger and the Spin-off
Transaction and recommends that Shareholders vote FOR the approval and adoption
of the Proposal. The Penril Board believes that the Merger will provide
significant value to all Shareholders and offers opportunities for growth using
the additional capital, expertise and technology available from Bay. In reaching
its decision to approve the Merger, the Penril Board considered several factors
as more fully described under "The Merger -- Recommendation of the Penril Board;
Penril's Reasons for the Merger;" and "Background of the Spin-off Transaction
and the Merger."
Opinion of Financial Advisor to the Penril Board. Broadview Associates LLC
("Broadview"), which was engaged by the Penril Board to serve as its financial
advisor, delivered its opinion to the Penril Board on June 10, 1996, stating
that, as of June 10, 1996, the consideration to be received by Shareholders in
the Merger was fair to the holders of Penril Common Stock from a financial point
of view. The full text of the written opinion of Broadview which sets forth the
assumptions made, procedures followed, matters considered and limits of the
review, updated as of the date hereof, is attached hereto as Annex IV. Holders
of Penril Common Stock are urged to, and should, read the opinion in its
entirety. See "The Merger -- Opinion of Financial Advisor to the Penril Board."
Bay's Reasons for the Merger. The Bay Board of Directors (the "Bay Board")
believes that the Merger is in the best interests of Bay and its shareholders
because the strategic advantages of owning and controlling its own modem
technology will enable Bay to broaden its product offering and strengthen its
market presence in key markets. See "The Merger -- Bay's Reasons for the
Merger."
Conditions to the Merger. The respective obligations of Penril and Bay to
consummate the Merger are subject to the satisfaction or waiver (where
permissible) of certain conditions, including, but not limited to, approval of
the Proposal by the holders of the requisite number of shares of Penril Common
Stock; the consummation of the Spin-off Transaction; expiration or termination
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), which has occurred; the absence of any stop
order suspending the effectiveness of the Registration Statement on Form S-4
filed by Bay of which this Proxy Statement/Prospectus is a part; and the absence
of any preliminary or permanent injunction which prevents the consummation of
the Merger. See "The Merger Agreement -- Conditions."
Amendment. The Merger Agreement may be amended by the parties thereto at
any time before or after approval thereof by Shareholders, but, after such
approval, no amendment may be made which alters or changes the kind of shares
and/or the ratios at which Penril Common Stock is to be converted into Bay
Common Stock as provided in the Merger Agreement or which in any way materially
adversely affects the
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<PAGE> 19
rights of such Shareholders, without the further approval of such Shareholders.
Penril does not intend to resolicit Shareholder approval in connection with any
amendment of the terms of the Merger Agreement except as would be required by
the foregoing terms of the Merger Agreement. See "The Merger Agreement --
Amendment."
Regulatory Approvals. The consummation of the Merger is also subject to
the parties obtaining certain regulatory approvals, including expiration of the
relevant waiting period under the HSR Act, which has occurred, and the absence
of any stop order suspending the effectiveness of the Registration Statement on
Form S-4 filed by Bay, of which this Proxy Statement/Prospectus is a part. See
"The Merger -- Regulatory Approvals."
Exclusivity. The Merger Agreement provides that, subject to the Penril
Board's fiduciary duties to its shareholders, Penril will not and will use its
best efforts to cause its affiliates and each of its directors, officers,
employees, agents and representatives not to take any action to directly or
indirectly (i) encourage, solicit, initiate, engage or participate in
discussions or negotiations with any person or entity concerning any merger,
consolidation, sale or license of material assets or other business combination
involving Penril or any of its subsidiaries, in each case relating only to the
Modem Business or (ii) provide any non-public information concerning the
business, properties or assets of Penril or its subsidiaries to any person or
entity (collectively, the "Prohibited Communications"). If, within 180 days from
the execution of the Merger Agreement but prior to termination of the Merger
Agreement under certain circumstances, both (i) Penril has received,
participated in or encouraged inquiries, discussions or negotiations in the form
of Prohibited Communications; and (ii) the Penril Board has approved or has
recommended to its shareholders that they accept the terms of any Acquisition
Proposal (defined below) or has resolved to take any actions referenced in such
Prohibited Communications with a party with whom Penril engaged in such
Prohibited Communications, then that certain Perpetual License Agreement between
Penril and Bay dated June 16, 1996 (the "Perpetual License Agreement") will
become effective without further action or consideration on the part of any
party. Pursuant to the Perpetual License Agreement, Penril grants to Bay a
nonexclusive worldwide right and license to practice certain rights in order to
make, use, market and sell certain modem-related products. In the event the
Perpetual License Agreement becomes effective, Penril's management believes
there will be a material adverse effect on the financial condition and operation
of Penril because Bay will then have the perpetual right to use or otherwise
exploit the intellectual property, patents, software and know-how which was
previously the exclusive property of Penril. A copy of the Perpetual License
Agreement is attached hereto as Annex V. See "Risk Factors -- Risks Relating to
Penril" and "The Merger Agreement -- Exclusivity."
Termination; Effect of Termination. The Merger Agreement may be
terminated, and the Merger abandoned at any time prior to the Effective Time,
either before or, if applicable, after its approval by Shareholders as follows:
(i) by mutual written consent of Penril and Bay; (ii) by either Penril or Bay
upon notice to the other party if such other party is in breach of any material
representation, warranty or covenant contained in the Merger Agreement; (iii) by
either Penril or Bay if the Merger fails to receive the requisite approval by
Shareholders; or (iv) under certain other circumstances. See "The Merger
Agreement -- Termination; Effect of Termination." Upon termination of the Merger
Agreement under certain circumstances, the Perpetual License Agreement will
become effective. In the case of termination by reason of mutual agreement, lack
of Shareholder approval, delayed closing due to Penril's failure to satisfy
certain conditions precedent, or in the event the Penril Board withdraws its
approval or recommendation to Shareholders of the Merger Agreement, then the
Perpetual License Agreement will become effective without further action or
consideration on the part of any party. In the case of termination by reason of
any failure to obtain approval under the HSR Act, issuance and remaining in
effect of a stop order suspending the effectiveness of the Registration
Statement, or failure to consummate the Spin-off Transaction in accordance with
the terms of the Merger Agreement, then the Perpetual License Agreement will
become effective upon payment by Bay of $50,000,000 to Penril in immediately
available funds. See "The Merger Agreement -- Termination; Effect of
Termination."
Management and Operations of Penril after the Merger. After the Merger,
Penril will be a wholly-owned subsidiary of Bay. See "The Merger -- Management
and Operations of Penril after the Merger."
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<PAGE> 20
Employee Benefits. Pursuant to the Merger Agreement, Bay has agreed, for a
period of at least one year from and after the Effective Time, to cause Penril
to either (a) maintain all employee benefits of Penril or the Modem Subsidiaries
existing at the Effective Time or (b) provide benefits to employees and former
employees of Penril that are, taken as a whole, substantially equivalent to or
better than the benefits presently offered by Penril, or the applicable Modem
Subsidiary, immediately prior to the Effective Time; See "The Merger -- Employee
Benefits."
Anticipated Accounting Treatment. The Merger is intended to be treated as
a purchase for accounting and financial reporting purposes. The Spin-off
Transaction resulting in the transfer of the Remote Access Business to Access
Beyond will be recorded at historical cost and will not result in a step-up in
basis in the financial statements of Access Beyond. These accounting treatments
are not a condition to the Merger. See "The Merger -- Anticipated Accounting
Treatment."
Certain Federal Income Tax Consequences. The Merger is intended to qualify
as a tax-free reorganization within the meaning of Sections 368(a)(1)(B) of the
Internal Revenue Code of 1986, as amended (the "Code"). All Shareholders should
carefully read the section of this Proxy Statement/Prospectus entitled "Certain
Federal Income Tax Consequences" for a discussion of the anticipated tax
consequences of the Merger.
Listing of the Bay Common Stock. Bay has agreed to cause the Bay Common
Stock to be issued to Shareholders pursuant to the Merger Agreement to be
authorized for listing on the NYSE, upon official notice of issuance. Such
authorization for listing is a condition to the obligations of Bay, Merger Sub
and Penril to consummate the Merger. See "The Merger -- New York Stock Exchange
Listing."
Effective Time of the Merger. The Merger will be consummated and become
effective after the requisite approval of Shareholders has been obtained and all
other conditions to the Merger have been satisfied or waived (where permissible)
and upon the filing by Merger Sub and Penril of a properly executed Certificate
of Merger with the Secretary of State of the State of Delaware, or at such time
thereafter as is provided in the Certificate of Merger (the "Effective Time").
It is anticipated that, assuming all conditions are met, the Merger will occur
on or about November 19, 1996. See "The Merger Agreement -- Effective Time."
Consequences of Failure to Receive Shareholder Approval. In the event that
Shareholders do not approve the Proposal or if the Merger is not consummated for
any other reason, Penril intends to continue to conduct the Modem Business and
the Remote Access Business of Access Beyond as an independent company in
accordance with its business plan. In the event the Merger is not consummated
due to lack of Shareholder approval, the Perpetual License Agreement will become
effective without further action or consideration on the part of any party to
the Merger Agreement.
No Appraisal Rights. Holders of shares of Penril Common Stock are not
entitled to dissenters' appraisal rights under the Delaware General Corporation
Law (the "DGCL") in connection with the Merger. Under the DGCL, dissenters'
appraisal rights are not available to Shareholders because (a) Penril Common
Stock was designated as a National Market System security by the National
Association of Securities Dealers, Inc. on the record date for the Special
Meeting and (b) the Bay Common Stock to be issued pursuant to the Merger will be
listed on the NYSE as of the Effective Time, upon official notice of issuance.
See "The Merger -- No Appraisal Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. In considering the recommendation of the Penril Board with
respect to the Proposal, Shareholders should be aware that certain members of
the Penril Board and management have interests in the Merger that are in
addition to or different from the interests of Shareholders generally. In
connection with the Merger and the Spin-off Transaction, certain key officers of
Penril will be entering into employment agreements as described below. In
connection with the Merger, Bay has agreed to treat Penril Options in the manner
described below. Certain key officers of Penril are entitled to bonuses,
additional compensation or
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<PAGE> 21
severance payments from Penril as a result of the Merger and the transactions
contemplated by the Merger as described below.
Beneficial Ownership of Penril Common Stock by Directors and Officers of
Penril. As of October 11, 1996, directors and executive officers of Penril and
their affiliates may be deemed to be beneficial owners of an aggregate of
approximately 17.0% of the outstanding Penril Common Stock. Each of the
directors and executive officers of Penril has advised Penril that he intends to
vote or direct the vote of all the outstanding Penril Common Stock over which he
has voting control in favor of approval of the Proposal. The directors and
executive officers of Penril will not receive any benefit in their capacities as
Shareholders that differs from or is in addition to the benefit received by all
other Shareholders. All Affiliates (as that term is defined under Rule 145(c)
and (d) of the Securities Act) of Penril have executed an Affiliate's Agreement
whereby each such Affiliate has covenanted and agreed to vote all Penril Common
Stock held or controlled by such Affiliate at the time of the Special Meeting in
favor of the Proposal. See "Ownership of Penril Common Stock."
Employment Agreements. Pursuant to their existing employment agreements
with Penril, certain officers of Penril are entitled to bonuses or severance
payments as a result of the Merger. Under the terms of Penril's employment
agreement with Ronald A. Howard, Executive Vice President of Penril, Mr. Howard
is entitled to receive a bonus equal to $562,500 upon the closing of the Merger.
Under the terms of a Letter Agreement between Penril and Henry D. Epstein,
Chairman, President and Chief Executive Officer of Penril, Mr. Epstein is
entitled to a severance payment equal to $550,000 due to a change in control of
Penril. This severance payment is due and payable to Mr. Epstein in a lump sum
on or before the fifth day following the date of termination of Mr. Epstein's
employment. Under the terms of a Letter Agreement between Penril and Richard D.
Rose, Senior Vice President and Chief Financial Officer of Penril, Mr. Rose will
receive a performance bonus of $50,000 for calendar year 1996, which will be
pro-rated if Penril is sold or acquired prior to December 31, 1996. In addition,
Mr. Rose is entitled to a bonus of $150,000 upon consummation of the Merger.
Pursuant to the terms of the Distribution Agreement to be entered into between
Penril and Access Beyond, Penril will retain, and will not transfer to Access
Beyond in the Spin-off Transaction, cash sufficient to pay these change in
control payments, and Penril will make these payments at or prior to the
consummation of the Merger.
Upon consummation of the Spin-off Transaction, it is anticipated that Mr.
Howard and Mr. Rose will each enter into an employment agreement with Access
Beyond and Mr. Epstein will be a consultant to Access Beyond under the terms of
a consulting agreement between Access Beyond and Ideonics, a financial and
technology consulting firm owned by Mr. Epstein. See "The Merger -- Interests of
Certain Persons in the Merger."
Treatment of Penril Options. Under the terms of the Penril Options, and
the award agreements pursuant to which such options were granted, the Penril
Options were to immediately and automatically vest upon a change in control of
Penril, and upon such change in control, each optionholder would have the right
to exercise any options in full to the extent not previously exercised, without
regard to vesting limitations. On July 2, 1996, Penril's Stock
Option/Compensation Committee took action which accelerated the vesting schedule
as provided under certain award agreements and caused all of the outstanding
Penril Options held by directors and executive officers of Penril to vest and on
September 19, 1996, Penril's Stock Option/Compensation Committee took action
which accelerated the vesting schedule under certain award agreements and caused
all the remaining outstanding unvested Penril Options to vest. Each of the
Penril Options outstanding at the Effective Time, will be assumed by Bay and,
immediately after the Effective Time, will be deemed to constitute, without any
action on the part of the holder thereof, an option to acquire, as of the
Effective Time, Bay Common Stock on the same terms and conditions as were
applicable under each such Penril Option at the Effective Time, subject to
adjustment of the number of shares and the exercise price for the Conversion
Ratio. In addition, the applicable provisions of each award agreement for Penril
Options remaining outstanding after the Effective Time will have been equitably
adjusted after the Spin-off Transaction and prior to the Closing Date by the
Penril Board to reflect the Spin-off Transaction. At or prior to the Effective
Time, Penril and Bay will take all action necessary to cause the assumption by
Bay, as of the Effective Time, of the Penril Options not exercised prior
thereto. As of October 11, 1996, all Penril Options
17
<PAGE> 22
held by Penril's directors and executive officers had been exercised. See "The
Merger Agreement -- Terms of the Merger" and "Ownership of Penril Common Stock."
Indemnification. Pursuant to the terms of the Merger Agreement, from and
after the Effective Time, Bay will indemnify, defend and hold harmless each of
the officers, directors and employees of Penril and its subsidiaries, against
all losses, expenses, claims, damages or liabilities based in whole or in part
on the fact that such person is or was such officer, director or employee of
Penril or its subsidiaries, to the fullest extent permitted or required under
applicable law; provided however that no such party shall be entitled to
indemnification for claims based on the fact that such party is or was a
Shareholder. In addition, Bay has agreed that all rights to indemnification
existing in favor of the officers, directors, or employees of Penril as provided
in Penril's or its subsidiaries' organizational documents as in effect as of the
Effective Time shall survive the Merger for a period of not less than six years
from the Effective Time. Bay has agreed to unconditionally guarantee the
satisfaction of such rights. See "The Merger Agreement -- Indemnification."
RISK FACTORS
For a discussion of certain risk factors that should be considered
carefully by Shareholders in determining whether to vote in favor of the
Proposal, See "Risk Factors" beginning at page 20.
SURRENDER OF CERTIFICATES
Promptly after the Effective Date, Bay shall cause The First National Bank
of Boston, as its exchange agent, to mail a notice and transmittal form and
exchange instructions to each holder of record of Penril Common Stock.
CERTIFICATES FOR SHARES OF PENRIL COMMON STOCK SHOULD NOT BE SURRENDERED UNTIL
SUCH NOTICE, TRANSMITTAL FORM AND EXCHANGE INSTRUCTIONS ARE RECEIVED. Holders of
Penril Options outstanding as of the Effective Date will be entitled to receive
(i) options for shares of Bay Common Stock upon delivery of a consent letter
consenting to the amendment or adjustment, as the case may be, of their option
award agreements, together with a duly executed transmittal form or (ii) Bay
Common Stock upon delivery of a notice of exercise and tender of the exercise
price. See "The Merger Agreement -- Surrender and Payment."
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<PAGE> 23
SHAREHOLDER RIGHTS
As a result of the Spin-off Transaction and the Merger, holders of Penril
Common Stock of record as of both the Spin-off Record Date and the Effective
Time will be entitled to receive shares of both AB Common Stock and Bay Common
Stock. Prior to the Merger, the rights of Shareholders will continue to be
governed by the laws of Delaware and Penril's Amended and Restated Certificate
of Incorporation ("Penril's Certificate of Incorporation") and Bylaws. After the
Effective Time, the rights of holders of Bay Common Stock received in the Merger
will be governed by the laws of Delaware and the Certificate of Incorporation
and Bylaws of Bay. The rights of holders of AB Common Stock received in the
Spin-off Transaction will be governed by the laws of Delaware and Access
Beyond's Restated Certificate of Incorporation ("Access Beyond's Certificate of
Incorporation"). There are certain differences between Penril's Certificate of
Incorporation and Bay's Certificate of Incorporation and between Penril's
Certificate of Incorporation and Access Beyond's Certificate of Incorporation.
See "Comparison of Rights of Holders of Bay Capital Stock and Penril Capital
Stock"; and "Comparison of Rights of Holders of Penril Capital Stock and Access
Beyond Capital Stock."
RECENT DEVELOPMENTS CONCERNING BAY
On September 24, 1996, Bay acquired all of the outstanding shares of
LANcity, a provider of advanced cable modem technology, for $59.0 million. The
acquisition was accounted for as a purchase. Based on estimates, Bay allocated
$42.6 million of the purchase price to in-process research and development,
which was charged to expense upon the closing of the transaction.
On October 14, 1996, Bay announced that its revenue for the quarter ended
September 30, 1996 was $522.7 million, an increase of 14% from $457.8 million in
the same period of fiscal 1996, and that its income from operations was $27.3
million or 5.2% of revenue in the first quarter of fiscal 1997, which includes a
$42.6 million charge to operations for in-process research and development in
connection with the acquisition of LANcity, compared to $92.4 million or 20.2%
of revenue in the same period of fiscal 1996. Bay also announced that, including
the effect of the acquisition, its net income for the quarter ended September
30, 1996 was $5.6 million, or $0.03 per share, compared to $63.2 million, or
$0.32 per share, in the same period of fiscal 1996. See "Information Concerning
Bay -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Recent Developments."
---------------
"BIAX", "PENRIL", "PENRIL CORP.", "PENRIL DATABILITY NETWORKS", "PENRIL
DATABILITY NETWORKS AND THE PENRIL DATABILITY DESIGN", "PENRIL DATABILITY
DESIGN", "PENRIL DATACOMM", and "PENRIL DATA COMMUNICATIONS" (expired) are
trademarks, tradenames and service marks owned by Penril.
Optivity, BN and AN are registered trademarks, and Bay Networks, the Bay
logo, Xylogics, Clam, Nautica, Marlin, System 5000, 28000, LattisSwitch, ASN,
BaySIS, Distributed 5000, System 2000, Remote Annex, Instant Internet and
CENTILLION are trademarks of Bay.
This Proxy Statement/Prospectus may also include other trademarks and trade
names which are the property of their respective owners.
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<PAGE> 24
RISK FACTORS
The following risk factors should be considered carefully by Shareholders
in evaluating whether to approve the Proposal and thereby become holders of AB
Common Stock and Bay Common Stock. These factors should be considered in
conjunction with the other information included and incorporated by reference in
this Proxy Statement/Prospectus and the Access Beyond Prospectus.
RISKS RELATING TO PENRIL
Failure to Consummate Merger; License Rights. In the event Shareholders do
not approve the Proposal or the Merger is not consummated for any other reason,
Penril may experience a materially adverse effect on its operations and
financial condition. In connection with the Merger, Penril and Bay entered into
the Perpetual License Agreement whereby Penril granted Bay a non-exclusive
license to certain intellectual property, software and technical know-how
relating to certain V.34+ Xylogics Octal Modem Cards. In the event the Merger
Agreement is terminated under certain circumstances, including for lack of
Shareholder approval, the Perpetual License Agreement will become effective
without payment by Bay of any consideration therefor and Bay will have the
right, pursuant to the terms of the Perpetual License Agreement, to hire certain
designated Penril employees who are important to the Modem Business. See "The
Merger Agreement -- Termination; Effect of Termination." In addition, if the
Merger Agreement is terminated under certain other circumstances, the Perpetual
License Agreement will become effective upon payment by Bay to Penril of
$50,000,000. If the Perpetual License Agreement becomes effective without
consideration from Bay, Penril may suffer adverse financial consequences. If the
Perpetual License Agreement becomes effective under either instance, Penril's
management believes Penril will suffer material adverse effects on its
operations because the granting of the non-exclusive license to Bay and the
permission to hire the designated employees in all likelihood would make the
acquisition of Penril less attractive to other potential purchasers and, in
addition, in all likelihood would make the licensed technology less valuable to
Penril. Even if the Perpetual License Agreement does not become effective, Bay
nevertheless has had access to the technology through the terms of that certain
License Agreement (the "License Agreement") dated as of June 16, 1996, between
Penril and Bay, which license expires December 15, 1996. The License Agreement
is attached hereto as Annex VI. See "The Merger Agreement -- Termination; Effect
of Termination."
Potential Effect on Penril's Business. Penril anticipates that it will
experience changes in its business resulting from the public announcement of the
Merger and Spin-off Transaction. Such changes may include, among other things, a
potential change in the current buying patterns of resellers and potential
customers as a result of the announced transactions, and the decision on the
part of certain customers to defer purchasing decisions as they evaluate the
future product strategy and competitive positioning of Penril after the Merger.
Any such changes could have a material adverse effect upon the results of
operations of Penril both in the near term and the long term.
Important Considerations Related to Forward-Looking Statements. With the
exception of historical information, the matters discussed in this Proxy
Statement/Prospectus may include forward-looking statements that involve risks
and uncertainties. Penril wishes to caution readers that a number of important
factors, including those identified in this section as well as factors discussed
elsewhere in this Proxy Statement/Prospectus and in Penril's other filings with
the Commission, could affect Penril's actual results and cause actual results to
differ materially from those in the forward-looking statements.
RISKS RELATING TO THE MERGER
Effect of Stock Price on Merger Consideration. THE NUMBER OF SHARES OF BAY
COMMON STOCK TO BE RECEIVED BY SHAREHOLDERS IN THE MERGER WILL BE BASED UPON A
FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR TO THE CLOSE OF BUSINESS ON THE
SECOND BUSINESS DAY IMMEDIATELY PRECEDING THE CLOSING DATE. The number of shares
of Bay Common Stock will depend upon the Bay Exchange Price, which establishes
the Conversion Ratio. BECAUSE THE BAY EXCHANGE PRICE, AND THE CONVERSION RATIO
AS OF THE CLOSING DATE ARE NOT DETERMINABLE AS OF THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL MEETING, THE EXACT NUMBER
OF SHARES OF BAY COMMON STOCK TO BE RECEIVED IN EXCHANGE FOR THE OUTSTANDING
PENRIL
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<PAGE> 25
COMMON STOCK IS NOT CURRENTLY DETERMINABLE. In considering the Proposal,
Shareholders should take into account that the price of Bay Common Stock at the
Closing Date is likely to vary from the Bay Exchange Price and the prices as of
the date of this Proxy Statement/Prospectus and the date on which Shareholders
vote on the Merger. Such fluctuations may be due to changes in the business,
operations or prospects of Bay, market assessments of the likelihood that the
Merger will be consummated and the timing thereof, general market and economic
conditions, and other factors. See "The Merger Agreement -- Terms of the Merger"
and "Comparative Market Price Information."
RISKS RELATING TO BAY
Business Environment and Risk Factors That May Affect Future Results. The
following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. Bay's future
operating results may be affected by various trends and factors which are beyond
Bay's control. These include, among other factors, changes in general economic
conditions, rapid or unexpected changes in technologies and uncertain business
conditions that affect the data networking industry. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
Risks Related to Forward Looking Statements. With the exception of
historical information, the matters discussed in this document may include
forward-looking statements that involve risks and uncertainties. Bay wishes to
caution readers that a number of important factors, including those identified
in this section as well as factors discussed elsewhere in this Proxy
Statement/Prospectus and in Bay's other reports filed with the Commission, could
affect Bay's actual results and cause actual results to differ materially from
those in the forward-looking statements.
Risks Related to New Products. Bay's future revenue is dependent on its
ability to successfully develop, manufacture and market products for customers
worldwide. In this regard, future growth is dependent on Bay's ability to timely
and successfully develop and introduce new products, establish new distribution
channels, develop affiliations with leading market participants which facilitate
product development and distribution, and market existing and new products with
service providers, resellers and channel partners, and others. Also, future
revenue may be affected in part by factors which influence the business of Bay's
direct and indirect resellers, such as the resellers' organization structure,
purchasing patterns and inventory levels.
Bay believes that the markets for its products are characterized by rapid
rates of technological innovation for both hardware and software. Rapid rates of
technological change, in turn, may lead to shorter or more unpredictable product
life cycles. There can be no assurance that Bay's research and development
efforts will result in commercially successful new technology and products in
the future. In addition, as the technical complexity of new products increases,
it may become increasingly difficult to introduce new products quickly and
according to schedule.
Risks Related to Recent Developments. Bay recently announced an internal
reorganization and implemented a new information system which it believes will
better serve its customers and the market overall. There can be no assurances
that these actions will achieve Bay's objectives.
Dependence on Personnel. Bay's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of Bay will depend on the ability of Bay to attract and retain skilled
employees. Changes in personnel, therefore, could adversely affect operating
results.
Risks Related to Gross Margin. Bay's gross margin percentage is a function
of the product mix sold in any period. Other factors such as unit volumes,
obsolescence of inventory, heightened price competition, changes in channels of
distribution, shortages in components due to timely supplies of parts from
vendors or ability to obtain items at reasonable prices, and availability of
skilled labor, also may continue to affect the cost of sales and the fluctuation
in gross margin percentages in future periods. In the past, Bay has paid
premiums to secure adequate supplies of components, and it could become
necessary to make such payments again in the future.
Risks Related to Timing of Product Shipments. One of the risks potentially
affecting Bay's operating results is the fact that a substantial portion of
Bay's revenue in any period may result from shipments during the latter part of
a period. Because Bay establishes its operating expense level based on its
operational goals, if shipments in any period do not meet goals, net profits may
be adversely affected.
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<PAGE> 26
Risks Related to Backlog. Bay has attempted to reduce its product
manufacturing lead times and its backlog of orders. To the extent that backlog
is reduced during any particular period, it could result in more variability and
less predictability in Bay's quarter to quarter revenue and operating results.
If manufacturing lead times are not reduced, Bay's customers may cancel, or not
place, orders if shorter lead times are available from other manufacturers. In
addition, Bay's ability to meet customer demand may also be dependent on the
ability of Bay to increase manufacturing levels for new products to volumes
required based on anticipated orders by the market.
Risks Related to Intellectual Property Rights. Bay currently relies upon a
combination of patents, copyrights, trademarks and trade secret laws to
establish and protect its proprietary rights in its products. Bay maintains as
proprietary the software and other portions of the technology incorporated in
its network management and other products, and may license that technology to
others as necessary. There can be no assurance that the steps taken by Bay in
this regard will be adequate to prevent misappropriation of its technology or
that Bay's competitors will not independently develop technologies that are
substantially equivalent or superior to Bay's technology. In addition, the laws
of some foreign countries do not protect Bay's proprietary rights to the same
extent as do the laws of the United States. Bay has a number of patents and may
apply for additional patents. There can be no assurance that patents will issue
from any applications filed by Bay or that, if patents do issue, the claims will
be sufficiently broad to protect the technology invented by Bay. In addition, no
assurance can be given that any patents issued to Bay will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages.
Because of the existence of a large number of patents in the networking
field and the rapid rate of issuance of new patents or new standards that may
issue or to obtain important technology, it may be necessary for Bay to enter
into technology licenses from others. Such licenses could impact Bay's operating
results, and there is no assurance that Bay will be able to license such
technology.
Bay has announced a number of strategic technology alliances and
cooperative marketing efforts. There can be no assurance that such alliances
will lead to standards acceptable to the market, or competitive products.
Risks Related to New Markets. During the past several quarters, Bay
entered new markets, including the remote access and internet markets, primarily
through the acquisition of other businesses. In addition, Bay announced the
formation of a subsidiary, NETGEAR, which focuses on developing and marketing
products for the small office and home office market. The revenue or net profits
from these new markets and businesses has not been material in the past. At
present, these new markets are undeveloped and rapidly changing. If these
markets do not develop, or if Bay's strategies for these markets are
unsuccessful, Bay's operating results may be adversely affected.
Revenue Fluctuations and Competition. The data networking industry has
grown in the past few years, however, Bay's revenue may fluctuate year over year
or any quarter over quarter based on competition and customers waiting for
anticipated product introductions. The networking industry is highly competitive
and competition is expected to intensify and could adversely affect Bay's future
results. Networking and communications suppliers compete in areas such as:
conformity to existing and emerging industry standards; interoperability with
other networking products; the ability to run Ethernet, token ring and FDDI
networks on most common cabling systems; network management capabilities; ease
of use; scalability; price; performance; reliability; product features;
technical support; marketing expertise; and product innovation.
There are many companies competing in various segments of the intelligent
hub, switching, router and remote access network markets. Bay's principal
competitors include Ascend Communications, Cabletron Systems, Inc., Cascade
Communications, Cisco Systems, Inc. ("Cisco"), Digital Equipment Corporation,
Fore Systems, Inc., Hewlett-Packard Company, Inc., International Business
Machines Corporation and 3Com Corporation, among others. Several of Bay's
competitors have greater name recognition, more extensive engineering,
manufacturing and marketing capabilities, and greater financial, technological
and personnel resources than those available to Bay. In addition, certain
companies in the networking industry have expanded their product lines or
technologies in recent years as a result of acquisitions. Specifically, 3Com
Corporation acquired Chipcom Corporation and Cisco recently acquired StrataCom,
Inc. and recently
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<PAGE> 27
announced its intention to acquire Telebit Corporation, a manufacturer of
digital modems. There can be no assurance that Bay will be able to compete
successfully in the future with existing or new competitors.
With industry standards established and new standards emerging, more
companies have developed standards-based products and have sought to compete on
the basis of price. Pressures from competitors offering lower priced products
could result in future price reductions for Bay's products.
Risks Related to Acquisitions. To implement its business plans, Bay may
make further acquisitions in the future. Acquisitions require significant
financial and management resources both at the time of the transaction and
during the process of integrating the newly acquired business into Bay's
operations. Bay's operating results could be adversely affected if it is unable
to successfully integrate such new companies into its operations. Certain
acquisitions or strategic transactions may be subject to approval by the other
party's board or shareholders, domestic or foreign governmental agencies, or
other third parties. Accordingly, there is a risk that important acquisitions or
transactions could fail to be concluded as planned. Future acquisitions by Bay
could also result in issuances of equity securities or the rights associated
with the equity securities, which could potentially dilute earnings per share.
In addition, future acquisitions could result in the incurrence of additional
debt, taxes, or contingent liabilities, and amortization expenses related to
goodwill and other intangible assets. These factors could adversely affect Bay's
future operating results and financial position. As Bay's competitors have
pursued a strategy of growth through acquisition, there is a risk that future
acquisitions could be more expensive due to competition among bidders for target
companies.
Reliance on Resellers and Distributors. VAR and distributor networks have
continued to represent an important part of Bay's overall sales and distribution
strategy. While Bay is not dependent on any single VAR or distributor, the loss
of, or changes in the relationship with or performance by, several VARs or
distributors nevertheless could have a material adverse effect on Bay's revenue
and operating results. The loss of, or changes in the relationship with or
performance by, one or more international distributors could have a material
adverse effect on Bay's revenue and operating results.
Risks Related to Customer Support and Service. The market for Bay's
products increasingly demands high levels of customer support and service. As a
result, Bay aims to provide competitive levels of support and service, as well
as product warranties. There is a risk that Bay or its contractors may be unable
to provide a level of service that is acceptable to its customers. There is also
a risk that Bay may incur substantial costs related to warranties or service
claims.
Risks Related to International Sales. International sales may be an
increasingly important contributor to Bay's revenue and net profits. As a
result, operating results are increasingly affected by the risks of such
activities, including economic conditions in the international markets in which
Bay sells its products and political and economic instability, fluctuations in
currency exchange rates, changes in international regulatory requirements,
international staffing and employment issues, tariffs and other trade barriers,
import and export controls and the burden of complying with foreign laws. Sales
into developing nations may fluctuate to a greater extent than sales to
customers in developed nations, as those markets are only beginning to adopt new
technologies and establish purchasing practices. These risks may adversely
affect Bay's future operating results and financial position.
Risks Related to Government Regulations and Product Certification. Bay's
operations are also subject to laws, regulations, government policies, and
product certification requirements worldwide. Changes in such laws, regulations,
policies, or requirements could affect the demand for Bay's products or result
in the need to modify products, which may involve substantial costs or delays in
sales and could have an adverse effect on Bay's future operating results.
Risks of Stock Volatility and Absence of Dividends. In recent years, the
stock market in general and the market for technology stocks in particular,
including Bay Common Stock, have experienced extreme price fluctuations. There
is a risk that stock price fluctuation could impact Bay's operations. Changes in
the price of Bay Common Stock could affect Bay's ability to successfully attract
and retain qualified personnel or complete necessary business combinations or
other transactions in the future. Bay has never paid any cash dividends on its
capital stock, and there can be no assurances that Bay will do so.
23
<PAGE> 28
RISKS RELATING TO ACCESS BEYOND
Stand Alone Company. Access Beyond was recently incorporated for the
purpose of effecting the Spin-off Transaction and the Merger and, as a
corporation, does not have any operating history. However, the business of
Access Beyond, the Remote Access Business as conducted by Penril prior to the
Spin-off Transaction, has an operating history consisting of the development and
sales of local area network ("LAN") and host access products (the "LAN and Host
Access products") and the development of a new product family called Access
Beyond.
Absence of Trading Market for AB Common Stock. Prior to the consummation
of the Spin-off Transaction and the Merger, there will not have been any trading
market for the AB Common Stock, and there can be no assurance as to the prices
at which trading in the AB Common Stock will occur after completion of the
Spin-off Transaction and the Merger. Until the AB Common Stock is distributed
and an orderly market develops (if one does), the trading price may be volatile.
Prices for AB Common Stock will be determined in the marketplace and may be
influenced by many factors, including the operating performance of Access
Beyond, the depth and liquidity of the market for AB Common Stock, and general
economic and market conditions. Application has been made to list the AB Common
Stock for trading on Nasdaq.
Dependence on Key Management. If Access Beyond is to be successful, such
success will be due in large part to the performance of Ronald A. Howard, Access
Beyond's President and Chief Executive Officer, and, to a lesser extent, other
key management personnel. The loss of Mr. Howard's services could adversely
affect Access Beyond's ability to achieve profitability and growth. Although
Access Beyond anticipates it will enter into an employment contract with Mr.
Howard which will provide for his continued employment, no assurance can be
given that Access Beyond will be able to retain the services of Mr. Howard or
any other key management personnel. See "Description of Penril and Access
Beyond -- Access Beyond."
Technological Changes. The market for networking products is subject to
rapid technological change, evolving industry standards and frequent new product
introductions, and therefore requires a high level of expenditures for research
and development. Access Beyond may be required to incur significant expenditures
to develop such new integrated product offerings. There can be no assurance that
customer demand for products integrating network management and remote access
technologies will grow at the rate expected by Access Beyond, that Access Beyond
will be successful in developing, manufacturing and marketing new products or
product enhancements that respond to these customer demands or to evolving
industry standards and technological change, that Access Beyond will not
experience difficulties that could delay or prevent the successful development,
introduction, manufacture and marketing of these products (especially in light
of the increasing design and manufacturing complexities associated with the
integration of technologies), or that its new products and product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. Access Beyond's business, operating results and financial condition
may be materially and adversely affected if Access Beyond encounters delays in
developing or introducing new products or product enhancements or if such
product enhancements do not gain market acceptance. In order to maintain a
competitive position, Access Beyond must also continue to enhance its existing
products and there is no assurance that it will be able to do so. A portion of
future revenues will come from new products and services. Access Beyond cannot
determine the ultimate effect that new products will have on its revenues or
earnings.
Competition. The networking industry is highly competitive and competition
is expected to intensify. There are numerous companies competing in various
segments of the network management and remote access markets. Competitors
include Ascend Communications, Shiva Corporation, Cisco Systems, Inc., U.S.
Robotics, Inc., Microcom, Inc., and Bay, among others. Many of Access Beyond's
competitors have greater name recognition, more extensive engineering,
manufacturing and marketing capabilities, and greater financial, technological
and personnel resources than those available to Access Beyond. In addition,
certain companies in the networking industry have expanded their product lines
or technologies in recent years as a
24
<PAGE> 29
result of acquisitions. There can be no assurance that Access Beyond will be
able to compete successfully in the future with existing or new competitors.
Product Protection and Intellectual Property. Access Beyond, like many
other companies in the network access industry, currently relies upon rights
granted through licenses from third parties for a substantial amount of
proprietary information used to develop its products. However, some companies
may determine not to grant such licenses and may seek to protect their
proprietary rights in such technological information. Accordingly, there can be
no assurance that Access Beyond will be able to continue obtaining additional
rights to utilize proprietary technological information necessary to develop its
products. Because of the existence of a large number of patents in the
networking field and the rapid rate of issuance of new patents, it is not
economically practical to determine in advance whether a product or any of its
components infringe patent rights of others. In the event of any infringement,
Access Beyond believes that, based upon industry practice, necessary licenses or
rights under such patents may be obtained on terms that should not have a
material adverse effect on Access Beyond's consolidated financial position or
results of operations. However, there can be no assurance in this regard.
Effect of Certain Anti-Takeover Provisions. Access Beyond's Certificate of
Incorporation includes certain provisions that are intended to prevent or delay
the acquisition of Access Beyond by means of a tender offer, proxy context or
otherwise. Specifically, Access Beyond's Certificate of Incorporation provides
for a classified Board of Directors, classified into three classes with terms of
three years each. In addition, Access Beyond's Certificate of Incorporation
authorizes the Board of Directors of Access Beyond to issue preferred stock,
without further shareholder approval, which could have dividend, redemption,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of AB Common Stock. Finally, Access
Beyond is subject to Section 203 of the DGCL which limits transactions between a
publicly held company and "interested shareholders" (generally those
shareholders who, together with their affiliates and associates, own 15% or more
of a company's outstanding capital stock). Any one of, or a combination of, the
above anti-takeover provisions could discourage a third party from attempting to
acquire control of Access Beyond. See "Description of Access Beyond Capital
Stock." Access Beyond's stock option plans will provide for acceleration of
stock options upon a change in control of Access Beyond, which will have the
effect of making an acquisition of control of Access Beyond more expensive.
These plans may also inhibit a change in control of Access Beyond. In addition,
certain officers of Access Beyond will have severance compensation agreements
with Access Beyond that will provide for substantial cash payments and
acceleration of other benefits in the event of specified corporate changes
related to Access Beyond, including a change in control of Access Beyond.
Important Considerations Related to Forward-Looking Statements. With the
exception of historical information, the matters discussed in this Proxy
Statement/Prospectus may include forward-looking statements that involve risks
and uncertainties. Penril wishes to caution readers that a number of important
factors, including those identified in this section as well as factors discussed
elsewhere in this filing and in Penril's other filings with the Commission,
could affect Access Beyond's actual results and cause actual results to differ
materially from those in the forward-looking statements.
Dividends. Access Beyond does not anticipate paying dividends in the
foreseeable future.
For a discussion of additional considerations relating to Access Beyond,
see "Risk Factors" in the Access Beyond Prospectus attached hereto as Annex II.
Shareholders are urged to read the Access Beyond Prospectus in its entirety.
RISKS RELATING TO TAX TREATMENT OF THE MERGER AND THE SPIN-OFF TRANSACTION
As described below, although Penril has received an opinion from its tax
counsel based upon certain representations and assumptions that it is more
likely than not that the Spin-off Transaction and the Merger will be tax-free
for federal income tax purposes, no ruling from the IRS to that effect has been
or will be sought. See "Certain Federal Income Tax Consequences." If the
Spin-off Transaction were not to qualify for tax-free treatment under Section
355 of the Code, then, in general, although not entirely free from doubt, for
federal income tax purposes it is likely that (i) each Shareholder would be
required to recognize income or gain on the receipt of the shares of AB Common
Stock in the Distribution in an amount up to the fair market value of the shares
of AB Common Stock received in the Distribution and (ii) Penril would be
required to recognize gain on the Distribution to the extent the fair market
value of the shares of AB Common Stock
25
<PAGE> 30
issued in the Distribution exceeded Penril's tax basis in such shares. Each
member of the Penril consolidated group (including Access Beyond and its
subsidiaries) would remain jointly and severally liable for such tax liability.
In addition, if the Merger does not qualify for tax-free treatment as a
reorganization described in Section 368(a)(1)(B) of the Code, then, in general,
although the matter is not entirely free from doubt, for federal income tax
purposes it is likely that each Shareholder would recognize gain measured by the
excess of the fair market value of the Bay Common Stock received in the Merger
plus the amount of cash in lieu of a fractional share over the tax basis in his
or her Penril Common Stock. Furthermore, if the tax free nature of the Merger is
invalidated it would reduce the likelihood that the Spin-off Transaction will
qualify as a tax-free Spin-off pursuant to Section 355 of the Code.
26
<PAGE> 31
SELECTED HISTORICAL FINANCIAL DATA
The following Selected Historical Financial Data of Bay have been derived
from its consolidated historical financial statements and should be read in
conjunction with the consolidated financial statements and the notes thereto
included herein.
The following Selected Historical Financial Data of Penril should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Penril and Access Beyond" included elsewhere herein
and Penril's consolidated financial statements and the notes thereto included
herein. The statement of operations data for the years ended July 31, 1996,
1995, 1994, 1993, and 1992 and the balance sheet data as of the same dates have
been derived from the audited consolidated financial statements of Penril.
No cash dividends have been declared or paid on Bay Common Stock. Penril
declared and paid cash dividends of $.02 per share of Penril Common Stock in
each of its 1994 and 1992 fiscal years.
SELECTED HISTORICAL FINANCIAL DATA OF BAY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BAY -- HISTORICAL STATEMENT OF
INCOME DATA(1):
Revenue..................... $2,056,634 $1,403,595 $1,136,393 $926,154 $507,013
Income before provision for
income taxes(2).......... 351,816 220,673 208,221 174,303 86,241
Net income.................. 206,325 128,986 124,378 103,280 57,260
Net income per share........ 1.04 0.69 0.69 0.58 0.34
Shares used to compute net
income per share......... 198,778 187,659 180,088 179,191 169,218
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BAY -- HISTORICAL BALANCE
SHEET DATA(1):
Total assets................ $1,506,535 $1,155,046 $ 848,496 $700,203 $374,153
Working capital............. 816,016 696,085 585,508 479,974 248,980
Long-term debt.............. 110,147 113,430 110,283 110,431 436
Stockholders' equity........ 1,094,695 770,086 583,721 458,025 296,506
<FN>
- ---------------
(1) All amounts and per share data for prior periods have been retroactively
restated to reflect the acquisition of Xylogics in a pooling of interests
transaction effective December 15, 1995. All share and per share data
applicable to prior periods have also been retroactively restated to reflect
a three-for-two stock split of Bay Common Stock in the form of a stock
dividend, effective November 24, 1995.
(2) Includes charges of $39.7 million, $6.7 million, $17.9 million and $17.9
million for the years ended June 30, 1996, 1995, 1994 and 1993,
respectively, for in-process research and development charges resulting from
acquisitions and $10.2 million and $63.4 million for the years ended June
30, 1996 and 1995 for merger related expenses.
</TABLE>
27
<PAGE> 32
SELECTED HISTORICAL FINANCIAL DATA OF PENRIL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PENRIL -- HISTORICAL STATEMENT OF OPERATIONS
DATA:
Net revenues(1).............................. $39,435 $52,611 $61,838 $44,108 $32,966
Net income (loss)
Continuing operations(2)................... (20,668) (4,614) 2,344 1,027 188
Discontinued operations.................... 404 (1,661) (828) (896) 906
Loss on disposal of discontinued
operations.............................. (640) (1,400) -- -- --
Earnings (loss) per share
Continuing operations...................... (2.14) (0.61) 0.30 0.15 0.03
Discontinued operations.................... .04 (0.22) (0.11) (0.13) 0.13
Loss on disposal........................... (.07) (0.19) -- -- --
Cash dividends per share..................... -- -- 0.02 -- 0.02
PENRIL -- HISTORICAL BALANCE SHEET DATA:
Total assets(3).............................. $33,780 $44,387 $51,061 $49,178 $28,689
Long-term debt............................... 905 5,681 8,890 10,217 1,875
Stockholders' equity......................... 18,215 21,723 28,580 27,501 22,177
<FN>
- ---------------
(1) Included in net revenues are the following net revenues relating to the
Modem Business, including $4.5 million paid in the fourth quarter of fiscal
1996 to Penril for a license agreement with Bay:
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues............................ $19,519 $18,974 $22,828 $21,768 $16,789
<FN>
(2) Net income from continuing operations for fiscal 1996 includes a charge of
$9.7 million for restructuring costs and $500,000 for costs incurred through
July 31, 1996 related to the Merger.
(3) Included in total assets are the following net assets relating to the
discontinued operations (Technipower and EMI):
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net assets.............................. $ 7,337 $ 5,145 $ 6,830 $ 7,299 $ 6,883
</TABLE>
28
<PAGE> 33
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Bay and
Penril and combined per share data on an unaudited pro forma basis after giving
effect to the Spin-off Transaction, and to the Merger as a purchase transaction,
and assuming that 4,213,455 shares of Bay Common Stock, based on the outstanding
shares of Penril Common Stock as of July 31, 1996, will be issued for all of the
outstanding Penril Common Stock. These data should be read in conjunction with
the selected historical financial data, the unaudited pro forma consolidated
financial statements of Access Beyond, the Unaudited Pro Forma Combined
Condensed Financial Statements of Bay and the separate historical consolidated
financial statements of Bay and Penril included elsewhere in this Proxy
Statement/Prospectus. The unaudited pro forma combined financial data, which
represents the pro forma combined financial data of Bay and the Modem Business,
are not necessarily indicative of the operating results or financial position
that would have been achieved had the Spin-off Transaction and the Merger been
consummated at the beginning of the periods presented and should not be
construed as representative of future operations.
<TABLE>
<CAPTION>
AS OF OR
HISTORICAL YEAR ENDED JUNE 30, 1996
-------------------------------- ------------------------------------
BAY PENRIL BAY
AS OF OR AS OF OR BAY PRO FORMA
YEAR ENDED YEAR ENDED PRO FORMA COMBINED
JUNE 30, 1996 JULY 31, 1996 COMBINED(3)(4) EQUIVALENTS(3)(4)
------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Income (loss) per share from
continuing operations........... $1.04(1) $(2.14) $ 0.97 $0.38
Book value per share(2)........... $5.81 $ 1.68 $ 5.94 $2.31
<FN>
- ---------------
(1) Reflects an in-process research and development charge of $39.7 million and
merger related expenses of $10.2 million in connection with acquisitions
during the year ended June 30, 1996.
(2) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period.
(3) Pro forma combined income per share from continuing operations reflects
Bay's net income for the year ended June 30, 1996 and Penril's income from
continuing operations for the year ended July 31, 1996, after giving effect
to the Spin-off Transaction, and is based on (i) Bay's weighted average
common and common equivalent shares outstanding for the year ended June 30,
1996, (ii) 4,213,455 shares of Bay Common Stock assumed to be issued for all
of the outstanding shares of Penril Common Stock, based on the outstanding
shares of Penril Common Stock at July 31, 1996 and assumes that such shares
were outstanding for the entire period and (iii) the applicable number of
shares relative to the Penril Options assumed by Bay. To the extent that the
number of outstanding shares of Penril Common Stock increases or decreases
between July 31, 1996 and the closing date of the Merger, the number of
shares of Bay Common Stock to be issued in connection with the Merger will
increase or decrease proportionately. Pro forma combined income per share
from continuing operations includes a pro forma adjustment of approximately
$11.1 million for the estimated effect of amortization over a five year
period of acquired intangibles in the Merger. The pro forma combined book
value per share reflects the stockholders' equity of Bay as of June 30, 1996
and Bay's estimated allocation of the total purchase price of Penril, and is
based on the outstanding shares of Bay Common Stock as of June 30, 1996 and
the shares of Bay Common Stock assumed to be issued in connection with the
Merger.
(4) Based on preliminary estimates, Bay expects that approximately $60 million
to $65 million of the total purchase price will be allocated to in-process
research and development and will be charged to operations at the time of
the closing of the Merger, currently anticipated to be during the quarter
ended December 31, 1996. The effect of this charge using the mid-point of
the range has been reflected in the pro forma combined book value per share
but has not been reflected in the pro forma combined income per share from
continuing operations.
</TABLE>
29
<PAGE> 34
COMPARATIVE MARKET PRICE INFORMATION
Penril Common Stock is quoted on Nasdaq under the symbol "PNRL." Bay was
quoted on Nasdaq until February 29, 1996, under the symbol "BNET", when it began
trading on the NYSE on February 29, 1996, under the symbol "BAY."
The following tables set forth, for the periods indicated, the high and low
sale prices of Penril Common Stock as reported on Nasdaq, and the high and low
closing price of Bay Common Stock as reported on Nasdaq and the NYSE.
<TABLE>
<CAPTION>
PENRIL COMMON BAY COMMON STOCK
STOCK
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
Calendar 1994
First Quarter.................................... $ 7.50 $ 5.38 $29.09 $21.42
Second Quarter................................... 6.50 3.50 25.87 14.17
Third Quarter.................................... 4.13 3.13 17.00 12.79
Fourth Quarter................................... 3.75 2.13 20.33 12.83
Calendar 1995
First Quarter.................................... $ 4.75 $ 2.13 $25.75 $18.71
Second Quarter................................... 6.00 3.13 27.50 22.46
Third Quarter.................................... 8.38 4.38 37.33 27.17
Fourth Quarter................................... 11.25 5.25 48.42 33.58
Calendar 1996
First Quarter.................................... $ 9.50 $ 5.50 $47.88 $28.38
Second Quarter................................... 14.13 6.00 36.75 25.00
Third Quarter.................................... 14.50 11.88 30.00 21.63
Fourth Quarter (through October 15).............. 15.25 13.38 27.00 20.25
</TABLE>
On June 14, 1996, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the last
reported sale price of Penril Common Stock on Nasdaq was $10.00 per share and
the closing price of Bay Common Stock on the NYSE -- Composite Tape was $27.25
per share.
On October 15, 1996, the most recent practicable date prior to the printing
of this Proxy Statement/Prospectus, the last reported sale price of Penril
Common Stock on Nasdaq was $13.875 per share and the closing price of Bay Common
Stock on the NYSE was $20.875 per share.
There were approximately 4,456 shareholders of Bay of record as of
September 30, 1996. There were 921 shareholders of Penril of record as of
October 11, 1996.
Bay has never paid any cash dividends on its capital stock, and there can
be no assurances that Bay will do so. See "Risk Factors -- Risks Relating to
Bay -- Absence of Dividends."
Penril declared and paid cash dividends of $.02 per share of Penril Common
Stock in fiscal 1994 and in fiscal 1992.
Prior to consummation of the Spin-off Transaction, there is no public
trading market for the AB Common Stock. However, Access Beyond has made
application to list the AB Common Stock for trading on Nasdaq.
THE SPECIAL MEETING
GENERAL; DATE AND PLACE OF THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to holders of Penril
Common Stock in connection with the solicitation of proxies by the Penril Board
for use at the Special Meeting to be held on Friday, November 15, 1996 at 9:00
a.m. (local time) at 1201 Quince Orchard Blvd., Gaithersburg, Maryland, and at
any adjournments or postponements thereof.
30
<PAGE> 35
Representatives of Deloitte & Touche LLP, Penril's independent auditors,
are expected to be present at the Special Meeting, will have the opportunity to
make a statement if they desire to do so, and are expected to be available to
respond to appropriate questions.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to Shareholders on or about October 22, 1996.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, Shareholders will consider and vote upon a single
proposal to approve and adopt the Spin-off Transaction and the Merger.
The Penril Board has determined that the Merger and the Spin-off
Transaction are fair to, and in the best interests of, Penril and its
shareholders, in their capacity as shareholders, has unanimously approved the
Proposal and unanimously recommends that Shareholders vote FOR the Proposal to
approve each of the Spin-off Transaction and the Merger. See "Background of the
Spin-off Transaction and the Merger"; and "The Merger -- Recommendation of the
Penril Board; Penril's Reasons for the Merger."
SHAREHOLDERS ENTITLED TO VOTE; REQUISITE APPROVAL
The Penril Board has fixed October 11, 1996 as the record date for the
determination of Shareholders entitled to notice of, and to vote at, the Special
Meeting. Accordingly, only holders of record of Penril Common Stock on the
record date will be entitled to notice of, and to vote at, the Special Meeting.
As of October 11, 1996, there were 11,917,687 shares of Penril Common Stock
outstanding and entitled to vote, which shares were held by 921 holders of
record. Each holder of record of Penril Common Stock on the record date is
entitled to cast one vote per share, exercisable in person or by properly
executed proxy, at the Special Meeting. The presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of Penril
Common Stock entitled to vote at the Special Meeting is necessary to constitute
a quorum at the Special Meeting.
Approval and adoption of the Spin-off Transaction and of the Merger will be
voted on by Shareholders as a single proposal. Therefore, failure to obtain the
requisite shareholder approval WILL RESULT IN THE ABANDONMENT BY PENRIL OF THE
MERGER AND SPIN-OFF TRANSACTION. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF PENRIL COMMON STOCK IS NECESSARY TO
APPROVE AND ADOPT THE PROPOSAL.
As of October 11, 1996, directors and executive officers of Penril and
their affiliates may be deemed to be beneficial owners of approximately 17.0% of
the outstanding shares of Penril Common Stock. Each of the directors and
executive officers of Penril has advised Penril that he intends to vote or
direct the vote of the Penril Common Stock over which he has voting control for
approval and adoption of the Proposal.
AT THE SPECIAL MEETING, ALTHOUGH ABSTENTIONS AND BROKER NON-VOTES WILL BE
COUNTED FOR PURPOSES OF DETERMINING THE PRESENCE OF A QUORUM, ABSTENTIONS AND
BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL WITH
RESPECT TO DETERMINING WHETHER THE PROPOSAL HAS RECEIVED THE REQUISITE NUMBER OF
AFFIRMATIVE VOTES.
PROXIES
This Proxy Statement/Prospectus is being furnished to Shareholders in
connection with the solicitation of proxies by and on behalf of the Penril Board
for use at the Special Meeting.
All shares of Penril Common Stock which are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting, and not revoked, will be voted at the Special
Meeting in accordance with the instructions indicated on such proxies. IF NO
INSTRUCTIONS ARE INDICATED (OTHER THAN IN THE CASE OF BROKER NON-VOTES), SUCH
PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE PROPOSAL.
As of the date of this Proxy Statement/Prospectus, the Penril Board does
not know of any other matters which are to come before the Special Meeting. If
any other matters are properly presented at the Special Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Special
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<PAGE> 36
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the enclosed
forms of proxy and acting thereunder will have discretion to vote on such
matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (a) filing
with the Secretary of Penril at or before the taking of the vote at the Special
Meeting a written notice of revocation bearing a later date than the proxy or
(b) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Penril DataComm Networks, Inc., 1300 Quince Orchard
Boulevard, Gaithersburg, Maryland 20878, Attention: Secretary, or hand delivered
to the Secretary of Penril, at or before the taking of the vote of the Special
Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement/Prospectus, will be borne by Penril. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Penril in person or by telephone, telegram, facsimile
or other means of communication. Such directors, officers and employees will not
be additionally compensated for, but may be reimbursed for reasonable
out-of-pocket expenses in connection with, such solicitation. Penril has
retained MacKenzie Partners, Inc., a proxy solicitation firm, for assistance in
connection with the Special Meeting at a cost of approximately $5,000 plus
reasonable out-of-pocket expenses. Arrangements will be made with custodians,
nominees and fiduciaries for the forwarding of proxy solicitation materials to
beneficial owners of shares held of record by such custodians, nominees and
fiduciaries, and Penril will reimburse such custodians, nominees and fiduciaries
for their reasonable expenses incurred in connection therewith.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
The procedure for the exchange of shares after the Merger is consummated is set
forth below in this Proxy Statement/Prospectus.
BACKGROUND OF THE SPIN-OFF
TRANSACTION AND THE MERGER
During fiscal 1995, revenues of Penril's data communications products
declined from the prior year, in part because delays were experienced by Penril
in shipment of its new generation of V.34 modem products which had received very
favorable reviews in trade publications. During the same period, Penril embarked
on a program to replace its older networking products with a new single hardware
platform which incorporated various functions, such as remote LAN access,
bridging/routing, multiplexing or host access. These new products were named
"Access Beyond" and were introduced to the marketplace in Spring, 1996.
The combined delays in Penril's ability to ship its new modem products and
its new networking products made it evident that Penril would need an infusion
of capital during the following twelve months. In June, 1995, in order to
maximize its options, Penril engaged Broadview Associates LLC ("Broadview") to
provide assistance in seeking to maximize shareholder value. At that time, the
Penril Board determined that it would consider a proposal which involved the
disposition of a portion or portions of Penril, or the entire company.
Over the next six months, Broadview contacted a number of potential
strategic acquirers and, after obtaining confidentiality agreements, provided
them with the product and other information they were seeking in order to
determine whether they would be interested in pursuing a transaction with
Penril. These efforts did not result in any significant responses and
Broadview's engagement terminated in December, 1995. However, Broadview's
engagement agreement did allow it to benefit from a transaction between Penril
and certain companies for a specified time period. In early 1996, Broadview
contacted or re-contacted several major manufacturers of data
communication/networking products and found that there was new interest in
Penril, principally because Penril was further along in its development of its
new modem and networking products. In April, 1996, Bay, one of the companies
that Broadview had previously contacted, offered preliminarily to acquire Penril
for consideration valued at $10.00 per share. Penril determined that this was an
inadequate price for the entire company and negotiations continued. Bay informed
Penril that the only portion of Penril in which it had an interest was Penril's
modem product line and that Bay had no interest in acquiring the Remote
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Access Business, Technipower, or EMI. In meetings with Bay, Penril made it clear
that while Penril's preferred course would be to find a buyer for the entire
company at an appropriate price, Penril would consider the sale to Bay of just
the Modem Business provided it could be done as part of a transaction or series
of transactions which would provide maximum value for Shareholders. To this end,
Penril established three conditions that had to be met: (i) that the entire
transaction be tax-free to Penril and its shareholders; (ii) that the new
company that remained (Access Beyond) be adequately financed; and (iii) that the
consideration for the Modem Business in Bay Common Stock be a minimum of $10.00
per share for each share of Penril Common Stock.
After a series of negotiations, Bay agreed that it would be willing to
acquire the Modem Business, exchanging $10.00 payable in Bay Common Stock
according to an exchange value determined by averaging Bay's closing stock
prices over a specified period prior to closing for each share of Penril Common
Stock, and Penril and its advisors developed the structure pursuant to which
this could be accomplished with a spin-off to Shareholders of a new company
(Access Beyond) containing all of the assets, liabilities and business of Penril
other than the Modem Business, which would remain with Penril and which would
then be acquired by Bay. Negotiations continued and resulted in the execution of
the Merger Agreement on June 16, 1996.
THE SPIN-OFF TRANSACTION
TERMS OF THE SPIN-OFF TRANSACTION
Access Beyond, which is a wholly-owned subsidiary of Penril, was recently
organized for purposes of effectuating the Spin-off Transaction. Until shortly
before the Merger, Access Beyond will own no material assets and will conduct no
significant business activity. Prior to the Merger Penril and Access Beyond will
enter into a Distribution Agreement pursuant to which Penril will, among other
things, (a) transfer to Access Beyond as a capital contribution all of the
right, title and interest in the Remote Access Business and all of the other
assets of Penril unrelated to the Modem Business and (b) agree to make certain
change of control payments in the aggregate amount of $1,262,500 to three Penril
officers prior to the Effective Time; and Access Beyond will (a) assume, pay,
perform and discharge all of the liabilities of Penril other than (i)
liabilities relating to the Modem Business and (ii) the bank debt of Penril
which may not exceed $4,000,000 at the Effective Time; and (b) indemnify Penril
for any and all liabilities, costs or expenses for Penril's Retirement and
Savings Plan. At the time of such contribution, Penril will own all of Access
Beyond's outstanding stock, which Penril then will distribute and transfer to
each holder of record of Penril Common Stock, as of the close of business on the
Spin-off Record Date, on the basis of one share of AB Common Stock for each
share of Penril Common Stock held by each such holder.
INDEMNIFICATION OBLIGATIONS
Obligations of Access Beyond. The Indemnification Agreement provides that
from and after consummation of the Spin-off Transaction, Access Beyond will
indemnify, defend and hold harmless Penril and its directors, officers,
employees, agents and/or affiliates from any and all costs, expenses, losses,
damages and liabilities (collectively "Claims") incurred or suffered, directly
or indirectly, by Penril resulting from or attributable to, among other things,
(i) the operation of Access Beyond after the Spin-off Transaction; (ii) any
claim, suit or other type of proceeding based upon, arising out of or in
connection with the operation of Penril prior to the Merger (other than those
based upon, arising out of or in connection with the Modem Business, the Merger,
the Merger Agreement, the solicitation of proxies relating to the approval of
the Merger and other transactions relating to the Merger, or the tax
consequences of the Spin-off Transaction, but including any claim, suit or other
type of proceeding based upon, arising out of or in connection with the sale or
transfer of all or substantially all of the assets or business of any subsidiary
of Penril, including EMI and Technipower, but excluding the Modem Subsidiaries);
(iii) any claim, suit or other type of proceeding relating to the termination of
employment of certain employees of Penril in connection with the Spin-off
Transaction and the Merger; and (iv) any claim, suit or other type of proceeding
based upon, arising out of or in connection with any information concerning
Access Beyond in this Proxy Statement/Prospectus or in the Access Beyond
Prospectus that was furnished by Penril and/or Access Beyond for inclusion in
this Proxy Statement/Prospectus or in the Access Beyond Prospectus.
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Obligations of Penril. The Indemnification Agreement provides that from
and after the consummation of the Spin-off Transaction, Penril will indemnify,
defend and hold harmless Access Beyond and its directors, officers, employees,
agents and/or affiliates from any Claims incurred or suffered, directly or
indirectly, by Access Beyond resulting from or attributable to, among other
things, (i) the operation of Penril from and after the Spin-off Transaction,
(ii) any claim, suit or other type of proceeding based upon, arising out of or
in connection with the operation of the Modem Business prior to the Merger; and
(iii) any claim, suit or other type of proceeding relating to the Merger, the
Merger Agreement, the solicitation of proxies relating to approval of the Merger
and other transactions relating to the Merger (other than those claims based
upon, arising out of or in connection with the Access Beyond Registration
Statement on Form S-1 or any information furnished by Penril or Access Beyond
concerning Access Beyond for inclusion in this Proxy Statement/Prospectus) or
the tax consequences of the Spin-off Transaction.
NON-COMPETITION/CONFIDENTIALITY
Bay and Penril after the Merger are required to cause any employee of
Penril, as the surviving corporation of the Merger, who was an employee of
Penril immediately prior to the Spin-off Transaction to agree to hold in
confidence and not to use contrary to the interests of Access Beyond any
confidential information concerning Access Beyond that is in such individual's
possession at the Effective Time as a result of such individual's employment by
Penril. In addition, Penril, as the surviving corporation of the Merger, has
agreed to release any employee of Access Beyond who was an employee of Penril
immediately prior to the Spin-off Transaction from any agreement not to compete
with Penril, as the surviving corporation of the Merger, or from any agreement
that would prohibit such employee from being employed by Access Beyond. Penril,
as the surviving corporation of the Merger shall have the benefit of any
confidentiality and/or nondisclosure agreements executed by employees of Penril
or the Modem subsidiaries.
EMPLOYEE BENEFIT MATTERS
Bay will assume all of Penril's employee benefit plans, including, without
limitation, Penril's Corporate Employee Benefit Trust, Flexible Benefit Trust,
and Exec-U-Care Health Insurance Plan but not Penril's Retirement and Savings
Plan (collectively, the "Plans"). Penril and Bay have agreed to take all action
as may be necessary in order to establish Bay as successor to Penril as to all
duties, liabilities and obligations under the Plans, including, but not limited
to, obtaining the written release of Penril from such rights, duties,
liabilities and obligations under or with respect to the Plans.
PENRIL OPTIONS
Under the terms of the Penril Options and the award agreements pursuant to
which such options were granted, the Penril Options were to immediately and
automatically vest upon a change in control of Penril, and each optionholder
would have the right to exercise any Penril Options in full to the extent not
previously exercised, without regard to vesting limitations. On July 2, 1996,
Penril's Stock Option/Compensation Committee took action which accelerated the
vesting schedule as provided under certain award agreements and caused all of
the outstanding Penril Options held by directors and executive officers of
Penril to vest and on September 19, 1996, Penril's Stock Option/Compensation
Committee took action which accelerated the vesting schedule under certain award
agreements and caused all the remaining outstanding unvested Penril Options to
vest. Each of the Penril Options outstanding at the Effective Time, will be
assumed by Bay and, immediately after the Effective Time, will be deemed to
constitute, without any action on the part of the holder thereof, an option to
acquire, as of the Effective Time, Bay Common Stock on the same terms and
conditions as were applicable under each such Penril Option at the Effective
Time, subject to adjustment of the number of shares and the exercise price for
the Conversion Ratio. The applicable provisions of each award agreement for
Penril Options remaining outstanding immediately after the Effective Time will
have been equitably adjusted after the Spin-off Transaction and prior to the
Closing Date by the Penril Board to reflect the Spin-off Transaction.
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THE MERGER
RECOMMENDATION OF THE PENRIL BOARD; PENRIL'S REASONS FOR THE MERGER
The Penril Board has determined that the Merger is fair to, and in the best
interests of, Penril and its shareholders, in their capacity as shareholders,
has unanimously approved the Merger and unanimously recommends that Shareholders
vote FOR the Proposal.
From time to time over the last several years, Penril has reviewed and
reexamined its business strategies and prospects in an attempt to maximize
shareholder value. During fiscal 1995, revenues of Penril's data communications
products declined from the prior year, in part because delays were experienced
by Penril in shipment of its new generation of V.34 modem products. During this
same period, Penril replaced its older networking products with what is now the
Remote Access Business. In April 1996, Bay expressed a desire to acquire
Penril's modem product line only and indicated that Bay had no interest in
acquiring the Remote Access Business, or the business conducted by EMI or
Technipower.
Penril's management believed that a strategic merger, if on terms and
conditions acceptable to the Penril Board and the Shareholders, could present a
valuable opportunity to enhance Shareholders' investment in Penril as well as an
opportunity to grow the Remote Access Business without any negative effects from
the Modem Business. The terms of the Merger and the Merger Agreement were the
result of arms'-length negotiations between Penril and Bay and their respective
representatives. The Penril Board consulted with its legal and financial
advisors and management of Penril. After careful review and consideration, the
Penril Board has determined that the Merger and the Spin-off Transaction will
provide significant value to Shareholders.
In reaching its decision to approve the Proposal, the Penril Board
considered several factors, including the benefits of remaining independent,
and, without assigning any relative or specific weights, the Board deemed the
following factors to be persuasive:
(a) the consideration to be received by the Shareholders ($10.00
payable in Bay Common Stock for each share of Penril Common Stock) in
relation to the book value per share of Penril Common Stock of $2.65 at
April 30, 1996, earnings (loss) per share of ($1.02) for the fiscal year
ended July 31, 1995 and the then market value of the Penril Common Stock
($10.44 per share at June 10, 1996);
(b) the prospect as a result of the Merger of Shareholders holding
shares in Bay, a company for which there is a more active and liquid
trading market;
(c) the opinion of Penril's financial advisor, Broadview, to the
effect that, as of June 10, 1996, the consideration to be received by
Shareholders in the Merger is fair, from a financial point of view, to
Shareholders;
(d) the terms and conditions of the Merger Agreement, which the Penril
Board concluded to be advisable and fair to Penril and Shareholders in
light of the nature of the transaction with Bay and which led the Penril
Board to conclude that, in its opinion, there is a high likelihood of the
Merger being consummated;
(e) the information relating to the financial condition, results of
operations and prospects of Penril, including the prospects of Penril in
the absence of a business combination or other strategic transaction; and
(f) the exchange of Penril Common Stock for Bay Common Stock in the
Merger in a tax-free transaction.
BAY'S REASONS FOR THE MERGER
Bay's Board, in unanimously approving the Merger, considered a number of
potential benefits which could be attained by the Merger: (a) gaining access to
and control of modem technology, which Bay views as important in the internet
service provider market, (b) integration of Penril modem technology with Bay's
Remote Annex(TM) products in order to offer a broader line of products for the
enterprise and workgroup
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markets, and (c) obtaining a group of highly qualified engineers having
expertise in digital signal processing, a technology Bay views as important for
its business.
The Bay Board also considered risks relating to the Merger, including (i)
the risk that the benefits sought in the Merger would not be fully achieved,
(ii) the risk that the Merger would not be consummated, (iii) the effect of the
public announcement on Penril and its business, and (iv) other risks described
under "Risk Factors -- Risks Relating to Bay".
Additionally, in evaluating the proposed Merger, the Bay Board considered
the potential impact on net income in the near and later term. Although based on
such analyses the Bay Board concluded that the Merger would likely be dilutive
to net income per share in the near term, for the strategic reasons set forth
above, the Bay Board determined that the Merger was in the best interest of Bay.
OPINION OF FINANCIAL ADVISOR TO THE PENRIL BOARD
Penril has retained Broadview as its financial advisor to render its
opinion with respect to the fairness, from a financial point of view, to the
holders of Penril Common Stock, of the consideration to be received by the
holders of Penril Common Stock in the Merger. Broadview rendered its opinion to
the Penril Board on June 10, 1996, that, as of the date of such opinion, the
consideration to be received by the holders of Penril Common Stock in the Merger
was fair, from a financial point of view, to the holders of Penril Common Stock.
THE FULL TEXT OF THE OPINION OF BROADVIEW, UPDATED AS OF THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH CERTAIN QUALIFICATIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEWS UNDERTAKEN, IS ATTACHED AS
ANNEX IV TO THIS PROXY STATEMENT/PROSPECTUS, AND SHOULD BE READ IN ITS ENTIRETY.
THE SUMMARY OF THE FULL TEXT OPINION OF BROADVIEW SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPINION.
BROADVIEW'S OPINION SHOULD NOT BE CONSTRUED BY HOLDERS OF PENRIL COMMON STOCK AS
A RECOMMENDATION AS TO HOW SUCH HOLDERS SHOULD VOTE AT THE SPECIAL MEETING. THE
INFORMATION SET FORTH BELOW WAS PROVIDED TO THE PENRIL BOARD BY BROADVIEW AND
DESCRIBES, AMONG OTHER THINGS, FACTORS WHICH WERE CONSIDERED BY BROADVIEW IN
ARRIVING AT ITS OPINION.
In arriving at its opinion, Broadview reviewed, among other things, the
Merger Agreement, together with exhibits and schedules thereto, certain publicly
available information relating to the business, financial condition and
operations of Penril and Bay as well as certain other non-public information,
primarily financial in nature, furnished to it by Penril relating to the
respective businesses, earnings, assets and prospects of Penril. Broadview also
held discussions with members of senior management of Penril concerning its
operations, business strategy, financial performance, and prospects. With
respect to financial forecasts used in its analysis, Broadview assumed that such
forecasts were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Penril as to the future
performance of Penril. Broadview also reviewed equity analysts' reports covering
Bay and certain publicly available information concerning the trading of, and
the trading market for, Penril Common Stock and Bay Common Stock, as well as
certain publicly available information concerning comparable companies and
transactions, all as more fully set forth in Broadview's opinion.
Broadview was not engaged to and did not conduct a physical inspection of
any of the assets, properties or facilities of either Penril or Bay, and was not
engaged to and did not make or, obtain and was not furnished with any
independent evaluation or appraisal of any of such assets, properties or
facilities or any of the liabilities of Penril or Bay. Broadview assumed and
relied upon, without independent investigation, the accuracy and completeness of
the financial and other information provided to it or publicly available, relied
upon the representations and warranties of Penril and Bay contained in the
Merger Agreement, and was not engaged to and did not independently attempt to
verify any of such information. Broadview also assumed that all of the
conditions to the Merger as set forth in the Merger Agreement, including the
tax-free treatment of the Merger to the holders of Penril Common Stock, would be
satisfied and that the Merger would be consummated on a timely basis in the
manner contemplated by the Merger Agreement. No limitations were imposed by
Penril upon Broadview with respect to the scope of its investigation nor were
any specific instructions given to Broadview in connection with its fairness
opinion.
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In connection with rendering its opinion dated June 10, 1996, Broadview
advised the Penril Board that it considered a variety of financial analyses, as
summarized below. The discussion of such analyses does not purport to be a
complete description of the analyses underlying Broadview's opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinion, Broadview 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, Broadview believes that its analyses must be considered as
a whole and that selecting portions of such analyses and of the factors
considered by Broadview without considering all such analyses and factors may
create a misleading or incomplete view of the analytical process underlying
Broadview's opinion. Any estimates contained in Broadview's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. In addition, analyses relating to
the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
The following is a summary discussion of selected valuation methodologies
considered and prepared by Broadview and discussed with the Penril Board in
connection with Broadview's written opinion dated June 10, 1996:
Public Company Comparables Analyses. Broadview reviewed the following
selected public companies from a financial point of view: US Robotics, Inc;
Telebit Corporation; Xircom Inc.; Microcom, Inc.; Zoom Telephonics, Inc.; Boca
Research, Inc.; Global Village Communication, Inc; and Data Race, Inc.
These comparable companies have a Trailing Twelve Month ("TTM")
Price/Earnings ("P/E") ratio range of 15.00 to 57.19 with a median of 18.47;
Forward P/E ratio range of 11.03 to 40.56 with a median of 15.90; and Total
Market Capitalization/Revenue ("TMC/R") ratio range of 0.77 to 6.13 with a
median of 1.47.
The per share valuation implied by the median TMC/R multiple is $1.64. The
TTM P/E and Forward P/E valuation analyses are not meaningful because of the
Modem Business' negative TTM and projected earnings indicated by management.
Transactions Comparables Analyses. Broadview reviewed and analyzed selected
recent comparable merger and acquisition transactions involving sellers in the
modem equipment segment of the information technology industry, including the
acquisition of Primary Access Corp. by 3Com Corp.; the acquisition of Digicom
Systems, Inc. by Creative Technology Ltd.; the acquisition of Megahertz Holding
Corp. by U. S. Robotics, Inc.; the acquisition of Octocom Systems, Inc. by
Telebit Corporation; the acquisition of Omnitel, Inc. by Data Race, Inc. and the
acquisition of Apex Data, Inc. by Smart Modular Technologies, Inc. The
price/revenue multiples of the aforementioned transactions ranged from .45 to
6.57 with a median of 1.14, and the per share valuation implied by the median
price/revenue multiple is $1.21.
No company or transaction used in the above analyses as a comparison is
identical to Penril, Bay or the Merger. Accordingly, an analysis of the results
of the foregoing necessarily involves complex considerations and judgments
concerning the differences in financial and operating characteristics of the
companies and other factors that could affect the acquisition values of the
companies to which they are being compared. Mathematical analysis (such as
determining the mean or median) is not, in itself, a meaningful method of using
comparable transaction data.
Stock Performance Analysis. Broadview examined the historical performance
of both Penril Common Stock and Bay Common Stock for comparative purposes.
Broadview examined the relative relationships between the Penril and Bay actual
share prices for the twelve months ended June 7, 1996; the Penril and Bay Common
Stock price appreciation for the twelve months ended June 7, 1996; and the
number of shares of Bay Common Stock to be received by Shareholders in the
Merger based upon the Conversion Ratio and Bay Common Stock performance for the
twelve months ended June 7, 1996. Broadview conducted its stock
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performance analysis using stock data for Penril prior to consummation of the
Spin-off Transaction although the analysis was being used to determine the
fairness of the Merger involving only the Modem Business.
The analyses performed by Broadview are not necessarily indicative of
actual values, which may be significantly more or less favorable than the values
suggested by such analyses. Such analyses were prepared solely as part of
Broadview's opinion. The term "fair from a financial point of view" is a
standard phrase contained in investment banker fairness opinions and refers to
the fact that Broadview's opinion as to the fairness of the consideration to be
received by holders of Penril Common Stock is addressed solely to the financial
attributes of such considerations. The analyses do not purport to be appraisals
or to reflect the prices at which a company might actually be sold. In addition,
the valuation methodologies were used to value only the Modem Business to remain
in Penril after consummation of the Spin-off Transaction. Finally, as described
above, Broadview's opinion was one of many factors taken into consideration by
the Penril Board in making its determination to approve the Merger Agreement.
Consequently, the Broadview analyses described above should not be viewed as
determinative of the Penril Board's conclusions with respect to the value of
Penril or of the decision of the Penril Board to agree to the consideration to
be received by holders of Penril Common Stock.
In connection with its opinion dated as of the date of this Proxy
Statement/Prospectus, Broadview performed procedures to update certain of its
analyses and reviewed the assumptions on which such analyses were based and the
factors considered in connection therewith. Broadview's opinion is based on
economic and market conditions and other circumstances existing on, and
information made available as of, the date of the opinion.
Broadview's opinion does not address Penril's underlying business decision
to effect the Spin-off Transaction, the Merger or any other terms of either the
Spin-off Transaction or the Merger. Broadview was not asked to consider and its
opinion does not address the relative merits of the Spin-off Transaction or the
Merger compared to any alternative business strategies that might exist for
Penril or the effect of any other transaction in which Penril might engage.
Broadview's opinion does not represent its opinion as to what the value of
Penril Common Stock or Bay Common Stock may be at the Effective Time.
Broadview focuses on providing merger and acquisition advisory services to
information technology ("IT") companies. In this capacity, Broadview is
continually engaged in valuing such businesses and maintains an extensive
database of IT mergers and acquisitions for comparative purposes. Broadview is
currently acting as financial advisor to the Penril Board and will receive a fee
from Penril upon the successful conclusion of the Merger. Broadview is not an
affiliate of either Penril or Bay. Penril has agreed to indemnify Broadview, its
officers, directors and controlling persons against certain liabilities,
including certain liabilities under federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. In considering the recommendation of the Penril Board with respect
to the Merger Agreement, Shareholders should be aware that certain members of
the Penril Board and management have interests in the Merger that are in
addition to or different from the interests of Shareholders generally. In
connection with the Merger, Bay has agreed to treat Penril Options in the manner
described below. In addition, certain key officers of Penril are entitled to
bonuses or severance payments as a result of the Merger as described under
"Background of the Spin-off Transaction and the Merger" and "The Merger
Agreement -- Terms of the Merger."
Beneficial Ownership of Penril Common Stock by Directors and Officers of
Penril. As of October 11, 1996, directors and executive officers of Penril and
their affiliates may be deemed to be beneficial owners of approximately 17.0% of
the outstanding Penril Common Stock. Each of the directors and executive
officers of Penril has advised Penril that he intends to vote or direct the vote
of all the outstanding shares of Penril Common Stock over which he has voting
control at the time of the Special Meeting in favor of approval of the Proposal.
The directors and executive officers of Penril will not receive any benefit in
their capacities as Shareholders that differs from or is in addition to the
benefit received by all other Shareholders. All Affiliates
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(as that term is defined under Rule 145(c) and (d) of the Securities Act) of
Penril have executed an Affiliate's Agreement whereby each such Affiliate has
covenanted and agreed to vote all Penril Common Stock held or controlled by such
Affiliate at the time of the Special Meeting in favor of the Proposal. See
"Ownership of Penril Common Stock."
Ronald A. Howard Employment Agreement. Ronald A. Howard, Executive
Vice-President of Penril, is presently a party to an Employment Agreement with
Penril dated May 1, 1993 as amended by a letter agreement dated October 25, 1995
(together, the "Howard Employment Agreement"). The Howard Employment Agreement
provides for the employment of Mr. Howard until April 30, 1997. Under the terms
of the Howard Employment Agreement, if Penril is sold or acquired during the
term of the Howard Employment Agreement, including by way of a transaction such
as the Merger, then immediately upon the closing of such sale, Mr. Howard is
entitled to receive a bonus of $562,500. This bonus is in addition to Mr.
Howard's regular compensation. Pursuant to the Distribution Agreement, Penril
will pay this change in control payment to Mr. Howard at or prior to the
consummation of the Merger. The Howard Employment Agreement, in addition to Mr.
Howard's base compensation and bonuses, provides for certain benefits and salary
continuation in the event of disability or termination without cause.
Simultaneously with consummation of the Spin-off Transaction, it is
anticipated that Mr. Howard will enter into an employment contract with Access
Beyond (the "Howard AB Employment Agreement") for Mr. Howard to serve as
Chairman of the Board, President and Chief Executive Officer of Access Beyond.
It is anticipated that the Howard AB Employment Agreement will provide, among
other things, a two year term of employment, an annual salary of $175,000, an
opportunity for bonus plan compensation pursuant to a plan to be established by
the Board of Directors of Access Beyond, and benefits consistent with those
which are normally provided by Access Beyond to its executive employees
including, without limitation, a $5,000,000 term life insurance policy. It is
anticipated that the Howard AB Employment Agreement will also provide that
options to purchase 300,000 shares of AB Common Stock are to be granted to Mr.
Howard and that, upon a change of control of Access Beyond, Mr. Howard will
receive a payment equal to two and one-half times his last full annual
compensation, including bonus.
Henry D. Epstein Employment Agreement. Under the terms of a Letter
Agreement between Penril and Henry D. Epstein, President and Chief Executive
Officer of Penril, Mr. Epstein is entitled to a severance payment equal to two
times Mr. Epstein's total cash compensation for the last full fiscal year upon
termination of his employment in the event of a change in control of Penril.
Upon consummation of the Merger, Mr. Epstein's employment with Penril will
terminate. Accordingly, this severance payment of $550,000 will be paid to Mr.
Epstein in a lump sum on the Closing Date. Pursuant to the Distribution
Agreement, Penril will pay this change in control payment to Mr. Epstein at or
prior to the consummation of the Merger. Simultaneously with consummation of the
Spin-off Transaction, it is anticipated that Mr. Epstein will be a consultant to
Access Beyond under the terms of a consulting agreement between Access Beyond
and Ideonics, a financial and technology consulting firm owned by Mr. Epstein
(the "AB Consulting Agreement"). It is anticipated that the AB Consulting
Agreement will provide, among other things, for a four year consulting term,
with an annual consulting fee equal to $137,500. In addition, pursuant to the AB
Consulting Agreement, Access Beyond will provide Ideonics with office space,
secretarial assistance, and health insurance benefits for Mr. Epstein. Mr.
Epstein is Chairman of the Board of both Penril and Access Beyond until the
Merger and the Spin-off Transaction, respectively.
Richard D. Rose Employment Agreement. Richard D. Rose, Senior Vice
President and Chief Financial Officer of Penril, is presently a party to a
letter agreement with Penril dated January 18, 1995 as amended by a letter
agreement dated March 19, 1996 (the "Rose Employment Agreement"). The Rose
Employment Agreement provides for the employment of Mr. Rose as Senior Vice
President and Chief Financial Officer of Penril for a one year term from the
date of the Rose Employment Agreement with automatic renewal unless notice is
given by either Mr. Rose or Penril at least sixty (60) days prior to such
anniversary date. Under the terms of the Rose Employment Agreement, Mr. Rose's
annual salary is $150,000. Penril has guaranteed a performance bonus of $50,000
for calendar year 1996 which will be pro-rated if Penril is sold or acquired
prior to December 31, 1996. In addition, Mr. Rose is entitled to a bonus of
$150,000 upon consummation of the
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Merger. Pursuant to the Distribution Agreement, Penril will pay Mr. Rose this
$150,000 change in control payment to Mr. Rose at or prior to the consummation
of the Merger.
Simultaneously with consummation of the Spin-off Transaction, it is
anticipated that Mr. Rose will enter into an employment agreement with Access
Beyond (the "Rose AB Employment Agreement") for Mr. Rose to serve as Senior Vice
President, Chief Financial Officer and Treasurer of Access Beyond. It is
anticipated that the Rose AB Employment Agreement will provide for an annual
salary of $150,000, options to purchase 75,000 shares of AB Common Stock which
will be granted to Mr. Rose, a payment of between .5 to 1.0 times Mr. Rose's
base salary in event of a change in control of Access Beyond, between four and
twelve months notice of termination and the ability to participate in any
executive bonus plan and other benefits consistent with those normally provided
by Access Beyond to its executive officers.
Penril Options. Under the terms of the Penril Options, and the award
agreements pursuant to which such options were granted, the Penril Options were
to immediately and automatically vest upon a change in control of Penril, and
upon such change in control, an option holder would have the right, commencing
at least five (5) days prior to the change in control and, subject to any other
limitation on the exercise of the option in effect on the date of exercise, to
immediately exercise any options in full to the extent not previously exercised,
without regard to vesting limitations. On July 2, 1996, Penril's Stock
Option/Compensation Committee took action which accelerated the vesting schedule
as provided under certain award agreements and caused all of the outstanding
Penril Options held by directors and executive officers of Penril to vest and on
September 19, 1996, Penril's Stock Option/Compensation Committee took action
which accelerated the vesting schedule under certain award agreements and caused
all the remaining outstanding unvested Penril Options to vest. Each of the
Penril Options outstanding at the Effective Time, will be assumed by Bay and,
immediately after the Effective Time, will be deemed to constitute, without any
action on the part of the holder thereof, an option to acquire, as of the
Effective Time, Bay Common Stock on the same terms and conditions as were
applicable under such Penril Option at the Effective Time, subject to adjustment
of the number of shares and the exercise price for the Conversion Ratio. In
addition, the applicable provisions of each award agreement for Penril Options
remaining outstanding after the Effective Time will have been equitably adjusted
after the Spin-off Transaction and prior to the Closing Date by the Penril Board
to reflect the Spin-off Transaction. At or prior to the Effective Time, Penril
and Bay will take all action necessary to cause the assumption by Bay, as of the
Effective Time, of the Penril Options not exercised prior thereto. As of October
11, 1996, all Penril Options held by Penril's directors and executive officers
had been exercised. For additional information regarding Penril Options held by
Penril's directors and executive officers, see "Ownership of Penril Common
Stock." Other than the assumption of existing Penril Options, no stock options,
or similar rights will be received by Penril's directors and executive officers
as a result of the Merger. See "The Merger Agreement -- Terms of the Merger"
regarding the treatment of existing Penril Options in the Merger.
Indemnification. Pursuant to the terms of the Merger Agreement, from and
after the Effective Time, Bay will indemnify, defend and hold harmless the
officers, directors and employees of Penril and its subsidiaries, against all
losses, expenses, claims, damages or liabilities based in whole or in part on
the fact that such person is or was such officer, director or employee of Penril
or its subsidiaries, to the fullest extent permitted or required under
applicable law; provided however that such party will not be entitled to
indemnification for claims based on the fact that such party is or was a
Shareholder. In addition, Bay has agreed that all rights to indemnification
existing in favor of the directors, officers or employees of Penril as provided
in Penril's or its subsidiaries' organizational documents as in effect as of the
Effective Time will survive the Merger for a period of not less than six years
from the Effective Time. Bay has agreed to unconditionally guarantee the
satisfaction of such rights. In addition, any existing indemnification
agreements between Penril and any of its current directors and officers will be
retained by Penril after the Merger. Bay has agreed to release the directors,
officers and employees of Penril from any and all claims it may have against
them, other than claims based solely on fraud. Penril has likewise agreed to
release the officers, directors and employees of Bay from any and all claims it
may have against them, other than claims based solely on fraud. See "The Merger
Agreement -- Indemnification."
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<PAGE> 45
EMPLOYEE BENEFITS
Under the Merger Agreement, Bay has agreed, for a period of at least one
year from and after the Effective Time, to cause the surviving corporation of
the Merger to either (a) maintain all employee benefits of Penril or the Modem
Subsidiaries, as the case may be, existing on the Effective Time or (b) provide
benefits to employees and former employees of the surviving corporation of the
Merger that are, taken as a whole, substantially equivalent to or better than
the benefits offered by Penril or the applicable Modem Subsidiary, as the case
may be, immediately prior to the Effective Time. Bay intends to proceed under
option (b) above.
MANAGEMENT AND OPERATIONS OF PENRIL AFTER THE MERGER
Penril will be the surviving corporation in the Merger and, following the
Merger, will be, and will be operated as, a wholly-owned subsidiary of Bay.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is intended to qualify as a purchase for accounting and
financial reporting purposes. The qualification of the Merger as a purchase is
not a condition to the consummation of the Merger.
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 have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and applicable waiting period requirements have been satisfied.
Penril filed notification and report forms under the HSR Act with the FTC on
July 12, 1996, and Bay filed notification and report forms under the HSR Act
with the FTC and the Antitrust Division on July 17, 1996. A request for early
termination of the required waiting period under the HSR Act was granted
effective July 29, 1996. At any time before or after the Effective Time of the
Merger, notwithstanding that the waiting period under the HSR Act has been
terminated, the Antitrust Division, the FTC or any state could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of substantial assets or businesses of Penril or
Bay. Private parties may also seek to take legal action under the antitrust laws
under certain circumstances.
In connection with the Merger, Bay has filed with the Commission, and the
Commission has declared effective under the Securities Act, a registration
statement on Form S-4 (the "Registration Statement") to register with the
Commission the Bay Common Stock to be issued to holders of Penril Common Stock
upon consummation of the Merger. This Proxy Statement/Prospectus contains some,
but not all, of the information set forth in the Registration Statement. Under
the Securities Act and pursuant to the terms of the Merger Agreement, for the
Merger to be consummated, no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and remain in
effect.
RESALE OF BAY COMMON STOCK; AFFILIATES
All shares of Bay Common Stock received by holders of Penril Common Stock
in the Merger will be freely transferable, except that Bay Common Stock received
by persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of Bay or Penril prior to the Merger may be resold by them only
in transactions permitted by the resale provisions of Rule 145 under the
Securities Act with respect to affiliates of Penril, or Rule 144 under the
Securities Act with respect to persons who are or become affiliates of Bay, or
as otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Bay or Penril generally include individuals or entities that
control, are controlled by, or are under common control with Penril or Bay, as
the case may be, and may include certain officers and directors of such party as
well as principal shareholders of such party.
Prior to the execution of the Merger Agreement, Penril delivered to Bay a
letter identifying Henry D. Epstein and Ronald A. Howard as the only persons who
Penril believed to be "affiliates" of Penril as that term is used in paragraphs
(c) and (d) of Rule 145 under the Securities Act (the "Affiliates"). Prior to
distribution
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of this Prospectus/Proxy Statement, Penril has delivered to Bay an agreement
from each of the Affiliates representing that he will not offer, sell, pledge,
transfer or otherwise dispose of any of the Bay Common Stock issued to him
pursuant to the Merger, except in compliance with Rule 145 or another exemption
from the registration requirements of the Securities Act.
NEW YORK STOCK EXCHANGE LISTING
Bay has agreed to cause the Bay Common Stock to be issued to Shareholders
and holders of Penril Options pursuant to the Merger Agreement to be authorized
for listing on the NYSE, upon official notice of issuance. Such authorization
for listing is a covenant of Bay under the Merger Agreement and is a condition
to the obligations of Penril to consummate the Merger.
NO APPRAISAL RIGHTS
UNDER THE DGCL, THE HOLDERS OF PENRIL COMMON STOCK ARE NOT ENTITLED TO ANY
APPRAISAL RIGHTS WITH RESPECT TO THE MERGER. Under the DGCL, dissenters'
appraisal rights are not available for shares of any class of stock which, on
the applicable record date for the shareholder vote on a merger, are designated
as a Nasdaq National Market security and which are to be converted into shares
of stock of any other corporation listed on the effective date of the merger on
a national securities exchange. On the record date, Penril Common Stock was
designated as a Nasdaq security and it is a condition to consummation of the
Merger that the Bay Common Stock to be issued to Shareholders in the Merger be
listed on the NYSE, upon official notice of issuance. Accordingly, holders of
Penril Common Stock are not entitled to dissenters' appraisal rights in
connection with the Merger.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex I to this Proxy
Statement/Prospectus. The summary is qualified in its entirety by reference to
the Merger Agreement. Shareholders are urged to read the Merger Agreement in its
entirety for a more complete description of the Merger.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger
by Shareholders and the satisfaction of the other conditions to the Merger,
Merger Sub will be merged with and into Penril, the separate existence of Merger
Sub will cease and Penril will be the surviving corporation of the Merger and a
wholly-owned subsidiary of Bay.
At the Effective Time, by virtue of the Merger and without any action on
the part of Penril, Bay, Merger Sub or Shareholders, each share of Penril Common
Stock, each Penril Option then outstanding and each share of common stock of
Merger Sub shall be converted pursuant to the terms of the Merger Agreement, as
described below. See "-- Terms of the Merger."
The Certificate of Incorporation of Merger Sub as in effect immediately
prior to the Effective Time and as amended in accordance with the provisions of
the Merger Agreement, will be the Certificate of Incorporation of Penril
following the Merger. The By-laws of Merger Sub as in effect immediately prior
to the Effective Time and as amended in accordance with the provisions of the
Merger Agreement will be the By-laws of Penril following the Merger, and
thereafter both the Certificate of Incorporation and the By-laws may be amended
in accordance with their terms and as provided by law. The name of the surviving
corporation of the Merger will, by virtue of the Merger, remain "Penril DataComm
Networks, Inc.," until changed.
EFFECTIVE TIME
The Merger will be consummated and become effective after the requisite
approval of Shareholders has been obtained and all other conditions to the
Merger have been satisfied and upon the filing by Merger Sub and Penril of a
properly executed Certificate of Merger with the Secretary of State of the State
of Delaware or at such time thereafter as is provided in the Certificate of
Merger.
In the event that Shareholders do not approve the Proposal or if the Merger
is not consummated for any other reason, neither the Spin-off Transaction nor
the Merger will take place. In such case, Penril does not have any present
intention to carry out any alternative transactions. Penril may still determine
in the future to effect the Spin-off Transaction without the Merger, but Penril
has no present intention to do so. In the event the Merger is not consummated
because Shareholders do not approve the Proposal, the Perpetual License
Agreement will become effective without further action or consideration on the
part of any party to the Merger Agreement or to the Perpetual License Agreement.
If the Perpetual License Agreement becomes effective without consideration from
Bay, Penril's management believes Penril will suffer material adverse financial
consequences. In addition, regardless of whether consideration is received from
Bay, Penril's management believes Penril will suffer material adverse effects on
its operations because the granting of the non-exclusive license to Bay and
permission to hire certain designated Penril employees in all likelihood would
make the acquisition of Penril less attractive to other potential purchasers
and, in addition, in all likelihood would make the licensed technology less
valuable to Penril. Even if the Perpetual License Agreement does not become
effective, Bay nevertheless has had access to the technology through the terms
of the License Agreement dated as of June 16, 1996 between Penril and Bay, which
license expires December 15, 1996. See "Risk Factors -- Risks Relating to
Penril -- Failure to Consummate Merger."
TERMS OF THE MERGER
General. Upon consummation of the Merger, each issued and outstanding
share of Penril Common Stock (other than shares of Penril Common Stock owned
beneficially by Bay or Merger Sub, and shares of Penril Common Stock held by
Penril as treasury shares, all of which will be automatically cancelled and
retired without consideration therefor) will be converted into the right to
receive the number of shares of Bay Common Stock equal to the Conversion Ratio.
The "Conversion Ratio" means the number determined by
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dividing (i) $10.00 by (ii) the Bay Exchange Price. The "Bay Exchange Price"
means the average of the closing prices of Bay Common Stock on the NYSE for the
five (5) consecutive trading days immediately preceding the second business day
immediately preceding the Closing Date. Each share of the common stock, $.01 par
value, of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and thereafter evidence one fully paid and
nonassessable share of Penril Common Stock.
By way of example (but in each instance subject to payment of cash in lieu
of fractional shares): if the Bay Exchange Price is $24.375, the Conversion
Ratio will be 0.41 and each 100 shares of Penril Common Stock will entitle the
holder thereof to receive 41 shares of Bay Common Stock.
Based upon the capitalization of Bay and Penril as of October 15, 1996, and
assuming a Conversion Ratio of 0.41, Shareholders and holders of Penril Options
(assuming all Penril Options are exercised prior to the Effective Time) will own
approximately 2.54% of the outstanding shares of Bay Common Stock immediately
following consummation of the Merger.
THE NUMBER OF SHARES OF BAY COMMON STOCK TO BE RECEIVED BY SHAREHOLDERS IN
THE MERGER WILL BE BASED UPON A FORMULA AND CANNOT PRECISELY BE DETERMINED PRIOR
TO THE CLOSE OF BUSINESS ON THE SECOND BUSINESS DAY IMMEDIATELY PRECEDING THE
CLOSING DATE. The number of shares of Bay Common Stock will depend upon the Bay
Exchange Price, which establishes the Conversion Ratio. BECAUSE THE BAY EXCHANGE
PRICE AND THE CONVERSION RATIO AS OF THE CLOSING DATE ARE NOT DETERMINABLE AS OF
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE SPECIAL
MEETING, THE EXACT NUMBER OF SHARES OF BAY COMMON STOCK TO BE RECEIVED IN
EXCHANGE FOR THE OUTSTANDING PENRIL COMMON STOCK IS NOT CURRENTLY DETERMINABLE.
Had the Merger been consummated on October 15, 1996, the Bay Exchange Price
would have been $24.375, and each share of Penril Common Stock outstanding would
have been converted into 0.41 shares of Bay Common Stock. The closing price of
Bay Common Stock on that date, as reported on the NYSE-Composite Tape, was
$20.875 per share. In fact, the Bay Exchange Price is likely to be greater than
or less than $24.375, and the price at which Bay Common Stock will be trading on
the NYSE on and after the Effective Time is likely to be greater than or less
than the Bay Exchange Price.
Treatment of Penril Options. Under the terms of the Penril Options, and
the award agreements pursuant to which such options were granted, the Penril
Options were to immediately and automatically vest upon a change in control of
Penril, and upon such change in control, each optionholder would have the right,
commencing at least five (5) days prior to the change in control and, subject to
any other limitation on the exercise of the option in effect on the date of
exercise, to immediately exercise any options in full to the extent not
previously exercised, without regard to vesting limitations. On July 2, 1996,
Penril's Stock Option/Compensation Committee took action which accelerated the
vesting schedule as provided under certain award agreements and caused all of
the outstanding Penril Options held by directors and executive officers of
Penril to vest and on September 19, 1996, Penril's Stock Option/Compensation
Committee took action which accelerated the vesting schedule under certain award
agreements and caused all the remaining outstanding unvested Penril Options to
vest. Each of the Penril Options outstanding at the Effective Time will be
assumed by Bay and, immediately after the Effective Time, will be deemed to
constitute, without any action on the part of the holder thereof, an option to
acquire, as of the Effective Time, Bay Common Stock ("Bay Option") on the same
terms and conditions as were applicable under such Penril Option at the
Effective Time except as described in the next paragraph.
The number of shares of Bay Common Stock that the holder of a Penril Option
will be entitled to receive upon exercise of the new Bay Option received upon
conversion of the Penril Option in the Merger is equal to the number of shares
of Penril Common Stock subject to the unexercised portion of such Penril Option
multiplied by the Conversion Ratio. Any fraction resulting from such
multiplication will be rounded up or down to the nearest whole number or, in the
case of .5, to the nearest odd number. The exercise price per share of each Bay
Option will be equal to the exercise price of such Penril Option immediately
prior to the Effective Time, divided by the Conversion Ratio. The term,
exercisability, status as an "incentive stock option" under Section 422 of the
Code, if applicable, and all other terms of the Penril Options shall otherwise
remain unchanged. In addition, the applicable provisions of each award agreement
for Penril Options remaining outstanding immediately after the Effective Time
will have been equitably adjusted after the Spin-off
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Transaction and prior to the Closing Date by the Penril Board to reflect the
Spin-off Transaction. As of October 11, 1996, all Penril Options held by
Penril's directors and executive officers had been exercised.
At or prior to the Effective Time, Penril and Bay will take all action
necessary to cause the assumption by Bay as of the Effective Time of the
outstanding Penril Options. Bay has agreed to take all corporate action
necessary to reserve for issuance a sufficient number of shares of Bay Common
Stock for delivery upon exercise of the Penril Options, including, without
limitation, the filing of a registration statement on Form S-8 with respect to
all shares of Bay Common Stock subject to such Penril Options, and has agreed to
use its best efforts to maintain the effectiveness of such registration
statement for so long as such Penril Options remain outstanding.
Fractional Shares. No fractional shares of Bay Common Stock will be issued
in the Merger. Except as provided below with respect to the Penril Options, in
lieu of any such fractional shares, each holder of Penril Common Stock who
otherwise would be entitled to receive a fractional share of Bay Common Stock
pursuant to the Merger will be paid an amount in cash equal to such fractional
interest multiplied by the Bay Exchange Price. With respect to Penril Options, a
holder of a Penril Option will be entitled to receive the number of shares of
Bay Common Stock equal to the number of shares of Penril Common Stock subject to
the unexercised portion of such Penril Option, together with the options
received upon the equitable adjustment or amendment, as the case may be, of such
Penril option, multiplied by the Conversion Ratio. Any fraction resulting from
such multiplication will be rounded up or down to the nearest whole number, or,
in the case of .5, to the nearest odd number.
SURRENDER AND PAYMENT
As soon as practicable after the Effective Time, Bay shall cause The First
National Bank of Boston (the "Exchange Agent"), to mail a notice and transmittal
form and exchange instructions to each holder of record of certificates which
immediately prior to the Effective Time represented outstanding shares of Penril
Common Stock (the "Certificates"), into which his, her or its shares were
converted into Bay Common Stock under the terms of the Merger Agreement (other
than those surrendered and paid for on the Closing Date) advising such holder of
the effectiveness of the Merger and the procedure for surrendering to the
Exchange Agent such Certificate in exchange for (i) certificates representing
that number of whole shares of Bay Common Stock that such holder has the right
to receive pursuant to the Merger and (ii) cash for any fractional shares of Bay
Common Stock to which such holder otherwise would be entitled. SHAREHOLDERS ARE
REQUESTED NOT TO AND SHOULD NOT SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL
SUCH TRANSMITTAL FORM AND INSTRUCTIONS ARE RECEIVED.
At and after the Effective Time and until surrendered as provided above,
Certificates and, in the case of Penril Options, option award agreements or
other evidence of the ownership thereof, will be deemed to represent the right
to receive share certificates representing, or in the case of Penril Options,
options to purchase, that number of whole shares of Bay Common Stock into which
the shares of Penril Common Stock or Penril Options, as the case may be,
formerly represented by such Certificates or option award agreements were
converted in the Merger and, other than in the case of conversion of Penril
Options, a cash payment in lieu of any fractional shares, and the holders of
Certificates or option award agreements will not be entitled to receive
dividends or any other distributions from Bay or exercise any other rights of
holders of Bay Common Stock until such Certificates are surrendered or options
are exercised. Upon surrender of a Certificate, there shall be paid to the
person in whose name such shares of Bay Common Stock are issued any dividends or
other distributions which have a record date after the Closing Date and which
were paid or delivered between the Effective Time and the time of such surrender
with respect to such shares of Bay Common Stock. In no event shall the persons
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions.
As soon as practicable after the Effective Time, Bay or Penril after the
Merger, will mail a notice to each holder of Penril Options that are, as of the
Effective Time, outstanding, whether vested or unvested, and each such holder of
Penril Options will be entitled to receive an option to acquire the number of
shares of Bay Common Stock issuable to such holder of Penril Options in the
Merger. The notice shall advise such holders
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of Penril Options that such options will be assumed by Bay and will continue in
effect on the same terms and conditions as were applicable under the Penril
Options at the Effective Time, other than with respect to the adjustment in the
exercise price and as otherwise set forth in the notice.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties, respectively, relating to, among other things: (a) due organization,
valid existence and good standing of each of Penril and its subsidiaries, Bay
and Merger Sub and the corporate powers to operate their respective businesses;
(b) the capital structure of each of Penril, Bay and Merger Sub; (c) the
authorization, execution, delivery and enforceability of the Merger Agreement
and the consummation of the transactions contemplated by the Merger Agreement by
Penril, Bay and Merger Sub and the execution and delivery of the Merger
Agreement and the consummation of the transactions contemplated thereby not
being in violation of their respective organizational documents, material
contracts and agreements, or law or requiring any filing with or consent or
approval of any governmental entity; (d) documents and financial statements
filed by each of Penril and its subsidiaries and by Bay with the Commission and
the accuracy of information contained therein; (e) the absence of certain
material adverse changes or events; (f) litigation against or affecting Penril
or its subsidiaries; (g) undisclosed liabilities of Penril and its subsidiaries;
(h) taxes, tax returns and audits of Penril and its subsidiaries; (i) title to
and ownership of assets by Penril and its subsidiaries necessary for the conduct
of the Modem Business; (j) ownership, license of or otherwise legally
enforceable rights of Penril and its subsidiaries to certain intellectual
property, any intellectual property litigation and absence of any breach of any
license or infringement upon any patent; (k) inventory of Penril and its
subsidiaries relating to the Modem Business; (l) real property leases and
subleases of Penril and its subsidiaries; (m) material contracts, agreements and
commitments of Penril and its subsidiaries; (n) pending claims against Penril
and its subsidiaries; (o) insurance for the benefit of Penril and the Modem
Subsidiaries; (p) employees of Penril and its subsidiaries; (q) employee benefit
plans by Penril and its subsidiaries and compliance with the Employee Retirement
Income Security Act of 1974, as amended; (r) environmental matters relating to
Penril and its subsidiaries; (s) legal compliance of Penril and the Modem
Subsidiaries; (t) permits of Penril and its subsidiaries relating to the Modem
Business; (u) intercompany agreements and arrangements and affiliate
transactions among Penril or any Modem Subsidiary and its Affiliates; (v)
absence of brokers fees incurred by Penril with the exception of obligations to
Broadview; (w) approval of the Merger by the Penril Board; (x) receipt of the
Broadview opinion; and (y) absence of brokers fees incurred by Bay with the
exception of obligations to Alex, Brown & Sons, Inc.
CONDUCT OF BUSINESS BY PENRIL PENDING THE MERGER
Pursuant to the Merger Agreement, Penril has agreed that, during the period
from the date of the Merger Agreement to the Effective Time, except as
contemplated by the Merger Agreement, as related to the Spin-off Transaction, or
as specifically set forth in the schedules to the Merger Agreement, Penril will
and will cause each of its subsidiaries to conduct its operations in the
ordinary course of business consistent with past custom and practice (including
with respect to frequency and amount) ("Ordinary Course of Business") and in
compliance with all applicable laws and regulations and, to the extent
consistent therewith, use all reasonable efforts, solely as to the Modem
Business (a) to preserve intact its current business organization, (b) keep its
physical assets in good working condition, (c) keep available the services of
its current employees, and (d) preserve its relationship with customers,
suppliers and others having business dealings with it to the end that the
goodwill and ongoing business relating to the Modem Business shall not be
impaired in any material respect.
In addition, pursuant to the Merger Agreement, Penril has agreed that,
prior to the Effective Time, except as otherwise consented to in writing by Bay
or as contemplated by the Merger Agreement, as specifically set forth in the
schedules to the Merger Agreement or as related to the Spin-off Transaction,
neither Penril nor any Modem Subsidiary will: (a) issue, sell, deliver or agree
or commit to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise)
or authorize the issuance, sale or delivery of, or redeem or repurchase, any
stock of any
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class or any other securities or any rights, warrants or options to acquire any
such stock or other securities; (b) split, combine or reclassify any shares of
its capital stock; declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
its capital stock; (c) create, incur or assume any debt not currently
outstanding that would cause or result in the debt of Penril reflected at
Closing to exceed $4,000,000; assume, guarantee, endorse or otherwise become
liable or responsible for the obligations of any other person or entity; or make
any loans, advances (other than in the Ordinary Course of Business) or capital
contributions to, or investments in, any other person or entity in an amount
greater than $200,000; (d) enter into, adopt or amend any employee benefit plan
or any employment or severance agreement or arrangement or (except for normal
increases in the Ordinary Course of Business) materially increase in any manner
the compensation or fringe benefits of, or materially modify the employment
terms of, its directors, officers or employees, generally or individually, or
pay any benefit not required by the terms of any existing employee benefit plan;
(e) acquire, sell, lease, encumber or dispose of any assets or property other
than purchases and sales of assets in the Ordinary Course of Business; (f) amend
its charter or By-laws; (g) change in any material respect its accounting
methods, principles or practices, except insofar as may be required by a
generally applicable change in generally accepted accounting principles ("GAAP")
or by the Commission; (h) discharge or satisfy any security interest or pay any
material obligation or liability related to the Modem Business other than in the
Ordinary Course of Business; (i) mortgage or pledge any of its property or
assets relating to the Modem Business or take any action that subjects any such
assets to any security interest; (j) sell, assign, transfer or license any
intellectual property relating to the Modem Business (except in limited
circumstances set forth in the Merger Agreement); (k) enter into, amend,
terminate, take or omit to take any action that would constitute a violation of
or default under, or waive any rights under, any material contract or agreement
relating to the Modem Business if such action would have a material adverse
effect on the Modem Business; (l) make or commit to make any capital expenditure
relating to the Modem Business in excess of $50,000 per item; (m) take any
action or fail to take any action permitted by the Merger Agreement with the
knowledge that such action or failure to take action would result in (i) a
breach by Penril of certain representations and warranties of Penril or (ii) any
of the conditions precedent of the Merger not being satisfied; or (n) agree in
writing or otherwise to take any of the foregoing actions.
Notwithstanding the foregoing, prior to the Effective Time, Penril may: (i)
engage in any activities necessary to consummate the Spin off Transaction; (ii)
amend all confidentiality, noncompetition or similar agreements with certain
employees as set forth in the Merger Agreement to eliminate any restriction or
prohibition applicable to such employees from working for Access Beyond; (iii)
equitably adjust the terms and provisions of the award agreements pursuant to
the Penril Options for Penril Options to be outstanding after the Effective Time
(See "-- Terms of Merger; Treatment of Penril Options"); (iv) transfer certain
split dollar life insurance policies on the lives of each of Ronald A. Howard,
Henry D. Epstein and Richard D. Rose to each of the respective insureds as more
fully set forth in the Merger Agreement (which transfer has been made); and (v)
sell, liquidate or otherwise transfer the stock or assets of Technipower, EMI
and Constant Power, Inc. (or any portion thereof) upon terms and conditions
consented to by Bay.
CERTAIN COVENANTS
Under the Merger Agreement, Bay, Merger Sub and Penril have each agreed to
(i) promptly give written notice to the other upon becoming aware of the
occurrence or, to their knowledge, impending or threatened occurrence, of any
event which could cause or constitute a breach of any of its representations,
warranties or covenants contained or referenced in the Merger Agreement; (ii)
use its best efforts to obtain all such waivers, permits, approvals and
authorizations and to effect all such registrations and filings as may be
required to consummate the transactions contemplated by the Merger Agreement;
and (iii) promptly file any notification, and report forms or material required
under the HSR Act.
In addition, Penril has agreed to cause Access Beyond to agree that between
the date of execution of the Merger Agreement and 18 months after the Closing
Date, it will not and will cause its affiliates not to induce any person who is
an employee, officer, or agent of Bay or any Bay affiliate to terminate such
relationship or to employ or assist in employing any such person. Bay has agreed
that between the date of execution of the
47
<PAGE> 52
Merger Agreement and the Closing Date with respect to Penril and for 18 months
after the Closing Date with respect to Access Beyond, Bay will not and will
cause its affiliates not to induce any person who is an employee, officer or
agent of either Penril or Access Beyond, as the case may be, and their
affiliates, to terminate such relationship or to employ or assist in employing
any such person.
EXCLUSIVITY
The Merger Agreement provides that, subject to the fiduciary duties of the
Penril Board to Shareholders (the "Penril Board Fiduciary Duties"), and
compliance with Rule 14c-2 of the Exchange Act, with regard to any Acquisition
Proposal (as defined below) Penril will not, and will use its best efforts to
cause its affiliates, and its directors, officers, employees, representatives
and agents not to, directly or indirectly, take any action to (i) encourage,
solicit, initiate, engage or participate in discussions or negotiations with any
person or entity (other than Bay) concerning any sale or license of material
assets or property relating to the Modem Business, any merger, consolidation,
tender offer, recapitalization, accumulation of Penril Common Stock, proxy
solicitation or other business combination involving Penril, any Modem
Subsidiary or any division of Penril or any of its subsidiaries, in each case
relating to the Modem Business or (b) provide any non-public information
concerning the business, properties or assets of Penril or any of its
subsidiaries relating to the Modem Business to any person or entity (other than
(i) to Bay, (ii) as contemplated by the Merger Agreement, or (iii) as required
by law or court order) (collectively, "Prohibited Communications"). "Acquisition
Proposal" means any proposed (A) merger, consolidation or similar transaction
involving Penril, (B) sale, lease or other disposition directly or indirectly by
merger, consolidation, share exchange or otherwise of assets of Penril or its
subsidiaries representing 30% or more of the Modem Business or of the
consolidated assets of Penril and its subsidiaries, (C) issuance, sale or other
disposition of (including by way of merger, consolidation, share exchange or
similar transaction) securities (or options, rights or warrants to purchase, or
securities convertible into, such securities) representing 30% or more of the
voting power of Penril or (D) transaction in which any person shall acquire
beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange
Act), or the right to acquire beneficial ownership or any "group" (as such term
is defined under the Exchange Act) shall have been formed which beneficially
owns or has the right to acquire beneficial ownership of 30% or more of the
outstanding Penril Common Stock.
The Merger Agreement requires Penril to immediately notify Bay of, and
disclose to Bay all details of, any inquiries, discussions or negotiations
resulting from the Prohibited Communications.
If within 180 days from the execution of the Merger Agreement, but prior to
termination of the Merger Agreement as a result of (i) Penril's failure to
obtain the necessary consents, approvals, authorizations or to have effected all
of the registrations, filings and notices required of Penril under the Merger
Agreement or (ii) Penril's failure to have performed or complied with certain of
the agreements and covenants required to be performed or complied with by Penril
under the Merger Agreement, both of the following events have occurred: (x)
Penril has received, participated in or encouraged any Prohibited
Communications, and (y) the Penril Board has approved or recommended that
Shareholders accept the terms of any Acquisition Proposal or resolved to take
any action arising out of the Prohibited Communications with a party with whom
they engaged in such Prohibited Communications, then the Perpetual License
Agreement shall become effective without any further action or consideration on
the part of any party.
INDEMNIFICATION
The Merger Agreement provides that, from and after the Effective Time, Bay
will indemnify, defend and hold harmless the officers, directors and employees
of Penril and its subsidiaries (the "Indemnified Parties") against all losses,
expenses, claims, damages or liabilities ("Claims") based in whole or in part on
the fact that such person is or was such officer, director or employee of Penril
or its subsidiaries (including arising out of the transactions contemplated by
the Merger Agreement) to the fullest extent permitted or required under
applicable law; provided, however, that such party shall not be entitled to
indemnification for Claims based on the fact that such party is or was a
Shareholder. The Merger Agreement provides that all rights to indemnification
existing in favor of the officers, directors or employees of Penril as provided
in Penril's or the subsidiaries' respective Articles or Certificate of
Incorporation or By-Laws or Code of Regulations, as in effect
48
<PAGE> 53
as of the Effective Time, with respect to matters occurring through the
Effective Time, will survive the Merger and continue in full force and effect
for a period of not less than six years from the Effective Time. Bay has
guaranteed unconditionally the satisfaction of all such rights to
indemnification (and has agreed to pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
fullest extent permitted under Delaware law, upon receipt from the Indemnified
Party to whom expenses are advanced of the undertaking to repay such advances
contemplated by Section 145(e) of the DGCL).
The Merger Agreement provides that, in the event any Claim is brought
against any Indemnified Party (whether arising before or after the Effective
Time), after the Effective Time, (a) the Indemnified Parties may retain Penril's
regularly engaged independent legal counsel or other independent legal counsel
satisfactory to them, provided that such other counsel shall be reasonably
acceptable to Bay, (b) Bay will pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received, and (c) Bay will use its reasonable efforts to assist in the defense
of any such matter, provided that Bay shall not be liable for any settlement of
any Claim effected without its written consent, which consent shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under the Merger Agreement upon learning of any such Claim, must notify Bay
(although the failure so to notify Bay shall not relieve Bay from any liability
which Bay may have under the Merger Agreement, except to the extent such failure
materially prejudices Bay), and must deliver to Bay the undertaking contemplated
by Section 145(e) of the DGCL. The Merger Agreement provides that the
Indemnified Parties as a group may retain no more than one law firm (in addition
to local counsel) to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct (as determined by
counsel to the Indemnified Parties), a conflict on any significant issue between
the positions of any two or more Indemnified Parties, in which event such
additional counsel as may be required may be retained by the Indemnified Parties
and will be paid by Bay.
Bay has agreed to release the officers, directors and employees of Penril
from any and all claims it may have against them, other than claims based solely
on fraud. Penril has likewise agreed to release the officers, directors and
employees of Bay from any and all claims it may have against them, other than
claims based solely on fraud.
CONDITIONS
Conditions to Each Party's Obligation to Effect the Merger. The respective
obligations of Penril and Bay to effect the Merger are subject to certain
conditions, including: (a) the Proposal shall have been approved and adopted by
a majority of the outstanding shares of Penril Common Stock; (b) the
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act and shall not have been the subject of any stop
order suspending effectiveness issued by the Commission; (c) the waiting period
and extensions applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated; (d) no preliminary or permanent
injunction or other order, decree or ruling shall have been issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission nor shall any statute, rule, regulation or executive order
promulgated or enacted by any governmental entity be in effect, which prevents
the consummation of the Merger or makes such consummation illegal; and (e) the
Spin-off Transaction shall have been consummated in accordance with the
applicable terms contained in the Merger Agreement.
Conditions to Obligation of Penril to Effect the Merger. The obligation of
Penril to effect the Merger is subject to additional conditions, including: (a)
the obtaining of all waivers, permits, consents, approvals or other
authorizations and the effecting of all registrations, filings and notices
required under the Merger Agreement (except where the failure to so obtain or so
effect would not have a material adverse effect on the assets, business,
financial conditions, results of operations or future prospects of Bay or the
ability to consummate the transactions contemplated by the Merger Agreement);
(b) the performance or compliance in all material respects by Bay and Merger Sub
of all obligations required to be performed or complied with by them under the
Merger Agreement; (c) the accuracy of the representations and warranties of Bay
and Merger Sub as of the dates provided in the Merger Agreement; (d) receipt by
Penril of a certificate certifying
49
<PAGE> 54
satisfaction of the conditions set forth in the Merger Agreement; and (e) the
authorization of the Bay Common Stock for listing on the NYSE upon official
notice of issuance.
Conditions to Obligations of Bay and Merger Sub to Effect the Merger. The
obligations of Bay and Merger Sub to effect the Merger are subject to additional
conditions, including: (a) the obtaining of all waivers, permits, consents,
approvals or other authorizations and the effecting of all registrations,
filings and notices required under the Merger Agreement (except where the
failure to so obtain or so effect would not have a material adverse effect on
the assets, business, financial conditions, results of operations or future
prospects of Penril and the Modem Subsidiaries taken as a whole, or on the
ability to consummate the transactions contemplated by the Merger Agreement);
(b) the performance or compliance in all material respects by Penril of all
agreements and covenants required to be performed or complied with by it under
the Merger Agreement; (c) the accuracy of the representations and warranties of
Penril as of the dates provided in the Merger Agreement; (d) the receipt by Bay
of a certificate certifying satisfaction of the conditions set forth in the
Merger Agreement; (e) the receipt by Bay of a letter from Deloitte & Touche LLP,
Penril's independent auditors, dated a date within two business days before the
date on which the Registration Statement shall become effective and a subsequent
similar letter dated as of a date not more than two days prior to the Effective
Time, and addressed to Bay, in form and substance reasonably satisfactory to Bay
and customary in scope and substance for comfort letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement; (f) the receipt by Bay and Merger Sub of
resignations, effective as of the Effective Time, of each director and officer
of Penril and the Modem Subsidiaries specified by Bay in writing on or prior to
the Closing Date and (g) Penril and Access Beyond shall have executed and
delivered the Indemnification Agreement.
TERMINATION; EFFECT OF TERMINATION
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Time (whether before or after approval by Shareholders):
(a) by mutual written consent of Penril and Bay;
(b) by Bay, upon written notice to Penril in the event Penril is in
breach, or by Penril, upon written notice to Bay and Merger Sub in the
event either Bay or Merger Sub is in breach of any material representation,
warranty or covenant in the Merger Agreement, which breach continues
unremedied for 10 days after delivery of written notice;
(c) by either Bay, Merger Sub or Penril, upon notice to the other
parties, at any time after Shareholders have voted on whether to approve
the Merger Agreement in the event the Merger Agreement does not receive the
requisite Shareholder approval;
(d) by Bay upon written notice to Penril if the Closing Date has not
occurred on or before November 25, 1996 by reason of failure of Penril to
satisfy any condition precedent under Section 5.1 or 5.2 of the Merger
Agreement (unless the failure results primarily from a breach by Bay or
Merger Sub of any representation, warranty or covenant contained in the
Merger Agreement);
(e) by Penril, upon notice to Bay and Merger Sub if the Closing Date
has not occurred on or before November 25, 1996 by reason of failure of Bay
or Merger Sub to satisfy any condition precedent under Section 5.1 or 5.3
of the Merger Agreement (unless the failure results primarily from a breach
by Penril of any representation, warranty or covenant contained in the
Merger Agreement); or
(f) by either Penril, Merger Sub or Bay if the Penril Board withdraws
or modifies in a manner adverse to Bay its approval or recommendation to
the Shareholders of the Merger Agreement or the Merger or shall have
approved and recommended to Shareholders that they accept the terms of any
Acquisition Proposal or shall have resolved to take any of the foregoing
actions; provided, however, that reasonable delay required to comply with
Penril Board Fiduciary Duties is not deemed a withdrawal or adverse
modification.
Effect of Termination. All obligations of the parties to the Merger
Agreement will terminate without any liability to any other party upon
termination of the Merger Agreement (except for liability as a result of
50
<PAGE> 55
willful breaches of the Merger Agreement or with respect to confidentiality in
Section 4.7 of the Merger Agreement).
Notwithstanding the above, if the Merger is not consummated as a result of
(i) mutual agreement set forth in (a) above; (ii) lack of Shareholder approval
set forth in (c) above; (iii) failure by Penril to satisfy certain conditions
precedent set forth in (d) above but only as to conditions regarding (w)
Shareholder approval, (x) performance and compliance by Penril of agreements and
covenants required to be performed or complied with as of or prior to the
Effective Time (but only with respect to "Special Breaches" defined below), (y)
material breach of a representation or warranty given by Penril of which the
officers of Penril had prior knowledge, and (z) failure to execute the
Indemnification Agreement; or (iv) withdrawal or adverse modification of the
Penril Board recommendation as set forth in (f) above, then the Perpetual
License Agreement shall become effective without any action or consideration on
the part of any party. If the Merger is not consummated as a result of Penril's
failure to satisfy certain conditions precedent as set forth in (d) above but
solely as to conditions regarding (x) HSR Act waiting period, (y) Commission
approval of the effectiveness of the Registration Statement, or (z) consummation
of the Spin-off Transaction, then the Perpetual License Agreement becomes
effective upon payment by Bay to Penril of $50,000,000 in immediately available
funds. In addition, if, within 180 days from the execution of the Merger
Agreement but prior to termination by reason of Penril's failure to satisfy
conditions precedent as set forth in (d) above, but solely as to the conditions
regarding (y) necessary waivers, permits, consents and approvals or (z)
performance and compliance by Penril of agreements and covenants required to be
performed or complied with as of or prior to the Effective Time, Penril has
received, participated in or encouraged inquiries, discussions or negotiations
in the form of Prohibited Communications, and the Penril Board approves or
recommends to Shareholders that they accept the terms of any Acquisition
Proposal, or has resolved to take any actions referenced in the Prohibited
Communications with a party with whom Penril engaged in such Prohibited
Communications, then the Perpetual License Agreement shall become effective
without further action or consideration. "Special Breach" means Penril engaged
in the following transactions between execution of the Merger Agreement and the
Effective Time without the consent of Bay: (a)(i) issued, sold, delivered or
agreed to commit to issue, sell or deliver (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase or
otherwise) or authorized the issuance, sale or delivery of, or redeemed or
repurchased, any stock of any class or any other securities or any rights,
warrants or options to acquire any such stock or securities, (ii) entered into,
adopted or amended any employee benefit plan or any employment or severance
agreement or arrangement or materially increased in any manner the compensation
or fringe benefits of, or materially modified the employment terms of, its
directors, officers or employees, generally or individually, or paid any benefit
not required by the terms of any existing employee benefit plan, (iii) amended
its Certificate of Incorporation or its By-laws, (iv) changed in any material
respect its accounting methods, principles or practices except as required by
GAAP, (v) discharged or satisfied any security interest or paid any material
obligation or liability related to the Modem Business other than in the ordinary
course of business, (vi) mortgaged or pledged any of its property or assets
relating to the Modem Business or took any action that subjects such assets to
any security interest, (vii) sold, assigned, transferred or licensed any
intellectual property relating to the Modem Business (except in limited
circumstances set forth in the Merger Agreement), or (viii) made or committed to
make any capital expenditure relating to the Modem Business; (b) made any loans,
advances, or capital contributions to, or investments in, any other person or
entity in amounts greater than $200,000 and (c) acquired, sold, leased,
encumbered or disposed of any assets or property relating to the Modem Business
other than purchases and sales of assets in the ordinary course of business.
The Perpetual License Agreement provides Bay with a license to intellectual
property, software, and technical know-how relating to certain V.34+ Xylogics
Octal Modem Cards. The Perpetual License Agreement will become effective (a)
immediately and automatically if the Merger Agreement is terminated as set forth
above under circumstances which require no additional action or consideration
from any party, (b) upon the payment by Bay of $50,000,000 within 10 business
days of Bay's giving notice of such termination to Penril or (c) immediately and
automatically if within 180 days after execution of the Merger Agreement but
prior to termination of the Merger Agreement Penril has (i) received,
participated in, or encouraged Prohibited Communications and (ii) the Penril
Board has approved or recommended to Shareholders that
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<PAGE> 56
they accept the terms of any Acquisition Proposal, but in no event can the
Perpetual License Agreement become effective earlier than December 16, 1996, the
date on which the License Agreement expires. The Perpetual License Agreement
contemplates that Penril will develop an 8 port Digital Modem Card for Bay,
train Bay's personnel in the underlying technology, and provide technical
assistance where necessary to permit Bay to market this digital technology. In
addition, in order to practice the licensed technology, a license under a
specific patent held by Penril must be granted (the "Patent License"). Penril
and Bay will negotiate the terms and conditions of the Patent License. The
Patent License will be subject to the following conditions: (a) if Bay pays
$50,000,000 for the Perpetual License Agreement under certain circumstances upon
termination of the Merger Agreement, the royalty rate for modems covered by such
patent will not exceed the lesser of $.30 per modem or the lowest rate being
charged to any other licensee of such patent, and (b) if no such payment is
made, the royalty rate will not exceed that being charged to any other licensees
manufacturing a comparable volume of modems under such license. The Perpetual
License Agreement also grants Bay the right to hire, within 90 days of its
effective date, up to five designated Penril employees, which employees are
important to the Modem Business.
AMENDMENT
The Merger Agreement may be amended by the parties thereto, at any time
before or after approval thereof by Shareholders, but, after such approval, no
amendment may be made which alters or changes the kind of shares and/or the
ratios at which Penril Common Stock is to be converted into Bay Common Stock as
provided in the Merger Agreement or which in any way materially adversely
affects the rights of Shareholders, without the further approval of
Shareholders. The Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties to the Merger Agreement. Penril
does not intend to resolicit Shareholder approval in connection with any
amendment of the terms of the Merger Agreement except as would be required by
the foregoing terms of the Merger Agreement.
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<PAGE> 57
PROFORMA FINANCIAL INFORMATION OF BAY
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Condensed Financial Statements
assume a business combination between Bay and the Modem Business accounted for
as a purchase and are based on the historical consolidated financial statements
and notes thereto of Bay included elsewhere in this Proxy Statement/Prospectus
and on the historical financial information of the Modem Business shown
elsewhere in this Proxy Statement/Prospectus. The Pro Forma Combined Condensed
Balance Sheet combines Bay's balance sheet as of June 30, 1996 with the Modem
Business' pro forma Statement of Assets and Liabilities as of July 31, 1996. The
Pro Forma Combined Condensed Statement of Income combines Bay's historical
results of operations for the fiscal year ended June 30, 1996 with the Modem
Business' pro forma Statement of Revenue and Identified Operating Expenses for
the fiscal year ended July 31, 1996 and assumes that the transaction occurred at
the beginning of the period presented.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated at the beginning of
the period presented, nor is it necessarily indicative of the future operating
results or financial position of the combined companies following the Merger.
These Unaudited Pro Forma Combined Condensed Financial Statements are based
on, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of Bay and Penril and the
unaudited pro forma consolidated financial statements of Access Beyond and
related notes thereto included elsewhere herein.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
MODEM
BAY BUSINESS PRO FORMA PRO FORMA
JUNE 30, 1996 JULY 31, 1996 ADJUSTMENTS COMBINED
------------- ------------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 315,064 $ 315,064
Short-term investments............. 119,093 119,093
Accounts receivable................ 320,892 $ 3,099 323,991
Inventories........................ 239,725 4,261 243,986
Deferred income taxes.............. 74,320 1,700 76,020
Other current assets............... 48,615 75 48,690
------------- ------------- ----------
Total current assets....... 1,117,709 9,135 1,126,844
Investments.......................... 154,064 154,064
Property and equipment, net.......... 211,674 346 212,020
Other assets......................... 23,088 197 $55,694 78,979
------------- ------------- --------------- ----------
$ 1,506,535 $ 9,678 $55,694 $1,571,907
============ ============ =============== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.............. $ 4,000 $ 4,000
Accounts payable................... $ 116,894 2,673 119,567
Accrued expenses................... 133,352 372 $ 2,500 136,224
Accrued income taxes............... 4,818 4,720 9,538
Deferred revenue................... 46,629 46,629
------------- ------------- --------------- ----------
Total current
liabilities.............. 301,693 7,045 7,220 315,958
Long-term debt....................... 110,147 -- 110,147
Stockholders' equity................. 1,094,695 2,633 (62,500)
110,974 1,145,802
------------- ------------- --------------- ----------
$ 1,506,535 $ 9,678 $55,694 $1,571,907
============ ============ =============== =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
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<PAGE> 58
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
MODEM
BAY BUSINESS
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
JUNE 30, 1996 JULY 31, 1996 ADJUSTMENTS COMBINED
------------- ------------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.............................. $ 2,056,634 $19,519 $ (4,500) $2,071,653
Cost of sales........................ 945,318 9,869 955,187
------------- ------------- --------------- ----------
Gross profit.................... 1,111,316 9,650 (4,500) 1,116,466
Operating expenses:
Research and development........... 213,521 1,765 11,139 226,425
Selling and marketing.............. 452,319 2,324 454,643
General and administrative......... 72,205 370 72,575
In-process research and
development..................... 39,713 -- 39,713
Merger related expenses............ 10,231 -- 10,231
------------- ------------- --------------- ----------
Total operating expenses........ 787,989 4,459 11,139 803,587
------------- ------------- --------------- ----------
Income from operations............... 323,327 5,191 (15,639) 312,879
Net interest income and other........ 28,489 -- 28,489
------------- ------------- --------------- ----------
Income before provision for income
taxes.............................. 351,816 5,191 (15,639) 341,368
Provision for income taxes........... 145,491 -- (668) 144,823
------------- ------------- --------------- ----------
Net income........................... $ 206,325 $ 5,191 $ (14,971) $ 196,545
============ ============ =============== =========
Net income per share................. $ 1.04 $ 0.97
============ =========
Shares used to compute net income per
share.............................. 198,778 203,258
============ =========
<FN>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
- ---------------
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
1. Under the terms of the Merger Agreement, Bay will exchange $10.00 payable in
Bay Common Stock according to an exchange value based on the Bay Exchange
Price for each share of Penril Common Stock, and will assume the outstanding
Penril Options with the number of shares and the exercise price appropriately
adjusted by the Conversion Ratio. (At July 31, 1996, Penril had 10,849,647
shares of common stock outstanding and 1,124,951 options outstanding to
purchase Penril Common Stock.) To the extent that the number of outstanding
shares of Penril Common Stock increases or decreases between July 31, 1996
and the closing date of the Merger, the number of shares of Bay Common Stock
to be issued in connection with the Merger will increase or decrease
proportionately. The Unaudited Pro Forma Combined Condensed Financial
Statements reflect the issuance of 4,213,455 shares of Bay Common Stock.
2. Bay expects to incur charges currently estimated to be between $2.0 million
and $3.0 million, in the quarter ended December 31, 1996, the quarter in
which the Merger is expected to be consummated, to reflect transaction costs.
An estimated charge, at the midpoint of the above range, is reflected in the
Pro Forma Combined Condensed Balance Sheet.
3. Pro forma combined net income per share includes a pro forma adjustment to
eliminate $4.5 million paid by Bay and included as revenue by the Modem
Business in the fourth quarter of 1996 pursuant to a license agreement and a
pro forma adjustment of $11.1 million for the estimated effect of
amortization over a five year period of acquired intangibles in the Merger.
The Pro Forma Combined Condensed Balance Sheet reflects the stockholders'
equity of Bay as of June 30, 1996 and Bay's estimated allocation of the total
purchase price of Modem Business and is based on the outstanding shares of
Bay Common Stock as of June 30, 1996 and the shares of Bay Common Stock
assumed to be issued in connection with the Merger.
4. Based on preliminary estimates, Bay expects that approximately $60 million to
$65 million of the total purchase price will be allocated to in-process
research and development and will be charged to operations at the time of the
closing of the Merger, currently anticipated to be during the quarter ended
December 31, 1996. The effect of this charge using the mid-point of the range
has been reflected in the Pro Forma Combined Condensed Balance Sheet but has
not been reflected in the Pro Forma Combined Income Statement.
5. There were no material differences between the accounting policies of Bay and
the Modem Business and, accordingly, no pro forma conforming adjustments are
required in the Pro Forma Combined Condensed Statement of Income.
</TABLE>
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<PAGE> 59
DISCUSSION AND ANALYSIS OF PRO FORMA INFORMATION
The following discussion should be read in conjunction with the Unaudited
Pro Forma Combined Condensed Financial Statements presented above, the
historical financial statements that are included in the Proxy
Statement/Prospectus from which such information was derived, and Management's
Discussion and Analysis of Financial Condition and Results of Operations for
both Bay and Penril also included in this Proxy Statement/Prospectus.
Bay expects to incur charges currently estimated to be between $2.0 million
and $3.0 million, in the quarter ended December 31, 1996, the quarter in which
the Merger is expected to be consummated, to reflect transaction costs. An
estimated charge at the midpoint of the above range is reflected in the Pro
Forma Combined Condensed Balance Sheet. This range, and the ranges described
above, are preliminary estimates only and are therefore subject to change.
Based on preliminary estimates, Bay expects that approximately $60 million
to $65 million of the total purchase price will be allocated to in-process
research and development and will be charged to operations at the time of the
closing of the Merger, currently anticipated to be during the quarter ended
December 31, 1996. The effect of this charge using the mid-point of the range
has been reflected in the Pro Forma Combined Condensed Balance Sheet but has not
been reflected in the Pro Forma Combined Income Statement.
There can be no assurance that the future revenue of Bay will be equal to
or greater than the pro forma combined revenue of Bay and the Modem Business.
On a pro forma basis as of June 30, 1996, Bay would have had an aggregate
of $588.2 million in cash, cash equivalents and investments. Bay believes that
this amount, together with cash generated from operations, will be sufficient to
meet Bay's future cash requirements through at least the next twelve months.
INFORMATION CONCERNING BAY
BUSINESS
Bay develops, manufactures, markets and supports a comprehensive line of
data networking products and services, including high-speed routers, switches,
intelligent hubs, remote and internet access solutions and sophisticated
management software providing network design and configuration solutions. These
products enable end users to build or enhance their data network systems,
including all levels from small local area networks to large enterprise-wide
information infrastructures.
In October 1994, SynOptics Communications, Inc. ("SynOptics") and Wellfleet
Communications, Inc. ("Wellfleet") effected a strategic combination of the two
companies through the merger of a wholly-owned subsidiary of Wellfleet with and
into SynOptics (the "Combination"). In connection with the Combination,
Wellfleet changed its name to Bay Networks, Inc. On May 15, 1995, Bay acquired
Centillion Networks, Inc. a leading provider of Token Ring and Token Ring-to-ATM
switching products.
On December 15, 1995, Bay acquired Xylogics, Inc. ("Xylogics"), a
technology and market leader in enterprise remote access, offering remote users
and offices transparent corporate-wide access to networking resources. On March
13, 1996, Bay acquired all of the outstanding shares of Performance Technology,
Inc., a privately held company headquartered in San Antonio, Texas and a leader
in developing LAN-to-Internet access technology, providing small offices and
small-to-medium-sized businesses easy, secure access to the Internet. On March
31, 1996, Bay acquired substantially all of the net assets of Armon Networking,
Ltd., headquartered in Tel Aviv, Israel, a technology developer of RMON-based
distributed analysis tools and multi-segment LAN probes. See "Information
Concerning Bay -- Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 to the Consolidated Financial Statements
of Bay included herein.
Bay's products connect and interconnect multiple types of LANs, comprised
of computer equipment from the same or different manufacturers, to form an
internetworked system. These products connect computers to form LANs,
interconnect LANs located in a single facility and, through WAN connections, may
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connect LANs dispersed around the world. The internetworking of these networks
enables computer users operating different types of equipment in different
locations to communicate, exchange data and share other computing resources.
Bay is a Delaware corporation incorporated in May, 1986. Bay's principal
offices are located at 4401 Great America Parkway, Santa Clara, California
95054.
NETWORKING SOLUTIONS
Organizations are increasingly seeking to internetwork their disparate,
often incompatible, LANs and WANs to share information and computing resources
across the organization for applications such as electronic mail, sharing of
databases, multi-site engineering and product development, transaction
processing and electronic image transfer. Enterprise-wide networks facilitate
efficient and rapid data communications among connected work groups, departments
and locations and provide for more effective utilization of information and
computer resources. In addition, as the computing paradigm migrates to
client-server architectures, enterprise-wide networks are the enabler that
allows those technologies to be implemented by organizations. The
internetworking of LANs and WANs into enterprise-wide networks requires data
communications products which efficiently, reliably, and quickly transmit data
to appropriate locations on different networks, reconcile incompatible LAN and
WAN standards between networks and manage large, complex internetworks.
To meet these internetworking needs, Bay has developed a family of computer
networking products including hubs, routers, switches, and network management
software. Bay's hub products, which reside at the center of networks and serve
as a control and consolidation point for network activity, integrate
connectivity, network management and internetworking products into a structured
network solution that emphasizes network management scalability and manages
complexity across the network.
As network demands continue to increase, switching delivers the performance
required to support the emerging image processing, animation, modeling,
scientific and multimedia applications of the future. Bay's router products
choose the optimal path to interconnect LANs or to route data to the WAN. These
products enhance network segmentation and security, improve reliability (since
alternative paths can be used) and increase bandwidth utilization (since the
best path between source and destination is chosen by a router).
Organizations are experiencing a shift from departmental-only to
enterprise-wide remote access and the need for applications and network
infrastructure that are remote access-ready as a result of increased business
mobility, the move to telecommuting, reduced cost of ownership of both product
and WAN services, and widespread adoption of remote access standards. Remote and
internet access products extend the backbone network beyond the branch office,
bringing remote users closer to the enterprise and permit connection to the
corporate LAN so users can work anywhere -- at home, in a hotel or in a remote
office -- at any time. Users can access electronic mail, databases and file
servers as if they were directly included within the network.
PRODUCTS
Bay's product lines include a broad family of internetworking products,
including routers, hubs, switches, remote and internet access solutions, and
network management technologies. These products encompass LAN and WAN
components, which allow Bay to offer a solution to communicate network data
worldwide, managed from a single network management software platform which
supports Bay's product lines.
Bay's product strategy is focused on weaving LAN connectivity, management
and internetworking solutions into a flexible network fabric capable of
supporting large, diverse enterprise networks. The center of this strategy is
the intelligent hub, which acts as a central control point for network
connections, management and growth. The intelligent hub incorporates the
hardware and software required to connect computing devices to structured
networks using various cabling types and media-access methods, switches, bridges
and routers that enable the internetworking of various network segments into
enterprise networks. Integrated network management software products facilitate
network operation by diagnosing and solving network problems. The categories of
Bay's product lines are described below.
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Connectivity Products, which include intelligent hubs and related host
modules and transceivers, enable computing devices to communicate over networks.
Intelligent hubs provide integrated connectivity and centralized management by
supporting ethernet, token ring and fiber distributed data interface ("FDDI")
protocols, or any combination of the three in the same hub. Transceivers provide
an interface between the computing devices and cabling systems and are
implemented either as units external to the computer or as integrated circuits
on network cards.
Network Management Products distribute management intelligence throughout
geographically dispersed networks and enable network administrators to monitor
and control the network. The open, standards-based network management products
are comprised principally of intelligent modules which resides within hubs,
sophisticated management software which resides on intelligent modules and
advanced software application programs which reside on network management
computer consoles. Through a combination of hardware and software components,
intelligent network management modules gather network information close to the
source of data activity, reduce it into meaningful information within the hub,
and forward the data to a central network management console attached to the
network. The actual management of data takes place in the hub, relieving the
burden on central network management resources and enabling networks to grow
along with the expansion of the business.
Using the Simple Network Management Protocol ("SNMP"), which ensures
compatibility with other management systems that may already be in place in a
particular networking environment, Bay's network management products address a
wide variety of diverse environments. The Optivity network management system
works with DOS and UNIX network management platforms from International Business
Machines Corporation, Hewlett-Packard Company, Inc., Novell, Inc. and Sun
Microsystems, Inc. Additionally, Bay offers application software products which
automate operational functions and facilitate design and management of a
network. The flexibility of these software products enable them to interface in
an array of multi-vendor environments.
Internetworking Products are modular devices integrated into intelligent
hubs or stand-alone devices which provide links between independent LAN segments
and control the flow of data on the LAN. The devices connect data traffic
between linked networks and forward packets of data destined for other locations
throughout the network. Bay's internetworking product lines include local and
remote bridges, local and remote routers, and switches. Bridges, which are
protocol-independent, are the simplest method of connecting LAN segments.
Bridges sort through all traffic on a network, and decide whether to send it to
the remainder of the network.
As networks grow in both size and complexity, routers provide additional
intelligence in connecting individual networks. Unlike bridges, routers actually
examine the protocol of the data packets which permits protocol filtering and
security control. Bay offers a family of scalable and highly flexible router
products that concurrently provide bridging and multi-protocol routing functions
in modular and stackable forms. The Backbone Node ("BN") products are designed
to satisfy the throughput and/or availability requirements of the most demanding
enterprise internetworks. The Backbone Node provides complete fault resiliency
with redundant processor interconnects, power supplies, and software image
storage in combination with its symmetric multiprocessor architecture.
Bay also offers a modular, stackable router, which is designed to provide
seamless integration of multiple units stacked together, performing as a single
router. This modular product offers scalability for expanding sites requiring
remote, regional or departmental access to the corporate network.
Switching Products interconnect LANs by supporting multiple parallel
communications and eliminating LAN bandwidth congestion. These products offer
connectivity to LAN and WAN technologies such as asynchronous transfer mode
("ATM"), FDDI and token ring, as well as a full suite of networking protocols
for high-speed LAN and switching environments.
In fiscal 1995, Bay introduced BaySIS (TM) (Bay Switched Internetworking
Services), a new networking architecture that combines switching technology with
traditional shared-media hub and router technology.
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The resulting switched-internetworking architecture permits the customer to
migrate from their existing technology in a controlled, reliable and
cost-effective manner.
Remote and Internet Access Products, including Remote Annex analog remote
access servers, Nautica ISDN router products and Instant Internet internet
access server, which are key to on-line access to corporate information and
services such as the Internet, extend the backbone network beyond the branch
office, bringing remote users closer to the enterprise.
The Remote Annex family of products, which are highly scalable and are
offered in a variety of configurations, provide users with transparent dial-in
access to Ethernet LANS. Users can access electronic mail, data bases and file
servers residing on Novell NetWare, TCP/IP and AppleTalk LANs as if they were
directly included with the network.
ISDN is a digital telephone connection that accommodates high bandwidth
transmissions such as graphics, images or large text files and provides an
immediate, high speed, reliable connection to network resources. The Nautica
series of ISDN routers support a wide range of routed protocols including Novell
IPX/SPX, TCP/SP, Netbios, Microsoft WINS and Banyan Vines as well as the OSPF
and RIP2 routing protocols. These products provide bandwidth-on-demand,
dial-on-demand, data compression security, configuration and network management
features.
Instant Internet provides small offices and small-to-medium-sized
businesses easy, secure access to the internet, by providing an all-in-one unit
to connect NetWare, Windows '95 and Windows NT users directly to the internet
without requiring any time-consuming changes to LAN clients or servers.
SALES CHANNELS
Bay's global market strategy emphasizes the support of sales and service
through a network of value added resellers ("VARs"), distributors, networking
OEMs and, through its domestic field sales force, directly to major customers.
The goal of the multi-channel strategy is to offer Bay flexibility to meet
specific needs and furnish Bay with broad coverage of worldwide markets.
Value Added Resellers. VARs integrate Bay's products, along with products
sold by other LAN and WAN vendors, into turnkey networking systems that are sold
directly to end users. VARs also sell Bay's products as stand-alone units. Bay
provides support to the VAR network through its field sales force and customer
service organization, so that in addition to sales generated independently, VAR
sales are also the result of sales leads generated by Bay's direct marketing
efforts. Sales to VARs are made at discounts based on purchase volumes and other
incentive programs. VARs may choose to procure the Bay products they resell by
purchasing directly from Bay or from its distributors as described below.
Distributors. Bay also sells its products to distributors who typically
resell to VARs or other dealers. Distributors must meet certain criteria that
are substantially different from those which Bay's VARs must meet. Bay's
distributors generally provide a minimal level of systems integration.
Distributors purchase at standard discounts based on certain incentive programs.
Bay offers additional sales and marketing programs to assist those VARs and
dealers who purchase through distributors in promoting, selling and supporting
Bay's products.
Bay's VARs and distributors may carry other products which are
complementary to, or compete with those of Bay, and these non-exclusive VARs and
distributors may choose to give higher priority to products of other suppliers
or competitors.
Field Sales Force. Bay's field sales force manages its sales activities
through multi-channel distribution strategies. Bay's customers include end-users
of large, complex, enterprise-wide networks, who typically provide their own
systems integration. The field sales and technical support force also provides
training and technical support to Bay's VARs, distributors and end-users.
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Marketing. Bay has implemented several marketing programs designed to
support the sale of its products through broad-scale reseller distribution
(two-tier distributors and direct resellers), generate sales leads for its
distribution channels and enhance brand name recognition. Bay's marketing
activities include frequent participation in industry trade shows and seminars,
advertisements in major trade publications worldwide, publications of technical
articles in the trade press, the distribution of sales literature and product
specifications and ongoing communications with its installed base of end-user
customers. Bay's reseller and distribution programs include incentives and
benefits such as Co-op and reseller marketing programs.
CUSTOMERS AND BACKLOG
Bay's product backlog on June 30, 1996, was approximately $120 million as
compared to product backlog on June 30, 1995, of approximately $231 million. Bay
includes in its backlog only orders confirmed with a purchase order for products
to be shipped within six months. Because of the generally short cycle between
order and shipment, and occasional customer changes in delivery schedules or
cancellation of orders which are made without significant penalty, Bay does not
believe that its backlog as of any particular date is necessarily indicative of
actual net sales for any future period. One reseller, Anixter Inc., a
wholly-owned subsidiary of Anixter International, Inc., accounted for
approximately 13% ($263.0 million), 14% ($198.0 million) and 14% ($162.0
million) of Bay's revenue in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively.
Bay has attempted to reduce its product manufacturing lead times and its
backlog of orders. To the extent that backlog is reduced during any particular
period, it could result in more variability and less predictability in Bay's
quarter to quarter revenue and operating results. If manufacturing lead times
are not reduced, Bay's customers may cancel, or not place, orders if shorter
lead times are available from other manufacturers. In addition, Bay's ability to
meet customer demand may also be dependent on the ability of Bay to increase
manufacturing levels for new products to volumes based on anticipated orders by
the market.
CUSTOMER SUPPORT, SERVICE AND WARRANTY
Bay services, repairs and provides technical support for its products. A
significant portion of Bay's service and support activities is related to
software and network configuration and is provided by Bay's assistance centers.
Bay has contracted with third parties to supplement service provided directly by
Bay for on-site hardware maintenance. International service is provided
primarily by distributors, supplemented with phone support centers in France,
Japan and Australia. Bay sells products to end-users with warranty periods of up
to twelve months from the date of shipment for domestic sales and up to fifteen
months from the date of shipment for international export sales. Following the
expiration of the warranty period, if any, Bay offers services under maintenance
contracts or on a time and materials basis. Bay also provides on-site network
support services such as system installation, network integration services and
technical consulting.
RESEARCH AND DEVELOPMENT
Bay has devoted significant resources to research and development, spending
$213.5 million, $145.3 million and $117.6 million during the fiscal years ended
June 30, 1996, 1995 and 1994, respectively.
During fiscal 1996, Bay continued development of enhancements to its
current products and to the development of new products in the areas of emerging
technologies such as ATM, remote access, switched internetworking technologies,
and the integration of voice, video and data networking. Bay plans to continue
its commitment to research and development in fiscal 1997, as Bay believes that
the markets for its products are characterized by rapid rates of technological
innovation for both hardware and software.
MANUFACTURING
Bay's manufacturing operations are located at its Santa Clara and
Sunnyvale, California; Billerica and Burlington, Massachusetts; Tel Aviv, Israel
and San Antonio, Texas facilities. Bay uses contract manufacturers in the United
Kingdom for its Nautica(TM) product line to meet product demands for the United
Kingdom market.
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Bay's manufacturing process consists of purchasing; automated,
semi-automated and manual assembly; burn in processing; in-circuit testing;
final assembly and test; and inspection.
Most of the components used in Bay's products are available from more than
one supplier. Failure of Bay's vendors to supply required items could have a
material adverse effect upon Bay's business. Bay seeks to maintain an inventory
level sufficient to meet its anticipated short-term production needs. In the
past, Bay has paid premiums to secure adequate supplies of components, and it
could become necessary to make such payments again in the future.
COMPETITION
The data networking industry has grown in the past few years, however,
Bay's revenue may fluctuate year over year or any quarter over quarter based on
competition and customers waiting for anticipated product introductions. The
networking industry is highly competitive and competition is expected to
intensify and could adversely affect Bay's future results. Networking and
communications suppliers compete in areas such as: conformity to existing and
emerging industry standards; interoperability with other networking products;
the ability to run Ethernet, token ring and FDDI networks on most common cabling
systems; network management capabilities; ease of use; scalability; price;
performance; reliability; product features; technical support; marketing
expertise; and product innovation.
There are many companies competing in various segments of the intelligent
hub, switching, router and remote access network markets. Bay's principal
competitors include Ascend Communications, Cabletron Systems, Inc., Cascade
Communications, Cisco, Digital Equipment Corporation, Fore Systems, Inc.,
Hewlett-Packard Company, Inc., International Business Machines Corporation and
3Com Corporation, among others. Several of Bay's competitors have greater name
recognition, more extensive engineering, manufacturing and marketing
capabilities, and greater financial, technological and personnel resources than
those available to Bay. In addition, certain companies in the networking
industry have expanded their product lines or technologies in recent years as a
result of acquisitions. Specifically, 3Com Corporation acquired Chipcom
Corporation and Cisco recently acquired StrataCom, Inc. and recently announced
its intention to acquire Telebit Corporation. There can be no assurance that Bay
will be able to compete successfully in the future with existing or new
competitors.
With industry standards established and new standards emerging, more
companies have developed standards-based products and have sought to compete on
the basis of price. Pressures from competitors offering lower priced products
could result in future price reductions for Bay's products.
PROPRIETARY RIGHTS AND LICENSES
Bay currently relies upon a combination of patents, copyrights, trademarks
and trade secret laws to establish and protect its proprietary rights in its
products. Bay maintains as proprietary the software and other portions of the
technology incorporated in its network management and other products, and may
license that technology to others as necessary. There can be no assurance that
the steps taken by Bay in this regard will be adequate to prevent
misappropriation of its technology or that Bay's competitors will not
independently develop technologies that are substantially equivalent or superior
to Bay's technology. In addition, the laws of some foreign countries do not
protect Bay's proprietary rights to the same extent as do the laws of the United
States. Bay has a number of patents and may apply for additional patents. There
can be no assurance that patents will issue from any applications filed by Bay
or that, if patents do issue, the claims will be sufficiently broad to protect
the technology invented by Bay. In addition, no assurance can be given that any
patents issued to Bay will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide competitive advantages.
Because of the existence of a large number of patents in the networking
field and the rapid rate of issuance of new patents or new standards that may
issue or to obtain important technology, it may be necessary for Bay to enter
into technology licenses from others. Such licenses could impact Bay's operating
results, and there is no assurance that Bay will be able to license such
technology.
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EMPLOYEES
As of June 30, 1996, Bay employed 5,758 persons, including regular,
temporary and contract employees, none of whom is represented by a labor union.
Bay has experienced no work stoppages and considers its employee relations to be
positive.
PROPERTIES
Bay's principal executive facility is located at Bay's corporate
headquarters in Santa Clara, California. Bay has eastern operations located in
Billerica and Burlington, Massachusetts. Bay has administrative, sales and
marketing, product development, manufacturing and support facilities at both
locations.
The Santa Clara facilities consist of approximately 1,021,975 square feet
under leases that expire from April, 1999 to November, 2002. Bay has an option
to renew certain of these leases for two additional five-year terms. Bay's
Massachusetts facilities consist of approximately 663,963 square feet under
leases that will expire through February, 2001 and Bay has an option to renew
certain of these leases for various terms. Bay has additional fiscal year 1997
lease commitments in Billerica, Massachusetts, of approximately 165,000 square
feet.
A subsidiary of Bay has a fifty percent interest in a limited partnership
which owns one of Bay's manufacturing facilities. Of the above total, Bay leases
118,000 square feet from the limited partnership. Bay has, also included in the
above total, approximately 405,113 square feet of space in other manufacturing
buildings in Sunnyvale and Santa Clara, California, and Billerica,
Massachusetts.
Bay acquired additional manufacturing, research and development operations
during fiscal year 1996. Bay Networks Israel (1996) Ltd., which acquired the
business of Armon Networking, Ltd. in Tel Aviv, Israel occupies 27,975 square
feet and Performance Technology, Inc. in San Antonio, Texas, occupies 19,413
square feet.
Some of Bay's manufacturing and distribution facilities, as well as a
portion of Bay's research and development, and sales and administrative
functions, are located in areas of seismic risk. Bay's future operating results
could be materially affected by a major earthquake.
Bay leases and occupies sales and service offices in 36 states throughout
the United States and Puerto Rico and 34 countries worldwide. Bay's worldwide
operations are located in Argentina, Australia, Austria, Belgium, Brazil,
Canada, Cayman Islands, China, Colombia, Denmark, Finland, France, Germany, Hong
Kong, India, Indonesia, Israel, Italy, Japan, Korea, Malaysia, Mexico, the
Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, South Africa,
Spain, Sweden, Switzerland, Taiwan, Thailand, United Arab Emirates and the
United Kingdom.
LEGAL PROCEEDINGS
From time to time, as a normal incidence of the nature of Bay's business,
various claims, charges and litigation are asserted or commenced against Bay. In
the opinion of management, final judgments from such claims, charges and
litigation, if any, against Bay would not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
At various times Bay has been approached by others claiming to hold valid
patents applicable to its products, who have offered to license the patented
technology. Bay may enter into such licensing agreements or may vigorously
contest such claims, depending upon the specific circumstances.
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MANAGEMENT
The directors and executive officers of Bay as of September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
NAME/POSITION AGE BUSINESS EXPERIENCE
- ------------- --- -------------------
<S> <C> <C>
Arthur Carr 65 Mr. Carr has served as a director of Bay since 1987. Mr.
Director Carr has been a private investor since November 1993. Mr.
Carr was the President, Chief Executive Officer and
Director of Bytex Corporation from 1991 to 1993.
Previously, he was a Principal of Carr & Associates from
1989 to 1991, and the President and Chief Operating
Officer of Stellar Computer, Inc. (later known as Stardent
Computer, Inc.) from 1986 to 1989. Mr. Carr is also a
director of Stratus Computer, Inc.
Shelby H. Carter, Jr. 65 Mr. Carter has served as a director of Bay since October
Director 1994, and served as a director and the Chairman of the
Board of SynOptics, of which he was a founder, from its
inception in June 1985 to October 1994. Since January
1986, Mr. Carter has also served as a professor at the
University of Texas Graduate School of Business and
College of Business Administration. From December 1986 to
September 1989, he served as an advisory partner at Austin
Ventures, L.P., a venture capital firm. In January 1985,
Mr. Carter retired from his positions as General Sales
Manager, Worldwide Operations and Corporate Vice President
for Xerox Corporation, where he had been employed since
January 1970; prior to that he was employed for 15 years
by IBM Corporation. Mr. Carter also serves on the Board of
Directors of Input/Output, Inc.
Kathleen A. Cote 47 Ms. Cote has served as a director of the Company since
Director August 1996. Ms. Cote is President and Chief Operating
Officer of Computervision Corporation and has been
appointed by the Board of Directors of Computervision
Corporation to assume the additional role of Chief
Executive Officer of Computervision Corporation in
November 1996. Since 1986, Ms. Cote served in various
positions in Computervision, including Vice President of
Manufacturing, Vice President of Worldwide Service, and
Vice President of Marketing and Corporate Communications.
Ms. Cote is also a director of Walden University,
Massachusetts High Technology Council, Inc. and
Computervision Corporation. She has previously served as a
director or trustee of Babson College, the Women's
Initiative for Technology Leadership, the Boston Chapter
of the National Urban League, the Massachusetts Private
Industry Council and the Council for Women in Technology,
co-sponsored by the Department of Labor and the University
of Massachusetts. She also served as Vice Chairman of the
Massachusetts Council for Advanced Technology Transfer in
Manufacturing.
</TABLE>
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<TABLE>
<CAPTION>
NAME/POSITION AGE BUSINESS EXPERIENCE
- ------------- --- -------------------
<S> <C> <C>
John S. Lewis 50 Mr. Lewis has served as a director of Bay since October
Director 1994, and served as a director SynOptics from August 1986
to October 1994. Since September 1995, he has been a
managing partner of PVG Equity Partners, L.L.C., the
general partner of Pacific Venture Group, L.P., a venture
capital investment firm. Since July 1989, he has also been
a general partner of Paragon Venture Management Company
II, L.P., the general partner of Paragon Venture Partners,
II, L.P., a venture capital investment firm. From 1983 to
1994, he was a general partner of Paragon Venture
Management Company, the general partner of Paragon
Partners, a venture capital investment firm. From 1981 to
1983, Mr. Lewis served as a Vice President of Citicorp
Venture Capital Ltd., and from 1973 to 1981, Mr. Lewis
held various management positions with Citicorp N.A. and
Citicorp. Mr. Lewis also serves on the Board of Directors
of On Assignment, Inc., ArthroCare Corporation and
TopoMetrix Corporation.
Benjamin F. Robelen 68 Mr. Robelen has been a director of Bay since 1991. Mr.
Director Robelen has been a private investor and business
consultant since 1986. He is also a director of VMARK
Software, Inc. Since 1980, Mr. Robelen has served as a
board member of several public and private companies.
Prior to that time, Mr. Robelen served as the Vice
President, Finance and Administration of Prime Computer,
Inc. as well as other positions at high-technology
companies.
Andrew K. Ludwick 50 Mr. Ludwick, a founder of SynOptics, served as President
Director and Chief Executive Officer of Bay from October 1994 until
October 14, 1996, as a director of Bay since October 1994
and as President, Chief Executive Officer and a director
of SynOptics from its inception June 1985 to October 1994.
From June 1969 to June 1985, Mr. Ludwick served in various
positions in marketing, market planning, sales operations,
and corporate strategy at Xerox Corporation.
Paul J. Severino 49 Mr. Severino, a founder of Wellfleet, assumed
Chairman of the Board, responsibilities of President and Chief Executive Officer
President, Chief of Bay on October 14, 1996 and has served as Chairman of
Executive Officer the Board of Bay since October 1994 and served as
and Director President and Chief Executive Officer and a director from
Wellfleet's inception in 1985 to October 1994. Prior to
founding Wellfleet, Mr. Severino was a founder and
President of Interlan, Inc. from 1981 to 1985. Interlan
was sold to Micom Systems, Inc. in 1985, at which time Mr.
Severino became a Vice President of Micom. Mr. Severino is
also a director of Data Translation, Inc., a supplier of
data acquisition and image processing products for desktop
computers, and the Massachusetts Technology Development
Corporation (MTDC).
Ronald V. Schmidt 52 Dr. Schmidt, a founder of SynOptics, has served as the
Executive Vice President, Executive Vice President and Chief Technical Officer of
Chief Technical Officer Bay since October 1994 and as a director since May 1996.
and Dr. Schmidt served as Senior Vice President, Chief
Director Technical Officer and a director of SynOptics from its
inception in June 1985 to October 1994. Prior to June
1985, he served as a Research Fellow from June 1981 to
November 1985 at Xerox Corporation's Palo Alto Research
Center (Xerox "PARC"). Prior to serving at Xerox PARC, Dr.
Schmidt spent seven years at AT&T's Bell Laboratories
where he was a member of the technical staff performing
research in fiber communications. He is currently a Fellow
of the IEEE.
</TABLE>
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<TABLE>
<CAPTION>
NAME/POSITION AGE BUSINESS EXPERIENCE
- ------------- --- -------------------
<S> <C> <C>
Jeffry R. Allen 44 Mr. Allen has served as Senior Vice President of
Senior Vice President, Operations since November 1995. Mr. Allen most recently
Operations served as Vice President and Controller of Bay from
October 1994 to November 1995. From December 1990 to
October 1994, Mr. Allen held various positions at
SynOptics, the latest of which was Vice President and
Controller. Before joining SynOptics, he held various
positions from December 1973 to November 1990 at
Hewlett-Packard Company, Inc., the latest of which was
Controller of the Information Networks Group.
Lloyd Carney 34 Mr. Carney joined Bay in July 1990 as Director of
Vice President, Worldwide Technical Operations in the manufacturing organization of
Customer Service Wellfleet. He held this position until April 1993 when he
assumed the position of Vice President, Worldwide Customer
Service. Prior to joining Bay, Mr. Carney was Test
Engineering Manager and had new product introduction
responsibilities at Proteon Inc. Prior to Proteon, Mr.
Carney held various engineering and project management
positions at Prime Computer, Inc.
Richard D. Eyestone 50 Mr. Eyestone joined Bay in July 1991 as the Southern
Senior Vice President, Regional Manager. He held the position of Regional Vice
Product and Market President-Southern Region from November 1994 until July
Management, Enterprise 1995 and Vice President of U.S. Sales from July 1995 until
Business Unit May 1996 when Mr. Eyestone assumed the position of Senior
Vice President of Market and Product Management for Bay's
Enterprise Business Unit. Prior to joining Bay, Mr.
Eyestone held various sales management positions at
PictureTel Corporation and Masscomp, Inc.
Michael J. Grady 47 Mr. Grady joined Bay as Vice President, Engineering, in
Senior Vice President of August 1992 and has served as Senior Vice President of
Engineering, Enterprise Engineering, Enterprise Business Unit since May 1996. From
Business Unit 1980 to July 1992, Mr. Grady held various positions within
the Engineering and Customer Support areas at Stratus
Computer, Inc., the latest of which was Vice President,
Customer Service and Technical Support and prior to that,
Vice President, Major Account Engineering. Prior to
working for Stratus Computer Inc., Mr. Grady held various
positions at Honeywell Information Systems.
Vito E. Palermo 32 Mr. Palermo has served as Vice President and Controller
Vice President since November 1995. He joined Bay in June 1992 as
and Controller Manufacturing and Customer Service Controller, served as
Corporate Accounting and Financial Planning Manager from
October 1993 to September 1994 and was promoted to
Director of Finance, Hub Product Business Unit in October
1994. Prior to joining Bay, Mr. Palermo held several
financial management positions at Digital Equipment
Corporation from September 1986 to May 1992.
Gary Rogers 39 Mr. Rogers joined Bay in 1992 as Director of Reseller
Vice President, Sales. He held the position of Vice President, European
International Sales Operation from March 1994 until July 1996, when Mr. Rogers
assumed position of Vice President, International Sales.
Prior to joining Bay, Mr. Rogers was Vice President, Sales
at Wavetracer, Inc. from 1990 until 1992, and held various
sales management positions at ImagiTex, Inc. from 1987
until 1990, the latest of which was Vice President U.S.
Sales.
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
NAME/POSITION AGE BUSINESS EXPERIENCE
- ------------- --- -------------------
<S> <C> <C>
William J. Ruehle 54 Mr. Ruehle has served as Executive Vice President and
Executive Vice President Chief Financial Officer of Bay since October 1994 and
and Chief Financial served as Vice President and Chief Financial Officer of
Officer SynOptics from July 1987 to October 1994. From January
1979 to June 1987, he served as a Vice President and Chief
Financial Officer of Acrian, Inc., a microwave
semiconductor manufacturer. He began his career in
corporate finance at CBS, Inc.
Bruce I. Sachs 36 Mr. Sachs joined Bay in December 1995 as President,
Executive Vice President, Xylogics Business Unit and as Executive Vice President,
Internet/Telecom Internet/Telecom Business Unit since May 1996. Mr. Sachs
Business Unit served as President and Chief Executive Officer of
& President, Xylogics Xylogics from August 1993 to December 1995. He joined
Business Unit Xylogics in May 1989 as Director of Engineering,
Communications Products, was promoted to Vice President of
Engineering in March 1991 and served as Executive Vice
President from December 1992 to August 1993. From May 1985
to February 1989 he was the Director of Engineering,
Transmission Products at Infinet, Inc.
Gene Wahlberg 43 Mr. Wahlberg joined Bay in October 1990 as a National
Vice President, Account Manager for the Southwest Region. He held
U.S. Sales positions as Southwest Sales Manager, Central Region
Director and Regional Vice President, Central Region
through May 1996 when he assumed the position of Vice
President, U.S. Sales. Prior to joining Bay, Mr. Wahlberg
was a principal in a manufacturing representative company
for 5 years and held various Sales Management positions at
Mostek Corporation.
</TABLE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 30, 1996 certain information
with respect to the beneficial ownership of Bay Common Stock by (i) each
stockholder known by Bay to be the beneficial owner of more than 5% of Bay
Common Stock, (ii) each director of Bay, (iii) the Chief Executive Officer and
the four other most highly compensated executive officers of Bay as of September
30, 1996 and (iv) all directors and executive officers of Bay as a group.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE BAY
OF BENEFICIAL COMMON STOCK
NAME OF BENEFICIAL OWNER(1) OWNERSHIP(2) OUTSTANDING
- --------------------------- ----------------- ------------
<S> <C> <C>
Directors and Executive Officers:
Arthur Carr (3).......................................... 62,315 *
Shelby H. Carter, Jr. (4)................................ 131,008 *
Kathleen A. Cote......................................... -- --
John S. Lewis (5)........................................ 109,233 *
Benjamin F. Robelen (6).................................. 109,884 *
Andrew K. Ludwick (7).................................... 3,635,085 1.9%
Paul J. Severino (8)..................................... 3,123,400 1.7%
William J. Ruehle (9).................................... 797,259 *
Ronald V. Schmidt (10)................................... 1,401,987 *
Directors and executive officers as a group (17 persons)
(11)................................................... 12,027,990 6.4%
<FN>
- ---------------
* Less than 1%
(1) The persons named in the table above have sole voting and investment power
with respect to all shares of Bay Common Stock shown as beneficially owned
by them, subject to community property laws where applicable and to the
information contained in the footnotes to this table.
</TABLE>
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<PAGE> 70
(2) In connection with the combination of Bay and SynOptics through the merger
of a wholly-owned subsidiary of Bay into SynOptics in October 1994 (the
"SynOptics Merger"), the 1991 Restated Stock Option Plan of Wellfleet was
amended and restated and renamed the Bay Networks, Inc. 1994 Stock Option
Plan (the "1994 Option Plan"). Options granted under the 1994 Option Plan
prior to the SynOptics Merger are referred to in the notes below as options
granted under the "Wellfleet 1991 Option Plan."
(3) Includes 59,315 shares subject to options granted under the Wellfleet
Communications, Inc. 1991 Director Stock Option Plan (the "Wellfleet
Directors Option Plan") or the Bay Networks, Inc. 1994 Outside Directors
Stock Option Plan (the "Bay Networks Directors Option Plan") that may be
exercised within sixty days of September 30, 1996.
(4) Includes 41,871 shares subject to options granted under the Bay Networks
Directors Option Plan that may be exercised within 60 days of September 30,
1996.
(5) Includes 41,871 shares subject to options granted under the Bay Networks
Directors Option Plan that may be exercised within 60 days of September 30,
1996. Also includes 1,304 shares held in trust for the minor children of
Mr. Lewis, of which he disclaims beneficial ownership.
(6) Includes 44,164 shares subject to options granted under the Wellfleet
Directors Option Plan or the Bay Networks Directors Option Plan that may be
exercised within 60 days of September 30, 1996.
(7) Includes 2,023,252 shares subject to immediately exercisable options
granted under the SynOptics Communications, Inc. Amended and Restated 1986
Stock Option Plan (the "SynOptics 1986 Option Plan"), which options were
assumed by Bay in the SynOptics Merger, and under the 1994 Option Plan. A
portion of these shares are not yet vested, and thus would be subject to
repurchase by Bay at a price equal to the option exercise price, if the
corresponding options were exercised before those shares had vested. Also
includes 50,946 shares held by Mr. Ludwick's spouse as custodian for his
minor children, of which he disclaims beneficial ownership.
(8) Includes 322,500 shares subject to immediately exercisable options granted
under the 1994 Option Plan or issuable upon exercise of outstanding stock
options exercisable within 60 days of September 30, 1996 under the
Wellfleet 1991 Option Plan. A portion of these shares are not yet vested,
and thus would be subject to repurchase by Bay at a price equal to the
option exercise price, if the corresponding options were exercised before
those shares had vested. Also includes 162,000 shares held by Mr.
Severino's spouse, of which he disclaims beneficial ownership, and 12,000
shares held by or for the benefit of Mr. Severino's children, of which he
disclaims beneficial ownership.
(9) Includes 648,839 shares subject to immediately exercisable options granted
under the SynOptics 1986 Option Plan, which options were assumed by Bay in
the SynOptics Merger, and under the 1994 Option Plan. A portion of these
shares are not yet vested, and thus would be subject to repurchase by Bay
at a price equal to the option exercise price, if the corresponding options
were exercised before those shares had vested.
(10) Includes 621,079 shares subject to immediately exercisable options granted
under the SynOptics 1986 Option Plan, which options were assumed by Bay in
the SynOptics Merger, and under the 1994 Option Plan. A portion of these
shares are not yet vested, and thus would be subject to repurchase by Bay
at a price equal to the option exercise price, if the corresponding options
were exercised before those shares had vested.
(11) Includes 6,334,660 shares subject to immediately exercisable options or
issuable upon exercise of outstanding options exercisable within 60 days of
September 30, 1996 beneficially owned by executive officers and directors.
A portion of these shares are not yet vested, and thus would be subject to
repurchase by Bay at a price equal to the option exercise price, if the
corresponding options were exercised before those shares had vested.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Business Environment and Risk Factors. The following discussion should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere herein as well as the section below
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<PAGE> 71
under the heading "Risk Factors That May Affect Future Results". Bay's future
operating results may be affected by various trends and factors which are beyond
Bay's control. These include, among other factors, changes in general economic
conditions, rapid or unexpected changes in technologies and uncertain business
conditions that affect the data networking industry. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
With the exception of historical information, the matters discussed below
under the headings "Results of Operations" and "Liquidity and Capital Resources"
may include forward-looking statements that involve risks and uncertainties. Bay
wishes to caution readers that a number of important factors, including those
identified in the section entitled "Risk Factors That May Affect Future
Results," as well as factors discussed elsewhere in this Proxy
Statement/Prospectus and in Bay's other reports filed with the Commission, could
affect Bay's actual results and cause actual results to differ materially from
those in the forward-looking statements.
Recent Developments Concerning Bay
On September 24, 1996, Bay acquired all of the outstanding shares of
LANcity, a provider of advanced cable modem technology, for $59.0 million. The
acquisition was accounted for as a purchase. Based on estimates, Bay allocated
$42 million of the purchase price to in-process research development which was
charged to expense upon the closing of the transaction.
Revenue for the quarter ended September 30, 1996 was $522.7 million, an
increase of 14% from $457.8 million in the same period of fiscal 1996, due
primarily to increased unit sales of Bay's products. Income from operations was
$27.3 million or 5.2% of revenue in the first quarter of fiscal 1997, which
includes a $42.6 million charge to operations for in-process research and
development in connection with the acquisition of LANcity, compared to $92.4
million or 20.2% of revenue in the same period of fiscal 1996. Including the
effect of the acquisition, net income for the quarter ended September 30, 1996
was $5.6 million, or $0.03 per share, compared to $63.2 million, or $0.32 per
share, in the same period of fiscal 1996. The decrease in income from operations
and net income is due to a product mix shift towards products carrying lower
gross margins; an increase in operating expenses as a percentage of revenue,
from 34.8% in the first quarter of fiscal 1996 to 47.0% in the first quarter of
fiscal 1997, due to increased costs associated with larger sales and sales
support staff, marketing programs for new product introductions and the
in-process research and development charge.
Results of Operations
Revenue. Revenue increased 46.5% to $2,056.6 million in fiscal 1996 as
compared to $1,403.6 million in fiscal 1995 and $1,136.4 million in fiscal 1994.
The growth in revenue in fiscal 1996 was attributable to market growth and
strong demand for Bay's products. This growth was a result of worldwide unit
volume increases for virtually all of Bay's product lines. While sales in all
major product areas increased, the highest percentage increase was in the
switching product line; Bay's new products in the remote access market,
including the Xylogics' Nautica line, were particularly well received in those
markets. Revenue from the router product line grew over fiscal 1995 as sales to
the telecommunications industry increased. The increase in revenue in fiscal
1995 was attributable to growth in market demand for Bay's products with growth
across all of Bay's product lines. Bay has continued to increase revenue through
execution of its multi-channel distribution strategy and growth in international
operations.
International revenue was $716.5 million or 34.8% of total revenue in
fiscal 1996, compared to $458.4 million or 32.7% of total revenue and $345.7
million or 30.4% of total revenue in fiscal 1995 and fiscal 1994, respectively.
The increase in each period was primarily due to Bay's international expansion
and growth in the Asia/Pacific market, as well as continued growth in the
European market. Bay continues to emphasize the multi-channel sales strategy
which consists of qualified resellers, distributors and dealers. Bay's
international revenue was primarily denominated in U.S. dollars. The effect of
foreign exchange rate fluctuations did not have a significant impact on Bay's
operating results in any period.
Revenue in past periods may not be indicative of revenue in the future,
which may be affected by other business environment and risk factors previously
discussed, as well as other factors noted below.
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<PAGE> 72
Gross Profit. Gross profit was $1,111.3 million or 54.0% of revenue in
fiscal 1996, compared to $772.6 million or 55.0% of revenue and $630.7 million
or 55.5% of revenue in fiscal 1995 and fiscal 1994, respectively. The gross
profit increase was due to sequentially higher worldwide unit volume each year.
The gross margin percentage decline in fiscal 1996 was affected by several
factors: a product mix shift towards shared media, including increased volumes
of stackable Ethernet products, and additional reserves for excess inventory as
a result of product transitions that occurred in fiscal 1996. The decline was
partially offset by manufacturing cost reductions, reductions in material
premium charges, and increased router sales which carry higher margins. The
decline in fiscal 1995 was primarily from competitive list price reductions,
product mix shifts toward non-modular products which carry lower margins, and
price increases on certain components.
Bay believes there is a risk that gross margin percentages may decline if
the product mix continues to shift towards non-modular products and competition
continues to increase. Bay expects market emphasis on lower margin routers and
high-speed switching products in the future. Other factors, including changes in
material and labor costs and distribution channels, may also have an adverse
effect on gross margin percentages in the future.
Operating Expenses. Research and development spending grew by 46.9% to
$213.5 million in fiscal 1996 from $145.3 million in fiscal 1995 and 23.6% from
$117.6 million in fiscal 1994 as compared with fiscal 1995, although the
percentage of revenue of 10.4% remained constant for each fiscal year. The
increase in expense relates to Bay's continued development of enhancements to
its current products and to the development of new products and addition of
personnel through hiring and through acquisitions and business combinations.
During the year, Bay Networks continued development of new products in the areas
of emerging technologies such as ATM, remote access, switched internetworking
technologies, and the integration of voice, video and data networking. Bay plans
to continue its commitment to research and development in fiscal 1997, as Bay
believes that the markets for its products are characterized by rapid rates of
technological innovation for both hardware and software. Research and
development expenses may increase in absolute dollars in future periods, and
such expenditures may vary as a percentage of revenue. There can be no assurance
that Bay's research and development efforts will result in commercially
successful new technology and products in the future, and those efforts may be
affected by other factors noted below.
Selling and marketing expenses were $452.3 million or 22.0% of revenue in
fiscal 1996, compared to $302.5 million or 21.6% of revenue and $246.8 million
or 21.7% of revenue in fiscal 1995 and fiscal 1994, respectively. The increase
in expense in both fiscal 1996 and fiscal 1995, as compared with the prior
fiscal year, was primarily related to the increased costs associated with larger
sales and sales support staffs, commission expenses resulting from higher sales
levels, expansion of Bay's sales and marketing programs, and investments related
to new product launches and entry into new markets worldwide. Bay's investment
in its sales, marketing and support staff may vary as a percentage of revenue in
the future.
General and administrative expenses were $72.2 million or 3.5% of revenue
in fiscal 1996, compared to $55.7 million or 4.0% of revenue and $47.5 million
or 4.2% of revenue in fiscal 1995 and fiscal 1994, respectively. The absolute
dollar increase in general and administrative expenses each year related to the
addition of personnel, and expenditures related to both domestic and
international facilities and information technology needed to support the growth
in Bay's business. General and administrative expenses may vary as a percentage
of revenue in the future.
In fiscal 1996, Bay acquired all of the outstanding shares of Performance
Technology, Inc., a developer of LAN-to-internet access technology, for a total
purchase price of $12.6 million, and substantially all of the net assets of
Armon Networking, Ltd., a technology developer of RMON-based distributed
analysis tools and multi-segment LAN probes, for a total purchase price of $34.2
million. Approximately $39.7 million was charged to in-process research and
development related to internetworking technologies associated with these
acquisitions.
Bay incurred in-process research and development expenses of $6.7 million
and $17.9 million related to the acquisitions of Scorpion Ltd. and Coral Network
Corporation in fiscal 1995 and 1994, respectively.
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In June 1996, Bay signed a definitive agreement to acquire the Digital
Signal Processing (DSP) modem business of Penril, a provider of advanced
DSP-based modems and remote access products. Based on preliminary estimates, Bay
expects to allocate approximately $60 million to $65 million of the total
purchase price, which is based on a fixed formula, to in-process research and
development, which will be charged to expense upon the closing of the
transaction, currently expected to be in the quarter ending December 31, 1996.
As a result of the various business combinations in fiscal 1996 and 1995,
Bay has incurred merger related expenses of $16.1 million and $63.4 million,
respectively. These merger related expenses related to transaction costs,
severance related expenses, closing of duplicate facilities, write off of
duplicate inventory and other assets and other costs incident to the
transactions. In fiscal 1996, Bay reversed previously accrued merger costs of
$5.9 million associated with the Wellfleet/SynOptics business combination and
the Centillion acquisition. The reduction in the estimated costs were realized
primarily due to the usage of facilities which Bay had previously planned to
vacate. See Note 2 to the Notes to Consolidated Financial Statements of Bay
included herein.
Net Interest Income and Other. Net interest income and other was $28.5
million, or 1.4% of revenue in fiscal 1996, compared to $21.8 million or 1.6% of
revenue and $7.3 million or 0.6% of revenue in fiscal 1995 and fiscal 1994,
respectively. The increase in absolute dollars in interest income was due to
higher average invested cash and investment balances, which yielded higher
interest income in fiscal year 1996 and 1995.
Income Taxes. Bay's effective income tax rate was 37.5%, 37.8% and 37.6%
in fiscal 1996, fiscal 1995 and fiscal 1994, respectively, and excludes the
effect of the in-process research and development charges and certain merger
related expenses which were not deductible for income tax purposes. At June 30,
1996, a valuation allowance of $6.8 million was offset against the net operating
losses and credit carryforwards acquired from Coral Network Corporation,
Centillion Networks, Inc. and Performance Technology, Inc. which are subject to
substantial limitation. Management has concluded that other than the allowance
related to these acquisitions, no valuation allowance is required based on its
assessment that future levels of taxable income will be sufficient to realize
the future tax benefits represented by the deferred income taxes.
Liquidity and Capital Resources. As of June 30, 1996, total cash and
short- and long-term investments totaled $588.2 million, down from $651.6
million at June 30, 1995. Cash generated from operating activities declined to
$105.9 million, compared to $258.1 million and $169.0 million in fiscal 1995 and
fiscal 1994, respectively.
Cash provided from operations decreased from the prior year due to an
increase in income before depreciation and amortization which was more than
offset by increases in accounts receivable and inventory. The increase in
accounts receivable in fiscal 1996 was due to revenue growth, including the
continued expansion in international operations relative to total operations
which typically have longer collection cycles. Days sales outstanding in
receivables were 54 days at June 30, 1996 compared to 40 days at June 30, 1995.
Days sales outstanding may continue to vary, due to, among other things, timing
of product shipments and international expansion. The increase in inventory was
primarily attributable to increasing inventory levels to meet desired
manufacturing lead times and anticipated demand for new product introductions.
Bay used $119.7 million, $298.5 million and $222.3 million for investing
activities in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The
consumption of cash in fiscal 1996 was due to increases in property, plant and
equipment needed for increased levels of business and Bay's information
technology. Bay expects to spend additional cash related to additional property,
plant and equipment and information technology required to support Bay's
operations in fiscal 1997. Furthermore, Bay acquired two companies in fiscal
1996, Performance Technology, Inc., for $12.6 million, and Armon Networking,
Ltd., for $34.2 million, for the purpose of entering new markets, including the
internet market. The major investing activities in fiscal 1995 and fiscal 1994
were primarily attributable to capital additions to support business operations.
Financing activities provided $44.9 million, $34.3 million and $24.5
million in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The cash
generated from financing activities was primarily due to cash received in
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connection with the issuance of stock under Bay's stock plans, which resulted in
net proceeds of $45.4 million, $34.0 million and $24.4 million, respectively.
A subsidiary of Bay has outstanding $110 million of convertible
subordinated debentures which bear interest of 5 1/4% per annum, payable
semi-annually, and mature in May 2003. The debentures are convertible at the
option of the holder into Bay Common Stock at a conversion price of $42.61 per
share. Bay has reserved 2,581,725 shares of Bay Common Stock for the conversion
of these debentures. Beginning May 1996, the debentures are redeemable at the
option of Bay, initially at approximately 103.7% and at decreasing prices
thereafter to 100% at maturity. To date, Bay's management has made no decision
whether to redeem the debentures.
Bay believes that it has the financial resources needed to meet business
requirements, including capital expenditures, working capital requirements, the
debt obligations outstanding and operating lease commitments for facilities at
least through the next twelve months.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition, Bay identifies the
following risk factors which could affect Bay's actual results and cause actual
results to differ materially from those in the forward-looking statements.
Risks Related to New Products. Bay's future revenue is dependent on its
ability to successfully develop, manufacture and market products for customers
worldwide. In this regard, future growth is dependent on Bay's ability to timely
and successfully develop and introduce new products, establish new distribution
channels, develop affiliations with leading market participants which facilitate
product development and distribution, and market existing and new products with
service providers, resellers and channel partners, and others. Also, future
revenue may be affected in part by factors which influence the business of Bay's
direct and indirect resellers, such as the resellers' organization structure,
purchasing patterns and inventory levels.
Bay believes that the markets for its products are characterized by rapid
rates of technological innovation for both hardware and software. Rapid rates of
technological change, in turn, may lead to shorter or more unpredictable product
life cycles. There can be no assurance that Bay's research and development
efforts will result in commercially successful new technology and products in
the future. In addition, as the technical complexity of new products increases,
it may become increasingly difficult to introduce new products quickly and
according to schedule.
Risks Related to Recent Developments. Bay recently announced an internal
reorganization and implemented a new information system which it believes will
better serve its customers and the market overall. There can be no assurances
that these actions will achieve Bay's objectives.
Dependence on Personnel. Bay's success depends upon the continued
contributions of its personnel, many of whom would be difficult to replace. The
success of Bay will depend on the ability of Bay to attract and retain skilled
employees. Changes in personnel, therefore, could adversely affect operating
results.
Risks Related to Gross Margin. Bay's gross margin percentage is a function
of the product mix sold in any period. Other factors such as unit volumes,
obsolescence of inventory, heightened price competition, changes in channels of
distribution, shortages in components, due to timely supplies of parts from
vendors or ability to obtain items at reasonable prices, and availability of
skilled labor, also may continue to affect the cost of sales and the fluctuation
in gross margin percentages in future periods. In the past, Bay has paid
premiums to secure adequate supplies of components, and it could become
necessary to make such payments again in the future.
Risks Related to Timing of Product Shipments. One of the risks potentially
affecting Bay's operating results is the fact that a substantial portion of
Bay's revenue in any period may result from shipments during the latter part of
a period. Because Bay establishes its operating expense level based on its
operational goals, if shipments in any period do not meet goals, net profits may
be adversely affected.
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Risks Related to Backlog. Bay has attempted to reduce its product
manufacturing lead times and its backlog of orders. To the extent that backlog
is reduced during any particular period, it could result in more variability and
less predictability in Bay's quarter to quarter revenue and operating results.
If manufacturing lead times are not reduced, Bay's customers may cancel, or not
place, orders if shorter lead times are available from other manufacturers. In
addition, Bay's ability to meet customer demand may also be dependent on the
ability of Bay to increase manufacturing levels for new products to volumes
required based on anticipated orders by the market.
Risks Related to Intellectual Property Rights. Bay currently relies upon a
combination of patents, copyrights, trademarks and trade secret laws to
establish and protect its proprietary rights in its products. Bay maintains as
proprietary the software and other portions of the technology incorporated in
its network management and other products, and may license that technology to
others as necessary. There can be no assurance that the steps taken by Bay in
this regard will be adequate to prevent misappropriation of its technology or
that Bay's competitors will not independently develop technologies that are
substantially equivalent or superior to Bay's technology. In addition, the laws
of some foreign countries do not protect Bay's proprietary rights to the same
extent as do the laws of the United States. Bay has a number of patents and may
apply for additional patents. There can be no assurance that patents will issue
from any applications filed by Bay or that, if patents do issue, the claims will
be sufficiently broad to protect the technology invented by Bay. In addition, no
assurance can be given that any patents issued to Bay will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages.
Because of the existence of a large number of patents in the networking
field and the rapid rate of issuance of new patents or new standards that may
issue or to obtain important technology, it may be necessary for Bay to enter
into technology licenses from others. Such licenses could impact Bay's operating
results, and there is no assurance that Bay will be able to license such
technology.
Bay has announced a number of strategic technology alliances and
cooperative marketing efforts. There can be no assurance that such alliances
will lead to standards acceptable to the market, or competitive products.
Risks Related to New Markets. During the past several quarters, Bay
entered new markets, including the remote access and internet markets, primarily
through the acquisition of other businesses. In addition, Bay announced the
formation of a subsidiary, NETGEAR, which focuses on developing and marketing
products for the small office and home office market. The revenue or net profits
from these new markets and businesses has not been material in the past. At
present, these new markets are undeveloped and rapidly changing. If these
markets do not develop, or if Bay's strategies for these markets are
unsuccessful, Bay's operating results may be adversely affected.
Revenue Fluctuations and Competition. The data networking industry has
grown in the past few years, however, Bay's revenue may fluctuate year over year
or any quarter over quarter based on competition and customers waiting for
anticipated product introductions. The networking industry is highly competitive
and competition is expected to intensify and could adversely affect Bay's future
results. Networking and communications suppliers compete in areas such as:
conformity to existing and emerging industry standards; interoperability with
other networking products; the ability to run Ethernet, token ring and FDDI
networks on most common cabling systems; network management capabilities; ease
of use; scalability; price; performance; reliability; product features;
technical support; marketing expertise; and product innovation.
There are many companies competing in various segments of the intelligent
hub, switching, router and remote access network markets. Bay's principal
competitors include Ascend Communications, Cabletron Systems, Inc., Cascade
Communications, Cisco, Digital Equipment Corporation, Fore Systems, Inc.,
Hewlett-Packard Company, Inc., International Business Machines Corporation and
3Com Corporation, among others. Several of Bay's competitors have greater name
recognition, more extensive engineering, manufacturing and marketing
capabilities, and greater financial, technological and personnel resources than
those available to Bay. In addition, certain companies in the networking
industry have expanded their product lines or technologies in recent years as a
result of acquisitions. Specifically, 3Com Corporation acquired
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Chipcom Corporation and Cisco recently acquired StrataCom, Inc. and recently
announced its intention to acquire Telebit Corporation, a manufacturer of
digital modems. There can be no assurance that Bay will be able to compete
successfully in the future with existing or new competitors.
With industry standards established and new standards emerging, more
companies have developed standards-based products and have sought to compete on
the basis of price. Pressures from competitors offering lower priced products
could result in future price reductions for Bay's products.
Risks Related to Acquisitions. To implement its business plans, Bay may
make further acquisitions in the future. Acquisitions require significant
financial and management resources both at the time of the transaction and
during the process of integrating the newly acquired business into Bay's
operations. Bay's operating results could be adversely affected if it is unable
to successfully integrate such new companies into its operations. Certain
acquisitions or strategic transactions may be subject to approval by the other
party's board or shareholders, domestic or foreign governmental agencies, or
other third parties. Accordingly, there is a risk that important acquisitions or
transactions could fail to be concluded as planned. Future acquisitions by Bay
could also result in issuances of equity securities or the rights associated
with the equity securities, which could potentially dilute earnings per share.
In addition, future acquisitions could result in the incurrence of additional
debt, taxes, or contingent liabilities, and amortization expenses related to
goodwill and other intangible assets. These factors could adversely affect Bay's
future operating results and financial position. As Bay's competitors have
pursued a strategy of growth through acquisition, there is a risk that future
acquisitions could be more expensive due to competition among bidders for target
companies.
Reliance on Resellers and Distributors. VAR and distributor networks have
continued to represent an important part of Bay's overall sales and distribution
strategy. While Bay is not dependent on any single VAR or distributor, the loss
of, or changes in the relationship with or performance by, several VARs or
distributors nevertheless could have a material adverse effect on Bay's revenue
and operating results. The loss of, or changes in the relationship with or
performance by, one or more international distributors could have a material
adverse effect on Bay's revenue and operating results.
Risks Related to Customer Support and Service. The market for Bay's
products increasingly demands high levels of customer support and service. As a
result, Bay aims to provide competitive levels of support and service, as well
as product warranties. There is a risk that Bay or its contractors may be unable
to provide a level of service that is acceptable to its customers. There is also
a risk that Bay may incur substantial costs related to warranties or service
claims.
Risks Related to International Sales. International sales may be an
increasingly important contributor to Bay's revenue and net profits. As a
result, operating results are increasingly affected by the risks of such
activities, including economic conditions in the international markets in which
Bay sells its products and political and economic instability, fluctuations in
currency exchange rates, changes in international regulatory requirements,
international staffing and employment issues, tariffs and other trade barriers,
import and export controls and the burden of complying with foreign laws. Sales
into developing nations may fluctuate to a greater extent than sales to
customers in developed nations, as those markets are only beginning to adopt new
technologies and establish purchasing practices. These risks may adversely
affect Bay's future operating results and financial position.
Risks Related to Government Regulations and Product Certification. Bay's
operations are also subject to laws, regulations, government policies, and
product certification requirements worldwide. Changes in such laws, regulations,
policies, or requirements could affect the demand for Bay's products or result
in the need to modify products, which may involve substantial costs or delays in
sales and could have an adverse effect on Bay's future operating results.
Risks of Stock Volatility and Absence of Dividends. In recent years, the
stock market in general and the market for technology stocks in particular,
including Bay Common Stock, have experienced extreme price fluctuations. There
is a risk that stock price fluctuation could impact Bay's operations. Changes in
the price of Bay Common Stock could affect Bay's ability to successfully attract
and retain qualified personnel or complete
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necessary business combinations or other transactions in the future. Bay has
never paid any cash dividends on its capital stock, and there can be no
assurance that Bay will do so.
MERGER SUB
Merger Sub is a Delaware corporation recently formed by Bay for the sole
purpose of facilitating the Merger. Merger Sub is a wholly-owned subsidiary of
Bay with no assets (other than those received in connection with its initial
capitalization) or liabilities (other than those incurred in connection with its
incorporation).
UNAUDITED PROFORMA FINANCIAL STATEMENTS OF ACCESS BEYOND
While the Spin-off Transaction will take place as described above, the
following unaudited pro forma consolidated financial statements have been
prepared from Penril's historical consolidated financial statements to show the
Modem Business as a pro forma adjustment and Access Beyond, on a proforma basis,
as the continuing entity.
With the exception of historical information, the matters discussed in this
section include forward-looking statements that involve risks and uncertainties.
Penril wishes to caution readers that a number of important factors, including
those identified in this section as well as factors discussed in "Risk Factors"
and elsewhere in this Proxy Statement/Prospectus, could affect Access Beyond's
actual results and cause actual results to differ materially from those in the
forward-looking statements.
PROFORMA BALANCE SHEET
The following unaudited proforma consolidated balance sheet for Access
Beyond has been prepared based upon the historical consolidated balance sheet
for Penril as of July 31, 1996 and giving effect to the Spin-off Transaction and
the events that are directly attributable to that transaction. In the opinion of
Penril's management, all material adjustments necessary to reflect the effects
of the Spin-off Transaction have been made. Such unaudited proforma information
should be read in conjunction with the historical consolidated financial
statements of Penril, including the notes thereto, which are included elsewhere
in this Proxy Statement/Prospectus, and the notes to this unaudited proforma
consolidated balance sheet.
The unaudited proforma consolidated balance sheet has been prepared based
upon assumptions deemed appropriate by the management of Penril, does not
purport to represent what the actual financial position would have been assuming
the Spin-off Transaction had been consummated at July 31, 1996, may not be
indicative of actual results and does not purport to represent the future
financial position of Access Beyond.
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ACCESS BEYOND
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PENRIL ADJUSTMENTS AS ADJUSTED
AS -- MODEM -- ACCESS
REPORTED BUSINESS BEYOND
-------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 4,237 $ $ 4,237
Accounts receivable, net........................... 7,044 3,099(1) 3,945
Inventories........................................ 9,684 4,261(2) 5,423
Deferred income taxes.............................. 1,700 1,700(3) --
Net assets of discontinued operations.............. 7,337 -- 7,337
Other current assets............................... 249 75(2) 174
-------- ----------- -----------
TOTAL CURRENT ASSETS............................ 30,251 9,135 21,116
Property and equipment, net........................ 2,457 346(2) 2,111
Other assets....................................... 1,072 197(2) 875
-------- ----------- -----------
TOTAL ASSETS......................................... $33,780 $ 9,678 $24,102
======== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings.............................. $ 4,000 $ 4,000(4) $ --
Current portion of long-term debt.................. 272 272
Accounts payable................................... 6,076 2,673(5) 3,403
Accrued compensation and commission................ 1,347 121(2) 1,226
Other accrued expenses............................. 1,758 251(2) 1,507
-------- ----------- -----------
TOTAL CURRENT LIABILITIES....................... 13,453 7,045 6,408
Long-term debt, net of current portion............... 633 -- 633
Other noncurrent liabilities......................... 1,479 -- 1,479
-------- ----------- -----------
TOTAL LIABILITIES.................................... 15,565 7,045 8,520
Stockholders' Equity
Common stock....................................... 109 -- 109
Additional paid-in capital......................... 39,837 -- 39,837
Retained earnings (deficit)........................ (21,581 ) 2,633 (24,214)
-------- ----------- -----------
18,365 2,633 15,732
Equity adjustment from foreign currency
translation..................................... (150 ) -- (150)
-------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY........................... 18,215 2,633 15,582
-------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................................. $33,780 $ 9,678 $24,102
======== =========== ===========
<FN>
- ---------------
(1) Adjustments to eliminate estimated Modem Business receivables as of July 31,
1996 based on assumed turnover of receivables to sales.
(2) Adjustments to eliminate specifically identified Modem Business related
assets and liabilities to remain with Penril after the Spin-off Transaction.
(3) Adjustments to eliminate deferred income taxes and other tax benefits to
remain with Penril after the Spin-off Transaction.
(4) Adjustments to eliminate the bank debt to remain with Penril after the
Spin-off Transaction.
(5) Adjustments to eliminate Modem Business related trade payables to remain
with Penril after the Spin-off Transaction.
</TABLE>
PROFORMA STATEMENT OF OPERATIONS
The following unaudited proforma consolidated statement of operations for
Access Beyond has been prepared from the historical results of operations of
Penril. The pro-forma adjustments have been computed
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assuming the Spin-off Transaction had been consummated August 1, 1995. This
statement should be read in conjunction with the historical consolidated
financial statements of Penril including the notes thereto, which are included
elsewhere in this Proxy Statement/Prospectus, the unaudited proforma
consolidated balance sheet appearing above and the notes to this unaudited
proforma consolidated statement of operations.
The unaudited proforma consolidated statement of operations has been
prepared based upon an identification of those costs that could be directly
attributed to the Modem Business. Expenses which were not specifically
identified with either the Modem Business or the Remote Access Business remain
with Access Beyond; consequently the expenses shown for Access Beyond are in
excess of those that would have been incurred had Access Beyond been a stand
alone company. This statement does not purport to represent what the actual
results of operations would have been for Access Beyond had the Spin-off
Transaction been consummated at the beginning of the period, is not indicative
of actual results and does not purport to represent what the results of
operations of Access Beyond may be for future periods.
ACCESS BEYOND
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1996
------------------------------------------
PENRIL, ADJUSTMENTS AS ADJUSTED
AS -- MODEM -- ACCESS
REPORTED BUSINESS(1) BEYOND
-------- ----------- -----------
<S> <C> <C> <C>
Net Revenues from Continuing Operations................ $ 39,435 $19,519(2) $ 19,916
Cost and Expenses:
Cost of revenues..................................... 22,409 9,869(2) 12,540
Selling, general and administrative.................. 18,611 2,321(3) 15,917
373(4)
Product development and engineering.................. 7,389 370(5) 5,624
176(6)
1,219(7)
Amortization of cost over net assets acquired........ 734 734
Provision for restructuring costs.................... 9,718 9,718
Merger related expenses.............................. 500 500
------ ------ ------
59,361 14,328 45,033
Operating Income (Loss) from Continuing Operations..... (19,926) 5,191 (25,117)
Other Expenses:
Interest expenses.................................... (698) (698)
Other, net........................................... (44) (44)
------ ------ ------
(742) -- (742)
Income (Loss) from Continuing Operations Before
Income Taxes......................................... (20,668) 5,191 (26,859)
Benefit from Income Taxes.............................. -- -- --
------ ------ ------
Income (Loss) from Continuing Operations............... $(20,668) $ 5,191 $ (26,859)
====== ====== ======
Net income (loss) per common and equivalent shares..... $ (2.78)
======
Shares used in per share calculations.................. $ 9,650
======
<FN>
- ---------------
(1) The adjustments for the Modem Business are only for those items that can be
directly attributed to the Modem Business.
(2) Adjustments to exclude the Modem Business revenues and associated costs of
sales. Modem Business revenues includes $4.5 million reflecting payment
under a license agreement between Penril and Bay entered into in the fourth
quarter of Penril's fiscal 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Penril and Access
Beyond -- Results of Operations -- Fiscal 1996 Compared to Fiscal 1995."
</TABLE>
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(3) Adjustments to exclude expenses of the Modem Subsidiaries which are
attributable to the Modem Business.
(4) Adjustments to exclude marketing and advertising relating to the Modem
Business.
(5) Adjustments to eliminate rent expense related to Modem Business product
development and engineering.
(6) Adjustments to eliminate Modem Business related depreciation, amortization
and other operating costs.
(7) Adjustments to eliminate Modem Business related engineering labor.
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DESCRIPTION OF PENRIL AND ACCESS BEYOND
PENRIL
General. Penril develops and markets data communications network systems.
Recently, Penril formed a wholly-owned subsidiary named Access Beyond. Prior to
the Merger and Spin-off Transaction, Penril will transfer to Access Beyond as a
capital contribution all of the right, title and interest in all of Penril's
Remote Access Business unrelated to the Modem Business. Upon consummation of the
Merger, Penril will continue development, design and sales of modems and modem
technology.
Description of Modem Business. The modem family of products includes a
variety of products for use in sending data from one point to another via public
or private telephone lines. The mainstay of this product grouping is the V.34
modem. Based on proprietary DSP and controller design, Penril's V.34bis modems
offer many advanced features including data transmission speeds up to 33,600
bits per second, protocol intelligent compression performance (e.g., Internet
Asynchronous PPP and SLIP) and remote software upgradeability for implementation
of future standards.
Modems are delivered in several forms including desktop boxes and modem
cards which implement modems on a single board. In addition to a wide variety of
modem products and capabilities, Penril's modems support sophisticated modem
management capabilities which are sold together with Penril's modem products.
Products are sold through a world wide network of resellers, distributors and
OEMs. Based on the high end functionality of Penril's products, Penril focuses
its sales efforts on large modem installations, including telephone companies
and PTTs world wide.
In the last nine months, Penril has begun aggressive licensing and OEM
development programs involving its advanced modem technology. For semi-conductor
manufacturers, such projects involve the portation of Penril's modem software to
new custom chip environments and the payment of substantial engineering fees and
per chip royalties. For communications companies, projects involve the design of
custom high density modem solutions that integrate with existing customer
products, with anticipated subsequent high volume purchases of such custom
cards.
In addition to high speed modems and modem technology, Penril expects to
continue to sell T1 Customer Premise Equipment. Penril offers a system that
allows multiple telephone and data communications to be transmitted over one
high-speed transmission line at speeds up to 1.54 million bits per second. This
product supports network management, voice, data and video communications as
well as access to long distance carrier networks.
ACCESS BEYOND
General. Access Beyond, which is a Delaware corporation and a wholly-owned
subsidiary of Penril, was recently formed by Penril solely for the purpose of
effecting the Merger and the Spin-off Transaction. Until shortly before the
Merger, Access Beyond will own no material assets and will not conduct any
business activities other than in connection with the Spin-off Transaction and
the Merger. Prior to the Merger, Penril will transfer to Access Beyond, as a
capital contribution, all of the right, title and interest in all of Penril's
Remote Access Business and all other businesses and assets and corresponding
liabilities of Penril unrelated to the Modem Business. Upon consummation of the
Merger, Merger Sub will merge with and into Penril, Penril will become a
wholly-owned subsidiary of Bay, and Access Beyond will continue with its own
separate corporate existence unaffiliated with Penril. The mailing address of
Access Beyond's principal executive office is 1300 Quince Orchard Boulevard,
Gaithersburg, Maryland, 20878 and the telephone number is (301) 921-8600.
While Access Beyond is a newly formed corporate entity, the Remote Access
Business to be contributed to Access Beyond by Penril has an operating history
consisting of the development and sales of LAN and Host Access products and the
development of a new product family called Access Beyond. In connection with the
Remote Access Business, Access Beyond engages in the development and marketing
of network access
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devices which enable local, remote or mobile users to access network resources
located at remote sites, central sites or any other point in the network.
Products. Access Beyond's product line consists largely of products which
serve the LAN and Host Access markets and a new product family called Access
Beyond, serving the remote access market.
The LAN and Host Access products currently sold by Access Beyond include
statistical multiplexers and host access servers (VCX), Ethernet terminal
servers (CSX), Ethernet local and remote bridge routers (BRX), and a line of
CSU/DSU wide area products. Access Beyond's new Access Beyond product family is
targeted at the remote access market, providing a scaleable, modular platform
into which a variety of connectivity options are expected to be offered, and
allowing room for growth and investment protection. The Access Beyond family of
products is expected to replicate the function of most of the LAN and Host
Access products, allowing Access Beyond to phase out LAN and Host Access
products models in favor of new Access Beyond models. Each of the LAN and Host
Access products provides Access Beyond with an existing revenue stream as well
as an installed base. Sales of LAN and Host Access products will initially
provide a significant portion of the revenues of Access Beyond.
The VCX product line of multiplexers ranges from 4-port remote site
multiplexers to enterprise solutions providing up to 304 ports or 36 trunk lines
and multipurpose communication servers that combine both wide area network
("WAN") and LAN capabilities. These products can function as a data PBX, X.25
PAD, statistical multiplexer, terminal server or any combination of these.
Although the market for these products is in decline, Access Beyond continues to
serve the installed base and fulfill customer applications.
The CSX Ethernet communications server family provides local and dialup
access to Ethernet LANs. Available as either 8-port or 16-port stand alone units
or as a modular chassis based solution, the CSX server provides terminal and
dialup access for TCP/IP networks. The BRX family includes modular switching
routers that provide up to 16 LAN ports and 2 WAN ports. A key element to the
BRX product line is in the Constellation software which provides a scaleable
router/switching solution. Access Beyond believes that the Constellation
software, which uses an architecture called Logical Bridge Routing, enables
network managers to optimize bridge/router port configurations for efficient
high performance. The Constellation software is one of the key elements in the
new Access Beyond product line.
Access Beyond anticipates that a wide range of Access Beyond models will be
available to meet varying site requirements, with chassis sizes ranging from
small 4-port units to completely modular 196-port units, thus allowing the user
to customize the chassis-based units to provide a unique mix of LAN and WAN
interfaces that meet the specific demands of its network environment. Interface
options are expected to include: Ethernet backbone and end user ports,
integrated WAN interfaces, analog modems, digital modems, CSU/DSU and ISDN
interfaces. The modularity and scaleability of the Access Beyond product family
is intended to give the customer flexibility in network configuration and
expansion potential.
The first phase of Access Beyond includes Ram Rack, a high density modem
product and Access Beyond 1000 Remote Access Servers, which are now being
shipped to customers. These products provide remote users with competitively
priced remote access to Novell, TCP/IP and Appletalk networks. The next phase of
the Access Beyond rollout is expected to include the Access Beyond 2400 and
Access Beyond 4400 modular chassis systems. These products are designed to
expand the flexibility of the product line with optional interfaces for direct
terminal connections, integrated V.34 modems and integrated ISDN terminal
adapters, along with LAN and high speed WAN (T1/E1/PRI) connectivity.
Access Beyond anticipates that future enhancements to its remote access
software will provide integration of the remote access capabilities with full
multi-protocol routing. This combination is expected to provide additional
connectivity options and reduced access costs for corporate remote access
networks by allowing a single Access Beyond server to replace several separate
competitive devices. The software features of Access Beyond are and will be
focused on solving the problems of corporate remote LAN access. With the growth
of the Internet and the World Wide Web, corporate telecommuters and traveling
employees now require simultaneous support for multiple networking protocols
allowing access to a wide variety of applications. Networking security is
provided via a collection of security options.
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All Access Beyond products will be monitored and configured with a
graphical, menu-driven Windows-based management tool that provides real-time
management control over the Access Beyond products. This management tool will be
based on the industry standard SNMP protocol to ensure interoperability with
equipment and management systems from other vendors.
Access Beyond expects that it will deliver the industry's first unified
approach to remote access, with one comprehensive product line that can supply
both LAN and WAN technologies required in a single architecture, with complete
management control, and new levels of investment protection for end users.
Existing applications will be changed from dedicated services to faster, lower
cost and more flexible services such as Frame Relay and Ethernet. Access Beyond
is intended to provide a migration path from these older networks to the remote
access networks of the future.
DISCONTINUED OPERATIONS
Technipower. Technipower, a wholly-owned subsidiary of Penril,
manufactures uninterruptible power supplies and power regulating equipment. In
July, 1995, the Penril Board decided to focus more of Penril's resources on its
main business of data communications and therefore discontinued the operations
of Technipower. On July 16, 1996, Penril announced it had entered into an
agreement to sell Technipower, subject to certain contingencies. On October 11,
1996, Penril sold the assets of Technipower for $4.3 million. Penril received
approximately $1.5 million in cash on that date, with the remaining $2.8 million
being due, pursuant to the agreement, on or prior to December 31, 1996. The net
proceeds from the sale will become additional capital of Access Beyond. All
liabilities related to Technipower which otherwise would be the obligations of
Penril will, from and after the Spin-off Transaction, be the obligations of
Access Beyond.
EMI. Another wholly-owned subsidiary of Penril, EMI, specializes in the
production of sophisticated high frequency electronic instrumentation equipment.
The Penril Board determined to sell EMI and therefore EMI has been classified as
a discontinued operation. Penril is in the process of selling EMI. However,
because it is unlikely that EMI will be sold prior to consummation of the
Spin-off Transaction, it is anticipated that the assets and liabilities of EMI
will be contributed to Access Beyond as part of the Spin-off Transaction.
PROPERTIES
Penril. Penril owns no real property. Penril conducts most of its
operations from its corporate headquarters located in Gaithersburg, Maryland
under an operating lease which expires on September 30, 1999. The lease for the
Gaithersburg corporate headquarters is for approximately 54,874 square feet.
Penril has an option to extend the term of the lease for one additional term of
119 months. Upon consummation of the Merger, it is anticipated that Penril will
sublease all of the premises in its corporate headquarters to Access Beyond,
from which Access Beyond will operate. In addition, Penril, after the Merger,
will be obligated under an operating lease for premises located at 22 First
Field Road in Gaithersburg, Maryland. This lease is for approximately 22,643
square feet and expires in 1999. Penril has an option to extend the term of the
lease for one additional term of 119 months, provided that Penril is not in
default under the terms of the lease for the Quince Orchard Boulevard premises.
Finally, Penril will, after the Merger, also be obligated under a lease for a
location having approximately 6,800 square feet used by one of the Modem
Subsidiaries located in Tempest Business Center on Kingsclere Road, Basingstoke,
England.
Access Beyond. Upon consummation of the Spin-off Transaction, Access
Beyond's executive offices will be located in Gaithersburg, Maryland in
facilities which Access Beyond will sublease from Penril. The overlease is for
54,874 square feet and expires on September 30, 1999. The sublease between
Penril and Access Beyond will commence upon consummation of the Distribution, or
upon Access Beyond's occupancy of the property, whichever is earlier, and will
provide for the sublease of all of the premises with an expiration date of
September 30, 1999. Access Beyond will assume all costs and expenses under the
overlease including rental payments. Access Beyond's monthly payment for rent
and additional charges will be approximately $66,219. In addition, upon
consummation of the Spin-off Transaction, Access Beyond will assume all lease
obligations of Penril other than those discussed above; provided, however, that
notwithstanding such assumption by Access Beyond, Penril will remain obligated
under the terms of the leases. Access Beyond will
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own no real property. Access Beyond and its subsidiaries will continue to lease
a research and development facility in Carlstadt, New Jersey. This lease is for
approximately 44,403 square feet and expires in September, 2001. In addition to
the facilities mentioned above, Access Beyond will also lease several sales
offices throughout the United States. Access Beyond believes its properties will
be adequate for its needs.
In addition, EMI is a party to a lease for a manufacturing facility located
in Johnstown, New York containing approximately 40,400 square feet (the "EMI
Lease"). The EMI Lease expires in August, 2005. In the event EMI is not sold
prior to consummation of the Spin-off Transaction, the aforementioned lease
obligations of EMI will be contributed by Penril to Access Beyond as part of the
Remote Access Business. Technipower is party to a lease for a manufacturing
facility located in Danbury, Connecticut containing approximately 30,000 square
feet (the "Technipower Lease"). The Technipower Lease expires in February, 1998.
Notwithstanding the sale of Technipower, Penril may remain contingently
obligated under the terms of the Technipower Lease. See "-- Discontinued
Operations."
LEGAL PROCEEDINGS
Penril is a party to several material legal proceedings as summarized
below. With the exception of the proceeding against Rockwell International
Corporation, et. al., and one other legal proceeding incurred in connection with
the Modem Business, all costs, expenses, liabilities and obligations of the
litigations will be assumed by Access Beyond in connection with the Spin-off
Transaction and all recoveries from such litigation will be realized by Access
Beyond; provided, however, that Penril may be deemed to have remained
contingently liable for satisfaction of the obligations. Penril believes it has
adequately reserved against such claims and lawsuits, and any ultimate liability
arising out of such claims and lawsuits will not have a material adverse effect
on the financial condition or operations of Penril or Access Beyond.
On December 24, 1994, Penril filed a complaint against Network Systems
Corporation of Minneapolis, Minnesota ("NSC") in the Circuit Court of Maryland
for Montgomery County. The litigation arises out of a contract in which Penril
agreed to develop certain computer hardware and software to NSC's
specifications. Penril alleges breach of contract, fraudulent inducement and
defamation and is seeking specific performance, compensatory damages of
$2,000,000 and punitive damages of $5,000,000. On March 28, 1995, NSC filed an
answer and counterclaim in which NSC alleges negligent misrepresentation, fraud
and breach of contract by Penril. NSC is seeking rescission of the contract,
restitution of monies paid by NSC to Penril, compensatory damages of $5,000,000
and punitive damages in an unspecified amount. As of September 30, 1996, the
litigation was in the discovery stage. Penril believes the counterclaim of NSC
is without merit.
On December 6, 1995, Penril filed a lawsuit against Rockwell International
Corporation and U.S. Robotics Access Corporation seeking declaratory,
injunctive, and money damage relief by reason of an alleged patent infringement
by the defendants. The action was filed in the United States District Court for
the District of Maryland. In September 1996, Penril agreed to settle its lawsuit
with U.S. Robotics Access Corporation. As of September 30, 1996, the litigation
was in the pre-discovery, pleading stage.
On June 1, 1993, Penril initiated a lawsuit against Standard Microsystems
Corp. ("SMC"), SMC Massachusetts, Inc., Ashraf M. Dahad and Kwabena Akufo (the
"SMC Defendants") in the Circuit Court of Maryland for Montgomery County for
breach of contract including, among others, failure to transfer technology,
unfair competition and false representations. Penril sought relief in an
aggregate amount of approximately $50 million. The SMC Defendants subsequently
brought a counterclaim alleging fraud, breach of contract, and seeking recovery
of amounts due under the contract which were alleged to be approximately
$1,650,000 in compensatory damages plus unspecified punitive damages. In
September 1996, Penril and the SMC Defendants agreed to drop the fraud charges
and to settle the contractual dispute. Pursuant to the terms of the settlement,
Penril is to receive from SMC, in settlement of the litigation, $3.5 million,
net of legal fees, in the first quarter of fiscal 1997.
Digital Equipment Corporation ("Digital") has claimed, through a series of
written communications, that Penril has violated Digital patents related to
Digital LAT technology. Penril has taken the position that Datability, Inc.,
prior to its acquisition by Penril had a relationship with Digital that involved
the development of LAT for which Datability has not collected. Both Digital and
Penril have taken the position that it is in both
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parties best interest to work toward a fair resolution. As of September 30, 1996
no formal claims have been filed.
Finally, Penril is also engaged in certain litigation relating to
collection of its accounts receivable.
SUPPLIERS
Material and components for both Penril's and Access Beyond's products are
purchased from outside suppliers. While most components are available from
several suppliers, a few are provided from sole-source vendors. Penril and
Access Beyond each believes that in most cases alternative sources of supply
could be obtained within a reasonable time period; however, an interruption in
the supply of such components could have a temporary adverse effect on each of
Penril's and Access Beyond's operations.
PATENTS, COPYRIGHTS AND LICENSES
Each of Penril and Access Beyond owns, or is licensed or otherwise
possesses legally enforceable rights to use, several patents, patent
applications, trademarks, trade names, service marks, copyrights, schematics,
technology, know-how, computer software programs or applications, and tangible
or intangible proprietary information or material essential and necessary to the
business of Penril and Access Beyond. Each of Penril and Access Beyond may
desire in the future to obtain additional licenses related to its products and
believes, based on industry practice, that any necessary licenses could be
obtained. The costs of such licenses may vary significantly depending on the
nature of the technology involved.
The patents owned by Penril include patents entitled "Precoding Scheme for
Transmitting Data Using Optimally-Shaped Constellations over
Intersymbol-Interference Channels" (jointly owned with the University of
Maryland pursuant to a certain Patent Ownership Agreement, dated April 3, 1996),
"Modem and Method for Eight Dimensional Trellis Code Modulation", and "Radio
Frequency Apparatus for Measuring Moisture Content of Materials as a Function of
Dielectric Constant" (expired on November 3, 1992).
The trademarks, trade names, and service marks owned by Penril include
BIAX, PENRIL, PENRIL CORP., PENRIL DATABILITY NETWORKS, PENRIL DATABILITY
NETWORKS AND THE PENRIL DATABILITY DESIGN, THE PENRIL DATABILITY DESIGN, PENRIL
DATACOMM, and PENRIL DATA COMMUNICATIONS.
Penril currently licenses much of its technology, including multiplexer
base system technology, channel bank system technology, quad voice card
technology, quad analog card technology, high speed data card technology, logic
redundancy technology, drop and insert arrangement technology, networking
technology, V.34 data/fax modem technology, bridge routers and remote access
servers technology, router software technology, V.42bis modem technology,
license under MNP Link protocol technology, and various software licenses.
On June 16, 1996, Penril and Bay entered into a Perpetual License Agreement
whereby Penril licensed Bay certain intellectual property, software, and
technical know-how relating to certain V.34+ Xylogics Octal Modem Cards. The
Effective Date of this Agreement is contingent on certain terms contained in the
Merger Agreement. Should Penril or Bay terminate the Merger Agreement, this
Agreement will become effective under certain circumstances upon the payment by
Bay within 10 business days of giving notice of such termination to Penril of
$50,000,000, but no earlier than December 16, 1996. The agreement contemplates
that Penril will develop an 8 port Digital Modem Card for Bay, train Bay's
personnel in the underlying technology, and provide technical assistance where
necessary to permit Bay to market this digital technology. In addition, in order
to practice the licensed technology, a license under a certain patent must be
granted by Penril to Bay. Penril and Bay will negotiate the terms and conditions
of such license. Such license will be subject to the following conditions: (a)
if Bay makes the payment of $50,000,000 should the Merger Agreement be
terminated, the royalty rate for modems covered by such patent will not exceed
the lesser of $.30 per modem or the lowest rate being charged to any other
licensee of such patent, and (b) if no such payment is made, the royalty rate
will not exceed that being charged to any other licensee manufacturing a
comparable volume of modems under such license. The Perpetual License Agreement
also grants Bay the
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right to hire, within 90 days of its effective date, up to five designated
Penril employees, which employees are important to the Modem Business. Also on
June 16, 1996, Penril and Bay entered into a License Agreement whereby Penril
licensed to Bay certain intellectual property, software and technical know-how
relating to certain V.34+ Xylogics Octal Modem Cards. The License Agreement
terminates December 15, 1996. Bay paid Penril a fee of $4,500,000 upon execution
of the License Agreement.
The patents which are owned by EMI include patents entitled "Fiber Optic
Connector" and "Guard Time Elimination in a TimeDivision Multiplexed, Active
Star-coupled, Half-duplex Mode, Synchronous Communications Network." The United
States trademarks, tradenames and service marks which are owned by EMI includes
ELECTRO-METRICS. These patents, trademarks, tradenames and service marks are
currently intended to be sold as part of the assets of EMI. If the sale of that
subsidiary is not consummated prior to the consummation of the Spin-off
Transaction, these patents, trademarks, tradenames and service marks will be
contributed to Access Beyond in the Spin-off Transaction as part of EMI.
The United States trademarks, tradenames and service marks which will be
owned by Access Beyond upon consummation of the Spin-off Transaction include
ACCESS BEYOND, MULTIVERTER, FORSITE, MUX/ROUTER and SUNUPS.
Access Beyond will license much of its technology including: integrated
access software; CSU/DSU technology; token ring LAN bridge technology; frame
relay assembler disassembler technology; FDDI bridge technology and software;
PC/TCP SNMP technology; ring local area network technology; terminal emulation
software; remote access software; token ring interface card technology and
software; router card technology and software; network management software; and
basic frame relay software for LAN interconnect products.
On June 16, 1996, Penril and Bay entered into a Development and License
Agreement on behalf of Access Beyond whereby Bay licensed to Penril on behalf of
Access Beyond certain intellectual property, software, and technical know-how
relating to certain 24 port Digital Modem Cards. The agreement contemplates that
Bay will develop a 24 port Digital Modem Card for Access Beyond, train Access
Beyond's personnel in the underlying technology, and provide technical
assistance where necessary to permit Access Beyond to market this digital
technology.
Finally, the consummation of the Spin-off Transaction is conditioned upon a
transfer of a license for intellectual property, software and technical know-how
pursuant to the terms of that certain Technology License Agreement to be
executed between Penril and Access Beyond. The Technology License Agreement
contemplates that a third party will develop for Access Beyond a 24 port Digital
Modem Card compatible with and capable of operating together within Access
Beyond's product family, and that Penril will train Access Beyond's personnel in
the underlying technology and provide technical assistance where necessary to
permit Access Beyond to market this digital technology. Access Beyond will pay a
royalty to Penril on the following basis: to the extent that (a) Penril enters
into a cross licensing agreement involving a specified patent and (b) the
technology covered by such patent is incorporated into products sold under this
Agreement, a royalty equal to the per modem royalty rate which Penril pays as a
result of such cross license for every modem that Access Beyond sells.
BACKLOG
A significant portion of data communications revenues will be based on
customer purchase orders with immediate shipment requirements. Backlog, which
tends not to be significant in data communications products, is a result of the
occasional customer order with future scheduled shipment requirements or
misalignment of demand and production of a particular product. Because data
communications revenues do and will constitute such a significant portion of the
revenues of Penril and Access Beyond respectively, it is the opinion of Penril's
management and of Access Beyond's management that the dollar amount of backlog
at any given time is not indicative of the actual level of revenues which will
ultimately be realized during future periods. Consequently, each of Penril's and
Access Beyond's managements believes that the amount of backlog is not a
material consideration in understanding Penril's or Access Beyond's business
operations.
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COMPETITION
Penril does and Access Beyond will encounter substantial competition in the
marketing of their products and many of their competitors have greater
financial, marketing and technical resources. Important competitive factors in
the markets for each of Penril's and Access Beyond's products are established
customer base, product performance and features, service and support as well as
price. Each of Penril's and Access Beyond's managements believes that its
company will compete favorably with respect to these factors. There can be no
assurance that either of Penril's or Access Beyond's products will compete
successfully with competitive products that may be offered in the future or that
aggressive pricing will not negatively impact the profitability of Penril or
Access Beyond.
EMPLOYEES
As of October 11, 1996, EMI had 72 employees and the rest of Penril had 246
employees. It is currently anticipated that employees working at EMI will remain
employees of that entity when it is sold. As part of the restructuring of
Penril, the Spin-off Transaction and the Merger, 46 employees have been notified
that their employment will be terminated, approximately 160 employees will be
employed by Access Beyond and approximately 40 employees will be employed by
Penril immediately following the Merger. Each of Penril and Access Beyond
believes that its future success will depend largely on its ability to retain
certain key personnel and to recruit and retain additional highly skilled
employees who are in great demand. Penril has and Access Beyond will have
employment contracts with certain officers, but does not and will not have
employment contracts with its other employees.
Penril is not a party to any collective bargaining agreement with its
employees. Penril has not experienced work stoppages and believes that its
employee relations are satisfactory.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PENRIL AND ACCESS BEYOND
GENERAL BUSINESS DEVELOPMENTS
Beginning in fiscal year 1994, Penril began to focus its business on remote
access connectivity products. Out of this strategy came Penril's new Remote
Access Business. The first phase of the new Remote Access Business includes the
Ram Rack and the Access Beyond 1000 Remote Access Server.
As part of this strategy, the Penril Board made the decision to sell EMI
and consequently, EMI has been classified as a discontinued business. Penril
continues to operate EMI and expects EMI to operate at least at a break-even
level through the anticipated disposition date, which Penril's management
believes will be completed by December 31, 1996. Prior to the end of fiscal
1996, Penril entered into an agreement, subject to certain contingencies, to
sell Technipower. The sale was completed on October 11, 1996 for $4.3 million.
Penril received approximately $1.5 million in cash on that date, with the
remaining $2.8 million being due, pursuant to the agreement, on or prior to
December 31, 1996. Penril recorded a charge of $640,000 in the fourth quarter of
fiscal 1996 for the estimated loss on disposal of both these businesses. No
assurance can be given that EMI will be sold or that the timing or terms of any
such sale will be favorable to and as anticipated by Penril.
Under the terms of the Merger Agreement, Penril will transfer all of its
Remote Access Business and any other assets unrelated to the Modem Business to
Access Beyond and then distribute all of the shares of AB Common Stock to
Shareholders. Following the Spin-off Transaction, Merger Sub will merge with and
into Penril, whose primary remaining operations will consist of the Modem
Business, with Penril becoming a wholly-owned subsidiary of Bay.
As a result of all of the above items, in the fourth quarter of fiscal
1996, Penril took actions to strategically restructure the business to focus on
the remote access connectivity products, to reduce costs and to improve
competitiveness for the long term. This restructuring plan includes the
elimination of the VCP and BRX product lines and the introduction of the new
Remote Access Business. The decision to restructure and refocus is not dependent
upon consummation of the Merger. As a result of this decision to restructure the
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business, Penril recorded a charge in the fourth quarter of fiscal 1996 of $9.7
million. This charge consisted of a write-down of costs in excess of net assets
acquired ($5.0 million), a provision for costs associated with contractual
obligations for leased facilities in Hong Kong and Carlstadt, New Jersey ($1.0
million), a provision for the write-down of purchased technology ($1.0 million),
a provision for the write-down of inventories and fixed assets ($2.3 million),
and a provision for costs associated with termination of approximately 90
employees ($400,000).
On an annualized basis this plan is expected to reduce labor costs by
approximately $3 million, reduce amortization and depreciation expenses by
approximately $700,000, and reduce facilities expenses by approximately
$300,000. Access Beyond anticipates completion of the employee terminations and
consolidation of leased facilities by the end of the second quarter of fiscal
1997, and does not anticipate any additional costs associated with this
restructuring plan.
With the exception of historical information, the matters discussed in this
section include forward-looking statements that involve risks and uncertainties.
Penril and Access Beyond wish to caution readers that a number of important
factors, including those identified in this section as well as factors discussed
in "Risk Factors" and elsewhere in this Proxy Statement/Prospectus, could affect
Access Beyond's actual results and cause actual results to differ materially
from those in the forward-looking statements.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1996, Penril adopted the provisions of Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires
Penril to review long-lived assets, certain identifiable intangibles, and
goodwill related to those assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. As a result of events occurring in the fourth quarter of fiscal
1996, Penril decided to restructure and refocus its remaining businesses. Due to
these events, Penril determined that the excess of costs over net assets
acquired would not be recoverable, and a charge of $5.0 million was taken in the
fourth quarter of fiscal 1996 against the carrying value of this asset. This
charge was the remaining balance in the account "Excess of Cost over Fair Value
of Net Assets Acquired."
During fiscal 1996, Statement of Financial Accounting Standard No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," which establishes a
fair value based method for stock-based compensation plans, was issued. SFAS 123
includes both recognition and measurement provisions and disclosure requirements
for stock-based compensation. Penril has elected not to adopt the recognition
and measurement provisions of SFAS 123. The effect of adopting this statement in
fiscal 1997 is not deemed to be material.
RESULTS OF OPERATIONS
As a result of the Merger Agreement with Bay and the spin-off of the LAN
and Host Access products business in the Spin-off Transaction, the following
discussion is based on the Penril historical financial statements, with revenues
and expenses which could be specifically identified with the modem products
shown separately from the LAN and Host Access products. All revenues and
expenses which could not be specifically identified with the modem products were
included with the LAN and Host Access products, consequently the expenses for
the LAN and Host Access products are in excess of those that would have been
incurred had Access Beyond been a stand alone company. As noted above,
Technipower and EMI are classified as discontinued operations and are not
included in this discussion unless otherwise noted. Dollar amounts are reported
in thousands.
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FISCAL 1996 COMPARED TO FISCAL 1995
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
------- ------- --------
<S> <C> <C> <C>
Revenues:
LAN and Host Access products......................... $19,916 $33,637 $(13,721)
Modem products....................................... 19,519 18,974 545
------- ------- --------
$39,435 $52,611 $(13,176)
======= ======= ========
</TABLE>
The decrease in revenues for Penril's LAN and Host Access products was
primarily attributable to the continued decline in market demand for terminal
servers and multiplexers which resulted in lower volumes and more competitive
pricing. Access Beyond intends to phase out these products, which represent
older technology, and introduce its new Remote Access Business. The new Remote
Access Business is designed to meet the growing demand for remote access
technology. Access Beyond believes that its new Remote Access Business has a
unique product architecture that combines both remote access and internetworking
capabilities which will offer expanded and fully compatible capabilities to the
existing customer base as well as offering new customers a product line which
will be state of the art in remote access. Access Beyond believes that this new
Remote Access Business will be competitively priced and will generate revenues
over the next fiscal year to offset the decline in revenue from its older LAN
and Host Access products.
In the fourth quarter of fiscal 1996, Penril and Bay entered into a License
Agreement whereby Bay acquired a license to certain intellectual property rights
related to Penril's modem technology, and Penril was paid $4.5 million. Revenues
for the Modem Business without this license agreement would have been $15.0
million in fiscal 1996 compared with $19.0 million in fiscal 1995. The decrease
in revenue from the sale of modem products was due to slower than expected sales
of Penril's V.34 modems, and a decline in sales of older modem products. Penril
believes that more competitive pricing of its new V.34 modems will result in
higher revenues for fiscal 1997 compared to fiscal 1996, and that these higher
revenues should offset the continued decline in sales of older modem products.
Exports represented 44% of Penril's total revenues in fiscal 1996 and 45%
of Penril's revenues in fiscal 1995. Approximately 60% of Penril's exports
related to modem products in both fiscal 1996 and fiscal 1995. Revenues from
Penril's foreign subsidiaries, which are primarily sales and marketing
operations (in England and Hong Kong), represented 7% of Penril's total revenues
in fiscal 1996 and 5% of Penril's total revenues in fiscal 1995, and over 95% of
those revenues were generated from the subsidiary in England. Due to the growing
demand worldwide for data communications products, Penril believes it will
continue to generate revenue from exports of both its LAN and Host Access
products and its modem products. Because of the location of its primary foreign
subsidiary, Penril does not believe it has any significant exposure to exchange
rate risk.
In the three years ended July 31, 1996, foreign operations have generated
net losses after eliminations of $401,000, $49,000 and $625,000 respectively,
while domestic operations generated net losses of $20.3 million in fiscal 1996,
net losses of $5.1 million in fiscal 1995, and net income of $2.5 million in
fiscal 1994. Penril's foreign operations are sales and distribution locations
dealing primarily with modem products and performing no manufacturing. The net
losses from foreign operations are due to greater price competitiveness, which
has caused a decline in gross profit margins. In addition, Penril has pursued an
expansion in its foreign operations sales force resulting in an increase in
operating expenses. The net losses from Penril's domestic operations in fiscal
1996 included a restructuring charge of $9.7 million and merger related expenses
of $500,000. The net losses from Penril's domestic operations in fiscal 1996 and
1995 were due to lower sales volumes and higher absorption of manufacturing
variances and other fixed charges related to Penril's domestic manufacturing
operation, compared to fiscal 1994. Penril's domestic manufacturing operations
perform all manufacturing for Penril and consequently must absorb all of the
unfavorable manufacturing variances resulting from the lower sales volumes.
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As a result of the Merger Agreement with Bay, Penril's foreign operations
related to the modem products will remain with Penril. Therefore, Penril's
management believes that following the Spin-off Transaction, Access Beyond's
foreign operations will be significantly reduced.
As a result of the restructuring plan, the Hong Kong subsidiary will be
phased out in fiscal 1997, and sales and marketing operations will be performed
from the U.S. Penril does not anticipate that the restructuring plan will have a
material effect on revenues for either the modem products or the LAN and Host
Access products.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1996 1995 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Gross Profit Margin:
LAN and Host Access products.......................... 37% 46% (9%)
Modem products........................................ 49% 41% 8%
</TABLE>
The decrease in the gross profit margins for LAN and Host Access products
was due to reductions in product pricing in order to remain competitive in the
market place, and increases in manufacturing inefficiencies due to lower sales
volumes. As noted above, Penril entered into a License Agreement with Bay in the
fourth quarter of fiscal 1996 for $4.5 million. Gross profit margins without
this License Agreement would have been 34% in fiscal 1996 compared to 41% in
fiscal 1995. The decrease in gross profit margins for modem products was due to
higher costs of materials in the V.34 modem product line as well as pricing
competition and lower manufacturing efficiencies related to the lower sales
volume.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
------- ------- -----
<S> <C> <C> <C>
Selling, general and administrative expenses:
LAN and Host Access products............................ $16,417 $16,479 $ (62)
Modem products.......................................... 2,694 2,286 408
------- ------- -----
$19,111 $18,765 $ 346
======= ======= =====
</TABLE>
Selling, general and administrative expenses decreased for the LAN and Host
Access products primarily from lower commissions paid due to lower sales volume.
There was also a reduction in personnel costs as a result of eliminating several
administrative positions in Penril's Gaithersburg, Maryland facilities during
fiscal 1995. This reduction was partially offset by a charge of $500,000 during
the fourth quarter of fiscal 1996, for costs incurred related to the Merger. All
expenses which could not be specifically identified with the modem products were
included with the LAN and Host Access products, consequently the expenses for
the LAN and Host Access products are in excess of those that would have been
incurred had Access Beyond been a stand alone company.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
------ ------ -----
<S> <C> <C> <C>
Product development expenses:
LAN and Host Access products.............................. $5,624 $5,520 $ 104
Modem products............................................ 1,765 1,918 (153)
------ ------ -----
$7,389 $7,438 $ (49)
====== ====== =====
</TABLE>
Product development expenses for the LAN and Host Access products increased
because of an increase in personnel costs related to development of the new
Remote Access Business. Modem product development expenses decreased because of
reductions in personnel costs as a result of Penril's cost reduction efforts in
fiscal 1995. All expenses which could not be specifically identified with the
modem products were included with the LAN and Host Access products, consequently
the expenses for the LAN and Host Access products are in excess of those that
would have been incurred had Access Beyond been a stand alone company.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
---- ------ -----
<S> <C> <C> <C>
Interest expense............................................. $698 $1,228 $(530)
</TABLE>
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During fiscal 1996, Penril sold Penril Common Stock in private placements
which generated approximately $14.7 million in cash. A portion of the proceeds
was used to repay all term debt during fiscal 1996, which resulted in decreased
interest expense.
FISCAL 1995 COMPARED TO FISCAL 1994
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1994 CHANGE
------- ------- -------
<S> <C> <C> <C>
Revenues:
LAN and Host Access products.......................... $33,637 $39,011 $(5,374)
Modem products........................................ 18,974 22,827 (3,853)
------- ------- -------
$52,611 $61,838 $(9,227)
======= ======= =======
</TABLE>
The decrease in revenues for the LAN and Host Access products was primarily
attributable to the declining market for terminal servers and multiplexers as
these products were reaching the end of the product life cycle, and to a
decrease in orders from some of Penril's OEM customers. The decrease in revenues
from modem products was due to unexpected delays in shipment of the V.34 and
V.34bis modems. Part of this delay resulted in a decline in total exports to
$23.6 million in fiscal 1995 from $25.6 million in fiscal 1994.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Gross Profit Margin:
LAN and Host Access products........................ 46% 54% (8%)
Modem products...................................... 41% 45% (4%)
</TABLE>
The decrease in gross profit margins for LAN and Host Access products was due to
lower manufacturing efficiencies. The decrease in gross profit margins for modem
products was due to costs associated with the initial production of the V.34
modem product line, lower manufacturing efficiencies and pricing competition
related to the decrease in sales.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1994 CHANGE
------- ------- -----
<S> <C> <C> <C>
Selling, general and administrative expenses:
LAN and Host Access products.......................... $16,479 $16,965 $(486)
Modem products........................................ 2,286 1,850 436
------- ------- -----
$18,765 $18,815 $ (50)
======= ======= =====
</TABLE>
Selling, general and administrative expenses decreased for LAN and Host
Access products primarily because of a reduction in personnel costs as a result
of eliminating several administrative positions in Penril's Gaithersburg,
Maryland facilities during fiscal 1995 as part of Penril's cost reduction
program. Selling, general and administrative expenses for modem products
increased primarily due to additional allowances for bad debts.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1994 CHANGE
------ ------ -------
<S> <C> <C> <C>
Product development expenses:
LAN and Host Access products........................... $5,520 $6,797 $(1,277)
Modem products......................................... 1,918 2,020 (102)
------ ------ -------
$7,438 $8,817 $(1,379)
====== ====== =======
</TABLE>
Product development expenses decreased because of reductions in personnel
costs as a result of Penril's cost reduction efforts in fiscal 1995 and 1994.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Interest expense...................................... $1,228 $908 $320
</TABLE>
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<PAGE> 92
Interest expense increased because of the increase in the prime rate from
7% in fiscal 1994 to 9% in fiscal 1995, and because the rate charged Penril by
its principal bank was raised from prime plus 1/2% to prime plus 2%.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, Penril sold 2,607,000 shares of Penril Common Stock in
two unrelated series of private placements which generated aggregate proceeds of
$14.7 million. The aggregate proceeds were used to repay all of Penril's bank
term debt and all its outstanding subordinated debt, which together totaled $4.8
million, and to fund general working capital needs including the loss of $11.1
million (excluding restructuring charges) for fiscal 1996.
As a result of the strategic business plan to restructure Penril, Penril
recorded a restructuring charge of $9.7 million in the fourth quarter of fiscal
1996. This restructuring charge included non-cash items for the write-down of
costs in excess of net assets acquired ($5.0 million), a provision for the
write-down of purchased technology ($1.0 million) and a provision for the
write-down of inventory ($2.2 million). This restructuring charge also included
items that will require future cash expenditures by Access Beyond for employee
severance ($400,000) and obligations for leased facilities ($1.0 million). The
severance payments to employees will occur in the fiscal 1997 second quarter and
the payments under the leased facilities obligations will occur over the
remaining life of the lease with $282,000 due in fiscal 1997, $289,000 due in
fiscal 1998 and $440,000 due after fiscal 1998.
As a result of lower than expected sales and the buildup of inventory to
support the new Remote Access Business, inventory levels of Penril increased
$1.3 million during the first nine months of fiscal 1996. Consequently, Penril
started a program to reduce inventories that resulted in a fourth quarter
reduction of approximately $750,000. In addition, as noted above, Penril
recorded an inventory write-down provision of $2.2 million as part of the
restructuring charge. These actions resulted in Penril's inventory levels
declining to $9.7 million at July 31, 1996, or a reduction of $1.7 million below
the July 31, 1995 inventory level of $11.4 million.
Contributing to Penril's cash flow in fiscal 1996 was a reduction in
accounts receivable of $6.5 million. This reduction was the result of the lower
sales volumes in fiscal 1996 compared to fiscal 1995 and an aggressive
collection effort that reduced the average collection time from 94 days in
fiscal 1995 to 65 days in fiscal 1996.
Penril's accounts payable declined by $2.1 million, also as a result of the
lower level of business.
As part of the Spin-off Transaction, Access Beyond is to receive all the
cash and cash equivalents of Penril. As of September 25, 1996, Penril had cash
and cash equivalents of approximately $3.8 million. In addition, Penril is
expected to generate cash from several non-operating sources. These anticipated
sources include the following:
Penril settled a law suit with Standard Micro Systems Corp. on
September 24, 1996. Pursuant to the settlement agreement, Penril is to
receive, in October 1996, $3.5 million in cash after all related expenses
have been paid.
On October 11, 1996, Penril sold the assets of Technipower for $4.3
million. Penril received approximately $1.5 million in cash on that date,
with the remaining $2.8 million payment being due, pursuant to the terms of
the agreement, on or prior to December 31, 1996.
Penril is in discussions with a potential buyer of EMI. Although there
can be no assurance that a sale of EMI will occur, Penril's management
believes that the sale of EMI will be completed by December 31, 1996 with
expected net cash proceeds of $3.0 million to $3.5 million after
transaction expenses.
As part of the Merger Agreement with Bay, Access Beyond will receive $1.5
million at the Effective Time pursuant to a Transitional Services Agreement with
Penril.
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Between September 25, 1996 and the Spin-off Transaction, Penril also
anticipates receiving approximately $5 million from the exercise of employee and
non-employee director stock options. Of this amount, approximately $4.6 million
was received between September 25, 1996 and October 11, 1996. The cash generated
from the exercises is expected to be used for the expenditures related to the
Merger and the Spin-off Transaction. These expenditures include legal and
accounting fees of approximately $650,000, investment banker fees of
approximately $1.3 million and change of control payments due to certain
officers of Penril of $1.3 million.
Penril currently has a line of credit with its principal bank. The
agreement provides a maximum working capital facility of $5.5 million with
borrowing based on qualified accounts receivable and secured by substantially
all of Penril's assets. Interest accrues at the bank's prime rate plus 2% with a
commitment fee of 3/8% on the unused portion of the facility. In the event the
facility is canceled prior to its expiration, there is a fee due the bank equal
to 3% of the total facility. As of July 31, 1996, Penril had borrowed $4 million
under the line and had utilized another $90,000 in connection with a standby
letter of credit. Pursuant to the Merger Agreement, after the Merger Penril will
retain bank debt up to a maximum of $4 million.
Currently there are discussions with lending institutions regarding a line
of credit for Access Beyond after the Spin-off Transaction. Penril believes
Access Beyond will be able to secure a line of credit after the Spin-off
Transaction, although there can be no assurances that a line of credit will be
secured, and if secured will be on economic terms favorable to Access Beyond.
Penril's management believes that during the first 12 months following the
Spin-off Transaction Access Beyond will have cash expenditures of approximately
$2.2 million for fixed assets and capitalized technology purchases and $700,000
related to the employee severance and lease obligations noted above.
Immediately following the Spin-off Transaction, management believes Access
Beyond will have $7.8 million in cash as well as the right to receive a payment
of $2.8 million from the sale of Technipower and possibly proceeds from the sale
of EMI. Based on Access Beyond's expectation with respect to product development
and production, Access Beyond's cash from operations alone will not satisfy
Access Beyond's cash requirements during the first 12 months following the
Spin-off Transaction. However, Access Beyond expects that cash on hand as noted
above, cash from operations and cash from the sources discussed above, will
satisfy Access Beyond's cash requirements during the first 12 months after the
Spin-off Transaction. There can be no assurance that product development will
proceed at the expected pace, that Access Beyond's sales will achieve expected
levels, that staffing and facilities required will be able to be maintained at
the reduced levels expected under the restructuring plan referred to above, or
that other competitive factors will not result in cash from operations being
less than expected by management. However, Access Beyond has the ability to
defer product development and marketing expenditures if necessary, to match with
cash flow. The deferral of these expenditures could have a negative impact on
future sales of Access Beyond's products. Access Beyond believes, based on its
expected cash on hand, cash from operations, cash from the sources discussed
above and the anticipated bank line of credit, that there will be adequate cash
flow to fund Access Beyond's operations.
FINANCIAL INFORMATION FOR THE MODEM BUSINESS
Penril has not accounted for the Modem Business as a business segment, nor
maintained separate historical accounting records for the Modem Business. In
addition, certain asset, liability, equity, revenue, and expense accounts of
Penril are not divisible by product line. Therefore, the preparation of
comprehensive financial statements for the Modem Business, including a balance
sheet, statement of operations, statement of equity, and statement of cash
flows, is not necessarily meaningful or appropriate in presenting the accounts
of the Modem Business to be sold. Accordingly, a statement of assets and
liabilities to be sold and statements of revenues and identified operating
expenses have been presented based upon the assumptions described below.
The unaudited statement of assets and liabilities to be sold, which
represents the assets and liabilities associated with the Modem Business, has
been derived from the historical consolidated balance sheet of Penril as of July
31, 1996. Included are certain assets and liabilities including accounts
receivable, inventories, property, certain other assets, accounts payable,
accrued compensation, and certain other liabilities specifically
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<PAGE> 94
associated with the Modem Business or the portion related to the Modem Business
that can be reasonably estimated. Cash and equity accounts are considered
indivisible from Penril as a whole, and accordingly, these accounts have not
been allocated in the statement of assets and liabilities to be sold.
The unaudited statements of revenues and identified operating expenses
which are associated with the Modem Business have been derived from the
historical consolidated statements of operations of Penril for the periods
presented. There are several items including revenues, cost of revenues and
certain operating expenses that have been specifically identified with the Modem
Business.
In the opinion of Penril's management, the assumptions used in the
preparation of these statements are reasonable in appropriately identifying the
assets and liabilities to be sold, and the revenues and identified operating
expenses associated with the Modem Business.
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<PAGE> 95
STATEMENT OF ASSETS AND LIABILITIES
TO BE SOLD WITH THE MODEM BUSINESS
(Unaudited -- In thousands)
ASSETS
<TABLE>
<CAPTION>
AS OF
JULY 31, 1996
--------------
<S> <C>
Current Assets
Cash........................................................................... $ --
Accounts receivable............................................................ 3,099
Inventories.................................................................... 4,261
Deferred income taxes per contract............................................. 1,700
Other current assets........................................................... 75
--------------
TOTAL CURRENT ASSETS...................................................... 9,135
Property and Equipment, net...................................................... 346
Other assets..................................................................... 197
--------------
TOTAL ASSETS................................................................... $ 9,678
==========
LIABILITIES
Current Liabilities
Bank debt...................................................................... $ 4,000
Accounts payable............................................................... 2,673
Accrued compensation........................................................... 121
Other current liabilities...................................................... 251
--------------
TOTAL LIABILITIES......................................................... 7,045
--------------
NET ASSETS....................................................................... $ 2,633
==========
</TABLE>
See notes to financial statements.
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<PAGE> 96
STATEMENTS OF REVENUE AND IDENTIFIED OPERATING EXPENSES
OF THE MODEM BUSINESS
(Unaudited -- In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenue........................................................ $19,519 $18,974 $22,827
Identified Operating Expenses
Cost of revenues............................................. 9,869 11,109 12,512
Penril Ltd. expenses......................................... 2,321 1,928 1,485
Engineering project labor.................................... 1,219 549 581
Rent expense................................................. 370 336 307
Modem specific marketing and advertising..................... 373 358 365
Depreciation, amortization and other specifically identified
modem expenses............................................ 176 186 229
------- ------- -------
Total Identified Costs and Expenses.......................... 14,328 14,466 15,479
------- ------- -------
Net Contribution............................................... $ 5,191 $ 4,508 $ 7,348
======= ======= =======
<FN>
- ---------------
Notes
1. Business Description
On June 16, 1996, as amended August 5, 1996, Penril entered into the Merger
Agreement with Bay, subject to approval by the Shareholders. As a condition of
and in order to facilitate the Merger, immediately prior thereto, Penril will
transfer all of the remote access products business and substantially all of the
other businesses, assets and liabilities unrelated to the Modem Business to a
newly-formed, wholly-owned subsidiary named Access Beyond, Inc. and will
distribute to its Shareholders all the capital stock of Access Beyond. The Modem
Business will be the only business of Penril at the time of the Merger.
The Modem Business has not been accounted for by Penril as a segment and
consequently Penril has not historically maintained separate records relating to
the Modem Business. However, there are several items including revenues, cost of
revenues, and certain operating expenses that have been identified as they
relate to the operation of the Modem Business. In addition, certain assets and
liabilities including accounts receivable, inventories, property, certain other
assets, accounts payable, accrued compensation, and certain other liabilities
specifically associated with the Modem Business or the portion related to the
Modem Business can be reasonably estimated. These statements have been prepared
from this available information. Cash and equity accounts are based on all of
the financial records of Penril, not a portion of Penril. Because these
statements are for a product line and not for Penril, a statement of cash flow
and a statement of equity are not applicable.
Pursuant to the Merger Agreement with Bay, although not specifically associated
with any product line, all cash (other than $1,262,500 for certain change of
control payments to three Penril officers at or prior to the consummation of the
Merger) will be contributed to Access Beyond in connection with the Spin-off
Transaction and outstanding bank debt up to $4 million will remain with Penril.
These items have been so reflected in these statements.
The modem business is involved in the development and marketing of high
performance modems and modem technology. Penril markets its products to a broad
range of distributors, value-added resellers and original equipment
manufacturers.
2. Summary of Significant Accounting Policies
Revenue Recognition: Revenues are recognized at the time of shipment of the
product or performance of product-related services.
</TABLE>
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<PAGE> 97
Cash: In connection with the Spin-off Transaction, no cash will remain with
Penril (other than $1,262,500 for certain change of control payments to three
Penril officers at or prior to the consummation of the Merger).
Inventories: Inventories are based on items used exclusively in the modem
business and an allocation of raw materials used in both modem and non-modem
products. The inventories include the cost of material and, when applicable,
labor and manufacturing overhead. Costs are stated at the lower of cost
(first-in, first-out method) or market.
Property, Equipment and Depreciation: Additions to property and equipment are
recorded at cost. Penril provides depreciation for financial purposes using
primarily the straight-line method over the estimated useful lives of the assets
which range from 3-10 years.
Leasehold improvements are amortized over the term of the related lease or the
estimated useful lives, whichever is shorter.
Deferred Income Taxes: Deferred income tax assets and liabilities are computed
for differences between financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future. A
valuation allowance is established to reduce deferred tax assets to the amount
expected to be realized. Pursuant to the Merger Agreement, net tax assets remain
with Penril.
Accounts payable: Accounts payable amounts have been assigned based on an
estimate by Penril's management as to the portion applicable to modem versus
non-modem product lines.
3. Bank Financing
Pursuant to the Merger Agreement, outstanding bank debt of up to $4 million will
remain with Penril after the Spin-off Transaction.
The credit agreement with Penril's principal bank provides for a maximum working
capital facility of $5,500,000 with borrowings based on qualified accounts
receivable and secured by substantially all of Penril's assets. Interest accrues
at the bank's prime rate plus 2% with a commitment fee of 3/8% assessed on the
unused portion of the facility. In the event the facility is cancelled prior to
its expiration, there is a fee due the bank equal to 3% of the total facility.
The agreement expires March 31, 1997. As of July 31, 1996, Penril had $5,412,000
available of which Penril had utilized $4,000,000, for working capital loans and
$90,000 for an outstanding standby letter of credit.
4. Balance Sheet Detail
<TABLE>
<S> <C>
Inventories:
Raw material............................................................... $3,000
Work in process............................................................ 160
Finished goods............................................................. 1,101
------
Total inventories.......................................................... $4,261
======
Property and Equipment,net:
Machinery and equipment.................................................... $1,170
Leasehold improvements..................................................... 27
------
Total property and equipment, at cost........................................ $1,197
Less accumulated depreciation and amortization............................. (851)
------
Total property and equipment, net............................................ $ 346
======
</TABLE>
DESCRIPTION OF BAY CAPITAL STOCK
The following summary of the terms of Bay's capital stock does not purport
to be complete and is qualified in its entirety by reference to the applicable
provisions of Delaware law and the Bay Articles of Incorporation, as amended
(the "Bay Charter").
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<PAGE> 98
The authorized capital stock of Bay consists of 300,000,000 shares of Bay
Common Stock and 1,000,000 shares of Preferred Stock, $.001 par value ("Bay
Preferred Stock").
BAY COMMON STOCK
As of September 30, 1996 there were approximately 188,468,183 shares of Bay
Common Stock outstanding held of record by approximately 4,456 stockholders.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Bay Common Stock are entitled to receive ratably such
dividends as may be declared by the Bay Board out of funds legally available
therefor. Bay has not paid any cash dividends on its Common Stock and is
prohibited by certain of its borrowing arrangements from paying cash dividends
without prior approval from the relevant lender. Each holder of Bay Common Stock
is entitled to one vote for each share held of record by him or her and may not
cumulate votes for the election of directors. In the event of a liquidation,
dissolution or winding up of Bay, holders of Bay Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Bay Common
Stock have no preemptive rights and have no rights to convert their Common Stock
into any other securities and there are no redemption provisions with respect to
such shares. All of the outstanding shares of Bay Common Stock are fully paid
and non-assessable.
The transfer agent for Bay Common Stock is The First National Bank of
Boston Shareholder Services.
PREFERRED STOCK
As of June 30, 1996, there were no shares of Bay Preferred Stock
outstanding. The Bay Preferred Stock may be issued from time to time in one or
more series. The Bay Board has authority to fix the designation, preferences,
and rights of each such series and the qualifications, limitations and
restrictions thereon and to increase or decrease the number of shares of such
series (but not below the number of shares of such series then outstanding),
without any further vote or action by the shareholders. The Bay Board has
created one series of Bay Preferred Stock, designated as Series A Preferred
Stock (the "Series A Preferred Stock). There are 500,000 shares of Bay Preferred
Stock designated as Series A Preferred Stock. Dividends are paid quarterly at a
rate equal to the greater of $175,000 or 1,000 times the aggregate share amount
of all cash dividends and 1,000 times the aggregate per share amount of all
non-cash dividends declared on the Bay Common Stock during the immediately
preceding quarterly dividend period, subject to adjustment. Each share of Series
A Preferred Stock entitles the holder thereof to 1,000 votes on all matters
submitted to holders of Bay stock. Holders of Series A Preferred Stock are
entitled, in the event of liquidation, dissolution or winding up of Bay, to
receive the greater of $175,000 per share or 1,000 times the aggregate amount to
be distributed per share to holders of the Bay Common Stock, as adjusted. Series
A Preferred Stock is not redeemable.
STOCKHOLDER RIGHTS PLAN
In February 1995, the Bay Board declared a dividend distribution of one
Preferred Stock Purchase Right (each a "Right" and collectively the "Rights")
for each outstanding share of Bay Common Stock. The distribution was paid as of
February 23, 1995, to shareholders of record on that date and subsequently to
holders of shares issued after that date. Each Right entitles the registered
holder to purchase from Bay one one-thousandth share of Bay Series A Preferred
Stock at an exercise price of $175 per such portion of a share (the "Exercise
Price").
The description and terms of the Rights are set forth in the Rights
Agreement dated as of February 7, 1995 (the "Rights Agreement") between Bay and
First National Bank of Boston, as the Rights Agent, a copy of which is attached
to Bay's Registration Statement of Form 8-A filed with the Commission on
February 14, 1995. The Rights will expire February 6, 2005, unless earlier
redeemed or exchanged, and will become exercisable and transferable separately
from the Bay Common Stock only (i) on the earlier of (A) the tenth day following
the public announcement by Bay or any person or group (an "Acquiring Person")
that such person or group has acquired, without the approval of the Bay Board,
beneficial ownership of 15% or more of
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<PAGE> 99
the outstanding Bay Common Stock, or (B) the tenth business day (unless extended
by the Board prior to the time a person becomes an Acquiring Person) following
the commencement, or announcement of an intention to commence by any person or
group of persons, a tender offer which would result in the offeror owning 15% or
more of the outstanding Common Stock of Bay (the earlier of such dates being
referred to as the "First Distribution Date", and the two dates collectively
referred to as the "Distribution Date").
If Bay or more than 50% of its assets or earnings power is acquired in a
merger or other business combination transaction after the Distribution Date,
each holder of a Right other than an Acquiring Person shall thereafter have the
right to purchase, upon payment of the Exercise Price, such number of shares of
common stock of the acquiring company having a current market value equal to the
Exercise Price, divided by one-half the current market price of such common
stock. If any person or group acquires 15% or more of Bay's Common Stock, or an
Acquiring Person engages in certain self-dealing transactions (as specified in
the Rights Agreement) with Bay, each holder of Rights other than such Acquiring
Person will have the right to purchase upon payment of the then current Exercise
Price, in lieu of one one-thousandth of a share of Preferred Stock per
outstanding Right, such number of shares of Common Stock having a market value
at the time of the transaction equal to the Exercise Price divided by one-half
the current market value of the Common Stock. After any of these events, Bay may
also exchange all or any portion of the outstanding Rights, other than Rights
held by such Acquiring Person for shares of Bay's Common Stock at an exchange
ratio of one share of Common Stock or one one-thousandth of a share of Preferred
Stock per Right, subject to the provisions of the Rights Agreement. The Bay
Board may redeem the Rights for $.001 per Right at any time prior to the day a
person or group becomes a 15% shareholder.
The Rights are designed to enable all Bay stockholders to realize the full
value of their investment and to provide for fair and equal treatment for all
stockholders in Bay in the event of an unsolicited attempt by an acquiror to
take over Bay Networks in a manner or on terms not approved by the Bay Board.
The Rights may have the effect of rendering more difficult an acquisition of Bay
deemed undesirable by the Bay Board. The Rights may cause substantial dilution
to a person or group that attempts to acquire Bay on terms or in a manner not
approved by Bay's Board, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
OWNERSHIP OF PENRIL COMMON STOCK
The following table sets forth, as of October 11, 1996, based in part on
information provided to Penril by the persons named in the table, the number of
shares of Penril Common Stock owned by the members of the Penril Board, Penril's
Chief Executive Officer and the other executive officers of Penril, all
directors and executive officers as a group, and beneficial owners of more than
5% of the shares of Penril Common Stock. As of October 11, 1996, all Penril
Options held by Penril's directors and executive officers had been exercised.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OWNERSHIP
- ------------------- ----------------------- ----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Henry David Epstein
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 862,179(2) 7.2%
Norman G. Einspruch
P.O. Box 248581
Coral Gables, Florida 33124 36,000 (3)
John P. Lowe, Jr.
30 Corporate Woods
Suite 200
Rochester, New York 14623 51,000 (3)
</TABLE>
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<PAGE> 100
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OWNERSHIP
- ------------------- ----------------------- ----------
<S> <C> <C>
Richard D. Margolis
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378 31,000 (3)
Michael H. Newlin
6517 Wilmett Road
Bethesda, Maryland 20817 12,000 (3)
Howard M. Schneider
130 Liberty Street
New York, New York 10006 21,000 (3)
Ronald A. Howard
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 925,603 7.8%
Richard D. Rose
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 46,667 (3)
C.P. Houston
1300 Quince Orchard Boulevard
Gaithersburg, Maryland 20878 41,667 (3)
All directors and executive officers as a group (10
individuals) 2,027,116 17.0%
Five Percent Shareholders:
Pequot Partners Fund, L.P.,
Pequot Endowment Fund, L.P. and
Pequot International Fund Inc.
354 Pequot Avenue
Southport, CT 06490 1,925,000(4) 16.2%
J.J. Cramer & Co.
56 Beaver Street, Suite 701
New York, New York 10004 1,131,250(5) 9.5%
<FN>
- ---------------
(1) Includes, in certain instances, shares held in the name of an executive
officer's or director's spouse or minor children, the reporting of which is
required by applicable rules of the Securities and Exchange Commission, but
as to which shares the executive officer or director may have disclaimed
beneficial ownership.
(2) This figure is composed of 823,029 shares owned directly by Mr. Epstein, and
39,150 shares Mr. Epstein transferred to Henriette Wenkart Epstein but has
the right to vote so long as she is the beneficial owner of such shares,
pursuant to a seven year, irrevocable proxy.
(3) Less than 1%.
(4) Includes 86,500 shares of Common Stock owned by Dawson-Samberg Capital
Management, Inc., 787,100 shares of Common Stock owned by Pequot Partners
Fund, L.P., a Delaware limited partnership, whose general partner and
investment manager is Pequot General Partners, a Connecticut general
partnership ("General Partners"), 352,900 shares of Common Stock owned by
Pequot Endowment Fund, L.P., a Delaware limited partnership whose general
partner and investment manager is Pequot Endowment Partners, L.P., a
Delaware limited partnership ("Endowment Partners") and 698,500 shares of
Common Stock owned by Pequot International Fund, Inc., a British Virgin
Islands corporation, whose investment manager is DS International Partners,
L.P., a Delaware limited partnership ("International Partners"). (Pequot
Partners Fund, L.P., Pequot Endowment Fund, L.P. and Pequot International
Fund Inc. are collectively referred to as the "Funds"). General Partners,
Endowment Partners and International Partners (collectively, the "Partners")
are the beneficial owners, as such term is used in Rule 13d-3 of the
Exchange Act, of the shares of Common Stock owned by the Fund for which they
act as
</TABLE>
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<PAGE> 101
investment manager, respectively. The Partners may be deemed to constitute a
group as such term is used in Section 13(d)(3) of the Act. Each of the
Partners disclaims beneficial ownership of the Common Stock beneficially
owned by the other partners.
(5) James J. Cramer, President of J.J. Cramer & Co. and Karen Cramer, Vice
President of J.J. Cramer & Co. have shared voting and dispositive power with
respect to the shares held by the Partnership.
DESCRIPTION OF ACCESS BEYOND CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Access Beyond consists of 30,000,000 shares
of common stock, $.01 par value per Share ("AB Common Stock"), and 3,000,000
shares of preferred stock, $.01 par value per share ("AB Preferred Stock").
Immediately after the Spin-off Transaction, it is estimated that approximately
11,993,000 shares of AB Common Stock will be issued and outstanding, assuming
exercise of all of the Penril Options.
AB COMMON STOCK
The holders of AB Common Stock are entitled to one vote for each share held
of record on all matters submitted to the vote of shareholders, including the
election of directors. The holders of AB Common Stock do not have cumulative
voting rights. Subject to any preferential rights held by holders of the AB
Preferred Stock, the holders of AB Common Stock are entitled to receive ratably
such dividends as may be declared from time to time by Access Beyond's Board of
Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of Access Beyond, holders of AB Common
Stock will be entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of outstanding AB Preferred Stock, if
any. Holders of AB Common Stock do not have preemptive, conversion or redemption
rights. All the issued and outstanding shares of AB Common Stock are fully
authorized, validly issued, fully paid and nonassessable.
No current public trading market for the AB Common Stock exists, although
Access Beyond has applied to list the AB Common Stock for trading on the Nasdaq
National Market System. The extent of the market for the AB Common Stock and the
prices at which the AB Common Stock may trade cannot be predicted. Until the AB
Common Stock is distributed and an orderly market develops, the trading price
may be volatile.
After the Spin-off Transaction, Access Beyond will be an independent,
publicly-traded company. The number and identity of stockholders of Access
Beyond immediately after the Spin-off Transaction cannot currently be determined
with certainty based on the number and identity of stockholders of Penril on the
Spin-off Record Date. However, based on the number of record stockholders and
outstanding shares of Penril Stock as of the close of business on October 11,
1996, the anticipated exercise of outstanding Penril Options and the
distribution ratio of one share of AB Common Stock for every one share of Penril
Stock, Access Beyond expects to have approximately 920 holders of record of AB
Common Stock and 11,993,000 shares of AB Common Stock and no shares of AB
Preferred Stock issued and outstanding immediately after the Spin-off
Transaction. In addition, it is anticipated that the total number of shares of
AB Common Stock with respect to which options may be granted and restricted
stock may be awarded under option plans to be established by Access Beyond will
not exceed 2,250,000 shares, 250,000 of which would be allocated strictly to a
non-employee directors' plan, subject to adjustment (together with the exercise
price of options and the purchase price, if any, of restricted stock) to reflect
any change in shares of AB Common Stock by reason of stock dividends, stock
splits, recapitalizations, mergers, consolidations or other similar events
affecting the number or kind of outstanding shares. It is believed that
directors and executive officers of Access Beyond will own, in the aggregate,
approximately twenty-six percent of the outstanding shares of AB Common Stock
immediately after the Spin-off Transaction.
The AB Common Stock distributed to Penril stockholders will be freely
transferable, except for shares received by any persons who may be deemed to be
"affiliates" of Access Beyond under the Securities Act. Persons who may be
deemed to be affiliates of Access Beyond after the Spin-off Transaction
generally include
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<PAGE> 102
individuals or entities that control, are controlled by, or are under common
control with Access Beyond and may include certain officers and directors of
Access Beyond as well as principal stockholders of Access Beyond. Persons who
are affiliates of Access Beyond will be permitted to sell their shares of AB
Common Stock only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption provided by Section 4(1) of the Securities
Act or Rule 144 thereunder. The Section 4(1) exemption allows the sale of
unregistered shares by a person who is not an issuer, an underwriter or a
dealer. Rule 144 provides persons who are not issuers with objective standards
for selling restricted securities and securities held by affiliates without
registration. The rule requires that (1) current public information be available
concerning the issuer; (2) restricted stock be held two years or more (including
the holding period of the prior owner, other than an affiliate of Access
Beyond); (3) volume limitations are placed on sales during any three-month
period; and (4) affiliates comply with certain manner of sale restrictions. The
amount of AB Common Stock which could be sold by a person (or persons whose
shares are aggregated) under Rule 144 during a three month period cannot exceed
the greater of (1) one percent of the shares of AB Common Stock outstanding as
shown by the most recent report or statement published by Access Beyond, or (2)
the average weekly trading volume for the shares for a four-week period prior to
the date that notice of the sale is filed with the Commission.
The transfer agent and registrar for the AB Common Stock is Continental
Stock Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors of Access Beyond, without further approval or action
by the stockholders, is authorized to issue shares of AB Preferred Stock in one
or more series and to fix as to any such series the dividend rate, redemption
prices, preferences on liquidation or dissolution, sinking fund terms, if any,
conversion rights, voting rights and any other preference or special rights and
qualifications. Issuances of AB Preferred Stock may adversely affect the rights
of holders of AB Common Stock. Holders of AB Preferred Stock might, for example,
be entitled to preference in distributions to be made to stockholders upon the
liquidation, dissolution or winding up of Access Beyond. In addition, holders of
AB Preferred Stock might enjoy voting rights that limit, qualify or adversely
affect the voting rights of holders of AB Common Stock. Such rights of the
holders of one or more series of AB Preferred Stock might include the right to
vote as a class with respect to the election of directors, major corporate
transactions or otherwise, or the right to vote together with the holders of
Company Stock with respect to any such matter. The holders of AB Preferred Stock
might be entitled to cast multiple votes per share. The issuance of AB Preferred
Stock could have the effect of delaying, deferring, or preventing a change in
control of Access Beyond without further action by the stockholders. Access
Beyond has no present plans to issue any shares of Preferred Stock.
COMPARISON OF RIGHTS OF HOLDERS OF BAY CAPITAL STOCK AND
PENRIL CAPITAL STOCK
If the Merger is consummated, holders of Penril Common Stock will become
holders of Bay Common Stock and the rights of Shareholders will be governed by
the Bay Charter and the Bay By-laws. The rights of Bay shareholders differ in
certain respects from the rights of Shareholders. Certain of the differences are
summarized below. This summary is qualified in its entirety by reference to the
full text of such documents. For information as to how such documents may be
obtained, See "Available Information."
BUSINESS COMBINATIONS
Generally, under the DGCL, the approval by the affirmative vote of the
holders of a majority of the outstanding stock (or, if the certificate of
incorporation provides for more or less than one vote per share, a majority of
the votes of the outstanding stock) of a corporation entitled to vote on the
matter is required for a merger or consolidation or sale, lease, or exchange of
all or substantially all the corporation's assets to be consummated.
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<PAGE> 103
Penril's Certificate of Incorporation provides that, subject to certain
exceptions, the affirmative vote of the holders of at least 80% of the voting
power of all the then-outstanding shares of capital stock of Penril entitled to
vote generally in the election of directors is required to approve every
"Business Combination" (defined to include mergers, consolidations, sales of
assets of Penril having a fair market value of $1,000,000 or more, issuances or
transfers by Penril of any securities of Penril having a fair market value of
$1,000,000 or more, and certain other transactions) between Penril and any
"Interested Stockholder" (generally defined to mean any beneficial owner of more
than 10% of the voting power of the outstanding Penril voting stock). Such 80%
vote is not required if the Business Combination is approved by a majority of
the Continuing Directors (generally defined to mean the directors who were
members of the Penril Board on December 13, 1983 or a person designated as a
Continuing Director by a majority of the Continuing Directors) or if the
Business Combination satisfies certain price and procedural conditions.
Bay's Certificate of Incorporation provides that, subject to certain
exceptions, the affirmative vote of the holders of at least 75% of the voting
power of the outstanding shares of capital stock of Bay entitled to vote
generally in the election of directors or class of directors, voting together as
a single class, is required to approve any "Business Combination" (defined to
include mergers, sales of assets of Bay having a fair market value in excess of
10% of the fair market value of the total assets of Bay, and certain other
transactions) between Bay and any "Interested Stockholder" (generally defined to
mean any beneficial owner of more than 15% of Bay common stock). Such 75% vote
is not required if the Business Combination is approved by a majority of the
"Disinterested Directors" of Bay (generally defined to mean the directors who
are not affiliated with the Interested Stockholder) or if the Business
Combination satisfies certain price and procedural conditions.
STATE TAKEOVER LEGISLATION
Delaware Business Combination Law. Section 203 of the DGCL (the "Delaware
Business Combination Law") generally prohibits any "business combination"
(defined to include a variety of transactions, including (i) mergers and
consolidations, (ii) sales or dispositions of assets having an aggregate market
value equal to 10% or more of the aggregate market value of the corporation
determined on a consolidated basis, (iii) issuances of stock (except for certain
pro rata and other issuances), (iv) disproportionate benefits from the
corporation (including loans and guarantees) and (v) any transaction which has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation which is owned by the interested shareholder (except
as a result of immaterial changes)) between a Delaware corporation and any
"interested shareholder" (defined generally as any person who, directly or
indirectly, beneficially owns 15% or more of the outstanding voting stock of the
corporation) for a period of three years following the date that such
shareholder became an interested shareholder. The restrictions of the Delaware
Business Combination Law do not apply, however, (A) if, prior to such date, the
board of directors of the corporation approved either the business combination
or the transaction which resulted in such shareholder's becoming an interested
shareholder, (B) if, the interested shareholder owned at least 85% of the voting
stock of the corporation at the time the transaction resulting in such
shareholder becoming an interested shareholder was commenced (excluding, for the
purposes of determining the number of shares outstanding, shares owned by
persons who are directors and also officers and by certain employee plans of the
corporation), (C) if, on or subsequent to such date, the business combination is
approved by the board of directors and the holders of at least two-thirds of the
outstanding voting shares not owned by the interested shareholder or (D) under
certain other circumstances.
In addition, a Delaware corporation may adopt an amendment to its
certificate of incorporation or bylaws expressly electing not to be governed by
the Delaware Business Combination Law if, in addition to any other vote required
by law, such amendment is approved by the affirmative vote of a majority of the
shares entitled to vote. Such amendment will not, however, be effective until 12
months after such shareholder vote and will not apply to any business
combination with an interested shareholder who was such on or prior to the
effective date of such amendment. Any such by-law amendment may not be further
amended by the board of directors. The Delaware Business Combination Law is
inapplicable to the Merger.
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Penril's Certificate of Incorporation requires the affirmative vote of the
holders of at least 80% of the votes which all Shareholders would be entitled to
cast at any annual election of directors or class of directors to amend or
repeal, or to adopt any provision inconsistent with certain provisions of
Penril's Certificate of Incorporation. The provisions of Penril's Certificate of
Incorporation subject to the 80% vote requirement include those provisions which
(i) divide the Penril Board into three classes serving staggered three year
terms and establish the number of directors, term of office, and the standards
for removal of directors and the filling of vacancies on the Penril Board; (ii)
prohibit Shareholders from acting by written consent in lieu of a meeting; (iii)
provide that special meetings of Shareholders may be called only by the Penril
Board pursuant to a resolution adopted by a majority of the total number of
authorized directors; and (iv) require an 80% vote to approve "Business
Combinations" with "Interested Directors."
Bay's Certificate of Incorporation requires the affirmative vote of the
holders of at least 75% of the votes which all Bay shareholders would be
entitled to cast at any annual election of directors or class of directors to
amend or repeal, or to adopt any provision inconsistent with certain provisions
of Bay's Certificate of Incorporation. The provisions of Bay's Certificate of
Incorporation subject to 75% vote requirement include those provisions which (i)
divide Bay's board into three classes serving staggered three-year terms and
establish the standards for removal of directors described under "Comparison of
Stockholder Rights -- Number, Election, and Removal of Directors" above; (ii)
prohibit stockholders from acting by written consent in lieu of a meeting; (iii)
provide that special meetings of stockholders may be called by the President or
the Chairman of the Board; and (iv) require a 75% vote to approve "Business
Combinations" with "Interested Directors" as described under "Comparison of
Stockholder Rights -- Business Considerations" above.
AMENDMENTS TO CHARTERS
Under the DGCL, unless otherwise provided in the certificate of
incorporation, a proposed amendment to the certificate of incorporation requires
the affirmative vote of the holders of a majority of the outstanding stock
entitled to vote thereon. If any such amendment would adversely affect the
rights of any holders of shares of a class or series of stock, the affirmative
vote of the holders of a majority of all outstanding shares of the class or
series, voting as a class, is also necessary to authorize such amendment.
Penril's Certificate of Incorporation provides that no amendment to
Penril's Certificate of Incorporation shall amend, alter, change or repeal any
of the super-majority voting provisions relating to business combinations;
division into classes, number, removal of members, term of office and the
filling of vacancies on the Penril Board; or Shareholder action at Shareholder
meetings unless the amendment effecting such amendment, alteration, change or
repeal shall have received the affirmative vote of the holders of at least 80%
of the outstanding shares of capital stock entitled to vote thereon.
Bay's Certificate of Incorporation requires the affirmative vote of the
holders of at least 75% of the votes which all Bay shareholders would be
entitled to cast at the annual election of directors or class of directors to
amend or repeal, or to adopt any provision inconsistent with certain provisions
of Bay's Certificate of Incorporation. The provisions of Bay's Certificate of
Incorporation subject to such 75% vote requirement included those provisions
which (i) divide Bay's board into three classes serving staggered three-year
terms and establish the standards for removal of directors described under
"Comparison of Stockholder Rights -- Number, Election and Removal of Directors"
above; (ii) prohibit stockholders from acting by written consent in lieu of a
meeting; (iii) provide that special meetings of stockholders may be called by
the President or the Chairman of the Board; and (iv) require a 75% vote to
approve "Business Combinations" with "Interested Directors" as described under
"Comparison of Stockholder Rights -- Business Combinations" above.
AMENDMENTS TO BYLAWS
Under the DGCL, the power to adopt, alter and repeal the by-laws is vested
in the shareholders, except to the extent that the certificate of incorporation
or by-laws vest it in the board of directors. Penril's By-laws provide that
Penril's By-laws, or any of them, may be supplemented, amended or repealed by
the Penril Board, or by the vote of a majority in interest of the shareholders
represented and entitled to vote thereon at any meeting at which a quorum is
present; provided, however, that the affirmative vote of the holders of at least
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80% of the voting power of all the then-outstanding shares of the Penril voting
stock, voting together as a single class is required to amend, alter or repeal
the sections of Penril's By-laws governing (i) action of Shareholders without a
meeting; (ii) the number of directors; (iii) term of office of directors; (iv)
quorum and voting of directors; or (v) the amendment of the By-laws. Bay's
By-laws provide that Bay's By-laws may be altered, amended or repealed or new
by-laws may be adopted by the affirmative vote of a majority of the directors
serving on the Bay Board or by the affirmative vote of a majority of the shares
of the capital stock issued and outstanding; provided, however, that the
affirmative vote of the holders of at least 75% of the capital stock issued and
outstanding is required to amend provisions relating to certain matters. See
"-- Amendments to Charter."
REDEMPTION OF CAPITAL STOCK
Under the DGCL, subject to certain limitations, a corporation's stock may
be made subject to redemption by the corporation at its option, at the option of
the holders of such stock or upon the happening of a specified event. The DGCL
prohibits the purchase or redemption of stock when the capital of a corporation
is or would become impaired; but shares entitled to dividend or liquidation
preference may be purchased or redeemed out of capital if such shares are
retired and capital is reduced in accordance with legal requirements. Penril's
Certificate of Incorporation grants the Penril Board the authority to adopt
amendments to Penril's Certificate of Incorporation to provide for redemption of
shares of capital stock of Penril, but Penril's Certificate of Incorporation
does not presently contain any provisions governing the right to redeem
outstanding shares of capital stock. Bay's Certificate of Incorporation states
that Series A Preferred Stock shall not be redeemable.
SHAREHOLDER ACTION
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at a meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote, if a written consent or consents setting forth the action taken is signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote upon such action were present and voted.
Penril's Certificate of Incorporation provides that any action required or
permitted to be taken by Shareholders must be effected at an annual or special
meeting of Shareholders and may not be effected by any consent in writing by
such Shareholders. Bay's Certificate of Incorporation provides that any action
required or permitted to be taken by the Bay shareholders may not be effected by
any consent in writing by such shareholders.
SPECIAL SHAREHOLDER MEETINGS
The DGCL provides that a special meeting of shareholders may be called by
the board of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the by-laws.
Penril's Certificate of Incorporation and Bylaws provide that meetings of
Shareholders may be called only by the Penril Board pursuant to a resolution
adopted by a majority of the total number of authorized directors.
The Bylaws of Bay provide that a shareholder must give advance written
notice to the company if the shareholder intends to bring any business before a
meeting of shareholders or to make nominations for the board of directors. Bay's
advance notice provisions currently require shareholders to give such notice (i)
in the case of an annual meeting, not less than 120 days in advance of the date
that Bay's proxy statement was released to shareholders in connection with the
previous year's annual meeting, or if no annual meeting was held in the previous
year, not later than the close of business on the tenth day following the day on
which notice of the date of the meeting was mailed or such public disclosure was
made and (ii) in the case of a special meeting, not later than the close of
business on the tenth day following the day on which notice of the date of the
meeting was mailed or such public disclosure was made.
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NUMBER, ELECTION AND REMOVAL OF DIRECTORS
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and terms of directors.
However, if the certificate of incorporation contains provisions fixing the
number of directors, such number may not be changed without amending the
certificate of incorporation. Penril's Certificate of Incorporation provides
that the number of directors shall be fixed from time to time exclusively by the
Penril Board pursuant to a resolution adopted by a majority of the total number
of authorized directors (whether or not there exists any vacancies in previously
authorized directorships at the time any such resolution is presented for
adoption). Bay's Certificate of Incorporation provides that the number of
directors of Bay shall be fixed by the Bay Board.
The DGCL permits the certificate of incorporation of a corporation or a
by-law to provide that directors be divided into one, two or three classes. The
term of office of one class of directors shall expire each year with the terms
of office of no two classes expiring the same year. Penril's Certificate of
Incorporation divides the Penril Board into three classes, serving staggered
terms of three years each. Bay's Certificate of Incorporation divides the Bay
Board into three classes, serving staggered terms of three years each.
Under the DGCL, a director or directors may be removed with or without
cause by the holders of a majority of the shares then entitled to vote at an
election of directors; provided, however, that in the case of a corporation
whose board of directors is classified, shareholders may effect such removal
only for cause. Penril's Certificate of Incorporation provides that any
director, or the entire Penril Board, may be removed from office at any time,
but only for cause and only by the affirmative vote of the holders of at least
80% of the voting power of all the then-outstanding shares of the voting stock,
voting together as a single class. Bay's Certificate of Incorporation provides
that any one or more of the directors of Bay may be removed, with or without
cause, by the holders of at least 75% of the shares then entitled to vote on an
election of directors.
VACANCIES
Under the DGCL, unless otherwise provided in the certificate of
incorporation or the by-laws, vacancies on the board of directors and newly
created directorships resulting from an increase in the authorized number of
directors may be filled by a majority of the directors then in office, although
less than a quorum, or by the sole remaining director. Whenever the holders of
any class or classes of stock or series thereof are entitled to elect one or
more directors, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by the sole remaining
director so elected. In addition, if, at the time of the filling of any such
vacancy or newly created directorship, the directors in office constitute less
than a majority of the whole board (as constituted immediately prior to any such
increase), the Delaware Court of Chancery may, upon application of any
shareholder or shareholders holding at least 10% of the total number of
outstanding shares entitled to vote for such directors, summarily order an
election to fill any such vacancy or newly created directorship, or replace the
directors chosen by the directors then in office.
Penril's Certificate of Incorporation and By-laws provide that any vacancy
or newly created directorship resulting from any increase in the authorized
number of directors may be filled only by vote of a majority of the directors
then in office, though less than a quorum, and any director so chosen shall hold
office for a term expiring at the annual meeting of shareholders at which the
term of office of the class to which the director has been elected expires.
Bay's Certificate of Incorporation provides that any vacancy or newly created
directorship resulting from an increase in the authorized number of directors
may be filled by vote of a majority of the directors then in office, though less
than a quorum, or by a sole remaining director. A director elected to fill a
vacancy shall serve for the unexpired term. A director chosen to fill a newly
created directorship shall hold office until the next election of the class for
which the director has been chosen.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the DGCL, a corporation may indemnify any director, officer, employee
or agent against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or
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in the right of the corporation to procure a judgment in its favor -- a
"derivative action") if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe that his or her conduct was unlawful. Penril's Certificate of
Incorporation generally provides that Penril will indemnify and hold harmless
any person who is or was a director or officer of Penril who is or was a party
or is threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she, or a person of whom he or she is the legal representative, (i) is or was
a director or officer of Penril, or (ii) is or was serving at the request of
Penril as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, to the fullest extent
authorized by the DGCL. Bay's Certificate of Incorporation provides that Bay
shall indemnify any person who is, was or has agreed to become a director or
officer of Bay or is or was serving or has agreed to serve, at the request of
Bay, as a director, officer or trustee of another entity, against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with any
pending, threatened or completed action, suit or proceeding any appeal
therefrom. Such person must have acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe that his or her conduct was unlawful. Bay also has the right to
indemnify other employees or agents as determined by the Bay Board from time to
time.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
The DGCL provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. However, no such provision can eliminate or limit the
liability of a director for (i) any breach of the director's duty of loyalty to
the corporation or its shareholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
violation of Section 174 of the DGCL regarding unlawful payment of dividends or
unlawful stock purchases or redemptions, (iv) any transaction from which the
director derived an improper personal benefit or (v) any act or omission prior
to the adoption of such a provision in the certificate of incorporation.
Penril's Certificate of Incorporation provides that no director shall be
personally liable to Penril or to any shareholder for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to Penril or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit. Bay's
Certificate of Incorporation does not contain any provision limiting the
personal liability of its directors.
COMPARISON OF RIGHTS OF HOLDERS OF PENRIL CAPITAL STOCK
AND ACCESS BEYOND CAPITAL STOCK
BUSINESS COMBINATIONS
Generally, under the DGCL, the approval by the affirmative vote of the
holders of a majority of the outstanding stock (or, if the certificate of
incorporation provides for more or less than one vote per share, a majority of
the votes of the outstanding stock) of a corporation entitled to vote on the
matter is required for a merger or consolidation or sale, lease, or exchange of
all or substantially all the corporation's assets to be consummated.
Access Beyond's Certificate of Incorporation does not contain provisions
regarding business combinations and does not impose requirements in addition to
or different from those imposed by the DGCL.
Penril's Certificate of Incorporation provides that, subject to certain
exceptions, the affirmative vote of the holders of at least 80% of the voting
power of all the then-outstanding shares of capital stock of Penril entitled to
vote generally in the election of directors is required to approve every
"Business Combination" (defined to include mergers, consolidations, sales of
assets of Penril having a fair market value of $1,000,000
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or more, issuances or transfers by Penril of any securities of Penril having a
fair market value of $1,000,000 or more, and certain other transactions) between
Penril and any "Interested Stockholder" (generally defined to mean any
beneficial owner of more than 10% of the voting power of the outstanding Penril
voting stock). Such 80% vote is not required if the Business Combination is
approved by a majority of the Continuing Directors (generally defined to mean
the directors who were members of the Penril Board on December 13, 1983 or a
person designated as a Continuing Director by a majority of the Continuing
Directors) or if the Business Combination satisfies certain price and procedural
conditions.
AMENDMENTS TO CHARTERS
Under the DGCL, unless otherwise provided in the certificate of
incorporation, a proposed amendment to the certificate of incorporation requires
an affirmative vote of the holders of a majority of the outstanding stock
entitled to vote thereon. If any such amendment would adversely affect the
rights of any holders of shares of a class or series of stock, the vote of the
holders of a majority of all outstanding shares of the class or series, voting
as a class, is also necessary to authorize such amendment.
Access Beyond's Certificate of Incorporation provides that no amendment to
Access Beyond's Certificate of Incorporation shall amend, alter, change or
repeal the super-majority voting provisions relating to division of the Board of
Directors of Access Beyond (the "AB Board") into classes, the number and removal
of members of the AB Board, term of office, and the filling of vacancies on the
AB Board unless the amendment, alteration, change or repeal shall have received
the affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock entitled to vote thereon. Access Beyond's Certificate of
Incorporation otherwise comports with the DGCL.
Penril's Certificate of Incorporation provides that no amendment to
Penril's Certificate of Incorporation shall amend, alter, change or repeal any
of the super-majority voting provisions relating to business combinations;
division into classes, number, removal of members, term of office and the
filling of vacancies on the Penril Board; or Shareholder action at Shareholder
meetings unless the amendment effecting such amendment, alteration, change or
repeal shall have received the affirmative vote of the holders of at least 80%
of the outstanding shares of capital stock entitled to vote thereon. Penril's
Certificate of Incorporation otherwise comports with the DGCL.
AMENDMENTS TO BY-LAWS
Under the DGCL, the power to adopt, alter and repeal the by-laws is vested
in the shareholders, except to the extent that the certificate of incorporation
or by-laws vest it in the board of directors.
Access Beyond's By-laws provide that Access Beyond's By-laws, or any of
them, may be supplemented, amended or repealed by the AB Board, or by the vote
of a majority in interest of the shareholders represented and entitled to vote
thereon at any meeting at which a quorum is present; provided, however, that the
affirmative vote of the holders of at least 80% of the voting power of the
then-outstanding shares of Access Beyond voting stock, voting together as a
single class, is required to amend, alter or repeal any sections of the Access
Beyond By-laws which have the same effect as those provisions of Access Beyond's
Certificate of Incorporation governing (i) division of the AB Board into three
classes serving staggered three year terms; (ii) the number of directors; (iii)
term of office of directors; (iv) removal of directors and (v) the filling of
vacancies on the AB Board.
Penril's By-laws provide that Penril's By-laws, or any of them, may be
supplemented, amended or repealed by the Penril Board, or by the vote of a
majority in interest of Shareholders represented and entitled to vote thereon at
any meeting at which a quorum is present; provided, however, that the
affirmative vote of the holders of at least 80% of the voting power of all the
then-outstanding shares of the Penril voting stock, voting together as a single
class is required to amend, alter or repeal the sections of Penril's By-laws
governing (i) action of Shareholders without a meeting; (ii) the number of
directors; (iii) term of office of directors; (iv) quorum and voting of
directors; or (v) amendment of Penril's By-laws.
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REDEMPTION OF CAPITAL STOCK
Under the DGCL, subject to certain limitations, a corporation's stock may
be made subject to redemption by the corporation at its option, at the option of
the holders of such stock or upon the happening of a specified event. The DGCL
prohibits the purchase or redemption of stock when the capital of a corporation
is or would become impaired; but shares entitled to dividend or liquidation
preference may be purchased or redeemed out of capital if such shares are
retired and capital is reduced in accordance with legal requirements. Access
Beyond's Certificate of Incorporation does not contain any provisions relating
to the right to redeem outstanding shares of capital stock. Penril's Certificate
of Incorporation grants the Penril Board the authority to adopt amendments to
the Penril Certificate of Incorporation to provide for redemption of shares of
capital stock of Penril, but Penril's Certificate of Incorporation does not
presently contain any provisions governing the right to redeem outstanding
shares of capital stock.
SHAREHOLDER ACTION
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at a meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote, if a written consent or consents setting forth the action taken is signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote upon such action were present and voted.
Access Beyond's Certificate of Incorporation and By-laws provide that all
elections and questions put to shareholders shall be decided by the vote of a
majority in interest of the shareholders present in person or represented by
proxy and entitled to vote at the meeting, except as otherwise permitted or
required by the DGCL, Access Beyond's Certificate of Incorporation or Access
Beyond's By-laws.
Penril's Certificate of Incorporation provides that any action required or
permitted to be taken by Shareholders must be effected at an annual or special
meeting of Shareholders and may not be effected by any consent in writing by
such Shareholders.
SPECIAL SHAREHOLDER MEETINGS
The DGCL provides that a special meeting of shareholders may be called by
the board of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the by-laws.
Access Beyond's By-laws provide that special meetings may be called by the
Chairman of the Board, the Vice Chairman of the Board, the President, any Vice
President or by the AB Board and shall be called by any of the forgoing at the
request in writing of shareholders owning a majority in amount of the capital
stock of Access Beyond issued and outstanding and entitled to vote.
Penril's Certificate of Incorporation and By-laws provide that meetings of
Shareholders may be called only by the Penril Board pursuant to a resolution
adopted by a majority of the total number of authorized directors.
NUMBER AND ELECTION OF DIRECTORS
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and terms of directors.
However, if the certificate of incorporation contains provisions fixing the
number of directors, such number may not be changed without amending the
certificate of incorporation. Access Beyond's Certificate of Incorporation
provides that the number of directors shall be fixed from time to time pursuant
to a resolution adopted by a majority of the entire AB Board. Penril's
Certificate of Incorporation provides that the number of directors shall be
fixed from time to time exclusively by the Penril Board pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented for adoption).
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The DGCL permits the certificate of incorporation of a corporation or a
by-law to provide that directors be divided into one, two or three classes. The
term of office of one class of directors shall expire each year with the terms
of office of no two classes expiring the same year. The AB Board consists of 5
individuals and Access Beyond's Certificate of Incorporation divides the AB
Board into three classes with each director serving a three year term (after the
initial term). The Penril Board consists of 7 individuals, and Penril's
Certificate of Incorporation divides the Penril Board into three classes with
each director serving a three year term.
ANTI-TAKEOVER PROVISIONS
Access Beyond's Certificate of Incorporation requires the affirmative vote
of the holders of at least 80% of the votes which all shareholders would be
entitled to cast at any annual election of directors or class of directors to
amend or repeal, or to adopt any provision inconsistent with certain provisions
of Access Beyond's Certificate of Incorporation. The provisions of Access
Beyond's Certificate of Incorporation subject to the 80% of vote requirement
include those provisions which divide the AB Board into three classes serving
staggered three year terms and establish the standards for the number, term of
office, removal of directors and the filling of vacancies on the AB Board. In
addition, Access Beyond's By-laws contain certain anti-takeover provisions which
establish an advance notice procedure regarding the nomination of directors by
shareholders and shareholder proposals to be brought before an annual meeting
and provisions which restrict the right of shareholders to call special
meetings.
Penril's Certificate of Incorporation requires the affirmative vote of the
holders of at least 80% of the votes which all shareholders would be entitled to
cast at any annual election of directors or class of directors to amend or
repeal, or to adopt any provision inconsistent with, certain provisions of
Penril's Certificate of Incorporation. The provisions of Penril's Certificate of
Incorporation subject to the 80% vote requirement include those provisions which
(i) divide the Penril Board into three classes serving staggered three year
terms and establish the standards for the number, term of office, removal of
directors and the filling of vacancies on the Penril Board; (ii) prohibit
Shareholders from acting by written consent in lieu of a meeting; (iii) provide
that special meetings of Shareholders may be called only by the Penril Board
pursuant to a resolution adopted by a majority of the total number of authorized
directors; and (iv) require an 80% vote to approve "Business Combinations" with
"Interested Directors."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the DGCL, a corporation may indemnify any director, officer, employee
or agent against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation to procure a judgment in
its favor -- a "derivative action") if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was unlawful.
Access Beyond's Certificate of Incorporation provides, among other things,
that Access Beyond shall indemnify any person who is or was a director or
officer of Access Beyond who is or was a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of Access Beyond), by reason of the fact that he (i) is or
was a director or officer of Access Beyond, or (ii) is or was serving at the
request of Access Beyond as director, officer, employee, agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Access
Beyond and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the
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best interests of Access Beyond or, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Penril's Certificate of Incorporation generally provides that Penril shall
indemnify and hold harmless any person who is or was a director or officer of
Penril who is or was a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, (i) is or was a director or officer of Penril, or (ii) is or was
serving at the request of Penril as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, to the fullest extent authorized by the DGCL.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material federal income tax consequences
of the Transfer, the Distribution and the Merger to the holders of shares of
Penril Common Stock. The federal income tax discussion set forth below is for
general information only and may not apply to particular categories of holders
of shares of Penril Common Stock subject to special treatment under the Internal
Revenue Code of 1986 (the "Code"), including without limitation, foreign holders
and holders whose Penril Common Stock were acquired pursuant to the exercise of
any employee stock option or otherwise as compensation. EACH HOLDER OF SHARES OF
PENRIL COMMON STOCK AND PENRIL OPTIONS IS URGED TO CONSULT HIS TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE TRANSFER, THE DISTRIBUTION, THE
MERGER AND THE OTHER TRANSACTIONS DISCUSSED HEREIN, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
CONSEQUENCES OF PROPOSED TRANSACTION
As described previously under "The Spin-off Transaction" and "The Merger
Agreement", Penril and Access Beyond will effect the Transfer through the
contribution by Penril to Access Beyond of the Remote Access Business and all
other assets that are not part of the Modem Business and through the assumption
by Access Beyond of the related liabilities. Penril will then effect the
Distribution through the distribution of the shares of AB Common Stock to each
Shareholder of record. Immediately thereafter, Merger Sub will merge with and
into Penril.
Penril has received an opinion from its counsel Benesch, Friedlander,
Coplan & Aronoff P.L.L. ("Counsel") to the effect that, on the basis of the
facts, representations and assumptions set forth in the opinion, for federal
income tax purposes, it is more likely than not that (i) the Distribution will
qualify as a tax-free Spin-off pursuant to Section 355 of the Code and (ii) the
Merger will qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code.
The representations (among others) relied upon by Counsel in giving its
opinion contain statements or agreements to the effect that: Penril's Modem
Business and Remote Access Business have each been actively conducted for five
years and will continue to be conducted as separate, active businesses after the
proposed transactions; certain transactions between Penril and Bay in effect
prior to the closing of the Spin-off Transaction and the Merger are fair market
value transactions entered into for valid business reasons independent of the
Merger, and all of the transactions between Access Beyond and Bay or Penril in
effect after the closing of the Spin-off Transaction and the Merger (other than
certain contributions made to Access Beyond by Penril prior to the Spin-off
Transaction) will also be fair market value transactions entered into for valid
business reasons; the transfer of certain cash and liquid assets to Access
Beyond (and the retention of certain debt by Penril) is necessitated by the
ongoing business needs of Access Beyond; the liquid assets being received by
Access Beyond will be used in the operation of its Remote Access Business and
will not be used to make distributions to, or redeem the shares of AB Common
Stock held by, shareholders of Access Beyond; Penril will be maintained as a
separate corporation by Bay; and Bay owns no Penril stock and has no intention
to reacquire any stock issued in the Merger.
107
<PAGE> 112
The favorable tax treatment of both the Spin-off Transaction and the Merger
also depends upon the historic shareholders of Penril maintaining a so-called
"continuity of interest" in both the Bay Common Stock received in the Merger and
the AB Common Stock received in the Spin-off Transaction. Under Revenue
Procedures issued by the Internal Revenue Service (the "Service"), continuity of
interest is maintained in each transaction if the historic shareholders of
Penril continue to maintain at least one-half their stock investment in Penril
in the modified form of each of the AB Common Stock and Bay Common Stock
received by them in the proposed transactions. Penril has represented that it
knows of no plan or intent by any Shareholder to sell more than one-half of his
Bay Common Stock or AB Common Stock received in the proposed transactions. There
are no court cases or published rulings by the Service giving guidance on how to
measure the continuity of interest of historic shareholders in publicly owned
corporations, such as Penril, where 5% shareholders own less than 50% of the
stock of the corporation. However, Counsel is of the opinion, based upon
Penril's representations regarding the plans and intentions of its shareholders,
that both the Spin-off Transaction and the Merger meet the continuity of
interest requirement. It should be noted that Penril has not sought
representations (as required by the Service from taxpayers seeking private
letter rulings in reorganizations) from each of its 5% shareholders as to their
plans and intentions with respect to their Penril Common Stock or the Bay Common
Stock and the AB Common Stock to be received in the proposed transactions.
CONSEQUENCES OF THE TRANSFER AND THE DISTRIBUTION TO PENRIL, ACCESS BEYOND AND
SHAREHOLDERS
As described above under "The Spin-off Transaction", immediately prior to
the Merger, Penril and Access Beyond will effect the Transfer through the
contribution by Penril to Access Beyond of the Remote Access Business and all
other assets that are not part of the Modem Business. Penril will then effect
the Distribution through the distribution of the shares of AB Common Stock to
each shareholder of record. If the distribution qualifies as a tax-free Spin-off
for federal income tax purposes:
1. The Transfer and the Distribution, together, will qualify as a
reorganization pursuant to Section 368(a)(1)(D) of the Code.
2. No gain or loss will be recognized by Penril or Access Beyond in
connection with the Transfer.
3. No gain or loss will be recognized by Penril in connection with the
Distribution.
4. A Shareholder will not recognize any income, gain or loss in connection
with the Distribution.
5. Following the Distribution, a Shareholder will apportion the tax basis
for his shares of Penril Common Stock between such Penril Common Stock and the
AB Common Stock received (or, in the case of fractional shares, deemed received)
in the Distribution in proportion to the relative fair market values of such
Penril Common Stock and AB Common Stock on the Distribution Date. A
Shareholder's holding period for the AB Common Stock received or deemed received
in the Distribution will include the period during which such Shareholder held
the Penril Common Stock with respect to which the AB Common Stock was received
or deemed received, provided that such Penril Common Stock is held as a capital
asset by such Shareholder as of the time of the Distribution.
Counsel's opinion with respect to the Transfer and the Distribution is
based upon certain representations and assumptions and represents Counsel's best
legal judgment, and is not binding upon the Service or the courts. If any
representation or assumption relied upon in rendering Counsel's opinion is
inaccurate, or if the Service were to challenge successfully the federal income
tax treatment of the Transfer and the Distribution set forth in Counsel's
opinion, then, in general, although not entirely free from doubt, for federal
income tax purposes it is likely that (i) each Shareholder would be required to
recognize income or gain on the receipt of the shares of AB Common Stock in the
Distribution in an amount up to the fair market value of the shares of AB Common
Stock received in the Distribution and (ii) Penril would be required to
recognize gain on the Distribution to the extent the fair market value of the
shares of AB Common Stock issued in the Distribution exceeded Penril's tax basis
in such shares. In such event (a) the tax basis of the shares of AB Common Stock
received by a Shareholder in the Distribution would be the fair market value of
such shares on the date the
108
<PAGE> 113
Distribution is consummated and (b) the holding period for such shares of AB
Common Stock would begin the day after the date the Distribution is consummated.
Current treasury regulations require that each Shareholder who receives AB
Common Stock pursuant to the Distribution attach to his federal income tax
return for the year in which the Distribution occurs a detailed statement
setting forth such information as may be appropriate in order to demonstrate the
applicability of Section 355 of the Code to the Distribution. Penril or its
successor, Bay, will convey the appropriate information to each Shareholder of
record as of the Spin-off Record Date.
CONSEQUENCES OF THE MERGER TO PENRIL, BAY AND SHAREHOLDERS
As described above under the heading "The Merger Agreement", immediately
after the Transfer and the Distribution, pursuant to the Merger Agreement,
Merger Sub will merge with and into Penril. If the merger qualifies as a
reorganization within the meaning of Section 368(a)(1)(B) of the Code for
federal income tax purposes:
1. Both Penril and Bay will be parties to the reorganization within the
meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Penril or Bay as a result of the
Merger.
3. No gain or loss will be recognized by Shareholders whose shares of
Penril Common Stock are exchanged solely for Bay Common Stock pursuant to the
Merger except with respect to the cash received by such Shareholders in lieu of
a fractional share interest in Bay Common Stock.
4. A Shareholder who receives cash in lieu of a fractional share interest
of Bay Common Stock will be treated as if such cash had been received in
redemption of the fractional share interest. The receipt of such cash generally
should result in gain or loss in an amount equal to the difference between the
amount of the cash received and the portion of the tax basis in the Penril
Common Stock that is allocable to the shares of Penril Common Stock after the
Distribution that is treated as redeemed (See Paragraph 5 of "Consequences of
the Transfer and the Distribution to Penril, Access Beyond and Shareholders"
above). Such gain or loss generally will be treated as capital gain or loss,
provided that such fractional share is held by such Shareholder as a capital
asset at the Effective Time.
5. The aggregate tax basis of the Bay Common Stock received or, in the case
of fractional shares, deemed received by Shareholders who exchange their Penril
Common Stock for Bay Common Stock in the Merger will be the same as the tax
basis of the Penril Common Stock surrendered in exchange therefor (after
allocation of such tax basis between Penril Common Stock and AB Common Stock
received in connection with the Distribution).
6. The holding period for the shares of Bay Common Stock received in the
Merger will include the period during which the shares of Penril Common Stock
surrendered in exchange therefor were held, provided that such shares of Penril
Common Stock were held as capital assets at the Effective Time.
Counsel's opinion with respect to the Merger is based upon certain
representations and assumptions and represents Counsel's best legal judgment,
and is not binding upon the Service or the courts. If any representation or
assumption relied upon in rendering Counsel's opinion with respect to the Merger
is inaccurate, or if the Service were to challenge successfully the federal
income tax treatment of the Merger set forth in Counsel's opinion, then, in
general, although not entirely free from doubt, for federal income tax purposes
it is likely that each Penril shareholder would recognize gain measured by the
excess of the fair market value of the Bay Common Stock received in the Merger
plus the amount of cash in lieu of a fractional share over the tax basis in his
Penril Common Stock. Furthermore, if the tax free nature of the Merger is
invalidated it would reduce the likelihood that the Spin-off Transaction will
qualify as a tax-free Spin-off pursuant to Section 355 of the Code.
THE FOREGOING DISCUSSION OF THE ANTICIPATED MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IS BASED ON THE LAW IN EFFECT AS OF THE DATE HEREOF,
INCLUDING THE CODE, THE TREASURY REGULATIONS PROMULGATED
109
<PAGE> 114
THEREUNDER, AND ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS THEREOF, ALL OF
WHICH ARE SUBJECT TO CHANGE (POSSIBLY ON A RETROACTIVE BASIS). THIS DISCUSSION
DOES NOT ADDRESS ANY ASPECT OF STATE, LOCAL OR FOREIGN TAXATION. IN ADDITION,
THIS DISCUSSION DOES NOT ATTEMPT TO ADDRESS ALL ISSUES THAT MAY BE RELEVANT TO A
PARTICULAR HOLDER OF PENRIL COMMON STOCK IN LIGHT OF SUCH HOLDER'S PERSONAL
CIRCUMSTANCES, AND DOES NOT APPLY TO HOLDERS SUBJECT TO SPECIAL TREATMENT UNDER
THE FEDERAL INCOME TAX LAWS. FURTHER, THIS DISCUSSION MAY NOT APPLY TO A HOLDER
OF PENRIL COMMON STOCK WHO ACQUIRED HIS STOCK PURSUANT TO THE EXERCISE OF AN
EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION, AND DOES NOT APPLY TO A
HOLDER OF PENRIL OPTIONS WHO RECEIVES SHARES OF BAY COMMON STOCK IN EXCHANGE
THEREFOR. ACCORDINGLY, EACH HOLDER OF PENRIL COMMON STOCK SHOULD CONSULT SUCH
HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF
THE MERGER, INCLUDING THE EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
LEGAL MATTERS
The validity of the shares of Bay Common Stock to be issued in connection
with the Merger will be passed upon for Bay by the law firm of Hale and Dorr,
Washington, D.C.
Certain of the tax consequences of the Merger to Shareholders will be
passed upon by Benesch, Friedlander, Coplan & Aronoff P.L.L., Cleveland, Ohio,
on behalf of Penril. See "Certain Federal Income Tax Consequences." Richard D.
Margolis, who is a partner in the firm of Benesch, Friedlander, Coplan & Aronoff
P.L.L., participated in the representation of Penril in connection with the
Merger, and is a director of Penril, beneficially owned, 31,000 shares of Penril
Common Stock as of October 11, 1996.
EXPERTS
The consolidated financial statements of Penril and its subsidiaries as of
July 31, 1996 and 1995, and for each of the three years in the period ended July
31, 1996, included in this Proxy Statement of Penril, which is referred to and
made part of this Prospectus and Registration Statement of Bay, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and in the Registration Statement of Bay and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of Bay Networks, Inc. as of June 30,
1996 and 1995 and for each of the three years in the period ended June 30, 1996
included in the Proxy Statement of Penril Datacomm Networks, Inc., which is
referred to and made a part of this Prospectus and Registration Statement of Bay
Networks, Inc., have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing herein which, as to fiscal 1994, is
based in part on the report of Price Waterhouse LLP, independent accountants, as
it relates to Wellfleet Communications, Inc.'s consolidated financial statements
for the year ended June 30, 1994. The financial statements referred to above are
included in reliance upon such reports given upon the authority of such firms as
experts in accounting and auditing.
SHAREHOLDER PROPOSALS
As previously announced, any proposals of Shareholders intended to be
presented at the 1996 Annual Meeting of Shareholders (if such meeting is
required), must be received by Penril for inclusion in Penril's proxy statement
no later than October 17, 1996.
110
<PAGE> 115
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Penril DataComm Networks, Inc. and Subsidiaries
Audited Financial Statements:
Independent Auditors' Report.................................................. F-2
Consolidated Statements of Operations for each of
the three years in the period ended July 31, 1996........................... F-3
Consolidated Balance Sheets as of July 31, 1996 and 1995...................... F-4
Consolidated Statements of Cash Flows for each of the
three years in the period ended July 31, 1996............................... F-5
Consolidated Statements of Stockholders' Equity for
each of the three years in the period
ended July 31, 1996......................................................... F-6
Notes to Consolidated Financial Statements for
the years ended July 31, 1996, 1995, and 1994............................... F-7-17
Bay Networks, Inc.
Report of Ernst & Young LLP, Independent Auditors................................ F-18
Report of Price Waterhouse LLP, Independent Accountants.......................... F-19
Consolidated Balance Sheets as of June 30, 1996 and 1995......................... F-20
Consolidated Statements of Income for the Years Ended June 30, 1996, 1995, and
1994.......................................................................... F-21
Consolidated Statements of Stockholders' Equity for the Years Ended June 30,
1996, 1995, and 1994.......................................................... F-22
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and
1994.......................................................................... F-23
Notes to Consolidated Financial Statements....................................... F-24-34
</TABLE>
F-1
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Penril DataComm Networks, Inc.
Gaithersburg, Maryland
We have audited the accompanying consolidated balance sheets of Penril DataComm
Networks, Inc. and subsidiaries as of July 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 July 31, 1996. These financial
statements are the responsibility of Penril'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, such consolidated financial statements present fairly, in all
material respects, the financial position of Penril DataComm Networks, Inc. and
subsidiaries as of July 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Washington, D.C.
September 6, 1996
(September 20, 1996 as to the sixth and ninth paragraphs of Note 7)
F-2
<PAGE> 117
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31.
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES FROM CONTINUING OPERATIONS...................... $ 39,435 $ 52,611 $ 61,838
COSTS AND EXPENSES
Cost of revenues........................................... 22,409 29,394 30,516
Selling, general and administrative........................ 18,611 18,765 18,815
Product development and engineering........................ 7,389 7,438 8,817
Amortization of cost over net assets acquired.............. 734 834 816
Provision for restructuring costs.......................... 9,718 -- --
Merger related expenses.................................... 500 -- --
-------- -------- --------
59,361 56,431 58,964
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS........... (19,926) (3,820) 2,874
OTHER EXPENSE
Interest expense........................................... (698) (1,228) (908)
Other, net................................................. (44) (144) (134)
-------- -------- --------
(742) (1,372) (1,042)
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES...................................................... (20,668) (5,192) 1,832
BENEFIT FOR INCOME TAXES..................................... -- 578 513
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS..................... (20,668) (4,614) 2,345
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes........................................ 404 (1,661) (828)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
net of income taxes........................................ (640) (1,400) --
-------- -------- --------
NET INCOME (LOSS)............................................ $(20,904) $ (7,675) $ 1,517
======== ======== ========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Continuing operations...................................... $ (2.14) $ (0.61) $ 0.30
Discontinued operations.................................... 0.04 (0.22) (.11)
Loss on disposal of discontinued operations................ (0.07) (0.19) --
-------- -------- --------
$ (2.17) $ (1.02) $ 0.19
======== ======== ========
Shares used in per share calculation......................... 9,650 7,559 7,809
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 118
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................................ $ 4,237 $ 992
Accounts receivable, less allowance for doubtful accounts of $554 in 1996
and $1,067 in 1995..................................................... 7,044 13,521
Inventories.............................................................. 9,684 11,427
Deferred income taxes.................................................... 1,700 1,700
Net assets of discontinued operations.................................... 7,337 5,145
Other current assets..................................................... 249 778
------- -------
TOTAL CURRENT ASSETS..................................................... 30,251 33,563
------- -------
Property and equipment, net.............................................. 2,457 2,648
Excess of cost over fair value of net assets acquired, net............... -- 5,689
Other assets............................................................. 1,072 2,487
------- -------
TOTAL ASSETS............................................................. $33,780 $44,387
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings.................................................. $ 4,000 $ 5,095
Current portion of long-term debt...................................... 272 5,164
Accounts payable....................................................... 6,076 8,156
Accrued compensation and commissions................................... 1,347 894
Deferred revenue....................................................... -- 1,244
Other accrued expenses................................................. 1,758 852
------- -------
TOTAL CURRENT LIABILITIES................................................ 13,453 21,405
Long-term debt, net of current portion................................... 633 517
Other noncurrent liabilities............................................. 1,479 742
------- -------
TOTAL LIABILITIES........................................................ 15,565 22,664
------- -------
Commitments and Contingencies (Note 7)
Stockholders' Equity
Serial preferred stock, $.01 par value; authorized, 100,000 shares;
issued, none........................................................ -- --
Common stock, $.01 par value; authorized, 20,000,000 shares; issued and
outstanding, 10,849,647 shares in 1996 and 7,542,815 shares in
1995................................................................ 109 76
Additional paid-in capital............................................. 39,837 22,384
Retained earnings (deficit)............................................ (21,581) (677)
------- -------
18,365 21,783
Equity adjustment from foreign currency translation.................... (150) (60)
------- -------
TOTAL STOCKHOLDERS' EQUITY............................................... 18,215 21,723
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $33,780 $44,387
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 119
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS
Net Income (Loss) from operations............................ $(20,668) $(4,614) $ 2,345
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization............................. 3,452 4,418 3,676
Benefit from deferred income taxes........................ -- (578) (513)
Provision for restructuring costs......................... 9,718 -- --
Other..................................................... (93) 25 234
(Increase) decrease in assets:
Accounts receivable....................................... 6,477 2,508 (1,710)
Inventories............................................... (472) 1,122 (1,820)
Other current assets...................................... 529 (287) (98)
Increase (decrease) in liabilities:
Accounts payable.......................................... (2,080) 1,792 (818)
Other liabilities......................................... (731) (291) 823
-------- ------- -------
Net cash provided by (used in) continuing operating
activities................................................... (3,868) 4,095 2,120
CASH FLOWS FROM DISCONTINUED OPERATIONS
Income (Loss) from discontinued operations................... (236) (3,061) (828)
Non-cash charges and changes in working capital.............. (2,832) 285 469
Provision for loss on disposal of discontinued operations.... 640 1,400 --
-------- ------- -------
Net cash used in discontinued operations....................... (2,428) (1,376) (359)
-------- ------- -------
Net cash provided by (used in) operations...................... (6,296) 2,719 1,761
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for purchased technology........................ (800) (1,049) (1,126)
Expenditures for property, equipment and other............... (747) (417) (933)
-------- ------- -------
Net cash used in investing activities.......................... (1,547) (1,466) (2,059)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit.......................... (1,095) 1,870 2,740
Borrowings on long-term debt................................. -- -- 1,780
Payments on long-term debt................................... (5,210) (3,300) (4,182)
Issuance of common stock..................................... 17,486 74 320
Dividends paid............................................... -- -- (147)
Other........................................................ (93) 94 36
-------- ------- -------
Net cash provided by (used in) financing activities............ 11,088 (1,262) 547
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR......... 992 1,001 752
-------- ------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR............... $ 4,237 $ 992 $ 1,001
======== ======= =======
SUPPLEMENTAL INFORMATION
Cash payments for income taxes............................... $ 20 $ 113 $ 59
======== ======= =======
Cash payments for interest................................... $ 783 $ 1,103 $ 795
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 120
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------- PAID-IN UNEARNED EARNINGS CURRENCY
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) ADJUSTMENT
--------- ------ ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AUGUST 1, 1993.................. 7,330,736 $ 73 $ 22,271 $ (143) $ 5,628 $ (328)
Net income............................ 1,517
Dividends paid........................ (147)
Issuance of common stock --
Upon exercise of stock options..... 132,700 1 367
Upon exercise of warrants.......... 180,000 2 400
Shares of common stock retired in
connection with the exercise of
options and warrants............... (66,840) (1) (458)
Shares of common stock returned in
conjunction with the valuation of
Datability, Inc.................... (124,388) (1) (828)
Shares of common stock returned in
conjunction with employee stock
award program...................... (9,840) (32) 21
Amortization of unearned income....... 106
Foreign currency translation
adjustment......................... 132
--------- ---- ------- ----- -------- -----
BALANCE JULY 31, 1994................... 7,442,368 $ 74 $ 21,720 $ (16) $ 6,998 $ (196)
Net loss.............................. (7,675)
Issuance of common stock --
Upon exercise of stock options..... 33,067 1 73
Upon exercise of warrants.......... 80,000 1 194
For acquisition of patent rights... 50,000 1 118
Shares of common stock retired in
connection with options, warrants,
and awards......................... (62,620) (1) (194) 16
Deferred tax benefit from exercise of
options............................ -- -- 473
Foreign currency translation
adjustment......................... 136
--------- ---- ------- ----- -------- -----
BALANCE JULY 31, 1995................... 7,542,815 $ 76 $ 22,384 $ -- $ (677) $ (60)
Net loss.............................. (20,904)
Issuance of common stock --
Upon sale in private placements.... 2,607,267 26 14,718
Upon exercise of stock options..... 687,284 7 2,735
Upon exercise of warrants.......... 25,000 -- --
Shares of common stock retired in
connection with options, warrants,
and awards......................... (12,719) -- --
Foreign currency translation
adjustment......................... (90)
--------- ---- ------- ----- -------- -----
BALANCE JULY 31, 1996................... 10,849,647 $109 $ 39,837 $ -- $(21,581) $ (150)
========= ==== ======= ===== ======== =====
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 121
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Penril and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS: Penril considers cash on hand, deposits in
banks, and highly liquid investments with an original maturity of three months
or less as cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
due to the short maturities of such instruments. Long-term debt is carried at
amounts approximating fair values based on current rates offered to Penril for
debt with similar collateral and guarantees, if any, and maturities.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market. The inventories include the cost of material and,
when applicable, labor and manufacturing overhead.
<TABLE>
<CAPTION>
JULY 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Inventories (in thousands):
Raw material............................ $ 5,823 $ 6,381
Work in process......................... 541 452
Finished goods.......................... 3,320 4,594
-------- --------
Total inventories....................... $ 9,684 $ 11,427
======== ========
</TABLE>
PROPERTY, EQUIPMENT AND DEPRECIATION: Additions to property and equipment
are recorded at cost. Penril provides depreciation for financial reporting
purposes using primarily the straight-line method over the estimated useful
lives of the assets which range from 3 to 10 years. Leasehold improvements are
amortized over the term of the related lease or their estimated useful lives,
whichever is shorter (in thousands).
<TABLE>
<CAPTION>
ESTIMATED JULY 31,
USEFUL ---------------------
LIFE 1996 1995
----------- -------- --------
<S> <C> <C> <C>
Machinery, and equipment................ 3-5 years $ 10,875 $ 9,952
Purchased software and technology....... 3-5 years 5,486 5,486
Leasehold improvements.................. 3-10 years 879 865
-------- --------
Total property and equipment, at cost... 17,240 16,303
Less accumulated depreciation and
amortization.......................... (14,783) (13,655)
-------- --------
Total property and equipment, net....... $ 2,457 $ 2,648
======== ========
</TABLE>
REVENUE RECOGNITION: Revenues are recognized at the time of shipment of
the product or performance of product-related services. Revenues from the
license of product technology is recorded upon delivery of the technology
specification and the fulfillment of other material obligations.
ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
<PAGE> 122
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED: During fiscal 1996,
Penril adopted the provisions of Statement of Financial Accounting Standards No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", which requires Penril to review long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As a result of events
occurring in the fourth quarter of fiscal 1996, Penril decided to restructure
and refocus its remaining businesses. Due to these events, Penril determined
that the excess of costs over net assets acquired would not be recoverable, and
a charge of $4,952,000 was taken in the fourth quarter of fiscal 1996 against
the carrying value of this asset. This charge was the remaining balance in the
account "Excess of costs over fair value of net assets acquired" (See Note 2).
Excess of cost over fair value of net assets acquired (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Cost............................................................. $ -- $8,090
Less accumulated amortization.................................... -- 2,401
------ ------
$ -- $5,689
====== ======
</TABLE>
INCOME TAXES: Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future.
A valuation allowance is established to reduce deferred tax assets to the amount
expected to be realized.
EARNINGS PER SHARE: Earnings per share for fiscal 1996 and 1995 are
calculated based on the weighted average shares of common stock outstanding.
Earnings per share for fiscal 1994 year are calculated using the modified
treasury stock method, which limits the assumed purchase of treasury shares to
20% of the outstanding shares of common stock. Any remaining proceeds are
assumed first to retire debt, with any remaining proceeds invested in commercial
paper. The difference between fully diluted and primary earnings per share was
not significant in any year.
SOFTWARE DEVELOPMENT COSTS: Certain acquired software development costs
are being amortized over their estimated economic life, principally five years,
commencing when each product is available for general release. Internal software
development and any other costs of development are expensed as incurred except
those costs applicable to third party contracts.
NEW ACCOUNTING PRONOUNCEMENTS: During fiscal 1996, Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which establishes a fair value based method for stock-based
compensation plans, was issued. SFAS 123 includes both recognition and
measurement provisions and disclosure requirements for stock-based compensation.
The Company has elected not to adopt the recognition and measurement provisions
of SFAS 123. The effect of adopting this statement in fiscal 1997 is not deemed
to be material.
RECLASSIFICATIONS: Certain reclassifications have been made to prior
period consolidated financial statements to conform to the July 31, 1996
presentation.
2. RESTRUCTURING
In the fourth quarter of fiscal 1996, Penril took actions to strategically
restructure its business to improve Penril's financial performance. The
restructuring included a plan to focus Penril's business operations on the
remote access server and remote connectivity markets ("remote access") and away
from the data transmis-
F-8
<PAGE> 123
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sion markets. As a result of this plan Penril recorded a charge of $9,718,000 in
the fourth quarter of fiscal 1996. This charge was for the following costs.
a. The excess of costs over the fair value of net assets acquired through
the Datability, Inc. acquisition in fiscal 1993, was related to data
transmission techniques and, due to the restructuring plan, has no net
realizable value. Accordingly the remaining book value of $4,952,000 was written
off.
b. A charge of $2,339,000 was taken for the write-off of inventory and
fixed assets related to the data transmission business.
c. A charge of $1,012,000 was taken for contractual obligations and
settlement costs incurred for leased facilities in Carlstadt, New Jersey, Hong
Kong and Malaysia, which will be vacated under the restructuring plan.
d. A charge of $979,000 was taken for computer software related to the data
transmission business that was capitalized in accordance with FAS86, which has
no realizable value under the restructuring plan.
e. A charge of $436,000 was taken for severance costs associated with
employees terminated in connection with the restructuring plan. No such costs
were paid as of July 31, 1996.
3. DISCONTINUED OPERATIONS
As part of Penril's decision to restructure its business, the Board of
Directors of Penril decided to sell Electro-Metrics, Inc. ("EMI"), a wholly
owned subsidiary which manufactures test equipment and systems for analysis of
electromagnetic interference and communications security including applications
in satellite communications. As a result of this decision, previously reported
financial statements have been restated to reflect EMI as a discontinued
operation. Penril continues to operate EMI and expects EMI to operate at least
at a break-even level through the anticipated disposition date, which Penril's
management believes will be completed by December 31, 1996.
During fiscal 1995, the Board of Directors of Penril decided to sell
Technipower, a wholly-owned subsidiary manufacturing uninterruptible power
supplies and power regulating equipment. The divestiture of Technipower is
expected to be completed in fiscal 1997 for $4,300,000. The following table sets
forth the selected financial data of both Discontinued Operations (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues................................ $10,469 $ 8,960 $11,995
======= ======= =======
Income (Loss) from operations net of
income taxes.......................... $ 404 $(1,661) $ (828)
Loss on disposal net of income taxes.... (640) (1,400) --
------- ------- -------
Total loss from discontinued
operations............................ $ (236) $(3,061) $ (828)
======= ======= =======
Depreciation and Amortization........... $ 431 $ 415 $ 472
======= ======= =======
Capital Expenditures.................... $ 275 $ 245 $ 441
======= ======= =======
Identifiable Assets at year end......... $10,210 $ 7,950 $ 8,112
======= ======= =======
</TABLE>
Because Penril expects to retain the tax benefits associated with the
discontinued operations, no income tax benefit has been recorded for any year.
F-9
<PAGE> 124
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of the discontinued operations consist of the following (in
thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Current assets.......................... $ 9,135 $ 6,803
Current liabilities..................... (2,229) (1,395)
------- -------
Net current assets...................... 6,906 5,408
Property, plant and equipment, net...... 783 849
Other non-current tangible assets,
net................................... 60 42
Non-current liabilities................. (4) (10)
------- -------
Net tangible assets..................... 7,745 6,289
Intangible assets, net.................. 232 256
------- -------
7,977 6,545
Estimated loss on disposal.............. (640) (1,400)
------- -------
Net Assets of Discontinued Operations... $ 7,337 $ 5,145
======= =======
</TABLE>
4. ACQUISITIONS
On May 6, 1993, Penril acquired all of the outstanding stock of Datability,
Inc. ("Datability"). The acquisition was accounted for by the purchase method,
and accordingly, the results of operations of Datability are included in the
Consolidated Statements of Operations from the date of acquisition. Datability
has been consolidated with Penril's data communications operations located in
Gaithersburg, Maryland.
The acquisition was accomplished through the issuance of 1,050,000 shares
of Penril's common stock ("Common Stock"). The purchase price totaled $4,980,000
including acquisition costs of $386,000. At the acquisition date, the purchase
price exceeded the fair value of net assets acquired by $8,169,000. Under terms
of the agreement, the final purchase price was dependent upon the valuation of
the net assets acquired. During fiscal 1994, a valuation adjustment of $829,000
resulted in 124,388 shares of the Common Stock being returned to Penril thereby
reducing the excess of cost over the fair value of net assets acquired. During
the fourth quarter of fiscal 1996, Penril expensed the remaining portion of
excess of cost over the fair value of net assets acquired.
5. FINANCING
BANK FINANCING: On March 15, 1996 Penril amended the credit agreement with
its principal bank. The new agreement provides for a maximum working capital
facility of $5,500,000 with borrowings based on qualified accounts receivable
and secured by substantially all Penril's assets. Interest accrues at the bank's
prime rate plus 2% with a commitment fee of 3/8% assessed on the unused portion
of the facility. In the event the facility is canceled prior to its expiration,
there is a fee due the bank equal to 3% of the total facility. The agreement
expires March 31, 1997. As of July 31, 1996, Penril had $5,412,000 available of
which Penril had utilized $4,000,000 for working capital loans and $90,000 for a
letter of credit. On June 16, 1996, Penril entered into a Plan and Agreement of
Merger, as amended on August 5, 1996 (the "Merger Agreement") with Bay Networks,
Inc. ("Bay") and a subsidiary of Bay. As part of the Merger Agreement with Bay,
outstanding bank debt up to $4,000,000 remains with Penril after the Transfer.
Average monthly borrowings and weighted average interest rate for the three
years ended July 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Average monthly borrowings under working capital facility
(in thousands)................................................. $4,353 $4,621 $1,475
Weighted average interest rate................................... 10.47% 9.6% 7.2%
</TABLE>
F-10
<PAGE> 125
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 7, 1996, Penril had repaid all outstanding term debt with its
principal bank.
SUBORDINATED DEBT: In April 1995, as part of the bank financing
arrangements, Penril was permitted to make principal payments on the
subordinated debt only after the bank term loans had been reduced by $3,000,000.
This reduction was accomplished by December 1995 at which time Penril made a
subordinated debt principal payment of $174,000 as required by the amended
subordinated debt agreement. The remaining outstanding balance of $805,000 was
repaid in May 1996.
LONG-TERM DEBT: Long-term debt at July 31, 1996 and 1995 consisted of (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----- -------
<S> <C> <C>
Term loans....................................................... $ -- $ 3,848
Subordinated debt................................................ -- 979
----- -------
-- 4,827
Capital leases and other......................................... 905 854
----- -------
905 5,681
Less current portion............................................. (272) (5,164)
----- -------
Long-term debt................................................... $ 633 $ 517
===== =======
</TABLE>
Future maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
Year Ending July 31,
1997.......................... $272
1998.......................... 261
1999.......................... 190
2000.......................... 146
2001.......................... 36
----
Total......................... $905
====
</TABLE>
6. INCOME TAXES
The following table sets forth the differences between the tax provision
(benefit) from continuing operations calculated at the statutory federal income
tax rate and the actual tax benefit for each year (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Tax provision at federal statutory rate....................... $(7,027) $(1,724) $ 644
Amortization of nondeductible intangibles..................... 1,931 283 283
State & foreign taxes, net of federal benefit................. (1,137) (218) 236
Utilization of net operating loss carryforward................ -- -- (1,195)
Change in valuation allowance................................. 6,093 1,134 (538)
Other......................................................... 140 (53) 57
------- ------- -------
Income tax benefit............................................ $ -- $ (578) $ (513)
======= ======= =======
</TABLE>
The primary components of temporary differences which give rise to Penril's
net deferred tax asset are shown in the table below. At July 31, 1996 Penril
had consolidated federal net operating loss carryforwards including the EMI and
Technipower subsidiaries of approximately $17,200,000 which expires in 2007
through 2011, and general business and other tax credits of $1,248,000 to
reduce future tax liabilities through 2009.
F-11
<PAGE> 126
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF JULY 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets (in thousands):
Reserves and other contingencies............................... $ 1,500 $ 1,462
Depreciation and amortization.................................. 65 34
Restructuring reserve.......................................... 1,859
Net operating loss............................................. 6,780 2,615
General business and other tax credits......................... 1,248 1,248
Loss on discontinued operations................................ 546 546
Valuation reserve.............................................. (9,837) (3,744)
------- -------
Total deferred tax assets...................................... 2,161 2,161
Deferred tax liabilities:
Amortization of technologies................................. (461) (461)
------- -------
Net deferred tax assets........................................ $ 1,700 $ 1,700
======= =======
</TABLE>
The net deferred tax asset will remain with Penril after the Transfer
referred to below.
7. COMMITMENTS AND CONTINGENCIES
PENDING TRANSACTION
Under the terms of the Merger Agreement, Penril will transfer (the
"Transfer") all of its remote access products business and any other assets
unrelated to its modem business to a newly formed subsidiary, Access Beyond,
Inc. ("Access Beyond") and then distribute all of the shares of Access Beyond
common stock to Penril's stockholders in a spin-off transaction (the
"Spin-off"). Following the Spin-off, the subsidiary of Bay will merge with and
into Penril, whose primary remaining operations will consist of its modem
business, with Penril becoming a wholly-owned subsidiary of Bay.
Pursuant to the Spin-off and merger, stockholders of Penril, as of the
appropriate record dates, will receive one share of Access Beyond common stock
for every share of Penril common stock held, plus $10 in Bay common stock. The
dollar value of Bay shares to be paid is fixed according to an exchange value
determined by averaging the closing prices of Bay common stock over a specific
period prior to consummation of the merger with Bay. In addition to the assets
and liabilities related to the modem business, Bay will assume the outstanding
bank debt of Penril up to $4,000,000. All cash of Penril on the date of the
closing of the transactions will be transferred to Access Beyond.
The transactions are subject to regulatory and Penril stockholders'
approval and certain conditions to closing as set forth in the Merger Agreement.
At the time of the consummation of the merger, Penril is responsible for payment
of the investment banking fees of approximately $1,300,000 and for change of
control payments of approximately $1,300,000 due to certain officers of Penril.
LEASED FACILITIES: Penril leases office and manufacturing facilities and
equipment under lease agreements, certain of which are renewable at Penril's
option and/or provide for increases in rent related to increases in the Consumer
Price Index and other factors. Rent expense for the fiscal years 1996, 1995 and
1994 was $1,673,000, $1,941,000 and $1,754,000 respectively. Approximate
aggregate future minimum rentals
F-12
<PAGE> 127
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applicable to operating leases in effect at July 31, 1996 without consideration
of the effects of the Spin-off and merger transaction are as follows (in
thousands):
<TABLE>
<S> <C>
Year Ending July 31,
1997.......................... $1,720
1998.......................... 1,758
1999.......................... 1,729
2000.......................... 775
2001.......................... 633
Beyond 2001................... 135
------
Total minimum rentals................... $6,750
======
</TABLE>
LEGAL PROCEEDINGS: Penril is a party to several material legal proceedings
as summarized below. With the exception of the proceeding against Rockwell
International Corporation, et. al., and one other legal proceeding incurred in
connection with the modem business, all costs, expenses, liabilities and
obligations of the litigation will be assumed by Access Beyond in connection
with the Spin-off and all recoveries from such litigation will be realized by
Access Beyond; provided, however, that Penril may be deemed to have remained
contingently liable for satisfaction of the obligations.
On June 1, 1993 Penril initiated a lawsuit against Standard Microsystems
Corp. ("SMC"), SMC Massachusetts, Inc., Ashraf M. Dahad and Kwabena Akufo (the
"SMC Defendants") in the Circuit Court of Maryland for Montgomery County for
breach of contract including, among other things, failure to transfer
technology, unfair competition and false representations. Penril sought relief
in an aggregate amount of approximately $50,000,000. The SMC Defendants
subsequently brought a counterclaim alleging fraud and breach of contract and
sought recovery of amounts due under the contract which were alleged to be
approximately $1,650,000 in compensatory damages plus unspecified punitive
damages. In September 1996, Penril and the SMC Defendants agreed to drop the
fraud charges and to settle the contractual dispute. Penril will receive from
SMC, in settlement of litigation, $3,500,000, net of legal payments, in the
first quarter of fiscal 1997.
On December 24, 1994, Penril filed a complaint against Network Systems
Corporation of Minneapolis, Minnesota ("NSC") in the Circuit Court of Maryland
for Montgomery County. The litigation arises out of a contract in which Penril
agreed to develop certain computer hardware and software to NSC's
specifications. Penril alleges breach of contract, fraudulent inducement and
defamation and is seeking specific performance, compensatory damages of
$2,000,000 and punitive damages of $5,000,000. On March 28, 1995, NSC filed an
answer and counterclaim in which NSC alleges negligent misrepresentation, fraud
and breach of contract by Penril. NSC is seeking rescission of the contract,
restitution of monies paid by NSC to Penril, compensatory damages of $5,000,000
and punitive damages in an unspecified amount. As of July 31, 1996, the
litigation was in the discovery stage.
Digital Equipment Corporation ("DEC") has claimed, through a series of
written communications, that Penril has violated DEC patents related to DEC LAT
technology. Penril has taken the position that Datability, prior to its
acquisition by Penril, had a relationship with DEC that involved the development
of LAT for which Datability has not collected. Both DEC and Penril have taken
the position that it is in the best interests of both parties to work toward a
fair resolution. As of July 31, 1996 no formal claims have been filed.
On December 6, 1995, Penril filed a lawsuit against Rockwell International
Corporation and U.S. Robotics Access Corporation seeking declaratory,
injunctive, and money damage relief by reason of an alleged patent infringement
by the defendants. The action was filed in the United States District Court for
the District of Maryland. In September 1996, Penril agreed to settle its lawsuit
with U.S. Robotics.
Penril is involved in other routine litigation.
F-13
<PAGE> 128
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes none of the litigation will have a material adverse
effect on Penril's financial position or results of operations.
8. STOCKHOLDERS' EQUITY
On September 22, 1995, Penril issued an aggregate of 1,465,000 shares of
its unregistered Common Stock to Pequot Partners Fund, L.P., Pequot Endowment
Fund, L.P and Pequot International Fund, Inc. (collectively the "Investors") for
$7,325,000 in a private transaction. As required by the Purchase Agreement
between the Investors and Penril, a shelf registration was filed with the
Securities and Exchange Commission which became effective on February 28, 1996.
The Investors may request one public shelf registration after the three years
until the later of September 22, 1999 or 30 days after Penril files its annual
report on Form 10-K for the fiscal year ended July 31, 1999. If Penril does not
keep the shelf registration effective for the required three years, the
Investors are entitled to require Penril to effect up to two public
registrations during that time. As part of the transaction, Penril has agreed to
increase the Board of Directors of Penril by one and, so long as the Investors
collectively own in the aggregate not less than 10% of the issued and
outstanding Common Stock, the Investors are entitled to fill such vacancy by
designating one person to the Board of Directors. In addition, on October 5,
1995, Penril completed the sale of 50,000 shares of its unregistered common
stock to Cramer Partners, L.P. for $250,000.
In the second half of fiscal 1996, Penril issued 1,092,267 shares of its
unregistered common stock in an unrelated series of private placements which
generated $7,425,000.
SERIAL PREFERRED STOCK: Penril's Serial Preferred Stock may be issued in
one or more series. The shares of any series may be convertible into Common
Stock, may have priority over Common Stock in the payment of dividends and in
the distribution of assets in the event of liquidation or dissolution of Penril,
and may have preferential or other voting rights, all as determined by the Board
of Directors of Penril at the time it approves the series.
EMPLOYEE STOCK OPTIONS AND STOCK AWARDS: On December 13, 1995, Penril
adopted the 1995 Long-Term Stock Option Incentive Plan (the "1995 Plan") to
replace the 1986 Incentive Plan which expires on October 8, 1996. The
stockholders of Penril approved the 1995 Plan at the Annual Meeting held April
10, 1996. Under the 1995 Plan, which will terminate December 13, 2005, key
employees of Penril and its subsidiaries may be granted awards consisting of
non-qualified stock options, incentive stock options, and restricted stock
awards. The option price of shares of Common Stock will not be less than 100%
(110% in the case of incentive stock options granted to optionees holding more
than 10% of the voting stock of Penril at the date of grant) of the fair market
value of shares of Common Stock on the date of grant. No option will be
exercisable more than ten years (five years in the case of incentive stock
options granted to optionees holding more than 10% of the voting stock of Penril
on the date of grant) from the date it is granted. Penril has reserved 1,000,000
shares for issuance under the 1995 Plan. At July 31, 1996, employees had been
granted awards for 70,000 shares.
In the case of a "change in control" of Penril, an option holder will
generally have the right, commencing at least five days prior to the "change in
control" and subject to any other limitation on the exercise of the option in
effect on the date of exercise, to immediately exercise any options in full to
the extent not previously exercised, without regard to any vesting limitations.
On July 2, 1996 Penril's Stock Option/Compensation Committee (the "Committee")
took action which caused all of the outstanding Penril options held by directors
and executive officers of Penril to vest.
The terms of restricted stock awards granted under the 1995 Plan are
determined at the time of the award. Penril will hold the shares of Common Stock
under restricted stock awards until all restrictions lapse and such Common Stock
may not be sold or transferred by the employee until such time. The employee
must
F-14
<PAGE> 129
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be employed by Penril when the restrictions lapse in order to receive the shares
of Common Stock when the restrictions lapse.
On October 8, 1986, Penril adopted the 1986 Incentive Plan (the "1986
Plan"). Under the 1986 Plan, which will terminate on October 8, 1996, key
employees of Penril and its subsidiaries may be granted awards consisting of
incentive stock options, non-qualified stock options, and restricted stock
awards. The option price of shares of Common Stock subject to options granted
under the 1986 Plan will not be less than 100% (110% in the case of incentive
stock options granted to optionees holding more than ten percent of the voting
stock of Penril at the date of grant) of the fair market value of shares of
Common Stock at the date of grant. No option will be exercisable more than ten
years (five years in the case of incentive stock options granted to optionees
holding more than ten percent of the voting stock of Penril on the date of
grant) from the date it is granted. At July 31, 1996 an aggregate of 964,538
shares of Common Stock were reserved for issuance under the 1986 Plan, of which
employees have been awarded grants for 962,951 shares of Common Stock.
In the case of a "change in control" of Penril, an option holder will
generally have the right, commencing at least five days prior to the "change in
control" and subject to any other limitation on the exercise of the option in
effect on the date of exercise, to immediately exercise any options in full to
the extent not previously exercised, without regard to any vesting limitations.
On July 2, 1996 the Committee took action which caused all of the outstanding
Penril options held by directors and executive officers of Penril to vest.
The terms of restricted stock awards ("Stock Awards") granted under the
1986 Plan are determined at the time of issuance and are evidenced by a written
restricted stock agreement. Any Stock Awards granted are subject to approval by
a majority of all "disinterested directors" as defined in Rule 16b-3 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended.
On October 1, 1992, Penril granted Stock Awards, under the 1986 Plan for an
aggregate of 71,220 shares of Common Stock of Penril to employees of the
Gaithersburg, Maryland facility. The Stock Awards granted vested over two years
and employees had to be employed by Penril when the vested shares of Common
Stock were issued. Of the total shares of Common Stock awarded, 53,020 were
issued. Penril issued 29,560 shares of Common Stock in October, 1993 which
represented 50% of the Stock Awards outstanding on that date and the remaining
23,460 shares of Common Stock on October 1, 1994. Compensation related to the
Stock Award Program was amortized over the vesting period.
NON-EMPLOYEE DIRECTOR STOCK OPTIONS: On December 9, 1987, Penril adopted
the Non-Employee Directors' Stock Option Plan ("Directors Plan"). Under the
Directors Plan an option to purchase 24,000 shares of Common Stock is
automatically granted to each non-employee director of Penril on the first day
of his initial term. In addition, options to purchase shares of Common Stock are
automatically granted to each non-employee director on the fifth business day
after the Annual Report on Form 10-K is filed with the Securities and Exchange
Commission as follows: in each of the first two successive years after the
initial grant an option to purchase 6,000 shares of Common Stock is granted, and
in each of the next five successive years an option to purchase 3,000 shares of
Common Stock is granted. The option price per share of Common Stock of any
option granted under the Directors Plan is the fair market value of a share of
Common Stock on the date the option is granted. No option will be exercisable
more than ten years from the date of grant. An aggregate of 125,333 shares of
Common Stock were reserved for issuance under the Directors Plan at July 31,
1996, of which 92,000 shares of Common Stock have been granted. On July 2, 1996
the Committee took action which caused all of the outstanding Penril options
held by directors and executive officers of Penril to vest.
F-15
<PAGE> 130
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option transactions during the three years ended July
31, 1996 is as follows:
<TABLE>
<CAPTION>
1995 INCENTIVE
1986 INCENTIVE PLAN DIRECTORS' PLAN PLAN
--------------------- -------------------- ------------------
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF PRICE OF PRICE OF PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
--------- --------- -------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding August 1, 1993............ 1,192,752 $4.15 165,000 $3.35 -- $ --
Granted............................... 81,500 4.76 39,000 4.84 -- --
Exercised............................. (132,700) 2.77 -- -- -- --
Canceled.............................. (104,133) 4.67 -- -- -- --
--------- ----- -------- ----- ------ -----
Outstanding July 31, 1994............. 1,037,419 4.15 204,000 3.64 -- --
Granted............................... 348,000 3.12 18,000 3.25 -- --
Exercised............................. (33,067) 2.23 -- -- -- --
Canceled.............................. (233,617) 4.15 -- -- -- --
--------- ----- -------- ----- ------ -----
Outstanding July 31, 1995............. 1,118,735 3.89 222,000 3.61 -- --
Granted............................... 494,000 7.34 18,000 5.69 70,000 $6.77
Exercised............................. (539,284) 4.02 (148,000) 3.87 -- --
Canceled.............................. (110,500) 4.32 -- -- -- --
--------- ----- -------- ----- ------ -----
Outstanding July 31, 1996............. 962,951 $5.54 92,000 $3.59 70,000 $6.77
========= ===== ======== ===== ====== =====
Exercisable Options at July 31,
1996................................ 602,384 $5.73 92,000 $3.59 60,000 $6.44
</TABLE>
WARRANTS: In March, 1987, Henry D. Epstein joined Penril as President and
Chief Executive Officer and was sold Class A warrants to purchase 400,000 shares
of Common Stock at $2.23 per share and Class B warrants to purchase 80,000
shares of Common Stock at $2.34 per share. Mr. Epstein exercised 220,000 Class A
warrants in January 1993, 80,000 Class A warrants in January 1994 and 100,000
Class A warrants in February 1994. In February 1995, Mr. Epstein exercised all
80,000 Class B warrants. All exercises were accomplished by delivery of shares
of Common Stock previously held.
In October 1992, Penril issued a warrant to purchase 166,000 shares of
Common Stock at $4.50 per share, the fair market value on the date of issuance,
to Coast Federal Savings Bank ("Coast") in settlement of a law suit brought
against Penril. In addition, Penril issued Class E warrants to purchase 25,000
shares of Common Stock at $3.625 per share, the fair market value on the date of
issuance, to Mr. Epstein in consideration for Mr. Epstein, in his capacity as a
stockholder of Penril, assisting Penril in settling the litigation with Coast.
The Coast warrant expired June 7, 1995. In August 1995, Mr. Epstein exercised
all Class E warrants.
CASH DIVIDENDS: Penril declared a cash dividend of $.02 per share of
Common Stock to the holders of record on December 16, 1993 and paid December 30,
1993. There were 7,332,296 shares outstanding on the record date.
9. RETIREMENT AND SAVINGS PLAN
Penril's Retirement and Savings Plan ("401(k) Plan") is a defined
contribution plan including provisions of section 401(k) of the Internal Revenue
Code. Employees of Penril who have completed 90 days of service ("Participants")
are eligible to participate in the 401(k) Plan. The 401(k) Plan permits, but
does not require, Penril to match employee contributions. In addition, Penril
may make discretionary contributions to the 401(k) Plan which will be allocated
to each Participant based on the ratio of such Participant's eligible
compensation to the total of all Participants' eligible compensation. Amounts
contributed by Penril vest as to 30% after 1 year of eligible service, 60% after
2 years of eligible service and 100% after 3 years of eligible service.
Participants may elect to direct the investment of their contributions in
accordance with the provisions
F-16
<PAGE> 131
PENRIL DATACOMM NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the 401(k) Plan. Penril made matching contributions of $61,000, $45,000 and
$50,000 during fiscal 1996, 1995 and 1994, respectively. There were no
additional Penril contributions in any year. As part of the Transfer, the 401(k)
Plan will be transferred to Access Beyond and active participation in the 401(k)
Plan will be limited to eligible employees of Access Beyond. Access Beyond
intends to split up the 401(k) Plan so the portion of the plan representing the
benefits of participants not employed by Access Beyond can be terminated. Penril
provides no post-employment or post-retirement benefits.
10. GEOGRAPHIC AREA INFORMATION
Penril's foreign operations consist principally of sales and marketing
activities through subsidiaries located in Hong Kong and the United Kingdom.
Certain information, including the effect of intercompany transactions, relating
to Penril's operations on a geographic basis is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Revenues
U.S. Revenue
Domestic................................................... $ 19,350 $26,190 $35,404
Export:
Europe.................................................. 8,808 9,326 11,665
Pacific Rim............................................. 3,868 6,402 4,959
Central and South America............................... 2,393 3,487 4,574
Other International..................................... 2,235 4,403 4,353
-------- ------- -------
Total Exports........................................... 17,304 23,618 25,551
-------- ------- -------
Total U.S. Revenue........................................... $ 36,654 $49,808 $60,955
Revenue from foreign subsidiaries............................ 7,392 6,839 7,876
Adjustments and eliminations................................. (4,611) (4,036) (6,993)
-------- ------- -------
Total Revenues............................................... $ 39,435 $52,611 $61,838
======== ======= =======
Income (Loss) before taxes
U.S.......................................................... $(20,267) $(5,143) $ 2,457
Foreign...................................................... (531) 688 1,479
Eliminations................................................. 130 (737) (2,104)
-------- ------- -------
Total Income (Loss) from continuing operations before
taxes...................................................... $(20,668) $(5,192) $ 1,832
======== ======= =======
Identifiable Assets
U.S.......................................................... $ 31,325 $40,946 $47,213
Foreign subsidiaries......................................... 2,455 3,441 3,848
-------- ------- -------
Total Identifiable Assets.................................... $ 33,780 $44,387 $51,061
======== ======= =======
</TABLE>
F-17
<PAGE> 132
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bay Networks, Inc.
We have audited the accompanying consolidated balance sheets of Bay
Networks, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1996. These consolidated financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Wellfleet Communications,
Inc., which statements reflect net income constituting approximately 51% of the
related 1994 consolidated financial statement total. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Wellfleet Communications,
Inc. is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, and for 1994 the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bay
Networks, Inc. at June 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
July 19, 1996
F-18
<PAGE> 133
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Wellfleet Communications, Inc.
In our opinion, the consolidated statements of income, of stockholders'
equity and of cash flows of Wellfleet Communications, Inc. and its subsidiaries
(not presented separately herein) present fairly, in all material respects, the
results of their operations and their cash flows for the year ended June 30,
1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Wellfleet
Communications, Inc. for any period subsequent to June 30, 1994.
PRICE WATERHOUSE LLP
Boston, Massachusetts
July 18, 1994
F-19
<PAGE> 134
BAY NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 315,064 $ 283,913
Short-term investments............................................ 119,093 314,872
Accounts receivable, net of allowance for doubtful accounts of
$9,683 at June 30, 1996 and $10,441 at June 30, 1995........... 320,892 177,300
Inventories....................................................... 239,725 94,600
Deferred income taxes............................................. 74,320 83,260
Other current assets.............................................. 48,615 13,670
---------- ----------
Total current assets........................................... 1,117,709 967,615
Investments......................................................... 154,064 52,864
Property and equipment, net......................................... 211,674 122,179
Other assets........................................................ 23,088 12,388
---------- ----------
Total assets................................................... $1,506,535 $1,155,046
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 116,894 $ 83,316
Accrued payroll and related costs................................. 63,242 47,573
Accrued expenses.................................................. 23,108 19,784
Accrued marketing costs........................................... 22,019 15,251
Accrued merger costs.............................................. 5,575 15,066
Accrued income taxes.............................................. 4,818 48,968
Accrued warranty.................................................. 19,408 12,495
Deferred revenue.................................................. 46,629 29,077
---------- ----------
Total current liabilities...................................... 301,693 271,530
---------- ----------
Long-term debt...................................................... 110,147 113,430
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value -- Authorized -- 1,000,000
shares:
Issued and outstanding -- none................................. -- --
Common stock, $.01 par value -- Authorized -- 300,000,000 shares:
Issued and outstanding -- 188,537,072 shares at June 30, 1996
and 181,086,596 shares at June 30, 1995....................... 1,885 1,810
Additional paid-in capital........................................ 474,322 322,704
Retained earnings................................................. 618,488 445,572
---------- ----------
Total stockholders' equity..................................... 1,094,695 770,086
---------- ----------
Total liabilities and stockholders' equity.......................... $1,506,535 $1,155,046
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 135
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenue................................................ $2,056,634 $1,403,595 $1,136,393
Cost of sales.......................................... 945,318 630,983 505,666
---------- ---------- ----------
Gross profit......................................... 1,111,316 772,612 630,727
---------- ---------- ----------
Operating expenses:
Research and development............................. 213,521 145,336 117,626
Selling and marketing................................ 452,319 302,496 246,802
General and administrative........................... 72,205 55,734 47,458
In-process research and development.................. 39,713 6,741 17,898
Merger related expenses.............................. 10,231 63,419 --
---------- ---------- ----------
Total operating expenses.......................... 787,989 573,726 429,784
---------- ---------- ----------
Income from operations................................. 323,327 198,886 200,943
Net interest income and other.......................... 28,489 21,787 7,278
---------- ---------- ----------
Income before provision for income taxes............... 351,816 220,673 208,221
Provision for income taxes............................. 145,491 91,687 83,843
---------- ---------- ----------
Net income............................................. $ 206,325 $ 128,986 $ 124,378
========== ========== ==========
Net income per share................................... $ 1.04 $ 0.69 $ 0.69
========== ========== ==========
Weighted average common shares and equivalents......... 198,778 187,659 180,088
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 136
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER ADDITIONAL TOTAL
OF PAR PAID-IN RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, JULY 1, 1993........................ 167,151 $1,672 $ 232,326 $224,027 $ 458,025
Shares issued under
stock plans, net......................... 4,811 48 24,309 -- 24,357
Tax benefits from stock plan activity....... -- -- 26,292 -- 26,292
Elimination of SynOptics'
net activity for the
six months ended December 31, 1993....... (1,341) (13) (20,348) (28,970) (49,331)
Net income.................................. -- -- -- 124,378 124,378
------- ------ -------- -------- ----------
BALANCES, JUNE 30, 1994....................... 170,621 1,707 262,579 319,435 583,721
Shares issued under
stock plans, net......................... 4,878 48 33,988 -- 34,036
Tax benefits from stock plan activity....... -- -- 13,271 -- 13,271
Shares issued for equity of Centillion...... 5,354 54 11,056 (1,720) 9,390
Shares issued for equity of Scorpion........ 384 3 3,154 -- 3,157
Elimination of Xylogics' net activity for
the three months ended October 31,
1994..................................... (150) (2) (1,344) (1,129) (2,475)
Net income.................................. -- -- -- 128,986 128,986
------- ------ -------- -------- ----------
BALANCES, JUNE 30, 1995....................... 181,087 1,810 322,704 445,572 770,086
Shares issued under
stock plans, net......................... 7,450 75 78,721 (33,409) 45,387
Tax benefits from stock plan activity....... -- -- 72,897 -- 72,897
Net income.................................. -- -- -- 206,325 206,325
------- ------ -------- -------- ----------
BALANCES, JUNE 30, 1996....................... 188,537 $1,885 $ 474,322 $618,488 $ 1,094,695
======= ====== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 137
BAY NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows provided by operating activities:
Net income.................................................... $ 206,325 $ 128,986 $ 124,378
Adjustments to reconcile net income to cash flows provided by
operating activities:
Depreciation and amortization............................. 82,795 59,202 44,288
In-process research and development....................... 39,713 6,741 17,898
Benefit from deferred income taxes........................ (13,900) (37,596) (11,192)
Accounts receivable....................................... (141,506) (27,783) (48,291)
Inventories............................................... (144,425) 7,648 856
Other current assets...................................... (34,945) (965) (6,402)
Accounts payable.......................................... 31,366 25,200 (14,094)
Accrued expenses.......................................... 22,338 48,363 13,990
Deferred revenue.......................................... 17,552 18,788 3,755
Accrued income taxes...................................... 40,600 29,475 43,812
--------- --------- ---------
Cash flows provided by operating activities............ 105,913 258,059 168,998
--------- --------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment..................... (170,574) (79,512) (74,598)
Purchases of investments.................................... (422,280) (517,868) (246,131)
Proceeds from maturities of investments..................... 469,320 293,457 118,689
Proceeds from sales of investments.......................... 47,539 15,237 --
Acquisition of Armon Networking Ltd., net assets............ (34,231) -- --
Acquisition of Performance Technology, Inc., net of cash
acquired.................................................. (11,583) -- --
Other assets................................................ 2,111 (9,823) (20,269)
--------- --------- ---------
Cash flows used in investing activities................ (119,698) (298,509) (222,309)
--------- --------- ---------
Cash flows provided by financing activities:
Proceeds (payments) from issuance of long-term debt......... (451) 254 157
Purchase of treasury common stock........................... (57,353) (1,272) (891)
Issuance of common stock.................................... 102,740 35,308 25,248
--------- --------- ---------
Cash flows provided by financing activities............ 44,936 34,290 24,514
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 31,151 (6,160) (28,797)
Net equity of Centillion Networks, Inc. upon combination...... -- 9,390 --
Net equity of Scorpion Ltd. upon acquisition.................. -- 3,157 --
Elimination of SynOptics' net cash activity for the six months
ended December 31, 1993..................................... -- -- 128,700
Elimination of Xylogics, Inc. net cash activity for the three
months ended October 31, 1994............................... -- (2,476) --
Cash and cash equivalents at beginning of year................ 283,913 280,002 180,099
--------- --------- ---------
Cash and cash equivalents at end of year...................... $ 315,064 $ 283,913 $ 280,002
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid during the year............................... $ 5,927 $ 6,021 $ 6,100
========= ========= =========
Income taxes paid during the year........................... $ 108,881 $ 98,955 $ 51,834
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 138
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Bay Networks,
Inc. (Bay Networks or Bay) and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents, Fair Values of Financial Instruments & Concentration of
Credit Risk
Financial instruments that potentially subject Bay to concentrations of
credit risk consist principally of cash equivalents, investments and trade
receivables.
All of Bay's cash equivalents and investments are classified as
available-for-sale and are reported at fair value with material unrealized gains
and losses, if any, included in stockholders' equity. The fair value of
investments is based on quoted market prices. Realized gains and losses are
included in net interest income and other. Cash equivalents have original
maturities of three months or less. Bay Networks has cash equivalents and
investments with various high quality institutions and, by policy, limits the
amount of credit exposure to any one institution.
Bay sells its products to customers in diversified industries worldwide.
Bay performs on-going credit evaluations of its customers' financial condition
and generally does not require collateral. Bay maintains reserves for potential
credit losses, and such losses have been within management's expectations and
have not been material in any year. Bay's trade receivables are derived from
sales spread across various industries and various geographical areas.
Foreign Currency Translation
The functional currency of each of Bay's international subsidiaries is the
foreign subsidiary's local currency. Assets and liabilities of Bay's
international operations are translated into U.S. dollars at exchange rates in
effect at the balance sheet date. Income and expense items are translated at
average exchange rates for the period. Accumulated net translation adjustments
were not material. Foreign exchange transaction gains and losses were not
material and are included in the results of operations.
Bay Networks' international business is an important contributor to Bay's
revenue and net profits. However, the majority of Bay Networks' international
sales are denominated in the U.S. dollar, and an increase in the value of the
U.S. dollar relative to foreign currencies could make products sold
internationally less competitive. The operating expenses of Bay Networks'
overseas offices are paid in local currencies and are subject to the effect of
fluctuations in foreign currency exchange rates. The effect of foreign exchange
rate fluctuations did not significantly impact Bay's operating results.
Financial exposure may nonetheless result, primarily from the timing of
transactions and the movement of exchange rates.
F-24
<PAGE> 139
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
(In thousands) 1996 1995
- -------------- -------- -------
<S> <C> <C>
Raw materials........................................................... $ 98,342 $30,988
Work-in-process......................................................... 54,468 38,158
Finished goods.......................................................... 86,915 25,454
-------- -------
Total inventories..................................................... $239,725 $94,600
======== =======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets ranging
from two to five years. Leasehold improvements are recorded at cost and are
amortized using the straight-line method over the remaining lease term or the
economic useful life, whichever is shorter.
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
(In thousands) 1996 1995
- -------------- --------- ---------
<S> <C> <C>
Machinery and equipment.............................................. $ 309,473 $ 214,942
Furniture and fixtures............................................... 36,685 22,769
Leasehold improvements............................................... 55,327 26,086
-------- --------
Total property and equipment....................................... 401,485 263,797
Accumulated depreciation and amortization............................ (189,811) (141,618)
-------- --------
Total property and equipment, net.................................. $ 211,674 $ 122,179
======== ========
</TABLE>
Warranty
Upon shipment to its customers, Bay provides for the estimated cost to
repair or replace products to be returned under warranty. Bay's warranty period
is up to 12 months from the date of shipment for domestic sales and up to 15
months from the date of shipment for international export sales.
Revenue Recognition
Bay recognizes revenue from product sales and accrues for estimated returns
at the time of shipment. Service revenue is recognized at the time service is
provided or ratably over the contractual service period.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising
expense was $18.2 million, $7.6 million and $8.4 million in 1996, 1995 and 1994,
respectively.
Net Income per Share
Net income per share is calculated using the weighted average number of
common shares and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of stock options using the
treasury stock method.
F-25
<PAGE> 140
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Distribution
On November 24, 1995, Bay effected a stock distribution in the form of a
three-for-two stock split to stockholders of record as of October 30, 1995. All
share and per share amounts applicable to prior periods have been retroactively
restated to reflect the effect of this split.
Effect of New Accounting Standards
In 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Bay will adopt SFAS 121 in the first
quarter of fiscal year 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
Bay accounts for its stock options and its employee stock purchase plan in
accordance with the provisions of the Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees. In 1995, the FASB issued
Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. Bay
intends to adopt the pro forma disclosure alternative of SFAS 123 for Bay's
fiscal year 1997. The adoption of SFAS 123 is not expected to have a material
effect on consolidated financial position, results of operations, or cash flows.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
2. BUSINESS COMBINATIONS
On October 21, 1994, SynOptics Communications, Inc. (SynOptics) and
Wellfleet Communications, Inc. (Wellfleet) effected a strategic combination of
the two companies through the merger of a wholly-owned subsidiary of Wellfleet
with and into SynOptics (the Combination). In connection with the Combination,
Wellfleet changed its name to Bay Networks, Inc. and issued 70,612,759 shares of
common stock for all the outstanding stock of SynOptics in a transaction
accounted for as a pooling of interests. The accompanying consolidated financial
statements are presented on a combined basis for all periods presented.
In May 1995, Bay acquired Centillion Networks, Inc. (Centillion) and issued
5,353,275 shares of common stock for all the outstanding stock of Centillion in
a transaction accounted for as a pooling of interests. As the results of
operations and financial position of Centillion were not material to Bay
Networks' 1995 consolidated financial statements, the prior years' amounts were
not restated.
In December 1995, Bay acquired Xylogics, Inc. (Xylogics), in a transaction
accounted for as a pooling of interests. Bay issued 8,710,865 shares of common
stock for all the outstanding stock of Xylogics and reserved 1,655,275 shares of
its common stock for issuance under Xylogics stock option plans which Bay
assumed in the acquisition. The accompanying consolidated financial statements
for prior periods have, accordingly, been restated to reflect this transaction.
F-26
<PAGE> 141
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
The following information shows revenue and net income (loss) of the
separate companies through the periods preceding the business combinations and
the combined results following the business combinations.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
(In thousands) 1996 1995 1994
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Bay Networks....................................... $2,026,038 $1,042,665 --
Wellfleet.......................................... -- 126,572 $ 384,223
SynOptics.......................................... -- 173,056 701,749
Xylogics........................................... 30,596 61,302 50,421
---------- ---------- ----------
$2,056,634 $1,403,595 $1,136,393
========== ========== ==========
Net income (loss):
Bay Networks....................................... $ 214,383 $ 92,633 --
Wellfleet.......................................... -- 21,576 $ 61,106
SynOptics.......................................... -- 16,790 59,825
Xylogics........................................... (8,058)(1) (2,013) 3,447
---------- ---------- ----------
$ 206,325 $ 128,986 $ 124,378
========== ========== ==========
<FN>
- ---------------
(1) Xylogics' net loss includes a portion of the merger related expenses.
</TABLE>
Merger related expenses for these transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
(In thousands) 1996 1995
-------------- ------- -------
<S> <C> <C>
Asset write-offs:
Duplicate product line inventory............................. $ 1,000 $ 4,700
Other........................................................ 4,300 4,200
------- -------
5,300 8,900
Accruals (reversals):
Duplicate facilities......................................... (5,900) 15,700
Transaction fees............................................. 7,600 18,800
Severance and related expenses............................... 1,200 8,200
Other........................................................ 2,000 11,800
------- -------
4,900 54,500
------- -------
$10,200 $63,400
======= =======
</TABLE>
Of the total amount for the year ended June 30, 1995, $61.1 million relates
to the Wellfleet/SynOptics combination and $2.3 million relates to the
Centillion acquisition. Of the total amount for the year ended June 30, 1996,
$16.1 million relates to the Xylogics acquisition and $5.9 million represents a
reversal of previously recorded merger related expenses in connection with the
prior year's transactions. Such reduction in the previous estimate was due
primarily to the usage of facilities which Bay had previously planned to vacate.
The remaining $5.5 million accrued at June 30, 1996 allows for accrued rent and
severance related expenses to be paid principally over periods of up to two
years.
Bay has acquired several smaller businesses, each of which has been
accounted for as a purchase. Bay purchased Performance Technology, Inc. for
approximately $12.6 million and Armon Networking, Ltd. for
F-27
<PAGE> 142
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
approximately $34.2 million in 1996; Scorpion Ltd. for approximately $9.3
million in 1995; and Coral Network Corporation for approximately $18.0 million
in 1994. The purchase price of each acquired company was allocated to the
acquired assets and liabilities based on their estimated fair values as of the
date of respective acquisition. Amounts allocated to developed technology,
workforce and goodwill are being amortized on a straight-line basis over a five
year period. Amounts allocated to in-process research and development of
approximately $39.7 million, $6.7 million and $17.9 million in 1996, 1995 and
1994, respectively, were expensed upon the closing of the respective
transactions. Pro forma information has not been presented because the effects
of these acquisitions were not material to Bay's consolidated financial
position, results of operations, or cash flows.
On June 16, 1996, Bay signed a definitive agreement to acquire the Digital
Signal Processing (DSP) modem business of Penril DataComm Networks, Inc.
(Penril), a provider of advanced DSP-based modems and remote access products.
Under terms of the agreement, Bay will exchange $10 payable in Bay's common
stock according to an exchange value determined by averaging Bay's closing stock
prices over a specified period prior to closing, for each share of Penril's
common stock. (At June 6, 1996, Penril had 10,543,369 shares of common stock
outstanding.) Immediately prior to the closing of this transaction, the
remaining non-DSP modem businesses of Penril will be spun off to Penril
stockholders. This acquisition is subject to regulatory approval and Penril
stockholders' approval. The acquisition will be accounted for as a purchase.
Based on preliminary estimates, Bay expects to allocate approximately $60
million to $65 million to in-process research and development, which will be
charged to expense upon the closing of the transaction, currently expected to be
in the quarter ending December 31, 1996.
3. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Investments
All of Bay's cash, cash equivalents and investments were classified as
available-for-sale and consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
(In thousands) 1996 1995
- -------------- ------------- -------------
<S> <C> <C>
Estimated Fair Value:
U.S. Treasuries and obligations of U.S. Government agencies.......... $ 158,000 $ 119,331
Obligations of states and political subdivisions..................... 122,338 163,519
Commercial paper..................................................... 101,568 177,084
Short-term money market funds........................................ 132,740 90,817
Bankers' acceptances................................................. -- 16,143
Demand deposits...................................................... 56,150 22,381
Other debt securities................................................ 17,425 62,374
-------- --------
$ 588,221 $ 651,649
======== ========
</TABLE>
F-28
<PAGE> 143
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of available-for-sale securities by contractual
maturity is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
(In thousands) 1996 1995
- -------------- ------------- -------------
<S> <C> <C>
Due in three months or less.......................................... $ 315,064 $ 283,913
Due through one year................................................. 119,093 314,872
Due after one year through three years............................... 132,547 52,864
Due after three years through five years............................. 21,517 --
-------- --------
$ 588,221 $ 651,649
======== ========
</TABLE>
Both gross unrealized gains and losses as of June 30, 1996 and 1995, and
realized gains and losses on sales of each type of security for the years ended
June 30, 1996 and 1995, were immaterial. At June 30, 1996 and 1995, the fair
market value of available-for-sale investments and cash equivalents approximates
cost. For the purpose of determining gross realized gains and losses, the cost
of securities sold is based upon specific identification.
Long-Term Debt
A subsidiary of Bay has outstanding $110,000,000 of convertible
subordinated debentures which bear interest of 5 1/4% per annum, payable
semi-annually, and mature in May 2003. The debentures are convertible at the
option of the holder into Bay's common stock at a conversion price of $42.61 per
share. Beginning May 1996, the debentures are redeemable at the option of Bay,
initially at approximately 103.7% and at decreasing prices thereafter to 100% at
maturity. The fair value of these debentures is estimated based on quoted market
prices obtained from a third party for similar debt and is approximately $99.7
million and $101.3 million as of June 30, 1996 and 1995, respectively. Bay has
reserved 2,581,725 shares of common stock for the conversion of these
debentures. Interest expense, primarily related to these debentures, was
approximately $5.9 million, $6.0 million and $5.9 million in 1996, 1995 and
1994, respectively.
4. COMMITMENTS AND CONTINGENCIES
Leases
Bay leases its domestic and international facilities under cancelable,
non-cancelable and month-to-month operating leases. Rent expense was
approximately $27.5 million, $22.7 million and $18.4 million in 1996, 1995 and
1994, respectively.
A subsidiary of Bay has a fifty percent interest in a limited partnership
which owns one of Bay's manufacturing facilities. Bay leases this facility from
the limited partnership. Included in the operating lease commitments table below
are $13.7 million related to this facility.
F-29
<PAGE> 144
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments as of June 30, 1996, of which $2.1 million
has been accrued as merger related expenses, are as follows:
<TABLE>
<CAPTION>
(In thousands)
-------------- OPERATING
YEARS ENDING LEASES
------------ ----------
<S> <C>
1997.................................................................... $ 34,442
1998.................................................................... 33,983
1999.................................................................... 29,630
2000.................................................................... 24,016
2001.................................................................... 18,850
Thereafter................................................................ 30,759
--------
Total minimum payments required........................................... $171,680
========
</TABLE>
Legal
From time to time, as a normal incidence of the nature of Bay's business,
various claims, charges and litigation are asserted or commenced against Bay. In
the opinion of management, final judgments from such claims, charges and
litigation, if any, against Bay would not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
5. EQUITY
Employee Stock Option Plans. Bay established a Stock Option Plan in 1994
under which it authorized 30,000,000 shares of common stock for granting of
either incentive or non-qualified stock options and increased the authorized
shares to 41,700,000 in 1996. Exercisability, option price and other terms are
determined by the Board of Directors, but the option price shall not be less
than the fair market value of the stock at the date of grant. Shares of options
generally vest at the rate of 25% after one year from the date of grant, and
then ratably over the following 36 months. At June 30, 1996, 13,339,025 shares
of common stock were reserved for future grants.
Pursuant to business combinations in 1995, Bay assumed stock option plans
under which options were generally exercisable upon grant and vested at the rate
of 25% after one year from the date of grant, and then ratably over the
following 36 months; however, those shares received upon exercise prior to
vesting were subject to repurchase by Bay. As of June 30, 1996, 60,222 shares
were subject to repurchase.
Additionally, on December 15, 1995, pursuant to the acquisition of
Xylogics, Bay assumed 1,655,275 outstanding options originally issued under
various Xylogics stock option plans. The options generally vest at the rate of
25% per year beginning one year from the date of grant.
Outside Directors Stock Option Plans. Bay established an Outside Directors
Stock Option Plan in 1994 under which it authorized 750,000 shares of the common
stock pursuant to a fixed formula for granting of non-qualified stock options to
directors of Bay who are not employees of Bay (Outside Directors) at exercise
prices not less than the fair market value on the date of grant. Upon initial
election or appointment, an Outside Director shall automatically receive an
option to purchase 52,500 shares of common stock. An Outside Director is granted
an additional 15,000 shares of common stock automatically on each of the second
through seventh anniversary dates of his or her initial grant. The options
granted under the Directors Stock Option Plan generally vest at a rate of
33 1/3% on the one year anniversary of the date of grant and then ratably over
the following 36 months. As of June 30, 1996, 495,000 shares of common stock
were reserved for future grants.
F-30
<PAGE> 145
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EQUITY (CONTINUED)
Additional information concerning stock option activity under the various
plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C> <C>
Outstanding at June 30, 1994.............................. 27,816,565 $ .02 - $35.06
Granted and assumed....................................... 12,907,410 .18 - 26.42
Exercised................................................. (4,468,013) .02 - 22.99
Canceled.................................................. (2,779,672) .10 - 35.06
---------- --------- ------
Outstanding at June 30, 1995.............................. 33,476,290 .02 - 35.06
Granted................................................... 6,134,745 19.69 - 43.96
Exercised................................................. (8,625,632) .02 - 35.06
Canceled.................................................. (1,902,955) .10 - 43.81
---------- --------- ------
Outstanding at June 30, 1996.............................. 29,082,448 $ .03 - $43.96
========== ========= ======
Exercisable at June 30, 1996.............................. 26,279,561 $ .03 - $43.96
========== ========= ======
</TABLE>
Employee Stock Purchase Plans. Bay has an Employee Stock Purchase Plan
(the Purchase Plan) under which 2,695,812 shares of common stock remain
available for future purchases. Each eligible employee may purchase shares of
common stock through the accumulation of payroll deductions of up to 10% of each
participating employee's gross wages not to exceed a maximum of $5,040 per
purchase period. The Purchase Plan authorizes the purchase of shares of common
stock at the end of semi-annual purchase periods beginning May 1 and November 1
of each year. The purchase price is an amount equal to 85% of its fair market
value determined as of the beginning of an offering period and the end of a
purchase period. In 1996 and 1995, employees purchased 696,712 shares and
613,070 shares and approximately $13.9 million and $8.2 million of proceeds were
recorded to stockholders' equity, respectively. The Purchase Plan will expire
upon either issuance of all shares reserved for issuance or at the discretion of
the Board of Directors. There are no plans to terminate the Purchase Plan at
this time.
Both Wellfleet and SynOptics maintained employee stock purchase plans under
which eligible employees purchased common stock at a price equal to 85% of the
lower of the fair market values as of the beginning of an offering period and
the end of a purchase period. During 1994, 543,658 shares were issued under
these plans and approximately $7.7 million of proceeds were recorded to
stockholders' equity. Pursuant to the Combination, these plans were terminated.
Stock Purchase Rights Plan. Under a preferred stock purchase rights plan,
adopted by Bay's Board of Directors on February 7, 1995, stockholders of Bay
received rights to purchase stock in Bay, or in an acquirer of Bay, at a
discounted price, under certain circumstances and in the event of particular
hostile efforts to acquire control of the Company. The rights may be redeemed
pursuant to the plan by the Board of Directors. The rights expire on February 7,
2005.
6. EMPLOYEE BENEFIT PLAN
Bay maintains the Bay Networks, Inc. 401(k) Plan (the Plan) to provide
retirement benefits for its employees. As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax deferred salary deductions for
eligible employees. Eligible employees may contribute from 1% to 15% of their
annual compensation to the Plan, limited to a maximum amount as set by the
Internal Revenue Service. Bay will make matching contributions unless business
conditions dictate otherwise, pursuant to a fixed formula and up to a maximum of
$1,500 per year. Bay matching contributions to the Plan totaled $3.4 million in
1996 and immaterial in 1995 and 1994.
F-31
<PAGE> 146
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
(In thousands) 1996 1995 1994
-------------- -------- -------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $131,676 $103,206 $77,200
State............................................. 21,262 19,821 15,592
Foreign........................................... 6,453 6,256 2,243
-------- -------- -------
159,391 129,283 95,035
Deferred:
Federal........................................... (8,346) (31,927) (9,362)
State............................................. (1,171) (5,669) (1,830)
Foreign........................................... (4,383) -- --
-------- -------- -------
(13,900) (37,596) (11,192)
-------- -------- -------
Total provision for income taxes.................... $145,491 $ 91,687 $83,843
======== ======== =======
</TABLE>
The components of Bay's total income (loss) before provision for income
taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
(In thousands) 1996 1995
-------------- -------- --------
<S> <C> <C>
Domestic....................................................... $363,282 $205,273
Foreign........................................................ (11,466) 15,400
-------- --------
Total.......................................................... $351,816 $220,673
======== ========
</TABLE>
For the year ended June 30, 1994, the foreign component of Bay's income
before provision for income taxes was not material.
Bay's effective tax rate was different from the U.S. statutory income tax
rate due to the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory tax rate........................................ 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit......................... 3.3 3.5 4.0
Tax benefit from Foreign Sales Corporation............................. (1.8) (2.6) (1.6)
Research and development (R&D) tax credits............................. -- -- (0.9)
In-process R&D costs relating to an acquisition........................ -- -- 2.7
Merger related expenses................................................ 1.9 3.5 --
Foreign losses not benefitted.......................................... 1.9 -- --
Other.................................................................. 1.1 2.1 1.1
---- ---- ----
41.4% 41.5% 40.3%
==== ==== ====
</TABLE>
F-32
<PAGE> 147
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (CONTINUED)
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. Bay's net deferred tax
assets (net of deferred tax liabilities) are comprised primarily of the
following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
(In millions) 1996 1995
- ------------- ----- -----
<S> <C> <C>
Reserves not currently deductible for tax purposes....................... $67.8 $59.7
Accrued expenses not currently deductible for tax purposes............... 6.1 3.6
Net operating losses and credit carryforwards acquired from Coral Network
Corporation............................................................ 3.9 4.1
Less valuation reserve against above carryforwards....................... (3.9) (4.1)
Net operating losses and credit carryforwards acquired from Centillion
Networks, Inc.......................................................... 2.6 4.4
Less valuation reserve against above carryforwards....................... (2.4) (2.4)
Net operating losses and credit carryforwards acquired from Performance
Technology, Inc. ...................................................... 0.5 --
Less valuation reserve against above carryforwards....................... (0.5) --
State income taxes....................................................... 2.5 3.0
Other individually immaterial items...................................... 5.6 --
----- -----
Total.................................................................... $82.2 $68.3
===== =====
</TABLE>
The valuation allowance at June 30, 1994 was $4.3 million related to Coral
Network Corporation. At June 30, 1996, Bay has available the following acquired
tax carryforwards. Utilization of these carryforwards may be subject to
substantial limitations due to the ownership change limitations provided by the
Internal Revenue Code of 1986.
<TABLE>
<CAPTION>
FEDERAL YEARS OF
TYPE OF TAX CARRYFORWARD: COMPANY FROM WHICH ACQUIRED: AMOUNTS EXPIRATION
- ------------------------------------ ----------------------------- -------------- ----------
<S> <C> <C> <C>
Net operating losses Coral Network Corporation $ 10.6 million 2003-2007
Centillion Networks, Inc. 5.7 million 2007-2009
Performance Technology, Inc. 1.0 million 2004-2009
General Business Tax Credits Coral Network Corporation $ 0.2 million 2003-2007
Centillion Networks, Inc. 0.2 million 2007-2009
Performance Technology, Inc. 0.2 million 2004-2009
</TABLE>
8. GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION
Bay operates in one industry segment and develops, manufactures, markets
and supports a comprehensive line of data networking products and services,
including high-speed routers, switches, intelligent hubs, remote and Internet
access solutions and sophisticated management software providing network design
and configuration solutions. These products enable end users to build or enhance
their data network systems, including all levels from small local area networks
to large enterprise-wide information infrastructures.
One customer accounted for approximately 13% ($263.0 million), 14% ($198.0
million) and 14% ($162.0 million) of Bay's revenue in 1996, 1995 and 1994,
respectively.
Bay's foreign operations consist of sales, marketing, and support
activities in subsidiaries throughout the world. The Company's international
export sales represented 34.8%, 32.7% and 30.4% in 1996, 1995 and 1994,
respectively. Substantially all of the export sales each year were denominated
in U.S. dollars.
F-33
<PAGE> 148
BAY NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION (CONTINUED)
Operating income generated by the foreign operations of Bay and their
corresponding identifiable assets were not material in 1995 and 1994,
respectively. Revenue classified by major geographic area is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
(In thousands) 1996 1995 1994
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues from unaffiliated customers in the United
States................................................... $1,340,136 $ 945,221 $ 790,716
Export sales from the United States:
Europe................................................... 469,762 300,896 211,780
Other.................................................... 246,736 157,478 133,897
---------- ---------- ----------
$2,056,634 $1,403,595 $1,136,393
========== ========== ==========
Operating income (loss):
United States............................................ $ 341,765
Europe................................................... (18,181)
Other.................................................... 5,905
Eliminations............................................. (6,162)
----------
$ 323,327
==========
Identifiable assets:
United States............................................ $1,452,935
Europe................................................... 50,241
Other.................................................... 11,052
Eliminations............................................. (7,693)
----------
$1,506,535
==========
</TABLE>
F-34
<PAGE> 149
ANNEX I
PLAN AND AGREEMENT OF MERGER
This Plan and Agreement of Merger entered into as of June 16, 1996 by and
among Bay Networks, Inc., a Delaware corporation (the "Buyer"), Beta Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of the Buyer (the
"Transitory Subsidiary"), and Penril DataComm Networks, Inc., a Delaware
corporation (the "Company"). The Buyer, the Transitory Subsidiary and the
Company are referred to collectively in this Agreement as the "Parties".
This Agreement contemplates a merger of the Transitory Subsidiary into the
Company, which merger will qualify as a tax-free reorganization described in
Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the
"Code"). In such merger, the stockholders of the Company will receive solely
voting capital stock of the Buyer in exchange for their capital stock of the
Company.
The Parties acknowledge that in the event that the transactions
contemplated by this Agreement are not consummated, the Company would experience
a substantial loss and hardship; therefore, to minimize the potential for such
(i) failure to consummate the transactions and (ii) loss and hardship, the
Parties have knowingly agreed not to include in this Agreement many otherwise
normal conditions to closing the transaction, including but not limited to, a
condition that there shall be no material adverse change prior to the Effective
Time (as defined below) to the Company, its business, financial condition,
results of operations, or prospects, to the Company's industry or to the general
business conditions.
Now, therefore, in consideration of the representations, warranties and
covenants in this Agreement contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 THE MERGER. Upon and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary shall merge with and into the Company (with
such merger referred to in this Agreement as the "Merger") at the Effective Time
(as defined below). From and after the Effective Time, the separate corporate
existence of the Transitory Subsidiary shall cease and the Company shall
continue as the surviving corporation in the Merger (the "Surviving
Corporation"). The "Effective Time" shall be the time at which the Company and
the Transitory Subsidiary file the certificate of merger or other appropriate
documents prepared and executed in accordance with the relevant provisions of
the Delaware General Corporation Law (the "Certificate of Merger") with the
Secretary of State of the State of Delaware. The Merger shall have the effects
set forth in Section 259 of the Delaware General Corporation Law.
1.2 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at a mutually agreed upon location,
commencing at 9:00 a.m. local time on a mutually agreeable date as soon as
practicable after the date on which all of the conditions to the obligations of
the Parties to consummate the transactions contemplated by this Agreement have
been satisfied or waived (the "Closing Date"), but in no event later than 150
days from the date hereof.
1.3 ACTIONS AT THE CLOSING. At the Closing, (a) the Company shall deliver
to the Buyer and the Transitory Subsidiary the various certificates, instruments
and documents referred to in Section 5.2, (b) the Buyer and the Transitory
Subsidiary shall deliver to the Company the various certificates, instruments
and documents referred to in Section 5.3, (c) the Company and the Transitory
Subsidiary shall file with the Secretary of State of the State of Delaware the
Certificate of Merger, and (d) the Buyer shall deliver a certificate for the
Merger Shares (as defined below) to a bank, trust company or other entity
reasonably satisfactory to the Company appointed by the Buyer to act as the
exchange agent (the "Exchange Agent") in accordance with Section 1.7.
<PAGE> 150
1.4 ADDITIONAL ACTION. The Surviving Corporation may, at any time after
the Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5 CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger
and without any action on the part of any Party or the holder of any of the
following securities:
(a) Each share of common stock, $0.01 par value per share, of the Company
("Company Shares") issued and outstanding immediately prior to the Effective
Time (other than Company Shares owned beneficially by the Buyer or the
Transitory Subsidiary, Dissenting Shares (as defined below) and Company Shares
held in the Company's treasury) shall be converted into and represent the right
to receive (subject to the provisions of Section 1.9) such number of shares of
common stock, $0.01 par value per share, of the Buyer ("Buyer Common Stock") as
is equal to the Conversion Ratio (as defined below). The "Conversion Ratio"
shall mean the number determined by dividing (i) $10.00 (ii) by the Buyer Stock
Market Price. The "Buyer Stock Market Price" shall mean the average of the
closing prices of the Buyer's Common Stock on the New York Stock Exchange (the
"NYSE") five (5) consecutive trading days immediately preceding the second
business day immediately preceding to the Closing Date. Stockholders of record
of the Company ("Company Stockholders") shall be entitled to receive immediately
all of the shares of Buyer Common Stock into which their Company Shares were
converted pursuant to this Section 1.5(a) (the "Merger Shares").
(b) Each Company Share held in the Company's treasury immediately prior to
the Effective Time and each Company Share owned beneficially by the Buyer or the
Transitory Subsidiary shall be cancelled and retired without payment of any
consideration therefor.
(c) Each share of common stock, $0.01 par value per share, of the
Transitory Subsidiary issued and outstanding immediately prior to the Effective
Time shall be converted into and thereafter evidence one share of common stock,
$0.01 par value per share, of the Surviving Corporation.
1.6 DISSENTING SHARES.
(a) For purposes of this Agreement, "Dissenting Shares" means Company
Shares held as of the Effective Time by a Company Stockholder who has not voted
such Company Shares in favor of the adoption of this Agreement and the Merger
and with respect to which appraisal shall have been duly demanded and perfected
in accordance with Section 262 of the Delaware General Corporation Law and not
effectively withdrawn or forfeited prior to the Effective Time. Dissenting
Shares shall not be converted into or represent the right to receive Merger
Shares, unless such Company Stockholder shall have forfeited his right to
appraisal under the Delaware General Corporation Law or withdrawn, with the
consent of the Company, his demand for appraisal. If such Company Stockholder
has so forfeited or withdrawn his right to appraisal of Dissenting Shares, then
(i) as of the occurrence of such event, such holder's Dissenting Shares shall
cease to be Dissenting Shares and shall be converted into and represent the
right to receive the Merger Shares issuable in respect of such Company Shares
pursuant to Section 1.5(a), and (ii) promptly following the occurrence of such
event, the Buyer shall deliver to the Exchange Agent a certificate representing
the Merger Shares to which such holder is entitled pursuant to Section 1.5(a).
(b) The Company shall give the Buyer (i) prompt notice of any written
demands for appraisal of any Company Shares, withdrawals of such demands, and
any other instruments that relate to such demands received by the Company and
(ii) the opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the Delaware General Corporation Law. The Company
shall not, except with the prior written consent of the Buyer, make any payment
with respect to any demands for appraisal of Company Shares or offer to settle
or settle any such demands.
1.7 EXCHANGE OF SHARES
(a) Prior to the Effective Time, the Buyer shall appoint the Exchange Agent
to effect the exchange for the Merger Shares of certificates that, immediately
prior to the Effective Time, represented Company Shares converted into Merger
Shares pursuant to Section 1.5 (including any Company Shares referred to in the
last
2
<PAGE> 151
sentence of Section 1.6(a)) ("Certificates"). On the Closing Date, the Buyer
shall deliver to the Exchange Agent, in trust for the benefit of holders of
Certificates, a stock certificate (issued in the name of the Exchange Agent or
its nominee) representing the Merger Shares, as described in Section 1.5(a). As
soon as practicable after the Effective Time, the Buyer shall cause the Exchange
Agent to send a notice and a transmittal form to each holder of a Certificate
(other than those surrendered and paid for at the Closing) advising such holder
of the effectiveness of the Merger and the procedure for surrendering to the
Exchange Agent such Certificate in exchange for the Merger Shares issuable
pursuant to Section 1.5(a). Each holder of a Certificate, upon proper surrender
thereof to the Exchange Agent in accordance with the instructions in such
notice, shall be entitled to receive in exchange therefor (subject to any taxes
required to be withheld) the Merger Shares issuable pursuant to Section 1.5(a).
Until properly surrendered, each such Certificate shall be deemed for all
purposes to evidence only the right to receive the Merger Shares issuable
pursuant to Section 1.5(a). Holders of Certificates shall not be entitled to
receive certificates for the Merger Shares to which they would otherwise be
entitled until such Certificates are properly surrendered.
(b) If any Merger Shares are to be issued in the name of a person other
than the person in whose name the Certificate surrendered in exchange therefor
is registered, it shall be a condition to the issuance of such Merger Shares
that (i) the Certificate so surrendered shall be transferable, and shall be
properly assigned, endorsed or accompanied by appropriate stock powers, (ii)
such transfer shall otherwise be proper and (iii) the person requesting such
transfer shall pay to the Exchange Agent any transfer or other taxes payable by
reason of the foregoing or establish to the satisfaction of the Exchange Agent
that such taxes have been paid or are not required to be paid. Notwithstanding
the foregoing, neither the Exchange Agent nor any Party shall be liable to a
holder of Company Shares for any Merger Shares issuable to such holder pursuant
to Section 1.5(a) that are delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed, the Buyer shall issue in exchange
for such lost, stolen or destroyed Certificate the Merger Shares issuable in
exchange therefor pursuant to Section 1.5(a). The Board of Directors of the
Buyer may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificate to give
the Buyer a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made against the Buyer with respect to the Certificate
alleged to have been lost, stolen or destroyed.
(d) Promptly following the date which is six months after the Closing Date,
the Exchange Agent shall return to the Buyer all Merger Shares in its
possession, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of a Certificate may surrender such Certificate to the Buyer and, subject
to applicable abandoned property, escheat and similar laws, receive in exchange
therefor the Merger Shares issuable with respect thereto pursuant to Section
1.5(a).
1.8 DIVIDENDS. No dividends or other distributions that are payable to the
holders of record of Buyer Common Stock as of a date on or after the Closing
Date shall be paid to former Company Stockholders entitled by reason of the
Merger to receive Merger Shares until such holders surrender their Certificates
in accordance with Section 1.7. Upon such surrender, the Buyer shall pay or
deliver to the persons in whose name the certificates representing such Merger
Shares are issued any dividends or other distributions that are payable to the
holders of record of Buyer Common Stock as of a date on or after the Closing
Date and which were paid or delivered between the Effective Time and the time of
such surrender; provided that no such person shall be entitled to receive any
interest on such dividends or other distributions.
1.9 FRACTIONAL SHARES. No certificates or scrip representing fractional
Merger Shares shall be issued to former Company Stockholders upon the surrender
for exchange of Certificates, and such former Company Stockholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
Merger Shares that would otherwise be issued to such former Company
Stockholders. In lieu of any fractional Merger Shares that would otherwise be
issued, each former Company Stockholder that would have been entitled to receive
a fractional Merger Share
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shall, upon proper surrender of such person's Certificates, receive a cash
payment equal to the closing price per share of the Buyer Common Stock on the
NYSE, on the business day immediately preceding the business day prior to the
Closing Date, multiplied by the fraction of a share that such Company
Stockholder would otherwise be entitled to receive. The fractional share
interests of each Company Stockholder will be aggregated, and no Company
Stockholder will receive cash in an amount equal to or greater than the value of
one full share of Buyer Common Stock.
1.10 OPTIONS AND RIGHTS.
(a) As of the Effective Time, all obligations of the Company with respect
to options to purchase Company Shares issued by the Company to the employees of
the Company listed on Schedule 1.10 pursuant to its stock option plans
("Options"), whether vested or unvested, shall be assumed by the Buyer.
(b) Immediately after the Effective Time, each Option outstanding
immediately prior to the Effective Time shall be deemed to constitute an option
to acquire, on the same terms and conditions as were applicable under such
Option at the Effective Time, such number of shares of Buyer Common Stock as is
equal to the number of Company Shares subject to the unexercised portion of such
Option multiplied by the Conversion Ratio (with any fraction resulting from such
multiplication to be rounded up or down to the nearest whole number or, in the
case of .5, to the nearest odd number). The exercise price per share of each
such Option shall be equal to the exercise price of such Option immediately
prior to the Effective Time, divided by the Conversion Ratio. The term,
exercisability, vesting schedule, status as an "incentive stock option" under
Section 422 of the Code, if applicable, and all of the other terms of the
Options shall otherwise remain unchanged. In addition to the foregoing, the
applicable provisions of each award agreement for Options to be outstanding
after the Effective Time will be equitably adjusted after the Spin-off
Transaction and prior to the Closing by the Company's Board of Directors to
reflect the Spin-off Transaction (as defined herein).
(c) As soon as practicable after the Effective Time, the Buyer or the
Surviving Corporation shall deliver to the holders of Options appropriate
notices setting forth such holders' rights pursuant to such Options, as amended
by this Section 1.10, and the agreements evidencing such Options shall continue
in effect on the same terms and conditions (subject to the amendments provided
for in this Section 1.10 and such notice).
(d) The Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery upon
exercise of the Options. As soon as practicable after the Effective Time, the
Buyer shall file a Registration Statement on Form S-8 (or any successor form)
under the Securities Act of 1933, as amended (the "Securities Act") with respect
to all shares of Buyer Common Stock subject to such Options that may be
registered on a Form S-8, and shall use its best efforts to maintain the
effectiveness of such Registration Statement for so long as such Options remain
outstanding.
(e) The Company shall obtain, prior to the Closing, the consent from each
holder of an Option to the adjustment or amendment, as the case may be, of such
Option or Right pursuant to this Section 1.10 (unless such consent is not
required under the terms of the applicable agreement, instrument or plan).
1.11 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of the
Surviving Corporation shall be the same as the Certificate of Incorporation of
the Transitory Subsidiary immediately prior to the Effective Time, except that
the name of the corporation set forth therein shall be changed to the name of
the Company.
1.12 BY-LAWS. The By-laws of the Surviving Corporation shall be the same
as the By-laws of the Transitory Subsidiary immediately prior to the Effective
Time, except that the name of the corporation set forth therein shall be changed
to the name of the Company.
1.13 DIRECTORS AND OFFICERS. The directors of the Transitory Subsidiary
shall become the directors of the Surviving Corporation as of the Effective
Time. The officers of the Company shall remain as officers of the Surviving
Corporation after the Effective Time, retaining their respective positions,
except as specified by the Buyer pursuant to Section 5.2(g).
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1.14 NO FURTHER RIGHTS. From and after the Effective Time, no Company
Shares shall be deemed to be outstanding, and holders of Certificates shall
cease to have any rights with respect thereto, except as provided in this
Agreement or by law.
1.15 CLOSING OF TRANSFER BOOKS. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented to
the Surviving Corporation or the Exchange Agent, they shall be cancelled and
exchanged for Merger Shares in accordance with Section 1.5(a), subject to
applicable law in the case of Dissenting Shares.
1.16 TAX-FREE REORGANIZATION. The Parties intend to adopt this Agreement
as a tax-free plan of reorganization and to consummate the Merger in accordance
with the provisions of Section 368(a)(1)(B) of the Code. The Buyer represents
and covenants that:
(a) The Surviving Corporation will pay its dissenting stockholders the
value of their Dissenting Shares out of its own funds. No funds will be supplied
for that purpose, directly or indirectly, by the Buyer, nor will the Buyer
directly or indirectly reimburse the Surviving Corporation for any payments for
Dissenting Shares.
(b) The Buyer presently intends, and at the Effective Time it will intend,
to continue the Company's historic business or use a significant portion of the
Company's historic business assets in a business.
(c) The Buyer has no plan or intention to liquidate the Surviving
Corporation; to merge the Surviving Corporation into another corporation; to
cause the Surviving Corporation to sell or otherwise dispose of any of its
assets, except for dispositions made in the ordinary course of the Surviving
Corporation's business; or to sell or otherwise dispose of any of the Company
Shares acquired in the Merger, except for transfers described in Section
368(a)(2)(C) of the Code.
(d) The Buyer has no plan or intention to reacquire any Buyer Common Stock
issued in the Merger.
(e) Neither the Buyer nor the Transitory Subsidiary is an investment
company (as defined in Section 368(a)(2)(F)(iii) and (iv)) of the Code.
(f) The payment of cash in lieu of fractional shares of Buyer Common Stock
is solely for the purpose of avoiding the expense and inconvenience to the Buyer
of issuing fractional shares and shall not represent separately bargained-for
consideration. The total cash consideration that will be paid in the transaction
to the Company Stockholders instead of issuing fractional shares of Buyer Common
Stock will not exceed one percent of the total consideration that will be issued
in the Merger to the Company Stockholders in exchange for their Company Shares.
The fractional share interests of each Company Stockholder will be aggregated,
and no Company Stockholder will receive cash in an amount equal to or greater
than the value of one full share of Buyer Common Stock.
(g) The Transitory Subsidiary is solely and directly owned by the Buyer.
(h) Neither the Buyer nor an affiliate of the Buyer has acquired Company
Shares since June 1, 1991. The Buyer and its affiliates own no Company Shares.
During the period from the date of this Agreement to the Effective Time, other
than pursuant to this Agreement, neither the Buyer nor any affiliate of the
Buyer shall acquire any Company Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule attached hereto (the "Disclosure Schedule"). The Disclosure
Schedule shall be initialed by the Parties and shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
II, and the disclosures in any paragraph of the Disclosure Schedule shall
qualify only the corresponding paragraph in this Article II.
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2.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The Company is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the state of its incorporation. The Company is duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the nature of the business described on
Section 2.1 of the Disclosure Schedule (the "Modem Business") or the ownership
or leasing of its properties relating to the Modem Business requires such
qualification except where the failure to be so qualified would not have a
material adverse effect on the Company and its Modem Subsidiaries (as defined
below) taken as a whole. The Company has all requisite corporate power and
authority to carry on the Modem Business in which it is engaged and to own and
use the properties owned and used by it in the Modem Business. The Company has
furnished to the Buyer true and complete copies of its Certificate of
Incorporation and By-laws, each as amended and as in effect on the date hereof.
The Company is not in violation of any provision of its Certificate of
Incorporation or By-laws.
2.2 CAPITALIZATION. The authorized capital stock of the Company consists
of 20,100,000 shares, comprised of 20,000,000 shares of common stock, $.01 par
value per share, of which 10,543,369 shares are issued and outstanding and no
shares are held in the treasury of the Company, all as of June 6, 1996, and
100,000 shares of preferred stock, $0.01 par value per share, of which no shares
are designated or outstanding. Section 2.2 of the Disclosure Schedule sets forth
a complete and accurate list as of June 6, 1996, of (i) all stockholders of
record of the Company, indicating the number of Company Shares held by each
stockholder, and (ii) all holders of Options, indicating the number of Company
Shares subject to Options held by such holders. All of the issued and
outstanding Company Shares are, and all Company Shares that may be issued upon
exercise of Options in accordance with the terms thereof will be, duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. There are no outstanding or authorized options, warrants, rights,
agreements or commitments to which the Company is a party or which are binding
upon the Company providing for the issuance, disposition or acquisition of any
of its capital stock, other than as listed in Section 2.2 of the Disclosure
Schedule. There are no outstanding or authorized stock appreciation, phantom
stock or similar rights with respect to the Company. Except pursuant to this
Agreement or the Affiliate Agreement (as defined herein), there are no
agreements, voting trusts, proxies, or understandings with respect to the
voting, or registration under the Securities Act, of any Company Shares other
than as set forth in Section 2.2 of the Disclosure Schedule. All of the issued
and outstanding Company Shares were issued in compliance with applicable federal
and state securities laws.
2.3 AUTHORIZATION OF TRANSACTION. The Company has all requisite power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement and, subject to the
adoption of this Agreement and the approval of the Merger by a majority of the
votes represented by the outstanding Company Shares entitled to vote on this
Agreement and the Merger (the "Requisite Stockholder Approval"), the performance
by the Company of this Agreement and the consummation by the Company of the
transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action on the part of the Company. This
Agreement has been duly and validly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms.
2.4 NONCONTRAVENTION. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott-Rodino Act"), the filing of the Certificate of Merger as required by
the Delaware General Corporation Law, and the filing of requisite forms relating
to the transfer of certain intellectual property rights of the Company (as
contemplated by this Agreement) neither the execution and delivery of this
Agreement by the Company, nor the consummation by the Company of the
transactions contemplated by this Agreement (and, for clauses (b) and (d) of
this Section 2.4, other than Spin-off Transaction), will (a) conflict with or
violate any provision of the charter or By-laws of the Company, (b) require on
the part of the Company or any corporation with respect to which the Company,
directly or indirectly, has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors (a "Subsidiary") any filing
with, or any permit, authorization, consent or approval of, any court,
arbitrational tribunal, administrative agency or commission or other
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governmental or regulatory authority or agency (a "Governmental Entity"), other
than any filing, permit, authorization, consent or approval which if not
obtained or made would not have a material adverse effect on the assets,
business, financial condition, results of operations or future prospects of the
Company and its Subsidiaries relating to the Modem Business, taken as a whole,
or on the ability of the Parties to consummate the transactions contemplated by
this Agreement, (c), except as set forth in Section 2.4 to the Disclosure
Schedule, conflict with, result in a breach of, constitute (with or without due
notice or lapse of time or both) a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify or cancel, or
require any notice, consent or waiver under, any contract, lease, sublease,
license, sublicense, franchise, indenture, agreement or mortgage for borrowed
money, instrument of indebtedness, Security Interest (as defined below) or other
arrangement to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary is bound or to which any of their assets is subject,
other than any conflict, breach, default, acceleration, termination,
modification or cancellation which individually or in the aggregate would not
have a material adverse effect on the assets, business, financial condition,
results of operations or future prospects of the Company and its Subsidiaries,
taken as a whole, or on the ability of the Parties to consummate the
transactions contemplated by this Agreement, (d) result in the imposition of any
Security Interest upon any assets of the Company or any Subsidiary relating to
the Modem Business or (e) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to the Company, any Subsidiary or any of their
properties or assets relating to the Modem Business. For purposes of this
Agreement, "Security Interest" means any mortgage, pledge, security interest,
encumbrance, charge, or other lien (whether arising by contract or by operation
of law), other than (i) mechanic's, materialmen's, and similar liens, (ii) liens
arising under worker's compensation, unemployment insurance, social security,
retirement, and similar legislation, and (iii) liens on goods in transit
incurred pursuant to documentary letters of credit, in each case arising in the
ordinary course of business consistent with past custom and practice (including
with respect to frequency and amount) ("Ordinary Course of Business") of the
Company and not material to the Company.
2.5 SUBSIDIARIES. Section 2.5 of the Disclosure Schedule lists each
Subsidiary and each Modem Subsidiary and sets forth for each Modem Subsidiary
(a) its jurisdiction of incorporation, (b) the number of shares of authorized
capital stock of each class of its capital stock, (c) the number of issued and
outstanding shares of each class of its capital stock, the names of the holders
thereof and the number of shares held by each such holder, (d) the number of
shares of its capital stock held in treasury, and (e) its directors and
officers. Each Modem Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation. Each Modem Subsidiary is duly qualified to conduct business and
is in corporate and tax good standing under the laws of each jurisdiction in
which the nature of its businesses or the ownership or leasing of its properties
requires such qualification except where the failure to be so qualified would
not have a material adverse effect on the Company and the Modem Subsidiaries
taken as a whole. Each Modem Subsidiary has all requisite corporate power and
authority to carry on the Modem Business in which it is engaged and to own and
use the properties owned and used by it in the Modem Business. The Company has
delivered or made available to the Buyer correct and complete copies of the
charter and By-laws of each Modem Subsidiary, as amended to date. No Modem
Subsidiary is in violation of any provision of its charter or By-laws. All of
the issued and outstanding shares of capital stock of each Modem Subsidiary are
duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. All shares of each Modem Subsidiary that are held of record
or owned beneficially by either the Company or any Modem Subsidiary are held or
owned free and clear of any restrictions on transfer (other than restrictions
under the Securities Act and state securities laws or as set forth in Section
2.5 of the Disclosure Schedule), claims, Security Interests, options, warrants,
rights, contracts, calls, commitments, equities and demands. There are no
outstanding or authorized options, warrants, rights, agreements or commitments
to which the Company or any Modem Subsidiary is a party or which are binding on
any of them providing for the issuance, disposition or acquisition of any
capital stock of any Modem Subsidiary. There are no outstanding stock
appreciation, phantom stock or similar rights with respect to any Modem
Subsidiary. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of any capital stock of any Modem
Subsidiary, except as set forth in Section 2.5 of the Disclosure Schedule. The
Company does not
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control directly or indirectly or have any direct or indirect equity
participation in any corporation, partnership, trust, or other business
association which is not a Subsidiary.
2.6 REPORTS AND FINANCIAL STATEMENTS. The Company has previously furnished
or made available to the Buyer complete and accurate copies, as amended or
supplemented, of its (a) Annual Report on Form 10-K for the fiscal years ended
July 31, 1994, and July 31, 1995, as filed with the Securities and Exchange
Commission (the "SEC"), (b) proxy statements relating to all meetings of its
stockholders (whether annual or special) since July 31, 1994, and (c) all other
reports or registration statements, other than Registration Statements on Form
S-8, filed by the Company with the SEC since July 31, 1994 (such annual reports,
proxy statements, registration statements and other filings, together with any
amendments or supplements thereto, are collectively referred to in this
Agreement as the "Company Reports"). The Company Reports constitute all of the
documents filed or required to be filed by the Company with the SEC since July
31, 1994, other than any Registration Statement on Form S-8. As of their
respective dates, the Company Reports filed since July 31, 1994, did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited financial statements and unaudited interim financial statements of the
Company included in the Company Reports filed since July 31, 1994 (together, the
"Financial Statements"), (i) comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, (ii) have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods covered thereby (except as may be indicated therein
or in the notes thereto, and in the case of quarterly financial statements, as
permitted by Form 10-Q under the Exchange Act), (iii) fairly present the
consolidated financial condition, results of operations and cash flows of the
Company and the Subsidiaries as of the respective dates thereof and for the
periods referred to therein, and (iv) are consistent with the books and records
of the Company and the Subsidiaries.
2.7 UNDISCLOSED LIABILITIES. As of the date hereof, none of the Company
and its Subsidiaries has any material liability (whether known or unknown,
whether absolute or contingent, whether liquidated or unliquidated and whether
due or to become due), except for (a) liabilities shown on the balance sheet
included in the Company's most recent Quarterly Report on Form 10-Q filed with
the SEC on March 15, 1996 (the "Most Recent Balance Sheet"), (b) liabilities
which have arisen since January 31, 1996, in the Ordinary Course of Business,
(c) contractual liabilities incurred in the Ordinary Course of Business which
are not required by GAAP to be reflected on a balance sheet and (d) liabilities
disclosed in Section 2.18 of the Disclosure Schedule. As used in this Section
2.7, "material liability" is deemed to mean a liability in excess of $100,000.
2.8 TAX MATTERS.
(a) Each of the Company and the Subsidiaries has filed all material Tax
Returns (as defined below) that it was required to file (taking into account
extensions) and to the knowledge of the Company no material position is
reflected in a Tax Return for which there was not substantial authority (as
defined in Section 6662 of the Code) or comparable foreign, federal, state or
local law. Each of the Company and the Subsidiaries has paid all Taxes (as
defined below) that are shown to be due on any such Tax Returns. The unpaid
Taxes of the Company and the Subsidiaries for tax periods through the date of
the Most Recent Balance Sheet are appropriately accrued or reserved for on the
Most Recent Balance Sheet. Neither the Company nor any Subsidiary has any actual
or potential liability for any Tax obligation of any taxpayer (including without
limitation any affiliated group of corporations or other entities that included
the Company or any Subsidiary during a prior period) other than the Company and
the Subsidiaries. All material Taxes that the Company or any Subsidiary is or
was required by law to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental Entity.
For purposes of this Agreement, "Taxes" means all taxes, charges, fees, levies
or other similar assessments or liabilities, including without limitation
income, gross receipts, ad valorem, premium, value-added, excise, real property,
personal property, sales, use, transfer, withholding, employment, payroll and
franchise taxes imposed by the United States of America or any state, local or
foreign government, or any agency thereof, or other political subdivision of the
United States
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or any such government, and any interest, fines, penalties, assessments or
additions to tax resulting from, attributable to or incurred in connection with
any tax or any contest or dispute thereof. For purposes of this Agreement, "Tax
Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes.
(b) The Company has delivered to the Buyer correct and complete copies of
all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by any of the Company or any
Subsidiary between January 1, 1989 and the date hereof. The federal income Tax
Returns of the Company have been audited by the Internal Revenue Service (the
"IRS") or are closed by the applicable statute of limitations for all taxable
years through July 31, 1986. As of the date hereof, no federal or state income
tax examination or audit of any Tax Returns of the Company or any Subsidiary by
any Governmental Entity is currently in progress or, to the knowledge of the
Company and the Subsidiaries, threatened or contemplated. As of the date hereof,
neither the Company nor any Subsidiary has waived any statute of limitations
with respect to taxes or agreed to an extension of time with respect to a tax
assessment or deficiency.
(c) Neither the Company nor any Subsidiary is a "consenting corporation"
within the meaning of Section 341(f) of the Code and none of the assets of the
Company or the Subsidiaries are subject to an election under Section 341(f) of
the Code. Neither the Company nor any Subsidiary has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
Neither the Company nor any Subsidiary is a party to any Tax allocation or
sharing agreement.
(d) Neither the Company nor any Subsidiary is or has ever been a member of
an "affiliated group" of corporations (within the meaning of Section 1504 of the
Code), other than a group of which only the Company and the Subsidiaries are
members. Neither the Company nor any Subsidiary has made an election under
Treasury Reg. Section 1.1502-20(g). Neither the Company nor any Subsidiary is or
has been required to make a basis reduction pursuant to Treasury Reg. Section
1.1502-20(b) or Treasury Reg. Section 1.337(d)-2T(b).
2.9 ASSETS. Each of the Company and the Subsidiaries owns or leases all
tangible assets necessary for the conduct of the Modem Business as presently
conducted and as presently proposed by the Company to be conducted. Each such
tangible asset is free from material defects, has been maintained in accordance
with normal industry practice, is in good operating condition and repair
(subject to normal wear and tear) and is suitable for the purposes for which it
presently is used. Except as set forth in Section 2.9 of the Disclosure
Schedule, no material asset of the Company (tangible or intangible) is subject
to any Security Interest.
2.10 OWNED REAL PROPERTY. Neither the Company nor any Modem Subsidiary
owns any real property.
2.11 INTELLECTUAL PROPERTY.
(a) Each of the Company and the Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights under all patents and patent
applications listed in Section 2.11 of the Disclosure Schedule and the right to
use all trademarks, trade names, service marks, copyrights, and any applications
for such trademarks, trade names, service marks and copyrights, schematics,
technology, know-how, computer software programs or applications and tangible or
intangible proprietary information or material listed in Section 2.11 of the
Disclosure Schedule that are used to conduct its Modem Business as currently
conducted or as currently planned by the Company to be conducted (collectively,
"Intellectual Property") and, except as qualified by or disclosed in Section
2.11 of the Disclosure Schedule, is aware of no intellectual property right of
any third party that may prevent the Company or its Subsidiaries from conducting
its Modem Business as currently conducted or as planned by the Company to be
conducted. Section 2.11 of the Disclosure Schedule lists (i) all patents and
patent applications and all trademarks, registered copyrights, trade names and
service marks which are both owned by and used in the Modem Business, including
the jurisdictions in which each such Intellectual Property right has been issued
or registered or in which any such application for such issuance or registration
has been filed, (ii) all material written licenses, sublicenses and other
agreements to which the Company or a Subsidiary is a party and pursuant to which
any person is authorized to use any
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Intellectual Property rights, and (iii) all material written licenses,
sublicenses and other agreements as to which the Company or a Subsidiary is a
party and pursuant to which the Company or a Subsidiary is authorized to use any
third party patents, trademarks or copyrights, including software, which are
used in the Modem Business or which form a part of any product or service
relating to the Modem Business ("Third Party Intellectual Property Rights").
Neither the Company nor any Subsidiary is a party to any oral license,
sublicense or agreement which, if reduced to written form, would be required to
be listed in Section 2.11 of the Disclosure Schedule under the terms of this
Section 2.11.
(b) Neither the Company nor any of the Subsidiaries is, nor will any of
them be as a result of the execution and delivery of this Agreement or the
performance of the Company's obligations under this Agreement, knowingly
infringing upon any intellectual property rights of others or in breach of any
license, sublicense or other agreement relating to the Intellectual Property or
Third Party Intellectual Property Rights, except as qualified by or disclosed in
Section 2.11 of the Disclosure Schedule.
(c) Except as set forth in Section 2.11 of the Disclosure Schedule, neither
the Company nor any of the Subsidiaries has been named in any suit, action or
proceeding which involves a claim of infringement of any Intellectual Property
right of any third party. Except as qualified by or disclosed in Section 2.11 of
the Disclosure Schedule, the manufacturing, marketing, licensing or sale of the
products or performance of the service offerings of the Company and the
Subsidiaries relating to the Modem Business do not infringe any Intellectual
Property right of any third party; and to the knowledge of the Company and the
Subsidiaries, the Intellectual Property rights of the Company and the
Subsidiaries are not being infringed by activities, products or services of any
third party.
2.12 INVENTORY. All inventory of the Company and the Subsidiaries relating
to the Modem Business, whether or not reflected on the Most Recent Balance
Sheet, consists of a quality and quantity usable and saleable in the Ordinary
Course of Business, except for obsolete items and items of below-standard
quality, all of which were, as of the date of the Most Recent Balance Sheet,
written-off or written-down to net realizable value or for which reserves were
established and set forth on the Most Recent Balance Sheet or which became such
in the Ordinary Course of Business after the date of the Most Recent Balance
Sheet.
2.13 REAL PROPERTY LEASES. Section 2.13 of the Disclosure Schedule lists
and describes briefly all real property leased or subleased to the Company or
any Subsidiary and lists the term of such lease, any extension and expansion
options, and the rent payable thereunder. The Company has delivered or made
available to the Buyer correct and complete copies of the leases and subleases
(as amended to the date hereof) listed in Section 2.13 of the Disclosure
Schedule.
2.14 CONTRACTS. Section 2.14 of the Disclosure Schedule lists the
following written arrangements (including without limitation written agreements)
to which the Company or any Subsidiary is a party:
(a) any written arrangement (or group of related written arrangements) for
the lease of personal property from or to third parties providing for lease
payments in excess of $200,000.00 per annum;
(b) any written arrangement (or group of related written arrangements)
relating to the Modem Business for the purchase or sale of raw materials,
commodities, supplies, products or other personal property or for the furnishing
or receipt of services (i) which calls for performance over a period of more
than one year, (ii) which involves more than the sum of $200,000.00, to be paid
from and after the date hereof as to any part or item for the Modem Business or
(iii) in which the Company or any Subsidiary has granted manufacturing rights,
"most favored nation" pricing provisions or marketing or distribution rights
relating to any products or territory related to the Modem Business or has
agreed to purchase a minimum quantity of goods or services or has agreed to
purchase goods or services related to the Modem Business exclusively from a
certain party;
(c) any written arrangement establishing a partnership or joint venture;
(d) any written arrangement (or group of related written arrangements)
under which it has created, incurred, assumed, or guaranteed (or may create,
incur, assume, or guarantee) indebtedness (including capitalized lease
obligations) involving more than $200,000.00 or under which it has imposed (or
may impose) a Security Interest on any of its assets, tangible or intangible;
(e) any written arrangement concerning noncompetition relating to the Modem
Business;
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(f) any written arrangement with any affiliates, as defined in Rule 12b-2
under the Exchange Act, of the Company ("Affiliates");
(g) any other written arrangement (or group of related written
arrangements) relating to the Modem Business not entered into in the Ordinary
Course of Business; and
(h) any other written arrangement (or group of related arrangements)
involving more than $200,000.00 per annum to be paid from and after the date
hereof, other than contracts, records and documents not relating to the Modem
Business that the Company reasonably and in good faith determines is of a
confidential and competitive nature.
The Company has delivered or made available to the Buyer a correct and complete
copy of each written arrangement (as amended to the date hereof) listed in
Section 2.14 of the Disclosure Schedule. With respect to each written
arrangement so listed: (i) the written arrangement is legal, valid, binding and
enforceable and in full force and effect as to the Company, and (ii) neither the
Company nor, to the Company's knowledge, the other parties thereto is in breach
or default, and no event has occurred which with notice or lapse of time would
constitute a breach or default or permit termination, modification, or
acceleration, by the Company or, to the Company's knowledge, by the other
parties thereto, under the written arrangement. Neither the Company nor any
Subsidiary is a party to any oral contract, agreement or other arrangement
which, if reduced to written form, would be required to be listed in Section
2.14 of the Disclosure Schedule under the terms of this Section 2.14.
2.15 ACCOUNTS RECEIVABLE. All accounts receivable of the Company and the
Subsidiaries relating to the Modem Business reflected on the Most Recent Balance
Sheet arose in the Ordinary Course of Business.
2.16 POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of the Company or any Modem Subsidiary.
2.17 INSURANCE. Section 2.17 of the Disclosure Schedule lists all
insurance policies of the Company relating to the Modem Business. Neither the
Company nor any Subsidiary has incurred any loss, damage, expense or liability
relating to the Modem Business covered by any such insurance policy for which it
has not properly asserted a claim under such policy. Each of the Company and the
Modem Subsidiaries is covered by insurance in scope and amount customary and
reasonable for the Modem Business.
2.18 LITIGATION. Section 2.18 of the Disclosure Schedule identifies, and
contains a brief description of, (a) any unsatisfied judgement, order, decree,
stipulation or injunction and (b) any claim, complaint, action, suit,
proceeding, hearing or investigation of or in any Governmental Entity or before
any arbitrator to which the Company or any Subsidiary is a party or, to the
knowledge of the Company and the Subsidiaries, is threatened to be made a party.
2.19 PRODUCT WARRANTY. No product manufactured, sold, leased, licensed or
delivered by the Company or any Subsidiary relating to the Modem Business is
subject to any guaranty, warranty, right of return or other indemnity beyond in
any material respect the applicable standard terms and conditions of sale or
lease, which are set forth in Section 2.19 of the Disclosure Schedule.
2.20 EMPLOYEES. Part I of Section 2.20 of the Disclosure Schedule contains
a list of all employees of the Company and each Subsidiary who are employed in
connection with the Modem Business, along with the position. The Company has
delivered to the Buyer a list setting forth the annual compensation of each such
person. Each employee of the Company and each Subsidiary listed in Part II of
Section 2.20 of the Disclosure Schedule has entered into an agreement relating
to the confidentiality and/or assignment of inventions with the Company or a
Subsidiary set forth opposite the employee's name, a copy of which has
previously been delivered to the Buyer. Neither the Company nor any Subsidiary
is a party to or bound by any collective bargaining agreement, nor has any of
them experienced any strikes, grievances, claims of unfair labor practices or
other collective bargaining disputes within the last two years. The Company and
the Subsidiaries have no knowledge of any organizational effort made or
threatened, either currently or within the past two years, by or
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on behalf of any labor union with respect to employees of the Company or any
Subsidiary who are employed in connection with the Modem Business.
2.21 EMPLOYEE BENEFITS.
(a) Section 2.21(a) of the Disclosure Schedule contains a complete and
accurate list of all Employee Benefit Plans (as defined below). For purposes of
this Agreement, "Employee Benefit Plan" means any "employee pension benefit
plan" (as defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")), any "employee welfare benefit plan" (as defined
in Section 3(1) of ERISA), and any other written or oral plan, agreement or
arrangement involving direct or indirect severance benefits, disability
benefits, deferred compensation, bonuses, stock options, stock purchase, phantom
stock, stock appreciation or other forms of incentive compensation or
post-retirement compensation maintained or contributed by the Company, any
Subsidiary or any ERISA Affiliate (as defined below). For purposes of this
Agreement, "ERISA Affiliate" means any entity which is a member of (i) a
controlled group of corporations (as defined in Section 414(b) of the Code),
(ii) a group of trades or businesses under common control (as defined in Section
414(c) of the Code), or (iii) an affiliated service group (as defined under
Section 414(m) of the Code or the regulations under Section 414(o) of the Code),
any of which includes the Company or a Subsidiary. Complete and accurate copies
of (i) all Employee Benefit Plans which have been reduced to writing, (ii)
written summaries of all unwritten Employee Benefit Plans, (iii) all related
trust agreements, insurance contracts and summary plan descriptions, and (iv)
all annual reports filed on IRS Form 5500, 5500C or 5500R for the last three
plan years for each Employee Benefit Plan, have been delivered or made available
to the Buyer. Each Employee Benefit Plan has been administered in all material
respects in accordance with its terms and each of the Company, the Subsidiaries
and the ERISA Affiliates has in all material respects met its obligations with
respect to such Employee Benefit Plan and has made all required contributions
thereto. The Company has made no commitments to make any voluntary contributions
to or to voluntarily fund any Employee Benefit Plans with the exception of
401(k) matching contribution commitments previously communicated to employees.
The Company and all Employee Benefit Plans are in compliance in all material
respects with the currently applicable provisions of ERISA and the Code and the
regulations thereunder.
(b) There are no investigations by any Governmental Entity, termination
proceedings or other claims (except claims for benefits payable in the normal
operation of the Employee Benefit Plans and proceedings with respect to
qualified domestic relations orders), suits or proceedings against or involving
any Employee Benefit Plan or asserting any rights or claims to benefits under
any Employee Benefit Plan that could give rise to any material liability.
(c) All the Employee Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the Internal
Revenue Service to the effect that such Employee Benefit Plans are qualified and
the plans and the trusts related thereto are exempt from federal income taxes
under Sections 401(a) and 501(a), respectively, of the Code, no such
determination letter has been revoked and, to the knowledge of the Company, such
revocation has not been threatened, and no such Employee Benefit Plan has been
amended since the date of its most recent determination letter or application
therefor in any respect, and, to the knowledge of the Company, no act or
omission has occurred, that would adversely affect its qualification or
materially increase its cost.
(d) Neither the Company, any Subsidiary, nor any ERISA Affiliate has,
during the six years preceding the Effective Time, maintained an Employee
Benefit Plan subject to Section 412 of the Code or Title IV of ERISA.
(e) At no time has the Company, any Subsidiary or any ERISA Affiliate been
obligated to contribute to any "multi-employer plan" (as defined in Section
4001(a)(3) of ERISA).
(f) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of the
Company or any Subsidiary (or to any beneficiary of any such employee),
including but not limited to retiree health coverage and deferred compensation,
but excluding
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continuation of health coverage required to be continued under Section 4980B of
the Code or state insurance law.
(g) To the knowledge of the Company, no act or omission has occurred and no
condition exists with respect to any Employee Benefit Plan maintained by the
Company, any Subsidiary or any ERISA Affiliate that would subject the Company,
any Subsidiary or any ERISA Affiliate to any material fine, penalty, tax or
liability of any kind imposed under ERISA or the Code.
(h) Except as set forth on Section 2.21(h) of the Disclosure Schedule, no
Employee Benefit Plan is funded by, associated with, or related to a "voluntary
employee's beneficiary association" within the meaning of Section 501(c)(9) of
the Code.
(i) No Employee Benefit Plan, plan documentation or agreement, summary plan
description or other written communication distributed generally to employees by
its terms prohibits the Company or, if applicable, the Subsidiary or ERISA
Affiliate, from amending or terminating any such Employee Benefit Plan.
(j) Section 2.21(j) of the Disclosure Schedule discloses each: (i)
agreement with any director, executive officer or other key employee of the
Company or any Subsidiary (A) the benefits of which are contingent, or the terms
of which are materially altered, upon the occurrence of a transaction involving
the Company or any Subsidiary of the nature of any of the transactions
contemplated by this Agreement, (B) providing any term of employment or
compensation guarantee or (C) providing severance benefits or other benefits
after the termination of employment of such director, executive officer or key
employee; (ii) agreement, plan or arrangement under which any person may receive
payments from the Company or any Subsidiary that may be subject to the tax
imposed by Section 4999 of the Code or included in the determination of such
person's "parachute payment" under Section 280G of the Code; and (iii) agreement
or plan binding the Company or any Subsidiary, including without limitation any
stock option plan, stock appreciation right plan, restricted stock plan, stock
purchase plan, severance benefit plan, or any Employee Benefit Plan, any of the
benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
2.22 ENVIRONMENTAL MATTERS.
(a) Each of the Company and the Subsidiaries has complied with all
applicable Environmental Laws (as defined below), except for violations of
Environmental Laws that do not, individually or in the aggregate, have a
material adverse effect on the assets, business, financial condition, or results
of operations of the Company and the Subsidiaries. To the knowledge of the
Company and the Subsidiaries, there are no pending, threatened civil or criminal
litigation, written notice of violation, formal administrative proceeding, or
investigation, inquiry or information request by any Governmental Entity,
relating to any Environmental Law involving the Company or any Subsidiary,
except for litigation, notices of violations, formal administrative proceedings
or investigations, inquiries or information requests that will not, individually
or in the aggregate, have a material adverse effect on the assets, business,
financial condition or results of operations of the Company and the
Subsidiaries. For purposes of this Agreement, "Environmental Law" means any
federal, state or local law, statute, rule or regulation or the common law
currently in existence and relating to the environment or occupational health
and safety, including without limitation any statute, regulation or order
pertaining to (i) treatment, storage, disposal, generation and transportation of
toxic or hazardous substances or solid or hazardous waste; (ii) air, water and
noise pollution; (iii) groundwater and soil contamination; (iv) the release or
threatened release into the environment of industrial, toxic or hazardous
substances, or solid or hazardous waste, including without limitation emissions,
discharges, injections, spills, escapes or dumping of pollutants, contaminants
or chemicals; (v) the protection of wild life, marine sanctuaries and wetlands;
(vi) underground and other storage tanks or vessels; and (vii) manufacture,
processing, use, distribution, treatment, storage, disposal, transportation or
handling of pollutants, contaminants, chemicals or toxic or hazardous substances
or oil or petroleum products or solid or hazardous waste. As used in this
Section 2.22, the terms "release" and
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"environment" shall have the meaning set forth in the federal Comprehensive
Environmental Compensation, Liability and Response Act of 1980 ("CERCLA").
(b) Except as disclosed in Section 2.22(b) of the Disclosure Schedule, to
the knowledge of the Company and the Subsidiaries, there have been no releases
of any Materials of Environmental Concern (as defined below) into the
environment at any parcel of real property or any facility formerly or currently
owned, operated or controlled by the Company or a Subsidiary. With respect to
any such releases of Materials of Environmental Concern, the Company or such
Subsidiary has given all required notices to Governmental Entities (copies of
which have been provided to the Buyer). Neither the Company nor any Subsidiary
has any knowledge of any releases of Materials of Environmental Concern at any
adjacent, adjoining or contiguous parcels of real property or facilities that
could reasonably be expected to have a material adverse effect on the real
property or facilities owned, operated or controlled by the Company or a
Subsidiary. For purposes of this Agreement, "Materials of Environmental Concern"
means any chemicals, pollutants or contaminants, hazardous substances (as such
term is defined under CERCLA), solid wastes and hazardous wastes (as such terms
are defined under the federal Resources Conservation and Recovery Act), toxic
materials, oil or petroleum and petroleum products, or any other material
subject to regulation under any Environmental Law.
(c) Set forth in Section 2.22(c) of the Disclosure Schedule is a list of
all formal, written environmental reports, investigations and audits relating to
premises currently or previously owned or operated by the Company or a
Subsidiary (whether conducted by or on behalf of the Company or a Subsidiary or
a third party, and whether done at the initiative of the Company or a Subsidiary
or directed by a Governmental Entity or other third party) which were issued or
conducted during the past five years and which the Company has possession of.
Complete and accurate copies of each such report, or the results of each such
investigation or audit, have been provided to the Buyer and any reliance by the
Buyer on such reports, investigations or audits is at the Buyer's sole risk.
2.23 LEGAL COMPLIANCE. Each of the Company and the Modem Subsidiaries, and
the conduct and operations of their respective businesses, are in compliance
with each law (including rules and regulations thereunder) of any federal,
state, local or foreign government, or any Governmental Entity, which (a)
affects or relates to this Agreement or the transactions contemplated by this
Agreement or (b) is applicable to the Company or such Modem Subsidiary or such
business, except for any violation of or default under a law referred to in
clause (b) above which reasonably may be expected not to have a material adverse
effect on the assets, business, financial condition, results of operations or
future prospects of the Company and the Modem Subsidiaries taken as a whole.
2.24 PERMITS. Section 2.24 of the Disclosure Schedule sets forth a list of
all permits, licenses, registrations, certificates, orders or approvals from any
Governmental Entity (including without limitation those issued or required under
Environmental Laws and those relating to the occupancy or use of owned or leased
real property) ("Permits") issued to or held by the Company or any Subsidiary
relating to the Modem Business. Such listed Permits are the only Permits that
are required for the Company and the Subsidiaries to conduct the Modem Business
as presently conducted or as proposed by the Company to be conducted, except for
those the absence of which would not have any material adverse effect on the
assets, business, financial condition, results of operations or future prospects
of the Company and the Modem Subsidiaries taken as a whole. Each such Permit is
in full force and effect and, to the best of the knowledge of the Company or any
Subsidiary, no suspension or cancellation of such Permit is threatened and there
is no basis for believing that such Permit will not be renewable upon
expiration. Each such Permit will continue in full force and effect following
the Closing.
2.25 CERTAIN BUSINESS RELATIONSHIPS WITH AFFILIATES. Except as set forth
in Section 2.25 of the Disclosure Schedule, no Affiliate of the Company (a) owns
any property or right, tangible or intangible, which is used in the Modem
Business, (b) has any claim or cause of action against the Company or any Modem
Subsidiary other than in the Ordinary Course of Business, or (c) owes any money
to the Company or any Modem Subsidiary. Section 2.25 of the Disclosure Schedule
describes any transactions or relationships other
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than in the Ordinary Course of Business between the Company and any Affiliate
thereof which are not reflected in the statements of operations of the Company
included in the Financial Statements.
2.26 BROKERS' FEES. Except for the obligations of the Company to Broadview
Associates, L.L.C. ("Broadview") pursuant to that certain Letter Agreement dated
March 18, 1996, neither the Company nor any Subsidiary has any liability or
obligation to pay any fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement.
2.27 BOOKS AND RECORDS. The minute books and other similar records of the
Company and each Modem Subsidiary contain true and complete records of all
actions taken at any meetings of the Company's or such Subsidiary's
stockholders, Board of Directors or any committee thereof and of all written
consents executed in lieu of the holding of any such meeting. The books and
records of the Company and each Modem Subsidiary accurately reflect in all
material respects the assets, liabilities, business, financial condition and
results of operations of the Company or such Subsidiary and have been maintained
in accordance with good business and bookkeeping practices.
2.28 COMPANY ACTION.
(a) The Board of Directors of the Company, at a meeting duly called and
held, has by the requisite vote of the directors (i) determined that the Merger
is fair and in the best interests of the Company and its stockholders, (ii)
adopted this Agreement in accordance with the provisions of the Delaware General
Corporation Law, and (iii) directed that this Agreement and the Merger be
submitted to the Company Stockholders for their adoption and approval and
resolved to recommend that Company Stockholders vote in favor of the adoption of
this Agreement and the approval of the Merger.
(b) The Company has received the written opinion of Broadview, dated the
date hereof, to the effect that the consideration to be received by the Company
Stockholders in the Merger is fair from a financial point of view to the Company
Stockholders. A copy of such opinion has been previously furnished to the Buyer.
2.29 DISCLOSURE. No representation or warranty by the Company contained in
this Agreement, and no statement contained in the Disclosure Schedule or any
other document, certificate or other instrument delivered to or to be delivered
by or on behalf of the Company pursuant to this Agreement, and no other written
statement made by the Company or any of its representatives in connection with
this Agreement, contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements in this Agreement or therein not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE TRANSITORY SUBSIDIARY
The Buyer and the Transitory Subsidiary, jointly and severally, represent
and warrant to the Company as follows:
3.1 ORGANIZATION. Each of the Buyer and the Transitory Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation.
3.2 CAPITALIZATION. The authorized capital stock of the Buyer consists of
300,000,000 shares of Buyer Common Stock, of which 188,452,729 shares were
issued and outstanding and 21,620 shares were held in the treasury of the Buyer
as of May 31, 1996. All of the issued and outstanding shares of Buyer Common
Stock are duly authorized, validly issued, fully paid, nonassessable and free of
all preemptive rights. All of the Merger Shares will be, when issued in
accordance with this Agreement, duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights.
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3.3 AUTHORIZATION OF TRANSACTION. Each of the Buyer and the Transitory
Subsidiary has all requisite power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by the Buyer and the Transitory Subsidiary and the performance
of this Agreement and the consummation of the transactions contemplated by this
Agreement by the Buyer and the Transitory Subsidiary have been duly and validly
authorized by all necessary corporate action on the part of the Buyer and
Transitory Subsidiary. This Agreement has been duly and validly executed and
delivered by the Buyer and the Transitory Subsidiary and constitutes a valid and
binding obligation of the Buyer and the Transitory Subsidiary, enforceable
against them in accordance with its terms.
3.4 NONCONTRAVENTION. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
Exchange Act, the Hart-Scott-Rodino Act and the filing of the Certificate of
Merger as required by the Delaware General Corporation Law, neither the
execution and delivery of this Agreement by the Buyer or the Transitory
Subsidiary, nor the consummation by the Buyer or the Transitory Subsidiary of
the transactions contemplated by this Agreement, will (a) conflict or violate
any provision of the charter or By-laws of the Buyer or the Transitory
Subsidiary, (b) require on the part of the Buyer or the Transitory Subsidiary
any filing with, or permit, authorization, consent or approval of, any
Governmental Entity, other than any filing, permit, authorization, consent or
approval which if not obtained or made would not have a material adverse effect
on the assets, business, financial condition, results of operations or future
prospects of the Buyer or on the ability of the Parties to consummate the
transactions contemplated by this Agreement, (c) conflict with, result in breach
of, constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of, create in any party any right to
accelerate, terminate, modify or cancel, or require any notice, consent or
waiver under, any contract, lease, sublease, license, sublicense, franchise,
permit, indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest or other arrangement to which the Buyer or
Transitory Subsidiary is a party or by which either is bound or to which any of
their assets are subject, other than any conflict, breach, default,
acceleration, termination, modification or cancellation which individually or in
the aggregate would not have a material adverse effect on the assets, business,
financial condition, results of operations or future prospects of the Buyer or
on the ability of the Parties to consummate the transactions contemplated by
this Agreement, or (d) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to the Buyer or the Transitory Subsidiary or any
of their properties or assets.
3.5 REPORTS AND FINANCIAL STATEMENTS. The Buyer has previously furnished
to the Company complete and accurate copies, as amended or supplemented, of its
(a) Annual Report on Form 10-K for the fiscal years ended June 30, 1994, and
June 30, 1995, as filed with the SEC, and (b) all other reports or statements
filed by the Buyer under Section 13 or 14 of the Exchange Act with the SEC since
June 30, 1994 (such reports are collectively referred to in this Agreement as
the "Buyer Reports"). The Buyer Reports constitute all of the documents required
to be filed by the Buyer under Section 13 or 14 of the Exchange Act with the SEC
since June 30, 1994. As of their respective dates, the Buyer Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited financial statements and unaudited interim financial statements of the
Buyer included in the Buyer Reports (i) comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, (ii) have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby (except as may be indicated therein or in the notes thereto, and
in the case of quarterly financial statements, as permitted by Form 10-Q under
the Exchange Act), (iii) fairly present the consolidated financial condition,
results of operations and cash flows of the Buyer as of the respective dates
thereof and for the periods referred to therein, and (iv) are consistent with
the books and records of the Buyer.
3.6 BROKERS' FEES. Except for the obligations of the Buyer to Alex. Brown
& Sons, Inc., neither the Buyer nor the Transitory Subsidiary has any liability
or obligation to pay any fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement.
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3.7 DISCLOSURE. No representation or warranty by the Buyer contained in
this Agreement, and no statement contained in any other document, certificate or
other instrument delivered to or to be delivered by or on behalf of Buyer
pursuant to this Agreement, and no other written statement made by the Buyer or
any of its representatives in connection with this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary, in light of the circumstances under which it was or
will be made, in order to make the statements in this Agreement or therein not
misleading.
ARTICLE IV
COVENANTS
4.1 BEST EFFORTS. Subject to the Company Board Fiduciary Duties (as
defined below), each of the Parties shall use its best efforts to take all
actions and to do all things necessary, proper or advisable to consummate the
transactions contemplated by this Agreement; provided, however, that
notwithstanding anything in this Agreement to the contrary, the Buyer shall not
be required to sell or dispose of or hold separately (through a trust or
otherwise) any assets or businesses of the Buyer or its Affiliates.
4.2 NOTICES AND CONSENTS. Each of the Parties shall use its best efforts
to obtain, at its expense, all such waivers, permits, consents, approvals or
other authorizations from third parties and Governmental Entities, and to effect
all such registrations, filings and notices with or to third parties and
Governmental Entities, as may be required by or with respect to such Party in
connection with the transactions contemplated by this Agreement.
4.3 SPIN-OFF TRANSACTION; CLOSING BALANCE SHEET.
(a) Following the execution of this Agreement and prior to the Closing, the
Company shall (i) transfer to one or more third parties or to one of its
Subsidiaries (the "Spin-off Company") (other than to Penril International, Ltd.
and Penril DataComm, Ltd. (such two Subsidiaries being collectively referred to
as the "Modem Subsidiaries")) any and all assets, whether tangible or
intangible, and liabilities of the Company related to all of its businesses
except for the Modem Business (provided, however, it is acknowledged that the
stock or assets of Electro-Metrics, Inc., Constant Power, Inc. and Technipower,
Inc., may be transferred to the Spin-off Company or, in the alternative, may be
sold, liquidated or otherwise transferred by the Company prior to the Closing
upon terms and conditions consented to by the Buyer, which consent will not be
unreasonably withheld), (ii) acquire from its Subsidiaries (other than the Modem
Subsidiaries) any and all assets, whether tangible or intangible, and
liabilities of such Subsidiaries related solely to the Modem Business and (iii)
distribute and transfer to its stockholders, in a transaction intended to be a
tax free transaction, all of the capital stock of the Spin-off Company, which
owns at that time all of the assets of the Company and its Subsidiaries not
related to the Modem Business (collectively, the "Spin-off Transaction"). The
assets and liabilities that the Company shall transfer to the Spin-off Company
in connection with the Spin-off Transaction are more fully described by the
Company on Schedule 4.3(a). In connection with the Spin-off Transaction, the
Spin-off Company and its subsidiaries shall have the right to employ all
employees of the Company except as set forth on Section 4.3(a) of the Disclosure
Schedule.
(b) The assets and liabilities of the Modem Business after the Spin-off
Transaction are more fully described by the Company on Schedule 4.3(b).
(c) Five business days prior to the Closing, the Company shall deliver to
the Buyer an unaudited balance sheet of the Company as at the Closing Date and
reflecting the consummation of the Spin-off Transaction (the "Closing Balance
Sheet"). The Closing Balance Sheet shall be accompanied by a certificate of the
chief financial officer of the Company stating that the Closing Balance Sheet
was prepared in accordance with GAAP (except as noted) and will fairly present
the financial condition of the Company at the Closing Date. The Company agrees
that the Closing Balance Sheet shall reflect that, on the basis of the book
value of the assets and liabilities retained by the Company on the Closing Date,
the Company shall have a tangible net worth of not less than One Dollar ($1).
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4.4 SPECIAL MEETING, PROSPECTUS/PROXY STATEMENT AND REGISTRATION STATEMENT.
(a) The Buyer and the Company shall jointly prepare, and the Company shall
file with the SEC under the Exchange Act, preliminary proxy materials for the
purpose of soliciting proxies from Company Stockholders to vote in favor of the
adoption of this Agreement (including without limitation the matters referred to
in Article VI) and the approval of the Merger and the approval of the Spin-off
Transaction at a special meeting of Company Stockholders to be called and held
for such purpose (the "Special Meeting"). Such proxy materials shall be in the
form of a prospectus/proxy statement to be used for the purpose of offering the
Merger Shares to Company Stockholders and soliciting such proxies from Company
Stockholders (such prospectus/proxy statement, together with any accompanying
letter to stockholders, notice of meeting and form of proxy, shall be referred
to in this Agreement as the "Prospectus/ Proxy Statement"). The Company, with
the assistance of the Buyer, shall promptly respond to any SEC comments on the
Prospectus/Proxy Statement and shall otherwise use its best efforts to resolve
as promptly as practicable all SEC comments to the satisfaction of the SEC.
(b) Promptly following the resolution to the satisfaction of the SEC of all
SEC comments on the Prospectus/ Proxy Statement (or the expiration of the
ten-day period under Rule 14a-6(a) under the Exchange Act, if no SEC comments
are received by such date), the Company shall distribute the Prospectus/Proxy
Statement to its stockholders and, pursuant thereto, solicit proxies from
Company Stockholders to vote in favor of the adoption of this Agreement and the
approval of the Merger at the Special Meeting and shall hold the Special Meeting
in accordance with the Delaware General Corporation Law.
(c) Promptly following the resolution to the satisfaction of the SEC of all
SEC comments on the Prospectus/ Proxy Statement (or the expiration of the
ten-day period under Rule 14a-6(a) under the Exchange Act, if no SEC comments
are received by such date), the Buyer shall file with the SEC under the
Securities Act a Registration Statement on Form S-4 (the "Registration
Statement"), which shall include the Prospectus/ Proxy Statement as a part
thereof. The Buyer, with the assistance of the Company, shall promptly respond
to any SEC comments on the Registration Statement and shall otherwise use its
best efforts to cause the Registration Statement to be declared effective as
promptly as practicable. The Buyer shall also take any and all such actions as
may be necessary or as it may deem advisable for the purpose of complying with
all applicable state securities laws in connection with the offering and
issuance of the Merger Shares.
(d) The Company shall comply with all applicable provisions of and rules
under the Exchange Act and all applicable provisions of the Delaware General
Corporation Law in the preparation, filing and distribution of the
Prospectus/Proxy Statement, the solicitation of proxies thereunder, and the
calling and holding of the Special Meeting. Without limiting the foregoing, the
Company shall ensure that the Prospectus/Proxy Statement does not, as of the
date on which it is distributed to Company Stockholders, and as of the date of
the Special Meeting, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading (provided that
the Company shall not be responsible for the accuracy or completeness of any
information furnished by the Buyer in writing for inclusion in the
Prospectus/Proxy Statement, as to which information the Buyer shall ensure that
the Prospectus/Proxy Statement does not, as of the date on which the
Prospectus/Proxy Statement is distributed to Company Stockholders, and as of the
date of the Special Meeting, contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading).
(e) The Buyer shall comply with all applicable provisions of and rules
under the Securities Act and state securities laws in the preparation and filing
of the Registration Statement and the offering and issuance of the Merger
Shares. Without limiting the foregoing, the Buyer shall ensure that the
Registration Statement does not, as of its effective date, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading
(provided that the Buyer shall not be responsible for the accuracy or
completeness of any information furnished by the Company in writing for
inclusion in the Registration Statement, as to which information the Company
shall ensure that the Registration Statement does not, as of its effective date,
contain any untrue statement of a material fact or
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omit to state a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading).
(f) Subject to the Company Board Fiduciary Duties (as defined below), the
Company, acting through its Board of Directors, shall include in the
Prospectus/Proxy Statement the recommendation of its Board of Directors that the
Company Stockholders vote in favor of the adoption of this Agreement and the
approval of the Merger, and shall otherwise use its best efforts to obtain the
Requisite Stockholder Approval.
4.5 HART-SCOTT-RODINO ACT. Each of the Parties shall promptly file any
Notification and Report Forms and related material that it may be required to
file with the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice under the Hart-Scott-Rodino Act, shall use its best
efforts to obtain an early termination of the applicable waiting period, and
shall make any further filings or information submissions pursuant thereto that
may be necessary, proper or advisable.
4.6 OPERATION OF BUSINESS. Except as contemplated by this Agreement or
related to the Spin-off Transaction or as set forth in Section 4.6 of the
Disclosure Schedule, during the period from the date of this Agreement to the
Effective Time, the Company shall (and shall cause each Subsidiary to) conduct
its operations in the Ordinary Course of Business and in compliance with all
applicable laws and regulations and, to the extent consistent therewith, use all
reasonable efforts, solely as to the Modem Business (i) to preserve intact its
current business organization, (ii) keep its physical assets in good working
condition, (iii) keep available the services of its current employees listed on
Section 4.6 of the Disclosure Schedule, and (iv) preserve its relationships with
customers, suppliers and others having business dealings with it to the end that
its goodwill and ongoing business relating to the Modem Business shall not be
impaired in any material respect. Without limiting the generality of the
foregoing, prior to the Effective Time, neither the Company nor any Modem
Subsidiary shall, without the written consent of the Buyer (except as
contemplated by this Agreement or related to the Spin-off Transaction or as set
forth in Section 4.6 of the Disclosure Schedule), which consent shall not be
unreasonably withheld:
(a) issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise) or authorize the issuance, sale
or delivery of, or redeem or repurchase, any stock of any class or any other
securities or any rights, warrants or options to acquire any such stock or other
securities (except pursuant to the conversion or exercise of convertible
securities or Options outstanding on the date hereof), or amend any of the terms
of any such convertible securities or Options (other than in connection with a
sale, liquidation or transfer referred to and in accordance with clause (e)
below);
(b) split, combine or reclassify any shares of its capital stock; declare,
set aside or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock;
(c) create, incur or assume any debt not currently outstanding that would
cause or result in the debt reflected on the Closing Balance Sheet to exceed
$4,000,000; assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person or entity; or make any loans, advances (other than in the Ordinary Course
of Business) or capital contributions to, or investments in, any other person or
entity in an amount greater than $200,000.00;
(d) enter into, adopt or amend any Employee Benefit Plan or any employment
or severance agreement or arrangement of the type described in Section 2.22(j)
or (except for normal increases in the Ordinary Course of Business) materially
increase in any manner the compensation or fringe benefits of, or materially
modify the employment terms of, its directors, officers or employees, generally
or individually, or pay any benefit not required by the terms in effect on the
date hereof of any existing Employee Benefit Plan;
(e) acquire, sell, lease, encumber or dispose of any assets or property
(including without limitation any shares or other equity interests in or
securities of any Modem Subsidiary), other than purchases and sales of assets in
the Ordinary Course of Business; provided, however, that the Company may sell,
liquidate or otherwise transfer the stock or assets of Technipower, Inc.,
Electro-Metrics, Inc. and Constant Power, Inc. (or
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any portion thereof) upon terms and conditions consented to by the Buyer, which
consent shall not be unreasonably withheld;
(f) amend its charter or By-laws;
(g) change in any material respect its accounting methods, principles or
practices, except insofar as may be required by a generally applicable change in
GAAP or by the SEC;
(h) discharge or satisfy any Security Interest or pay any material
obligation or liability related to the Modem Business other than in the Ordinary
Course of Business;
(i) mortgage or pledge any of its property or assets relating to the Modem
Business or take any action that subjects any such assets to any Security
Interest;
(j) sell, assign, transfer or license any Intellectual Property relating to
the Modem Business, other than (i) sales of tangible products through resellers
in the Ordinary Course of Business, (ii) as consented to by the Buyer, which
consent shall not be unreasonably withheld and (iii) pursuant to a license
agreement between the Company and the Spin-off Company, substantially in the
form of Exhibit A hereto;
(k) enter into, amend, terminate, take or omit to take any action that
would constitute a violation of or default under, or waive any rights under, any
material contract or agreement relating to the Modem Business if such action
would have a material adverse effect on the Modem Business;
(l) make or commit to make any capital expenditure relating to the Modem
Business in excess of $50,000.00 per item;
(m) take any action or fail to take any action permitted by this Agreement
with the knowledge that such action or failure to take action would result in
(i) any of the representations and warranties of the Company contained in
Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.7, 2.8, 2.10, 2.16 and 2.26 of this
Agreement becoming untrue or (ii) any of the conditions of the Merger set forth
in Article V not being satisfied; or
(n) agree in writing or otherwise to take any of the foregoing actions.
4.7 FULL ACCESS.
The Company shall (and shall cause each Subsidiary to) permit
representatives of the Buyer to have full access (at all reasonable times, upon
prior notice and in a manner so as not to interfere with the normal business
operations of the Company and the Subsidiaries) to all premises, properties,
financial and accounting records, contracts, other records and documents, and
personnel, of or pertaining to the Company and each Subsidiary other than
contracts, records and documents not relating to the Modem Business that the
Company reasonably and in good faith determines is of a confidential and
competitive nature. The Buyer shall hold, and shall cause its respective
employees and agents to hold, in confidence all such information in accordance
with the terms of the Confidentiality Agreement dated March 18, 1996 between the
Buyer and the Company.
4.8 NOTICE OF BREACHES. The Company shall promptly deliver to the Buyer
written notice of any event or development that would (a) render any
representation or warranty of the Company contained in Sections 2.1, 2.2, 2.3,
2.4, 2.5, 2.7, 2.8, 2.10, 2.16, and 2.26 (including the Disclosure Schedule)
inaccurate or incomplete in any material respect, or (b) constitute or result in
a breach by the Company of, or a failure by the Company to comply with, any
agreement or covenant in this Agreement applicable to such party. The Buyer or
the Transitory Subsidiary shall promptly deliver to the Company written notice
of any event or development that would (i) render any statement, representation
or warranty of the Buyer or the Transitory Subsidiary in this Agreement
inaccurate or incomplete in any material respect, or (ii) constitute or result
in a breach by the Buyer or the Transitory Subsidiary of, or a failure by the
Buyer or the Transitory Subsidiary to comply with, any agreement or covenant in
this Agreement applicable to such party. No such disclosure shall be deemed to
avoid or cure any such misrepresentation or breach.
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4.9 EXCLUSIVITY. The Company shall not, and the Company shall use its best
efforts to cause its Affiliates and each of its officers, directors, employees,
representatives and agents not to, directly or indirectly, (a) encourage,
solicit, initiate, engage or participate in discussions or negotiations with any
person or entity (other than the Buyer) concerning any merger, consolidation,
sale or license of material assets or property relating to the Modem Business,
tender offer, recapitalization, accumulation of Company Shares, proxy
solicitation or other business combination involving the Company, any Modem
Subsidiary or any division of the Company or any Subsidiary, in each case
relating to the Modem Business or (b) provide any non-public information
concerning the business, properties or assets of the Company or any Subsidiary
relating to the Modem Business to any person or entity (other than (i) to the
Buyer, (ii) as contemplated by this Agreement, or (iii) as required by law or
court order). Notwithstanding the foregoing or any other provision of this
Agreement, neither the provisions contained in this Section 4.9 or elsewhere in
this Agreement shall prohibit the Board of Directors of the Company from (i)
furnishing information to or entering into discussions or negotiations with, any
person or entity that makes an unsolicited bona fide written proposal to acquire
the Company (or the Modem Business) pursuant to a merger, consolidation, share
exchange, purchase of a substantial portion of the assets, business combination
or other similar transaction, if the Board of Directors of the Company
determines in good faith, based as to legal matters on the advice of counsel,
that such action is required for the Board of Directors to comply with its
fiduciary duties to stockholders imposed by law (the "Company Board Fiduciary
Duties") and (ii) complying with Rule 14c-2 of the Exchange Act with regard to
any Acquisition Proposal, if applicable, "Acquisition Proposal" shall mean any
proposed (A) merger, consolidation or similar transaction involving the Company,
(B) sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of assets of the Company or the
Subsidiaries representing 30% or more of the Modem Business or of the
consolidated assets of the Company and the Subsidiaries, (C) issue, sale, or
other disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 30% or
more of the voting power of the Company or (D) transaction in which any person
shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act), or the right to acquire beneficial ownership, or any "group"
(as such term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership, of 30% or
more of the outstanding Company Common Stock. The exercise of the Company Board
Fiduciary Duties, notwithstanding any other provision of this Agreement, shall
not constitute a breach or violation of any provision of this Agreement. The
Company shall immediately notify the Buyer of, and shall disclose to the Buyer
all details of, any inquiries, discussions or negotiations of the nature
described in this Section 4.9.
4.10 AGREEMENTS FROM CERTAIN AFFILIATES OF THE COMPANY. Concurrently with
or prior to the execution of this Agreement, the Company shall deliver to the
Buyer a list of all persons or entities who are at such time "affiliates" of the
Company as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "Company Affiliates"). In order to help ensure that the
issuance of Merger Shares will comply with the Securities Act and that the
Merger will be treated as a tax-free reorganization, the Company shall use all
reasonable efforts to cause each Company Affiliate to execute and deliver to the
Buyer, prior to the distribution of the Prospectus/Proxy Statement in accordance
with Section 4.4(b), a written agreement substantially in the form attached
hereto as Exhibit B (the "Affiliate Agreement"). If any Company Affiliate fails
to execute and deliver an Affiliate Agreement, the Buyer shall be entitled to
place appropriate legends on the certificates evidencing the Merger Shares to be
issued to such person or entity and any other shares of Buyer Common Stock
issued to such person or entity upon exercise of an Option or Other Right, and
to issue appropriate stock transfer instructions to the transfer agent for the
Buyer Common Stock, to the effect that such shares may be sold publicly only in
compliance with Rule 145 under the Securities Act.
4.11 LISTING OF MERGER SHARES. The Buyer shall list the Merger Shares on
the NYSE.
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4.12 INDEMNIFICATION; RELEASE.
(a) From and after the Effective Time, the Buyer shall indemnify, defend
and hold harmless the officers, directors and employees of the Company and the
Subsidiaries (individually, an "Indemnified Party" and collectively, the
"Indemnified Parties") against all losses, expenses, claims, damages or
liabilities ("Claims") based on the fact that such person is or was such
officer, director or employee of the Company or the Subsidiaries (including
arising out of the transactions contemplated by this Agreement) to the fullest
extent permitted or required under applicable law; provided, however, that no
Indemnified Party shall be entitled to indemnification pursuant to this Section
4.12 for Claims based on the fact that such person is or was a stockholder of
the Company. The Buyer agrees that all rights to indemnification existing in
favor of the directors, officers or employees of the Company as provided in the
Company's or the Subsidiaries' respective Articles or Certificate of
Incorporation or By-Laws or Code of Regulations, as in effect as of the date
hereof, with respect to matters occurring through the Effective Time, shall
survive the Merger and shall continue in full force and effect for a period of
not less than six years from the Effective Time and the Buyer hereby guaranties
unconditionally the satisfaction of all such rights to indemnification (and
shall pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the fullest extent permitted under
Delaware law, upon receipt from the Indemnified Party to whom expenses are
advanced of the undertaking to repay such advances contemplated by Section
145(e) of the Delaware General corporation Law). Without limiting the foregoing,
in the event any Claim is brought against any Indemnified Party (whether arising
before or after the Effective Time) after the Effective Time (i) the Indemnified
Parties may retain the Company's regularly engaged independent legal counsel or
other independent legal counsel satisfactory to them, provided that such other
counsel shall be reasonably acceptable to the Buyer, (ii) the Buyer shall pay
all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received and (iii) the Buyer shall use its
reasonable efforts to assist in the defense of any such matter, provided that
the Buyer shall not be liable for any settlement of any Claim effected without
its written consent, which consent shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section 4.12, upon
learning of any such Claim shall notify the Buyer (although the failure to so
notify the Buyer shall not relieve the Buyer from any liability which the Buyer
may have under this Section 4.12, except to the extent such failure materially
prejudices the Buyer) and shall deliver to the Buyer the undertaking
contemplated by Section 145(e) of the Delaware General Corporation Law. The
Indemnified Parties as a group may retain no more than one law firm (in addition
to local counsel) to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct (as determined by
counsel to the Indemnified Parties), a conflict on any significant issue between
the positions of any two or more Indemnified Parties, in which event such
additional counsel as may be required may be retained by the Indemnified Parties
and will be paid by the Buyer.
(b) The Buyer hereby remises and releases the directors, officers and
employees of the Company from any and all claims it may have against them, other
than claims based solely on fraud.
(c) The Company hereby remises and releases the directors, officers and
employees of the Buyer from any and all claims it may have against them, other
than claims based solely on fraud.
4.13 EMPLOYEE MATTERS.
(a) With respect to benefit plans available to employees of the Company or
the Modem Subsidiaries generally, for at least one year from and after the
Effective Time, the Buyer shall cause the Surviving Corporation to either (i)
maintain all employee benefits of the Company or the Modem Subsidiary, as the
case may be, including, without limitation, benefits under employee benefit
plans, policies and arrangements, existing on the Effective Time or (ii) provide
benefits to employees of the Surviving Corporation that are, taken as a whole,
substantially equivalent to or better than the benefits offered to such persons
by the Company or applicable Modem Subsidiary, as the case may be, immediately
prior to the Effective Time.
(b) The Parties acknowledge and agree that the Surviving Corporation and
the Modem Subsidiaries shall have the benefit of any confidentiality and/or
nondisclosure agreement executed by employees of the Company or the Modem
Subsidiaries. The Parties shall cause any employee of the Surviving Corporation
who
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was an employee of the Company immediately prior to the Spin-off to agree to
hold in confidence and to not use contrary to the interests of the Spin-off
Company any confidential information concerning the Spin-off Company that is in
such individual's possession at the Effective Time as a result of such
individual's employment by the Company. The Surviving Corporation agrees to
release any employee of the Spin-off Company who was an employee of the
Surviving Corporation immediately prior to the Spin-off from any agreement not
to compete with the Surviving Corporation or from any agreement that would
prohibit such employee from being employed by the Spin-off Company.
4.14 CORPORATE NAME. From and after the Closing Date, the Buyer shall not,
and shall cause the Surviving Corporation and all other Affiliates of the Buyer
to not, use the name "Penril" other than in the Modem Business.
4.15 NON-INTERFERENCE.
(a) The Company agrees to cause the Spin-off Company to agree that between
the date hereof and the Closing, and for eighteen (18) months after the Closing,
it will not and will cause its Affiliates to not, induce any person who is, on
the date hereof, or who becomes after the date hereof, an employee, officer or
agent of the Buyer or any Affiliate of the Buyer (i) to terminate such
relationship or (ii) to employ, or assist in employing, directly or indirectly,
any such person.
(b) The Buyer agrees that between the date hereof and the Closing, with
respect to the Company and its respective Affiliates, and for eighteen (18)
months after the Closing with respect to the Spin-off Company, the Buyer will
not and will cause its Affiliates to not, induce any person who is, on the date
hereof, or who becomes after the date hereof, an employee, officer or agent of
the Company or the Spin-off Company and their respective Affiliates (i) to
terminate such relationship or (ii) to employ or assist in employing, directly
or indirectly, any such person.
4.16 VOTE OF COMPANY SHARES. The Buyer covenants and agrees to vote, and
to cause its Affiliates to vote, all Company Shares held or controlled by them
in favor of approval of this Agreement and the Merger, and the transactions
contemplated hereby at the Special Meeting.
4.17 NON-SOLICITATION. The Buyer hereby covenants and agrees to request
that its direct sales force not solicit any business from any of the resellers
listed on Schedule 4.17 for a period of 18 months after the Closing, which
business relates to the business to be transferred by the Company to the
Spin-off Company in the Spin-off Transaction
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) this Agreement and the Merger shall have received the Requisite
Stockholder Approval;
(b) all applicable waiting periods (and any extensions thereof) under the
Hart-Scott-Rodino Act shall have expired or otherwise been terminated;
(c) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the SEC
and remain in effect;
(d) no Party hereto shall be subject to any order or injunction of a court
of competent jurisdiction which prohibits the consummation of the transactions
contemplated by this Agreement. In the event any such order or injunction shall
have been issued, each Party agrees to use its best efforts to have any such
order or injunction lifted; and
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(e) the Spin-off Transaction shall have been consummated in accordance with
Section 4.3 and with Schedule 4.3(a) and Schedule 4.3(b).
5.2 CONDITIONS TO OBLIGATIONS OF THE BUYER AND THE TRANSITORY
SUBSIDIARY. The obligation of each of the Buyer and the Transitory Subsidiary
to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the Company and the Subsidiaries shall have obtained all of the
waivers, permits, consents, approvals or other authorizations, and effected all
of the registrations, filings and notices, referred to in Section 4.2, except
for any which if not obtained or effected would not have a material adverse
effect on the assets, business, financial condition, results of operations or
future prospects of the Company and the Modem Subsidiaries, taken as a whole, or
on the ability of the Parties to consummate the transactions contemplated by
this Agreement;
(b) the representations and warranties of the Company set forth in Article
II shall be true and correct when made on the date hereof and, solely as to
those contained in Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.7, 2.8, 2.10, 2.16 and
2.26, shall be true and correct in all material respects as of the Effective
Time as if made as of the Effective Time;
(c) the Company shall have performed or complied with in all material
respects its agreements and covenants required to be performed or complied with
under this Agreement as of or prior to the Effective Time;
(d) There shall have been no material breach of the representations and
warranties of the Company contained in Article II of which officers of the
Company had knowledge prior to the date hereof;
(e) the Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (without qualification as to knowledge or materiality
or otherwise) to the effect that each of the conditions specified in clauses (a)
and (e) of Section 5.1 and clauses (a) through (d) of this Section 5.2 is
satisfied in all respects;
(f) the Buyer shall have received a "cold comfort" letter dated as of a
date not more than two days prior to the date that the Registration Statement is
declared effective and shall have received a subsequent similar letter dated as
of a date not more than two days prior to the Effective Time, from Deloitte &
Touche LLP, auditors for the Company, addressed to the Buyer in a customary form
reasonably satisfactory to the Buyer;
(g) the Buyer and the Transitory Subsidiary shall have received the
resignations, effective as of the Effective Time, of each director and officer
of the Company and the Modem Subsidiaries specified by the Buyer in writing on
or prior to the Closing; and
(h) the Company and the Spin-off Company shall have executed and delivered
an indemnification agreement substantially in the form of Exhibit C.
5.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the Buyer and the Transitory Subsidiary shall have obtained all of the
waivers, permits, consents, approvals or other authorizations, and effected all
of the registrations, filings and notices, referred to in Section 4.2, except
for any which if not obtained or effected would not have a material adverse
affect on the assets, business, financial condition, results of operations or
future prospects of the Buyer or on the ability of the Parties to consummate the
transactions contemplated by this Agreement.
(b) the representations and warranties of the Buyer and the Transitory
Subsidiary set forth in Article III and Section 1.16 shall be true and correct
when made on the date hereof and shall be true and correct in all material
respects as of the Effective Time as if made as of the Effective Time, except
for representations and warranties made as of a specific date, which shall be
true and correct as of such date;
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(c) each of the Buyer and the Transitory Subsidiary shall have performed or
complied with in all material respects its agreements and covenants required to
be performed or complied with under this Agreement as of or prior to the
Effective Time;
(d) each of the Buyer and the Transitory Subsidiary shall have delivered to
the Company a certificate (without qualification as to knowledge or materiality
or otherwise) to the effect that each of the conditions specified in clause (c)
of Section 5.1 and clauses (a) through (c) of this Section 5.3 is satisfied in
all respects; and
(e) the Merger Shares shall have been authorized for listing on the NYSE
upon official notice of issuance.
ARTICLE VI
TERMINATION
6.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
prior to the Effective Time (whether before or after Requisite Stockholder
Approval) as provided below:
(a) the Parties may terminate this Agreement by mutual written consent;
(b) the Buyer may terminate this Agreement by giving written notice to the
Company in the event the Company is in breach, and the Company may terminate
this Agreement by giving written notice to the Buyer and the Transitory
Subsidiary in the event the Buyer or the Transitory Subsidiary is in breach, of
any material representation, warranty or covenant contained in this Agreement,
and such breach is not remedied within 10 days of delivery of written notice
thereof;
(c) any Party may terminate this Agreement by giving written notice to the
other Parties at any time after the Company Stockholders have voted on whether
to approve this Agreement and the Merger in the event this Agreement and the
Merger failed to receive the Requisite Stockholder Approval;
(d) the Buyer may terminate this Agreement by giving written notice to the
Company if the Closing shall not have occurred (i) on or before the 120th day
following the date of this Agreement by reason of the failure of any condition
precedent under Section 5.1 (other than Sections 5.1(c) and 5.1(e)) or 5.2
hereof or (ii) on or before the 150th day following the date of this Agreement
by reason of the failure of any condition under Sections 5.1(c) and 5.1(e)
hereof (in either case (i) or (ii) above, unless the failure results primarily
from a breach by the Buyer or the Transitory Subsidiary of any representation,
warranty or covenant contained in this Agreement);
(e) the Company may terminate this Agreement by giving written notice to
the Buyer and the Transitory Subsidiary if the Closing shall not have occurred
(i) on or before the 120th day following the date of this Agreement by reason of
the failure of any condition precedent under Section 5.1 (other than Sections
5.1(c) and 5.1(e)) or 5.3 hereof or (ii) on or before the 150th day following
the date of this Agreement by reason of the failure of any condition under
Sections 5.1(c) and 5.1(e) hereof (in either case (i) or (ii) above, unless the
failure results primarily from a breach by the Company of any representation,
warranty or covenant contained in this Agreement); or
(f) any Party may terminate this Agreement if the Board of Directors of the
Company shall have withdrawn or modified in a manner adverse to the Buyer its
approval or recommendation to the Company Stockholders of this Agreement or the
Merger or shall have approved or recommended to the Company Stockholders that
they accept the terms of any Acquisition Proposal or shall have resolved to take
any of the foregoing actions; provided, however, that reasonable delay required
to comply with the Company Board Fiduciary Duties shall not be deemed to be a
withdrawal or a modification adverse to the Buyer.
6.2 EFFECT OF TERMINATION. If any Party terminates this Agreement pursuant
to Section 6.1, all obligations of the Parties hereunder shall terminate without
any liability of any Party to any other Party (except for any liability of any
Party for willful breaches of this Agreement and except as provided in the last
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sentence of Section 4.7), provided, however, (i) that if the Merger is not
consummated as a result of a termination of this Agreement pursuant to Sections
6.1(a), 6.1(c), 6.1(d) (but solely as it relates to Sections 5.1(a), 5.2(c) (but
solely as it relates to a Special Breach (as defined below) with respect to the
certain covenants contained in clauses (a), (c) through (j) and (l) of Section
4.6 (the "Section 4.6 Covenants")), 5.2(d) and 5.2(h)) or 6.1(f), then, without
further action or consideration on the part of any party or person, the license
agreement in the form of Exhibit D hereto shall become effective and (ii) that
if the Merger is not consummated as a result of a termination of this Agreement
pursuant to Section 6.1(d) (but solely as it relates to Sections 5.1(b), 5.1(c)
or 5.1(e)), then, without further action on the part of any party or person, the
license agreement in the form of Exhibit D hereto shall become effective upon
the payment by the Buyer within 10 business days after the giving of notice of
termination of this Agreement pursuant to Section 6.1(d) of Fifty Million
Dollars ($50,000,000.00) to the Company in immediately available funds.
Notwithstanding the foregoing, if within 180 days after the date hereof and
prior to termination of this Agreement pursuant to Section 6.1(d) (but solely as
it relates to Sections 5.2(a) or 5.2(c)), the Company has received, participated
in or encouraged inquiries, discussions or negotiations of the nature described
in Section 4.9 and the Board of Directors of the Company shall have approved or
recommended to the Company Stockholders that they accept the terms of any
Acquisition Proposal or shall have resolved to take any of the foregoing
actions, with a party with whom they had discussions during such period, then,
without further action or consideration on the part of any party or person, the
license agreement in the form of Exhibit D hereto shall become effective. For
purposes of this Section 6.2, "Special Breach" shall mean (i) any material
breach of clauses (a), (d), (f), (g), (h), (i), (j) and (l) of the Section 4.6
Covenants; (ii) any material breach of clause (c) of the Section 4.6 Covenants
related solely to loans, advances, capital contributions to, or investments in,
any other person or entity and (iii) any material breach of clause (e) of the
Section 4.6 Covenants related to the Modem Business.
ARTICLE VII
DEFINITIONS
The Section references for the defined terms used in this Agreement are set
forth on Schedule VII to this Agreement.
ARTICLE VIII
MISCELLANEOUS
8.1 PRESS RELEASES AND ANNOUNCEMENTS. No Party shall issue any press
release or public disclosure relating to the acquisition of the Modem Business
by the Buyer subject matter of this Agreement without the prior written approval
of the other Parties; provided, however, that any Party may make any public
disclosure it believes in good faith is required by law or regulation (in which
case the disclosing Party shall advise the other Parties and provide them with a
copy of the proposed disclosure prior to making the disclosure).
8.2 NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, the provisions in Article I
concerning issuance of the Merger Shares and the provisions of Section 1.16 are
intended for the benefit of the Company Stockholders; (ii) the provisions of the
last sentence of Section 4.10 are intended for the benefit of the Company
Affiliates; (iii) the provisions of Section 4.12 are intended for the benefit of
the Indemnified Parties and the officers, directors and employees of the Company
and of the Buyer; (iv) the provisions of Section 4.13(a) are intended for the
benefit of the employees of the Company and the Modem Subsidiaries; (v) the
provisions of Section 4.13(b) are intended for the benefit of the Modem
Subsidiaries; and (vi) the provisions of Sections 4.13(b), 4.14, 4.15 and 4.17
are intended for the benefit of the Spin-off Company.
26
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8.3 ENTIRE AGREEMENT. This Agreement (including the documents referred to
in this Agreement) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, with respect to the subject matter hereof.
8.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Parties named in this Agreement and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other Parties; provided that the Transitory Subsidiary may
assign its rights, interests and obligations hereunder to an Affiliate of the
Buyer.
8.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. This Agreement, once
executed, may be delivered to either party through the use of facsimile
transmission. In this regard, any and all signatures of the parties appearing on
any facsimile copies of this Agreement shall be deemed, unless otherwise proved,
the lawful and valid signature of the executing party.
8.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.7 NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service, in each case to the intended recipient as
set forth below:
If to the Company: Copy to:
Penril DataComm Networks, Inc. Benesch, Friedlander, Coplan &
1300 Quince Orchard Boulevard Aronoff, P.L.L.
Gaithersburg, Maryland 20878 2300 BP America Building
Attn.: Chairman Attn.: Irv Berliner, Esq.
Telecopier: (301) 921-9149 Telecopier: (216) 363-4588
If to the Buyer: Copy to:
Bay Networks, Inc. Bay Networks, Inc.
4401 Great America Parkway 4401 Great America Parkway
Santa Clara, California 95052 Santa Clara, California 95052
Attn.: President Attn.: Montgomery Kersten, Esq.
Telecopier: (408) 764-1799 Telecopier: (408) 764-1991
If to the Transitory Copy to:
Subsidiary:
Beta Acquisition Corporation Bay Networks, Inc.
c/o Bay Networks, Inc. 4401 Great America Parkway
4401 Great America Parkway Santa Clara, California 95052
Santa Clara, California 95052 Attn.: Montgomery Kersten, Esq.
Attn.: President Telecopier: (408) 764-1991
Telecopier: (408) 764-1799
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any Party may
27
<PAGE> 176
change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner in this Agreement set forth.
8.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Delaware.
8.9 AMENDMENTS AND WAIVERS. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time; provided, however,
that any amendment effected subsequent to the Requisite Stockholder Approval
shall be subject to the restrictions contained in the Delaware General
Corporation Law. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
8.10 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
8.11 EXPENSES. The Buyer and the Company shall each bear its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated by this Agreement. The fees and
expenses of the Company shall be accrued prior to the Closing Date and reflected
on the Closing Balance Sheet. The fees and expenses of the Transitory Subsidiary
shall be borne by the Buyer.
8.12 SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees
that one or more of the other Parties would be damaged irreparably in the event
any of the provisions of this Agreement are not performed in accordance with
their specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions of
Section 8.13), in addition to any other remedy to which it may be entitled, at
law or in equity.
8.13 SUBMISSION TO JURISDICTION. Each of the Parties (a) submits to the
jurisdiction of any state or federal court sitting in Delaware in any action or
proceeding arising out of or relating to this Agreement, (b) agrees that all
claims in respect of the action or proceeding may be heard and determined in any
such court, and (c) agrees not to bring any action or proceeding arising out of
or relating to this Agreement in any other court. Each of the Parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety or other security that might be required of
any other Party with respect thereto. Any Party may make service on another
Party by sending or delivering a copy of the process to the Party to be served
at the address and in the manner provided for the giving of notices in Section
8.7. Nothing in this Section 8.13, however, shall affect the right of any Party
to serve legal process in any other manner permitted by law.
28
<PAGE> 177
8.14 CONSTRUCTION. The language used in this Agreement shall be deemed to
be the language chosen by the Parties hereto to express their mutual intent, and
no rule of strict construction shall be applied against any Party. Any reference
to any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise.
8.15 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules
identified in this Agreement are incorporated in this Agreement by reference and
made a part hereof.
8.16 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. No
representations, warranties or agreements in this Agreement shall survive the
Closing, except for those contained in Article I and Sections 4.10 (the last
sentence only), 4.12, 4.13, 4.14, 4.15 and 4.17 and, to the extent relating to
such specified provisions, those contained in this Article VIII.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
THE BUYER:
BAY NETWORKS, INC.
By: /s/ Bruce I. Sachs
----------------------------------
Title: Executive Vice President
-------------------------------
THE TRANSITORY SUBSIDIARY:
BETA ACQUISITION CORP.
By: /s/ Bruce I. Sachs
----------------------------------
Title: Executive Vice President
-------------------------------
THE COMPANY:
PENRIL DATACOMM NETWORKS, INC.
By: /s/ Henry David Epstein Officer
----------------------------------
Title: President, Chief Executive
-------------------------------
29
<PAGE> 178
AMENDMENT AGREEMENT
This Agreement is made and entered into as of the 5th day of August, 1996,
by and among Bay Networks, Inc., a Delaware corporation (the "Buyer"), Beta
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the
Buyer (the "Transitory Subsidiary"), and Penril DataComm Networks, Inc., a
Delaware corporation (the "Company"). The Buyer, the Transitory Subsidiary and
the Company are referred to collectively in this Agreement as the "Parties".
WITNESSETH:
WHEREAS, a Plan and Agreement of Merger dated as of June 16, 1996, was
executed and entered into by and among the Parties (the "Merger Agreement"); and
WHEREAS, the Parties desire to amend the Merger Agreement as provided
herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereby agree as
follows:
1. AMENDMENT TO SECTION 1.2 OF THE MERGER AGREEMENT. Section 1.2 of the
Merger Agreement is hereby amended and restated in its entirety to read as
follows:
"1.2 THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at a mutually agreed upon
location, commencing at 9:00 a.m. local time on a mutually agreeable date
as soon as practicable after the date on which all of the conditions to the
obligations of the Parties to consummate the transactions contemplated by
this Agreement have been satisfied or waived (the "Closing Date"), but in
no event later than November 25, 1996."
2. AMENDMENT TO SECTION 1.9 OF THE MERGER AGREEMENT. Section 1.9 of the
Merger Agreement is hereby amended and restated in its entirety to read as
follows:
"1.9 FRACTIONAL SHARES. No certificates or scrip representing
fractional Merger Shares shall be issued to former Company Stockholders
upon the surrender for exchange of Certificates, and such former Company
Stockholders shall not be entitled to any voting rights, rights to receive
any dividends or distributions or other rights as a stockholder of the
Buyer with respect to any fractional Merger Shares that would otherwise be
issued to such former Company Stockholders. In lieu of any fractional
Merger Shares that would otherwise be issued, each former Company
Stockholder that would have been entitled to receive a fractional Merger
Share shall, upon proper surrender of such person's Certificates, receive a
cash payment equal to the Buyer Stock Market Price, multiplied by the
fraction of a share that such Company Stockholder would otherwise be
entitled to receive.
3. AMENDMENT TO SECTION 6.1 OF THE MERGER AGREEMENT. Section 6.1 of the
Merger Agreement is hereby amended and restated in its entirety to read as
follows:
"6.1 TERMINATION OF AGREEMENT. The Parties may terminate this
Agreement prior to the Effective Time (whether before or after Requisite
Stockholder Approval) as provided below:
(a) the Parties may terminate this Agreement by mutual written
consent;
(b) the Buyer may terminate this Agreement by giving written notice
to the Company in the event the Company is in breach, and the Company
may terminate this Agreement by giving written notice to the Buyer and
the Transitory Subsidiary in the event the Buyer or the Transitory
Subsidiary is in breach, of any material representation, warranty or
covenant contained in this Agreement, and such breach is not remedied
within 10 days of delivery of written notice thereof;
(c) any Party may terminate this Agreement by giving written notice
to the other Parties at any time after the Company Stockholders have
voted on whether to approve this Agreement and the
<PAGE> 179
Merger in the event this Agreement and the Merger failed to receive the
Requisite Stockholder Approval;
(d) the Buyer may terminate this Agreement by giving written notice
to the Company if the Closing shall not have occurred (i) on or before
November 25, 1996, by reason of the failure of any condition precedent
under Section 5.1 or 5.2 hereof (unless the failure results primarily
from a breach by the Buyer or the Transitory Subsidiary of any
representation, warranty or covenant contained in this Agreement);
(e) the Company may terminate this Agreement by giving written
notice to the Buyer and the Transitory Subsidiary if the Closing shall
not have occurred (i) on or before November 25, 1996, by reason of the
failure of any condition precedent under Section 5.1 or 5.3 hereof
(unless the failure results primarily from a breach by the Company of
any representation, warranty or covenant contained in this Agreement);
or
(f) any Party may terminate this Agreement if the Board of
Directors of the Company shall have withdrawn or modified in a manner
adverse to the Buyer its approval or recommendation to the Company
Stockholders of this Agreement or the Merger or shall have approved or
recommended to the Company Stockholders that they accept the terms of
any Acquisition Proposal or shall have resolved to take any of the
foregoing actions; provided, however, that reasonable delay required to
comply with the Company Board Fiduciary Duties shall not be deemed to be
a withdrawal or a modification adverse to the Buyer.
4. REPLACEMENT OF EXHIBIT C TO THE MERGER AGREEMENT. Exhibit C to the
Merger Agreement is replaced in its entirety by Exhibit C attached hereto.
5. EFFECT OF MODIFICATION. In the event of any inconsistency between the
provisions of the Merger Agreement and the applicable provisions of this
Agreement, the provisions of this Agreement shall control in all respects.
Otherwise, the Merger Agreement shall remain in full force and effect.
6. SUCCESSORS AND ASSIGNS; GOVERNING LAW. Subject to the Merger Agreement
as amended hereby, this Agreement shall inure to the benefit of and bind the
respective heirs, personal representatives, successors and assigns of the
parties hereto and shall be governed by and construed in accordance with the
internal laws (and not the law of conflicts) of the State of Delaware.
7. SEVERABILITY; MODIFICATIONS. Should one or more of the provisions of
this Agreement be determined by a court of law to be illegal or unenforceable,
the other provisions shall nevertheless remain effective and shall be
enforceable. This Agreement shall not be modified without the prior consent of
each of the Parties.
8. EXECUTION IN COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. This Agreement, once
executed, may be delivered to either party through the use of facsimile
transmission. In this regard, any and all signatures of the parties appearing on
any facsimile copies of this Agreement shall be deemed, unless otherwise proved,
the lawful and valid signature of the executing party.
2
<PAGE> 180
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth below.
Effective date of this Agreement: August 5, 1996.
THE BUYER:
BAY NETWORKS, INC.
By: /s/ Bruce I. Sachs
---------------------------------------
Title: Executive Vice President
------------------------------------
THE TRANSITORY SUBSIDIARY:
BETA ACQUISITION CORP.
By: /s/ Bruce I. Sachs
---------------------------------------
Title: Executive Vice President
------------------------------------
THE COMPANY:
PENRIL DATACOMM NETWORKS, INC.
By: /s/ Henry David Epstein
---------------------------------------
Title: President, Chief Executive Officer
------------------------------------
3
<PAGE> 181
ANNEX II
11,993,000 SHARES
ACCESS BEYOND, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Prospectus is being furnished in connection with the contemplated
distribution in the form of a dividend (the "Distribution") by Penril DataComm
Networks, Inc. ("Penril") to holders of record of its Common Stock, par value
$.01 per share ("Penril Stock") as of the close of business on the record date
to be set by the Board of Directors of Penril (the "Record Date") (which is
expected to be on or about November 15, 1996) of all of the outstanding shares
of Common Stock, par value $.01 per share ("Company Stock"), of its subsidiary,
Access Beyond, Inc. (the "Company"). The Company will operate all businesses
owned by Penril immediately prior to the Distribution other than Penril's modem
business.
The Distribution will be made beginning on or about the Distribution Date
(defined below) to holders of record of Penril Stock as of the Record Date on
the basis of one share of Company Stock for each share of Penril Stock held. The
Distribution will be on the day prior to or the day of the merger discussed
below (the "Distribution Date") (which is expected to be on or about November
19, 1996). The Distribution is being undertaken in connection with, and the
consummation of the Distribution is conditioned upon the consummation of, the
merger of Penril with a subsidiary of Bay Networks, Inc. ("Bay") whereby Penril
stockholders will receive shares of common stock of Bay in exchange for their
Penril Stock (the "Merger"). No consideration will be required to be paid by
Penril stockholders for the shares of Company Stock to be received in the
Distribution. Although Penril is separately seeking approval by Penril
stockholders of the Merger and the Distribution, no additional action will be
required to be taken by Penril stockholders in order to receive the shares of
Company Stock. Neither Penril nor the Company will receive any proceeds from the
Distribution. The Company has applied to have the Company Stock listed for
trading on the Nasdaq National Market under the symbol "ACCB".
PENRIL STOCKHOLDERS WHO WILL RECEIVE SHARES OF COMPANY STOCK IN THE
DISTRIBUTION SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Stockholders of Penril with inquiries related to the Distribution should
contact Penril's Stockholder Relations Department, 1300 Quince Orchard
Boulevard, Gaithersburg, Maryland 20878. After the Distribution Date,
stockholders of the Company with inquiries related to the Distribution should
contact the Company or its transfer agent.
THE DATE OF THIS PROSPECTUS IS OCTOBER 17, 1996.
<PAGE> 182
Through December 14, 1996, all dealers effecting transactions in the
securities offered hereby may be required to deliver a copy of this Prospectus.
This is in addition to the obligations of the Company to deliver this Prospectus
at the time of the initial distribution of the securities.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy any
security other than the securities offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy the securities by anyone in
any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any offer or sale made hereunder shall,
under any circumstances, create any implication that there has been no change in
the affairs of the Company since the date hereof.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-1 ("Form S-1")
with the Securities and Exchange Commission ("Commission") under the Securities
Act of 1933, as amended (the "Securities Act") with respect to the shares of
Company Stock being received by Penril stockholders in the Distribution. This
Prospectus does not contain all of the information set forth in the Form S-1 and
the exhibits and schedules thereto. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to herein are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Form S-1, reference is made to such exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Form S-1 and the exhibits and schedules thereto filed by the Company
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the Regional Offices of the Commission at Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can also be obtained
by mail from the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The Commission's web site can be accessed at http://www.sec.gov. It is
anticipated that Company Stock will also be quoted on The Nasdaq Stock Market
("Nasdaq"). Following the Distribution, such reports, proxy statements and other
information to be filed by the Company can also be inspected at the offices of
the National Association of Securities Dealers, Inc., Market Listing Section,
1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish to holders of Company Stock each fiscal year
an annual report which contains consolidated financial statements prepared in
accordance with United States generally accepted accounting principles and
audited and reported on, with an opinion expressed by, an independent public
accounting firm, and such other reports as may be required by law.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
ELECTRO-METRICS, ACCESS BEYOND, MULTIVERTER, FORSITE, MUX/ROUTER AND SUNUPS
ARE THE UNITED STATES TRADEMARKS, TRADENAMES AND SERVICEMARKS OWNED BY THE
COMPANY, PENRIL OR ONE OF PENRIL'S SUBSIDIARIES. THIS PROSPECTUS MAY ALSO
INCLUDE TRADEMARKS, TRADENAMES AND SERVICEMARKS WHICH ARE PROPERTY OF THEIR
RESPECTIVE OWNERS.
THIS PROSPECTUS MAY CONTAIN ESTIMATES, PROJECTIONS AND OTHER
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
TRENDS AND OTHER UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN THIS PROSPECTUS
THAT COULD CAUSE ACTUAL RESULTS TO VARY FROM THOSE PROJECTED. STOCKHOLDERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH ARE
BASED ONLY ON CURRENT JUDGMENTS AND CURRENT KNOWLEDGE.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION................................................................. 2
SUMMARY............................................................................... 5
Access Beyond, Inc............................................................... 5
Transactions..................................................................... 5
The Distribution................................................................. 6
Summary Consolidated Financial Data.............................................. 8
RISK FACTORS.......................................................................... 9
Stand Alone Company.............................................................. 9
Absence of Trading Market for Company Stock...................................... 9
Dependence on Key Management..................................................... 9
Technological Changes............................................................ 9
Competition...................................................................... 10
Product Protection and Intellectual Property..................................... 10
Certain Antitakeover Effects..................................................... 10
Important Considerations Related to Forward-Looking Statements................... 10
Dividends........................................................................ 11
Certain Tax Considerations....................................................... 11
Relationship with Penril......................................................... 11
THE DISTRIBUTION...................................................................... 11
Background of the Transfer and the Distribution.................................. 11
Manner of Effecting the Distribution............................................. 12
Listing and Trading of Company Stock............................................. 12
Certain Federal Income Tax Consequences of the Distribution...................... 13
Certain Consequences of the Distribution......................................... 14
Reason for Furnishing this Prospectus............................................ 14
CAPITALIZATION........................................................................ 15
SELECTED PROFORMA FINANCIAL DATA...................................................... 16
Proforma Balance Sheet........................................................... 16
Proforma Statements of Operations................................................ 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PENRIL AND THE COMPANY........................................................... 19
General Business Developments.................................................... 19
New Accounting Pronouncements.................................................... 19
Results of Operations............................................................ 20
Liquidity and Capital Resources.................................................. 23
BUSINESS.............................................................................. 25
General.......................................................................... 25
Products......................................................................... 25
Discontinued Operations.......................................................... 26
Suppliers........................................................................ 27
Patents, Copyrights And Licenses................................................. 27
Backlog.......................................................................... 27
Competition...................................................................... 28
Sales and Marketing.............................................................. 28
Customer Support, Service and Warranty........................................... 28
Research and Development......................................................... 28
Properties....................................................................... 28
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Employees........................................................................ 29
Legal Proceedings................................................................ 29
MANAGEMENT............................................................................ 31
Directors and Executive Officers................................................. 31
Committees of the Board of Directors............................................. 33
Compensation of Directors........................................................ 33
Executive Compensation........................................................... 34
Employment and Consulting Agreements............................................. 35
Penril Benefit Plans............................................................. 36
Company Benefit Plans............................................................ 39
SECURITY OWNERSHIP.................................................................... 42
DESCRIPTION OF CAPITAL STOCK.......................................................... 44
Authorized Capital Stock......................................................... 44
Company Stock.................................................................... 44
Preferred Stock.................................................................. 45
Antitakeover Provisions of the Company Certificate and Company By-laws........... 45
COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND PENRIL........................ 47
Business Combinations............................................................ 48
Amendments to Charters........................................................... 48
Amendments to By-laws............................................................ 48
Redemption of Capital Stock...................................................... 49
Stockholder Action............................................................... 49
Special Stockholder Meetings..................................................... 49
Number and Election of Directors................................................. 49
Antitakeover Provisions.......................................................... 50
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY................ 50
General.......................................................................... 50
Elimination of Liability in Certain Circumstances................................ 50
Indemnification and Insurance.................................................... 51
CERTAIN TRANSACTIONS.................................................................. 53
Distribution Agreement........................................................... 53
Development and License Agreement................................................ 53
Technology License Agreement..................................................... 53
Sublease Agreement............................................................... 53
Transitional Services Agreement.................................................. 54
Indemnification Agreement........................................................ 54
LEGAL MATTERS......................................................................... 55
EXPERTS............................................................................... 55
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus and is qualified by the more detailed information set forth
elsewhere in this Prospectus which should be read in its entirety. Unless the
context otherwise indicates, all references to the operations of the Company in
this Prospectus shall include the operations of the Remote Access Business (as
hereinafter defined) by Penril prior to the Distribution and assumes that the
actions set forth under "The Distribution" have taken place. Capitalized terms
used in this Summary but not defined in this Summary have the respective
meanings ascribed to them elsewhere in this Prospectus.
ACCESS BEYOND, INC.
The Company is a wholly owned subsidiary of Penril, organized by Penril for
the sole purpose of effecting the Distribution and the Merger. The Company was
incorporated on July 23, 1996. The mailing address of the Company's principal
executive offices is currently 1300 Quince Orchard Boulevard, Gaithersburg,
Maryland 20878, and the phone number is (301) 921-8600.
TRANSACTIONS
Penril has entered into a Plan and Agreement of Merger dated as of June 16,
1996, as amended on August 5, 1996 (the "Merger Agreement") among Penril, Bay
and a subsidiary of Bay, pursuant to which, upon the terms and subject to the
conditions set forth therein, Penril will be merged with the subsidiary of Bay,
with Penril surviving as a wholly-owned subsidiary of Bay. Prior to consummation
of the Merger, the Board of Directors of Penril will declare a distribution in
the form of a dividend to holders of Penril Stock, as of the close of business
on the Record Date, on the basis of one share of Company Stock for each share of
Penril Stock held on the Record Date. The shares to be distributed will
constitute all of the issued and outstanding shares of Company Stock immediately
following the Distribution. Following the Distribution, the Company will be an
independent company and the Company Stock will be publicly traded on Nasdaq. See
"The Distribution" and "Description of Capital Stock." The Distribution is
intended to be tax-free to Penril stockholders for federal income tax purposes.
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), each issued and outstanding share of Penril Stock (other than
shares of Penril Stock that are owned by Penril as treasury stock and other than
any shares of Penril Stock that are owned beneficially by Bay or any wholly
owned subsidiary of Bay, which will be automatically cancelled without
consideration) will be converted into the number of shares of common stock, par
value $.01 per share, of Bay (the "Bay Stock") equal to a specified ratio
determined by dividing $10 by the average closing price for Bay Stock for a
specified period prior to the Effective Time. Each of the options to purchase
Penril Stock outstanding at the Effective Time will be assumed by Bay and,
immediately after the Effective Time, will be deemed to constitute, without any
action on the part of the holder thereof, an option to acquire, as of the
Effective Time, Bay Stock on the same terms and conditions as were applicable
under such option at the Effective Time, subject to adjustment of the number of
shares and the exercise price for the conversion ratio referred to above. The
terms of the Merger are as described under "The Merger Agreement -- The Merger"
in the Proxy Statement/Prospectus of Penril and Bay (the "Proxy
Statement/Prospectus") to which this Prospectus is Annex II.
Immediately prior to the Distribution, Penril will transfer (the
"Transfer") to the Company substantially all of its assets and liabilities other
than assets and liabilities related to Penril's modem business (the "Modem
Business"). In addition, the Company and Penril have agreed to indemnify each
other after the Distribution with respect to certain losses, damages, claims and
liabilities arising primarily from their respective businesses. See "Certain
Transactions -- Indemnification Agreement."
The foregoing is a brief summary of certain terms of the Merger affecting
Penril. A more complete description of the Merger and the Merger Agreement may
be found in the Proxy Statement/Prospectus. The Distribution Agreement between
Penril and the Company is more fully described herein under "Certain
Transactions -- Distribution Agreement."
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THE DISTRIBUTION
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Distributing Company.................. Penril DataComm Networks, Inc., a Delaware corporation
("Penril").
Distributed Company................... Access Beyond, Inc., a Delaware corporation (the "Com-
pany"). The Company will engage in the development and
marketing of network access devices which enable
local, remote or mobile users to access network
resources located at remote sites, central sites or
any other point in the network (the "Remote Access
Business"). In addition, Penril is currently in the
process of selling one of its subsidiaries,
Electro-Metrics, Inc. ("EMI"), a manufacturer of
sophisticated high frequency instrumentation
equipment. It is unlikely that EMI will be sold prior
to the Transfer. In the event EMI is not sold prior to
the Transfer, the assets and liabilities of EMI will
be transferred to the Company as part of the Transfer.
See "Business -- Discontinued Operations."
Shares to be Distributed.............. 11,993,000 shares of Company Stock based on 11,993,000
shares of Penril Stock expected to be outstanding on
the Record Date. See "Description of Capital Stock."
Such shares will constitute all of the issued and
outstanding shares of Company Stock immediately
following the Distribution.
Distribution Ratio.................... One share of Company Stock for each share of Penril
Stock held on the Record Date. See "The
Distribution -- Manner of Effecting the Distribution."
Risk Factors.......................... Stockholders should consider certain factors discussed
under the heading "Risk Factors" beginning on page 9.
Relationship with Penril
After the Distribution.............. As of the Distribution Date, the Company and Penril
will enter into several agreements to define their
ongoing relationships. These agreements relate to the
provision of certain administrative services by the
Company to Penril, the license of certain trademarks,
trade names and service marks for use in the business
of the Company, indemnification for various claims and
development of certain technology. See "Certain
Transactions."
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Federal Income Tax Consequences....... The Board of Directors of Penril has received an
opinion from its tax counsel to the effect that, on
the basis of the facts, representations and
assumptions set forth in the opinion, for federal
income tax purposes, it is more likely than not that
(i) the Distribution will qualify as a tax-free
spin-off pursuant to Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii)
the Merger will qualify as a reorganization within the
meaning of Section 368(a)(1)(B) of the Code. If the
tax-free nature of the Merger in invalidated, it would
reduce the likelihood that the Distribution will
qualify as a tax-free spin-off pursuant to Section 355
of the Code. No ruling from the Internal Revenue
Service ("IRS") has been or will be sought with
respect to any aspect of the Distribution. For a more
detailed discussion of the federal income tax conse-
quences of the Distribution to the Penril
stockholders, see "Risk Factors -- Certain Tax
Considerations" and "The Distribution -- Certain
Federal Income Tax Consequences of the Distribution."
Post-Distribution Dividend Policies... The Company does not anticipate paying dividends for
the foreseeable future.
Company Stock Listing................. The Company has applied to have the Company Stock
listed for trading on Nasdaq under the symbol "ACCB."
Record Date........................... It is expected that the Record Date will be on or
immediately after receipt of approval by the Penril
stockholders of the Merger, the Transfer and the
Distribution.
Distribution Agent, Transfer Agent
and Registrar....................... Continental Stock Transfer & Trust Company
Distribution Date..................... It is expected that the Distribution Date will be on
or about November 19, 1996. As soon as practicable
thereafter, Penril will commence mailing certificates
representing shares of Company Stock. Holders of
Penril Stock will not be required to make any payment
or take any action, including tendering stock
certificates, in order to receive Company Stock. See
"The Distribution -- Manner of Effecting the
Distribution."
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following Summary Consolidated Financial Data of Penril should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Penril and the Company" included elsewhere herein
and Penril's consolidated financial statements and the notes thereto included
herein. The statement of operations data for the years ended July 31, 1996,
1995, 1994, 1993 and 1992 and the balance sheet data as of the same dates have
been derived from the audited consolidated financial statements of Penril.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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FISCAL YEAR ENDED JULY 31,
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1996 1995 1994 1993 1992
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PENRIL -- HISTORICAL STATEMENT OF OPERATIONS
DATA:
Net revenues(1)................................ $39,435 $52,611 $61,838 $44,108 $32,966
Net income (loss)
Continuing operations(2)..................... (20,668) (4,614) 2,345 1,027 188
Discontinued operations...................... 404 (1,661) (828) (896) 906
Loss on disposal of discontinued
operations................................ (640) (1,400) -- -- --
Earnings (loss) per share
Continuing operations........................ (2.14) (0.61) 0.30 0.15 0.03
Discontinued operations...................... .04 (0.22) (0.11) (0.13) 0.13
Loss on disposal............................. (.07) (0.19) -- -- --
Cash dividends per share....................... -- -- 0.02 -- 0.02
PENRIL -- HISTORICAL BALANCE SHEET DATA:
Total assets(3)................................ $33,780 $44,387 $51,061 $49,178 $28,689
Long-term debt................................. 905 5,681 8,890 10,217 1,875
Stockholders' equity........................... 18,215 21,723 28,580 27,501 22,177
<FN>
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(1) Included in net revenues are the following net revenues relating to the
Modem Business, including $4.5 million paid in the fourth quarter of fiscal
1996 to Penril for a license agreement with Bay:
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FISCAL YEAR ENDED JULY 31,
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1996 1995 1994 1993 1992
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Net revenues............................... $19,519 $18,974 $22,828 $21,768 $16,789
<FN>
(2) Net income from continuing operations for fiscal 1996 includes a charge of
$9.7 million for restructuring costs and $500,000 for costs incurred through
July 31, 1996 related to the Merger.
(3) Included in total assets are the following net assets relating to the
discontinued operations (Technipower, Inc. ("Technipower"), a subsidiary the
assets of which were sold by Penril on October 11, 1996, and EMI):
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FISCAL YEAR ENDED JULY 31,
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1996 1995 1994 1993 1992
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Net assets................................. $ 7,337 $ 5,145 $ 6,830 $ 7,299 $ 6,883
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RISK FACTORS
Holders of Penril Stock should be aware that the Distribution and ownership
of Company Stock involves certain risks, including those described below, which
could adversely affect the value of their holdings of Company Stock. Neither
Penril nor the Company makes, nor have they authorized any other person to make,
any representation about the future market value of Company Stock.
STAND ALONE COMPANY
The Company was recently incorporated for the purpose of effecting the
Distribution and the Merger and, as a corporation, does not have any operating
history. However, the Remote Access Business, as conducted by Penril prior to
the Distribution, has an operating history consisting of the development and
sales of local area network ("LAN") and host access products (the "LAN and Host
Access products") and the development of a new product family called Access
Beyond. See "Business -- Products."
ABSENCE OF TRADING MARKET FOR COMPANY STOCK
There is currently no established public trading market nor has there been
any established public trading market for Company Stock. The Company has applied
to have the Company Stock listed for trading on Nasdaq. There can be no
assurance as to the prices at which Company Stock will trade after the
Distribution Date. Until Company Stock is fully distributed and an orderly
trading market develops (if one does), the prices at which such stock trades may
fluctuate significantly. Prices for Company Stock will be determined in the
marketplace and may be influenced by many factors, including the operating
performance of the Company, the depth and liquidity of the market for Company
Stock, investor perception of the Company and general economic and market
conditions.
DEPENDENCE ON KEY MANAGEMENT
If the Company is to be successful, its success will be due in large part
to the performance of Ronald A. Howard, the Company's President and Chief
Executive Officer, and, to a lesser extent, of other key management personnel.
The loss of Mr. Howard's services could adversely affect the Company's ability
to achieve profitability and growth. Although the Company anticipates it will
have an employment contract with Mr. Howard which will provide for his continued
employment, no assurance can be given that the Company will be able to retain
the services of Mr. Howard or any other key management personnel. See
"Management -- Executive Compensation" and "Management -- Employment and
Consulting Agreements."
TECHNOLOGICAL CHANGES
The market for networking products is subject to rapid technological
change, evolving industry standards and frequent new product introductions, and
therefore requires a high level of expenditures for research and development.
The Company may be required to incur significant expenditures to develop new
integrated product offerings. There can be no assurance that customer demand for
products integrating network connectivity and remote access technologies will
grow at the rate expected by the Company, that the Company will be successful in
developing, manufacturing and marketing new products or product enhancements
that respond to these customer demands or to evolving industry standards and
technological change, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction, manufacture and
marketing of these products (especially in light of the increasing design and
manufacturing complexities associated with the integration of technologies), or
that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. The Company's
business, operating results and financial condition may be materially and
adversely affected if the Company encounters delays in developing or introducing
new products or product enhancements or if such product enhancements do not gain
market acceptance. In order to maintain a competitive position, the Company must
also continue to enhance its existing products and there is no assurance that it
will be able to do so. A major portion of future revenues is expected to come
from new products and services. The Company cannot determine the ultimate effect
that new products will have on its revenues or earnings.
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COMPETITION
The networking industry is highly competitive and competition is expected
to intensify. There are numerous companies competing in various segments of the
network management and remote access markets. Competitors include Ascend
Communications, Shiva Corporation, Cisco Systems, Inc., U.S. Robotics, Inc.,
Microcom, Inc. and Bay, among others. Many of the Company's competitors have
greater name recognition, more extensive engineering, manufacturing and
marketing capabilities and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies in
the networking industry have expanded their product lines or technologies in
recent years as a result of acquisitions. There can be no assurance that the
Company will be able to compete successfully in the future with existing or new
competitors.
PRODUCT PROTECTION AND INTELLECTUAL PROPERTY
The Company, like many other companies in the network access industry,
anticipates it will rely upon rights granted through licenses from third parties
for a substantial amount of proprietary information used to develop its
products; however, some companies may determine not to grant such licenses and
may seek to protect their proprietary rights in such technological information.
Accordingly, there can be no assurance that the Company will be able to continue
obtaining additional rights to utilize proprietary technological information
necessary to develop its products. Because of the existence of a large number of
patents in the networking field and the rapid rate of issuance of new patents,
it is not economically practical to determine in advance whether a product or
any of its components infringe patent rights of others. In the event of any
infringement, the Company believes that, based upon industry practice, necessary
licenses or rights under such patents may be obtained on terms that should not
have a material adverse effect on the Company's consolidated financial position
or results of operations. However, there can be no assurance in this regard.
CERTAIN ANTITAKEOVER EFFECTS
The Company's Restated Certificate of Incorporation (the "Company
Certificate") includes certain provisions that are intended to prevent or delay
the acquisition of the Company by means of a tender offer, proxy contest or
otherwise. Specifically, the Company Certificate provides for a classified Board
of Directors, classified into three classes with terms of three years each. In
addition, the Company Certificate authorizes the Board of Directors of the
Company to issue preferred stock without further stockholder approval, which
could have dividend, redemption, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
Company Stock. Finally, the Company is subject to Section 203 of the Delaware
General Corporation Law (the "DGCL") which limits transactions between a
publicly held company and "interested stockholders" (generally those
stockholders who, together with their affiliates and associates, own 15% or more
of a company's outstanding capital stock). Any one of, or a combination of, the
above anti-takeover provisions could discourage a third party from attempting to
acquire control of the Company. See "Description of Capital Stock." The
Company's 1996 Long-Term Incentive Plan and the Company's 1996 Non-Employee
Directors' Stock Option Plan will provide for acceleration of stock options upon
a change in control of the Company, which will have the effect of making an
acquisition of control of the Company more expensive. See "Management -- Company
Benefit Plans." These plans may also inhibit a change in control of the Company.
In addition, certain Company officers will have severance compensation
agreements with the Company that will provide for substantial cash payments and
acceleration of other benefits in the event of specified corporate changes
related to the Company, including a change in control of the Company. See
"Management -- Employment and Consulting Agreements."
IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
document may include forward-looking statements that involve risks and
uncertainties. The Company wishes to caution readers that a number of important
factors, including those identified in this section as well as factors discussed
elsewhere in this filing and in other filings with the Commission, could affect
the Company's actual results and cause actual results to differ materially from
those in the forward-looking statements.
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DIVIDENDS
The Company does not anticipate paying dividends for the foreseeable
future.
CERTAIN TAX CONSIDERATIONS
As described below, the Board of Directors of Penril has received an
opinion from its tax counsel to the effect that, on the basis of the facts,
representations and assumptions set forth in the opinion, for federal income tax
purposes, it is more likely than not that (i) the Distribution will qualify as a
tax-free spin-off pursuant to Section 355 of the Code and (ii) the Merger will
qualify as a reorganization within the meaning of Section 368(a)(1)(B) of the
Code. No ruling from the IRS to that effect has been or will be sought. If the
tax-free nature of the Merger is invalidated, it would reduce the likelihood
that the Distribution will qualify as a tax-free spin-off pursuant to Section
355 of the Code. See "The Distribution -- Certain Federal Income Tax
Consequences of the Distribution." If the Distribution were not to qualify for
tax-free treatment under Section 355 of the Code, then, in general, although not
entirely free from doubt, for federal income tax purposes it is likely that each
Penril stockholder would be required to recognize income or gain on the receipt
of Company Stock in the Distribution in an amount up to the fair market value of
the shares of Company Stock received in the Distribution. Each member of the
Penril consolidated group (including the Company and its subsidiaries) would
remain jointly and severally liable for any tax liability of Penril or its
subsidiary incurred prior to the Merger.
RELATIONSHIP WITH PENRIL
The Company does not have an operating history as an independent public
company. The operations of the Company historically have relied on the rest of
Penril for certain necessary administrative services. As of the Distribution
Date, Penril and the Company will enter into several agreements for purposes of
governing certain of the ongoing relationships between the two companies
following the Distribution, including indemnification obligations. Pursuant to
the Indemnification Agreement to be entered into between Penril and the Company
in connection with the Transfer (the "Indemnification Agreement"), the Company
will agree to indemnify Penril against all expenses and liabilities resulting
from (i) the operation of the Company from and after the Distribution, (ii)
Penril's operations prior to the Transfer other than those based upon, arising
out of or in connection with (a) the Modem Business, (b) the Merger and
transactions relating to the Merger or (c) the tax consequences of the
Distribution, (iii) the termination of employment of employees (other than those
employees identified as remaining with Penril after the Transfer) by Penril or
(iv) information furnished by Penril or the Company relating to the Company
contained in the Registration Statement filed by Bay in connection with the
Proxy Statement/Prospectus. Included within the potential liabilities against
which the Company will indemnify Penril are those referred to in "Business-Legal
Proceedings". Although the Company is not aware of any pending or threatened
material liability for which the Company anticipates becoming obligated to make
payments in connection with its obligation to indemnify Penril except for
possible payments resulting from the termination of employment of certain
employees (which payments management anticipates will not exceed approximately
$400,000), there can be no assurance that such indemnification obligations could
not arise or that such indemnification obligations would not be material to the
Company. These agreements were negotiated while the Company was owned by Penril
and consequently are not the result of arm's-length negotiations between
independent parties. Nonetheless, the Company believes that the agreements are
fair to the parties and contain terms which are generally comparable to those
which would result from arm's-length negotiations, although there can be no
assurance thereof.
THE DISTRIBUTION
BACKGROUND OF THE TRANSFER AND THE DISTRIBUTION
Because the Modem Business was all that Bay desired to acquire, Penril
determined to effect the Distribution, which is intended to be tax-free to
Penril stockholders for federal income tax purposes and which was a condition to
Bay's willingness to enter into the Merger Agreement. Penril believes the
Distribution will enable Penril stockholders to participate in the values and
prospects of the assets and business of the Company.
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<PAGE> 192
Although the Transfer and Distribution will not be effected unless the
Merger is approved and is about to occur, the Transfer and Distribution are
separate from the Merger and the Company Stock to be received by holders of
Penril Stock in the Distribution does not constitute a part of the consideration
to be received in the Merger.
Until shortly before the Merger, the Company will own no material assets
and will conduct no significant business activity. Prior to the Merger, Penril
and the Company will enter into a Distribution Agreement and an Indemnification
Agreement pursuant to which agreements Penril will transfer to the Company as a
capital contribution all of Penril's right, title and interest in the Remote
Access Business and all of the other assets of Penril unrelated to the Modem
Business, as well as a portion of Penril's total net operating loss
carryforward; and the Company will (a) assume, pay, perform and discharge all of
the liabilities of Penril other than (i) liabilities relating to the Modem
Business; and (ii) the bank debt of Penril (which may not exceed $4,000,000 at
the Effective Time); and (b) indemnify Penril for any and all claims and
liabilities arising as a result of or in connection with the sale by Penril of
Technipower or EMI. At the time of the Transfer, Penril will own all of the
Company's outstanding stock. See "Certain Transactions."
MANNER OF EFFECTING THE DISTRIBUTION
Pursuant to the Distribution, Penril will distribute as a dividend to its
stockholders of record as of the Record Date ("Holders") one share of Company
Stock for each share of Penril Stock then held. On the Distribution Date, Penril
will deliver to Continental Stock Transfer & Trust Company, as distribution
agent, certificates evidencing all of the issued and outstanding shares of
Company Stock owned by Penril, which will represent all of the issued and
outstanding shares of Company Stock. All shares of Company Stock distributed
will be fully paid, nonassessable and free of preemptive rights.
As a result of the Distribution, all of the issued and outstanding shares
of Company Stock will be distributed to Holders. The Record Date is expected to
be on or about November 15, 1996 and the Distribution Date will be on or about
November 19, 1996. It is presently anticipated that certificates representing
Company Stock will be mailed to Holders on or about the Distribution Date. After
the Distribution Date, Holders will hold their Penril Stock (until converted
into Bay Stock) as well as Company Stock. The Distribution will not affect the
number of, or the rights attaching to, outstanding shares of Penril Stock.
No Holder will be required to pay any cash or other consideration for the
shares of Company Stock received in the Distribution nor will any action be
required to be taken by any Holder, including tendering stock certificates, in
order to receive shares of Company Stock. Penril has accounted for the
Distribution as a dividend and has reduced its stockholders' equity by the net
book value of the Company Stock distributed.
IN ORDER TO BE ENTITLED TO RECEIVE THE DISTRIBUTION OF COMPANY STOCK, A
PENRIL STOCKHOLDER RECEIVING THIS PROSPECTUS MUST HAVE BEEN A HOLDER OF RECORD
OF PENRIL STOCK ON THE RECORD DATE.
LISTING AND TRADING OF COMPANY STOCK
The Company has applied to have the Company Stock listed for trading on
Nasdaq under the symbol "ACCB". The transfer agent and registrar for the Company
Stock is Continental Stock Transfer & Trust Company.
No current public trading market for the Company Stock exists, although a
"when-issued" market could develop several days prior to the Distribution Date.
The extent of the market for the Company Stock and the prices at which the
Company Stock may trade prior to or after the Distribution cannot be predicted.
See "Risk Factors -- Absence of Trading Market for Company Stock."
The Company Stock distributed to Holders will be freely transferable,
except for Company Stock received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act. Persons who may be deemed
to be affiliates of the Company after the Distribution generally include
individuals or entities that control, are controlled by or are under common
control with the Company and may include certain officers and directors of the
Company as well as principal stockholders of the Company. Persons who
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are affiliates of the Company will be permitted to sell their Company Stock only
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act, such as the
exemptions provided by Section 4(2) of the Securities Act or Rule 144
thereunder. It is not expected that Rule 144 will be available for the sale of
Company Stock by affiliates of the Company until at least 90 days after the
effectiveness of the Company's registration statement registering Company Stock
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See
"Description of Capital Stock -- Company Stock."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
General. The following is a summary of the material federal income tax
consequences of the Distribution to the holders of shares of Penril Stock. The
federal income tax discussion set forth below is for general information only
and may not apply to particular categories of holders of shares of Penril Stock
subject to special treatment under the Code, including without limitation,
foreign holders and holders whose Penril securities were acquired pursuant to
the exercise of any employee stock option or otherwise as compensation. EACH
HOLDER OF SHARES OF PENRIL STOCK AND PENRIL OPTIONS IS URGED TO CONSULT HIS TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE DISTRIBUTION,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
Consequences of Proposed Transaction. As described in the Summary, the
Distribution is being made in preparation for, and in conjunction with, the
Merger. The Board of Directors of Penril has received an opinion from its
counsel Benesch, Friedlander, Coplan & Aronoff P.L.L. ("Counsel") to the effect
that, on the basis of the facts, representations and assumptions set forth in
the opinion, for federal income tax purposes, it is more likely than not that
(i) the Distribution will qualify as a tax-free spin-off pursuant to Section 355
of the Code and (ii) the Merger will qualify as a reorganization within the
meaning of Section 368(a)(1)(B) of the Code. If the tax-free nature of the
Merger is invalidated, it would reduce the likelihood that the Distribution will
qualify as a tax-free spin-off pursuant to Section 355 of the Code.
The representations (among others) relied upon by Counsel in giving its
opinion contain statements or agreements to the effect that: the Modem Business
and Remote Access Business have each been actively conducted for five years and
will continue to be conducted as separate, active businesses after the proposed
transactions; certain transactions between Penril and Bay in effect prior to the
closing of the Distribution and the Merger are fair market value transactions
entered into for valid business reasons independent of the Merger, and all of
the transactions between the Company and Bay or Penril in effect after the
closing of the Distribution and the Merger (other than certain contributions
made to the Company by Penril prior to the Distribution) will also be fair
market value transactions entered into for valid business reasons; the transfer
of certain cash and liquid assets to the Company (and the retention of certain
debt by Penril) is necessitated by the ongoing business needs of the Company;
the liquid assets being received by the Company will be used in the operation of
its Remote Access Business and will not be used to make distributions to, or
redeem the shares of Company Stock held by stockholders of the Company; Penril
will be maintained as a separate corporation by Bay; and Bay owns no Penril
Stock and has no intention to reacquire any stock issued in the Merger.
The favorable tax treatment of both the Distribution and the Merger also
depends upon the historic stockholders of Penril maintaining a so-called
"continuity of interest" in both the Bay Stock received in the Merger and the
Company Stock received in the Distribution. Under Revenue Procedures issued by
the IRS, continuity of interest is maintained in each transaction if the
historic stockholders of Penril continue to maintain at least one-half their
stock investment in Penril in the modified form of each of the Company Stock and
Bay Stock received by them in the proposed transactions. Penril has represented
that it knows of no plan or intent by any stockholder to sell more than one-half
of his Bay Stock or Company Stock received in the proposed transactions. There
are no court cases or published rulings by the Service giving guidance on how to
measure the continuity of interest of historic stockholders in publicly owned
corporations, such as Penril, where 5% stockholders own, in the aggregate, less
than 50% of the stock of the corporation. However, Counsel is of the opinion,
based upon Penril's representations regarding the plans and intentions of its
stockholders,
13
<PAGE> 194
that both the Distribution and the Merger meet the continuity of interest
requirement. It should be noted that Penril has not sought representations (as
required by the IRS from taxpayers seeking private letter rulings in
reorganizations) from each of its 5% stockholders as to their plans and
intentions with respect to their Penril Stock or the Bay Stock and the Company
Stock to be received in the proposed transactions.
Consequences of the Distribution to Penril Stockholders. If the
distribution qualifies as a tax-free spin-off for federal income tax purposes:
1. A Penril stockholder will not recognize any income, gain or loss in
connection with the Distribution.
2. Following the Distribution, a Penril stockholder will apportion the
tax basis for his shares of Penril Stock between such Penril Stock and the
Company Stock received in the Distribution in proportion to the relative
fair market values of such Penril Stock and Company Stock on the
Distribution Date. A Penril stockholder's holding period for the Company
Stock received or deemed received in the Distribution will include the
period during which such stockholder held the Penril Stock with respect to
which the Company Stock was received or deemed received, provided that such
Penril Stock is held as a capital asset by such stockholder as of the time
of the Distribution.
Counsel's opinion with respect to the Distribution is based upon certain
representations and assumptions and represents Counsel's best legal judgment,
and is not binding upon the IRS or the courts. If any representation or
assumption relied upon in rendering Counsel's opinion is inaccurate, or if the
IRS were to challenge successfully the federal income tax treatment of the
Distribution set forth in Counsel's opinion, then, in general, although not
entirely free from doubt, for federal income tax purposes it is likely that each
Penril stockholder would be required to recognize income or gain on the receipt
of the shares of Company Stock in the Distribution in an amount up to the fair
market value of the shares of Company Stock received in the Distribution. In
such event (a) the tax basis of the shares of Company Stock received by a Penril
stockholder in the Distribution would be the fair market value of such shares on
the date the Distribution is consummated and (b) the holding period for such
shares of Company Stock would begin the day after the date the Distribution is
consummated.
Current treasury regulations require that each Penril stockholder who
receives Company Stock pursuant to the Distribution attach to his federal income
tax return for the year in which the Distribution occurs a detailed statement
setting forth such information as may be appropriate in order to demonstrate the
applicability of Section 355 of the Code to the Distribution. Penril or its
successor, Bay, will convey the appropriate information to each Penril
stockholder of record as of the Record Date.
CERTAIN CONSEQUENCES OF THE DISTRIBUTION
After the Distribution, Penril stockholders of record as of both the Record
Date and the Effective Time will own two securities (shares of Penril Stock,
until they are converted into shares of Bay Stock, and shares of Company Stock)
and will be able to increase or decrease their respective holdings in either Bay
or the Company without affecting their holdings in the other company. The
Company will be an independent, publicly traded company, owning and operating
the Remote Access Business and, if not disposed of prior to the Distribution,
Technipower and EMI.
REASON FOR FURNISHING THIS PROSPECTUS
This Prospectus is being prepared in order to provide information for
Holders, each of whom will receive shares of Company Stock in the Distribution.
It is not to be construed as an inducement or encouragement to buy or sell any
securities of Penril, the Company or any other corporation. The information
contained herein is provided as of the date of this Prospectus unless otherwise
indicated. Neither Penril nor the Company will update the information contained
in this Prospectus to effect any changes that may occur subsequent to the date
hereof, except in the normal course of their respective public disclosure
practices.
14
<PAGE> 195
CAPITALIZATION
The capitalization of the Company following the Distribution will reflect
the net book value of the assets transferred to and the liabilities assumed by
the Company from Penril in connection with the Transfer. The following table
sets forth the proforma adjusted capitalization of the Company at July 31, 1996.
This table has been prepared based upon the historical consolidated balance
sheet of Penril as of July 31, 1996 giving effect to the Transfer and the
Distribution. This table also reflects adjustments to the proforma
capitalization, as referred to in the note following the table. This table does
not reflect results of operations from and after July 31, 1996. This table
should be read in conjunction with the unaudited proforma consolidated financial
statements and notes thereto included elsewhere herein (dollars in thousands).
<TABLE>
<CAPTION>
AS
PROFORMA ADJUSTMENTS ADJUSTED
-------- ----------- --------
<S> <C> <C> <C>
Long-term debt (capitalized lease obligations)............ $ 633 $ 633
======= =======
Stockholders' equity:
Common stock, par value $.01 per share, 30,000,000
authorized, 11,993,000 outstanding................... $ 109 $ 11(1) $ 120
Additional paid-in capital.............................. 39,837 6,240(1) 46,077
Retained earnings....................................... (21,581) (21,581)
-------- --------
Total stockholders' equity................................ $ 18,365 $ 24,616
======= =======
Total capitalization...................................... $ 18,998 $ 25,249
======= =======
<FN>
- ---------------
(1) Adjustment for the issuance of 1,143,000 shares as a result of the exercise
of employee and non-employee director stock options with a value of
$6,251,000 that the Company assumes will be exercised from July 31, 1996 to
the Transfer.
</TABLE>
15
<PAGE> 196
SELECTED PROFORMA CONSOLIDATED FINANCIAL DATA
While the Transfer and the Distribution will take place as described above,
the following unaudited pro forma consolidated financial statements have been
prepared from Penril's historical consolidated financial statements to show the
Modem Business being sold to Bay as a pro forma adjustment and the Company, on a
proforma basis, as the continuing entity.
With the exception of historical information, the matters discussed in this
section include forward-looking statements that involve risks and uncertainties.
The Company wishes to caution readers that a number of important factors,
including those identified in this section as well as factors discussed in "Risk
Factors" and elsewhere in this Prospectus, could affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements.
PROFORMA BALANCE SHEET
The following unaudited proforma consolidated balance sheet for the Company
has been prepared based upon the historical consolidated balance sheet for
Penril as of July 31, 1996 and giving effect to the Transfer and the
Distribution and the events that are directly attributable to those
transactions. In the opinion of Penril's management, all material adjustments
necessary to reflect the effects of the Transfer and the Distribution have been
made. Such unaudited proforma information should be read in conjunction with the
historical consolidated financial statements of Penril, including the notes
thereto, which are included elsewhere in this Prospectus, and the notes to this
unaudited proforma consolidated balance sheet.
The unaudited proforma consolidated balance sheet has been prepared based
upon assumptions deemed appropriate by the management of Penril, does not
purport to represent what the actual financial position would have been if the
Transfer and the Distribution had been consummated at July 31, 1996, may not be
indicative of actual results and does not purport to represent the future
financial position of the Company.
16
<PAGE> 197
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PENRIL ADJUSTMENTS AS ADJUSTED
AS -- MODEM -- THE
REPORTED BUSINESS COMPANY
-------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 4,237 $ $ 4,237
Accounts receivable, net........................... 7,044 3,099(1) 3,945
Inventories........................................ 9,684 4,261(2) 5,423
Deferred income taxes.............................. 1,700 1,700(3) --
Net assets of discontinued operations.............. 7,337 -- 7,337
Other current assets............................... 249 75(2) 174
------- ------- -------
TOTAL CURRENT ASSETS............................ 30,251 9,135 21,116
Property and Equipment, net.......................... 2,457 346(2) 2,111
Other Assets......................................... 1,072 197(2) 875
------- ------- -------
TOTAL ASSETS......................................... $33,780 $ 9,678 $24,102
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings.............................. $ 4,000 $ 4,000(4) $ --
Current portion of long-term debt.................. 272 272
Accounts payable................................... 6,076 2,673(5) 3,403
Accrued compensation and commission................ 1,347 121(2) 1,226
Other accrued expenses............................. 1,758 251(2) 1,507
------- ------- -------
TOTAL CURRENT LIABILITIES....................... 13,453 7,045 6,408
Long-Term Debt, net of current portion............... 633 -- 633
Other Noncurrent Liabilities......................... 1,479 -- 1,479
------- ------- -------
TOTAL LIABILITIES.................................... 15,565 7,045 8,520
Stockholders' Equity
Common stock....................................... 109 -- 109
Additional paid-in capital......................... 39,837 -- 39,837
Retained earnings (deficit)........................ (21,581 ) 2,633 (24,214)
------- ------- -------
18,365 2,633 15,732
Equity adjustment from foreign currency
translation..................................... (150 ) -- (150)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY........................... 18,215 2,633 15,582
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................................. $33,780 $ 9,678 $24,102
======= ======= =======
<FN>
- ---------------
(1) Adjustments to eliminate estimated Modem Business receivables as of July 31,
1996 based on assumed turnover of receivables to sales.
(2) Adjustments to eliminate specifically identified Modem Business related
assets and liabilities to remain with Penril after the Transfer and the
Distribution.
(3) Adjustments to eliminate deferred income taxes and other tax benefits to
remain with Penril after the Transfer and the Distribution.
(4) Adjustments to eliminate the bank debt to remain with Penril after the
Transfer and the Distribution.
(5) Adjustments to eliminate Modem Business related trade payables to remain
with Penril after the Transfer and the Distribution.
</TABLE>
PROFORMA STATEMENTS OF OPERATIONS
The following unaudited proforma consolidated statement of operations for
the Company has been prepared from the historical results of operations of
Penril. The proforma adjustments have been computed assuming the Transfer and
the Distribution had been consummated August 1, 1995. This statement should be
read in conjunction with the historical consolidated financial statements of
Penril including the notes thereto,
17
<PAGE> 198
which are included elsewhere in this Prospectus, the unaudited proforma
consolidated balance sheet appearing above and the notes to this unaudited
proforma consolidated statement of operations.
The unaudited proforma consolidated statement of operations has been
prepared based upon an identification of those costs that could be directly
attributed to the Modem Business. Expenses which were not specifically
identified with either the Modem Business or the Remote Access Business remain
with the Company; consequently the expenses shown for the Company are in excess
of those that would have been incurred had the Company been a stand alone
company. This statement does not purport to represent what the actual results of
operations would have been for the Company had the Transfer and the Distribution
been consummated at the beginning of the period, is not indicative of actual
results and does not purport to represent what the results of operations of the
Company may be for future periods.
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1996
----------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PENRIL, ADJUSTMENTS AS ADJUSTED
AS -- MODEM -- THE
REPORTED BUSINESS(1) COMPANY
-------- ----------- -----------
<S> <C> <C> <C>
Net Revenues from Continuing Operations.............. $39,435 $ 19,519(2) $ 19,916
Cost and Expenses:
Cost of revenues................................... 22,409 9,869(2) 12,540
Selling, general and administrative................ 18,611 2,321(6) 15,917
373(7)
Product development and engineering................ 7,389 370(3) 5,624
176(4)
1,219(5)
Amortization of cost over net assets acquired...... 734 734
Provision for restructuring costs.................. 9,718 9,718
Merger related expenses............................ 500 500
------ ------ ------
59,361 14,328 45,033
Operating Income (Loss) from Continuing Operations... (19,926) 5,191 (25,117)
Other Expenses:
Interest expenses.................................. (698) (698)
Other, net......................................... (44) (44)
------ ------ ------
(742) -- (742)
Income (Loss) from Continuing Operations Before
Income Taxes....................................... (20,668) 5,191 (26,859)
Benefit from Income Taxes............................ -- -- --
------ ------ ------
Income (Loss) from Continuing Operations............. $(20,668) $ 5,191 $ (26,859)
====== ====== ======
Net income (loss) per common and equivalent shares... $ (2.78)
======
Shares used in per share calculations................ $ 9,650
======
<FN>
- ---------------
(1) The adjustments for the Modem Business are only for those items that can be
directly attributed to the Modem Business.
(2) Adjustments to exclude the Modem Business revenues and associated costs of
sales. Modem Business revenues includes $4.5 million reflecting payment
under a license agreement between Penril and Bay entered into in the fourth
quarter of fiscal 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Penril and the Company --
Results of Operations -- Fiscal 1996 Compared to Fiscal 1995."
(3) Adjustments to eliminate rent expense related to Modem Business product
development and engineering.
(4) Adjustments to eliminate Modem Business related depreciation, amortization
and other operating costs.
(5) Adjustments to eliminate Modem Business related engineering labor.
(6) Adjustments to exclude expenses of Penril DataComm, Ltd. and Penril
International Ltd. which are attributable to the Modem Business.
(7) Adjustments to exclude marketing and advertising relating to the Modem
Business.
</TABLE>
18
<PAGE> 199
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PENRIL AND THE COMPANY
GENERAL BUSINESS DEVELOPMENTS
Beginning in fiscal year 1994, Penril began to focus its business on remote
access connectivity products. Out of this strategy came Penril's new Remote
Access Business. The first phase of the new Remote Access Business includes the
Ram Rack and the Access Beyond 1000 Remote Access Server.
As part of this strategy, Penril's Board of Directors made the decision to
sell EMI and consequently, EMI has been classified as a discontinued business.
Penril continues to operate EMI and expects EMI to operate at least at a
break-even level through the anticipated disposition date, which Penril's
management believes will be completed by December 31, 1996. Prior to the end of
fiscal 1996, Penril entered into an agreement, subject to certain contingencies,
to sell Technipower. The sale was completed on October 11, 1996, with Penril
receiving approximately $1.5 million in cash on that date and approximately $2.8
million to be paid pursuant to the agreement on or prior to December 31, 1996.
Penril recorded a charge of $640,000 in the fourth quarter of fiscal 1996 for
the estimated loss on disposal of both these businesses. No assurance can be
given that EMI will be sold or that the timing or terms of any such sale will be
favorable to and as anticipated by Penril.
On June 16, 1996, as amended August 5, 1996, Penril entered into the Merger
Agreement with Bay and a subsidiary of Bay. Under the terms of the Merger
Agreement, Penril will transfer all of its Remote Access Business and any other
assets unrelated to the Modem Business to the Company and then distribute all of
the shares of Company Stock to Penril's stockholders. Following the Transfer and
the Distribution, the subsidiary of Bay will merge with and into Penril, whose
primary remaining operations will consist of the Modem Business, with Penril
becoming a wholly owned subsidiary of Bay.
As a result of all of the above items, in the fourth quarter of fiscal
1996, Penril took actions to strategically restructure the business to focus on
the remote access connectivity products, to reduce costs and to improve
competitiveness for the long term. This restructuring plan includes the
elimination of the VCP and BRX product lines and the introduction of the new
Remote Access Business. The decision to restructure and refocus is not dependent
upon consummation of the Merger. As a result of this decision to restructure the
business, Penril recorded a charge in the fourth quarter of fiscal 1996 of $9.7
million. This charge consisted of a write-down of costs in excess of net assets
acquired ($5.0 million), a provision for costs associated with contractual
obligations for leased facilities in Hong Kong and Carlstadt, New Jersey ($1.0
million), a provision for the write-down of purchased technology ($1.0 million),
a provision for the write-down of inventories and fixed assets ($2.3 million),
and a provision for costs associated with termination of approximately 90
employees ($400,000).
On an annualized basis this plan is expected to reduce labor costs by
approximately $3 million, reduce amortization and depreciation expenses by
approximately $700,000, and reduce facilities expenses by approximately
$300,000. The Company anticipates completion of the employee terminations and
consolidation of leased facilities by the end of the second quarter of fiscal
1997, and does not anticipate any additional costs associated with this
restructuring plan.
With the exception of historical information, the matters discussed in this
section include forward-looking statements that involve risks and uncertainties.
The Company wishes to caution readers that a number of important factors,
including those identified in this section as well as factors discussed in "Risk
Factors" and elsewhere in this Prospectus, could affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
which requires the Company to review long-lived assets, certain identifiable
intangibles, and goodwill related to those assets for impairment whenever events
or changes in circumstances indicate that the
19
<PAGE> 200
carrying amount of an asset may not be recoverable. As a result of events
occurring in the fourth quarter of fiscal 1996, the Company decided to
restructure and refocus its remaining businesses. Due to these events, the
Company determined that the excess of costs over net assets acquired would not
be recoverable, and a charge of $5.0 million was taken in the fourth quarter of
fiscal 1996 against the carrying value of this asset. This charge was the
remaining balance in the account "Excess of Cost over Fair Value of Net Assets
Acquired."
During fiscal 1996, Statement of Financial Accounting Standard No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," which establishes a
fair value based method for stock-based compensation plans, was issued. SFAS 123
includes both recognition and measurement provisions and disclosure requirements
for stock-based compensation. The Company has elected not to adopt the
recognition and measurement provisions of SFAS 123. The effect of adopting this
statement in fiscal 1997 is not deemed to be material.
RESULTS OF OPERATIONS
As a result of the Merger Agreement with Bay and the spin-off of the LAN
and Host Access products business in the Transfer, the following discussion is
based on the Penril historical financial statements, with revenues and expenses
which could be specifically identified with the modem products shown separately
from the LAN and Host Access products. All revenues and expenses which could not
be specifically identified with the modem products were included with the LAN
and Host Access products, consequently the expenses for the LAN and Host Access
products are in excess of those that would have been incurred had the Company
been a stand alone company. As noted above, Technipower and EMI are classified
as discontinued operations and are not included in this discussion unless
otherwise noted. Dollar amounts are reported in thousands.
FISCAL 1996 COMPARED TO FISCAL 1995
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
------- ------- --------
<S> <C> <C> <C>
Revenues:
LAN and Host Access products......................... $19,916 $33,637 $(13,721)
Modem products....................................... 19,519 18,974 545
------- ------- --------
$39,435 $52,611 $(13,176)
======= ======= ========
</TABLE>
The decrease in revenues for Penril's LAN and Host Access products was
primarily attributable to the continued decline in market demand for terminal
servers and multiplexers which resulted in lower volumes and more competitive
pricing. The Company intends to phase out these products, which represent older
technology, and introduce its new Remote Access Business. The new Remote Access
Business is designed to meet the growing demand for remote access technology.
The Company believes that its new Remote Access Business has a unique product
architecture that combines both remote access and internetworking capabilities
which will offer expanded and fully compatible capabilities to the existing
customer base as well as offering new customers a product line which will be
state of the art in remote access. The Company believes that this new Remote
Access Business will be competitively priced and will generate revenues over the
next fiscal year to offset the decline in revenue from its older LAN and Host
Access products.
In the fourth quarter of fiscal 1996, Penril and Bay entered into a License
Agreement whereby Bay acquired a license to certain intellectual property rights
related to Penril's modem technology, and Penril was paid $4.5 million. Revenues
for the Modem Business without this license agreement would have been $15.0
million in fiscal 1996 compared with $19.0 million in fiscal 1995. The decrease
in revenue from the sale of modem products was due to slower than expected sales
of Penril's V.34 modems, and a decline in sales of older modem products. Penril
believes that more competitive pricing of its new V.34 modems will result in
higher revenues for fiscal 1997 compared to fiscal 1996, and that these higher
revenues should offset the continued decline in sales of older modem products.
Exports represented 44% of Penril's total revenues in fiscal 1996 and 45%
of Penril's revenues in fiscal 1995. Approximately 60% of Penril's exports
related to modem products in both fiscal 1996 and fiscal 1995. Revenues from
Penril's foreign subsidiaries, which are primarily sales and marketing
operations (in England
20
<PAGE> 201
and Hong Kong), represented 7% of Penril's total revenues in fiscal 1996 and 5%
of Penril's total revenues in fiscal 1995, and over 95% of those revenues were
generated from the subsidiary in England. Due to the growing demand worldwide
for data communications products, Penril believes it will continue to generate
revenue from exports of both its LAN and Host Access products and its modem
products. Because of the location of its primary foreign subsidiary, Penril does
not believe it has any significant exposure to exchange rate risk.
In the three years ended July 31, 1996, foreign operations have generated
net losses after eliminations of $401,000, $49,000 and $625,000 respectively,
while domestic operations generated net losses of $20.3 million in fiscal 1996,
net losses of $5.1 million in fiscal 1995, and net income of $2.5 million in
fiscal 1994. Penril's foreign operations are sales and distribution locations
dealing primarily with modem products and performing no manufacturing. The net
losses from foreign operations are due to greater price competitiveness, which
has caused a decline in gross profit margins. In addition, Penril has pursued an
expansion in its foreign operations sales force resulting in an increase in
operating expenses. The net losses from Penril's domestic operations in fiscal
1996 included a restructuring charge of $9.7 million and merger related expenses
of $500,000. The net losses from Penril's domestic operations in fiscal 1996 and
1995 were due to lower sales volumes and higher absorption of manufacturing
variances and other fixed charges related to Penril's domestic manufacturing
operation, compared to fiscal 1994. Penril's domestic manufacturing operations
perform all manufacturing for Penril and consequently must absorb all of the
unfavorable manufacturing variances resulting from the lower sales volumes.
As a result of the Merger Agreement with Bay, Penril's foreign operations
related to the modem products will remain with Penril. Therefore, Penril's
management believes that following the Transfer and the Distribution, the
Company's foreign operations will be significantly reduced.
As a result of the restructuring plan, the Hong Kong subsidiary will be
phased out in fiscal 1997, and sales and marketing operations will be performed
from the U.S. Penril does not anticipate that the restructuring plan will have a
material effect on revenues for either the modem products or the LAN and Host
Access products.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1996 1995 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Gross Profit Margin:
LAN and Host Access products.......................... 37% 46% (9%)
Modem products........................................ 49% 41% 8%
</TABLE>
The decrease in the gross profit margins for LAN and Host Access products
was due to reductions in product pricing in order to remain competitive in the
market place, and increases in manufacturing inefficiencies due to lower sales
volumes. As noted above, Penril entered into a License Agreement with Bay in the
fourth quarter of fiscal 1996 for $4.5 million. Gross profit margins without
this License Agreement would have been 34% in fiscal 1996 compared to 41% in
fiscal 1995. The decrease in gross profit margins for modem products was due to
higher costs of materials in the V.34 modem product line as well as pricing
competition and lower manufacturing efficiencies related to the lower sales
volume.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
------- ------- -----
<S> <C> <C> <C>
Selling, general and administrative expenses:
LAN and Host Access products............................ $16,417 $16,479 $ (62)
Modem products.......................................... 2,694 2,286 408
------- ------- -----
$19,111 $18,765 $ 346
======= ======= =====
</TABLE>
Selling, general and administrative expenses decreased for the LAN and Host
Access products primarily from lower commissions paid due to lower sales volume.
There was also a reduction in personnel costs as a result of eliminating several
administrative positions in Penril's Gaithersburg, Maryland facilities during
fiscal 1995. This reduction was partially offset by a charge of $500,000 during
the fourth quarter of fiscal 1996, for costs incurred related to the Merger. All
expenses which could not be specifically identified with the modem
21
<PAGE> 202
products were included with the LAN and Host Access products, consequently the
expenses for the LAN and Host Access products are in excess of those that would
have been incurred had the Company been a stand alone company.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
------ ------ -----
<S> <C> <C> <C>
Product development expenses:
LAN and Host Access products.............................. $5,624 $5,520 $ 104
Modem products............................................ 1,765 1,918 (153)
------ ------ -----
$7,389 $7,438 $ (49)
====== ====== =====
</TABLE>
Product development expenses for the LAN and Host Access products increased
because of an increase in personnel costs related to development of the new
Remote Access Business. Modem product development expenses decreased because of
reductions in personnel costs as a result of Penril's cost reduction efforts in
fiscal 1995. All expenses which could not be specifically identified with the
modem products were included with the LAN and Host Access products, consequently
the expenses for the LAN and Host Access products are in excess of those that
would have been incurred had the Company been a stand alone company.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1996 1995 CHANGE
---- ------ -----
<S> <C> <C> <C>
Interest expense............................................. $698 $1,228 $(530)
</TABLE>
During fiscal 1996, Penril sold Penril Stock in private placements which
generated approximately $14.7 million in cash. A portion of the proceeds was
used to repay all term debt during fiscal 1996, which resulted in decreased
interest expense.
FISCAL 1995 COMPARED TO FISCAL 1994
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1994 CHANGE
------- ------- -------
<S> <C> <C> <C>
Revenues:
LAN and Host Access products.......................... $33,637 $39,011 $(5,374)
Modem products........................................ 18,974 22,827 (3,853)
------- ------- -------
$52,611 $61,838 $(9,227)
======= ======= =======
</TABLE>
The decrease in revenues for Penril's LAN and Host Access products was
primarily attributable to the declining market for terminal servers and
multiplexers as these products were reaching the end of the product life cycle,
and to a decrease in orders from some of Penril's OEM customers. The decrease in
revenues from modem products was due to unexpected delays in shipment of the
V.34 and V.34bis modems. Part of this delay resulted in a decline in total
exports to $23.6 million in fiscal 1995 from $25.6 million in fiscal 1994.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Gross Profit Margin:
LAN and Host Access products........................ 46% 54% (8%)
Modem products...................................... 41% 45% (4%)
</TABLE>
The decrease in gross profit margins for LAN and Host Access products was due to
lower manufacturing efficiencies. The decrease in gross profit margins for modem
products was due to costs associated with the initial production of the V.34
modem product line, lower manufacturing efficiencies and pricing competition
related to the decrease in sales.
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<PAGE> 203
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1994 CHANGE
------- ------- -----
<S> <C> <C> <C>
Selling, general and administrative expenses:
LAN and Host Access products.......................... $16,479 $16,965 $(486)
Modem products........................................ 2,286 1,850 436
------- ------- -----
$18,765 $18,815 $ (50)
======= ======= =====
</TABLE>
Selling, general and administrative expenses decreased for LAN and Host
Access products primarily because of a reduction in personnel costs as a result
of eliminating several administrative positions in Penril's Gaithersburg,
Maryland facilities during fiscal 1995 as part of Penril's cost reduction
program. Selling, general and administrative expenses for modem products
increased primarily due to additional allowances for bad debts.
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1994 CHANGE
------ ------ -------
<S> <C> <C> <C>
Product development expenses:
LAN and Host Access products........................... $5,520 $6,797 $(1,277)
Modem products......................................... 1,918 2,020 (102)
------ ------ -------
$7,438 $8,817 $(1,379)
====== ====== =======
</TABLE>
Product development expenses decreased because of reductions in personnel
costs as a result of Penril's cost reduction efforts in fiscal 1995 and 1994.
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1994 CHANGE
-------- -------- ------
<S> <C> <C> <C>
Interest expense...................................... $1,228 $908 $320
</TABLE>
Interest expense increased because of the increase in the prime rate from
7% in fiscal 1994 to 9% in fiscal 1995, and because the rate charged Penril by
its principal bank was raised from prime plus 1/2% to prime plus 2%.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, Penril sold 2,607,000 shares of Penril Stock in two
unrelated series of private placements which generated aggregate proceeds of
$14.7 million. The aggregate proceeds were used to repay all of Penril's bank
term debt and all its outstanding subordinated debt, which together totaled $4.8
million, and to fund general working capital needs including the loss of $11.1
million (excluding restructuring charges) for fiscal 1996.
As a result of the strategic business plan to restructure Penril, Penril
recorded a restructuring charge of $9.7 million in the fourth quarter of fiscal
1996. This restructuring charge included non-cash items for the write-down of
costs in excess of net assets acquired ($5.0 million), a provision for the
write-down of purchased technology ($1.0 million) and a provision for the
write-down of inventory ($2.2 million). This restructuring charge also included
items that will require future cash expenditures by the Company for employee
severance ($400,000) and obligations for leased facilities ($1.0 million). The
severance payments to employees will occur in the fiscal 1997 second quarter and
the payments under the leased facilities obligations will occur over the
remaining life of the lease with $282,000 due in fiscal 1997, $289,000 due in
fiscal 1998 and $440,000 due after fiscal 1998.
As a result of lower than expected sales and the buildup of inventory to
support the new Remote Access Business, inventory levels of Penril increased
$1.3 million during the first nine months of fiscal 1996. Consequently, Penril
started a program to reduce inventories that resulted in a fourth quarter
reduction of approximately $750,000. In addition, as noted above, Penril
recorded an inventory write-down provision of $2.2 million as part of the
restructuring charge. These actions resulted in Penril's inventory levels
declining to $9.7 million at July 31, 1996, or a reduction of $1.7 million below
the July 31, 1995 inventory level of $11.4 million.
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<PAGE> 204
Contributing to Penril's cash flow in fiscal 1996 was a reduction in
accounts receivable of $6.5 million. This reduction was the result of the lower
sales volumes in fiscal 1996 compared to fiscal 1995 and an aggressive
collection effort that reduced the average collection time from 94 days in
fiscal 1995 to 65 days in fiscal 1996.
Penril's accounts payable declined by $2.1 million, also as a result of the
lower level of business.
As part of the Transfer, the Company is to receive all the cash and cash
equivalents of Penril. As of September 25, 1996, Penril had cash and cash
equivalents of approximately $3.8 million. In addition, Penril is expected to
generate cash from several non-operating sources. These anticipated sources
include the following:
Penril settled a law suit with Standard Micro Systems Corp. on
September 24, 1996. Pursuant to the settlement agreement, Penril is to
receive, in October 1996, $3.5 million in cash after all related expenses
have been paid.
On October 11, 1996, Penril sold the assets of Technipower for $4.3
million. Penril received approximately $1.5 million in cash on that date,
with the remaining $2.8 million payment being due, pursuant to the terms of
the agreement, on or prior to December 31, 1996.
Penril is in discussions with a potential buyer of EMI. Although there
can be no assurance that a sale of EMI will occur, Penril's management
believes that the sale of EMI will be completed by December 31, 1996 with
expected net cash proceeds of $3.0 million to $3.5 million after
transaction expenses.
As part of the Merger Agreement with Bay, the Company will receive $1.5
million at the closing pursuant to the Transitional Services Agreement with
Penril.
Between September 25, 1996 and the Distribution, Penril also expects to
receive approximately $5 million from the exercise of employee and non-employee
director stock options. Of this amount, approximately $4.6 million was received
between September 25, 1996 and October 11, 1996. The cash generated from the
exercises is expected to be used for the expenditures related to the Merger and
the Transfer. These expenditures include legal and accounting fees of
approximately $650,000, investment banker fees of approximately $1.3 million and
change of control payments due to certain officers of Penril of $1.3 million.
Penril currently has a line of credit with its principal bank. The
agreement provides a maximum working capital facility of $5.5 million with
borrowing based on qualified accounts receivable and secured by substantially
all of Penril's assets. Interest accrues at the bank's prime rate plus 2% with a
commitment fee of 3/8% on the unused portion of the facility. In the event the
facility is canceled prior to its expiration, there is a fee due the bank equal
to 3% of the total facility. As of July 31, 1996, Penril had borrowed $4 million
under the line and had utilized another $90,000 in connection with a standby
letter of credit. Pursuant to the Merger Agreement, after the Merger Penril will
retain bank debt up to a maximum of $4 million.
Currently there are discussions with lending institutions regarding a line
of credit for the Company after the Transfer. Management believes the Company
will be able to secure a line of credit after the Transfer, although there can
be no assurances that a line of credit will be secured, and if secured will be
on economic terms favorable to the Company.
Penril's management believes that during the first 12 months following the
Distribution the Company will have cash expenditures of approximately $2.2
million for fixed assets and capitalized technology purchases and $700,000
related to the employee severance and lease obligations noted above.
Immediately following the Distribution, management believes the Company
will have $7.8 million in cash as well as the right to receive a payment of $2.8
million from the sale of Technipower and possibly proceeds from the sale of EMI.
Based on the Company's expectation with respect to product development and
production, the Company's cash from operations alone will not satisfy the
Company's cash requirements during the first 12 months following the
Distribution. However, the Company expects that cash on hand as noted above,
cash from operations and cash from the sources discussed above, will satisfy the
Company's cash requirements during the first 12 months after the Distribution.
There can be no assurance that product development will proceed at the expected
pace, that the Company's sales will achieve expected levels, that
24
<PAGE> 205
staffing and facilities required will be able to be maintained at the reduced
levels expected under the restructuring plan referred to above, or that other
competitive factors will not result in cash from operations being less than
expected by management. However, the Company has the ability to defer product
development and marketing expenditures if necessary, to match with cash flow.
The deferral of these expenditures could have a negative impact on future sales
of the Company's products. The Company believes, based on its expected cash on
hand, cash from operations, cash from the sources discussed above and the
anticipated bank line of credit, that there will be adequate cash flow to fund
the Company's operations.
BUSINESS
GENERAL
The Company, which is a wholly-owned subsidiary of Penril, was recently
formed by Penril solely for the purpose of effecting the Merger and the
Distribution. Until shortly before the Merger, the Company will own no material
assets and will not conduct any business activities other than in connection
with the Distribution and the Merger. Prior to the Merger, Penril will transfer
to the Company, as a capital contribution, all of the right, title and interest
in all of Penril's Remote Access Business and all other businesses and assets
and corresponding liabilities of Penril unrelated to the Modem Business. Upon
consummation of the Merger, a subsidiary of Bay will merge with and into Penril,
Penril will become a wholly-owned subsidiary of Bay, and the Company will
continue with its own separate corporate existence unaffiliated with Penril.
While the Company is a newly formed corporate entity, the Remote Access
Business to be contributed to the Company by Penril has an operating history
consisting of the development and sales of LAN and Host Access products and the
development of a new product family called Access Beyond. In connection with the
Remote Access Business, the Company engages in the development and marketing of
network access devices which enable local, remote or mobile users to access
network resources located at remote sites, central sites or any other point in
the network.
PRODUCTS
The Company's product line consists largely of products which serve the LAN
and Host Access markets and a new product family called Access Beyond, serving
the remote access market.
The LAN and Host Access products currently sold by the Company include
statistical multiplexers and host access servers (VCX), Ethernet terminal
servers (CSX), Ethernet local and remote bridge routers (BRX), and a line of
CSU/DSU wide area products. The Company's new Access Beyond product family is
targeted at the remote access market, providing a scaleable, modular platform
into which a variety of connectivity options are expected to be offered, and
allowing room for growth and investment protection. The Access Beyond family of
products is expected to replicate the function of most of the LAN and Host
Access products, allowing the Company to phase out LAN and Host Access products
models in favor of new Access Beyond models. Each of the LAN and Host Access
products provides the Company with an existing revenue stream as well as an
installed base. Sales of LAN and Host Access products will initially provide a
significant portion of the revenues of the Company.
The VCX product line of multiplexers ranges from 4-port remote site
multiplexers to enterprise solutions providing up to 304 ports or 36 trunk lines
and multipurpose communication servers that combine both wide area network
("WAN") and LAN capabilities. These products can function as a data PBX, X.25
PAD, statistical multiplexer, terminal server or any combination of these.
Although the market for these products is in decline, the Company continues to
serve the installed base and fulfill customer applications.
The CSX Ethernet communications server family provides local and dialup
access to Ethernet LANs. Available as either 8-port or 16-port stand alone units
or as a modular chassis based solution, the CSX server provides terminal and
dialup access for TCP/IP networks. The BRX family includes modular switching
routers that provide up to 16 LAN ports and 2 WAN ports. A key element to the
BRX product line is in the Constellation software which provides a scaleable
router/switching solution. The Company believes that the Constellation software,
which uses an architecture called Logical Bridge Routing, enables network
managers
25
<PAGE> 206
to optimize bridge/router port configurations for efficient high performance.
The Constellation software is one of the key elements in the new Access Beyond
product line.
The Company anticipates that a wide range of Access Beyond models will be
available to meet varying site requirements, with chassis sizes ranging from
small 4-port units to completely modular 196-port units, thus allowing the user
to customize the chassis-based units to provide a unique mix of LAN and WAN
interfaces that meet the specific demands of its network environment. Interface
options are expected to include: Ethernet backbone and end user ports,
integrated WAN interfaces, analog modems, digital modems, CSU/DSU and ISDN
interfaces. The modularity and scaleability of the Access Beyond product family
is intended to give the customer flexibility in network configuration and
expansion potential.
The first phase of Access Beyond includes Ram Rack, a high density modem
product and Access Beyond 1000 Remote Access Servers, which are now being
shipped to customers. These products provide remote users with competitively
priced remote access to Novell, TCP/IP and Appletalk networks. The next phase of
the Access Beyond rollout is expected to include the Access Beyond 2400 and
Access Beyond 4400 modular chassis systems. These products are designed to
expand the flexibility of the product line with optional interfaces for direct
terminal connections, integrated V.34 modems and integrated ISDN terminal
adapters, along with LAN and high speed WAN (T1/E1/PRI) connectivity.
The Company anticipates that future enhancements to its remote access
software will provide integration of the remote access capabilities with full
multi-protocol routing. This combination is expected to provide additional
connectivity options and reduced access costs for corporate remote access
networks by allowing a single Access Beyond server to replace several separate
competitive devices. The software features of Access Beyond are and will be
focused on solving the problems of corporate remote LAN access. With the growth
of the Internet and the World Wide Web, corporate telecommuters and traveling
employees now require simultaneous support for multiple networking protocols
allowing access to a wide variety of applications. Networking security is
provided via a collection of security options.
All Access Beyond products will be monitored and configured with a
graphical, menu-driven Windows-based management tool that provides real-time
management control over the Access Beyond products. This management tool will be
based on the industry standard SNMP protocol to ensure interoperability with
equipment and management systems from other vendors.
The Company expects that it will deliver the industry's first unified
approach to remote access, with one comprehensive product line that can supply
both LAN and WAN technologies required in a single architecture, with complete
management control, and new levels of investment protection for end users.
Existing applications will be changed from dedicated services to faster, lower
cost and more flexible services such as Frame Relay and Ethernet. Access Beyond
is intended to provide a migration path from these older networks to the remote
access networks of the future.
DISCONTINUED OPERATIONS
Technipower. Technipower, a wholly-owned subsidiary of Penril, manufactures
uninterruptible power supplies and power regulating equipment. In July 1995, the
Penril Board decided to focus more of Penril's resources on its main business of
data communications and therefore determined to treat Technipower as a
discontinued operation. On July 16, 1996, Penril announced it had entered into
an agreement to sell Technipower subject to certain contingencies. On October
11, 1996, Penril sold the assets of Technipower for $4.3 million. On that date,
Penril received approximately $1.5 million in cash, with approximately $2.8
million to be paid pursuant to the agreement prior to December 31, 1996. All
liabilities related to Technipower which otherwise would be the obligations of
Penril will, from and after the Transfer, be the obligations of the Company.
EMI. Another wholly-owned subsidiary of Penril, EMI, specializes in the
production of sophisticated high frequency electronic instrumentation equipment.
The Penril Board of Directors determined to sell EMI and therefore EMI has been
classified as a discontinued operation. Penril is in the process of selling EMI.
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<PAGE> 207
However, because it is unlikely that EMI will be sold prior to consummation of
the Distribution, it is anticipated that the assets and liabilities of EMI will
be contributed to the Company as part of the Transfer.
SUPPLIERS
Material and components for the Company's products are purchased from
outside suppliers. While most components are available from several suppliers, a
few are provided from sole-source vendors. The Company believes that in most
cases alternative sources of supply could be obtained within a reasonable time
period; however, an interruption in the supply of such components could have a
temporary adverse effect on the Company's operations.
PATENTS, COPYRIGHTS AND LICENSES
The Company owns, or is licensed or otherwise possesses legally enforceable
rights to use, several patents, patent applications, trademarks, trade names,
service marks, copyrights, schematics, technology, know-how, computer software
programs or applications, and tangible or intangible proprietary information or
material essential and necessary to the business of the Company. The Company may
desire in the future to obtain additional licenses related to its products and
believes, based on industry practice, that any necessary licenses could be
obtained. The costs of such licenses may vary significantly depending on the
nature of the technology involved.
The patents owned by EMI include patents entitled "Fiber Optic Connector"
and "Guard Time Elimination in a Time-Division Multiplexed, Active Star-coupled,
Half-duplex Mode, Synchronous Communications Network." The United States
trademarks, tradenames and service marks owned by EMI includes ELECTRO-METRICS.
These patents, trademarks, tradenames and service marks are currently intended
to be sold as part of the assets of EMI. If the sale of that subsidiary is not
consummated prior to the Transfer, these patents, trademarks, tradenames, and
service marks will be contributed to the Company as part of EMI.
The United States trademarks, tradenames and service marks owned by the
Company include ACCESS BEYOND, MULTIVERTER, FORSITE, MUX/ROUTER and SUNUPS.
The Company currently licenses technology including integrated access
software; CSU/DSU technology; frame relay assembler disassembler technology;
PC/TCP SNMP technology; terminal emulation software; remote access software;
router card technology and software; network management software; and basic
frame relay software for LAN interconnect products.
On June 16, 1996, Penril and Bay entered into a Development and License
Agreement on behalf of the Company whereby Bay licensed to Penril, on behalf of
the Company certain intellectual property, software, and technical know-how
relating to certain 24-port Digital Modem Cards. The agreement contemplates that
Bay will develop a 24-port Digital Modem Card for the Company, train the
Company's personnel in the underlying technology, and provide technical
assistance where necessary to permit the Company to market this digital
technology.
In connection with the Transfer, Penril and the Company will enter into a
Technology License Agreement whereby Penril will license to the Company certain
intellectual property, software and technical know-how, including those relating
to a patent jointly owned by Penril and the University of Maryland. The
Technology License Agreement will also obligate Penril to use its best efforts
to obtain for the Company all rights obtained by Penril pursuant to cross
licensing agreements involving such jointly owned patent.
BACKLOG
A significant portion of data communications revenues are based on customer
purchase orders with immediate shipment requirements. Backlog, which tends not
to be significant in data communications products, is a result of the occasional
customer order with future scheduled shipment requirements or misalignment of
demand and production of a particular product. Because data communications
revenues constitute such a significant portion of the revenues of the Company,
the Company believes that the dollar amount of backlog at any given time is not
indicative of the actual level of revenues which will ultimately be
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<PAGE> 208
realized during future periods. Consequently, the Company believes that the
amount of backlog is not a material consideration in understanding the Company's
business operations.
COMPETITION
The Company encounters substantial competition in the marketing of its
products and many of its competitors have greater financial, marketing and
technical resources. Important competitive factors in the markets for the
Company's products are established customer base, product performance and
features, service and support as well as price. The Company believes that it
competes favorably with respect to these factors. There can be no assurance that
the Company's products will compete successfully with competitive products that
may be offered in the future or that aggressive pricing will not negatively
impact the profitability of the Company.
SALES AND MARKETING
The Company's distribution channel is composed of value-added resellers
(VARs), original equipment manufacturers (OEMs) and distributors in more than 40
countries. Sales to end-user customers account for less than 10% of the
Company's revenues. This multi-channel strategy allows the Company to meet
specific customer needs while giving coverage to the worldwide markets.
Value Added Resellers. VARs integrate the Company's products with products
of other vendors, into networking systems that are sold directly to end-users.
VARs also sell the Company's products as stand-alone units. Sales to VARs are
made at discounts based on purchase volumes and other incentive programs.
Original Equipment Manufacturers. The Company also customizes its product
for sale through OEMs. This customization may range from simple private labeling
of existing products to complete customization of software and/or hardware to
fit the product lines of the OEM.
Distributors. The Company also sells its products to distributors who
generally resell to VARs and other dealers. Distributors generally provide a
minimal level of systems integration. The Company offers sales and marketing
programs to assist distributors in promoting, selling and supporting the
Company's products.
Many of the Company's VARs and distributors carry products which are
complementary to, or compete with, those of the Company, and may choose to give
higher priority to products of other suppliers or competitors of the Company.
CUSTOMER SUPPORT, SERVICE AND WARRANTY
The Company services, repairs and provides technical support for its
products. A large portion of these support activities, provided through a 24
hour United States support center, are related to software and hardware
configuration. The Company sells products with end-user warranty periods of up
to sixty months. Following the expiration of the warranty period, if any, the
Company offers services on a time and materials basis, or under maintenance
contracts.
RESEARCH AND DEVELOPMENT
Under its own sponsorship, the Company is continuously engaged in the
development of new products as well as the development and enhancement of its
existing products. The Company expensed approximately $5,624,000 (28% of
consolidated revenues) for product development and engineering during fiscal
1996 compared to $5,520,000 (16% of consolidated revenues) in fiscal 1995 and
$6,797,000 (17% of consolidated revenues) in fiscal 1994.
PROPERTIES
The Company's executive offices will be located in Gaithersburg, Maryland
in facilities which the Company will sublease from Penril. The overlease between
Penril and Real Estate Income Partners III is for 54,874 square feet and expires
on September 30, 1999. The sublease between Penril and the Company will
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<PAGE> 209
commence on the date of the Distribution, or upon the Company's occupancy of the
property, whichever is earlier, and will provide for the sublease of all the
premises with an expiration date of September 30, 1999. The Company will assume
all costs and expenses under the overlease including rental payments. The
Company's monthly payment for rent and additional charges will be approximately
$66,219. See "Certain Transactions -- Sublease Agreement".
The Company will lease a research and development facility in Carlstadt,
New Jersey. The lease is for approximately 44,403 square feet and expires in
September 2001. In addition to the facilities mentioned above, the Company will
also lease several sales offices throughout the United States. The Company
believes its properties will be adequate for its needs.
In addition, EMI is a party to a lease for a manufacturing facility located
in Johnstown, New York containing approximately 40,400 square feet (the "EMI
Lease"). The EMI Lease expires in August 2005. In the event EMI is not sold
prior to the Distribution, the aforementioned lease obligations of EMI will be
contributed by Penril to Access Beyond as part of the Transfer. Technipower is a
party to a lease for a manufacturing facility located in Danbury, Connecticut
containing approximately 30,000 square feet (the "Technipower Lease"). The
Technipower Lease expires in February 1998. The Company may remain contingently
obligated under the terms of the Technipower Lease. See "-- Discontinued
Operations".
EMPLOYEES
It is expected that the Company will employ approximately 160 employees as
of the Distribution Date. The Company believes that its future success will
depend largely on its ability to retain certain key personnel and to recruit and
retain additional highly skilled employees who are in great demand. The Company
will have employment contracts with certain officers, but does not have
employment contracts with its other employees. See "Management -- Employment and
Consulting Agreements".
LEGAL PROCEEDINGS
Penril is involved in various claims and lawsuits incidental to its
business. The Company has assumed the liabilities which may arise out of certain
lawsuits to which Penril is a party, the more significant of which lawsuits are
discussed below. All costs, expenses, liabilities and obligations of the
litigation discussed below have been assumed by the Company and all recoveries
from such litigation will be realized by the Company. In the opinion of
management, the Company is adequately reserved against such claims and lawsuits,
and any ultimate liability arising out of such claims and lawsuits will not have
a material adverse effect on the financial condition or operations of the
Company.
On June 1, 1993 Penril initiated a lawsuit against Standard Microsystems
Corp. ("SMC"), SMC Massachusetts, Inc., Ashraf M. Dahad and Kwabena Akufo (the
"SMC Defendants") in the Circuit Court of Maryland for Montgomery County for
breach of contract including, among other things, failure to transfer
technology, unfair competition and false representations. Penril sought relief
in an aggregate amount of approximately $50 million. The SMC Defendants
subsequently brought a counterclaim alleging fraud and breach of contract and
seeking recovery of amounts due under the contract which are alleged to be
approximately $1,650,000 in compensatory damages plus unspecified punitive
damages. In September 1996, Penril and the SMC Defendants agreed to drop the
fraud charges and to settle the contractual dispute. Penril will receive from
SMC, in settlement of the litigation, $3.5 million, net of legal fees, in the
first quarter of fiscal 1997.
On December 24, 1994, Penril filed a complaint against Network Systems
Corporation of Minneapolis, Minnesota ("NSC") in the Circuit Court of Maryland
for Montgomery County. The litigation arises out of a contract in which Penril
agreed to develop certain computer hardware and software to NSC's
specifications. Penril alleges breach of contract, fraudulent inducement and
defamation and is seeking specific performance, compensatory damages of
$2,000,000 and punitive damages of $5,000,000. On March 28, 1995, NSC filed an
answer and counterclaim in which NSC alleges negligent misrepresentation, fraud
and breach of contract by Penril. NSC is seeking rescission of the contract,
restitution of monies paid by NSC to Penril, compensatory
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<PAGE> 210
damages of $5,000,000 and punitive damages in an unspecified amount. As of
September 30, 1996, the litigation was in the discovery stage.
Digital Equipment Corporation ("DEC") has claimed, through a series of
written communications, that Penril has violated DEC patents related to DEC LAT
technology. Penril has taken the position that Datability, Inc., prior to its
acquisition by Penril, had a relationship with DEC that involved the development
of LAT for which Datability has not collected. Both DEC and Penril have taken
the position that it is in the best interests of both parties to work toward a
fair resolution. As of September 30, 1996 no formal claims have been filed.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Company Certificate and the Company's By-laws ("By-laws"),
the Board of Directors of the Company (the "Board of Directors") is divided into
three classes with each director serving a three year term (after the initial
term). The following table sets forth certain information as to persons who will
serve as directors and executive officers of the Company after the Distribution.
The directors of Class I will hold office until the first scheduled annual
meeting of stockholders in 1997, the directors of Class II will hold office
until the annual meeting of stockholders in 1998 and the director of Class III
will hold office until the annual meeting of stockholders in 1999. Thereafter,
stockholders will elect the directors of each Class at the appropriate
succeeding annual meeting of stockholders.
Directors
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION INFORMATION
- ------------ --------------------------------
<S> <C>
Class I -- Term Expiring at 1997
Annual Meeting
Barbara Perrier, 41 Ms. Perrier has served as Chief Financial Officer of
Communication Systems Technology, Inc., a developer
of software and hardware communications and control
equipment, since March 1996. Ms. Perrier served as
President of VideoGrafects, Inc., a multimedia
communications company specializing in the
production of video and computer based material,
from its founding in August 1992 until the Company
was sold to French Bray in March 1996. Prior to
founding VideoGrafects, Inc., Ms. Perrier was a
special (investing) partner with New Enterprise
Associates, a venture capital firm.
Paul Schaller, 48 Mr. Schaller has served as President of Schaller
Associates, a management consulting firm, since
March, 1996. From September, 1995 to March 1996, Mr.
Schaller was Vice President of Business Development
with the LAN Switching Division of FORE Systems,
Inc., a provider of ATM switching solutions. From
August 1993 to August 1995, Mr. Schaller was the
Vice President of Marketing at Alantec, Inc., a
provider of routing switches for the internetworking
market. Mr. Schaller was Vice President of Sales and
Marketing at Harmonic Lightwaves, Inc., a fiber
optic equipment provider from 1992 to 1993. From
1982 to 1991 Mr. Schaller was Vice President of
Sales and Marketing and General Manager of the
Digital Division of Vitalink Corporation, a provider
of remote internetworking equipment.
</TABLE>
31
<PAGE> 212
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION INFORMATION
- ------------ --------------------------------
<S> <C>
Class II -- Term Expiring at 1998
Annual Meeting
John Howard, 43 Mr. Howard has served as Chief Executive Officer of
Gryphon Capital Partners Corporation, an investment
firm, since January 1996. He served as Co-Chief
Executive Officer of Vestar Capital Partners, a
leveraged buyout firm, from 1990 to December 1995.
Mr. Howard is also a director of Celestial
Seasonings, Inc., a manufacturer of herbal teas,
Dyersburg Fabrics, Inc., a textile manufacturer, and
Clark Schwebel Inc., a fiberglass and Kevlar weaver.
Mr. Howard is the brother of Ronald A. Howard.
Arthur Samberg, 55 Mr. Samberg has served as President of
Dawson-Samberg Capital Management, Inc., a
registered investment advisor, since 1985. Mr.
Samberg is a General Partner and senior portfolio
manager of Pequot Partners Fund, L.P., Pequot
International Fund Inc. and Pequot Endowment Fund,
L.P.
Class III -- Term Expiring at 1999
Annual Meeting
Ronald A. Howard, 40, Prior to the Distribution, Mr. Howard will be named
Chairman of the Board, Chairman of the Board, President and Chief Executive
President and Chief Officer of the Company. Mr. Howard has served as
Executive Officer President of the Datability Networks Division of
Penril since 1994, and as Co-President of the
Division from May 1993 until November 1994. He has
held the position of Executive Vice President of
Penril from May 1993. Mr. Howard was President of
Datability Inc. from its founding in 1977 until it
was acquired by Penril in May 1993.
</TABLE>
Executive Officers (other than Directors)
<TABLE>
<CAPTION>
NAME, AGE AND PRINCIPAL POSITION PRINCIPAL OCCUPATION INFORMATION
- -------------------------------- --------------------------------
<S> <C>
Richard D. Rose, 41, Mr. Rose was named Senior Vice President, Chief
Senior Vice President, Chief Financial Officer and Treasurer of the Company in
Financial Officer and Treasurer August 1996 after having served as Senior Vice
President and Chief Financial Officer of Penril
since April 1996 and as Chief Financial Officer of
Penril since November 1994. He held the position of
Vice President Finance of Penril from February 1994
until April 1996 and Corporate Controller from 1988
until February 1994. Mr. Rose was named Vice
President-Controller and Principal Accounting
Officer of Penril in December 1990 and served in
said capacity until February 1994.
John Clary, 50, Mr. Clary was named Vice President of Strategic
Senior Vice President and Chief Planning of Penril in August 1996. From May 1995
Operating Officer until joining Penril, he was President and
co-founder of Outsource Solutions, Inc., an
electronics manufacturing services company. For more
than five years prior to May 1995, Mr. Clary held
several senior level management positions, most
recently as Senior Vice President, Product
Operations, with Network Equipment Technologies, a
WAN equipment manufacturing company.
</TABLE>
32
<PAGE> 213
<TABLE>
<CAPTION>
NAME, AGE AND PRINCIPAL POSITION PRINCIPAL OCCUPATION INFORMATION
- -------------------------------- --------------------------------
<S> <C>
James P. Gallagher, 52, Mr. Gallagher was named Vice President -- Sales of
Vice President -- Sales the Penril Datability Networks Division of Penril in
November 1994. From May 1993, when Penril acquired
Datability, Inc, until November 1994, Mr. Gallagher
was Vice President, North and South American Sales
of the Datability Networks Division. At Datability,
Inc, he was Vice President of Sales from April 1990
until May 1993.
Mark Silverman, 34, Mr. Silverman has been employed for more than five
Vice President -- Research and years by either the Datability Networks Division of
Development Penril or Datability, Inc. In January 1996, he was
named Vice President, Product Development for
Internetworking Products. His prior positions with
Penril and Datability, Inc. included Director of
Product Development from September 1992 to January
1996, Manager of Hardware Development from March
1990 to September 1992 and Hardware Engineer from
October 1987 to March 1990.
</TABLE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a
Compensation Committee.
The general functions of the Audit Committee include selecting the
independent auditors (or recommending such action to the Board of Directors),
evaluating the performance of the independent auditors and their fees for
services, reviewing the scope of the annual audit with the independent auditors
and the results of the audit with management and the independent auditors,
consulting with management, internal auditors and the independent auditors as to
the systems of internal accounting controls, and reviewing the nonaudit services
performed by the independent auditors and considering the effect, if any, on
their independence. The members of the Audit Committee will be outside directors
and will be determined by the full Board of Directors of the Company.
The Compensation Committee is authorized and directed to (i) review and
approve the compensation and benefits of the Company's executive officers, (ii)
review and approve the annual salary plans, (iii) review management organization
and development, (iv) review and advise management regarding the benefits,
including bonuses, and other terms and conditions of employment of other
employees, (v) administer the Incentive Plan (defined below) and the granting of
options under that plan, the Directors' Plan (defined below) and any other plans
that may be established, (vi) review and recommend for the approval of the Board
of Directors of the Company the compensation of directors, and (vii) determine
the compensation and benefits of the Chief Executive Officer and review and
approve, or modify if appropriate, the recommendations of the Chief Executive
Officer with respect to compensation and benefits of other executive officers.
The members of the Compensation Committee will be outside directors and will be
determined by the full Board of Directors.
COMPENSATION OF DIRECTORS
Members of the Board of Directors of the Company who are also employees of
the Company will not receive any additional compensation for service on the
Board of Directors or any committees of the Board of Directors. Members of the
Board of Directors of the Company who are not employees will receive an annual
retainer of $5,000 plus a stipend of $1,000 for each Board meeting attended.
Non-employee directors will receive additional stipends for service on
committees of the Board of Directors of the Company of $1,000 per committee
meeting not held on the same day as a Board meeting.
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<PAGE> 214
EXECUTIVE COMPENSATION
The following tables show information with respect to the annual
compensation for services in all capacities to Penril for the fiscal years ended
July 31, 1996, 1995 and 1994 of those persons who will be at the Distribution
Date, (i) the chief executive officer and (ii) the other four most highly
compensated executive officers of the Company (the "named executive officers")
who were employed by Penril during fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION -----------------------------------
NAME AND ----------------- STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY OPTIONS(1) COMPENSATION(2)
----------------------------------- ---- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Ronald A. Howard................... 1996 $221,877 250,000 $ 784
Chairman of the Board, 1995 $200,000 30,000 $ 5,458
President and Chief 1994 $203,333 -- $ 250
Executive Officer
John Clary (3)..................... -- -- -- --
Senior Vice President
and Chief Operating Officer
Richard D. Rose.................... 1996 $153,768 30,000 $ 4,746
Senior Vice President and 1995 $125,848 20,000 $ 4,547
Chief Financial Officer 1994 $115,335 5,000 $ 4,311
James Gallagher.................... 1996 $188,293 20,000 $ 300
Vice President -- Worldwide Sales 1995 $167,786 10,000 $ 250
1994 $168,858 -- $ 250
Mark Silverman..................... 1996 $109,577 15,000 $ 300
Vice President -- Research 1995 $105,674 5,000 $ 250
and Development 1994 $101,923 -- $ 250
<FN>
- ---------------
(1) Number of shares granted under the 1986 Incentive Plan of Penril. The
options are exercisable at prices ranging from $2.31 to $8.00 per share, the
fair market value at the date of grant. Penril does not grant SARs.
(2) Includes for fiscal 1996, $300 paid for the benefit of each of the named
executives pursuant to the Company's 401(k) Plan. Also includes $274 each
for Mr. Howard and Mr. Rose, under the Company's Split-Dollar Life Insurance
Program and for Mr. Howard and Mr. Rose, $210 and $3,172 respectively, paid
to the Exec-U-Care Medical Insurance Trust.
(3) Mr. Clary joined Penril on August 5, 1996, as Vice President of Strategic
Planning, at an annual salary of $150,000.
</TABLE>
34
<PAGE> 215
PENRIL OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION FOR
GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE OR MARKET PRICE ON ----------------------
GRANTED(1) FISCAL YEAR(1) BASE PRICE DATE OF GRANT EXPIRATION DATE 5% 10%
---------- -------------- ----------- --------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald A. Howard....... 250,000 44.3% $ 7.875 $ 7.875 09/08/2005 $1,238,136 $3,137,680
Richard D. Rose........ 20,000 3.5% 6.440 6.440 04/09/2006 $ 81,002 $ 205,274
Richard D. Rose........ 10,000 1.8% 5.690 5.690 11/03/2005 $ 35,784 $ 90,684
James Gallagher........ 10,000 1.8% 6.440 6.440 04/09/2006 $ 40,501 $ 102,637
James Gallagher........ 10,000 1.8% 7.875 7.875 09/08/2005 $ 49,525 $ 125,507
Mark Silverman......... 10,000 1.8% 6.440 6.440 04/09/2006 $ 40,501 $ 102,637
Mark Silverman......... 5,000 0.9% 8.000 8.000 12/19/2005 $ 25,156 $ 63,750
<FN>
- ---------------
(1) Reflects only options; Penril does not grant SARs.
(2) Assumed annual appreciation rates are set by the Commission and are not a
forecast of future appreciation. The actual realized value depends on the
market value of Penril Common Stock on the exercise date, and no gain to the
optionees is possible without an increase in the price of Penril Common
Stock. All assumed values are pre-tax and do not include dividends.
</TABLE>
AGGREGATED PENRIL OPTION EXERCISES IN FISCAL YEAR 1996
AND FISCAL 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS PER SHARE OPTIONS AT
AT FISCAL YEAR-END EXERCISE PRICE OF FISCAL YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE/ UNEXERCISED OPTIONS EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE(1) AT FISCAL YEAR-END UNEXERCISABLE(1)(2)
- ---------------------- --------------- -------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Ronald A. Howard...... 99,000 $520,875 271,000/-- $2.875-$7.875 $ 1,393,605/--
Richard D. Rose....... 96,667 $571,852 0/0 -- --
James Gallagher....... 12,000 $ 43,820 36,000/27,000 $2.310-$7.875 $ 303,375/$181,690
Mark Silverman........ 8,000 $ 14,440 13,500/18,500 $4.125-$8.000 $ 111,817/$114,818
<FN>
- ---------------
(1) Reflects only stock options; Penril does not grant SARs.
(2) Based on the Year-End per share closing price of $12.63 (as reported on
Nasdaq on July 31, 1996). Represents the difference between the per share
option exercise price and $12.63.
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Upon consummation of the Distribution, the Company anticipates that it will
enter into an employment contract with Mr. Howard for Mr. Howard to serve as
Chairman of the Board, President and Chief Executive Officer (the "Howard
Employment Agreement"). It is anticipated that the Howard Employment Agreement
will provide, among other things, a two year term of employment, an annual
salary of $175,000, an opportunity for bonus compensation pursuant to a plan to
be established by the Board of Directors, and benefits consistent with those
normally provided by the Company to its executive employees including, without
limitation, a $5,000,000 term life insurance policy. It is anticipated that the
Howard Employment Agreement will also provide that options to purchase 300,000
shares of Company Stock are to be granted to Mr. Howard and that, upon a change
of control of the Company, Mr. Howard will receive a payment equal to two and
one-half times his last full annual compensation, including bonus.
Also upon consummation of the Distribution, the Company anticipates that it
will enter into an employment agreement with Mr. Rose for Mr. Rose to serve as
Senior Vice President, Chief Financial Officer and Treasurer (the "Rose
Employment Agreement"). It is anticipated that the Rose Employment Agreement
will provide for Mr. Rose to serve as the Company's Chief Financial Officer at
an annual salary of $150,000. It is anticipated that the Rose Employment
Agreement also will provide that options to purchase 75,000 shares
35
<PAGE> 216
of Company Stock which will be granted to Mr. Rose, a payment of between .5 to
1.0 times Mr. Rose's base salary in the event of a change in control of the
Company, between four and twelve months notice of termination and the ability to
participate in any executive bonus plan and other benefits consistent with those
normally provided by the Company to its executive officers.
Upon consummation of the Distribution, an employment agreement between the
Company and Mr. Clary ("Clary Employment Agreement") will become effective. The
agreement will provide for a salary at the rate of $150,000 plus an opportunity
for bonus compensation of up to $150,000 pursuant to a plan to be established by
the Board of Directors. The term of this agreement will be terminable by either
party at will and will provide that options to purchase 125,000 shares of
Company Stock are to be granted to Mr. Clary. The agreement also will provide
for reimbursement of certain living expenses and travel expenses.
Effective as of the Distribution, Henry D. Epstein will be a consultant to
the Company under the terms of a consulting agreement (the "Epstein Agreement")
between the Company and Ideonics, a financial and technology consulting firm
owned by Mr. Epstein. The Epstein Agreement will provide, among other things,
for a four year consulting term with an annual consulting fee of $137,500. In
addition, pursuant to the Epstein Agreement, the Company will provide Ideonics
with office space, secretarial assistance and health care benefits for Mr.
Epstein. Mr. Epstein is Chairman of the Board of both Penril and the Company
until the Merger and the Distribution, respectively.
Pursuant to change of control provisions contained in current Penril
employment agreements, Penril will pay Mr. Howard, Mr. Rose and Mr. Epstein,
$562,500, $150,000 and $550,000, respectively, upon the consummation of the
Merger. The Distribution Agreement to be entered into by Penril and the Company
will confirm Penril's obligation to make these payments at or immediately prior
to the Merger.
PENRIL BENEFIT PLANS
Retirement and Savings Plan. Penril's Retirement and Savings Plan ("401(k)
Plan") is a defined contribution plan including provisions of Section 401(k) of
the Internal Revenue Code. Employees of Penril who have completed 90 days of
eligibility service ("Participants") are eligible to participate in the 401(k)
Plan. The 401(k) Plan permits, but does not require Penril to make matching
contributions. In addition, Penril may make discretionary contributions to the
401(k) Plan which will be allocated to each Participant based on the ratio of
such Participant's eligible compensation to the total of all Participants'
eligible compensation. Amounts contributed by Penril vest as to 30% after 1 year
of eligible service, 60% after 2 years of eligible service and 100% after 3
years of eligible service. Participants may elect to direct the investment of
their contributions in accordance with the provisions of the 401(k) Plan. As a
part of the Transfer, the 401(k) Plan will be transferred to the Company and
active participation in the 401(k) Plan will be limited to eligible employees of
the Company. The Company intends to split up the 401(k) Plan so that the portion
of the plan representing the benefits of participants not employed by the
Company can be terminated and distributed to participants. Pursuant to the terms
of the Distribution Agreement, the Company will indemnify Penril for any and all
liabilities, costs or expenses for the 401(k) Plan. See "Certain
Transactions -- Distribution Agreement."
The 1986 Incentive Plan of Penril. On October 8, 1986, the Board of
Directors of Penril adopted the 1986 Incentive Plan of Penril (the "1986 Plan").
The 1986 Plan is intended to encourage officers and other key employees of
Penril to acquire or increase their ownership of Penril Stock.
The 1986 Plan authorizes the grant to officers and key employees of awards
("Awards") consisting of "incentive stock options," as that term is defined
under the provisions of Section 422 of the Code, non-qualified stock options (or
a combination of the two) and restricted stock awards. There are 1,587 shares of
Penril Stock available for granting Awards under the 1986 Plan. The Stock
Option/Compensation Committee of the Board of Directors of Penril (the "Penril
Committee") administers the 1986 Plan and has sole discretion to determine those
employees to whom Awards will be granted, the number of Awards granted, the
provisions applicable to each Award and the time periods during which Awards may
be exercisable.
36
<PAGE> 217
The exercise price of each incentive stock option may not be less than the
fair market value of Penril Stock at the date of grant. Under the 1986 Plan,
fair market value is generally the closing price of Penril Stock on the last
business day prior to the date on which the value is to be determined. Unless
the Penril Committee determines otherwise, the option price per share of any
non-qualified stock option shall be the fair market value of the shares of
Penril Stock on the date the option is granted. The exercise price of each
incentive stock option granted to any stockholder possessing more than 10% of
the combined voting power of all classes of capital stock of Penril, or, if
applicable, a parent or subsidiary of Penril, on the date of grant must not be
less than 110% of the fair market value on that date, and no such option may be
exercisable more than five years after the date of grant.
Options granted are exercisable for a term of not more than ten years from
the date of grant. No employee may be granted an incentive stock option to the
extent the aggregate fair market value, as of the date of grant, of the stock
with respect to which incentive stock options are first exercisable by such
employee during any calendar year exceeds $100,000.
Restricted stock awards are rights granted by the Penril Committee to
receive shares of Penril Stock subject to forfeiture and other restrictions
determined by the Penril Committee. Until the restrictions with respect to any
restricted stock award lapse, the shares will be held by Penril and may not be
sold or otherwise transferred by the employee. Except as otherwise determined by
the Penril Committee, until the restrictions lapse, the shares will be forfeited
if the employee's employment is terminated for any reason other than a "change
in control" or "trigger event," death, disability or retirement on or after the
employee's attainment of 65 years of age. Except as otherwise determined by the
Penril Committee, all restrictions will lapse upon the earliest of the death,
disability or retirement of the recipient employee on or after the employee's
attainment of 65 years of age. Unless the Penril Committee determines otherwise,
30% of the shares subject to a restricted stock award will vest on the first
anniversary of the date of the grant, 60% on the second anniversary and 100% on
the third anniversary of the grant.
Awards granted under the 1986 Plan are subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting Penril
Stock such as the Distribution. An Award will not be transferable, other than by
will or the laws of descent and distribution or, in certain circumstances,
pursuant to a qualified domestic relations order, and an Award may be exercised,
during the lifetime of the holder of the Award, only by the holder, or the
holder's personal representative in the event of disability.
In the case of a "change in control" of Penril or a "trigger event," an
option holder will generally have the right, commencing at least five days prior
to the "change in control" or "trigger event" and subject to any other
limitation on the exercise of the option in effect on the date of exercise, to
immediately exercise any options in full to the extent they previously have not
been exercised, without regard to any vesting limitations. On July 2, 1996, the
Penril Committee took action which caused all of the outstanding Penril options
held by directors and executive officers of Penril to vest and on September 19,
1996 the Penril Committee took action which caused all the remaining outstanding
unvested Penril options to vest.
The 1986 Plan will terminate on October 8, 1996, and Awards will not be
granted under the 1986 Plan after that date although the terms of any Award may
be amended in accordance with the 1986 Plan at any date prior to the end of the
term of such Award. Any Awards outstanding at the time of termination of the
1986 Plan will continue in full force and effect according to the terms and
conditions of the Award and the 1986 Plan.
The 1986 Plan may be amended by the Board of Directors of Penril, provided
that stockholder approval will be necessary as required under Section 422 of the
Code or Rule 16b-3 of the regulations of the Exchange Act, and provided further
the no amendment may impair any rights of any holder of an Award previously
granted under the 1986 Plan without the holder's consent.
The 1995 Long-Term Incentive Plan of Penril. On December 13, 1995, Penril
adopted the 1995 Long-Term Incentive Plan of Penril (the "1995 Plan"). The 1995
Plan is intended to encourage officers and other key employees of Penril and its
subsidiaries to acquire or increase their ownership of Penril Stock.
37
<PAGE> 218
The 1995 Plan authorizes the grant to officers and key employees of awards
("Awards") consisting of "incentive stock options," as that term is defined
under the provisions of Section 422 of the Code, non-qualified stock options and
restricted stock awards. There are 930,000 shares of Penril Stock available for
granting Awards under the 1995 Plan. The Penril Committee administers the 1995
Plan and has sole discretion to determine those employees to whom Awards will be
granted, the number of Awards granted, the provisions applicable to each Award
and the time periods during which Awards may be exercisable.
The Penril Committee may grant incentive stock options, non-qualified stock
options, or a combination of the two. The exercise price of each incentive stock
option may not be less than the fair market value of Penril Stock at the date of
grant. Under the 1995 Plan, fair market value is generally the closing price of
Penril Stock on the last business day prior to the date on which the value is to
be determined. Unless the Penril Committee determines otherwise, the option
price per share of any non-qualified stock option will be the fair market value
of the shares of Penril Stock on the date the option is granted. The exercise
price of each incentive stock option granted to any stockholder possessing more
than 10% of the combined voting power of all classes of capital stock of Penril,
or, if applicable, a parent or subsidiary of Penril, on the date of grant must
not be less than 110% of the fair market value on that date, and no such option
may be exercisable more than five years after the date of grant.
Options granted will be exercisable for a term of not more than ten years
from the date of grant. In addition, no employee may be granted an incentive
stock option to the extent the aggregate fair market value, as of the date of
grant, of the stock with respect to which incentive stock options are first
exercisable by such employee during any calendar year, exceeds $100,000.
Restricted stock awards are rights granted by the Penril Committee to
receive shares of Company Stock subject to forfeiture and other restrictions
determined by the Penril Committee. Until the restrictions with respect to any
restricted stock award lapse, the shares will be held by Penril and may not be
sold or otherwise transferred by the employee. Except as otherwise determined by
the Penril Committee, until the restrictions lapse, the shares will be forfeited
if the employee's employment is terminated for any reason other than death,
disability or retirement on or after the employee's attainment of 65 years of
age. Except as otherwise determined by the Penril Committee, all restrictions
will lapse upon the earliest of the death, disability or retirement of the
recipient employee on or after the employee's attainment of 65 years of age.
Unless the Penril Committee determines otherwise, 30% of the shares subject to a
restricted stock award will vest on the first anniversary of the date of grant,
60% on the second anniversary and 100% on the third anniversary of the grant.
Awards granted under the 1995 Plan will be subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend, or other similar event affecting Penril
Stock. An Award will not be transferable, other than by will or the laws of
descent and distribution or, in certain circumstances, pursuant to a qualified
domestic relations order, and an Award may be exercised, during the lifetime of
the holder of the Award, only by the holder, or the holder's personal
representative in the event of disability.
In the case of a "change in control" of Penril, an option holder will
generally have the right, commencing at least five days prior to the "change in
control" and subject to any other limitation on the exercise of the option in
effect on the date of exercise, to immediately exercise any options in full to
the extent they previously have not been exercised, without regard to any
vesting limitations. On July 2, 1996 the Penril Committee took action which
caused all of the outstanding Penril options held by directors and executive
officers of Penril to vest and on September 19, 1996, the Penril Committee took
action which caused all the remaining outstanding unvested Penril options to
vest.
Penril, in its sole discretion, may establish procedures, subject to
certain restrictions, whereby an option holder, subject to the requirements of
Rule 16b-3, Regulation T, and certain other laws, may exercise an option or a
portion thereof without making a direct payment of the option price to Penril,
without regard to any vesting limitations.
38
<PAGE> 219
The 1995 Plan will terminate on December 13, 2005, and Awards may not be
granted under the 1995 Plan after that date, although the terms of any Award may
be amended in accordance with the 1995 Plan at any date prior to the end of the
term of such Award. Any Awards outstanding at the time of termination of the
1995 Plan will continue in full force and effect according to the terms and
conditions of the Award and the 1995 Plan.
The 1995 Plan may be amended by the Board of Directors of Penril, provided
that stockholder approval will be necessary as required under the Section 422 of
the Code or Rule 16b-3 of the regulations of the Exchange Act, and provided
further that no amendment may impair any rights of any holder of an Award
previously granted under the 1995 Plan without the holder's consent.
COMPANY BENEFIT PLANS
The Company's 1996 Long-Term Incentive Plan. It is expected that the Board
of Directors of the Company will adopt the Company's 1996 Long-Term Incentive
Plan (the "Company Incentive Plan"), subject to approval by the Company's
stockholders. The Company Incentive Plan will be intended to encourage ownership
of Company Stock by officers and other key employees of the Company, to
encourage their continued employment with the Company and to provide them with
additional incentives to promote the success of the Company.
The Company Incentive Plan will authorize the grant to officers and key
employees of options ("Options") consisting of "incentive stock options," as
that term is defined under the provisions of Section 422 of the Code and
non-qualified stock options. There will be 2,000,000 shares of Company Stock
available for granting Options under the Company Incentive Plan. The
Compensation Committee of the Board of Directors of the Company (the
"Committee") will administer the Company Incentive Plan and will have sole
discretion to determine those employees to whom Options will be granted, the
number of Options granted, the provisions applicable to each Option and the time
periods during which Options may be exercisable; provided, however, that no
employee may receive Options to acquire more than 500,000 shares of Company
Stock during any given year.
The Committee may grant incentive stock options, non-qualified stock
options, or a combination of the two. The exercise price of each incentive stock
option may not be less than the fair market value of the Company Stock at the
date of grant. Under the Company Incentive Plan, fair market value generally
will be the closing price of the Company Stock on Nasdaq on the last business
day prior to the date on which the value is to be determined; provided, however,
with respect to options granted on or before the Distribution Date, fair market
value means the average of the daily closing price of the Company Stock for the
first ten consecutive trading days that Company Stock is traded on Nasdaq other
than on an "as issued" or "when issued" basis, calculated to the nearest cent,
as determined by the Company. Unless the Committee determines otherwise, the
option price per share of any non-qualified stock option will be the fair market
value of the shares of Company Stock on the date the option is granted. The
exercise price of each incentive stock option granted to any stockholder
possessing more than 10% of the combined voting power of all classes of capital
stock of the Company, or, if applicable, a parent or subsidiary of the Company,
on the date of grant must not be less than 110% of the fair market value on that
date, and no such option may be exercisable more than five years after the date
of grant.
Options granted will be exercisable for a term of not more than ten years
from the grant. Unless the Committee determines otherwise, Options may be
exercised as to 30% of the shares subject to an Option at any time after the
first anniversary of the date of grant, as to 60% of the shares subject to an
Option at any time after the second anniversary of the date of grant and as to
all shares subject to an Option at any time after the third anniversary of the
date of grant. In addition, no employee may be granted an incentive stock option
to the extent the aggregate fair market value, as of the date of grant, of the
stock with respect to which incentive stock options are first exercisable by
such employee during any calendar year exceeds $100,000.
Options granted under the Company Incentive Plan will be subject to
adjustment upon a recapitalization, stock split, stock dividend, merger,
reorganization, liquidation, extraordinary dividend or other similar event
affecting the Company Stock. An Option will not be transferable, other than by
will or the laws of descent and
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distribution or, in certain circumstances, pursuant to a qualified domestic
relations order, and an Option may be exercised, during the lifetime of the
holder of the Option, only by the holder, or the holder's personal
representative in the event of disability.
In the case of a "change in control" of the Company, each Option granted
under the Company Incentive Plan will terminate 90 days after the occurrence of
such "change in control" and an option holder will generally have the right,
commencing at least five days prior to the "change in control" and subject to
any other limitation on the exercise of the Option in effect on the date of
exercise, to immediately exercise any options in full to the extent they
previously have not been exercised.
The Company Incentive Plan will terminate ten years after adoption and
Options will not be granted under the Company Incentive Plan after that date
although the terms of any Option may be amended in accordance with the Company
Incentive Plan at any date prior to the end of the term of such Option. Any
Options outstanding at the time of termination of the Company Incentive Plan
will continue in full force and effect according to the terms and conditions of
the Option and the Company Incentive Plan.
The Company Incentive Plan may be amended by the Board of Directors of the
Company, provided that stockholder approval will be necessary as required under
Section 422 of the Code or Rule 16b-3 of the regulations of the Exchange Act,
and provided further that no amendment may impair any rights of any holder of an
Option previously granted under the Company Incentive Plan without the holder's
consent.
The Company's 1996 Non-Employee Directors' Stock Option Plan. It is
expected that the Board of Directors of the Company will adopt the 1996
Non-Employee Directors' Stock Option Plan (the "Directors' Plan").
The Directors' Plan is intended to encourage non-employee directors of the
Company to acquire or increase their ownership of Company Stock on reasonable
terms, and to foster a strong incentive to put forth maximum effort for the
continued success and growth of the Company. The Directors' Plan provides for
the granting of non-qualified stock options to purchase 250,000 shares of
Company Stock to current and future non-employee directors of the Company. As of
the Distribution Date, the non-employee directors eligible to receive stock
options under the Directors' Plan will be Arthur Samberg, Barbara Perrier, John
Howard and Paul Schaller.
Each of the directors identified above as being eligible to receive stock
options under the Directors' Plan will be granted an option on or immediately
prior to the Distribution Date to purchase 25,000 shares of Company Stock. Each
non-employee director who subsequently joins the Board of Directors will be
granted, on the first business day following the first day of his term, an
option to purchase 25,000 shares of Company Stock. On the fifth business day
after the Company's Annual Report on Form 10-K is filed with the Commission for
each fiscal year that the Directors' Plan is in effect, each person who is a
non-employee Director on such date will receive an additional option to purchase
5,000 shares of Company Stock. If the number of shares available for grant under
the Directors' Plan on a scheduled date of grant is insufficient to make all the
grants, then each eligible director will receive an option to purchase a pro
rata number of the available shares.
The option price per share will be the fair market value of the shares of
Company Stock on the date of grant. Under the Directors' Plan, fair market value
is generally the closing price of the Company Stock on Nasdaq on the last
business day prior to the date on which the value is to be determined; provided,
however, that with respect to the initial option grants, fair market value means
the average of the daily closing price of the Company Stock for the first ten
consecutive trading days that Company Stock is traded on Nasdaq other than on an
"as issued" or "when issued" basis calculated to the nearest cent, as determined
by the Company.
The options granted under the Directors' Plan will be exercisable for a
term of ten years from the date of grant, subject to earlier termination, and
may be exercised as follows: (a) any options granted as of the effective date of
the Directors' Plan or as of the first day of a Director's initial term on the
Board of Directors of the Company may be exercised as to 30% of the shares
subject to such option at any time after the first anniversary of the date of
grant, as to 60% of the shares subject to such option at any time after the
second
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<PAGE> 221
anniversary of the date of grant, and as to all shares subject to such option at
any time after the third anniversary of the date of grant and (b) any other
options may be exercised at any time after the third anniversary of the date of
grant.
In the event that a director ceases to be a member of the Board of
Directors of the Company (other than by reason of death or disability), an
option may be exercised by the director (to the extent the director was entitled
to do so at the time he ceased to be a member of the Board of Directors of the
Company) at any time within seven months after he ceases to be a member of the
Board of Directors of the Company, but not beyond the term of the option. If the
director dies or becomes disabled while he is a member of the Board of Directors
of the Company or within seven months thereafter, an option may be exercised (to
the extent the director shall have been entitled to exercise the option as of
the date of his death or the termination of his directorship by reason of his
disability) by a legatee of the director under his will, or by him or his
personal representative or distributees, as the case may be, at any time within
12 months after his death or disability, but not beyond the term of the option.
The Directors' Plan will be administered by the Committee.
Options granted under the Directors' Plan will be subject to adjustment
upon a recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting the Company
Stock. Options will not be transferable other than by will or pursuant to the
laws of descent and distribution or pursuant to a qualified domestic relations
order, and will be exercisable during the lifetime of an option holder only by
such holder or his personal representative in the event of disability.
Upon a "change in control" of the Company (as defined in the Directors'
Plan), each option granted under the Directors' Plan will terminate on the later
of (i) 90 days after the occurrence of the "change in control" and (ii) seven
months following the date of grant of each option, and an option holder will
have the right, commencing at least five days prior to the "change in control"
and subject to any other limitation on the exercise of the option in effect on
the date of exercise, to immediately exercise any options in full, to the extent
they have not previously been exercised.
The Directors' Plan will terminate on the tenth anniversary of the
Distribution Date and options may not be granted under the Directors' Plan after
that date, although the terms of any option may be amended in accordance with
the Directors' Plan at any date prior to the end of the term of that option. Any
options outstanding at the time of termination of the Directors' Plan will
continue in full force and effect according to the terms and conditions of the
option and the Directors' Plan.
The Directors' Plan may be amended by the Board of Directors of the
Company, provided that stockholder approval will be necessary if required under
Rule 16b-3 of the General Rules and Regulations of the Exchange Act, and no
amendment may impair any of the rights of any holder of an option previously
granted under the Directors' Plan without the holder's consent.
The principal terms of the option grants are fixed in the Directors' Plan.
Therefore, the Committee will have no discretion to select which directors
receive options, the number of shares of Company stock included in any grant, or
the exercise price of options.
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SECURITY OWNERSHIP
All of the outstanding Company Stock will be held by Penril until the
Distribution. The following table sets forth the projected beneficial ownership
of the Company Stock immediately following the Distribution by each director and
executive officer of the Company at that time and all directors and executive
officers of the Company at that time as a group, as well as by any person
projected to own beneficially more than 5% of the Company Stock, based upon such
person's reported ownership of Penril Stock in filings made with the Commission
pursuant to Sections 13(d) and 13(g) of the Exchange Act as of October 11, 1996.
The information in this table was based in part on information supplied by the
named individuals. Various members of management of the Company have indicated
that they may purchase shares of Company Stock in the open market after the
Distribution Date.
<TABLE>
<CAPTION>
SHARES OF COMPANY STOCK PROJECTED TO BE
BENEFICIALLY OWNED
----------------------------------------
AMOUNT AND
NAME AND ADDRESS NATURE OF BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP(1) OWNERSHIP
- --------------------------------------------------- -------------------- ---------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Ronald A. Howard 925,603 7.8%
1300 Quince Orchard Boulevard
Gaithersburg, MD 20878
John Howard -- --
80 Irving Place
New York, NY 10003
Barbara Perrier(2) 3,000 --(4)
8975 Guilford Road
Columbia, MD 21046
Arthur Samberg(3) 1,925,000 16.2%
354 Pequot Avenue
Southport, CT 06490
Paul Schaller -- --
6 Applewood Lane
Portola Valley, CA 94028
Richard D. Rose 46,667 --(4)
1300 Quince Orchard Boulevard
Gaithersburg, MD 20878
James Clary -- --
1300 Quince Orchard Boulevard
Gaithersburg, MD 20878
James P. Gallagher 63,000 --(4)
1300 Quince Orchard Boulevard
Gaithersburg, MD 20878
Mark Silverman 32,000 --(4)
1300 Quince Orchard Boulevard
Gaithersburg, MD 20878
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (9 2,995,270 24.8%
PERSONS)
</TABLE>
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<PAGE> 223
<TABLE>
<CAPTION>
SHARES OF COMPANY STOCK PROJECTED TO BE
BENEFICIALLY OWNED
NAME AND ADDRESS ----------------------------------------
OF BENEFICIAL OWNER AMOUNT AND
- --------------------------------------------------- NATURE OF BENEFICIAL PERCENTAGE
FIVE PERCENT SHAREHOLDERS OWNERSHIP(1) OWNERSHIP
- --------------------------------------------------- -------------------- ---------
<S> <C> <C>
Henry D. Epstein 823,029 6.9%
1300 Quince Orchard Boulevard
Gaithersburg, MD 20878
Pequot Partners Fund, L.P.,(3) 1,925,000 16.2%
Pequot Endowment Fund, L.P. and
Pequot International Fund, Inc.
354 Pequot Avenue
Southport, CT 06490
Cramer Partners, L.P.(5) 1,131,250 9.5%
56 Beaver Street, Suite 701
New York, NY 10004
<FN>
- ---------------
(1) Includes, in certain instances, shares held in the name of an executive
officer's or director's spouse or minor children, the reporting of which is
required by applicable rules of the Commission, but as to which shares the
executive officer or director may have disclaimed beneficial ownership.
(2) Ms. Perrier and her husband, John Dreyer, will have shared voting and
dispositive power with respect to these shares.
(3) Includes 86,500 shares of Common Stock to be owned by Dawson-Samberg Capital
Management, Inc., of which Mr. Samberg is President, 787,100 shares of
Common Stock to be owned by Pequot Partners Fund, L.P., a Delaware limited
partnership whose general partner and investment manager is Pequot General
Partners, a Connecticut general partnership ("General Partners"), 352,900
shares of Common Stock to be owned by Pequot Endowment Fund, L.P., a
Delaware limited partnership whose general partner and investment manager is
Pequot Endowment Partners, L.P., a Delaware limited partnership ("Endowment
Partners") and 698,500 shares of Common Stock to be owned by Pequot
International Fund Inc., a British Virgin Islands corporation, whose
investment manager is DS International Partners, L.P., a Delaware limited
partnership ("International Partners"). (Pequot Partners Fund, L.P., Pequot
Endowment Fund, L.P. and Pequot International Fund Inc. are collectively
referred to as the "Funds"). Mr. Samberg is a General Partner and senior
portfolio manager of each of the Funds. General Partners, Endowment Partners
and International Partners (collectively, the "Partners") are to be the
beneficial owners, as such term is used in Rule 13d-3 of the Exchange Act,
of the shares of Common Stock to be owned by the Fund for which they act as
investment manager, respectively. The Partners may be deemed to constitute a
group as such term is used in Section 13(d) (3) of the Exchange Act. Each of
the Partners disclaims beneficial ownership of the Common Stock to be
beneficially owned by the other partners. On September 22, 1995, the Funds
purchased from Penril in a private placement an aggregate of 1,465,000
shares of Penril Stock for an aggregate payment of $7,325,000.
(4) Less than 1%.
(5) James J. Cramer, President of J.J. Cramer & Co. and Karen Cramer, Vice
President of J.J. Cramer & Co. will have shared voting and dispositive power
with respect to the shares to be held by the Partnership.
</TABLE>
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<PAGE> 224
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Company Stock, and 3,000,000 shares of preferred stock, $.01 par value per
share ("Company Preferred Stock"). Immediately after the Distribution, it is
estimated that 11,993,000 shares of Company Stock will be issued and
outstanding.
COMPANY STOCK
The holders of Company Stock are entitled to one vote for each share held
of record on all matters submitted to the vote of stockholders, including the
election of directors. The holders of Company Stock do not have cumulative
voting rights. Subject to any preferential rights held by holders of the Company
Preferred Stock, the holders of Company Stock are entitled to receive ratably
such dividends as may be declared from time to time by the Company's Board of
Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, holders of Company Stock
will be entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of outstanding Company Preferred
Stock, if any. Holders of Company Stock do not have preemptive, conversion or
redemption rights. All the issued and outstanding shares of Company Stock are
duly authorized, validly issued, fully paid and nonassessable.
No current public trading market for the Company Stock exists, although the
Company intends to list the Company Stock on Nasdaq. The extent of the market
for the Company Stock and the prices at which the Company Stock may trade cannot
be predicted. Until the Company Stock is distributed and an orderly market
develops, the trading price may be volatile.
After the Distribution, the Company will be an independent, publicly-traded
company, owning, among other things, the Remote Access Business. The number and
identity of stockholders of the Company immediately after the Distribution
cannot currently be determined with certainty because it will be based on the
number and identity of stockholders of Penril on the Distribution Date. However,
based on the number of record stockholders and outstanding shares of Penril
Stock as of the close of business on October 11, 1996, the anticipated exercise
of outstanding Penril options and the distribution ratio of one share of Company
Stock for every one share of Penril Stock, the Company expects to have
approximately 920 holders of record of Company Stock and approximately
11,993,000 shares of Company Stock issued and outstanding immediately after the
Distribution and no holders of record of Company Preferred Stock or shares of
Company Preferred Stock issued and outstanding immediately after the
Distribution. In addition, as provided for in the Company Incentive Plan and the
Directors' Plan, it is anticipated that the total number of shares of Company
Stock with respect to which options may be granted and restricted stock may be
awarded under the Company Incentive Plan and the Directors' Plan will not exceed
2,250,000 shares, 250,000 of which would be allocated strictly to the Directors'
Plan, subject to adjustment (together with the exercise price of options and the
purchase price, if any, of restricted stock) to reflect any change in the
Company's outstanding shares of Company Stock by reason of stock dividends,
stock splits, recapitalizations, mergers, consolidations or other similar events
affecting the number or kind of outstanding shares. It is believed that
directors and executive officers of the Company will own, in the aggregate, less
than twenty-six percent (26%) of the outstanding shares of Company Stock
immediately after the Distribution. See "Security Ownership."
The Company Stock distributed to Penril stockholders will be freely
transferable, except for shares received by any persons who may be deemed to be
"affiliates" of the Company under the Securities Act. Persons who may be deemed
to be affiliates of the Company after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with the Company and may include certain officers and directors of the
Company as well as principal stockholders of the Company. Persons who are
affiliates of the Company will be permitted to sell their shares of Company
Stock only pursuant to an effective registration statement under the Securities
Act or an exemption from the registration requirements of the Securities Act,
such as the exemption provided by Section 4(1) of the Securities Act or Rule 144
thereunder. The Section 4(1) exemption allows the sale of unregistered shares by
a person who is not an issuer, an underwriter or a dealer. Rule 144 provides
persons who are not issuers with objective
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<PAGE> 225
standards for selling restricted securities and securities held by affiliates
without registration. The rule requires that (1) current public information be
available concerning the issuer; (2) restricted stock generally be held two
years or more; (3) volume limitations are placed on sales during any three-month
period; and (4) affiliates comply with certain manner of sale restrictions. The
amount of Company Common Stock which could be sold by a person (or persons whose
shares are aggregated) under Rule 144 during a three month period cannot exceed
the greater of (1) one percent of the shares of Company Common Stock outstanding
as shown by the most recent report or statement published by the Company, or (2)
the average weekly trading volume for the shares for a four-week period prior to
the date that notice of the sale is filed with the Commission.
The transfer agent and registrar for the Company Stock is Continental Stock
Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors of the Company, without further approval or action
by the stockholders, is authorized to issue shares of Company Preferred Stock in
one or more series and to fix as to any such series the dividend rate,
redemption prices, preferences on liquidation or dissolution, sinking fund
terms, if any, conversion rights, voting rights and any other preference or
special rights and qualifications. Issuances of Company Preferred Stock may
adversely affect the rights of holders of Company Common Stock. Holders of
Company Preferred Stock might, for example, be entitled to preference in
distributions to be made to stockholders upon the liquidation, dissolution or
winding up of the Company. In addition, holders of Company Preferred Stock might
enjoy voting rights that limit, qualify or adversely affect the voting rights of
holders of Company Stock. Such rights of the holders of one or more series of
Company Preferred Stock might include the right to vote as a class with respect
to the election of directors, major corporate transactions or otherwise, or the
right to vote together with the holders of Company Stock with respect to any
such matter. The holders of Company Preferred Stock might be entitled to cast
multiple votes per share. The issuance of Company Preferred Stock could have the
effect of delaying, deferring, or preventing a change in control of the Company
without further action by the stockholders. The Company has no present plans to
issue any shares of Preferred Stock.
ANTITAKEOVER PROVISIONS OF THE COMPANY CERTIFICATE AND COMPANY BY-LAWS
Penril, as sole stockholder of the Company, has approved a Company
Certificate and Company By-laws. Such Company Certificate and Company By-laws
(i) provide for a Classified Board of Directors of the Company from which
directors may only be removed by Stockholders for cause; (ii) generally provide
that only a majority of the Board of Directors of the Company shall have the
authority to fill vacancies on the Board of Directors; (iii) restrict the right
to amend certain provisions of the Company Certificate and Company By-laws; (iv)
restrict the right of stockholders to call special meetings; (v) establish an
advance notice procedure regarding the nomination of directors by stockholders
and stockholder proposals to be brought before an annual meeting; and (vi)
authorize the Company's Board of Directors to issue Company Preferred Stock
without further stockholder approval. These provisions are designed to encourage
any person who desires to take control of and/or acquire the Company to enter
into negotiations with the Board of Directors of the Company, thereby making
more difficult the acquisition of the Company by means of a tender offer, a
proxy contest or other non-negotiated means. In addition to encouraging any
person intending to attempt a takeover of the Company to negotiate with the
Board of Directors of the Company, these provisions also curtail such person's
use of a dominant equity interest to control any negotiations with the Board of
Directors of the Company. Under such circumstances, the Board of Directors of
the Company may be better able to make and implement reasoned business decisions
and protect the interests of all of the Company's stockholders. A copy of the
Company Certificate and Company By-laws are each filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
Classified Board of Directors. The Company Certificate provides for the
Board of Directors of the Company to be divided into three classes serving
staggered terms so that directors' initial terms will expire at the 1997, 1998
or 1999 annual meeting of stockholders. Starting with the 1997 annual meeting of
the
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<PAGE> 226
Company's stockholders, one class of directors will be elected each year for a
three-year term. See "Management -- Directors and Executive Officers." The
classes will be as nearly equal in number as possible. The classification of
directors makes it more difficult for a significant stockholder to change the
composition of the Board of Directors of the Company in a relatively short
period of time and, accordingly, provides the Board of Directors of the Company
and stockholders time to review any nomination that a significant stockholder
may make and to pursue alternative courses of action which it believes are fair
to all the stockholders of the Company.
Removal of and Filling Vacancies on the Board of Directors of the
Company. The Company Certificate provides that, subject to any rights of the
holders of any class or series of the capital stock of the Company entitled to
vote generally in the election of directors, only a majority vote of the members
of the Board of Directors then in office, although less than a quorum, shall
have the authority to fill any vacancies on the Board of Directors of the
Company, including vacancies created by an increase in the authorized number of
directors. Moreover, because the Company Certificate provides for a classified
board, Delaware law provides that the stockholders may remove a member of the
Board of Directors of the Company only for cause and the Company Certificate
requires the affirmative vote of the holders of at least 80% of the voting power
of all the then-outstanding shares of the voting stock of the Company, voting
together as a single class, to remove a member of the Board of Directors. These
provisions relating to removal and filling of vacancies on the Board of
Directors of the Company preclude stockholders from enlarging the Board of
Directors of the Company or removing incumbent directors and filling vacancies
with their own nominees.
Amendment of the Company Certificate and Company By-laws. The Company
Certificate contains provisions requiring the affirmative vote of the holders of
at least 80% of the voting power of the Company Stock entitled to vote generally
in the election of directors to amend certain provisions of the Company
Certificate and Company By-laws (including certain of the provisions discussed
above). These provisions make it more difficult for stockholders to make changes
in the Company Certificate or Company By-laws, including changes designed to
facilitate the exercise of control over the Company.
Special Meetings. The Company By-laws provide that special meetings of
stockholders can be called only by the Chairman of the Board, the Vice Chairman
of the Board, the President or any Vice President, the Secretary or by the Board
of Directors of the Company. Stockholders are not permitted to call a special
meeting but may, upon a written request by stockholders owning a majority in
amount of the entire capital stock of the Company issued and outstanding and
entitled to vote, require that any of the foregoing call a special meeting of
stockholders. These provisions prohibit a significant stockholder from
authorizing stockholder action without a meeting at which all stockholders would
be entitled to participate.
Nominations of Directors and Stockholder Proposals. The Company By-laws
establish an advance notice procedure with regard to the nomination other than
by, or at the direction of, the Board of Directors of the Company of candidates
for election as directors (the "Nomination Procedure") and with regard to
stockholder proposals to be brought before an annual meeting of stockholders
(the "Business Procedure"). The Nomination Procedure provides that only persons
who are nominated by, or at the direction of, the Board of Directors of the
Company, or by a stockholder of the Company entitled to vote for the election of
directors who has given timely written notice to the Secretary of the Company
prior to the meeting at which directors are to be elected, are eligible for
election as directors of the Company. The Business Procedure provides that to be
properly brought before an annual meeting, business must be specified in the
notice of the annual meeting given by or at the direction of the Board of
Directors of the Company or brought before the meeting by, or at the direction
of, the Board of Directors of the Company or by a stockholder who has given
timely written notice to the Secretary of the Company of such stockholder's
intention to bring such business before such meeting. To be timely, notice for
nominations or stockholder proposals must be received by the Company not less
than 60 days prior to the annual meeting; provided, however, that in the event
that less than 70 days notice or prior public disclosure of the date of the
annual meeting is given or made to stockholders, notice by a stockholder, to be
timely, must be received no later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made, whichever first occurs. In addition
to the foregoing requirements, the proxy rules under the Exchange Act set
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<PAGE> 227
forth certain requirements, including stockholder eligibility, timing and
attendance requirements, which must be satisfied in order for a stockholder
proposal to be included in the Company's proxy statement and form of proxy.
These requirements under the Exchange Act may differ from those set forth under
the Nomination Procedure or the Business Procedure.
Under the Nomination Procedure, notice to the Company from a stockholder
who proposes to nominate a person at an annual meeting for election as a
director must contain certain information about that person so nominated,
including age, business and residence addresses, principal occupation, the class
and number of shares of Company Stock beneficially owned, and such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee, and certain information about
the stockholder proposing to nominate that person. Under the Business Procedure,
notice relating to a stockholder proposal must contain certain information about
such proposal and about the stockholder who proposes to bring the proposal
before the meeting, including the class and number of shares of Company Stock
beneficially owned by such stockholder. If the officer of the Company presiding
at the meeting determines that a person was not nominated in accordance with the
Nomination Procedure, or that other business was not brought before the meeting
in accordance with the Business Procedure, such person is not eligible for
election as a director, or such business is not to be conducted as such meeting,
as the case may be.
The purpose of the Nomination Procedure is, by requiring advance notice of
nomination by stockholders, to afford the Board of Directors of the Company a
meaningful opportunity to consider the qualifications of the proposed nominees
and, to the extent deemed necessary or desirable by the Board of Directors of
the Company, to inform stockholders about such qualifications. The purpose of
the Business Procedure is, by requiring advance notice of stockholder proposals,
to provide a more orderly procedure for conducting annual meetings of
stockholders and, to the extent deemed necessary or desirable by the Board of
Directors of the Company, to provide the Board of Directors of the Company with
a meaningful opportunity to inform stockholders, prior to such meetings, of any
proposal to be introduced at such meetings, together with any recommendation as
to the Board of Directors of the Company's position or belief as to action to be
taken with respect to such proposal, so as to enable stockholders better to
determine whether they desire to attend such meeting or grant a proxy to the
Board of Directors of the Company as to the disposition of any such proposal.
Although the Company By-laws do not give the Board of Directors of the Company
any power to approve or disapprove stockholder nominations for the election of
directors or any other proposal submitted by stockholders, the Company By-laws
may have the effect of precluding a nomination for the election of directors or
precluding the conducting of business at a particular stockholder meeting if the
proper procedures are not followed, and may discourage or deter a third party
from conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company, even if the conduct of
such solicitation or such attempt might be beneficial to the Company and its
stockholders.
Issuance of Company Preferred Stock. The Company Certificate authorizes
the Board of Directors of the Company to issue Company Preferred Stock, without
further stockholder approval, which could have dividend, redemption,
liquidation, conversion, voting or other rights that could adversely affect the
voting power and other rights of holders of Company Stock. The ability of the
Board of Directors of the Company to issue Company Preferred Stock could have
the effect of delaying, deferring, or preventing a change in control of the
Company without further action by the stockholders.
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF THE COMPANY AND PENRIL
Following the Distribution, holders of Penril Stock will become holders of
Company Stock and the rights of such holders will be governed by the Company
Certificate and the Company By-laws. The rights of Company stockholders differ
in certain respects from the rights of Penril stockholders. Certain of the
differences are summarized below. This summary is qualified in its entirety by
reference to the full text of such documents.
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<PAGE> 228
BUSINESS COMBINATIONS
Generally, under the DGCL, the approval by the affirmative vote of the
holders of a majority of the outstanding stock (or, if the certificate of
incorporation provides for more or less than one vote per share, a majority of
the votes of the outstanding stock) of a corporation entitled to vote on the
matter is required for a merger or consolidation or sale, lease or exchange of
all or substantially all of the corporation's assets to be consummated.
The Company Certificate does not contain provisions regarding business
combinations and does not impose requirements in addition to or different from
those imposed by the DGCL.
Penril's Amended and Restated Certificate of Incorporation (the "Penril
Certificate") provides that, subject to certain exceptions, the affirmative vote
of the holders of at least 80% of the voting power of all the then-outstanding
shares of capital stock of Penril entitled to vote generally in the election of
directors is required to approve every "Business Combination" (defined to
include mergers, consolidations, sales of assets of Penril having a fair market
value of $1,000,000 or more, issuances or transfers by Penril of any securities
of Penril having a fair market value of $1,000,000 or more, and certain other
transactions) between Penril and any "Interested Stockholder" (generally defined
to mean any beneficial owner of more than 10% of the voting power of the
outstanding Penril voting stock). Such 80% vote is not required if the Business
Combination is approved by a majority of the Continuing Directors (generally
defined to mean the directors who were members of the Penril Board on December
13, 1983 or a person designated as a Continuing Director by a majority of the
Continuing Directors) or if the Business Combination satisfies certain price and
procedural conditions. With respect to business combinations other than with
Interested Stockholders, the Penril Certificate does not impose requirements in
addition to or different from those imposed by the DGCL.
AMENDMENTS TO CHARTERS
Under the DGCL, unless otherwise provided in the certificate of
incorporation, a proposed amendment to the certificate of incorporation requires
an affirmative vote of a majority of the outstanding stock entitled to vote
thereon. If any such amendment would adversely affect the rights of any holders
of shares of a class or series of stock, the vote of the holders of a majority
of all outstanding shares of the class or series, voting as a class, is also
necessary to authorize such amendment. The Company Certificate provides that no
amendment to the Company Certificate shall amend, alter, change or repeal the
super majority voting provisions relating to the division of the Board of
Directors of the Company into classes; the number and removal of members of the
Board of Directors of the Company; term of office of members of the Board of
Directors of the Company; and the filling of vacancies on the Board of Directors
of the Company unless the amendment, alteration, change or repeal shall have
received the affirmative vote of the holders of at least 80% of the outstanding
shares of capital stock entitled to vote thereon. The Company Certificate
otherwise comports with the DGCL.
The Penril Certificate provides that no amendment to the Penril Certificate
shall amend, alter, change or repeal any of the supermajority voting provisions
relating to business combinations; division into classes, number, removal of
members, term of office and the filling of vacancies on the Penril Board of
Directors; and Stockholder action at Stockholder meetings unless the amendment
effecting such amendment, alteration, change or repeal shall have received the
affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock entitled to vote thereon. The Penril Certificate otherwise
comports with the DGCL.
AMENDMENTS TO BY-LAWS
Under the DGCL, the power to adopt, alter and repeal the by-laws is vested
in the stockholders, except to the extent that the certificate of incorporation
vest it in the board of directors. The Company By-laws provide that the Company
By-laws, or any one of them, may be supplemented, amended or repealed by the
Board of Directors, or by the vote of a majority in interest of the stockholders
represented and entitled to vote thereon at any meeting at which a quorum is
present; provided, however, that the affirmative vote of the holders of at least
80% of the voting power of the then-outstanding shares of the Company voting
stock, voting together as a single class, is required to amend, alter or repeal
the sections of the Company By-Laws which have the same effect as those
provisions of the Company Certificate governing (i) division of the Company
Board of
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Directors into three classes serving staggered three year terms; (ii) the number
of directors; (iii) term of office of directors; (iv) removal of directors and
(v) the filling of vacancies on the Board of Directors.
The Penril By-laws provide that the Penril By-laws, or any of them, may be
supplemented, amended or repealed by the Penril Board of Directors, or by the
vote of a majority in interest of the stockholders represented and entitled to
vote thereon at any meeting at which a quorum is present; provided, however,
that the affirmative vote of the holders of at least 80% of the voting power of
all the then-outstanding shares of the Penril voting stock, voting together as a
single class, is required to amend, alter or repeal the sections of the Penril
By-laws governing (i) action of stockholders without a meeting; (ii) the number
of directors; (iii) term of office of directors; (iv) quorum and voting of
directors or (v) amendment of the Penril By-laws.
REDEMPTION OF CAPITAL STOCK
Under the DGCL, subject to certain limitations, a corporation's stock may
be made subject to redemption by the corporation at its option, at the option of
the holders of such stock or upon the happening of a specified event. The DGCL
prohibits the purchase or redemption of stock when the capital of a corporation
is or would become impaired; but shares entitled to dividend or liquidation
preference may be purchased or redeemed out of capital if such shares are
retired and capital is reduced in accordance with legal requirements. The
Company Certificate does not contain any provisions relating to the right to
redeem outstanding shares of capital stock. The Penril Certificate grants the
Penril Board of Directors the authority to adopt amendments to the Penril
Certificate to provide for redemption of shares of capital stock of Penril, but
the Penril Certificate does not contain any provisions governing the right to
redeem outstanding shares of capital stock.
STOCKHOLDER ACTION
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a written consent or consents setting forth the action taken is signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote upon such action were present and voted. The
Company Certificate and the Company By-laws provide that all elections and
questions put to stockholders shall be decided by the vote of a majority in
interest of the stockholders present in person or represented by proxy and
entitled to vote at the meeting, except as otherwise permitted or required by
the DGCL, the Company Certificate or the Company By-Laws. The Penril Certificate
provides that any action required or permitted to be taken by stockholders must
be effected at an annual meeting of stockholders and may not be effected by any
consent in writing by such stockholders.
SPECIAL STOCKHOLDER MEETINGS
The DGCL provides that a special meeting of stockholders may be called by
the board of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the by-laws. The Company By-laws provide that
special meetings may be called by the Chairman of the Board, the Vice Chairman
of the Board, the President, any Vice President or by the Board of Directors and
shall be called by any of the foregoing at the request in writing of
stockholders owning a majority in amount of the entire capital stock of the
Company issued and outstanding and entitled to vote. The Penril Certificate and
By-laws provide that meetings of stockholders may be called only by the Penril
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors.
NUMBER AND ELECTION OF DIRECTORS
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and terms of directors.
However, if the certificate of incorporation contains provisions fixing the
number of directors, such number may not be changed without amending the
certificate of incorporation. The Company Certificate provides that the number
of directors shall be fixed from time to time pursuant to a resolution adopted
by a majority of the entire Board of Directors. The Penril Certificate provides
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that the number of directors shall be fixed from time to time exclusively by the
Penril Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such resolution is
presented for adoption).
The DGCL permits the certificate of incorporation of a corporation or the
by-laws to provide that directors be divided into one, two or three classes. The
term of office of one class of directors shall expire each year with the terms
of office of no two classes expiring the same year. The Board of Directors
consists of 5 individuals divided into three classes with each director serving
a three year term (after the initial term). The Penril Certificate divides
Penril's Board of Directors into three classes with each director serving a
three year term.
ANTITAKEOVER PROVISIONS
The Company Certificate requires the affirmative vote of the holders of at
least 80% of the votes which all stockholders would be entitled to cast at any
annual election of directors or class of directors to amend or repeal, or to
adopt any provision inconsistent with certain provisions of the Company
Certificate. The provisions of the Company Certificate subject to the 80% vote
requirement include the provisions which divide the Board of Directors into
three classes serving staggered three year terms, establish the term of office
of directors and the standards for removal of directors and the filling of
vacancies on the Board of Directors. The Company Certificate also authorizes the
Board of Directors to issue Company Preferred Stock, without further stockholder
approval, which could have dividend, redemption, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
holders of Company Stock. In addition, the Company By-laws contain certain
antitakeover provisions which establish an advance notice procedure regarding
the nomination of directors by stockholders and stockholder proposals to be
brought before an annual meeting and provisions which restrict the right of
stockholders to call special meetings.
The Penril Certificate requires the affirmative vote of the holders of at
least 80% of the votes which all stockholders would be entitled to cast at any
annual election of directors or class of directors to amend or repeal, or to
adopt any provision inconsistent with certain provisions of Penril's Certificate
of Incorporation. The provisions of the Penril Certificate subject to the 80%
vote requirement include those provisions which (i) divide the Penril Board of
Directors into three classes serving staggered three year terms and establish
the standards for the number, term of office, removal of directors and the
filling of vacancies on the Penril Board of Directors; (ii) prohibit
stockholders from acting by written consent in lieu of a meeting; (iii) provide
that special meetings of stockholders may be called only by the Penril Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors; and (iv) require an 80% vote to approve "Business
Combinations" with "Interested Directors".
LIABILITY AND INDEMNIFICATION OF
OFFICERS AND DIRECTORS OF THE COMPANY
GENERAL
Officers and directors of the Company will be covered by certain provisions
of the DGCL, the Company Certificate, certain indemnification agreements with
the Company and insurance policies which serve to limit and/or indemnify them
against certain liabilities which they may incur in such capacities. These
various provisions and policies are described below.
ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES
Under the DGCL, corporations are permitted to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for, among other things, breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations now authorized
by such legislation, directors are accountable to corporations and their
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stockholders for monetary damages for conduct constituting negligence or gross
negligence in the exercise of their duty of care. Although the statute does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or recision. The Company
Certificate limits the liability of directors to the Company or its stockholders
to the fullest extent permitted by the DGCL. Specifically, no director of the
Company can be held personally liable for monetary damages for breach of such
director's fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.
INDEMNIFICATION AND INSURANCE
Under the DGCL, the Company has the power, under specified circumstances
generally requiring the director or officer to act in good faith and in a manner
he reasonably believes to be in or not opposed to the Company's best interests,
to indemnify its directors and officers in connection with actions, suits or
proceedings brought against them by a third party or in the name of the Company,
by reason of the fact that they were or are such directors or officers, against
expenses, judgments, fines and amounts paid in settlement in connection with any
such action, suit or proceeding.
The Company Certificate provides that the Company shall indemnify the
directors and officers of the Company to the fullest extent permitted by
Delaware law.
Specifically, the Company Certificate provides that the Company shall
indemnify any person who is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company), by reason of the fact that he (i) is or was a
director or officer of the Company, or (ii) is or was a director or officer of
the Company and is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
The Company Certificate provides that the Company shall indemnify any
person who is or was a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director or officer of the Company or is or was a director or officer of
the Company and is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Company unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
of the State of Delaware or such other court shall deem proper.
The Company Certificate provides that any indemnification under the
provisions described in the two paragraphs set forth above of a director,
officer, former director or former officer (unless ordered by a court)
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shall be made by the Company only as authorized in the specific case upon a
determination that indemnification of the director or officer is proper in the
circumstances because he has met the applicable standard of conduct set forth in
the above two paragraphs. Such determination shall be made (i) by the Board of
Directors of the Company by a majority vote consisting of directors who were not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if there are no such directors or if such directors so direct, by
independent legal counsel in a written opinion or (iii) by the stockholders of
the Company.
The Company Certificate also provides, only as authorized in the sole
discretion of the Company, for indemnification of any employee, agent, former
employee or former agent of the Company who is or was a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding or in connection with the defense or settlement of
such action, suit or proceeding to the same extent as set forth in the first two
paragraphs of this section with respect to officers and directors of the
Company. The authorization of the Company to so indemnify such employees and/or
agents shall be made (i) by a majority vote of the directors who are not parties
to such action, suit or proceeding, even though less than a quorum, or (ii) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion or (iii) by the stockholders.
The Company Certificate provides that to the extent that a director or
officer or employee or agent of the Company has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
defense of any claim, issue or matter therein, the Company shall indemnify him
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith, without the necessity of authorization in the
specific case.
The Company Certificate further provides that expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding may be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company as authorized in the Company Certificate. Such indemnification and
expenses incurred by other employees and agents may be so paid upon such terms
and conditions, if any, as the Board of Directors of the Company deems
appropriate.
The Company Certificate provides that the indemnification and advancement
of expenses provided by, or granted pursuant to, the Company Certificate is not
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or pursuant to the direction of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office. The
indemnification provided in the Company Certificate shall not be deemed to
preclude the indemnification of, and advancement of expenses to, any person who
is not specified in the Company Certificate, but whom the Company has the power
and obligation to indemnify under the provisions of the DGCL or otherwise.
The Company intends to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company, or
is or was a director, officer, employee or agent of the Company serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him or incurred by him in any
such capacity, or arising out of his status as such, whether or not the Company
would have the power or the obligation to indemnify him against such liability
under the Company Certificate.
The Company will enter into indemnification agreements with each of the
Company's directors and officers. The indemnification agreements require, among
other things, the Company to indemnify the directors and officers to the fullest
extent permitted by law, and to advance to such directors and officers all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The indemnification agreements will require
that the Company also indemnify and advance all expenses incurred
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by such directors and officers seeking to enforce their rights under the
indemnification agreements, and cover directors and officers under the Company's
directors' and officers' liability insurance. Although such indemnification
agreements will offer substantially the same scope of coverage afforded by
provisions in the Company Certificate, they provide greater assurance to
directors and officers that indemnification will be available because an
indemnification agreement, as a contract, cannot be modified unilaterally in the
future by the Board of Directors of the Company or by the stockholders to
eliminate the rights provided therein.
CERTAIN TRANSACTIONS
On or prior to the Distribution Date, the Company and Penril will enter
into certain agreements, described below, which will govern their ongoing
relationships. These agreements were structured and negotiated while the Company
was owned by Penril and consequently are not the result of arms-length
negotiations between independent parties. Nonetheless, the Company and Penril
believe that the terms are fair to the parties and contain terms which are
generally comparable to those which would result from arms-length negotiations.
In each case, the terms of these agreements have been reviewed by individuals
who will be included at a senior management level of the Company.
The agreements summarized below are filed as exhibits to the Registration
Statement. The following descriptions do not purport to be complete and are
qualified in their entirety by reference to the agreements as filed.
DISTRIBUTION AGREEMENT
Prior to the Merger, Penril and the Company will enter into a Distribution
Agreement pursuant to which Penril will, among other things, (a) transfer to the
Company as a capital contribution all of Penril's right, title and interest in
the Remote Access Business and all of the other assets of Penril unrelated to
the modem business and (b) agree to make certain change of control payments in
the aggregate amount of $1,262,500 to three Penril officers prior to or at the
Effective Time; and the Company will (a) assume, pay, perform and discharge
substantially all of the liabilities of Penril other than (i) liabilities
relating to the modem business and (ii) the bank debt of Penril (which may not
exceed $4,000,000 at the Effective Time); and (b) indemnify Penril for any and
all liabilities, costs or expenses for the 401(k) Plan. At the time of the
capital contributions, Penril will own all of the Company's outstanding stock.
DEVELOPMENT AND LICENSE AGREEMENT
On June 16, 1996, Penril and Bay entered into a Development and License
Agreement on behalf of the Company whereby Bay licensed to Penril, on behalf of
the Company, certain intellectual property, software and technical know-how
relating to certain 24-port Digital Modem Cards. The agreement contemplates that
Bay will develop a 24-port Digital Modem Card for the Company, train the
Company's personnel in the underlying technology, and provide technical
assistance where necessary to permit the Company to market this digital
technology. Penril will assign all of its rights under this Development and
License Agreement to the Company.
TECHNOLOGY LICENSE AGREEMENT
In connection with the Transfer, Penril and the Company will enter into a
Technology License Agreement whereby Penril will license to the Company certain
intellectual property, software and technical know-how, including those relating
to a patent jointly owned by Penril and the University of Maryland. The
Technology License Agreement will also obligate Penril to use its best efforts
to obtain for the Company all rights obtained by Penril pursuant to cross
licensing agreements involving such jointly owned patent.
SUBLEASE AGREEMENT
The Company will conduct most of its operations from its corporate
headquarters located in Gaithersburg, Maryland. The Company will sublease this
facility from Penril (the "Sublease"). Penril leases this
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property pursuant to a lease with Real Estate Income Partners III (the
"Overlease") dated March 31, 1989 as amended pursuant to a Letter Agreement
dated May 14, 1990. The Overlease provides for the rental of approximately
54,874 square feet of office space at a current monthly payment for rent and
additional charges of approximately $66,219. The Overlease expires on September
30, 1999; however, Penril has one option to extend the term of the Overlease for
a period of 119 months.
The Sublease will provide for the rental by the Company of the entire
facility at the monthly rental specified in the Overlease. The term of the
Sublease will commence on the date of the Distribution, or upon the Company's
occupancy of the property, whichever is earlier, and will expire on September
30, 1999. The Company will have no right to renew or extend the Sublease. The
Sublease will be subject and subordinate to the terms of the Overlease and to
all amendments, modifications, renewals, extensions and replacements of or to
the Overlease. Pursuant to the Sublease, the Company will covenant and agree
that it will perform and observe all of the provisions contained in the
Overlease to be performed and observed by Penril, and will be bound by all of
the terms, covenants and conditions of the Overlease binding upon Penril, with
the same force and effect as if such terms, covenants and conditions were set
forth in the Sublease.
TRANSITIONAL SERVICES AGREEMENT
The Company and Penril will enter into a Transitional Services Agreement
(the "Services Agreement") which will provide that the Company will provide
Penril with certain services (the "Services") for one year from and after the
Transfer in exchange for which Penril will pay the Company $1,500,000 upon
execution of the Services Agreement (the "Fee"), plus reimbursement for certain
expenses. The Fee is intended to cover the costs incurred by the Company in
providing the Services, including, but not limited to, salary and other
administrative costs and expenses. The Services include, among other things, (i)
assisting in the preparation of federal, state, local and foreign tax returns,
(ii) certain accounting, treasury and other financial services, (iii) assistance
in the preparation for shipping of certain equipment and inventories and (iv)
certain specified administrative, clerical and operational services.
INDEMNIFICATION AGREEMENT
Simultaneous with the consummation of the Distribution, Penril and the
Company will enter into an Indemnification Agreement between Penril and the
Company (the "Indemnification Agreement"). The Indemnification Agreement will
obligate the Company to indemnify and save harmless Penril and its directors,
officers, employees, agents and/or affiliates from any and all costs, expenses,
losses, damages and liabilities incurred or suffered, directly or indirectly, by
the indemnitees resulting from or attributable to (i) the operation of the
Company after the Distribution; (ii) any claim, suit or other type of proceeding
based upon or arising out of or in connection with the operation of Penril prior
to the Merger other than those based upon, arising out of or in connection with
(a) the modem business operated by Penril, (b) the Merger, (c) the Merger
Agreement, (d) the solicitation of proxies relating to the approval of the
Merger and other transactions relating to the Merger, or (e) the tax
consequences of the Distribution, but including any claim, suit, or other type
of proceeding based upon or arising out of or in connection with the sale or
transfer of all or substantially all of the assets or business of any subsidiary
of Penril, including EMI or of Technipower (but excluding the Modem
Subsidiaries); (iii) any claim, suit or other type of proceeding relating to the
termination of employment of certain employees of Penril and (iv) any claim,
suit or other type of proceeding based upon, arising out of or in connection
with any information concerning the Company in this Prospectus or any
information furnished by Penril or the Company concerning the Company f 
