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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 16, 1998
STAC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-20095 95-3825313
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
12636 HIGH BLUFF DRIVE, 4TH FLOOR, SAN DIEGO, CA 92130
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 794-4300
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This Current Report on Form 8-K is filed by Stac Software, Inc., a
Delaware corporation ("Stac"), in connection with the matters described herein.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Distribution of Hi/fn Common Stock
On December 16, 1998, Stac completed a distribution of all of its stock in
its subsidiary Hi/fn, Inc., a Delaware corporation ("Hi/fn"), to Stac's
stockholders. Hi/fn was a majority owned subsidiary of the Company and is
engaged in silicon and software implementations of data compression and data
encryption standards for the network communications and storage equipment
markets. In the distribution, Stac distributed one share of common stock of
Hi/fn ("Hi/fn Common Stock") for every 3.9455 shares of common stock of Stac
("Stac Common Stock") held by Stac's stockholders, pursuant to a Distribution
Agreement dated as of December 11, 1998 (the "Distribution Agreement") between
Stac and Hi/fn (the "Distribution"). A copy of the Distribution Agreement is
attached hereto as Exhibit 2.1 and is incorporated herein by reference.
Fractional shares of Hi/fn Common Stock were aggregated and the resulting 184
shares were sold in the public market. The aggregate net cash proceeds were
distributed to those Stac stockholders entitled to fractional shares. The Hi/fn
Common Stock currently is quoted and traded on The Nasdaq Stock Market's
National Market System under the symbol "HIFN."
Background and Reasons for the Distribution
The Distribution was designed to separate the semiconductor business of
Hi/fn from the software business of Stac. The Distribution has resulted in the
formation of two publicly traded companies, each of which will pursue an
independent strategic path. The Board of Directors of Stac (the "Stac Board")
believes the separation will offer both new entities the opportunity to pursue
strategic objectives appropriate to different business objectives, offer each
entity the financial flexibility to raise capital on a more cost-effective basis
and create targeted incentives for each company's management and key employees.
The Stac Board considered the following in making its decision to approve the
Distribution:
Business and Market Rationale. The Distribution will enable two companies
with distinct strategic, financial and operating goals to adopt strategies and
pursue objectives appropriate to their respective core businesses. The
Distribution will allow each entity to pursue its corporate objectives
independent of the operations and policies of the other. Following the
Distribution, Stac will continue to focus on its software business. Hi/fn, in
turn, will focus on its semiconductor business.
Access to Equity Capital. Hi/fn intends to engage in a public offering of
Hi/fn Common Stock as soon as possible following the Distribution, assuming
business and market conditions support such an offering. Stac also may elect to
raise additional capital after the Distribution. The Stac Board believes that,
as independent publicly traded entities, Stac and Hi/fn will each have greater
flexibility in their ability to raise equity capital and will be able to more
efficiently pursue their respective capital raising strategies in both the
private and public markets.
In the near term, Hi/fn will have substantial cash needs for (i) working
capital, (ii) funding the continued expansion of its business and (iii)
maintaining sufficient cash reserves to ensure customer, supplier and employee
credibility. In order to compete with its larger, direct competitors, Hi/fn will
need to raise additional capital to fund its growing inventory and accounts
receivable balances, fund
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increased technology research and development, fund technology acquisitions and
fund an increased marketing and sales infrastructure. Prior to the Distribution,
Stac's existing cash was not available to Hi/fn, except for limited debt or
equity financing. Stac intends to utilize its cash to fund its continued
development, marketing and sales efforts with respect to its Replica product
line. Further, Stac anticipates that with increasing advances in technology, it
will need to fund acquisitions of technology to be able to successfully compete
in the marketplace.
The Stac Board believes that the abilities of Stac and Hi/fn to raise
capital will be enhanced to the extent that the investment community can
evaluate each company on a stand-alone basis. Market analysts are increasingly
focusing their coverage on specific types of businesses, such as semiconductor
or software. As a result of this tendency for analysts to specialize, there are
few analysts that have the industry expertise to value both the semiconductor
and software components of Stac and Hi/fn as a combined entity. Accordingly,
representative analyst coverage for Stac has been extremely low compared to
other software and semiconductor companies. The Stac Board believes this lack of
sufficient and reliable analyst coverage significantly impairs Stac's and
Hi/fn's abilities to raise capital efficiently and effectively.
Management Focus and Employee Incentives. The Distribution will enable
both companies to focus on their respective businesses. Stac's software business
and Hi/fn's semiconductor business are sufficiently distinct in terms of
technology, stage of product development and commercialization, market focus and
other factors such that it is more advantageous for both to operate and be
managed as separate entities. The Distribution is expected to allow management
and employees of each company to focus on their respective paths of innovation
in product development and marketing, thereby enhancing the ability of each to
optimize productivity and growth. In addition, the Distribution is intended to
allow each company to provide both management and employees with targeted equity
compensation arrangements thereby optimizing the economic incentives each entity
will be able to provide its employees.
Attraction and Retention of Key Employees. Hi/fn competes for talented
managers and skilled employees in California's Silicon Valley against other
large, established semiconductor companies and against venture capital-funded
technology start-ups that traditionally provide significant stock options to key
employees. Given this competition, the Stac Board believes it is critical to
provide a structure that will be attractive to employees and provide them with
opportunities similar to those offered to them by other companies in Silicon
Valley. The Stac Board believes that to attract talented and skilled employees,
a company must provide equity-based compensation in a stand-alone entity to
provide opportunities for employees and management to maximize the value of
their equity interests through their actions.
Prior to the Distribution, Stac attempted to achieve such goals with
limited success. As an interim solution, Stac created Hi/fn as a separate legal
entity and established the 1996 Equity Participation Plan of Hi/fn, Inc. (the
"1996 Plan"). This approach established a direct link between employee
compensation and the semiconductor division's operations. However, Hi/fn's
status as a subsidiary of Stac limited the flexibility and perceived
independence of Hi/fn's management to operate Hi/fn and its ability to maximize
the value of Hi/fn's equity. In addition, the absence of a market for Hi/fn's
shares limited liquidity for option holders. Without registered shares and a
ready market, Hi/fn employees faced the prospect of having to pay substantial
withholding tax upon exercise of options without a ready means of obtaining cash
to pay such tax.
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The Stac Board believes that for Stac and Hi/fn to succeed in two highly
competitive and rapidly changing areas, they must be able to hire and retain
experts in the software and semiconductor fields. In order to do this, they must
be able to offer those employees the types of positions and compensation
incentives that stand-alone public companies can offer candidates. Specifically,
Stac and Hi/fn must be able to offer compensation that (i) is linked directly to
the separate performance of the software and semiconductor businesses, (ii)
provides maximum liquidity to the employees and (iii) provides operational
freedom and incentive to grow the two businesses independently.
Alternatives to Spin-off Transaction. In December 1997, Stac retained
Warburg Dillon Read LLC ("WDR") to provide advisory services regarding the
possible separation of Stac and Hi/fn. Stac also sought WDR's advice, from a
financial perspective, as to the various alternatives available to it to obtain
the financing and operational environment necessary to enable it to maximize the
likelihood of the success of its two business units. With input from WDR, the
Stac Board concluded that Stac's corporate structure did not represent an
acceptable structure for Hi/fn to obtain the financial resources needed to fully
carry out its business plans and that no alternative to a spin-off represented a
viable option for Hi/fn to achieve its business objectives.
In particular, the Stac Board, with input from WDR, examined the
possibility of (i) Hi/fn conducting an initial public offering of less than 100%
of its outstanding shares, (ii) the sale or merger of Hi/fn, (iii) the creation
and distribution of a tracking stock for Hi/fn and (iv) the establishment of
stock appreciation rights for employees of Hi/fn.
The Board determined that these alternatives involved a variety of
problems and failed to address many of Hi/fn's objectives. First, an initial
public offering of Hi/fn would leave Stac as a majority owner of Hi/fn. This
controlling position maintained by Stac would likely impair the attractiveness
of Hi/fn Common Stock to prospective employees as well as investors, and could
result in a discounted valuation in the public markets due to the perceived
overhang of this large block. Second, the Stac Board believed that Stac might
not get full value in a sale or merger of Hi/fn because the market for Hi/fn's
products directed to the networking market had not yet been established.
Moreover, the sale of the Hi/fn stock by Stac could cause an onerous tax burden
for Stac. Third, the Stac Board believed that the creation of a separate
tracking stock would, in addition to being unattractive to prospective employees
and directors, be too complex in light of the relatively small size of Hi/fn.
Finally, the creation of stock appreciation rights ("SARs") or "phantom stock"
for Hi/fn employees tied to the performance of the Hi/fn subsidiary also would
not be a viable alternative to prospective employees. In addition, upon
financial consolidation, the use of SARs or phantom stock could result in an
unacceptable level of compensation expense, which could impair the valuation of
Stac and thus Stac's access to the capital markets. Following this analysis, the
Stac Board concluded that a spin-off was the only viable alternative to enable
Stac to address its employee recruiting and financial needs and maximize
stockholder value.
Material Federal Income Tax Consequences of the Distribution
On December 8, 1998, Stac received a private ruling from the IRS stating
that the Distribution will qualify as a tax free spin-off under Section 355 of
the Code, and that, for federal income tax purposes:
(1) No gain or loss will be recognized by Stac upon the Distribution of
all the outstanding stock of Hi/fn then held by Stac to the Stac stockholders.
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(2) No gain or loss will be recognized by (and no amount will be included
in the income of) the stockholders of Stac upon receipt of the Hi/fn Common
Stock distributed to them in the Distribution.
(3) The aggregate basis of the stock of Stac and Hi/fn in the hands of
each Stac stockholder after the Distribution will, in each instance, equal the
aggregate basis of the Stac Common Stock held by such stockholder immediately
before the Distribution, allocated in proportion to the fair market value of
each.
(4) The holding period of the Hi/fn Common Stock which each Stac
stockholder receives will include the holding period of the Stac Common Stock
with respect to which the Distribution will be made, provided the Stac Common
Stock is held as a capital asset by such stockholder.
(5) Where cash is received by a Stac stockholder in lieu of fractional
share interests of Company Common Stock, such fractional share interests will be
treated as having been received and disposed of by such stockholder in a taxable
sale in which gain (or loss) will be treated as capital gain (or loss), provided
such stock is held as a capital asset by the selling Stac stockholder.
(6) Earnings and profits will be properly allocated between Stac and
Hi/fn.
It should be noted that private letter rulings, while generally binding on
the IRS, are subject to certain factual representations and assumptions. If the
factual representations and assumptions made by Stac were incorrect in any
material respect, Stac's ability to rely on the IRS ruling will be jeopardized.
However, Stac is not aware of any facts or circumstances that would cause such
representations and assumptions to be untrue.
If the Distribution were not to constitute a tax-free spin-off, then Stac
would be treated as recognizing a taxable gain equal to the difference between
(i) the fair market value of the distributed Company Common Stock on the
Distribution Date and (ii) Stac's adjusted basis of such Company Common Stock.
In addition, under the consolidated tax return rules of the Code, each member of
Stac's consolidated group (including Hi/fn) would be severally liable for such
tax liability. This resulting tax liability would have a material adverse effect
on the cash flows, business, financial condition and results of operations of
Stac and possibly Hi/fn.
Furthermore, if the Distribution were not to qualify under Section 355 of
the Code, each stockholder of Stac who receives shares of Hi/fn Common Stock in
the Distribution would be treated as if such stockholder had received a taxable
distribution in an amount equal to the fair market value of Company Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Stac's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in such holder's shares of
Stac Common Stock to the extent that the amount received exceeds such
stockholder's share of earnings and profits and (iii) a gain from the deemed
sale or exchange of such shares of Stac Common Stock to the extent the amount
received exceeds both such stockholder's share of earnings and profits and such
stockholder's basis in such shares of Stac Common Stock.
Under recently enacted Section 355(e), if the Distribution were considered
to be part of a plan or series of related transactions (a "Plan") in which,
after the Distribution, a 50% or greater interest in Hi/fn or Stac were acquired
by one or more persons, the IRS would claim that the Distribution was taxable at
the corporate level (although it would remain tax-free to the Stac
stockholders). Although
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neither Stac nor Hi/fn believes the Distribution is part of a Plan to effect a
50% change in ownership of either Stac or Hi/fn, the IRS has issued no guidance
on the definition of a Plan and for the first two years following the
Distribution, any cumulative 50% change of ownership within the two-year period
will be rebuttably presumed to be pursuant to a Plan. See "RISK FACTORS -- Tax
Risks of the Distribution."
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE DOES NOT
PURPORT TO COVER ALL FEDERAL INCOME TAX CONSEQUENCES THAT MAY APPLY TO ALL
CATEGORIES OF STOCKHOLDERS. ALL STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE PARTICULAR FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDERS.
Relationship Between Stac and Hi/fn after the Distribution
For the purpose of governing certain of the ongoing relationships between
Hi/fn and Stac after the Distribution and to provide mechanisms for an orderly
transition, Hi/fn and Stac have entered into various agreements, and will adopt
policies, as described below.
Distribution Agreement. Hi/fn and Stac have entered into a Distribution
Agreement dated as of December 11, 1998, which provides for, among other things,
the Distribution and certain other agreements governing the relationship between
Hi/fn and Stac following the Distribution. Subject to certain exceptions, the
Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities designed to allocate to Hi/fn, effective as of
the Distribution Date, financial responsibility for the liabilities arising out
of or in connection with the Hi/fn business. The other agreements executed in
connection with the Distribution Agreement set forth certain specific
allocations of liabilities between Hi/fn and Stac. See "-- Employee Benefits
Allocation Agreement"; "-- Tax Allocation and Indemnity Agreement" and "--
Transitional Services Agreement."
The Distribution Agreement also provides that each of Hi/fn and Stac will
be granted access to certain records and information in the possession of the
other, and requires the retention by each of Hi/fn and Stac for a period of
seven years following the Distribution of all such information in its
possession, and thereafter requires that each party give the other prior notice
of its intention to dispose of such information. In addition, the Distribution
Agreement provides for the allocation of shared privileges with respect to
certain information and requires each of Hi/fn and Stac to obtain the consent of
the other prior to waiving any shared privilege.
Prior to the Distribution, Stac had guaranteed Hi/fn's obligations under
its headquarters lease. Under the Distribution Agreement, Hi/fn agreed to obtain
and deliver to its landlord a $2.0 million letter of credit to replace Stac's
guaranty. Hi/fn provided the landlord with such a letter of credit prior to the
Distribution, which resulted in the automatic termination of the guaranty upon
the Distribution.
The Distribution Agreement provides that, except as otherwise set forth
therein or in any related agreement, all costs and expenses incurred in
connection with the Distribution will be charged to the party for whose benefit
the expenses are incurred, with any expenses that cannot be allocated on such
basis to be split equally between the parties.
Employee Benefits Allocation Agreement. Stac and Hi/fn have entered into
an Employee Benefits and Other Matters Allocation Agreement dated as of December
11, 1998 (the "Employee
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Benefits Allocation Agreement"), which contains a number of provisions relating
to employees of Stac and Hi/fn. The Employee Benefits Allocation Agreement
generally contemplates that Hi/fn will assume and retain all obligations and
liabilities with respect to Hi/fn employee plans and benefits and that Stac will
retain all obligations and liabilities with respect to Stac employee plans and
benefits.
Pursuant to the Employee Benefits Allocation Agreement, and consistent
with the terms of The Stac Electronics 1992 Stock Option Plan, as amended (the
"Stac Stock Option Plan"), and Stac, Inc. 1992 Non-Employee Directors' Stock
Option Plan (the "Stac Directors Plan"), vested and unvested options held by
employees, officers and directors of Stac who will remain with Stac will be
equitably adjusted for the effects of the Distribution on such options. The Stac
Board intends to make an adjustment to such options within 30 days after the
Distribution to retain the intrinsic value of such options after the
Distribution. The Stac Board intends to make such adjustment to the options
based on the closing sales price of the Stac Common Stock on the Nasdaq National
Market, less the closing sales price of Hi/fn Common Stock in when-issued
trading on the Nasdaq National Market on the date the Distribution was effected
(the "Distribution Date") divided by the Distribution Ratio. The adjustment is
expected to result in an increase in the number of Stac options outstanding and
a decrease in their associated exercise price. Douglas L. Whiting, who is a
director of both Stac and Hi/fn, will receive a different adjustment to his
options to purchase Stac Common Stock. Hi/fn will grant Mr. Whiting, under the
1996 Plan, an option to purchase the number of shares of Hi/fn Common Stock
equal to the number of shares of Stac Common Stock subject to outstanding
options he holds divided by the Distribution Ratio. The exercise price of Mr.
Whiting's options to purchase Stac Common Stock will be allocated between his
options to purchase Stac Common Stock and his new options to purchase Hi/fn
Common Stock based on the ratio of the closing sales price of Stac Common Stock
to the closing sale price of Hi/fn Common Stock (divided by the Distribution
Ratio) on the Nasdaq National Market on the Distribution Date. No adjustments
will be made to options outstanding under the 1996 Plan.
Hi/fn retains, with respect to Hi/fn employees, all responsibility for
liabilities and obligations as of the Distribution Date for medical and dental
plan coverage and for vacation and welfare plans. Stac will retain, with respect
to Stac employees, all responsibilities for all liabilities and obligations as
of the Distribution Date for medical and dental plan coverage and for vacation
and welfare plans.
Tax Allocation And Indemnity Agreement. Stac and Hi/fn have entered into a
Tax Allocation and Indemnity Agreement dated as of December 11, 1998 defining
the parties' rights and obligations with respect to tax returns and tax
liabilities, including, in particular, federal and state income tax returns and
liabilities, for taxable years and other taxable periods ending on or before the
Distribution Date. In general, Stac will be responsible for (i) filing all
federal and state income tax returns of Stac, Hi/fn and any of their
subsidiaries for all taxable years ending on or before the Distribution Date,
and (ii) paying the taxes relating to such returns (including any deficiencies
proposed by applicable taxing authorities). For post-Distribution periods, Stac
and Hi/fn will each be responsible for filing its own returns and paying its own
taxes relating to such returns (including any deficiencies proposed by
applicable taxing authorities). Stac and Hi/fn will cooperate with each other
and share information in preparing income tax returns and in dealing with other
tax matters.
In addition, pursuant to the Tax Allocation and Indemnity Agreement, if
the Distribution were not to constitute a tax-free spin-off under Section 355 of
the Code, then Hi/fn or Stac, as the case may be, would be obligated to
indemnify the other party for all taxes resulting from such failure if such
failure was attributable to (i) actions of Hi/fn or Stac after the Distribution,
or (ii) the breach of certain representations with respect to Hi/fn or Stac made
in the Tax Allocation and Indemnity Agreement.
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However, under the Tax Allocation and Indemnity Agreement, if the Distribution
were not to constitute a tax-free spin-off under Section 355 of the Code, Stac
would be obligated to bear all taxes of Stac resulting from such failure if
neither Stac nor Hi/fn (i) took actions after the Distribution which resulted in
such failure or (ii) breached certain representations made in the Tax Allocation
and Indemnity Agreement.
In addition, if the Distribution were not to constitute a tax-free
spin-off under Section 355 of the Code and both Hi/fn and Stac either (i) took
actions after the Distribution which resulted in such failure, or (ii) breached
certain representations made in the Tax Allocation and Indemnity Agreement, then
any taxes of Stac resulting from such failure would be divided equally between
Hi/fn and Stac. Furthermore, if each of Stac and Hi/fn take actions after the
Distribution resulting in the Distribution being a distribution to which Code
Section 355(e) applies (a "Disqualifying Distribution"), then whichever party
first caused the Distribution to be a Disqualifying Distribution (i.e., Stac or
Hi/fn, as the case may be) would be obligated to bear all taxes of Stac
resulting from such failure.
Neither Hi/fn nor Stac will indemnify any holder of Hi/fn Common Stock who
receives shares in the Distribution for any such taxes.
Transitional Services Agreement. Hi/fn and Stac have entered into a
Transitional Services Agreement dated as of December 11, 1998 (the "Transitional
Services Agreement") pursuant to which Stac will provide certain accounting
services to Hi/fn on a transitional basis after the Distribution. The fees for
such transitional services will be $6,500 per month plus any out-of-pocket
expenses incurred by Stac that are attributable to the work done for Hi/fn under
the Transitional Services Agreement. Hi/fn will be free to procure such services
from outside vendors or to develop in-house capabilities in order to provide
such services internally. Hi/fn will indemnify Stac and its officers, directors,
employees and agents against losses, claims or damages arising out of
allegations that the financial statements and accounting records prepared by
Hi/fn with Stac's assistance are inaccurate or incomplete. The Transitional
Services Agreement will terminate on December 31, 1999 unless extended in
writing by the parties.
Satisfaction of Intercompany Balances and Stac Loan. On September 28,
1998, Stac paid $4.4 million to Hi/fn, representing payment in full for all
amounts due to Hi/fn from Stac as of September 1, 1998. Hi/fn also paid to Stac,
prior to the Distribution, the amounts due to Stac as of October 31, 1998. Stac
will pay to Hi/fn, on or prior to December 31, 1998, any amounts due to Hi/fn
that are accumulated after October 31, 1998. On September 28, 1998, Stac also
loaned $5.0 million to Hi/fn pursuant to a short-term loan (the "Stac Loan").
The Stac Loan will become due and payable on September 30, 1999 and may be
prepaid in whole or part without penalty. The Stac Loan bears interest at the
prime rate set by Silicon Valley Bank plus 0.5% per annum, payable quarterly.
The Stac Loan is secured by a first priority security interest in all of Hi/fn's
assets, including Hi/fn's intellectual property.
Policies and Procedures for Addressing Conflicts. Hi/fn and Stac intend to
pursue separate and distinct business strategies to minimize potential conflicts
of interest between the two companies. Nonetheless, the ongoing relationships
between Hi/fn and Stac may present conflict situations for certain directors.
Certain persons will serve as directors of both Hi/fn and Stac, and also will
own (or have options or other rights to acquire) a significant number of shares
of common stock in both companies. Hi/fn and Stac have adopted appropriate
policies and to be followed by the Board of Directors of each company to address
potential conflicts. Such procedures include requiring the
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persons serving as directors of both companies to abstain from voting as
directors with respect to matters that present a significant conflict of
interest between the companies.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(b) Pro Forma Financial Information.
Audited Consolidated Balance Sheets of Stac, Inc. as of September 30, 1998
and 1997 and Audited Consolidated Statements of Operations for the Years
Ended September 30, 1998, 1997 and 1996. Hi/fn's assets and liabilities
and revenues, costs and expenses have been excluded from the respective
captions in the Consolidated Balance Sheets and Consolidated Statements of
Operations and have been reported as "Net assets of discontinued
operations" and "Income from discontinued operations, net of taxes,"
respectively, for all periods presented.
(c) Exhibits.
2.1 Distribution Agreement dated as of December 11, 1998 between Stac,
Inc. and Hi/fn, Inc.
10.1 Employee Benefits and Other Employment Matters Allocation Agreement
dated as of December 11, 1998 between Stac, Inc. and Hi/fn, Inc.
10.2 Tax Allocation and Indemnity Agreement dated as of December 11, 1998
between Stac, Inc. and Hi/fn, Inc.
10.3 Transitional Services Agreement dated as of December 11, 1998
between Stac, Inc. and Hi/fn, Inc.
10.4 Promissory Note dated as of September 28, 1998 made by Hi/fn, Inc.
in favor of Stac, Inc. (incorporated by reference to Amendment No. 3
to the Registration Statement on Form 10 filed by Hi/fn, Inc.).
10.5 Security Agreement dated as of September 28, 1998 between Hi/fn,
Inc. and Stac, Inc. (incorporated by reference to Amendment No. 3 to
the Registration Statement on Form 10 filed by Hi/fn, Inc.).
99.1 Press Release, dated December 16, 1998, issued by Stac, Inc.
99.2 Audited Consolidated Balance Sheets of Stac, Inc. as of September
30, 1998 and 1997 and Audited Consolidated Statements of Operations
for the Years Ended September 30, 1998, 1997 and 1996. Hi/fn's
assets and liabilities and revenues, costs and expenses have been
excluded from the respective captions in the Consolidated Balance
Sheets and Consolidated Statements of Operations and have been
reported as "Net assets of discontinued operations" and "Income from
discontinued operations, net of taxes," respectively, for all
periods presented (incorporated by reference to Stac's Annual
Report on Form 10-K for the year ended September 30, 1998).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 29, 1998 Stac, Inc.
By: /s/ JOHN R. WITZEL
--------------------------------
John R. Witzel
Vice President-Finance and Chief
Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
2.1 Distribution Agreement dated as of December 11, 1998 between
Stac, Inc. and Hi/fn, Inc.
10.1 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of December 11, 1998 between Stac, Inc. and
Hi/fn, Inc.
10.2 Tax Sharing Agreement dated as of December 11, 1998 between Stac,
Inc. and Hi/fn, Inc.
10.3 Transitional Services Agreement dated as of December 11, 1998
between Stac, Inc. and Hi/fn, Inc.
10.4 Promissory Note dated as of September 28, 1998 made by Hi/fn,
Inc. in favor of Stac, Inc. (incorporated by reference to
Amendment No. 3 to the Registration Statement on Form 10 filed by
Hi/fn, Inc.).
10.5 Security Agreement dated as of September 28, 1998 between Hi/fn,
Inc. and Stac, Inc. (incorporated by reference to Amendment No. 3
to the Registration Statement on Form 10 filed by Hi/fn, Inc.).
99.1 Press Release, dated December 16, 1998, issued by Stac, Inc.
99.2 Audited Consolidated Balance Sheets of Stac, Inc. as of September
30, 1998 and 1997 and Audited Consolidated Statements of
Operations for the Years Ended September 30, 1998, 1997 and 1996.
Hi/fn's assets and liabilities and revenues, costs and expenses
have been excluded from the respective captions in the
Consolidated Balance Sheets and Consolidated Statements of
Operations and have been reported as "Net assets of discontinued
operations" and "Income from discontinued operations, net of
taxes," respectively, for all periods presented (incorporated by
reference to Stac's Annual Report on Form 10-K for the year ended
September 30, 1998).
</TABLE>
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EXHIBIT 2.1
DISTRIBUTION AGREEMENT
between
STAC, INC.
and
HI/FN, INC.
dated as of
December 11, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. DEFINITIONS..........................................................2
SECTION 1.01. GENERAL............................................................2
SECTION 1.02. TERMS DEFINED ELSEWHERE IN AGREEMENT..............................10
ARTICLE II. ASSUMPTION AND SATISFACTION OF LIABILITIES.........................10
SECTION 2.01. ASSUMPTION AND SATISFACTION OF LIABILITIES........................11
ARTICLE III. THE DISTRIBUTION..................................................11
SECTION 3.01. COOPERATION PRIOR TO THE DISTRIBUTION.............................11
SECTION 3.02. STAC BOARD ACTION; CONDITIONS PRECEDENT TO THE DISTRIBUTION.......12
SECTION 3.03. THE DISTRIBUTION..................................................13
SECTION 3.04. CASH IN LIEU OF FRACTIONAL SHARES.................................14
ARTICLE IV. INDEMNIFICATION....................................................14
SECTION 4.01. INDEMNIFICATION BY STAC...........................................14
SECTION 4.02. INDEMNIFICATION BY HI/FN..........................................15
SECTION 4.03. INSURANCE PROCEEDS................................................15
SECTION 4.04. PROCEDURE FOR INDEMNIFICATION.....................................16
SECTION 4.05. REMEDIES CUMULATIVE...............................................20
SECTION 4.06. SURVIVAL OF INDEMNITIES...........................................20
ARTICLE V. CERTAIN ADDITIONAL MATTERS..........................................21
SECTION 5.01. HI/FN BOARD.......................................................21
SECTION 5.02. EMPLOYEE MATTERS..................................................21
SECTION 5.03. CERTIFICATE AND BYLAWS............................................21
SECTION 5.04. TERMINATION OF LEASE GUARANTY.....................................22
ARTICLE VI. ACCESS TO INFORMATION AND SERVICES.................................22
SECTION 6.01. PROVISION OF CORPORATE RECORDS....................................22
SECTION 6.02. ACCESS TO INFORMATION.............................................22
SECTION 6.03. PRODUCTION OF WITNESSES...........................................23
SECTION 6.04. REIMBURSEMENT.....................................................23
SECTION 6.05. RETENTION OF RECORDS..............................................24
SECTION 6.06. CONFIDENTIALITY...................................................24
SECTION 6.07. PRIVILEGED MATTERS................................................25
ARTICLE VII. INSURANCE.........................................................28
SECTION 7.01. POLICIES AND RIGHTS INCLUDED WITHIN THE HI/FN ASSETS..............28
SECTION 7.02. POST-DISTRIBUTION DATE CLAIMS.....................................28
SECTION 7.03. ADMINISTRATION AND RESERVES.......................................29
SECTION 7.04. AGREEMENT FOR WAIVER OF CONFLICT AND SHARED DEFENSE...............30
ARTICLE VIII. MISCELLANEOUS....................................................31
SECTION 8.01. COMPLETE AGREEMENT; CONSTRUCTION..................................31
SECTION 8.02. EXPENSES..........................................................31
SECTION 8.03. GOVERNING LAW.....................................................31
SECTION 8.04. NOTICES...........................................................31
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 8.05. AMENDMENTS........................................................32
SECTION 8.06. SUCCESSORS AND ASSIGNS............................................32
SECTION 8.07. TERMINATION.......................................................33
SECTION 8.08. SUBSIDIARIES......................................................33
SECTION 8.09. NO THIRD-PARTY BENEFICIARIES......................................33
SECTION 8.10. TITLES AND HEADINGS...............................................33
SECTION 8.11. EXHIBITS AND SCHEDULES............................................33
SECTION 8.12. LEGAL ENFORCEABILITY..............................................34
SECTION 8.13. ARBITRATION OF DISPUTES...........................................34
</TABLE>
<PAGE> 4
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Agreement") is made as of this 11th
day of December, 1998 between Stac, Inc., a Delaware corporation ("Stac"), and
hi/fn, inc., a Delaware corporation and subsidiary of Stac ("Hi/fn").
RECITALS
WHEREAS, Stac (i) directly and through subsidiaries other than Hi/fn,
designs, develops, markets and supports high-performance distributed business
systems recovery software solutions for enterprise customers (as more
specifically defined herein, the "Retained Business") and (ii) through Hi/fn,
Stac's OEM networking products subsidiary, designs, develops and markets
semiconductor and software solutions to improve the efficiency, security and
manageability of networks and to enhance the storage capacity of
high-capacity/high-speed storage devices (the "Hi/fn Business");
WHEREAS, Stac previously assigned to Hi/fn, and Hi/fn previously
assumed, the assets and liabilities relating to the Hi/fn Business pursuant to
an Assignment, Assumption and License Agreement dated as of November 21, 1996
between Stac and Hi/fn (the "Assignment Agreement");
WHEREAS, Stac and Hi/fn previously entered into a Cross License
Agreement dated as of November 21, 1996 (the "Cross License Agreement"), which
provides for Hi/fn's licensing back to Stac certain intellectual property rights
in technologies transferred to Hi/fn under the Assignment Agreement and Stac's
licensing to Hi/fn certain additional technologies;
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WHEREAS, Stac previously purchased 6,000,000 shares of Preferred
Series A Stock, $.001 per share, of Hi/fn ("Hi/fn Preferred Stock") pursuant to
a Stock Purchase Agreement dated as of November 21, 1996 (the "Stock Purchase
Agreement");
WHEREAS, the Board of Directors of Stac has determined that it is in
the best interests of Stac and the stockholders of Stac to separate Hi/fn from
Stac and, in order to effect such separation, to convert all shares of Hi/fn
Preferred Stock into shares of common stock, $.001 par value per share, of Hi/fn
("Hi/fn Common Stock"), and thereafter to distribute all of the outstanding
shares of Hi/fn Common Stock held by Stac to the holders of Stac Common Stock
(the "Distribution") in the ratio of one share of Hi/fn Common Stock for every
3.9159 shares of Stac Common Stock held by Stac stockholders on the Distribution
Record Date (subject to adjustment as described in Section 3.03 below) (the
"Distribution Ratio"); and
WHEREAS, in connection with the Distribution, Stac and Hi/fn have
determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect the Distribution, and to set forth the
agreements that will govern certain matters following the Distribution.
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained in this Agreement, the parties hereby agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01. General. As used in this Agreement, the following terms
shall have the following meanings:
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Action: Any action, claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: With respect to any specified Person, any other Person
directly or indirectly controlling or controlled by, or under direct or indirect
common control with, such specified Person. For purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" shall have meanings correlative to the foregoing.
Notwithstanding the foregoing, (i) the Affiliates of Stac shall not include
Hi/fn, the Hi/fn Subsidiaries or any other Person which would be an Affiliate of
Stac by reason of Stac's ownership of the capital stock of Hi/fn prior to the
Distribution or the fact that any officer or director of Hi/fn or any of the
Hi/fn Subsidiaries shall also serve as an officer or director of Stac, and (ii)
the Affiliates of Hi/fn shall not include Stac or any other Person which would
be an Affiliate of Hi/fn by reason of Stac's ownership of capital stock of Hi/fn
prior to the Distribution or the fact that any officer or director of Hi/fn or
any of the Hi/fn Subsidiaries shall also serve as an officer or director of
Stac.
Agent: The distribution agent appointed by Stac to distribute the
Hi/fn Common Stock pursuant to the Distribution.
Commission: The Securities and Exchange Commission.
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Distribution Date: The date determined by the Stac Board as the date
on which the Distribution shall be effected, which Distribution Date is
contemplated by the Stac Board to occur on or about December 16, 1998.
Distribution Record Date: The date established by the Stac Board as
the date for taking a record of the Holders of Stac Common Stock entitled to
participate in the Distribution, which Distribution Record Date has been
established as December 1, 1998.
Employee Benefits Allocation Agreement: The Employee Benefits and
Other Employment Matters Allocation Agreement between Stac and Hi/fn, which
agreement shall be entered into on or prior to the Distribution Date in
substantially the form of Exhibit A attached hereto.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Hi/fn Assets: The assets of the Hi/fn Group, including without
limitation (i) assets relating to the Hi/fn Business, determined on a basis
consistent with the determination of assets included on the Hi/fn Balance Sheet,
(ii) all of the assets expressly allocated to Hi/fn or the Hi/fn Subsidiaries
under this Agreement or the Related Agreements and (iii) any other assets of the
Hi/fn Group relating to the Hi/fn Business.
Hi/fn Board: The Board of Directors of Hi/fn.
Hi/fn Books and Records: The books and records (including computerized
records) of Hi/fn and the Hi/fn Subsidiaries and all books and records owned by
Stac which relate to the Hi/fn Business or are necessary to operate the Hi/fn
Business, including, without limitation, all such books and records relating to
Hi/fn Employees, all files relating to any Action being assumed by Hi/fn as part
of the Hi/fn Liabilities, original corporate minute books, stock ledgers
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<PAGE> 8
and certificates and corporate seals, and all licenses, leases, agreements and
filings, relating to Hi/fn, the Hi/fn Subsidiaries or the Hi/fn Business (but
not including the Stac Books and Records, provided that Hi/fn shall have access
to, and have the right to obtain duplicate copies of, the Stac Books and Records
in accordance with the provisions of Article VI).
Hi/fn Bylaws: The Bylaws of Hi/fn, substantially in the form of
Exhibit B, to be in effect at the Distribution Date.
Hi/fn Certificate: The Restated Certificate of Incorporation of Hi/fn,
substantially in the form of Exhibit C, to be in effect at the Distribution
Date.
Hi/fn Common Stock: The common stock, par value $.001 per share, of
Hi/fn.
Hi/fn Employees: All of the employees of Hi/fn at the time of the
Distribution.
Hi/fn Group: Hi/fn and the Hi/fn Subsidiaries, collectively.
Hi/fn Liabilities: (i) All of the Liabilities of the Hi/fn Group
under, or to be retained or assumed by Hi/fn or any of the Hi/fn Subsidiaries
pursuant to, this Agreement or any of the Related Agreements, (ii) all
Liabilities for payment of outstanding drafts of Stac attributable to the Hi/fn
Business existing as of the Distribution Date, (iii) all Liabilities arising out
of or in connection with any of the Hi/fn Assets or the Hi/fn Business,
determined on a basis consistent with the determination of the Liabilities of
Hi/fn included on the Hi/fn Balance Sheet, and (iv) all Liabilities arising out
of or in connection with any claims made by former Hi/fn officers or employees,
whether brought against Stac or Hi/fn.
Hi/fn Policies: All Policies, current or past, which are owned or
maintained by or on behalf of Stac or any of its Affiliates or predecessors,
which relate to the Hi/fn Business but do
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not relate to the Retained Business, and which Policies are either maintained by
the Hi/fn Group or assignable to the Hi/fn Group.
Hi/fn Balance Sheet: The Consolidated Balance Sheet for Hi/fn as of
November 30, 1998 attached hereto as Exhibit D.
Hi/fn Subsidiaries: All Subsidiaries of Hi/fn at the time of the
Distribution.
Holders: The holders of record of Stac Common Stock as of the
Distribution Record Date.
Insurance Proceeds: Those moneys (i) received by an insured from an
insurance carrier or (ii) paid by an insurance carrier on behalf of the insured,
in either case net of any applicable premium adjustment, retrospectively-rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.
Insured Claims: Those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Policies,
whether or not subject to deductibles, co-insurance, uncollectability or
retrospectively-rated premium adjustments, but only to the extent that such
Liabilities are within applicable Policy limits, including aggregates.
Liabilities: Any and all debts, liabilities and obligations, absolute
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, including all costs and expenses
relating thereto, and including, without limitation, those debts, liabilities
and obligations arising under any law, rule, regulation, Action, threatened
Action, order or consent decree of any governmental entity or any award of any
arbitrator of any kind, and those arising under any contract, commitment or
undertaking.
Nasdaq: The Nasdaq Stock Market's Nasdaq National Market.
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<PAGE> 10
Person: Any individual, corporation, partnership, association, trust,
estate or other entity or organization, including any governmental entity or
authority.
Policies: Insurance policies and insurance contracts of any kind
relating to the Hi/fn Business or the Retained Business as conducted prior to
the Distribution Date, including without limitation primary and excess policies,
comprehensive general liability policies, automobile and workers' compensation
insurance policies, directors' and officers' insurance, employment practices
insurance and self-insurance and captive insurance company arrangements,
together with the rights, benefits and privileges thereunder.
Privileges: All privileges that may be asserted under applicable law,
including, without limitation, privileges arising under or relating to the
attorney-client relationship (including but not limited to the attorney-client
and work product privileges), the accountant-client privilege, and privileges
relating to internal evaluative processes.
Privileged Information: All Information as to which Stac, Hi/fn or any
of their Subsidiaries are entitled to assert the protection of a Privilege.
Related Agreements: All of the agreements, instruments,
understandings, assignments or other arrangements which are entered into in
connection with the transactions contemplated hereby and which are set forth in
a writing, including, without limitation, (i) the Employee Benefits Allocation
Agreement, (ii) the Tax Sharing Agreement and (iii) the Transitional Services
Agreement.
Retained Assets: The assets of Stac other than the Hi/fn Assets,
including without limitation (i) assets relating to the Retained Business,
determined on a basis consistent with the determination of assets included on
the Stac Balance Sheet, (ii) all of the assets expressly
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<PAGE> 11
allocated to Stac under this Agreement or the Related Agreements, and (iii) any
other assets of Stac and its Affiliates relating to the Retained Business.
Retained Business: The businesses conducted by Stac pursuant to or
utilizing the Retained Assets, including without limitation the business of
designing, developing, marketing and supporting high-performance distributed
business systems recovery software solutions for enterprise customers, which
implement Stac's lossless data compression technologies.
Retained Employees: The individuals employed by Stac and not Hi/fn on
the Distribution Date.
Retained Liabilities: (i) All of the Liabilities arising out of or in
connection with the Retained Assets or the Retained Business, determined on a
basis consistent with the determination of the Liabilities of Stac included on
the Stac Balance Sheet, (ii) all of the Liabilities of Stac under, or to be
retained or assumed by Stac pursuant to, this Agreement or any of the Related
Agreements, (iii) all Liabilities for the payment of outstanding drafts of Stac
attributable to the Retained Business existing as of the Distribution Date, and
(iv) all Liabilities arising out of or in connection with any claims made by
former Stac officers or employees, whether brought against Stac or Hi/fn.
Retained Policies: All Policies, current or past, which are owned or
maintained by or on behalf of Stac (or any of its predecessors) which relate to
the Retained Business but do not relate to the Hi/fn Business.
Shared Policies: All Policies, current or past, which are owned or
maintained by or on behalf of Stac or its predecessors which relate to both the
Retained Business and the Hi/fn Business, and all other Policies not
constituting Hi/fn Policies or Retained Policies.
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Stac Board: The Board of Directors of Stac.
Stac Books and Records: The books and records (including computerized
records) of Stac and all books and records owned by Hi/fn which relate to the
Retained Business or are necessary to operate the Retained Business, including,
without limitation, all such books and records relating to Retained Employees,
all files relating to any Action pertaining to the Retained Liabilities,
original corporate minute books, stock ledgers and certificates and corporate
seals, and all licenses, leases, agreements and filings, relating to Stac or the
Retained Business (but not including the Hi/fn Books and Records, provided that
Stac shall have access to, and shall have the right to obtain duplicate copies
of, the Hi/fn Books and Records in accordance with the provisions of Article
VI).
Stac Common Stock: The common stock, par value $.001 per share, of
Stac.
Stac Balance Sheet: The Consolidated Balance Sheet for Stac as of
November 30, 1998 attached hereto as Exhibit E.
Stac Group: Stac and the Stac Subsidiaries, collectively.
Stac Subsidiaries: All Subsidiaries of Stac at the time of the
Distribution.
Subsidiary: With respect to any Person, (a) any corporation of which
at least a majority in interest of the outstanding voting stock (having by the
terms thereof voting power under ordinary circumstances to elect a majority of
the directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, owned or controlled by such Person, by one or more
Subsidiaries of such Person, or by such Person and one or more of its
Subsidiaries, or (b) any non-corporate entity in which such
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<PAGE> 13
Person, one or more Subsidiaries of such Person, or such Person and one or more
Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof, has at least majority ownership interest.
Tax Sharing Agreement: The Tax Sharing Agreement between Hi/fn and
Stac, which agreement shall be entered into on or prior to the Distribution Date
in substantially the form of Exhibit F attached hereto.
Transitional Services Agreements: The Transitional Services Agreement
between Hi/fn and Stac, which agreement shall be entered into on or prior to the
Distribution Date in substantially the form of Exhibit G attached hereto.
Section 1.02. Terms Defined Elsewhere in Agreement.
Each of the following terms is defined in the Section set forth
opposite such term:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Assignment Agreement Recitals
Consents 3.01(c)
Cross License Agreement Recitals
Distribution Recitals
Distribution Ratio Recitals
Hi/fn Recitals
Hi/fn Business Recitals
Hi/fn Indemnitees 4.01
Indemnifiable Losses 4.02
Indemnifying Party 4.03
Indemnitee 4.03
Information 6.02
Stac Recitals
Stac Indemnitees 4.02
Stac Options 3.03
Stock Purchase Agreement Recitals
Third-Party Claim 4.04(a)
</TABLE>
ARTICLE II.
ASSUMPTION AND SATISFACTION OF LIABILITIES
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Section 2.01. Assumption and Satisfaction of Liabilities. Except as
set forth in the Employee Benefits Allocation Agreement, the Tax Sharing
Agreement or the other Related Agreements, effective as of and after the
Distribution Date, (a) Hi/fn shall, and/or shall cause the Hi/fn Subsidiaries
to, assume, pay, perform and discharge in due course all of the Hi/fn
Liabilities and (b) Stac shall pay, perform and discharge in due course all of
the Retained Liabilities.
ARTICLE III.
THE DISTRIBUTION
Section 3.01. Cooperation Prior to the Distribution.
(a) Stac and Hi/fn shall cooperate in preparing, filing with the
Commission and causing to become effective any registration statements or
amendments thereof which are necessary to effect the Distribution or that may be
appropriate to reflect the establishment of, or amendments to, any employee
benefit plans and other plans contemplated by the Employee Benefits Allocation
Agreement.
(b) Stac and Hi/fn shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of states or other political
subdivisions of the United States in connection with the transactions
contemplated by this Agreement and the Related Agreements.
(c) Stac and Hi/fn shall use all reasonable efforts to obtain any
third-party consents or approvals necessary or desirable in connection with the
transactions contemplated hereby ("Consents").
(d) Stac and Hi/fn will use all reasonable efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, all things necessary
or desirable under applicable law, to consummate the transactions contemplated
under this Agreement and the Related Agreements.
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Section 3.02. Stac Board Action; Conditions Precedent to the
Distribution. The Stac Board shall, in its discretion, establish any appropriate
procedures in connection with the Distribution. In no event shall the
Distribution occur unless the following conditions shall have been satisfied:
(a) the Hi/fn Board, comprised as contemplated by Section 5.01, shall
have been elected, and the Hi/fn Certificate and Hi/fn Bylaws shall have been
adopted and shall be in effect;
(b) Stac and Hi/fn shall have obtained all Consents, the failure of
which to obtain would, in the determination of the Stac Board, have a material
adverse effect on Stac or Hi/fn;
(c) the Registration Statement on Form 10 under the Exchange Act filed
by Hi/fn shall have been declared effective by the Commission;
(d) the Hi/fn Common Stock shall have been approved for quotation and
trading on Nasdaq subject to official notice of issuance;
(e) Hi/fn shall have obtained and delivered to 750 University, LLC,
the landlord under its headquarters lease, a letter of credit in an amount and
with such other terms that upon completion of the Distribution, the Lease
Guaranty dated as of November 17, 1997 made by Stac in favor or 750 University,
LLC will terminate in accordance with its terms; and
(f) Stac and Hi/fn shall have entered into the Related Agreements;
provided, however, that (i) any such condition may be waived by the Stac Board
in its sole discretion, and (ii) the satisfaction of such conditions shall not
create any obligation on the part of Stac or any other party hereto to effect
the Distribution or in any way limit Stac's power of
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termination set forth in Section 8.07 or alter the consequences of any such
termination from those specified in such Section.
Section 3.03. The Distribution. On the Distribution Date, subject to
the conditions and rights of termination set forth in this Agreement, Stac shall
deliver to the Agent a share certificate representing all of the then
outstanding shares of Hi/fn Common Stock owned by Stac and shall instruct the
Agent to distribute, on or as soon as practicable following the Distribution
Date, such Hi/fn Common Stock to the Holders in accordance with the Distribution
Ratio. Notwithstanding the fact that the Record Date has been set at December 1,
1998, the Stac Board has determined to make an equitable adjustment to
outstanding options to purchase Stac Common Stock ("Stac Options") to reflect
the effects of the Distribution such that between the Record Date and the
Distribution Stac will treat shares of Stac Common Stock issued upon exercise of
Stac Options between the Record Date and the Distribution as having been
outstanding on the Record Date and entitled to receive shares of Hi/fn Common
Stock in the Distribution. Accordingly, the Distribution Ratio shall be adjusted
such that Stac will distribute one share of Hi/fn Common Stock for every number
of shares of Stac Common Stock equal to the number of shares of Stac Common
Stock outstanding on the Distribution Date (assuming no issuances of Stac Common
Stock other than upon exercise of Stac Options) divided by the number of shares
of Hi/fn Common Stock held by Stac immediately prior to the Distribution. Hi/fn
agrees to provide all share certificates that the Agent shall require in order
to effect the Distribution.
Section 3.04. Cash in Lieu of Fractional Shares. No certificate or
scrip representing fractional shares of Hi/fn Common tock shall be issued as
part of the Distribution,
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and in lieu thereof, each holder of Stac Common Stock who would otherwise be
entitled to receive a fractional share of Hi/fn Common Stock will receive cash
for such fractional share. Stac shall instruct the Agent to determine the number
of whole shares and fractional shares of Hi/fn Common Stock allocable to each
holder of record of Stac Common Stock as of the Distribution Record Date. Stac
shall instruct the Agent to aggregate all such fractional shares into whole
shares and sell the whole shares obtained thereby in the open market as soon as
practicable following the Distribution Date at then prevailing prices on behalf
of Holders who otherwise would be entitled to receive fractional share interests
and to distribute to each such Holder such Holder's ratable share of the
proceeds of such sale as soon as practicable after the Distribution Date. Stac
shall bear the costs of commissions incurred in connection with such sales.
ARTICLE IV.
INDEMNIFICATION
Section 4.01. Indemnification by Stac. Except as otherwise expressly
set forth in a Related Agreement, Stac shall indemnify, defend and hold harmless
Hi/fn and each of the Hi/fn Subsidiaries, and each of their respective
directors, officers, employees, agents and Affiliates and each of the heirs,
executors, successors and assigns of any of the foregoing (the "Hi/fn
Indemnitees") from and against the Retained Liabilities and any and all losses,
Liabilities, damages, including, without limitation, the costs and expenses of
any and all Actions, threatened Actions, demands, assessments, judgments,
settlements and compromises relating to the Retained Liabilities and attorneys'
fees and any and all expenses whatsoever reasonably incurred in investigating,
preparing or defending against any such Actions or threatened Actions
(collectively, "Hi/fn Indemnifiable Losses" and, individually, a "Hi/fn
Indemnifiable Loss") of the Hi/fn
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Indemnitees arising out of or due to the failure or alleged failure of Stac or
any of its Affiliates prior to or after the Distribution Date to pay, perform or
otherwise discharge in due course any of the Retained Liabilities.
Section 4.02. Indemnification by Hi/fn. Except as otherwise expressly
set forth in a Related Agreement, Hi/fn shall indemnify, defend and hold
harmless Stac and each of its directors, officers, employees, agents and
Affiliates and each of the heirs, executors, successors and assigns of any of
the foregoing (the "Stac Indemnitees") from and against the Hi/fn Liabilities
and any and all losses, Liabilities, damages, including, without limitation, the
costs and expenses of any and all Actions, threatened Actions, demands,
assessments, judgments, settlements and compromises relating to the Hi/fn
Liabilities and attorneys' fees and any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any such Actions or
threatened Actions (collectively, "Stac Indemnifiable Losses" and, individually,
a "Stac Indemnifiable Loss") of the Stac Indemnitees arising out of or due to
the failure or alleged failure of Hi/fn or any of its Affiliates prior to or
after the Distribution Date to pay, perform or otherwise discharge in due course
any of the Hi/fn Liabilities. The "Hi/fn Indemnifiable Losses" and the "Stac
Indemnifiable Losses" are collectively referred to as the "Indemnifiable
Losses."
Section 4.03. Insurance Proceeds. The amount which any party (an
"Indemnifying Party") is or may be required to pay to any other Person (an
"Indemnitee") pursuant to Section 4.01 or Section 4.02 shall be reduced
(including, without limitation, retroactively) by any Insurance Proceeds or
other amounts actually recovered by or on behalf of such Indemnitee in reduction
of the related Indemnifiable Loss. If an Indemnitee shall have received the
payment required by this Agreement from an Indemnifying Party in respect of an
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Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds,
or other amounts in respect of such Indemnifiable Loss as specified above, then
such Indemnitee shall pay to such Indemnifying Party a sum equal to the greater
of (i) the amount of such Insurance Proceeds or other amounts actually received
and (ii) the amount of the payment previously made by the Indemnifying Party in
respect of the Indemnifiable Loss.
Section 4.04. Procedure for Indemnification.
(a) Except as may be set forth in a Related Agreement, if an
Indemnitee shall receive notice or otherwise learn of the assertion by a Person
(including, without limitation, any governmental entity) who is not a party to
this Agreement or to any of the Related Agreements of any claim or of the
commencement by any such Person of any Action (a "Third-Party Claim") with
respect to which an Indemnifying Party may be obligated to provide
indemnification pursuant to this Agreement, such Indemnitee shall give such
Indemnifying Party written notice thereof promptly after becoming aware of such
Third-Party Claim; provided that the failure of any Indemnitee to give notice as
required by this Section 4.04 shall not relieve the Indemnifying Party of its
obligations under this Article IV, except to the extent that such Indemnifying
Party is prejudiced by such failure to give notice. Such notice shall describe
the Third-Party Claim in reasonable detail, and shall indicate the amount
(estimated if necessary) of the Indemnifiable Loss that has been or may be
sustained by such Indemnitee.
(b) An Indemnifying Party may elect to defend or to seek to settle or
compromise, at such Indemnifying Party's own expense and by such Indemnifying
Party's own counsel, any Third-Party Claim, provided that the Indemnifying Party
must confirm in writing that it agrees that the Indemnitee is entitled to
indemnification hereunder in respect of such Third-
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Party Claim. Within 30 days of the receipt of notice from an Indemnitee in
accordance with Section 4.04(a) (or sooner, if the nature of such Third-Party
Claim so requires), the Indemnifying Party shall notify the Indemnitee of its
election whether to assume responsibility for such Third-Party Claim (provided
that if the Indemnifying Party does not so notify the Indemnitee of its election
within 30 days after receipt of such notice from the Indemnitee, the
Indemnifying Party shall be deemed to have elected not to assume responsibility
for such Third-Party Claim), and such Indemnitee shall cooperate in the defense
or settlement or compromise of such Third-Party Claim. After notice from an
Indemnifying Party to an Indemnitee of its election to assume responsibility for
a Third-Party Claim, such Indemnifying Party shall not be liable to such
Indemnitee under this Article IV for any legal or other expenses (except
expenses approved in advance by the Indemnifying Party) subsequently incurred by
such Indemnitee in connection with the defense thereof; provided that if the
defendants in any such claim include both the Indemnifying Party and one or more
Indemnitees and in such Indemnitees' reasonable judgment a conflict of interest
between such Indemnitees and such Indemnifying Party exists in respect of such
claim, such Indemnitees shall have the right to employ separate counsel and in
that event the reasonable fees and expenses of such separate counsel (but not
more than one separate counsel reasonably satisfactory to the Indemnifying
Party) shall be paid by such Indemnifying Party. If an Indemnifying Party elects
not to assume responsibility for a Third-Party Claim (which election may be made
only in the event of a good faith dispute that a claim was inappropriately
tendered under Section 4.01 or 4.02, as the case may be), the Indemnitee may
defend or (subject to the following sentence) seek to compromise or settle such
Third-Party Claim. Notwithstanding the foregoing, an Indemnitee may not settle
or compromise any claim without prior written notice to
17
<PAGE> 21
the Indemnifying Party, which shall have the option within ten days following
the receipt of such notice (i) to disapprove the settlement and assume all past
and future responsibility for the claim, including reimbursing the Indemnitee
for prior expenditures in connection with the claim, or (ii) to disapprove the
settlement and continue to refrain from participation in the defense of the
claim, in which event the Indemnifying Party shall have no further right to
contest the amount or reasonableness of the settlement if the Indemnitee elects
to proceed therewith, or (iii) to approve the amount of the settlement,
reserving the Indemnifying Party's right to contest the Indemnitee's right to
indemnity, or (iv) to approve and agree to pay the settlement. In the event the
Indemnifying Party makes no response to such written notice from the Indemnitee,
the Indemnifying Party shall be deemed to have elected option (ii).
(c) If an Indemnifying Party chooses to defend or to seek to
compromise any Third-Party Claim, the Indemnitee shall make available to such
Indemnifying Party any personnel and any books, records or other documents
within its control or which it otherwise has the ability to make available that
are necessary or appropriate for such defense.
(d) Notwithstanding anything else in this Section 4.04 to the
contrary, an Indemnifying Party shall not settle or compromise any Third-Party
Claim unless such settlement or compromise contemplates as an unconditional term
thereof the giving by such claimant or plaintiff to the Indemnitee of a written
release from all liability in respect of such Third-Party Claim (and provided
further that such settlement may not provide for any non-monetary relief by
Indemnitee without the written consent of Indemnitee). In the event the
Indemnitee shall notify the Indemnifying Party in writing that such Indemnitee
declines to accept any such settlement or compromise, such Indemnitee may
continue to contest such Third-Party Claim, free of any
18
<PAGE> 22
participation by such Indemnifying Party, at such Indemnitee's sole expense. In
such event, the obligation of such Indemnifying Party to such Indemnitee with
respect to such Third-Party Claim shall be equal to (i) the costs and expenses
of such Indemnitee prior to the date such Indemnifying Party notifies such
Indemnitee of the offer to settle or compromise (to the extent such costs and
expenses are otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the
amount of any offer of settlement or compromise which such Indemnitee declined
to accept and (B) the actual out-of-pocket amount such Indemnitee is obligated
to pay subsequent to such date as a result of such Indemnitee's continuing to
pursue such Third-Party Claim.
(e) Any claim on account of an Indemnifiable Loss which does not
result from a Third-Party Claim shall be asserted by written notice given by the
Indemnitee to the applicable Indemnifying Party. Such Indemnifying Party shall
have a period of 15 days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such 15-day
period, such Indemnifying Party shall be deemed to have refused to accept
responsibility to make payment. If such Indemnifying Party does not respond
within such 15-day period or rejects such claim in whole or in part, such
Indemnitee shall be free to pursue such remedies as may be available to such
party under applicable law or under this Agreement.
(f) In addition to any adjustments required pursuant to Section 4.03,
if the amount of any Indemnifiable Loss shall, at any time subsequent to the
payment required by this Agreement, be reduced by recovery, settlement or
otherwise, the amount of such reduction, less any expenses incurred in
connection therewith, shall promptly be repaid by the Indemnitee to the
Indemnifying Party.
(g) In the event of payment by an Indemnifying Party to any Indemnitee
in
19
<PAGE> 23
connection with any Third-Party Claim, such Indemnifying Party shall be
subrogated to and shall stand in the place of such Indemnitee as to any events
or circumstances in respect of which such Indemnitee may have any right or claim
relating to such Third-Party Claim against any claimant or plaintiff asserting
such Third-Party Claim. Such Indemnitee shall cooperate with such Indemnifying
Party in a reasonable manner, and at the cost and expense of such Indemnifying
Party, in prosecuting any subrogated right or claim.
Section 4.05. Remedies Cumulative. The remedies provided in this
Article IV shall be cumulative and shall not preclude assertion by any
Indemnitee of any other rights or the seeking of any and all other remedies
against any Indemnifying Party.
Section 4.06. Survival of Indemnities. The obligations of each of
Hi/fn and Stac under this Article IV shall survive the sale or other transfer by
it of any assets or businesses or the assignment by it of any Liabilities with
respect to any Indemnifiable Loss of the other related to such assets,
businesses or Liabilities.
ARTICLE V.
CERTAIN ADDITIONAL MATTERS
Section 5.01. Hi/fn Board. Hi/fn and Stac shall take all actions which
may be required to constitute, effective as of the Distribution Date, the board
of directors of Hi/fn with the persons listed on Schedule 1.01(a).
Section 5.02. Employee Matters.
(a) On the Distribution Date, except to the extent retained or assumed
by Stac under this Agreement, the Employee Benefits Allocation Agreement or any
other agreement relating to the Distribution, Hi/fn shall retain or assume, as
the case may be, responsibility as
20
<PAGE> 24
employer for the Hi/fn Employees. On the Distribution Date, except to the extent
retained or assumed by Hi/fn under this Agreement, the Employee Benefits
Allocation Agreement or any other agreement relating to the Distribution, Stac
shall retain or assume, as the case may be, responsibility as employer for the
Retained Employees.
(b) Hi/fn shall cause all of the Hi/fn Employees to resign, effective
as of the Distribution Date, from all positions as officers or employees of Stac
in which they serve. Stac shall cause all of the Retained Employees to resign,
effective as of the Distribution Date, from all positions as officers or
employees of Hi/fn or any of its Subsidiaries in which they serve.
Section 5.03. Certificate and Bylaws. On or prior to the Distribution
Date, Hi/fn shall adopt the Hi/fn Certificate and the Hi/fn Bylaws, and shall
file the Hi/fn Certificate with the Secretary of State of the State of Delaware.
Section 5.04. Termination of Lease Guaranty. Hi/fn shall take all
actions necessary, including without limitation delivering a letter of credit in
the amount of $1,956,456 to 750 University, LLC, to satisfy the condition set
forth at Section 3.02(e).
21
<PAGE> 25
ARTICLE VI.
ACCESS TO INFORMATION AND SERVICES
Section 6.01. Provision of Corporate Records.
(a) Except as may otherwise be provided in a Related Agreement, Stac
shall arrange as soon as practicable following the Distribution Date for the
transportation (at Hi/fn's cost) to Hi/fn of the Hi/fn Books and Records in its
possession, except to the extent such items are already in the possession of
Hi/fn or a Hi/fn Subsidiary. The Hi/fn Books and Records shall be the property
of Hi/fn, but shall be available to Stac for review and duplication until Stac
shall notify Hi/fn in writing that such records are no longer of use to Stac.
(b) Except as otherwise provided in a Related Agreement,
Hi/fn shall arrange as soon as practicable following the
Distribution Date for the transportation (at Stac's cost) to Stac of the Stac
Books and Records in its possession, except to the extent such items are already
in the possession of Stac. The Stac Books and Records shall be the property of
Stac, but shall be available to Hi/fn for review and duplication until Hi/fn
shall notify Stac in writing that such records are no longer of use to Hi/fn.
Section 6.02. Access to Information. Except as otherwise provided in a
Related Agreement, from and after the Distribution Date, Stac shall afford to
Hi/fn and its authorized accountants, counsel and other designated
representatives reasonable access (including using reasonable efforts to give
access to persons or firms possessing information) and duplicating rights during
normal business hours to all records, books, contracts, instruments, computer
data and other data and information relating to pre-Distribution operations
(collectively, "Information") within Stac's possession insofar as such access is
reasonably required by Hi/fn for
22
<PAGE> 26
the conduct of its business, subject to appropriate restrictions for classified
or Privileged Information. Similarly, except as otherwise provided in a Related
Agreement, Hi/fn shall afford to Stac and its authorized accountants, counsel
and other designated representatives reasonable access (including using
reasonable efforts to give access to persons or firms possessing information)
and duplicating rights during normal business hours to Information within
Hi/fn's possession, insofar as such access is reasonably required by Stac for
the conduct of its business, subject to appropriate restrictions for classified
or Privileged Information. Information may be requested under this Article VI
for the legitimate business purposes of either party, including, without
limitation, audit, accounting, claims (including claims for indemnification
hereunder), litigation and tax purposes, as well as for purposes of fulfilling
disclosure and reporting obligations and for performing this Agreement and the
transactions contemplated hereby.
Section 6.03. Production of Witnesses. At all times from and after the
Distribution Date, each of Hi/fn and Stac shall use reasonable efforts to make
available to the other, upon written request, its and its Subsidiaries'
officers, directors, employees and agents as witnesses to the extent that such
persons may reasonably be required in connection with any Action.
Section 6.04. Reimbursement. Except to the extent otherwise
contemplated in any Related Agreement, a party providing Information or witness
services to the other party under this Article VI shall be entitled to receive
from the recipient, upon the presentation of invoices therefor, payments of such
amounts, relating to supplies, disbursements and other out-of-pocket expenses
(at cost) and direct and indirect expenses of employees who are witnesses or
otherwise furnish assistance (at cost), as may be reasonably incurred in
providing such
23
<PAGE> 27
Information or witness services.
Section 6.05. Retention of Records. Except as otherwise required by
law or agreed to in a Related Agreement or otherwise in writing, each of Stac
and Hi/fn may destroy or otherwise dispose of any of the Information, which is
material Information and is not contained in other Information retained by Stac
or Hi/fn, as the case may be, at any time after the seventh anniversary of this
Agreement, provided that, prior to such destruction or disposal, (a) it shall
provide no less than 90 or more than 120 days prior written notice to the other,
specifying in reasonable detail the Information proposed to be destroyed or
disposed of and (b) if a recipient of such notice shall request in writing prior
to the scheduled date for such destruction or disposal that any of the
Information proposed to be destroyed or disposed of be delivered to such
requesting party, the party proposing the destruction or disposal shall promptly
arrange for the delivery of such of the Information as was requested at the
expense of the party requesting such Information.
Section 6.06. Confidentiality. Each of Stac and its Subsidiaries on
the one hand, and Hi/fn and its Subsidiaries on the other hand, shall hold, and
shall cause its consultants and advisors to hold, in strict confidence, all
Information concerning the other in its possession or furnished by the other or
the other's representatives pursuant to this Agreement (except to the extent
that such Information has been (i) in the public domain through no fault of such
party or (ii) later lawfully acquired from other sources by such party), and
each party shall not release or disclose such Information to any other person,
except its auditors, attorneys, financial advisors, rating agencies, bankers and
other consultants and advisors, unless compelled to disclose by judicial or
administrative process or, as reasonably advised by its counsel or by other
requirements
24
<PAGE> 28
of law, or unless such Information is reasonably required to be disclosed in
connection with (x) any litigation with any third-parties or litigation between
Stac and the Hi/fn Group, (y) any contractual agreement to which Stac or the
Hi/fn Group are currently parties, or (z) in exercise of either party's rights
hereunder.
Section 6.07. Privileged Matters. Stac and Hi/fn recognize that legal
and other professional services that have been and will be provided prior to the
Distribution Date have been and will be rendered for the benefit of both the
Stac Group and the Hi/fn Group and that both the Stac Group and the Hi/fn Group
should be deemed to be the client for the purposes of asserting all Privileges.
To allocate the interests of each party in the Privileged Information, the
parties agree as follows:
(a) Stac shall be entitled, in perpetuity, to control the assertion or
waiver of all Privileges in connection with Privileged Information which relates
solely to the Retained Business, whether or not the Privileged Information is in
the possession of or under the control of Stac or Hi/fn. Stac shall also be
entitled, in perpetuity, to control the assertion or waiver of all Privileges in
connection with Privileged Information that relates solely to the subject matter
of any claims constituting Retained Liabilities, now pending or which may be
asserted in the future, in any lawsuits or other proceedings initiated against
or by Stac, whether or not the Privileged Information is in the possession of or
under the control of Stac or Hi/fn.
(b) Hi/fn shall be entitled, in perpetuity, to control
the assertion or waiver of all Privileges in connection with
Privileged Information which relates solely to the Hi/fn Business, whether or
not the Privileged Information is in the possession of or under the control of
Stac or Hi/fn. Hi/fn shall also be entitled, in perpetuity, to control the
assertion or waiver of all Privileges
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<PAGE> 29
in connection with Privileged Information which relates solely to the subject
matter of any claims constituting Hi/fn Liabilities, now pending or which may be
asserted in the future, in any lawsuits or other proceedings initiated against
or by Hi/fn, whether or not the Privileged Information is in the possession of
Hi/fn or under the control of Stac or Hi/fn.
(c) Stac and Hi/fn agree that they shall have a shared Privilege, with
equal right to assert or waive, subject to the restrictions in this Section
6.07, with respect to all Privileges not allocated pursuant to the terms of
Sections 6.07(a) and (b). All Privileges relating to any claims, proceedings,
litigation, disputes or other matters which involve both Stac and Hi/fn in
respect of which Stac and Hi/fn retain any responsibility or liability under
this Agreement shall be subject to a shared Privilege.
(d) No party may waive any Privilege which could be asserted under any
applicable law, and in which the other party has a shared Privilege, without the
consent of the other party, except to the extent reasonably required in
connection with any litigation with third-parties or as provided in subsection
(e) below. Consent shall be in writing, or shall be deemed to be granted unless
written objection is made within 20 days after notice upon the other party
requesting such consent.
(e) In the event of any litigation or dispute between a member of the
Stac Group and a member of the Hi/fn Group, either party may waive a Privilege
in which the other party has a shared Privilege, without obtaining the consent
of the other party, provided that such waiver of a shared Privilege shall be
effective only as to the use of Information with respect to the litigation or
dispute between the Stac Group and the Hi/fn Group, and shall not operate as a
waiver of the shared Privilege with respect to third-parties.
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<PAGE> 30
(f) If a dispute arises between the parties regarding whether a
Privilege should be waived to protect or advance the interest of either party,
each party agrees that it shall negotiate in good faith, shall endeavor to
minimize any prejudice to the rights of the other party, and shall not
unreasonably withhold consent to any request for waiver by the other party. Each
party specifically agrees that it will not withhold consent to waiver for any
purpose except to protect its own legitimate interests.
(g) Upon receipt by any party of any subpoena, discovery or other
request which arguably calls for the production or disclosure of Information
subject to a shared Privilege or as to which the other party has the sole right
hereunder to assert a Privilege, or if any party obtains knowledge that any of
its current or former directors, officers, agents or employees have received any
subpoena, discovery or other requests which arguably calls for the production or
disclosure of such Privileged Information, such party shall promptly notify the
other party of the existence of the request and shall provide the other party a
reasonable opportunity to review the Information and to assert any rights it may
have under this Section 6.07 or otherwise to prevent the production or
disclosure of such Privileged Information.
(h) The transfer of the Hi/fn Books and Records and the Stac Books and
Records and other Information between the Stac Group and the Hi/fn Group is made
in reliance on the agreement of Stac and Hi/fn, as set forth in Sections 6.06
and 6.07, to maintain the confidentiality of Privileged Information and to
assert and maintain all applicable Privileges. The access to information being
granted pursuant to Sections 6.01 and 6.02, the agreement to provide witnesses
and individuals pursuant to Section 6.03 and the transfer of Privileged
Information between the Stac Group and the Hi/fn Group pursuant to this
Agreement shall not be deemed a
27
<PAGE> 31
waiver of any Privilege that has been or may be asserted under this Agreement or
otherwise.
ARTICLE VII.
INSURANCE
Section 7.01. Policies and Rights Included Within the Hi/fn Assets.
Without limiting the generality of the definition of the Hi/fn Assets, the Hi/fn
Assets shall include (a) any and all rights of an insured party under each of
the Shared Policies, specifically including rights of indemnity and the right to
be defended by or at the expense of the insurer, with respect to all injuries,
losses, liabilities, damages and expenses incurred or claimed to have been
incurred on or prior to the Distribution Date by any party in or in connection
with the conduct of the Hi/fn Business or, to the extent any claim is made
against Hi/fn or any of its Subsidiaries, the Retained Business, and which
injuries, losses, liabilities, damages and expenses may arise out of insured or
insurable occurrences or events under one or more of the Shared Policies;
provided, however, that nothing in this Section 7.01 shall be deemed to
constitute (or to reflect) the assignment of the Shared Policies, or any of
them, to Hi/fn, and (b) the Hi/fn Policies.
Section 7.02. Post-Distribution Date Claims. If, subsequent to the
Distribution Date, any person, corporation, firm or entity shall assert a claim
against Hi/fn or any Hi/fn Subsidiary with respect to any injury, loss,
liability, damage or expense incurred or claimed to have been incurred on or
prior to the Distribution Date in or in connection with the Distribution or the
conduct of the Hi/fn Business or, to the extent any claim is made against Hi/fn
or any of its Subsidiaries, the Retained Business, and which injury, loss,
liability, damage or expense may arise out of insured or insurable occurrences
or events under one or more of the Shared Policies, Stac shall at the time such
claim is asserted be deemed to assign, without need of further
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<PAGE> 32
documentation, to Hi/fn any and all rights of an insured party under the
applicable Shared Policy with respect to such asserted claim, specifically
including rights of indemnity and the right to be defended by or at the expense
of the insurer; provided, however, that nothing in this Section 7.02 shall be
deemed to constitute (or to reflect) the assignment of the Shared Policies, or
any of them, to Hi/fn.
Section 7.03. Administration and Reserves.
(a) Notwithstanding the provisions of Article II, but subject to any
contrary provisions of any Related Agreement, from and after the Distribution
Date:
(i) Hi/fn shall be entitled to any reserves established by Stac,
or the benefit of reserves held by any insurance carrier, with respect to the
Hi/fn Liabilities; and
(ii) Stac shall be entitled to any reserves established by Stac,
or the benefit of reserves held by any insurance carrier, with respect to the
Retained Liabilities.
(b) Insurance Premiums. Stac shall provide continued coverage under
its director and officer liability insurance policy for a period of not less
than two years, with a policy limit of not less than Five Million Dollars
($5,000,000), for acts which took place or were alleged to have taken place
prior to the Distribution Date covering persons who were directors and officers
of Stac or Hi/fn prior to the Distribution Date. Stac has obtained such coverage
under a Shared Policy and will pay the premium for such policy. The cost of the
portion of the policy that covers acts and omissions of persons who were
directors and officers of Hi/fn prior to the Distribution Date is $52,020, which
amount is immediately due and payable to Stac, and Stac shall be entitled to
deduct such amount from the Hi/fn cash currently managed by Stac. In addition,
Hi/fn shall have the right but not the obligation to pay the premiums, to the
extent that
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Stac does not pay premiums with respect to Retained Liabilities
(retrospectively-rated or otherwise), with respect to other Shared Policies and
the Hi/fn Policies, as required under the terms and conditions of the respective
Policies, whereupon Stac shall forthwith reimburse Hi/fn for that portion of
such premiums paid by Hi/fn as are attributable to the Retained Liabilities.
(c) Allocation of Insurance Proceeds. Insurance Proceeds received with
respect to claims, costs and expenses under the Policies shall be paid to Hi/fn
with respect to the Hi/fn Liabilities and to Stac with respect to the Retained
Liabilities. Payment of the allocable portions of indemnity costs of Insurance
Proceeds resulting from the liability policies will be made to the appropriate
party upon receipt from the insurance carrier. In the event that the aggregate
limits on any Shared Policies are exceeded, the parties agree to provide an
equitable allocation of Insurance Proceeds received after the Distribution Date
based upon their respective bona fide claims. The parties agree to use their
best efforts to cooperate with respect to insurance matters.
Section 7.04. Agreement for Waiver of Conflict and Shared Defense. In
the event that Insured Claims of both Hi/fn and Stac exist relating to the same
occurrence, Hi/fn and Stac agree to jointly defend and to waive any conflict of
interest necessary to the conduct of that joint defense. Nothing in this Section
7.04 shall be construed to limit or otherwise alter in any way the indemnity
obligations of the parties to this Agreement, including those created by this
Agreement, by operation of law or otherwise.
ARTICLE VIII.
MISCELLANEOUS
Section 8.01. Complete Agreement; Construction. This Agreement,
including the Schedules and Exhibits and the Related Agreements and other
agreements and documents
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<PAGE> 34
referred to herein, shall constitute the entire agreement between the parties
with respect to the subject matter hereof and thereof and shall supersede all
previous negotiations, commitments and writings with respect to such subject
matter. Notwithstanding any other provisions in this Agreement to the contrary,
in the event and to the extent that there shall be a conflict between the
provisions of this Agreement and the provisions of the Related Agreements, the
Related Agreements shall control.
Section 8.02. Expenses. Except as otherwise set forth in this
Agreement or any Related Agreement, all costs and expenses in connection with
the preparation, execution, delivery and implementation of this Agreement, the
Distribution and with the consummation of the transactions contemplated by this
Agreement shall be charged to the party for whose benefit the expenses are
incurred, with any expenses which cannot be allocated on such basis to be split
equally between the parties.
Section 8.03. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to the principles of conflicts of laws thereof.
Section 8.04. Notices. All notices and other communications hereunder
shall be in writing and shall be delivered by hand, mailed by registered or
certified mail (return receipt requested) to the parties at the addresses below
(or at such other addresses for a party as shall be specified by like notice) or
sent by facsimile to the numbers listed below with confirmation of transmission,
and shall be deemed given on the date on which such notice is received:
To Hi/fn:
Hi/fn, Inc.
750 University Avenue
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<PAGE> 35
Los Gatos, CA 95302
(408) 399-3501 (fax)
Attention: William Walker
To Stac:
Stac, Inc.
12636 High Bluff Drive, 4th Floor
San Diego, CA 92130
(619) 794-4572
Attention: John Witzel
Section 8.05. Amendments. This Agreement may not be modified or
amended except by an agreement in writing signed by the parties.
Section 8.06. Successors and Assigns. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns. The parties acknowledge
and agree that any party into which Stac or Hi/fn merges or which acquires all
or substantially all of Stac's or Hi/fn's assets in a sale transaction would
constitute a permitted assign for purposes of this Section 8.06.
Section 8.07. Termination. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of the Stac Board without the approval of Hi/fn or of Stac's
stockholders. In the event of such termination, no party shall have any
liability to any other party pursuant to this Agreement.
Section 8.08. Subsidiaries. Each of the parties hereto shall cause to
be performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such party
which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
Section 8.09. No Third-Party Beneficiaries. Except for the provisions
of Article
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IV relating to Indemnitees, this Agreement is solely for the benefit
of the parties hereto and their respective Subsidiaries and Affiliates and
should not be deemed to confer upon third-parties any remedy, claim, Liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
Section 8.10. Titles and Headings. Titles and headings to sections
herein are inserted for the convenience of reference only and are not intended
to be a part of or to affect the meaning or interpretation of this Agreement.
Section 8.11. Exhibits and Schedules. The Exhibits and Schedules shall
be construed with and as an integral part of this Agreement to the same extent
as if the same had been set forth verbatim herein.
Section 8.12. Legal Enforceability. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. Without prejudice
to any rights or remedies otherwise available to any party hereto, each party
hereto acknowledges that damages would be an inadequate remedy for any breach of
the provisions of this Agreement and agrees that the obligations of the parties
hereunder shall be specifically enforceable.
Section 8.13. Arbitration of Disputes.
(a) Any controversy or claim arising out of this Agreement, or any
breach of this Agreement, including any controversy relating to a determination
of whether specific assets constitute Hi/fn Assets or Retained Assets or whether
specific Liabilities constitute Hi/fn
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<PAGE> 37
Liabilities or Retained Liabilities, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association then in
effect, as modified by this Section 8.13 or by the further agreement of the
parties.
(b) Such arbitration shall be conducted in San Diego, California.
(c) Any judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. The arbitrators shall have the
authority to award to the prevailing party its attorneys' fees and costs
incurred in such arbitration. The arbitrators shall not, under any
circumstances, have any authority to award punitive, exemplary or similar
damages, and may not, in any event, make any ruling, finding or award that does
not conform to the terms and conditions of this Agreement.
(d) Nothing contained in this Section 8.13 shall limit or restrict in
any way the right or power of a party at any time to seek injunctive relief in
any court and to litigate the issues relevant to such request for injunctive
relief before such court (i) to restrain the other party from breaching this
Agreement or (ii) for specific enforcement of this Section 8.13. The parties
agree that any legal remedy available to a party with respect to a breach of
this Section 8.13 will not be adequate and that, in addition to all other legal
remedies, each party is entitled to an order specifically enforcing this Section
8.13.
(e) The parties hereby consent to the jurisdiction of the federal
courts located in San Diego, California for all purposes under this Agreement.
(f) Neither party nor the arbitrators may disclose the existence or
results of any arbitration under this Agreement or any evidence presented during
the course of the arbitration without the prior written consent of both parties,
except as required to fulfill applicable
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<PAGE> 38
disclosure and reporting obligations, or as otherwise required by law.
(g) Except as provided in Section 8.13(c), each party shall bear its
own costs incurred in the arbitration. If either party refuses to submit to
arbitration any dispute required to be submitted to arbitration pursuant to this
Section 8.13, and instead commences any other proceeding, including, without
limitation, litigation, then the party who seeks enforcement of the obligation
to arbitrate shall be entitled to its attorneys' fees and costs incurred in any
such proceeding.
(Signature page follows.).
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
STAC, INC.
By: /s/ JOHN R. WITZEL
---------------------------------------
Name: John R. Witzel
Title: VP of Finance
HI/FN, INC.
By: /s/ WILLIAM R. WALKER
--------------------------------------
Name: William R. Walker
Title: Secretary
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<PAGE> 40
EXHIBITS
<TABLE>
<S> <C>
Exhibit A: Employee Benefits Allocation Agreement
Exhibit B: Hi/fn Bylaws
Exhibit C: Hi/fn Certificate
Exhibit D: Hi/fn Balance Sheet
Exhibit E: Stac Balance Sheet
Exhibit F: Tax Sharing Agreement
Exhibit G: Transitional Services Agreement
</TABLE>
<PAGE> 41
EXHIBIT D
Hi/fn Balance Sheet
[Attached]
<PAGE> 42
Hi/fn, Inc.
Consolidated Balance Sheet
<TABLE>
11/30/98
--------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash $10,432,204.16
Accounts Receivable 2,119,462.44
Inventory 161,985.00
Prepaid Expenses 274,959.50
Deferred Income Taxes 949,235.00
--------------
Total Current Assets 13,937,846.10
--------------
PROPERTY AND EQUIPMENT
Property and Equipment 2,637,330.48
Accumulated Depreciation (989,364.48)
--------------
Net Property and Equipment 1,647,966.00
--------------
Other Assets (4,533,492.06)
--------------
TOTAL ASSETS 11,052,320.04
==============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts Payable 976,378.31
Accrued Payroll and Taxes 307,213.35
Income Taxes Payable 2,096,418.00
Other Liabilities 1,030,516.08
--------------
Total Current Liabilities 4,410,525.74
--------------
Accrued Compensation
--------------
Total Non-Current Liabilities
--------------
Preferred Stock
--------------
STOCKHOLDER'S EQUITY
Retained Earnings 5,285,902.66
Year-to-Date Earnings 973,763.84
Cumulative Translation Adjustment
Treasury Stock
Common Stock 382,127.80
--------------
Total Stockholder's Equity 6,641,794.30
--------------
TOTAL LIABILITIES AND EQUITY $11,052,320.04
==============
</TABLE>
<PAGE> 43
EXHIBIT E
Stac Balance Sheet
[Attached]
<PAGE> 44
Stac, Inc.
Stac -- Domestic
Consolidated Balance Sheet
11/30/98
--------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $23,828,581.25
Accounts Receivable 37,317.20
Inventory 197,173.82
Prepaid Expenses 270,152.87
Deferred Income Taxes 1.00
--------------
Total Current Assets 24,333,226.14
--------------
PROPERTY AND EQUIPMENT
Property and Equipment 10,661,477.11
Accumulated Depreciation (7,571,828.11)
--------------
Net Property and Equipment 3,089,649.00
--------------
Other Assets 5,487,636.96
--------------
TOTAL ASSETS 32,910,512.10
==============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts Payable 1,666,297.80
Accrued Payroll and Taxes 833,571.84
Income Taxes Payable (2,647,456.13)
Other Liabilities 1,547,689.76
--------------
Total Current Liabilities 1,400,103.27
--------------
Accrued Compensation 156,546.74
--------------
Total Non-Current Liabilities 156,546.74
--------------
Preferred Stock
--------------
STOCKHOLDER'S EQUITY
Retained Earnings (408,944.85)
Year-to-Date Earnings (1,914,285.39)
Cumulative Translation Adjustment
Treasury Stock (41,347,258.06)
Common Stock 75,024,350.39
--------------
Total Stockholder's Equity 31,353,862.09
--------------
TOTAL LIABILITIES AND EQUITY $32,910,512.10
==============
</TABLE>
<PAGE> 45
Stac, Inc.
Stac - Europe
Consolidated Balance Sheet
<TABLE>
<CAPTION>
11/30/98
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 459,439.82
Accounts Receivable 817,038.31
Inventory 10,051.21
Prepaid Expenses 51,041.98
Deferred Income Taxes
-------------
Total Current Assets 1,337,571.32
-------------
PROPERTY AND EQUIPMENT
Property and Equipment 349,704.64
Accumulated Depreciation (262,014.34)
-------------
Net Property and Equipment 87,690.30
-------------
Other Assets
-------------
TOTAL ASSETS 1,425,261.62
=============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts Payable 226,565.79
Accrued Payroll and Taxes 20,610.00
Income Taxes Payable 0.45
Other Liabilities 29,539.87
-------------
Total Current Liabilities 276,716.11
-------------
Accrued Compensation
-------------
Total Non-Current Liabilities
-------------
Preferred Stock
-------------
STOCKHOLDER'S EQUITY
Retained Earnings 722,846.40
Year-to-Date Earnings (22,336.29)
Cumulative Translation Adjustment (30,456.60)
Treasury Stock
Common Stock 478,492.00
-------------
Total Stockholders' Equity 1,148.545.51
-------------
TOTAL LIABILITIES AND EQUITY $1,425,261.62
=============
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS
ALLOCATION AGREEMENT
THIS EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
(this "Agreement") is made and entered into as of December 11, 1998, by and
between STAC, INC., a Delaware corporation ("Stac"), and HI/FN, INC., a Delaware
corporation ("Hi/fn," and collectively with Stac, the "Parties"), effective as
of the Distribution Date (as hereinafter defined).
R E C I T A L S
WHEREAS, subject to certain conditions, Stac intends to spin off its
semiconductor business by distributing to Stac stockholders a special dividend
(the "Distribution") of one share of Hi/fn Common Stock for every 3.9159 shares
of Stac Common Stock (subject to adjustment as described in the Distribution
Agreement) held as of the close of business on the Record Date (the
"Distribution Ratio"); and
WHEREAS, in connection with such spin-off, Stac and Hi/fn have entered
into a Distribution Agreement of even date herewith (the "Distribution
Agreement"); and
WHEREAS, pursuant to the aforesaid Distribution Agreement, Stac and
Hi/fn have agreed to enter into an agreement allocating responsibilities with
respect to employee compensation, benefits and certain other employment matters
pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Stac and Hi/fn agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01. Definitions. As used in this Agreement, the following
terms shall have the meanings indicated below:
COBRA: Code Section 4980B and ERISA Sections 601 through 608,
establishing employer requirements for continuation of health care benefits for
the benefit of certain current and former employees or dependents thereof.
Code: the Internal Revenue Code of 1986, as amended, or any successor
legislation.
Commission: the Securities and Exchange Commission.
Distribution: the spin-off of Hi/fn pursuant to the Distribution
Agreement.
Distribution Agreement: the agreement described in the second recital of
this Agreement.
<PAGE> 2
Distribution Date: the date on which the Distribution occurs.
Employee: any individual who is in one of the following categories: a
Stac Employee, a Stac Terminee, a Hi/fn Employee or a Hi/fn Terminee.
Employer: Stac or Hi/fn, as the context indicates.
Employer Common Stock: Stac Common Stock in the case of Stac Employees
and Stac Terminees and Hi/fn Common Stock in the case of Hi/fn Employees and
Hi/fn Terminees.
Employer Stock Option Plan: a plan which provides for awards of
additional compensation to eligible Employees in the form of nonqualified or
incentive options to purchase Employer Common Stock, including without
limitation, the Stac Director Option Plan, the Stac Stock Option Plan and the
Hi/fn Equity Plan.
ERISA: the Employee Retirement Income Security Act of 1974, as amended,
or any successor legislation.
Hi/fn: Hi/fn, inc., a Delaware corporation, or any of its direct or
indirect subsidiaries.
Hi/fn Common Stock: the common stock, par value $.001 per share, of
Hi/fn.
Hi/fn Employee: any individual who is or becomes an employee of Hi/fn on
or after the Distribution Date. It also includes any director of Stac who
resigns from the Stac Board of Directors before the Distribution and
concurrently or within 90 days thereof is elected to the Hi/fn Board of
Directors.
Hi/fn Equity Plan: the Hi/fn, Inc. 1996 Equity Incentive Plan.
Hi/fn Individual: any individual who (i) is a Hi/fn Employee, (ii) is a
Hi/fn Terminee, or (iii) is a dependent or beneficiary of any individual
described in clause (i) or (ii).
Hi/fn Medical/Dental Plans: any Medical/Dental Plans maintained by Hi/fn
for or providing benefits to Hi/fn Individuals.
Hi/fn Profit Sharing Plan: the Profit Sharing Plan to be established by
Hi/fn in accordance with Section 2.02(b).
Hi/fn Qualified Beneficiary: any Hi/fn Individual (or dependent thereof)
who, on or before the Distribution Date, was a Qualified Beneficiary under any
Hi/fn Medical/Dental Plan.
Hi/fn Stock Option: an option to purchase Hi/fn Common Stock pursuant to
the Hi/fn Equity Plan.
Hi/fn Stock Value: the last sales price per share of Hi/fn Common Stock
(traded on a "when-issued" basis) on the Distribution Date.
2
<PAGE> 3
Hi/fn Terminee: any individual who was formerly employed by Hi/fn who
terminated employment prior to the Distribution Date.
HMO: any health maintenance organization organized under 42 U.S.C. Sec.
300e-9, or a state health maintenance organization statute that provides medical
services for Stac Individuals or Hi/fn Individuals under any Plan.
IRS: the Internal Revenue Service.
Medical/Dental Plan: a Welfare Plan providing health benefits to
Employees and their dependents.
Nasdaq National Market: The Nasdaq Stock Market's Nasdaq National
Market.
Plan: any plan, policy, arrangement, contract or agreement providing
compensation benefits for any group of Employees or former Employees or
individual Employee or former Employee, or the dependents or beneficiaries of
any such Employee or former Employee, whether formal or informal or written or
unwritten, and including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an Employer to any
Employee or former Employee or the beneficiaries of any such Employee or former
Employee, adopted or entered into by a Party prior to, or upon the Distribution.
The term "Plan" as used in this Agreement does not include any contract,
agreement or understanding entered into by Stac or Hi/fn relating to settlement
of actual or potential Employee related litigation claims.
Qualified Beneficiary: an individual (or dependent thereof) who either
(1) experiences a "qualifying event" (as that term is defined in Code Section
4980B(f)(3) and ERISA Section 603) while a participant in any Medical/Dental
Plan, or (2) becomes a "qualified beneficiary" (as that term is defined in Code
Section 4980B(g)(1) and ERISA 607(3)) under any Medical/Dental Plan.
Record Date: December 1, 1998.
Service Credit: the period taken into account under any Plan for
purposes of determining length of service or plan participation to satisfy
eligibility, vesting, benefit accrual and similar requirements under such Plan.
Stac: Stac, Inc., a Delaware corporation, or any of its direct or
indirect subsidiaries.
Stac Common Stock: the common stock, par value $.001 per share, of Stac,
Inc., a Delaware corporation.
Stac Director Option: an option to purchase Stac Common Stock pursuant
to the Stac Director Option Plan.
Stac Director Option Plan: The Stac, Inc. 1992 Non-Employee Directors'
Stock Option Plan to be continued by Stac following the Distribution pursuant to
Section 2.03(b).
3
<PAGE> 4
Stac Employee: any individual who immediately prior to the Distribution
was a Stac Employee and who is an employee or director of Stac immediately
following the Distribution.
Stac Individual: any individual who is (i) a Stac Employee, (ii) a Stac
Terminee, or (iii) a dependent or beneficiary of any individual specified in
clause (i) or (ii).
Stac Medical/Dental Plans: any Medical/Dental Plans maintained for or
providing benefits to Stac Individuals.
Stac Profit Sharing Plan: the Stac Profit Sharing and 401(k) Plan.
Stac Qualified Beneficiary: a Qualified Beneficiary who, immediately
following the Distribution, is not a Hi/fn Qualified Beneficiary and who,
immediately prior to the Distribution, was a Qualified Beneficiary under any
Stac Medical/Dental Plan.
Stac Stock Option: an option to purchase Stac Common Stock pursuant to
the Stac Stock Option Plan.
Stac Stock Option Plan: The Stac Electronics 1992 Stock Option Plan and
Stock Option Plan to be continued by Stac following the Distribution pursuant to
Section 2.03(a).
Stac Stock Post-Distribution Value: the last sales price per share of
Stac Common Stock on the Nasdaq National Market on the Distribution Date, less
the Hi/fn Stock Value divided by the Distribution Ratio.
Stac Stock Value: the last sales price per share of Stac Common Stock on
the Nasdaq National Market on the Distribution Date.
Stac Terminee: any individual who was formerly employed by Stac who
terminated such employment prior to the Distribution Date.
Stock Option: a nonqualified or incentive option to purchase Employer
Common Stock under an Employer Stock Option Plan.
Welfare Plan: any Plan which provides medical, health, disability,
accident, life insurance, death, dental or any other welfare benefit, including,
without limitation, any post-employment benefit, but excluding vacation benefits
covered under Section 2.05.
Section 1.02. Other Terms. Any capitalized terms used herein but not
defined herein shall have the meaning set forth in the Distribution Agreement.
Section 1.03. Certain Constructions. References to the singular in this
Agreement shall refer to the plural and vice-versa and references to the
masculine shall refer to the feminine and vice-versa.
Section 1.04. Sections. References to a "Section" are, unless otherwise
specified, to one of the Sections of this Agreement.
4
<PAGE> 5
Section 1.05. Survival. Obligations described in this Agreement shall
remain in full force and effect and shall survive the Distribution Date.
ARTICLE II.
EMPLOYEE BENEFITS
Section 2.01. Employment.
(a) Allocation of Responsibilities on Distribution Date. On
the Distribution Date, except to the extent retained or assumed by Stac under
this Agreement or any other agreement relating to the Distribution, Hi/fn shall
retain or assume, as the case may be, responsibility as employer for the Hi/fn
Employees. On the Distribution Date, except to the extent retained or assumed by
Hi/fn under this Agreement or any other agreement relating to the Distribution,
Stac shall retain or assume, as the case may be, responsibility as employer for
the Stac Employees. The assumption or retention of responsibility as employer by
Stac or Hi/fn described in this Section 2.01 shall not, of itself, constitute a
severance or a termination of employment under any Plan which provides for
severance benefits nor shall it constitute a change of control of Stac or Hi/fn
for purposes of any Plan.
(b) Assumption of Liabilities on Distribution Date: Except
as specifically provided in this Agreement, or as otherwise agreed by the
Parties:
(i) Immediately following the Distribution, Hi/fn
shall assume or retain, as the case may be, all benefit obligations and all
related rights in connection with any Plan with respect to the Hi/fn Employees
and Hi/fn Terminees and Stac shall have no further liability with respect
thereto.
(ii) Stac shall assume or retain, as the case may be,
all benefit obligations and all related rights in connection with any Plan and
with respect to the Stac Employees and Stac Terminees, and Hi/fn shall have no
further liability with respect thereto.
(c) Service Credits. In connection with the Distribution and
for purposes of determining Service Credits under any Plans, Stac shall credit
each Stac Employee and Hi/fn shall credit each Hi/fn Employee with such
Employee's Service Credits and original hire date as reflected in the Stac
records or Hi/fn records, as applicable, as of the Distribution Date. Such
Service Credits and hire date shall continue to be maintained as described
herein for as long as the Employee does not terminate employment or as otherwise
may be required by applicable law or any applicable Plan.
Section 2.02. Profit Sharing and 401(k) Plans.
(a) Stac Profit Sharing Plan. Effective as of the
Distribution Date, Stac and Hi/fn shall take, or cause to be taken, all action
necessary and appropriate to terminate the participation of the Hi/fn Employees
in the Stac Profit Sharing Plan.
(b) Establishment of Hi/fn Profit Sharing Plan. On or prior
to January 1, 1999, Hi/fn shall take, or cause to be taken, all action necessary
and appropriate to establish and
5
<PAGE> 6
administer a Profit Sharing Plan, hereafter referred to as the Hi/fn Profit
Sharing Plan, which shall contain such terms and conditions as Hi/fn may
determine, provided, however, that all Hi/fn Employees who were participating in
the Stac Profit Sharing Plan shall be eligible to participate in the Hi/fn
Profit Sharing Plan and, the Hi/fn Profit Sharing Plan shall at a minimum
provide for the benefits protected under Section 411(d)(6) of the Code that were
provided under the Stac Profit Sharing Plan. The Hi/fn Profit Sharing Plan shall
be intended to qualify for tax-favored treatment under Sections 401(a) and
401(k) of the Code and to comply with the requirements of ERISA.
(c) Transfer and Acceptance of Account Balances. As soon as
practicable after January 1, 1999 but not later than January 29, 1999 (the
"Transfer Date"), and subject to Hi/fn's compliance with Section 2.02(e), Stac
shall cause the trustees of the Stac Profit Sharing Plan to transfer to the
trustees or other funding agent of the Hi/fn Profit Sharing Plan the amounts (in
cash, securities, other property or a combination thereof) representing the
account balances of all Hi/fn Individuals to be allocated to the account
balances of such individuals under the Hi/fn Profit Sharing Plan. Such transfer
shall comply with Section 414(1) of the Code and the requirements of ERISA and
the regulations promulgated thereunder. Hi/fn shall cause the trustees or other
funding agent of the Hi/fn Profit Sharing Plan to accept the plan-to-plan
transfer from the Stac Profit Sharing Plan trustees, and to credit the accounts
of such Hi/fn Employees under the Hi/fn Profit Sharing Plan with amounts
transferred on their behalf.
(d) Stac to Provide Information. Stac shall provide Hi/fn,
as soon as practicable after the Distribution Date (with the cooperation of
Hi/fn to the extent that relevant information is in the possession of Hi/fn, and
in accordance with Section 5.02), with a list of Hi/fn Individuals who, to the
best knowledge of Stac, were participants in or otherwise entitled to benefits
under the Stac Profit Sharing Plan on the Distribution Date, together with a
listing of each participant's Service Credits under such Plan and a listing of
each such Hi/fn Individual's account balance thereunder. Stac shall, as soon as
practicable prior to or on the Transfer Date and in accordance with Section
5.02, provide Hi/fn with such additional information in the possession of Stac
(and not already in the possession of Hi/fn) as may be reasonably requested by
Hi/fn and necessary for Hi/fn to receive the plan-to-plan transfer under Section
2.02(c) and to administer effectively the Hi/fn Profit Sharing Plan thereafter.
(e) Regulatory Filings. Hi/fn and Stac shall, in connection
with the plan-to-plan transfer described in Section 2.02(c), cooperate in making
any and all appropriate filings required by the Commission or the IRS, or
required under the Code or ERISA or any applicable securities laws and the
regulations thereunder, and take all such action as may be necessary and
appropriate to cause such plan-to-plan transfer to take place. Further, prior to
making the plan-to-plan transfer under Section 2.02(c) Hi/fn shall either
provide a favorable IRS determination letter that the Hi/fn Profit Sharing Plan,
as adopted, satisfies the requirements for qualification under Section 401(a) of
the Code, or an opinion letter satisfactory to Stac, from Hi/fn's legal counsel
that the Hi/fn Profit Sharing Plan, as adopted, satisfies in form the
requirements for qualification under Section 401(a) of the Code. Stac shall make
any amendment and take any actions necessary to ensure that the Stac Profit
Sharing Plan satisfies the requirements for qualification under Section 401(a)
of the Code at the time of the Transfer Date.
6
<PAGE> 7
(f) Account Balances of Stac Employees. Stac shall retain
sole responsibility for all liabilities and obligations under the Stac Profit
Sharing Plan with respect to Stac Individuals, and Hi/fn shall have no liability
or obligation with respect thereto. Hi/fn shall assume or retain, sole
responsibility for all liabilities and obligations under the Hi/fn Profit
Sharing Plan with respect to Hi/fn Individuals, and Stac shall have no liability
or obligation with respect thereto.
Section 2.03. Stock Plans.
(a) Stac Stock Option Plan. Stac shall continue the Stac
Stock Option Plan. All options granted under the Stac Stock Option Plan will
continue to be denominated in Stac Common Stock and except as provided in
Section 2.03(d)(iv), subject to the terms and conditions of the Stac Stock
Option Plan and any option agreement entered into in connection therewith. Stac
shall continue to reserve those shares already reserved under the Stac Stock
Option Plan. Additionally, Stac, after the Distribution Date, will cause to be
reserved any additional shares identified for reservation thereunder to the
extent authorized by the stockholders of Stac.
(b) Stac Director Option Plan. Stac shall continue the Stac
Director Option Plan. All options granted under the Stac Director Option Plan
will continue to be denominated in Stac Common Stock and except as provided in
Section 2.03(d)(iv), subject to the terms and conditions of the Stac Director
Option Plan and any option agreement entered into in connection therewith. Stac
shall continue to reserve those shares already reserved under the Stac Director
Option Plan. Additionally, Stac, after the Distribution, will cause to be
reserved any additional shares identified for reservation thereunder to the
extent authorized by the stockholders.
(c) Hi/fn Equity Plan. Hi/fn shall continue the Hi/fn Equity
Plan. All options granted under the Hi/fn Equity Plan will continue to be
denominated in Hi/fn Common Stock and subject to the terms and conditions of the
Hi/fn Equity Plan and any option agreement entered into in connection therewith.
Hi/fn shall continue to reserve those shares already reserved under the Hi/fn
Equity Plan. Additionally, Hi/fn, after the Distribution, will cause to be
reserved any additional shares identified for reservation thereunder to the
extent authorized by the stockholders.
(d) Effect of the Distribution on Awards Made Prior to the
Distribution Date.
(i) Treatment of Stac Options: Stac Stock Options
and Stac Director Options, whether vested or unvested, held by Stac Employees
shall remain in effect following the Distribution/ provided, however, that the
option exercise price shall be equitably adjusted in accordance with Section
2.03(d)(iii) to reflect the Distribution.
(ii) Treatment of Hi/fn Options: Hi/fn Stock Options
and Hi/fn Director Options, whether vested or unvested, held by Hi/fn Employees
shall remain in effect following the Distribution. The Hi/fn Options will not be
adjusted in connection with the Distribution.
7
<PAGE> 8
(iii) Adjustment of Stac Stock Options: The number of
options and the option exercise price of Stac Stock Options and Stac Director
Options, shall be adjusted to reflect the Distribution. After the Distribution
Date the Option exercise price of each Stac Stock Option and Stac Director
Option shall equal the product of (A) the Stac Stock Post-Distribution Value and
(B) the quotient obtained by dividing the per share exercise price of the Stac
Option by the Stac Stock Value, rounded to the nearest whole cent. After the
Distribution Date the number of shares of Stac Common Stock subject to each Stac
Stock Option and Stac Director Option shall equal the product of (x) the number
of shares Stac Common Stock subject to such Stac Stock Option or Stac Director
Option and (y) the quotient obtained by dividing the Stac Stock Value by the
Stac Stock Post Distribution Value.
(iv) Whiting Options: Subject to the terms of this
Agreement, on the Distribution Date, Hi/fn shall grant to Douglas L. Whiting (so
long as he is a director of both Stac and Hi/fn on such date), a Hi/fn Option,
with respect to the Stac Options held by him as set forth on Exhibit A, in
substantially the form attached hereto as Exhibit B (each, a "Whiting Option").
Each Whiting Option shall provide for the purchase of a number of shares of
Hi/fn Common Stock equal to the quotient of the number of shares of Stac Common
Stock subject to a particular Stac Option held by him divided by the
Distribution Ratio, and then rounded down to the nearest whole share. The per
share exercise price of each Whiting Option shall equal the Hi/fn Stock Value
minus the Adjusted Hi/fn Per Share Spread. The Adjusted Hi/fn Per Share Spread
shall equal the Hi/fn Aggregate Spread divided by the number of shares subject
to the Whiting Option calculated above. The Hi/fn Aggregate Spread equals the
product of the Stac Spread and a fraction the numerator of which is the Hi/fn
Stock Value divided by the Distribution Ratio and the denominator of which is
the Stac Stock Value. The Stac Spread equals the number of shares subject to the
Stac Option listed on Exhibit A multiplied by the difference between the Stac
Stock Value and the Stac Exercise Price. The vesting provisions, term and other
provisions of each Whiting Option shall be the same as those in effect with
respect to the applicable corresponding Stac Option on the Distribution Date.
The per share exercise price of each Stac Option held by Mr. Whiting listed on
Exhibit A shall be adjusted as of the Distribution Date to equal the Stac Stock
Post-Distribution Value minus the Adjusted Stac Per Share Spread. The Adjusted
Stac Per Share Spread shall equal the Stac Aggregate Spread divided by the
number of shares subject to the Stac Option. The Stac Aggregate Spread equals
the product of the Stac Spread (as defined above) and a fraction the numerator
of which is the Stac Stock Post-Distribution Value and the denominator of which
is the Stac Stock Value. The vesting provisions, term and other provisions of
each Whiting Option shall be the same as those in effect with respect to the
applicable corresponding Stac Option on the Distribution Date. The vesting
provisions, term and other provisions of each such Stac Option shall be the same
as those in effect immediately prior to the Close of the Distribution Date.
(v) Limitation on Adjustments: To the extent that
any adjustment or limitation of this Section 2.03(d) is inconsistent with the
intended tax or accounting treatment of the Distribution or any option, it shall
not apply, and Stac and Hi/fn shall mutually agree on an alternative adjustment.
Section 2.04. Medical/Dental Plans.
8
<PAGE> 9
(a) Liability for Claims.
(i) Except as otherwise provided herein, as of the
Distribution Date, Stac shall assume or retain and shall be responsible for, or
cause its insurance carriers or HMOs to be responsible for, all liabilities and
obligations related to claims asserted or incurred or premiums owed with respect
to any Stac Individuals under any Stac Medical/Dental Plan, and Hi/fn shall have
no liability or obligation with respect thereto.
(ii) Except as otherwise provided herein, as of the
Distribution Date, Hi/fn shall assume or retain and shall be responsible for, or
cause its insurance carriers or HMOs to be responsible for, all liabilities and
obligations related to claims asserted or incurred or premiums owed with respect
to all Hi/fn Individuals under the Hi/fn Medical/Dental Plan, and Stac shall
have no liability or obligation with respect thereto.
(b) Continuation Coverage Administration. As of the
Distribution Date, Stac shall assume or retain and shall be solely responsible
for, or cause its insurance carriers or HMOs to be responsible for, providing
and administering the continuation coverage required by COBRA as it relates to
any Stac Qualified Beneficiary, and Hi/fn shall have no liability or obligation
with respect thereto.
(c) Continuation Coverage Claims. As of the Distribution
Date, Hi/fn shall assume or retain and shall be responsible for, or cause its
insurance carriers or HMOs to be responsible for, all liabilities and
obligations in connection with claims asserted or incurred or premiums owed
through the Distribution Date under any Stac Medical/Dental Plan in respect of
any Hi/fn Qualified Beneficiary and claims asserted or incurred or premiums owed
after the Distribution Date under any Stac Medical/Dental Plan in respect of any
Hi/fn Qualified Beneficiary, and Stac shall have no liability or obligation with
respect thereto.
Section 2.05. Vacation and Sick Pay Liabilities. Stac shall retain or
assume all accrued liabilities (whether vested or unvested, and whether funded
or unfunded) for vacation and sick leave in respect of all Stac Employees as of
the Distribution Date. Hi/fn shall retain or assume all accrued liabilities
(whether vested or unvested, and whether funded or unfunded) for vacation and
sick leave in respect of all Hi/fn Employees as of the Distribution Date. Hi/fn
shall be solely responsible for the payment to Hi/fn Employees of vacation or
sick leave accrued after the Distribution Date, and Stac shall be solely
responsible for the payment to Stac Employees of vacation or sick leave accrued
after the Distribution Date.
Section 2.06. Preservation of Right to Amend or Terminate Plans. Except
as otherwise expressly provided in this Article II, no provisions of this
Agreement, including, without limitation, the agreement of Stac or Hi/fn to make
a contribution or payment to or under any Plan herein referred to for any
period, shall be construed as a limitation on the right of Stac or Hi/fn to
amend such Plan or terminate its participation therein which Stac or Hi/fn would
otherwise have under the terms of such Plan or otherwise, and no provision of
this Agreement shall be construed to create a right in any employee or former
employee, or dependent or beneficiary of such employee or former employee under
a Plan which such person would not otherwise have under the terms of the Plan
itself; provided, however, that neither Party shall amend any Plan to the
9
<PAGE> 10
extent that such amendment would have the effect of increasing the liabilities
of the other Party under any Plan of the other Party, without such other Party's
consent.
Section 2.07. Payroll Reporting and Withholding.
(a) Form W-2 Reporting. Hi/fn and Stac may adopt the
"alternative procedure" for preparing and filing IRS Forms W-2 (Wage and Tax
Statements), as described in Section 5 of Revenue Procedure 84-77, 1984-2 IRS
Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this procedure Hi/fn as the
successor employer shall provide all required Forms W-2 to all Hi/fn Employees
and Stac Employees who join Hi/fn on or after the Distribution Date reflecting
all wages paid and taxes withheld by both Stac as the predecessor and Hi/fn as
the successor employer for the entire year during which the Distribution takes
place. Stac shall provide all required Forms W-2 to all other Stac Employees
reflecting all wages and taxes paid and withheld by Stac before and after the
Distribution Date. Stac and Hi/fn shall be responsible for filing IRS Forms 941
for their respective Employees.
(b) Forms W-4 and W-5. Hi/fn and Stac may adopt the
alternative procedure of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4
(Employee's Withholding Allowance Certificate) and W-5 (Earned Income Credit
Advance Payment Certificate). Under this procedure Stac shall provide to Hi/fn
as the successor employer all IRS Forms W-4 and W-5 on file with respect to each
Hi/fn Employee, and Hi/fn will honor these forms until such time, if any, that
such Hi/fn Employee submits a revised form.
(c) Garnishments, Tax Levies, Child Support Orders, and Wage
Assignments. With respect to Employees with garnishments, tax levies, child
support orders, and wage assignments in effect with Stac on the Distribution
Date, Hi/fn as the successor employer with respect to each Hi/fn Employee shall
honor such payroll deduction authorizations and will continue to make payroll
deductions and payments to the authorized payee, as specified by the court or
governmental order which was filed with Stac.
(d) Authorizations for Payroll Deductions. Unless otherwise
prohibited by this or another agreement entered into in connection with the
Distribution, or by a Plan document, with respect to all Stac Employees to be
transferred to Hi/fn on the Distribution Date who have authorizations for
payroll deductions in effect with Stac on the Distribution Date, Hi/fn as the
successor employer will honor such payroll deduction authorizations relating to
each Hi/fn Employee, and shall not require that such Hi/fn Employee submit a new
authorization to the extent that the type of deduction by Hi/fn does not differ
in amount or form from that made by Stac. Such deduction types include, without
limitation, contributions to any Plan; scheduled loan repayments to the relevant
Profit Sharing Plan or to an employee credit union; and direct deposit of
payroll, bonus advances, union dues, employee relocation loans, and other types
of authorized company receivables usually collectible through payroll
deductions.
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ARTICLE III.
EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between Hi/fn and Stac to the contrary, Hi/fn and Stac understand and
agree that:
Section 3.01. Separate Employers. On and after the Distribution Date and
the separation of Employees into their respective companies, Hi/fn and Stac will
be separate and independent employers.
Section 3.02. Employment Policies and Practices. Subject to the
provisions of ERISA and except as limited by applicable law or agreement, Hi/fn
and Stac may adopt, continue, modify or terminate such employment policies,
compensation practices, retirement plans, welfare benefit plans, and other
employee benefit plans of any kind or description, as each may determine, in its
sole discretion, are necessary or appropriate.
Section 3.03. Special Matters.
(a) Reimbursement. Stac and Hi/fn acknowledge that Stac, on
the one hand, and Hi/fn, on the other hand, may incur costs and expenses,
including, but not limited to, contributions to Plans, administrative costs
associated with the plan-to-plan transfer under Section 2.02(c) and the payment
of insurance premiums arising from or related to any of the Plans which are, as
set forth in this Agreement, the responsibility of the other Party hereto.
Accordingly, Stac and Hi/fn shall reimburse each other, as soon as practicable,
but in any event within thirty (30) days of receipt from the other Party of
appropriate verification, for all such costs and expenses.
(b) Payments to Stac. To the extent that Stac makes any
payment for, or takes responsibility for future payment of, any liability or
obligation which exists as of the Distribution Date and is assumed by Hi/fn
pursuant to this Agreement (any such payment, a "Liability Payment"), not later
than thirty (30) days after receipt of an invoice from Stac of such Liability
Payment, Hi/fn shall make a payment to Stac equal to the amount of such
Liability Payment.
Section 3.04. Notice of Claims. Without limitation to the scope and
application to each Party in the performance of its duties under Sections 3.03,
each Party will notify in writing and consult with the other Party prior to
making any settlement of an employee claim in such settlement reasonably could
result in any prejudice to such other Party arising from the settlement.
Section 3.05. Assumption of Unemployment Tax Rates. Changes in state
unemployment tax experience from that of Stac as of the Distribution Date shall
be handled as follows. In the event an option exists to allocate to Hi/fn state
unemployment tax experience of Stac, the Stac experience shall be transferred to
Hi/fn if this results in the lowest aggregate unemployment tax costs for both
Stac and Hi/fn combined, and the Stac experience shall be retained by Stac if
this results in the lowest aggregate unemployment tax costs for Stac and Hi/fn
combined.
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Section 3.06. Employees on Leave of Absence. After the Distribution
Date, Hi/fn shall assume responsibility, if any, as employer for all Hi/fn
Employees returning from an approved leave of absence. After the Distribution
Date, Stac shall assume responsibility, if any, as employer for all Stac
Employees returning from an approved leave of absence.
Section 3.07. No Third Party Beneficiary Rights.
(a) Neither this Agreement nor any other intercompany
agreement between Hi/fn and Stac is intended to nor does it create any third
party contractual or other common law rights. No person shall be deemed a
third-party beneficiary of the agreements between Hi/fn and Stac.
(b) Nothing contained in this Agreement shall confer upon
any Employee any right with respect to continuance of employment by either
Party, nor shall anything herein interfere with the right of either party to
terminate the employment of any Employee at any time, with or without cause, or
restrict a Party in the exercise of its independent business judgment in
modifying any of the terms and conditions of the employment of an Employee,
except as provided by applicable law.
(c) No provision of this Agreement shall create any third
party beneficiary rights in any Employee or any beneficiary or dependent thereof
with respect to the compensation, terms and conditions of employment and
benefits that may be provided to any Employee by either Party or under any
benefit plan which a Party may maintain.
Section 3.08. Attorney/Client Privilege. The provisions herein requiring
either Party to this Agreement to cooperate shall not be deemed to be a waiver
of the attorney/client privilege for either Party nor shall it require either
Party to waive its attorney/client privilege.
ARTICLE IV.
DEFAULT
Section 4.01. Default. If either Party materially defaults hereunder,
the non-defaulting Party shall be entitled to all remedies provided by law or
equity (including reasonable attorneys' fees and costs of suit incurred).
Section 4.02. Force Majeure. Hi/fn and Stac shall incur no liability to
each other due to a default under the terms and conditions of this Agreement
resulting from fire, flood, war, strike, lock-out, work stoppage or slow-down,
labor disturbances, power failure, major equipment breakdowns, construction
delays, accident, riots, acts of God, acts of United States' enemies, laws,
orders or at the insistence or result of any governmental authority or any other
delay beyond each other's reasonable control.
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ARTICLE V.
MISCELLANEOUS
Section 5.01. Relationship of Parties. Nothing in this Agreement shall
be deemed or construed by the Parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
Parties, it being understood and agreed that no provision contained herein, and
no act of the Parties, shall be deemed to create any relationship between the
Parties other than the relationship set forth herein.
Section 5.02. Access to Information, Cooperation. Stac and Hi/fn and
their authorized agents shall be given reasonable access to and may take copies
of all information relating to the subjects of this Agreement (to the extent
permitted by federal and state confidentiality laws) in the custody of the other
Party, including any agent, contractor, subcontractor, agent or any other person
or entity under the contract of such Party. The Parties shall provide one
another with such information within the scope of this Agreement as is
reasonably necessary to administer each Party's Plans. The Parties shall
cooperate with each other to minimize the disruption caused by any such access
and providing of information.
Section 5.03. Assignment. Neither Party shall, without the prior written
consent of the other, have the right to assign any rights or delegate any
obligations under this Agreement.
Section 5.04. Headings. The headings used in this Agreement are inserted
only for the purpose of convenience and reference, and in no way define or limit
the scope or intent of any provision or part hereof.
Section 5.05. Severability of Provisions. Neither Stac nor Hi/fn intend
to violate statutory or common law by executing this Agreement. If any section,
sentence, paragraph, clause or combination of provisions in this Agreement is in
violation of any law, such sections, sentences, paragraphs, clauses or
combinations shall be inoperative and the remainder of this Agreement shall
remain in full force and effect and shall be binding upon the Parties.
Section 5.06. Parties Bound. This Agreement shall inure to the benefit
of and be binding upon the Parties hereto and their respective successors and
permitted assigns. Nothing herein, expressed or implied, shall be construed to
give any other person any legal or equitable rights hereunder.
Section 5.07. Notices. All notices, consents, approvals and other
communications given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given when delivered personally or by overnight courier
or three days after being mailed by registered or certified mail (postage
prepaid, return receipt requested) to the named representatives of the Parties
at the following addresses for at such other address for a Party as shall be
specified by like notice, except that notices of changes of address shall be
effective upon receipt):
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(a) To Stac:
Stac, Inc.
12636 High Bluff Drive, 4th Floor
San Diego, CA 92130
Attention: Cliff Flowers
(b) To Hi/fn:
Hi/fn, Inc.
750 University Avenue
Los Gatos, CA 95302
Attention: William Walker
Hi/fn and Stac agree that, upon the request of either Party, the requested Party
will give copies of all of its notices, consents, approvals and other
communications hereunder to any lender to the requesting Party or other person
specified by such requesting Party.
Section 5.08. Further Action. Hi/fn and Stac each shall cooperate in
good faith and take such steps and execute such papers as may be reasonably
requested by the other Party to implement the terms and provisions of this
Agreement.
Section 5.09. Waiver. Hi/fn and Stac each agree that the waiver of any
default under any term or condition of this Agreement shall not constitute a
waiver of any subsequent default or nullify the effectiveness of that term or
condition.
Section 5.10. Governing Law. Unless otherwise preempted by Federal law,
all controversies and disputes arising out of or under this Agreement shall be
determined pursuant to the laws of the State of California, regardless of the
laws that might be applied under applicable principles of conflicts of laws.
Section 5.11. Entire Agreement. This Agreement and the Distribution
Agreement constitute the entire understanding between the Parties hereto, and
supersede all prior written or oral communications, relating to the subject
matter covered by said agreements. To the extent that the terms of this
Agreement and similar terms of the Distribution Agreement are in conflict, the
interpretation given to the conflicting terms of the Distribution Agreement
shall govern the interpretation and performance of this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement by
either Party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by the Parties.
Section 5.12. Dispute Resolution. Any dispute arising under this
Agreement shall be resolved by binding arbitration in the manner contemplated by
Section 8.13 of the Distribution Agreement, including the attorneys fees
provisions referred to therein.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
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STAC, INC., a Delaware corporation
By: /s/ JOHN R. WITZEL
------------------------------------
Name: John R. Witzel
----------------------------------
Title: VP of Finance
---------------------------------
HI/FN, INC., a Delaware corporation
By: /s/ WILLIAM R. WALKER
------------------------------------
Name: William R. Walker
-----------------------------------
Title: Secretary
----------------------------------
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EXHIBIT 10.2
TAX ALLOCATION AND INDEMNITY AGREEMENT
TAX ALLOCATION AND INDEMNITY AGREEMENT, dated as of December 11,
1998, among Stac, Inc., a Delaware corporation (the "Company"), and hi/fn, inc.,
a Delaware corporation ("Hi/fn").
WHEREAS, the Company, Hi/fn and the Company's other subsidiaries
have joined in filing consolidated federal income tax returns and certain
consolidated, combined or unitary state income tax returns;
WHEREAS, pursuant to a Distribution Agreement dated as of
December 11, 1998 among the Company and Hi/fn (the "Distribution
Agreement"), the Company will distribute to the holders of its common stock the
shares of common stock of Hi/fn held by the Company in a transaction intended to
qualify for tax-free treatment under Code Section 355 (the "Spin-off");
WHEREAS, pursuant to the Spin-off, Hi/fn will leave the Stac
Pre-Spin-off Group (as defined herein); and
WHEREAS, the parties hereto wish to provide for (i) the
allocation of, and indemnification against, certain liabilities for Taxes, (ii)
the preparation and filing of Tax Returns on a basis consistent with prior
practice and the payment of Taxes with respect thereto, and (iii) certain
related matters;
NOW THEREFORE, in consideration of their mutual promises, the
parties hereby agree as follows:
1. DEFINITIONS.
When used herein the following terms shall have the following
meanings:
"Affiliate" -- with respect to any corporation (the "given
corporation"), each person, corporation, partnership or other entity that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the given corporation. For
purposes of this definition, "control" means the possession, directly or
indirectly, of 50% or more of the voting power or value of outstanding voting
interests.
"Affiliated Group" -- an affiliated group of corporations within
the meaning of Code Section 1504(a) for the Taxable Period or, for purposes of
any state income tax matters, any consolidated, combined or unitary group of
corporations within the meaning of the corresponding provisions of tax law for
the state in question.
"After-Tax Basis" -- with respect to any liability indemnified
hereunder, the actual amount of any payment to be made with respect to such
liability, after giving effect to any tax cost incurred by the recipient arising
out of the receipt of such payment (unless such receipt is treated as other than
the receipt of taxable income), and reducing such payment by the value of, any
and all Federal, state or other Tax Benefits attributable to the full payment of
the indemnified liability, which value shall be determined on an assumed basis
by multiplying the amount of any applicable
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deduction, credit, offset or other tax item by the applicable highest marginal
rate of taxation in effect for the period for which the adjustment is made.
"Closing Date" -- the date on which the Spin-off is effected by
the Company.
"Code" -- the Internal Revenue Code of 1986, as amended, or any
successor thereto, as in effect for the Taxable Year in question.
"Combined Jurisdiction" -- for any Taxable Period, any state,
local or foreign jurisdiction in which the Company or a Company Affiliate is
included in a consolidated, combined, unitary or similar return with the Company
or any Company Affiliate for state, local or foreign Income Tax purposes.
"Company"-- as defined in the preamble to this Agreement.
"Effective Time" -- the time at which the Spin-off becomes
effective.
"Final Determination" -- (i) a decision, judgment, decree, or
other order by a court of competent jurisdiction, which has become final and
unappealable; (ii) a closing agreement or accepted offer in compromise under
Code Sections 7121 or 7122, or comparable agreements under the laws of other
jurisdictions; or (iii) any other final settlement with the IRS or other Taxing
Authority, or (iv) the expiration of an applicable statute of limitations.
"Hi/fn" -- as defined in the preamble to this Agreement.
"Hi/fn Group" -- Hi/fn and each corporation that would be a
member of an Affiliated Group with respect to which Hi/fn is the common parent
on the day after the Closing Date.
"Hi/fn Member" -- a corporation that would be a member of the
Hi/fn Group.
"Income Tax(es)" -- with respect to any corporation or group of
corporations, any and all Taxes based upon or measured by net income (regardless
of whether denominated as an "income tax," a "franchise tax" or otherwise),
imposed by any Taxing Authority, together with any related interest, penalties
or other additions thereto.
"Information Return(s)" -- any and all returns, reports,
estimates, information statements, declarations or other filings (other than Tax
Returns) required to be filed or supplied to any Tax Authority by any
corporation with respect to the Tax Liabilities of any other person or entity.
"IRS" -- the U.S. Internal Revenue Service.
"IRS Ruling" -- The letter ruling issued by the IRS in response
to the Ruling Request.
"Neutral Auditors" -- means a firm of nationally recognized
independent accountants who shall not have had a material relationship with the
Company or its Affiliates, or
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Hi/fn or its Affiliates, within the two (2) years preceding the date of the
notice of a dispute given pursuant to Section 7(p).
"Other Tax(es)" -- with respect to any corporation or Affiliated
Group, any and all Taxes, other than Income Taxes, together with any related
interest, penalties or other additions thereto.
"Overdue Rate" -- a rate of interest per annum that fluctuates
with the Federal short-term rate established from time to time pursuant to Code
Section 6621.
"Post-Closing Straddle Period" -- with respect to any Straddle
Period, the period beginning on the day after the Closing Date and ending on the
last day of such Taxable Year.
"Post-Closing Taxable Period" -- a Taxable Year that ends after
the Closing Date.
"Pre-Closing Straddle Period" -- with respect to any Straddle
Period, the period beginning on the first day of such Taxable Year and ending on
the close of business on the Closing Date.
"Pre-Closing Taxable Period" -- a Taxable Year that ends on or
before the Closing Date.
"Representative" -- with respect to any person or entity, any of
such person's or entity's directors, officers, employees, agents, consultants,
accountants, attorneys and other advisors.
"Ruling Request" -- the private letter ruling request filed by
the Company with the IRS, as supplemented and amended from time to time, with
respect to certain federal Income Tax matters relating to the Spin-off and other
related matters.
"Separate Jurisdiction" -- for any Taxable Period, any state,
local or foreign jurisdiction that is not a Combined Jurisdiction.
"Spin-off" -- as defined in the Preamble.
"Stac Pre-Spin-Off Group" -- the Company and each corporation
that joined with the Company in filing a consolidated federal income tax return
for any Pre-Closing Taxable Period. For purposes of this Agreement, the Stac
Pre-Spin-Off Group shall terminate at the close of the Closing Date. To the
extent applicable to any state income tax matters, the "Stac Pre-Spin-Off Group"
shall include all corporations joining in the filing of a consolidated, combined
or unitary income tax return for the state in question.
"Stac Pre-Spin-off Member" -- a corporation that was a member of
the Stac Pre-Spin-Off Group at the close of the Closing Date.
"Stac Post-Spin-off Group" -- the Company and each corporation
that joins with the Company in filing a consolidated federal income tax return
for any Post-Closing Taxable
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Period. For purposes of this Agreement, the Stac Post-Spin-off Group shall exist
from and after the day after the Closing Date. To the extent applicable to any
state income tax matters, the "Stac Post-Spin-off Group" shall include all
corporations joining in the filing of a consolidated, unitary or combined income
tax return for the state in question.
"Stac Post-Spin-off Member" -- a corporation that was a Stac
Pre-Spin-off Member and, for purposes of this Agreement, is a member of the Stac
Post-Spin-off Group on the day after the Closing Date.
"Straddle Period" -- any Taxable Year beginning before and ending
after the close of business on the Closing Date.
"Tax(es)" -- any net income, gross income, gross receipts, sales,
use, excise, franchise, transfer, payroll, premium, property or windfall profits
tax, alternative or add-on minimum tax, or other tax, fee or assessment,
together with any interest and any penalty, addition to tax or additional amount
imposed by any Taxing Authority, whether any such tax is imposed directly or
through withholding.
"Taxable Period" -- a Pre-Closing Taxable Period, a Post-Closing
Taxable Period, or a Straddle Period.
"Taxable Year" -- a taxable year (which may be shorter than a
full calendar or fiscal year), year of assessment or similar period with respect
to which any Tax may be imposed.
"Tax Benefit(s)" -- (i) in the case of an Income Tax for which a
consolidated Federal, or a consolidated, combined or unitary state or other, Tax
Return is filed, the amount by which the Tax liability of the Affiliated Group
or other relevant group of corporations is actually reduced on a "with and
without" basis (by deduction, entitlement to refund, credit, offset or
otherwise, whether available in the current Taxable Year, as an adjustment to
taxable income in any other Taxable Year or as a carryforward or carryback, and
including the effect on other Income or Other Taxes of such reduction), plus any
interest received with respect to any related Tax refund, and (ii) in the case
of any other Tax, the amount by which the Tax liability of a corporation is
actually reduced on a "with and without" basis (by deduction, entitlement to
refund, credit, offset or otherwise, whether available in the current taxable
year, as an adjustment to taxable income in any other Taxable Year or as a
carryforward or carryback, and including the effect on other Income or Other
Taxes of such reduction), plus any interest received with respect to any related
Tax refund.
"Taxing Authority" -- the IRS and any other domestic or foreign
governmental authority responsible for the administration of any Tax.
"Tax Practices" -- the most recently applied policies, procedures
and practices employed by the Stac Pre-Spin-Off Group in the preparation and
filing of, and positions taken on, any Tax Returns of the Company or any Company
Affiliate for any Pre-Closing Taxable Period.
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"Tax Return(s)" -- all returns, reports, estimates, information
statements, declarations and other filings relating to, or required to be filed
by any taxpayer in connection with, its liability for, or its payment or receipt
of any refund of, any Tax.
"Tax Treatment" -- as defined in Section 3(c) hereto.
2. OBLIGATIONS, RESPONSIBILITIES AND RIGHTS OF THE COMPANY
AND HI/FN.
(a) Preparation and Filing of Tax Returns.
(i) By the Company. The Company shall prepare
and timely file (or cause to be prepared and timely filed):
(A) on behalf of the Stac Pre-Spin-Off
Group and all Stac Pre-Spin-off Members, all Income Tax Returns for all
Pre-Closing Taxable Periods;
(B) on behalf of all Stac Post-Spin-off
Members on a separate or group basis, all Other Tax and Information Returns for
all Pre-Closing Taxable Periods; and
(C) on behalf of the Stac Post-Spin-off
Group and all Stac Post-Spin-off Members, all Tax and Information Returns for
all Straddle Periods and Post-Closing Taxable Periods (including in any such
Returns filed on a consolidated, combined or unitary basis, to the extent
required by law, that include the operations of Hi/fn of any Hi/fn Member for
any Pre-Closing Taxable Periods or Straddle Periods (or any portion of a
Straddle Period) with respect to such corporations).
(ii) By Hi/fn. Except to the extent specifically
provided in Section 2(a)(i), Hi/fn shall prepare and timely file (or cause to be
prepared and timely filed) on behalf of the Hi/fn Group, all Hi/fn Members, and
any group of less than all Hi/fn Members, all Tax and Information Returns for
all Taxable Periods required to be filed after the Closing Date.
(b) Provision of Filing Information. Hi/fn (or the
Company, as the case may be) shall cooperate and assist the Company (or Hi/fn)
in the preparation and filing of all Tax Returns subject to Section 2(a) and
submit to the Company (or Hi/fn) (x) all necessary filing information in a
manner consistent with past Tax Practices and (y) all other information
reasonably requested by the Company (or Hi/fn) in connection with the
preparation of such Tax Returns promptly after such request. It is expressly
understood and agreed that the Company's (or Hi/fn's) ability to discharge its
Tax Return preparation and filing responsibilities is contingent upon Hi/fn (or
the Company) providing the Company (or Hi/fn) with all cooperation, assistance
and information reasonably necessary or requested for the filing of such Income
Tax Returns and that Hi/fn (or the Company) shall indemnify the Company (or
Hi/fn) against any and all liability for Tax Increases (as defined below), and
the Company's (or Hi/fn's) indemnification obligations of Section 3 shall not
apply, if, and to the extent that, Taxes are increased as a result of material
inaccuracies in such information or of failures to provide such information and
assistance (with the amount of such resulting increase in Taxes referred to as
the "Tax Increase").
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(c) Taxable Year. Hi/fn and the Company agree that, to
the extent permitted by applicable law, (i) the Taxable Year of the Hi/fn
Members included in the consolidated Federal Income Tax Return of the Stac
Pre-Spin-Off Group for the Stac Pre-Spin-Off Group Taxable Year that includes
the Closing Date (and all corresponding consolidated, combined or unitary state,
local or other Income Tax Returns of the Stac Pre-Spin-Off Group) shall end at
the close of the Closing Date, and (ii) the Hi/fn Group and each Hi/fn Member
shall begin a new Taxable Year for purposes of such Federal, state, local or
other Income Taxes on the day after the Closing Date. The parties further agree
that, to the extent permitted by applicable law, all Federal, state, local or
other Tax and Information Returns shall be filed consistently with this
position.
(d) Advance Review of Tax Returns. At least thirty
(30) days prior to the filing of any Federal Income Tax Return (including
amendments thereto) that includes a Hi/fn Member, and at least fifteen (15) days
prior to the filing of any Tax Return other than any Federal Income Tax Return
(including amendments thereto) that includes a Hi/fn Member, the Company shall
provide Hi/fn with the portion of such Tax Return related to the Hi/fn Member.
In the case of each Tax Return subject to the conformity requirements of Section
2(e) and filed pursuant to Section 2(a)(ii), Hi/fn shall provide the Company
with copies of any such Tax Return at least thirty (30) days prior to the filing
thereof (including amendments thereto). Hi/fn and its Representatives (or the
Company and its Representatives, as the case may be) shall have the right to
review all related work papers prior to the filing of any such Tax Return. The
Company (or Hi/fn, as the case may be) shall consult with Hi/fn (or the Company)
regarding its comments with respect to such Tax Returns and shall in good faith
(A) consult with Hi/fn (or the Company) in an effort to resolve any differences
with respect to the preparation and accuracy of such Tax Returns and their
consistency with past Tax Practices and (B) consider Hi/fn's (or the Company's)
recommendations for alternative positions with respect to items reflected on
such Tax Returns; provided, however, that the Company (or Hi/fn) shall not be
required to consider any such recommendation if the result thereof would
adversely affect the Taxes of the Stac Post-Spin-off Group or any Stac
Post-Spin-off Member (or the Hi/fn Group or any Hi/fn Member) for any
Post-Closing Taxable Period and may condition the acceptance of any such
recommendation upon the receipt of appropriate indemnification from Hi/fn (the
Company) for any increases in Taxes that may result from the adoption of the
relevant alternative position.
(e) Consistent Positions on Tax Returns. The Company
(or Hi/fn, as the case may be) shall prepare all Tax Returns filed pursuant to
Section 2(a) for all Taxable Years ended on or before December 31, 1998 in a
manner consistent with past Tax Practices except as otherwise required by
changes in applicable law or material underlying facts.
(f) Allocation of Straddle Period Taxes. If required
to effect the purposes of this Agreement, Taxes shall be allocated between the
Pre- and Post-Closing Straddle Periods, by the Company in a reasonable manner,
subject to the following rules:
(i) To the extent not impractical, on the basis
of the actual operations and taxable income for each such period, determined by
closing the books of the entity at the close of business on the Closing Date; or
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(ii) To the extent that an allocation based on a
closing of the books is impractical, the Company may use any reasonable method
or methods, including allocations based on (x) allocations of taxable income,
loss, gain, deduction and credits made for the entity for Federal Income Tax
purposes, (y) rounding to the next nearest accounting period-end, and (z) the
actual number of days in the Pre- and Post-Closing Straddle Periods in
proportion to the number of days in the entire Straddle Period.
(g) Payment of Taxes. The Company shall pay (i) all Taxes
shown to be due and payable on all Tax Returns filed by the Company pursuant to
Section 2(a)(i) hereof (other than any Income Taxes of Hi/fn Members for
Separate Jurisdictions for all Pre-Closing Taxable Periods), and (ii) subject to
Section 3(b) and 3(c), all additions to Taxes payable by the Company under
clause (i) of this Section 2(g) that result from a Final Determination. Hi/fn
shall pay (w) all Taxes shown to be due and payable on all Tax Returns filed by
Hi/fn pursuant to Section 2(a)(ii) hereof, (x) all Income Taxes of Hi/fn Members
for Separate Jurisdictions for all Pre-Closing Taxable Periods, (y) all
additions to Taxes payable under clauses (w) or (x) of this Section 2(g) that
result from a Final Determination, and (z) to the extent provided in Section
3(c), all additional Taxes of the Company, the Stac Pre-Spin-Off Group, any Stac
Pre-Spin-off Member, the Stac Post-Spin-off Group or any Stac Post-Spin-off
Member.
(h) Amendments to Tax Returns. The Company (or Hi/fn,
as the case may be) shall be entitled to amend Tax Returns filed by the Company
(or Hi/fn) pursuant to Section 2(a); provided, however, that Hi/fn (or the
Company, solely with respect to Income Taxes of Hi/fn Members for Separate
Jurisdictions) shall not amend for any reason whatsoever any Tax Return of the
Company or any Stac Post-Spin-off Member (or Hi/fn, the Hi/fn Group or any Hi/fn
Member) for any Pre-Closing Taxable Period or any Post-Closing Taxable Period
ended on or before December 31, 1998, except (A) pursuant to the settlement or
other resolution of a contest subject to Section 6 or (B) with the Company's (or
Hi/fn's) written consent (which consent shall not be unreasonably withheld or
delayed); provided, however, that such prohibition shall not extend to the
correction of mathematical or material factual errors or other adjustments
necessary to conform such Tax Returns to applicable law or past Tax Practices.
(i) Refunds of Taxes. The Company shall be entitled to any
refund of any and all Taxes for which the Company shall have the payment
obligation under the first sentence of Section 2(g). Hi/fn shall be entitled to
any refund of any and all Taxes for which Hi/fn shall have the payment
obligation under the second sentence of Section 2(g). Except as otherwise
provided in this Agreement, if the Company or any Stac Post-Spin-off Member (or
Hi/fn or any Hi/fn Member, as the case may be) receives a Tax refund to which
Hi/fn or any Hi/fn Member (or the Company or any Stac Post-Spin-off Member) is
entitled pursuant to this Agreement, the Company (or Hi/fn) shall pay (in
accordance with Section 4) the amount of such refund (including any interest
received thereon) to Hi/fn (or the Company) promptly after receipt thereof.
(j) Carrybacks. Hi/fn shall notify the Company promptly of
the existence of any items of deduction, loss or credit arising in a
Post-Closing Taxable Year that are required to be carried back to a Taxable
Period of the Stac Pre-Spin-Off Group or any Stac Pre-Spin-off Member (other
than to a separate Tax Return of a member of the Hi/fn Group). Hi/fn hereby
expressly agrees (on its behalf and on behalf of all Hi/fn Members and
successors thereto) that the Company or any member of the Stac Post-Spin-off
Group may retain any cash refund or
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<PAGE> 8
reduction of a Tax liability or any other Tax Benefit obtained by the Company or
any member of the Stac Post-Spin-off Group (other than a member of the Hi/fn
Group) as a result of any carryback without compensation to Hi/fn or any Hi/fn
Member. Notwithstanding Section 2(e), Hi/fn and the Company agree that Hi/fn
should elect to carry forward all such items that affect the Company or any
member of the Stac Post-Spin-off Group to the extent permitted under applicable
law.
(k) NOL, ITC and AMT Credit Benefits. If any Hi/fn
Members have attributable to them, under applicable Federal and state Income Tax
law, any net operating loss carryforwards, investment tax credit carryforwards
and alternative minimum tax credit carryforwards (the "Carryforwards"), the
parties hereto agree that the Hi/fn Group and the Hi/fn Members shall be
exclusively entitled to use and benefit from the Carryforwards without
compensation to the Stac Pre-Spin-Off Group, any Stac Pre-Spin-off Member, the
Stac Post-Spin-off Group or any Stac Post-Spin-off Group Member. Hi/fn further
agrees that it shall have no recourse against the Stac Pre-Spin-Off Group, any
Stac Pre-Spin-off Member, the Stac Post-Spin-off Group or any Stac Post-Spin-off
Member regardless of (a) what amount of such Carryforwards are or will be
available to the Hi/fn Group and the Hi/fn Members in Post-Closing Taxable Years
and (b) whether the Carryforwards shall be subject to any limitation imposed as
a result of the application of Code Sections 382 and 383, the Treasury
regulations thereunder or other applicable law. The Company hereby agrees to
take any action or make any election reasonably required to permit Hi/fn and the
Hi/fn Members to utilize the Carryforwards; provided, however, that no such
action or election shall be required if it would adversely affect in any way the
Income Tax liabilities of the Stac Post-Spin-off Group or any Stac Post-Spin-off
Member for any Taxable Year. The parties also hereby agree that the provisions
of this Section 2(k) shall apply with respect to any similar carryforwards
available under applicable state, local or foreign Income Tax law.
(l) Information and Other Tax Returns. Any party
required to file any Information or other Tax Return pursuant to this Section 2
shall pay any related fees or charges (including any such fees or charges that
shall thereafter become due and payable with respect to such Information or
other Tax Return) and shall indemnify and hold the other party harmless against
any related interest and penalties, as well as any such fees or charges which
are assessed against such party as the result of a failure by the party
responsible for such failure to file any Information Return in a timely and
accurate manner.
3. INDEMNIFICATION.
(a) By the Company.
(i) Taxes. Subject to Sections 2(b), 3(b) and
3(c), the Company shall indemnify and hold Hi/fn and the Hi/fn Members harmless
(on an After-Tax Basis) against any and all Taxes for which the Company has the
payment obligation under the first sentence of Section 2(g).
(ii) Member Liability. Subject to Sections 2(b),
3(b) and 3(c), the Company shall indemnify and hold Hi/fn and the Hi/fn Members
harmless (on an After-Tax Basis) against each and every liability for Taxes of
the Stac Pre-Spin-Off Group under Treas. Reg.
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<PAGE> 9
Section 1.1502-6 or any similar law, rule or regulation administered by any
Taxing Authority, together with any related interest, penalties and other
additions.
(b) By Hi/fn.
(i) Taxes. Hi/fn shall indemnify and hold the
Stac Post-Spin-off Group and the Stac Post-Spin-off Members harmless (on an
After-Tax Basis) against the Taxes for which Hi/fn has the payment obligation
under the second sentence of Section 2(g).
(ii) Post-Closing Transactions. Notwithstanding
any contrary provision in this Agreement or in the Distribution Agreement, Hi/fn
shall indemnify and hold the Stac Post-Spin-off Group and the Stac Post-Spin-off
Members harmless (on an After-Tax Basis) against any Taxes imposed on or against
the Stac Pre-Spin-Off Group or the Stac Post-Spin-off Group (including any Stac
Pre-Spin-off Member or Stac Post-Spin-off Member) that are attributable to, or
arise from, transactions or events which take place outside the ordinary course
of business of Hi/fn and the Hi/fn Members and which occur after the Spin-off
becomes effective and prior to the close of the Closing Date.
(c) Assumed Tax Treatments.
(i) The parties expressly agree for all
purposes to treat the Spin-off as a tax-free distribution under Code Section 355
in accordance with (x) the IRS Ruling and Ruling Request or (y) an opinion of
independent accountants as described in the Registration Statement on Form 10
filed by Hi/fn, Inc. (the "Tax Treatment"). Each party hereto also expressly
agrees not to take (and to cause each of its Affiliates not to take) any action
(except where such action is required by law) that is inconsistent with the
treatment of the Spin-off and all related transactions in accordance with the
Tax Treatment and to take (and to cause each of its Affiliates to take) any and
all actions reasonably available to such party (or Affiliate) to support and
defend the Tax Treatment.
(ii) Notwithstanding anything to the contrary in
Sections 2(g), 3(a) or 3(b):
a. If there is a Final Determination
that results in the disallowance, in whole or in part, of the Tax
Treatment, and there has been no material breach of Section
3(c)(i) and no Stac Post-Spin-off Member or Hi/fn Member has
taken actions after the Spin-off which result in such
disallowance, then any liability of the Company for Taxes as a
result of such disallowance shall be borne solely by the Company.
b. Subject to the following sentence,
if there is a Final Determination that results in the
disallowance, in whole or in part, of the Tax Treatment, and one
or more Stac Post Spin-off Members and one or more Hi/fn Members
have materially breached Section 3(c)(i) or taken actions after
the Spin-off which result in such disallowance, then any
liability of the Company for
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<PAGE> 10
Taxes as a result of such disallowance shall be divided equally
between the Company and Hi/fn. Notwithstanding the foregoing, if
(A) there is a Final Determination that results in the
disallowance, in whole or in part, of the Tax Treatment, (B)
such disallowance is caused, in whole or in part, by the
application of Section 355(e) (or any successor statute) (in
which case the Spin-off shall constitute a "Disqualifying
Distribution"), and (C) prior to the Final Determination, each
of one or more Stac Post Spin-off Members, on the one hand, and
one or more Hi/fn Members, on the other hand, have taken actions
after the Spin-off which result in the Distribution constituting
a Disqualifying Distribution, then any liability of the Company
for Taxes as a result of the application of Section 355(e) shall
be borne solely by either (X) Hi/fn, in the event the first
actions after the Spin-off which caused the Spin-off to
constitute a Disqualifying Distribution were taken or caused
by one or more Hi/fn Members, or (Y) the Company, in the
event the first Disqualifying Distribution after the Spin-off
was taken or caused by one or more Stac Post Spin-off Members.
c. If there is a Final Determination
that results in the disallowance, in whole or in part, of the Tax
Treatment, and any Hi/fn Member (and no Stac Post-Spin-off
Member) has materially breached Section 3(c)(i) or has taken any
action after the Spin-off which results in such disallowance,
then Hi/fn shall indemnify and hold each Stac Post-Spin-off
Member harmless for any Taxes which would not have occurred but
for such disallowance.
d. If there is a Final Determination
that results in the disallowance, in whole or in part, of the Tax
Treatment, and any Stac Post-Spin-off Member (and no Hi/fn
Member) has materially breached Section 3(c)(i) or has taken any
action after the Spin-off which results in such disallowance,
then the Company shall indemnify and hold each Hi/fn Member
harmless for any Taxes which would not have occurred but for such
disallowance.
Any such claim for indemnification shall otherwise be handled in
the manner specified under this Section 3, but shall not affect in any manner
the provisions of Sections 5 and 6 with respect to cooperation and control of
contests and audits.
(d) Indemnification Procedure. Hi/fn (or the Company,
as the case may be) shall notify the Company (or Hi/fn) of any Taxes paid by the
Hi/fn Group or any Hi/fn Member (or the Stac Post-Spin-off Group or any Stac
Post-Spin-off Member) which are subject to indemnification under this Section 3;
provided, however, that no Tax liability of $10,000 or less in the aggregate
shall in any event be indemnified hereunder. To the extent not otherwise
provided in this Section 3, any other notification contemplated by this Section
3(d) shall include a detailed calculation (including, if applicable, separate
allocations of such Taxes between Pre- and Post-Closing Taxable Periods and
supporting work papers) and a brief explanation of the basis for
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<PAGE> 11
indemnification hereunder. Whenever a notification described in this Section
3(d) is given, the notified party shall pay the amount requested in such notice
to the notifying party in accordance with Section 4, but only to the extent that
the notified party agrees with such request. To the extent the notified party
disagrees with such request, it shall, within 20 days, so notify the notifying
party, whereupon the parties shall use their best efforts to resolve any such
disagreement. If such a dispute cannot be so resolved, resolution of the dispute
shall be governed by Section 7(p) hereof. To the extent not otherwise provided
for in this Section 3 or in Section 4, any payment made after such 20-day period
shall include interest at the Overdue Rate from the date such payment would have
been made under Section 4 based upon the original notice given by the notifying
party.
(e) Loss of Tax Benefits. Appropriate payments shall
be made between the parties to take account of subsequent losses of, or changes
in, any Tax Benefit that has been taken into account for purposes of determining
the After-Tax Basis of any indemnification payment.
4. METHOD, TIMING AND CHARACTER OF PAYMENTS REQUIRED BY THIS
AGREEMENT.
(a) Payment Procedures. The Company and Hi/fn hereby
agree to the following quarterly monitoring, notification and payment system
with respect to all amounts that shall become due and payable hereunder between
the parties: (i) the Company's Tax Department shall maintain a current
accounting for all amounts due and payable by the Company, Hi/fn or their
respective subsidiaries pursuant to this Agreement, (ii) Hi/fn shall notify the
Company in writing of any amounts that shall become due to it or its
subsidiaries hereunder on or before the 20th calendar day of the third month of
each quarterly period, (iii) on or before the last business day of the third
month of each quarterly period, the Company shall prepare and distribute to
Hi/fn a comprehensive quarterly report of all amounts that have become due
hereunder to either party or their subsidiaries (including any amounts known by
the Company to be due to Hi/fn or its subsidiaries even if not subject to a
written notification in accordance with clause (ii) above), (iv) the net amount
due between the Company and its subsidiaries on the one hand and Hi/fn and its
subsidiaries on the other hand as of such quarter-end (including any amounts
remaining unpaid, plus interest thereof, from prior periods) shall become
payable on the 10th calendar day of the first month of the following quarter
(or, if such day is not a business day, the next business day thereafter). The
parties hereby agree to consult with each other in good faith to resolve any
differences with respect to such quarterly reports and payments. The Company's
(or the Hi/fn's) failure to prepare or distribute any report under this Section
4(a) shall not relieve or defer the Company's (or Hi/fn's) obligation to pay any
amounts the Company (or Hi/fn) may owe to Hi/fn (or the Company) hereunder.
(b) Payment in Immediately Available Funds; Interest.
All payments made pursuant to this Agreement shall be made in immediately
available funds. Except as otherwise provided herein, any payment not made on
the date when payable under Section 4(a) or otherwise hereunder shall thereafter
bear interest at the Overdue Rate.
(c) Characterization of Payments. Any payment (other than
interest thereon) made hereunder by the Company to Hi/fn or by Hi/fn to the
Company shall be treated by
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all parties for all purposes as a non-taxable intercompany settlement of
liabilities existing immediately before the Spin-off or, to the extent
appropriate, as a non-taxable dividend distribution or capital contribution.
5. COOPERATION; DOCUMENT RETENTION; CONFIDENTIALITY.
(a) Provision of Cooperation, Documents and Other
Information. Upon reasonable request by a requesting party, the Company and
Hi/fn shall promptly provide (and shall cause their respective Affiliates to
provide) such requesting party with such cooperation and assistance, documents,
and other information, without charge, as may be necessary or reasonably helpful
in connection with (i) the preparation and filing of any original or amended Tax
Return, (ii) the conduct of any audit or other examination or any judicial or
administrative proceeding involving to any extent Taxes or Tax Returns within
the scope of this Agreement, or (iii) the verification by a party of an amount
payable hereunder to, or receivable hereunder from, another party. Such
cooperation and assistance shall include, without limitation: (w) the provision
on demand of books, records, Tax Returns, documentation or other information
relating to any relevant Tax Return; (x) the execution of any document that may
be necessary or reasonably helpful in connection with the filing of any Tax
Return by the Stac Pre-Spin-Off Group, a Stac Pre-Spin-off Member, the Stac
Post-Spin-off Group, a Stac Post-Spin-off Member, the Hi/fn Group or a Hi/fn
Member, or in connection with any audit, proceeding, suit or action of the type
generally referred to in the preceding sentence, including, without limitation,
the execution of powers of attorney and extensions of applicable statutes of
limitations, with respect to Tax Returns which the Company may be obligated to
file on behalf of Hi/fn Members pursuant to Section 2(a); (y) the prompt and
timely filing of appropriate claims for refund; and (z) the use of reasonable
best efforts to obtain any documentation from a governmental authority or a
third party that may be necessary or helpful in connection with the foregoing.
Each party shall make its employees and facilities available on a mutually
convenient basis to facilitate such cooperation.
(b) Retention of Books and Records. The Company, each
Stac Post-Spin-off Member, Hi/fn and each Hi/fn Member shall retain or cause to
be retained all Tax Returns, and all books, records, schedules, workpapers, and
other documents relating thereto, until the expiration of the later of (i) all
applicable statutes of limitations (including any waivers or extensions
thereof), and (ii) any retention period required by law or pursuant to any
record retention agreement. The parties hereto shall notify each other in
writing of any waivers, extensions or expirations of applicable statutes of
limitations, and shall provide at least thirty (30) days prior written notice of
any intended destruction of the documents referred to in the preceding sentence.
A party giving such a notification shall not dispose of any of the foregoing
materials without first obtaining the written approval (which may not be
unreasonably withheld) of the notified party.
(c) Status and Other Information Regarding Audits and
Litigation. The Company (or Hi/fn, as the case may be) shall use reasonable best
efforts to keep Hi/fn (or the Company) advised, as to the status of Tax audits
and litigation involving any issue relating to any Taxes, Tax Returns or Tax
Benefits subject to indemnification under this Agreement. To the extent relating
to any such issue, the Company (or Hi/fn) shall promptly furnish Hi/fn (or the
Company) copies of any inquiries or requests for information from any Taxing
Authority or any
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<PAGE> 13
other administrative, judicial or other governmental authority, as well as
copies of any revenue agent's report or similar report, notice of proposed
adjustment or notice of deficiency.
(d) Confidentiality of Documents and Information.
Except as required by law or with the prior written consent of the other party,
all Tax Returns, documents, schedules, work papers and similar items and all
information contained therein, which Tax Returns and other materials are within
the scope of this Agreement, shall be kept confidential by the parties hereto
and their Representatives, shall not be disclosed to any other person or entity
and shall be used only for the purposes provided herein.
6. CONTESTS AND AUDITS.
(a) Notification of Audits or Disputes. Upon the
receipt by the Company or any Stac Post-Spin-off Member (or Hi/fn or any Hi/fn
Member, as the case may be) of notice of any pending or threatened Tax audit or
assessment which may affect the liability for Taxes that are subject to
indemnification hereunder, the Company (or Hi/fn) shall promptly notify Hi/fn
(or the Company) in writing of the receipt of such notice.
(b) Control and Settlement.
(i) By The Company. The Company shall have the
right to control, and to represent the interests of all affected taxpayers in,
any Tax audit or administrative, judicial or other proceeding relating, in whole
or in part, to any Pre-Closing Taxable Period or any other Taxable Period for
which the Company is responsible, in whole or in part, for Taxes under Sections
2(g) and 3, and to employ counsel of its choice at its expense; provided,
however, that, with respect to such issues that may impact Hi/fn or any Hi/fn
Member for any Post-Closing Taxable Period or for which Hi/fn may be responsible
in part under Sections 2(g) and 3, the Company shall (i) afford Hi/fn full
opportunity to observe at any such proceedings and to review any submissions
related to such issues, (ii) in good faith consult with Hi/fn regarding its
comments with respect to such proceedings and submissions in an effort to
resolve any differences with respect to the Company's positions with regard to
such issues, (iii) in good faith consider Hi/fn's recommendations for
alternative positions with respect to such issues, and (iv) advise Hi/fn of the
reasons for rejecting any such alternative position. In the event of any
disagreement regarding the proceedings, the Company shall have the ultimate
control of the contest and any settlement or other resolution thereof.
(ii) By Hi/fn: Hi/fn shall have the right to
control, and to represent the interests of all affected taxpayers in, any Tax
audit or administrative, judicial or other proceeding relating solely to any
Post-Closing Taxable Period of the Hi/fn Group or any Hi/fn Member, or relating
to any other Taxable Period for which Hi/fn is solely responsible for Taxes
under Sections 2(g) and 3, and to employ counsel of its choice at its expense;
provided, however, that Hi/fn shall (i) afford the Company full opportunity to
observe at any such proceedings and to review any submissions related thereto
and (ii) not agree to settle any such proceeding in a manner that could
reasonably have a material and adverse effect on (A) any indemnification
obligation of the Company hereunder, (B) any Tax liability of the Stac
Pre-Spin-Off Group or any Stac Pre-Spin-off Member for any Pre-Closing Taxable
Period or (C) any Tax liability of the Stac Post-Spin-off Group or any Stac
Post-Spin-off Member for any Post-Closing
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<PAGE> 14
Taxable Period, without the prior written consent of the Company, which consent
shall not be unreasonably withheld.
(c) Delivery of Powers of Attorney. Hi/fn (and, to the
extent necessary, its subsidiaries) shall execute and deliver to the Company,
promptly upon request, such powers of attorney authorizing the Company to extend
statutes of limitations, receive refunds and take such other actions that the
Company reasonably considers to be appropriate in exercising its control rights
pursuant to this Section 6.
7. MISCELLANEOUS.
(a) Effectiveness. This Agreement shall be effective
from and after the Closing Date and shall survive until the expiration of any
applicable statute of limitations.
(b) Entire Agreement. This Agreement contains the
entire agreement among the parties hereto with respect to the subject matter
hereof.
(c) Guarantees of Performance. The Company and Hi/fn
hereby guarantee the complete and prompt performance by the members of their
respective Affiliated Groups of all of their obligations and undertakings
pursuant to this Agreement. If, subsequent to the Effective Time, either the
Company or Hi/fn shall be acquired by another entity such that 50% or more of
its common stock is in common control, such acquirer shall, by making such
acquisition, simultaneously agree to jointly and severally guarantee the
complete and prompt performance by the acquired corporation and any Affiliate of
the acquired corporation of all of their obligations and undertakings pursuant
to this Agreement.
(d) Severability. In case any one or more of the
provisions contained in this Agreement should be invalid, illegal or
unenforceable, the enforceability of the remaining provisions hereof shall not
in any way be affected or impaired thereby. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions hereof without including any of
such which may hereafter be declared invalid, void or unenforceable. In the
event that any such term, provision, covenant or restriction is hereafter held
to be invalid, void or unenforceable, the parties hereto agree to use their best
efforts to find and employ an alternate means to achieve the same or
substantially the same result as that contemplated by such term, provision,
covenant or restriction.
(e) Indulgences, etc. Neither the failure nor any
delay on the part of any party hereto to exercise any right under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right preclude any other or further exercise of the same or any other right,
nor shall any waiver of any right with respect to any occurrence be construed as
a waiver of such right with respect to any other occurrence.
(f) Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of California
without regard to the conflict of law principles thereof, except with respect to
matters of law concerning the internal corporate affairs of any corporate entity
which is a party to or subject of this Agreement, and as
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to those matters the law of the jurisdiction under which the respective entity
derives its powers shall govern.
(g) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be made in the
manner provided in Section 7 of the Transitional Services Agreement of even
date herewith between the Company and Hi/fn (the "Transitional Services
Agreement").
(h) Modification or Amendment. This Agreement may be
amended at any time by written agreement executed and delivered by duly
authorized officers of Hi/fn and the Company.
(i) Successors and Assigns. Except by operation of law
or in connection with the sale of all or substantially all the assets of a party
hereto, a party's rights and obligations under this Agreement may not be
assigned without the prior written consent of the other party. All of the
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and permitted assigns.
(j) No Third-Party Beneficiaries. This Agreement is
solely for the benefit of the parties to this Agreement and their respective
Affiliates and should not be deemed to confer upon third parties any remedy,
claim, liability, reimbursement, claim of action or other right in excess of
those existing without this Agreement.
(k) Other. This Agreement may be executed in any
number of counterparts, each such counterpart being deemed to be an original
instrument, and all of such counterparts shall together constitute one and the
same instrument. The section numbers and captions herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be deemed
to limit or otherwise affect any of the provisions hereof.
(l) Predecessors and Successors. To the extent necessary
to give effect to the purposes of this Agreement, any reference to any
corporation, Affiliated Group or member of an Affiliated Group shall also
include any predecessors or successors thereto, by operation of law or
otherwise.
(m) Effect of Transitional Services Agreement. At any
time when the Company is providing tax planning and compliance services to Hi/fn
under the Transitional Services Agreement, the rights and obligations of the
Company and Hi/fn under the advance review, consultation, notice and cooperation
provisions of Sections 2(c), 2(d), 5(a), 5(c), 6(a), 6(b) and 7(g) shall be
suspended. Such rights and obligations shall be immediately reinstated upon the
termination of the Transitional Services Agreement or upon written notice from
Hi/fn to such effect. In performing any such services, the Company shall act as
an agent and/or independent contractor of Hi/fn and shall have no personal
liability with respect to any Taxes related thereto other than as expressly
provided herein or in the Transitional Services Agreement.
(n) Tax Elections. Nothing in this Agreement is
intended to change or otherwise affect any previous tax election made by or on
behalf of the Stac Pre-Spin-Off Group. The Company, as common parent of the Stac
Pre-Spin-Off Group, shall continue to have sole
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discretion to make any and all elections with respect to all members of the Stac
Pre-Spin-Off Group for all Taxable Periods for which it is obligated to file Tax
or Information Returns under Section 2(a)(i).
(o) Injunctions. The parties acknowledge that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. The parties hereto shall be entitled to an injunction or injunctions
to prevent breaches hereto and to enforce specifically the terms and provisions
hereof in any court having jurisdiction; such remedy shall be in addition to any
other remedy available at law or in equity.
(p) Dispute Resolution. The Company and Hi/fn shall
endeavor in good faith to resolve any dispute under this Agreement, including
without limitation instances where the parties are required to reach mutual
agreement. If such a dispute cannot be so resolved, then either party may
deliver to the other a written notice detailing such party's objections. If the
Company and Hi/fn are unable to resolve the dispute within fifteen (15) days of
the receipt of such notice, then either party shall have the right to refer the
dispute for resolution to Neutral Auditors selected by the Company and Hi/fn
within ten (10) days after the expiration of such fifteen (15) day period. If
the Company and Hi/fn are unable to agree on the Neutral Auditors, then Hi/fn
and the Company shall each have the right to request the American Arbitration
Association to appoint the Neutral Auditors. Each party agrees to execute, if
requested by the Neutral Auditors, a reasonable engagement letter. All fees and
expenses relating to the work, if any, to be performed by the Neutral Auditors
shall be borne equally by the Company and Hi/fn. The Neutral Auditors shall act
as an arbitrator to determine, based solely on presentations by the Company and
Hi/fn, and not by independent review, only those issues still in dispute. The
Neutral Auditors' determination shall be made within thirty (30) days of such
firm's selection, shall be set forth in a written statement delivered to the
Company and Hi/fn, and shall be final, binding and conclusive.
(q) Further Assurances. Subject to the provisions
hereof, the parties hereto shall make, execute, acknowledge and deliver such
other instruments and documents, and take all such other actions, as may be
reasonably required in order to effectuate the purposes of this Agreement and to
consummate the transactions contemplated hereby. Subject to the provisions
hereof, each party shall, in connection with entering into this Agreement,
performing its obligations hereunder and taking any and all actions relating
hereto, comply with all applicable laws, regulations, orders and decrees, obtain
all required consents and approvals and make all required filings with any
governmental agency, other regulatory or administrative agency, commission or
similar authority and promptly provide the other party with all such information
as it may reasonably request in order to be able to comply with the provisions
of this sentence.
(r) Setoff. Except as provided in Section 4(a), all
payments to be made by any party under this Agreement shall be made without
setoff, counterclaim or withholding, all of which are expressly waived.
(s) Costs and Expenses. Unless otherwise specifically
provided herein, each party agrees to pay its own costs and expenses resulting
from the fulfillment of its respective obligations hereunder.
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(t) Rules of Construction. Any ambiguities herein shall be
resolved without regard to which party drafted this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or have caused this Agreement to be duly executed on their respective
behalf by their respective officers thereunto duly authorized, as of the day and
year above written.
STAC, INC.
a Delaware corporation
By: /s/ JOHN R. WITZEL
--------------------------
Name: John R. Witzel
------------------------
Title: VP of Finance
-----------------------
HI/FN, INC.,
a Delaware corporation
By: /s/ WILLIAM R. WALKER
--------------------------
Name: William R. Walker
------------------------
Title: Secretary
-----------------------
S-1
<PAGE> 1
EXHIBIT 10.3
TRANSITIONAL SERVICES AGREEMENT
This Transitional Services Agreement (this "Agreement") is made as of
this 11th day of December 1998 between Stac, Inc., a Delaware corporation
("Stac"), and hi/fn, inc., a Delaware corporation ("Hi/fn").
RECITALS
WHEREAS, pursuant to a Distribution Agreement dated as of December 11,
1998, (the "Distribution Agreement") between Stac and Hi/fn, Stac will separate
its software business and its semiconductor business (the "Spin-off") by way of
a special dividend by Stac to the stockholders of record of Stac's common stock,
consisting of the distribution on an approximately 1-for-4 basis, of all of the
outstanding shares of Hi/fn Common Stock held by Stac (following the conversion,
at Stac's election, of 6,000,000 shares of Series A Preferred Stock, par value
$.001 per share, of Hi/fn into 6,000,000 shares of Hi/fn Common Stock) (the
"Distribution"); and
WHEREAS, a condition of the closing of the transactions contemplated by
the Distribution Agreement is that Stac and Hi/fn enter into, among other
things, a transitional services agreement pursuant to which Stac shall provide
certain accounting services to Hi/fn.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants hereinafter set forth, and intending to be legally bound
hereby, the parties agree as follows:
1. ACCOUNTING SERVICES. Stac agrees to use its employees and assets to
provide to Hi/fn the accounting services currently provided by Stac to Hi/fn,
which are listed on Exhibit A hereto (the "Accounting Services"). Stac shall
have no obligation to perform the accounting services currently provided by
Hi/fn personnel, which also are described on Exhibit A hereto. The monthly
charge for the Accounting Services from and after the date hereof shall be
$6,500.00. Such amount shall be prepaid through December 31, 1999 by Hi/fn prior
to the Distribution. If the term of this Agreement is extended past December 31,
1999 pursuant to Section 4 hereof, Stac shall invoice Hi/fn monthly for
Accounting Services performed during the prior month (beginning January 1,
2000), and Hi/fn shall pay Stac for such services not later than ten (10) days
from the receipt of invoice. Hi/fn may decline any or all of the Accounting
Services at any time in its sole discretion; provided that the monthly charge
for services will not be reduced below $6,500 (i) unless Hi/fn has given Stac at
least 30 days notice of its decision to decline all services (in which case no
monthly charge will be due) or (ii) unless otherwise agreed by the parties in
writing.
Hi/fn expressly acknowledges and agrees that (i) Stac and its officers,
directors, employees, agents and counsel shall not be responsible for the
contents of Hi/fn financial statements generated by Stac or for their
preparation in accordance with generally accepted accounting principles, (ii)
the contents and accuracy of Hi/fn's financial statements shall be solely the
responsibility of Hi/fn and (iii) Stac's responsibility shall be only to process
transactions and journal entries as instructed by Hi/fn and to generate the
resulting financial statements. Hi/fn understands and agrees that it shall be
responsible for all planning and reporting to its various constituencies,
including, but not limited to its board of directors, stockholders, employees,
the Securities and Exchange Commission, the Internal Revenue
<PAGE> 2
Service, the California Franchise Tax Board, other federal and state regulatory
agencies, other taxing authorities and any corresponding or other foreign
entities.
2. OUTSIDE SERVICES. In the event that the providing party is required
to retain outside consultant/contractor assistance to perform any of the
services hereunder, the providing party shall first obtain the consent of the
other party to such retention and the other party shall pay directly the fees of
such consultant/contractor. The providing party shall not be held responsible
for the performance of such consultant/contractor services and the other party
assumes the risk thereof.
3. CONTRACTUAL RELATIONSHIP. The relationship between Stac and Hi/fn
under this Agreement shall be that of principal and agent in respect of the
services to be performed hereunder. In no event is the relationship of the
parties intended to be that of employer and employee and in no event is either
party to be deemed or purported to be the partner or joint venturer of the other
for any purpose whatsoever.
4. TERM. The term of this Agreement shall expire on December 31, 1999;
provided, however, that each party shall have the right, Hi/fn upon thirty (30)
days advance notice to Stac, and Stac upon six (6) months advance notice to
Hi/fn, to terminate all or part of the services it performs hereunder. This
Agreement may be extended on a month-to-month basis following December 31, 1999
upon mutual agreement of the parties. Upon the termination of all services,
payment therefor and payment of all consultants/contractors, this Agreement
shall terminate and any payments due the other party shall be immediately
payable. In addition, if this Agreement is terminated prior to December 31,
1999, Stac shall immediately refund to Hi/fn any amounts prepaid for
Accounting Services that were to be performed after the date of early
termination.
5. LIMITATION OF LIABILITY. Stac shall not have any liability whatsoever
to Hi/fn or to any third party for any loss, liability, damage, cost or
deficiency (collectively, "Losses"), or for any claim for Losses, including,
without limitation, Losses or claims for personal injury, death or property
damage, warranty, tort or products liability, resulting from, caused by or
arising out of Stac's performance under this Agreement except for claims arising
out of the negligence or willful default or breach of Stac hereunder. In no
event shall Stac have liability to Hi/fn or to any third party for indirect,
special or consequential damages or loss of profits (except with respect to its
willful default or breach), or for punitive damages for any reason whatsoever.
6. INDEMNIFICATION. Hi/fn agrees to indemnify, protect, defend and hold
harmless Stac (for purposes of this Section 6 "Stac" shall include the officers,
directors, employees, agents and counsel of Stac), from and against any and all
losses, claims, damages, expenses or liabilities, including the fees of not more
than one counsel to Stac, arising out of or based upon allegations that
financial statements or other accounting records prepared by Hi/fn with Stac's
assistance pursuant to this Agreement contain inaccuracies or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
7. NOTICES. All notices and other communications hereunder shall be in
writing and shall be delivered by hand or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other addresses for a party as shall be specified by like notice) and shall be
deemed given on the date on which such notice is received:
2
<PAGE> 3
To Stac:
Stac, Inc.
12636 High Bluff Drive, 4th Floor
San Diego, CA 92130
Attention: Cliff Flowers
To Hi/fn:
Hi/fn, Inc.
750 University Avenue
Los Gatos, CA 95302
Attention: William Walker
8. ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party hereto
without the prior written consent of the other party (other than to an
affiliate). Any purported assignment in violation of the provisions hereof shall
be void.
9. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California (regardless of the laws that might otherwise govern under
applicable California conflict of laws principles) as to all matters, including
but not limited to matters of validity, construction, effect, performance and
remedies.
10. 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.
11. INTERPRETATION. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement.
12. SEVERANCE. In the event that any provision of this Agreement is
declared illegal, invalid or unenforceable or contrary to law, it shall not
affect any other provision in the Agreement.
13. ENTIRE AGREEMENT. This Agreement and the Distribution Agreement
embody the entire agreement and understanding of the parties hereto in respect
of the subject matter hereof. This Agreement supersedes all prior agreements and
understandings between the parties with respect to the transactions contemplated
hereby.
14. DISPUTES. Any disputes arising under this Agreement shall be
resolved by binding arbitration in the manner contemplated by Section 8.13 of
the Distribution Agreement, including the attorneys' fees provision referenced
therein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE> 4
IN WITNESS WHEREOF, each of Stac and Hi/fn has caused this Agreement to
be executed by its duly authorized officer as of the date first above written.
STAC, INC.
By: /s/ JOHN R. WITZEL
--------------------------------------
Name: John R. Witzel
-----------------------------------
Title: VP of Finance
----------------------------------
HI/FN, INC.
By: /s/ WILLIAM R. WALKER
--------------------------------------
Name: William R. Walker
-----------------------------------
Title: Secretary
----------------------------------
4
<PAGE> 5
EXHIBIT A
The following work is currently performed by Hi/fn personnel and will continue
to be done by them or such other persons as Hi/fn appoints.
1) Purchasing - preparation of purchase orders for all hi/fn product materials
and services, receipt of orders, verification of receipt vs. purchase orders
and other duties associated with purchasing function.
2) Inventory - ordering, shipping, maintenance and control of physical
inventory including periodic counts and reconciliation, in conjunction with
Stac accounting personnel, of any differences.
3) Property, plant and equipment - ordering, delivery and maintenance, tagging
and tracking, input into asset accounting system and recording monthly
depreciation expense. Also responsible for conducting physical inventories
as needed, and reconciling the fixed asset accounting system to the general
ledger.
4) Accounts Payable - matching of invoices against supporting documents, coding
of account distribution, obtaining approvals and other preparation of data
for input into accounts payable system, printing of checks, responding to
vendor calls, reconciliation of accounts payable ledger, signing checks and
other duties associated with the accounts payable function.
5) Payroll - preparation of payroll input for delivery to Stac personnel,
including hours worked, distribution of hours, time-off information and any
special or bonus pay information. Beginning February 1, 1999 assume
responsibility for payroll input, tax filings and deposits.
6) Order entry and invoicing - entry of sales orders into sales order entry
system, tracking of orders, preparation of picking tickets and shipping
documents, sales reconciliation, returns processing, responding to customer
calls re orders and shipments and other duties associated with the sales
accounting function.
7) Journal entries - preparation of journal entries other than payroll journal
entries which are prepared by Stac. Includes journal entries that adjust
reserves, allowances, revenue recognition, accruals for expenses, prepaid
amortization and other journal entries.
8) SEC reports - prepare and file all SEC filings, answer SEC questions and
comments. Preparation may require adjustment of standard internal reports
provided by Stac to comply with SEC requirements.
9) Audits and reviews - plan, schedule and control annual audit and quarterly
reviews by outside independent auditors.
10) Accounting systems maintenance - in addition to the monthly $6,500 fee to
Stac for accounting services, pay to outside vendors or reimburse Stac for
any costs associated with licensing and maintaining the accounting software
for Hi/fn's use.
11) Credit check and approval-request credit references, D&B reports and make
decisions as to level of credit to be granted to new customers.
5
<PAGE> 6
12) Option/stock accounting-track all option/stock/ESPP activity, reconcile with
transfer agent, perform valuation and run reports necessary for quarterly
reporting.
The following work is currently performed by Stac personnel and will continue to
be done by them during the term of this agreement or by such other persons as
Stac appoints, unless Hi/fn takes on performance of a function or service
directly.
1) Payroll - input of payroll data provided by Hi/fn, processing of payroll,
delivery of checks or automatic deposits, preparation of payroll tax
returns, preparation of payroll general ledger entries and other duties
associated with payroll not performed by Hi/fn as described above. After
February 1, Hi/fn will input their own payroll and be responsible for all
tax filings and other deposits, and Stac will only do the related journal
entries.
2) Cash - reconciliation of Hi/fn cash accounts, management of Hi/fn cash in
the manner currently done through BT Alex Brown, preparation and delivery of
cash investment reports as previously done and other duties associated with
accounting for cash.
3) Accounts Receivable - collection of and deposit of Hi/fn trade accounts
receivable including collection calls and other duties normally associated
with the accounts receivable function and not performed by Hi/fn as
described above.
4) Inventory - maintenance of accounting records in detail currently
maintained, reconciliation of differences between book and physical counts
with Hi/fn personnel.
5) General ledger accounts -, preparation and entry of payroll journal entries.
6) Reports - run reports currently run by Stac for Hi/fn including those listed
below. Provide Hi/fn personnel access to reporting modules for purpose of
designing and running own reports.
Income Statement
Balance Sheet
Departmental expense reports
7) Closing schedules - on a best efforts basis, provide reports listed above by
the 7th workday following the end of each month.
8) SEC reports - provide historical (defined as "pre-spinoff") information in
addition to normal reports as reasonably requested by Hi/fn for Hi/fn's
preparation of SEC filings.
9) Audits and reviews - provide historical information as requested by
independent accounts for annual audit and quarterly reviews.
10) Access and turnover - provide Hi/fn personnel with access to accounting
systems as authorized by Hi/fn's CFO, assist Hi/fn personnel as reasonably
necessary to turn over accounting records and know-how in order for Hi/fn or
their appointees to take over the Stac provided accounting functions.
6
<PAGE> 7
11) Accounting systems maintenance - maintain accounting systems software in
working order and maintain backups of accounting data.
7
<PAGE> 1
EXHIBIT 99.1
[Stac Logo]
FOR IMMEDIATE RELEASE
Contact Information:
Stac, Inc.
John Witzel
Sylvia Evans (619) 794-4399
Stac COMPLETES SPIN-OFF OF Hi/fn, INC.
Stac Renamed Stac Software, Inc.
SAN DIEGO, December 16, 1998 - Stac, Inc. (Nasdaq: STAC) today announced that it
has completed the spin-off and distribution to its stockholders of its shares of
Hi/fn, Inc. (Nasdaq: HIFN), its semiconductor subsidiary. As part of the
distribution, effective immediately after the close of market trading on
December 16, 1998, holders of Stac common stock will receive a dividend of one
(1) share of common stock of Hi/fn, Inc. for every 3.9455 shares of Stac common
stock. Regular public trading of Hi/fn shares under the ticker symbol "HIFN"
will begin as of December 17, 1998, at which time Stac common stock will trade
ex-dividend. Ex-dividend trading of Stac is expected to result in a reduction of
the opening quotation for Stac shares on Nasdaq at the start of trading on
December 17 to adjust for the value of Hi/fn stock distributed to Stac
stockholders.
Stac also announced that, effective December 17, 1998, its name will become Stac
Software, Inc. to better reflect the Company's focus on providing enterprise
storage management software. "With the spin-off of Hi/fn completed, Stac is now
positioned as a 'pure-play' enterprise storage management software company
offering products under the Replica and ReachOut brands," said Gary Clow, Stac's
chairman and chief executive officer.
Pursuant to a letter ruling received from the Internal Revenue Service, the
dividend distribution will not result in recognition of taxable income or gain
to Stac or its stockholders under Section 355 of the Internal Revenue Code,
except to the extent of cash received in lieu of fractional shares. In addition,
a taxpayer's basis in Stac stock prior to the dividend will be equal to their
aggregate basis in Stac and Hi/fn after the dividend. Based on the closing
prices of Stac shares (STAC - $5.8125) and Hi/fn when issued shares (HIFNV -
$17.50) on December 16, 1998, stockholders of Stac could allocate 24 percent of
their tax basis in Stac shares to Stac and the remaining 76 percent to Hi/fn.
Stockholders should consult their own tax advisors to determine if another
method of allocating their tax basis is more appropriate.
-more-
<PAGE> 2
Page 2
Stac Completes Spin-off of Hi/fn, Inc.
ABOUT STAC
Founded in 1983, Stac, Inc. is known worldwide for its innovations in data
compression. The company builds on these advancements to create high-performance
systems recovery software solutions for enterprise customers. Stac has
established strategic relationships with Hewlett-Packard, IBM, Legato Systems,
Microsoft, Network Associates, Novell and other industry leaders. Stac's
products are sold through a variety of domestic and international channels.
Information on Stac's award-winning products can be accessed via the Internet at
http://www.stac.com, by calling the company's North America Headquarters in San
Diego, California: 1-800-279-7822 (U.S. and Canada), Stac's European
Headquarters in the United Kingdom: +44(0) 1344-302900 (Europe) or +1(619)
794-3741 in other countries.
ABOUT HI/FN
Hi/fn, Inc. of Los Gatos, California makes integrated circuits and software for
manufacturers of computer networking products. Hi/fn's integrated
compression-encryption technology is central to the growth of the Internet,
helping to make electronic mail, web browsing and Internet shopping faster and
more secure. Nearly all network router manufacturers use Hi/fn's patented
technology to improve data packet processing.
Except for the historical information contained herein, this news release
contains forward-looking statements that are subject to risks and uncertainties,
including risks associated with the lack of an established trading market for
Hi/fn stock and for Stac stock traded without Hi/fn, uncertainty of the future
profitability of Stac and the continued profitability of Hi/fn, and the
development of markets being targeted by new products from Stac and Hi/fn. These
and other risks are detailed from time to time in Stac's SEC reports, including
its report on Form 10-K for the year ended September 30, 1997 and its most
recent Form 10-Q, as well as in the Registration Statement on Form 10, as
amended, filed by Hi/fn in connection with the distribution.
###
Stac, Replica and ReachOut are trademarks or registered trademarks of Stac, Inc.
All other trademarks are property of their respective owners.
<PAGE> 1
EXHIBIT 99.2
Incorporated by reference to pages F-2 and F-3 of the Annual Report on Form 10-K
of Stac Software, Inc. for the year ended September 30, 1998
STAC SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 11,573 $ 18,609
Marketable securities ................................................... 12,859 33,040
Accounts receivable ..................................................... 777 2,745
Inventories ............................................................. 197 181
Deferred income taxes ................................................... -- 1,157
Income taxes receivable ................................................. 1,314 --
Prepaid expenses and other current assets ............................... 317 493
-------- --------
Total current assets .......................................... 27,037 56,225
Property and equipment, net ............................................... 3,329 3,949
Deferred income taxes ..................................................... -- 6,366
Net assets of discontinued operations ..................................... 12,995 2,958
Other assets .............................................................. 505 613
-------- --------
$ 43,866 $ 70,111
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 1,458 $ 1,091
Income taxes payable .................................................... -- 1,402
Accrued expenses and other current liabilities .......................... 3,022 3,258
-------- --------
Total current liabilities ..................................... 4,480 5,751
Other liabilities ......................................................... 173 237
-------- --------
4,653 5,988
-------- --------
Commitments and contingencies (Notes 9 and 11)
Stockholders' equity:
Common stock, par value $0.001 per share, authorized 100,000,000 shares;
31,166,000 and 30,880,000 shares issued in 1998 and 1997, respectively 31 31
Additional paid in capital .............................................. 75,143 74,319
Treasury stock, at cost; 7,797,000 and 3,828,000 shares in 1998 and 1997,
respectively .......................................................... (41,347) (21,351)
Cumulative translation adjustment ....................................... (29) (106)
Retained earnings ....................................................... 5,415 11,230
-------- --------
Total stockholders' equity ................................... 39,213 64,123
-------- --------
$ 43,866 $ 70,111
======== ========
</TABLE>
<PAGE> 2
STAC SOFTWARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues ....................................................... $ 19,403 $ 33,190 $ 33,871
Cost of revenues ............................................... 980 1,581 1,436
-------- -------- --------
Gross margin ................................................... 18,423 31,609 32,435
Operating expenses:
Research and development ..................................... 7,555 8,574 6,715
Purchased research and development ........................... -- -- 12,217
Sales and marketing .......................................... 10,509 14,564 11,246
General and administrative ................................... 4,446 4,688 3,497
Restructuring ................................................ 350 850 --
-------- -------- --------
Total operating expenses ................................... 22,860 28,676 33,675
Operating income (loss) ........................................ (4,437) 2,933 (1,240)
Interest income ................................................ 2,434 2,404 2,115
-------- -------- --------
Income (loss) before income taxes .............................. (2,003) 5,337 875
Provision for income taxes ..................................... 5,879 1,475 4,701
-------- -------- --------
Income (loss) from continuing operations ....................... (7,882) 3,862 (3,826)
Discontinued operations:
Income from discontinued operations, net of taxes of $1,627 in
1998, $1,235 in 1997 and $ 1,441 in 1996 ................... 2,067 1,798 2,151
-------- -------- --------
Net income (loss) .............................................. (5,815) 5,660 (1,675)
Less preferred dividends ....................................... -- -- 168
-------- -------- --------
Net income (loss) available for
common stockholders .......................................... $ (5,815) $ 5,660 $ (1,843)
======== ======== ========
Earnings per common share, basic
Income (loss) from continuing operations ....................... $ (0.31) $ 0.13 $ (0.13)
Income from discontinued operations ............................ $ 0.08 $ 0.06 $ 0.07
Net income (loss) .............................................. $ (0.23) $ 0.19 $ (0.06)
Earnings per common share, diluted
Income (loss) from continuing operations ....................... $ (0.31) $ 0.12 $ (0.13)
Income from discontinued operations ............................ $ 0.08 $ 0.06 $ 0.07
Net income (loss) .............................................. $ (0.23) $ 0.18 $ (0.06)
Weighted average common shares
outstanding, basic ........................................... 25,349 30,552 30,585
Weighted average common shares
outstanding, diluted ......................................... 25,349 30,926 30,585
</TABLE>
