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ASCEND COMMUNICATIONS, INC. PROSPECTUS
WHITETREE, INC. CONSENT SOLICITATION STATEMENT
Ascend Communications, Inc., a Delaware corporation ("Ascend"), has filed a
Registration Statement on Form S-4 (together with the attachments thereto, the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), covering up to 1,350,000 shares of its Common Stock, par
value $0.001 per share ("Ascend Common Stock"), to be issued in connection
with the proposed merger (the "Merger") of Ascend Acquisition Corporation II,
a Delaware corporation and a wholly-owned subsidiary of Ascend ("Sub"), with
and into Whitetree, Inc., a California corporation ("Whitetree"), pursuant to
the Agreement and Plan of Merger entered into by and among Ascend, Sub and
Whitetree dated as of February 14, 1997 (the "Merger Agreement").
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), Whitetree will become a wholly-owned subsidiary of Ascend,
and all outstanding shares of Whitetree Capital Stock (as defined below) will
be converted into the right to receive shares of Ascend Common Stock. As used
herein, "Whitetree Capital Stock" means all issued and outstanding shares of
Common Stock of Whitetree, par value $.001 per share ("Whitetree Common
Stock") and all issued and outstanding shares of Series A Convertible
Preferred Stock of Whitetree, par value $.001 per share ("Series A Preferred
Stock"), Series B Convertible Preferred Stock of Whitetree, par value $.001
per share ("Series B Preferred Stock"), Series C Convertible Preferred Stock
of Whitetree, par value $.001 per share ("Series C Preferred Stock"), and
Series D Convertible Preferred Stock of Whitetree, par value $.001 per share
("Series D Preferred Stock" and together with the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, "Whitetree Preferred
Stock" and together with the Whitetree Common Stock "Whitetree Capital
Stock"). The Merger Agreement provides that Ascend will issue a total of
between 970,000 and 1,350,000 shares of Ascend Common Stock in exchange for
all Whitetree Capital Stock, warrants and options. The exact number of shares
of Ascend Common Stock to be issued in the Merger will depend on the average
last sale price of Ascend Common Stock during the five (5) consecutive trading
days immediately preceding the date (the "Closing Date") on which the Merger
closes (the "Ascend Average Stock Price"). For each share of Series D
Preferred Stock, holders will receive $7.68 worth of Ascend Common Stock
(based on the Ascend Average Stock Price). For each share of Whitetree Common
Stock, Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, holders will receive between 0.0647 and 0.0878 of a share of
Ascend Common Stock. See "The Merger Agreement--Conversion of Securities." If
the average Ascend Average Stock Price is equal to $56.00 (the last sale price
of Ascend Common Stock on March 11, 1997) and if all outstanding warrants to
purchase Whitetree Preferred Stock are exercised for cash, except Whitetree
warrants to purchase Series D Preferred Stock, and there have been no other
changes in Whitetree capital structure since February 14, 1997, each share of
Whitetree Common Stock, and Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock will be converted into the right to receive
0.0767 of a share of Ascend Common Stock and each share of Series D Preferred
Stock will be converted into the right to receive 0.1371 of a share of Ascend
Common Stock.
In connection with the Merger, five percent (5%) of the shares of Ascend
Common Stock otherwise issuable to holders of Whitetree Capital Stock and
options (the "Escrow Shares") will be placed into escrow and held as security
for losses incurred by Ascend and certain related parties in the event of any
breach of Whitetree's representations, warranties, covenants or agreements in
the Merger Agreement.
This Prospectus/Consent Solicitation Statement ("Prospectus/Consent
Solicitation Statement") constitutes (a) the Prospectus of Ascend filed as
part of the Registration Statement, and (b) the Consent Solicitation Statement
of Whitetree relating to the solicitation of consents of the shareholders of
Whitetree (the "Consents"). All information herein with respect to Whitetree
has been furnished by Whitetree, and all information herein with respect to
Ascend and Sub has been furnished by Ascend. All unaudited pro forma combined
financial information herein has been prepared by Ascend using historical
financial information regarding Ascend and Whitetree, which in turn was
furnished by Ascend and Whitetree, respectively. This Prospectus/Consent
Solicitation Statement is first being mailed to the shareholders of Whitetree
on or about March 12, 1997.
SEE "RISK FACTORS" COMMENCING ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED CAREFULLY BY WHITETREE SHAREHOLDERS IN EVALUATING
THE PROPOSALS TO BE VOTED ON IN THE CONSENTS AND THE ACQUISITION OF THE
SECURITIES OFFERED HEREBY.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF ASCEND OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Consent Solicitation Statement is March 12, 1997.
<PAGE>
AVAILABLE INFORMATION
Ascend is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed by
Ascend with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should be available for inspection at the
Commission's Regional Offices located at 7 World Trade Center, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60611.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a website (the "Commission
Website") that contains reports, proxy and information statements and other
information regarding Ascend. The address of the Commission Website is
http://www.sec.gov. Ascend Common Stock is quoted on The Nasdaq National
Market. Reports and other information concerning Ascend also can be inspected
at the offices of the National Association of Securities Dealers, Inc., Market
Listing Section, 1735 K Street, N.W., Washington, D.C. 20006.
Ascend has filed with the Commission the Registration Statement with respect
to the shares of Ascend Common Stock to be issued pursuant to the Merger
Agreement. This Prospectus/Consent Solicitation Statement does not contain all
of the information set forth in the Registration Statement. A copy of the
Registration Statement may be obtained from the Commission's principal office
in Washington, D.C. or on the Commission Website. Statements contained in this
Prospectus/Consent Solicitation Statement as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT IN CONNECTION WITH THE SOLICITATION OF THE CONSENTS OR
THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ASCEND,
WHITETREE OR ANY OTHER PERSON. THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
ANY SECURITIES, OR THE SOLICITATION OF A CONSENT, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT NOR ANY DISTRIBUTION OF SECURITIES
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF ASCEND OR WHITETREE SINCE THE DATE HEREOF
OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
Ascend, Multiband, Multiband RPM, Pipeline and RubberBandwidth are
registered trademarks of Ascend, and Multiband Bandwidth on Demand, Multiband
Plus, Multiband VSX, MAX, Pipeline Remote LAN Access Router, GRF, Ascend
Accelerated, MultiDSL, Multilink Protocol Plus (MP+) Pipeline 25, Pipeline 50
and Pipeline 400 are trademarks of Ascend. Whitetree is a registered trademark
of Whitetree, and LANES, Whitetree (and Design), WM1000 and WS3000 are
trademarks of Whitetree. This Prospectus/Consent Solicitation Statement also
may include other trademarks and trade names which are the property of their
respective owners.
2
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TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... 2
SUMMARY................................................................... 6
The Companies........................................................... 6
Purpose of Solicitation of Consents..................................... 7
Record Date............................................................. 7
Vote Required........................................................... 7
Effects of the Merger................................................... 7
Escrow and Indemnification.............................................. 10
Recommendation of the Whitetree Board of Directors...................... 10
Opinion of Whitetree's Financial Advisor................................ 10
Interests of Certain Persons in the Merger.............................. 11
Voting Agreements....................................................... 11
Effective Time of the Merger............................................ 12
Conditions to the Merger................................................ 12
Regulatory Requirements................................................. 12
Termination............................................................. 12
Surrender of Whitetree Stock Certificates............................... 13
Certain Federal Income Tax Consequences................................. 13
Accounting Treatment.................................................... 13
Comparison of Stockholder Rights........................................ 13
Dissenters' Rights...................................................... 13
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA................ 14
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA............. 17
MARKET PRICE INFORMATION.................................................. 18
RISK FACTORS.............................................................. 19
Risks Relating to the Merger............................................ 19
Risks Relating to Ascend................................................ 19
CONSENT OF SHAREHOLDERS OF WHITETREE...................................... 25
General................................................................. 25
Record Date and Outstanding Shares...................................... 25
Consent Required........................................................ 25
THE MERGER................................................................ 26
Background of the Merger................................................ 26
Reasons for the Merger; Recommendation of the Whitetree Board of
Directors.............................................................. 27
Opinion of Whitetree's Financial Advisor................................ 29
Interests of Certain Persons in the Merger.............................. 30
Voting Agreements....................................................... 31
Accounting Treatment.................................................... 31
Certain Federal Income Tax Consequences................................. 32
Regulatory Requirements................................................. 33
Federal Securities Law Consequences..................................... 34
Nasdaq National Market Quotation........................................ 34
Dissenters' Rights...................................................... 34
</TABLE>
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TABLE OF CONTENTS--(CONTINUED)
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<S> <C>
THE MERGER AGREEMENT...................................................... 36
The Merger.............................................................. 36
Conversion of Securities................................................ 36
Escrow and Indemnification.............................................. 38
Representations and Warranties.......................................... 38
Certain Covenants and Agreements........................................ 39
Conditions to Closing................................................... 41
Related Matters After the Merger........................................ 42
Termination............................................................. 42
Amendment and Waiver.................................................... 43
Expenses................................................................ 43
INFORMATION CONCERNING ASCEND............................................. 44
Business................................................................ 44
Applications............................................................ 44
The Ascend Solution..................................................... 45
Ascend Strategy......................................................... 45
Current Products........................................................ 47
Technology.............................................................. 50
Marketing and Sales..................................................... 51
Technical Assistance and Support........................................ 52
Research and Development................................................ 53
Competition............................................................. 54
Manufacturing and Quality............................................... 54
Proprietary Rights...................................................... 55
Employees............................................................... 55
Properties.............................................................. 56
Management.............................................................. 56
Selected Consolidated Financial Data.................................... 59
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 59
Security Ownership of Certain Beneficial Owners and Management.......... 63
Executive Compensation and Other Matters................................ 64
INFORMATION CONCERNING WHITETREE.......................................... 67
Business................................................................ 67
Industry Background..................................................... 67
The Whitetree Solution.................................................. 68
Whitetree Stand-Alone Strategy.......................................... 68
Current Products........................................................ 69
Development Efforts..................................................... 70
Manufacturing, Sales and Distribution................................... 71
Competition............................................................. 71
Technology Alliances and Partnerships................................... 71
Employees............................................................... 71
Properties.............................................................. 72
Management.............................................................. 72
Selected Consolidated Financial Data.................................... 74
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 74
Security Ownership of Certain Beneficial Owners and Management.......... 77
Executive Compensation.................................................. 78
</TABLE>
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TABLE OF CONTENTS--(CONTINUED)
<TABLE>
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UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS............. 80
COMPARISON OF RIGHTS OF HOLDERS OF WHITETREE CAPITAL STOCK AND HOLDERS OF
ASCEND CAPITAL STOCK.................................................... 86
DESCRIPTION OF ASCEND CAPITAL STOCK...................................... 91
Common Stock........................................................... 91
Certain Charter Provisions............................................. 91
Preferred Stock........................................................ 91
LEGAL MATTERS............................................................ 91
EXPERTS.................................................................. 92
INDEX TO ASCEND COMMUNICATIONS, INC. AND WHITETREE, INC. FINANCIAL
STATEMENTS.............................................................. F-1
ANNEX A--AGREEMENT AND PLAN OF MERGER.................................... A-1
ANNEX B--OPINION OF DEUTSCHE MORGAN GRENFELL INC. ...................... B-1
ANNEX C--CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW............ C-1
ANNEX D--WHITETREE, INC. AMENDED AND RESTATED ARTICLES OF INCORPORATION
(AS AMENDED)............................................................ D-1
ANNEX E--WHITETREE, INC. BYLAWS. ....................................... E-1
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus/Consent Solicitation Statement. Reference is made to, and this
summary is qualified in its entirety by, the more detailed information
contained in this Prospectus/Consent Solicitation Statement and the Annexes
hereto. Whitetree shareholders are urged to read this Prospectus/Consent
Solicitation Statement and the Annexes hereto in their entirety. This
Prospectus/Consent Solicitation Statement contains a number of forward-looking
statements which reflect the current views of Ascend and/or Whitetree with
respect to future events that will have an effect on their future financial
performance. These forward-looking statements are subject to various risks and
uncertainties, including those set forth under "Risk Factors" and elsewhere
herein, that could cause actual results to differ materially from historical
results or those currently anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements. All share and per share
data of Ascend in this Prospectus/Consent Solicitation Statement reflect all
stock splits of Ascend Common Stock effected prior to the date hereof.
THE COMPANIES
Ascend. Ascend develops, manufactures, markets, sells and supports a broad
range of high-speed integrated remote networking products that enable its
customers to build: (i) Internet access systems consisting of point-of-presence
("POP") termination equipment for Internet service providers ("ISPs") and
remote site Internet access equipment for Internet subscribers; (ii) high speed
Internet Protocol ("IP") switches for application in telecommunications
carriers and ISP backbone networks; (iii) extensions and enhancements to
corporate backbone networks that facilitate access to these networks by remote
offices, telecommuters and mobile computer users; and (iv) videoconferencing
and multimedia access facilities. These products support existing digital and
analog networks.
Ascend has four product families, each of which is focused on a major
application segment: MAX products for wide area network ("WAN") access to
corporate backbone networks, Internet access in POPs and multimedia access
facilities; GRF products for high performance IP switching in Internet and
carrier backbone networks; Pipeline and NetWarp products for telecommuting,
remote office access and Internet access by individual sites or users; and
Multiband products for videoconferencing and multimedia networks. Ascend's
products offer integrated security and network management functionality. These
products support a wide variety of application interfaces, switched digital
services, digital modem services and digital and analog access line types. This
wide range of connectivity and interoperability options significantly increases
the number of telecommunication carrier, ISP POP, corporate and individual
sites that can benefit from Ascend's products. Ascend's products are
distributed and serviced globally and Ascend maintains marketing and sales
relationships with ISPs, including UUNET, PSI, BBN, MCI, Demon Internet (UK)
and IIJ (Japan), with major telecommunications carriers, including AT&T,
Sprint, MCI, GTE, Pacific Bell, Southwestern Bell, British Telecom, France
Telecom, Deutsche Telecom and NTT in Japan, with video equipment providers,
including Compression Labs, PictureTel and VTEL, and with value-added resellers
and distributors throughout the world.
Ascend was incorporated in California in 1989 and reincorporated in Delaware
in 1994. Ascend's principal offices are located at One Ascend Plaza, 1701
Harbor Bay Parkway, Alameda, California 94502, and its telephone number at that
location is (510) 769-6001.
Whitetree. Whitetree develops and markets networking products that are
designed to enable next generation local area networks ("LANs") and WANs.
Whitetree also has established expertise in Asynchronous Transfer Mode ("ATM")
technology, and is building upon its technical expertise in both LAN and WAN to
develop next generation packet and/or cell gigabit-speed connection-oriented
switching products. Whitetree's products permit differing protocol-based
LAN/WAN equipment to co-exist on the same network, eliminating the need for
"forklift" upgrades. Whitetree's solutions are intended to position it to
benefit from the growth in the LAN/WAN switching markets, including the upgrade
to higher speed networks (e.g., Gigabit Ethernet).
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Whitetree was incorporated in California in 1993. Whitetree's principal
offices are located at 1371 Shorebird Way, Mountain View, California 94043, and
its telephone number at that location is (415) 855-0855.
Sub. Sub was incorporated in Delaware in 1997 for the purpose of effecting
the acquisition of Whitetree via the Merger. Sub has no material assets and has
not engaged in any activities except in connection with the proposed
acquisition of Whitetree. Sub's principal offices are located at One Ascend
Plaza, 1701 Harbor Bay Parkway, Alameda, California 94502, and its telephone
number at that location is (510) 769-6001.
PURPOSE OF SOLICITATION OF CONSENTS
The purpose of the solicitation of the Consents from the shareholders of
Whitetree is to request approval of (i) the Merger Agreement, pursuant to which
Sub will be merged with and into Whitetree, resulting in Whitetree becoming a
wholly-owned subsidiary of Ascend, (ii) the related Agreement of Merger to be
filed with the California Secretary of State in order to effect the Merger
("Agreement of Merger"), (iii) the establishment of an escrow fund against
which claims for indemnification may be made by Ascend and certain related
parties following consummation of the Merger (the "Escrow Fund"), (iv) the
appointment of Geoffrey Yang as the shareholder agent for the Escrow Fund (the
"Shareholder Agent"), and (v) certain related matters. Approval of the
foregoing matters shall constitute approval of all of the matters related to
the Merger described herein. See "Consent of Shareholders of Whitetree" and
"The Merger Agreement--Escrow and Indemnification."
RECORD DATE
Only holders of record at the close of business on February 14, 1997 (the
"Record Date") of issued and outstanding shares of Whitetree Capital Stock are
entitled to consent to the approval of the Merger Agreement, the Agreement of
Merger, the establishment of the Escrow Fund and the appointment of Geoffrey
Yang as the shareholder agent for the Escrow Fund. As of February 14, 1997,
there were 70 Whitetree shareholders of record and 2,899,720 shares of
Whitetree Common Stock and 10,285,601 shares of Whitetree Preferred Stock
issued and outstanding.
VOTE REQUIRED
Approval of the Merger requires the consent of holders of (i) a majority of
the outstanding shares of Whitetree Common Stock entitled to vote and (ii) a
majority of the outstanding shares of Whitetree Preferred Stock entitled to
vote. See "Consent of Shareholders of Whitetree--Consent Required."
The directors and executive officers of Whitetree and certain of their
affiliates have entered into agreements with Ascend whereby they have agreed to
vote the shares of Whitetree Capital Stock over which they have voting control
and to execute written consents with respect to such shares in favor of
approval of the Merger Agreement and the Merger and any matter which could
reasonably be expected to facilitate the Merger, and, in connection therewith,
have granted irrevocable proxies to the Board of Directors of Ascend covering
approximately 1,658,383 shares of Whitetree Common Stock, or 57% of the
outstanding Whitetree Common Stock as of the Record Date and approximately
8,081,482 shares of Whitetree Preferred Stock, or 79% of the outstanding
Whitetree Preferred Stock as of the Record Date. See "The Merger--Voting
Agreements."
EFFECTS OF THE MERGER
Upon consummation of the Merger pursuant to the Merger Agreement, Sub will be
merged with and into Whitetree, which will be the surviving corporation (the
"Surviving Corporation"), Whitetree will become a
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wholly-owned subsidiary of Ascend, and the shares of Whitetree Capital Stock
which either (a) are issued and outstanding at the Effective Time or (b) would
be outstanding upon exercise of each then-outstanding option to purchase
Whitetree Common Stock, whether vested or unvested (a "Whitetree Option") or
upon conversion of Whitetree securities which are convertible into Whitetree
Capital Stock (including all warrants to purchase Whitetree Capital Stock (each
a "Whitetree Warrant"), if any, which remain outstanding at the Effective Time)
shall be converted, in the aggregate, into the right to receive (or options to
acquire, in the case of Whitetree Options) a certain number of shares of Ascend
Common Stock (the "Merger Consideration"). The Merger Consideration shall be
determined as follows: (i) if the average of the last sale prices of Ascend
Common Stock as reported by The Nasdaq National Market for the
five (5) consecutive trading days immediately preceding the Closing Date (the
"Ascend Average Stock Price") is equal to or greater than $60.00 and equal to
or less than $80.00, the Merger Consideration shall be 1,100,000 shares of
Ascend Common Stock; (ii) if the Ascend Average Stock Price is greater than
$80.00, the Merger Consideration shall be adjusted so that it is equal to the
quotient of $88,000,000 divided by the Ascend Average Stock Price; and (iii) if
the Ascend Average Stock Price is less than $60.00, the Merger Consideration
shall be adjusted so that it is equal to the quotient of $66,000,000 divided by
the Ascend Average Stock Price. If the Ascend Average Stock Price is greater
than $91.11 and Ascend does not agree to fix the Merger Consideration at
970,000 shares of Ascend Common Stock, Whitetree shall have the right to
terminate the Merger Agreement; and if the Ascend Average Stock Price is less
than $48.89 and Whitetree does not agree to fix the Merger Consideration at
1,350,000 shares of Ascend Common Stock, Ascend shall have the right to
terminate the Merger Agreement.
Subject to the foregoing limitations, each share of Whitetree Capital Stock
which is issued and outstanding at the Effective Time shall be converted into
the consideration set forth below:
(i) Each share of Series D Preferred Stock which is issued and
outstanding as of the Effective Time (other than shares owned by Ascend and
its wholly-owned subsidiaries and other than Dissenting Shares (as defined
below)) shall be converted into the right to receive a fraction of a fully
paid and non-assessable share of Ascend Common Stock that is equal to the
quotient of (A) $7.68, divided by (B) the Ascend Average Stock Price (the
"Series D Conversion Number").
(ii) Each share of Whitetree Common Stock, Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock which is issued and
outstanding as of the Effective Time (other than shares owned by Ascend and
its wholly-owned subsidiaries and other than Dissenting Shares) shall be
converted into the right to receive a fraction of a fully paid and non-
assessable share of Ascend Common Stock that is equal to the quotient of
(A) the Merger Consideration, less the aggregate number of shares of Ascend
Common Stock issuable to holders of Series D Preferred Stock, as described
above, divided by (B) the sum of the aggregate number of shares of
Whitetree Common Stock, Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock which are issued and outstanding as of the
Effective Time (other than shares owned by Ascend and its wholly-owned
subsidiaries) and the aggregate number of shares of Whitetree Common Stock
which are issuable upon exercise of the Whitetree Options and upon the cash
exercise of Whitetree Warrants other than Whitetree Warrants to purchase
Series D Preferred Stock (the "Common Conversion Number"). Solely for
purposes of clauses (A) and (B) of this paragraph (ii), no shares of
Whitetree Capital Stock shall be deemed to be Dissenting Shares.
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The following table sets forth the approximate conversion numbers applicable
to, and the approximate value of the Ascend Common Stock to be received in
exchange for each share of Whitetree Capital Stock, at various Ascend Average
Stock Prices. The conversion numbers and valuations contained in the table
assume no change in Whitetree's capital structure since February 14, 1997 and
the cash exercise prior to the Effective Time of all Whitetree Warrants except
Whitetree Warrants to purchase Series D Preferred Stock. Dollar values are
based on the Ascend Average Stock Prices and may not reflect actual market
value realizable by shareholders of Whitetree.
<TABLE>
<CAPTION>
WHITETREE COMMON STOCK,
SERIES A PREFERRED STOCK,
SERIES B PREFERRED STOCK AND
SERIES C PREFERRED STOCK SERIES D PREFERRED STOCK
------------------------------ ------------------------------
DOLLAR VALUE OF
ASCEND COMMON STOCK
RECEIVED PER SHARE DOLLAR VALUE OF
OF WHITETREE ASCEND COMMON
COMMON CAPITAL STOCK SERIES D STOCK RECEIVED PER
ASCEND AVERAGE CONVERSION (OTHER THAN SERIES CONVERSION SHARE OF SERIES D
STOCK PRICES NUMBER D PREFERRED STOCK) NUMBER PREFERRED STOCK
-------------- ---------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C>
$91.11...... .0647 $5.89 .0843 $7.68
80.00...... .0736 5.89 .0960 7.68
70.00...... .0728 5.09 .1097 7.68
64.25...... .0721 4.63 .1195 7.68
60.00...... .0716 4.30 .1280 7.68
56.00...... .0767 4.30 .1371 7.68
48.89...... .0878 4.30 .1571 7.68
</TABLE>
The number of shares to be issued to each holder of Whitetree Capital Stock
exchanged pursuant to the Merger Agreement who would otherwise be entitled to
receive a fraction of a share of Ascend Common Stock (after taking into account
all of the Whitetree Capital Stock delivered by such holder) shall be rounded
up to the nearest whole share. All such shares of Whitetree Capital Stock, when
so converted, no longer shall be outstanding and automatically shall be
cancelled and retired and shall cease to exist, and each holder of a
certificate representing any such shares shall cease to have any rights with
respect thereto, except the right to receive the shares of Ascend Common Stock
upon the surrender of such certificate in accordance with the procedures
detailed below, without interest. See "The Merger Agreement--Conversion of
Securities."
Upon the consummation of the Merger, each Whitetree Warrant which is
outstanding at the Effective Time and which has not theretofore been exercised,
will be treated as if such Whitetree Warrant had been exercised immediately
prior to the Effective Time pursuant to the net exercise provisions thereof,
and will automatically be converted, without further action by Whitetree or the
holder thereof, into the right to receive that number of shares of Ascend
Common Stock into which the shares of Whitetree Capital Stock issuable pursuant
to the net exercise provisions of such Whitetree Warrant would be converted in
the Merger. See "The Merger Agreement--Conversion of Securities."
Based upon the outstanding shares of Whitetree Capital Stock and Ascend
Common Stock as of March 11, 1997 (and assuming (i) the cash exercise of all
then-outstanding Whitetree Warrants prior to the Effective Time, (ii) no
exercise by Whitetree shareholders of their dissenters' rights and (iii) an
Ascend Average Stock Price equal to the last sale price of Ascend Common Stock
on March 11, 1997 (i.e. $56.00)), the shareholders of Whitetree immediately
prior to the consummation of the Merger will own approximately 1% of the
outstanding shares of Ascend Common Stock immediately following the
consummation of the Merger.
Upon consummation of the Merger, each Whitetree Option will be assumed by
Ascend and will be deemed to constitute an option to acquire, on the same terms
and conditions as were applicable under such Whitetree Option, the same number
of shares of Ascend Common Stock (rounded down to the nearest whole share) as
the
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holder of such Whitetree Option would have been entitled to receive pursuant to
the Merger had such holder exercised such Whitetree Option in full immediately
prior to the consummation of the Merger, at a price per share (rounded up to
the nearest whole cent) equal to the per share exercise price of such Whitetree
Option as in effect immediately prior to the Effective Time divided by the
Common Conversion Number. Following the Effective Time, Ascend will issue to
each holder of a Whitetree Option a document evidencing the assumption of such
Whitetree Option by Ascend. See "The Merger Agreement--Certain Covenants and
Agreements."
ESCROW AND INDEMNIFICATION
At the Effective Time, Ascend will deposit into escrow certificates
representing five percent (5%) of the shares of Ascend Common Stock issuable to
the holders of Whitetree Capital Stock in the Merger, on a pro rata basis. If
any of the Whitetree Options assumed by Ascend are exercised after the
Effective Time and before the end of the Escrow Period (as defined below), five
percent (5%) of the shares of Ascend Common Stock issuable upon exercise of
such Whitetree Options will be added to the Escrow Fund. If, at the end of the
Escrow Period any Whitetree Options have not been exercised, such options will
be subject to similar adjustment, and the number of shares of Ascend Common
Stock issuable upon the exercise of such options will be reduced in proportion
to any reduction in the number of shares of Ascend Common Stock received by
holders of Whitetree Options assumed by Ascend which are exercised prior to the
termination of the Escrow Fund. The Escrow Fund will be available to indemnify
Ascend and certain related parties for damages that they incur or reasonably
anticipate incurring by reason of the breach by Whitetree of any
representation, warranty, covenant or agreement of Whitetree contained in the
Merger Agreement. Claims against the Escrow Fund shall be Ascend's sole remedy
following the Merger for any such breaches. Ascend's right to receive shares
from the Escrow Fund is subject to certain limitations. The Escrow Fund will
continue in existence until the earlier of (i) 5 p.m., California time, one
year following the Closing Date or (ii) the filing with the Commission of the
Ascend Annual Report on Form 10-K for the fiscal year ended December 31, 1997
or (iii) the release of Ascend's Annual Report to Stockholders for the fiscal
year ended December 31, 1997 (the "Escrow Period"); provided however, that six
(6) months after the Closing Date if there are no pending or disputed claims,
fifty percent (50%) of the number of shares comprising the Escrow Fund less any
payments made to Ascend and certain related parties as a consequence of any
damages shall be released to the former shareholders of Whitetree on a pro rata
basis. See "The Merger Agreement--Escrow and Indemnification."
RECOMMENDATION OF THE WHITETREE BOARD OF DIRECTORS
The Board of Directors of Whitetree (the "Whitetree Board") has approved the
Merger Agreement and the transactions contemplated therein and recommends that
holders of Whitetree Capital Stock approve the Merger Agreement, the filing of
the Agreement of Merger with the Secretary of State of the State of California,
the establishment of the Escrow Fund and the appointment of Geoffrey Yang as
the shareholder agent for the Escrow Fund. See "The Merger--Reasons for the
Merger; Recommendation of the Whitetree Board of Directors."
OPINION OF WHITETREE'S FINANCIAL ADVISOR
At a meeting of the Whitetree Board on February 14, 1997, Deutsche Morgan
Grenfell Technology Group ("DMG") rendered its written opinion (the '"Opinion")
that, as of such date based upon and subject to the various considerations set
forth in the Opinion, the Common Conversion Number pursuant to the Merger
Agreement was fair from a financial point of view to the holders of shares of
Whitetree Common Stock. The full text of the Opinion of DMG, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken in connection with the Opinion, is attached as Annex B to this
Prospectus/Consent Solicitation Statement and is incorporated herein by
reference. Whitetree shareholders are urged to, and should, read the Opinion in
its entirety. See "The Merger--Opinion of Whitetree's Financial Advisor."
10
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of February 14, 1997, directors and executive officers of Ascend and their
affiliates may be deemed to be beneficial owners of approximately 4.4% of the
outstanding shares of Ascend Common Stock. See "Information Concerning Ascend--
Security Ownership of Certain Beneficial Owners and Management." Ascend
stockholders are not required to approve the Merger.
As of February 14, 1997, directors and executive officers of Whitetree and
their affiliates may be deemed to be beneficial owners of approximately 57% of
the outstanding shares of Whitetree Common Stock and 79% of the outstanding
shares of Whitetree Preferred Stock. See "Information Concerning Whitetree--
Security Ownership of Certain Beneficial Owners and Management."
Three Whitetree officers, who also are directors of Whitetree, Maureen
Lawrence, President and Chief Executive Officer, Kingston Duffie, Chief
Technology Officer, and M. Denise Savoie, Vice President of Business Operations
and Chief Financial Officer, and one additional director of Whitetree, Dr.
David Liddle, hold shares of Whitetree Common Stock pursuant to stock purchase
agreements which provide that all such shares are immediately released from a
repurchase option in favor of Whitetree in the event of a merger of Whitetree
in which immediately after such merger, less than 51% of Whitetree's Capital
Stock is owned by persons who owned in the aggregate at least 51% of
Whitetree's Capital Stock immediately before such merger. Because the Merger
involves a change in ownership of more than 51% of Whitetree's Capital Stock,
106,062, shares of Whitetree Common Stock held by Ms. Lawrence, 10,775 shares
of Whitetree Common Stock held by Mr. Duffie, 11,285 shares of Whitetree Common
Stock held by Ms. Savoie and 32,083 shares of Whitetree Common Stock held by
Dr. Liddle, are subject to immediate release from the repurchase option in
favor of Whitetree assuming that the Merger is consummated on April 1, 1997. In
addition, an aggregate of 88,077 shares held by other holders of the Whitetree
Common Stock will be released from a repurchase option in favor of Whitetree
assuming that the Merger is consummated on April 1, 1997.
The directors and executive officers of Whitetree and certain of their
affiliates are obligated to vote or direct the vote of all of the outstanding
shares of Whitetree Capital Stock over which they have voting control (and to
execute written consents with respect to such shares) in favor of the approval
of the Merger Agreement and any matter that could reasonably be expected to
facilitate the Merger. See "The Merger--Voting Agreements."
As a condition to the consummation of the Merger, Maureen Lawrence, Kingston
Duffie and Kathryn Hill, each of whom is an executive officer of Whitetree,
will accept employment with Ascend. See "The Merger Interests of Certain
Persons in the Merger."
Under the Merger Agreement, Ascend is required to provide indemnification to
the directors and officers of Whitetree against certain liabilities. See "The
Merger Agreement--Certain Covenants and Agreements."
The foregoing interests of the directors, executive officers and certain
shareholders of Whitetree in the Merger may mean that such persons have a
personal interest in the Merger which may not be identical to the interest of
other Whitetree shareholders.
VOTING AGREEMENTS
In connection with the execution of the Merger Agreement, each of the
directors and executive officers of Whitetree and certain of their affiliates
(who, as of February 14, 1997, together held approximately 57% of the
outstanding shares of Whitetree Common Stock and approximately 79% of the
outstanding shares of Whitetree Preferred Stock), entered into voting
agreements (the "Voting Agreements") pursuant to which such persons agreed,
among other things, (i) to vote the shares of Whitetree Capital Stock over
which they have voting control in favor of approval of the Merger Agreement and
the Merger and any matter which could reasonably be expected to facilitate the
Merger and against any proposal made in opposition to or competition with the
consummation of the Merger or which would, or could reasonably be expected to,
prohibit or discourage the Merger, (ii) not to transfer, pledge, sell, exchange
or offer to transfer or sell or otherwise dispose of or encumber any shares of
Whitetree Capital Stock, and (iii) not to enter into any agreement to do any of
the foregoing prior to the earliest of the consummation of the Merger or the
termination of the Merger Agreement. See "The Merger--Voting Agreements."
11
<PAGE>
EFFECTIVE TIME OF THE MERGER
It is anticipated that the Merger will be completed as promptly as
practicable after the requisite approval by the shareholders of Whitetree has
been obtained and all other conditions to the Merger have been satisfied or
waived. It is anticipated that, assuming all conditions are met, the Merger
will become effective on April 1, 1997.
CONDITIONS TO THE MERGER
The consummation of the Merger is subject to the satisfaction of certain
conditions, including the following: (i) the Agreement of Merger and the Merger
shall have been approved and adopted by requisite vote of holders of Whitetree
Capital Stock (including any requisite class votes) pursuant to the California
General Corporation Law (the "CGCL"); (ii) the required federal and state
regulatory filings and approvals shall have been made and obtained; (iii) the
waiting period required by the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), shall have expired or early termination shall
have been granted; (iv) there shall be no order, injunction or other legal or
regulatory restraint or prohibition in effect preventing the consummation of
the Merger or restricting the conduct of either Ascend's or Whitetree's
business after the consummation of the Merger; (v) counsel to Ascend and
Whitetree shall have rendered opinions that the Merger will be treated as a
tax-free reorganization for federal income tax purposes; (vi) Ascend shall have
received a letter from Ernst & Young LLP and Whitetree shall have received a
letter from Price Waterhouse LLP as to their concurrence with the respective
company's management regarding the appropriateness of pooling of interests
accounting for the Merger under Accounting Principles Board Opinion No. 16 if
the Merger is consummated in accordance with the Merger Agreement;
(vii) Ascend, Sub and Whitetree shall have performed, in all material respects,
all obligations required to be performed by the respective parties at or prior
to the Closing Date; (viii) the accuracy of the parties' representations and
warranties when made and, in the case of certain representations and warranties
(including Whitetree's representations and warranties concerning its
intellectual property), at the Closing Date; (ix) all required third-party
consents shall have been received; (x) the Registration Statement shall have
become effective, all required blue sky authorizations shall have been received
and the shares of Ascend Common Stock to be issued in the Merger shall have
been authorized for quotation on The Nasdaq National Market; (xi) the execution
and delivery of certain ancillary agreements; and (xii) no event shall have
occurred which would have a material adverse effect on Ascend. Neither a
decrease in the market price or trading volume of Ascend Common Stock nor a
failure by Ascend to meet the earnings predictions of equity analysts as
reflected in the First Call consensus estimate for any period ending (or for
which earnings are released) between February 14, 1997 and the Closing Date
shall be deemed by themselves to constitute a material adverse effect on
Ascend. See "The Merger--Accounting Treatment," "--Certain Federal Income Tax
Consequences" and "The Merger Agreement--Conditions to Closing."
REGULATORY REQUIREMENTS
The consummation of the Merger is subject to certain regulatory requirements,
including expiration of the applicable waiting period under the HSR Act. On
February 25, 1997, Ascend and Whitetree each filed a notification and report
form under the HSR Act, together with a request for early termination of the
applicable 30-day waiting period. See "The Merger--Regulatory Requirements."
TERMINATION
The Merger Agreement is subject to termination by mutual written consent of
Ascend and Whitetree and at the option of either Ascend or Whitetree if the
Merger is not consummated by May 31, 1997, unless the waiting period pursuant
to the HSR Act has not expired, in which event the Merger Agreement shall not
be terminable by either party until September 30, 1997. The Merger Agreement
also is subject to termination by Ascend or Whitetree if a court of competent
jurisdiction or other governmental entity permanently enjoins, restrains or
otherwise prohibits the Merger. In addition, (i) Ascend may terminate the
Merger Agreement if the Ascend
12
<PAGE>
Average Stock Price is less than $48.89 and Whitetree does not agree to fix the
Merger Consideration at 1,350,000 shares of Ascend Common Stock; and (ii)
Whitetree may terminate the Merger Agreement if the Ascend Average Stock Price
is greater than $91.11 and Ascend does not agree to fix the Merger
Consideration at 970,000 shares of Ascend Common Stock. See "The Merger
Agreement--Termination."
SURRENDER OF WHITETREE STOCK CERTIFICATES
If the Merger is consummated, The First National Bank of Boston (the
"Exchange Agent") will mail a letter of transmittal with instructions to all
holders of record of Whitetree Capital Stock immediately prior to the Merger
for use in surrendering their share certificates in exchange for certificates
representing shares of Ascend Common Stock. CERTIFICATES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED. See "The Merger
Agreement--Conversion of Securities."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be a tax-free reorganization so that no gain or
loss would be recognized by Ascend or Whitetree and no gain or loss would be
recognized by Whitetree shareholders, except in respect to cash received
pursuant to the exercise of dissenters' rights. Holders of Whitetree Warrants
may be subject to federal income tax. Whitetree shareholders are urged to
consult their own tax advisors as to the specific tax consequences of the
Merger to the individual shareholder. It is a condition to the consummation of
the Merger that Ascend and Whitetree shall each have received an opinion from
their respective counsel to the effect that the Merger will constitute a tax-
free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). For a further discussion of
federal income tax consequences of the Merger, see "The Merger--Certain Federal
Income Tax Consequences." See also "The Merger Agreement--Conditions to
Closing."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to the Merger that (i)
Ascend shall have received a letter from Ernst & Young LLP, Ascend's
independent auditors, and (ii) Whitetree shall have received a letter from
Price Waterhouse LLP, Whitetree's independent accountants, as to their
concurrence with the respective company's management regarding the
appropriateness of pooling of interests accounting for the Merger under
Accounting Principles Board Opinion No. 16 if the Merger is consummated in
accordance with the Merger Agreement. See "The Merger--Accounting Treatment"
and "The Merger Agreement--Conditions to Closing."
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Rights of Holders of Whitetree Capital Stock and Holders
of Ascend Capital Stock" for a summary of the material differences between the
rights of holders of Ascend Common Stock and Whitetree Capital Stock.
DISSENTERS' RIGHTS
Holders of Whitetree Capital Stock who object to the Merger may, under
certain circumstances and by following procedures prescribed by the CGCL,
exercise dissenters' rights and receive cash for their shares of Whitetree
Capital Stock in an amount equal to the fair market value of the Whitetree
Capital Stock as determined pursuant to such procedures. The failure of a
dissenting shareholder of Whitetree to follow the appropriate procedures will
result in the termination or waiver of such rights. In the event that a
Whitetree shareholder who attempts to exercise dissenters' rights should fail
to make a proper demand for payment or otherwise relinquishes or loses such
shareholder's status as a dissenting shareholder, such Whitetree shareholder
shall be entitled to receive from Ascend the same number of shares of Ascend
Common Stock that such Whitetree shareholder would have received in the Merger
if such Whitetree shareholder had not attempted to exercise dissenters' rights.
See "The Merger--Dissenters' Rights."
13
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
Ascend's historical balance sheet data at December 31, 1996 and 1995 and
historical statement of income data for each of the three years in the period
ended December 31, 1996 are derived from Ascend's audited consolidated
financial statements included elsewhere in this Prospectus/Consent Solicitation
Statement. Ascend's historical balance sheet data as of December 31, 1994, 1993
and 1992 and historical statement of income data for each of the two years in
the period ended December 31, 1993 are derived from Ascend's audited
consolidated financial statements not incorporated by reference or included
herein. Ascend's consolidated financial statement information is qualified by
and should be read in conjunction with such financial statements and the notes
thereto included elsewhere in this Prospectus/Consent Solicitation Statement.
Whitetree's historical balance sheet data as of September 30, 1996 and 1995 and
the statement of operations data for each of the three years in the period
ended September 30, 1996 are derived from Whitetree's audited consolidated
financial statements included elsewhere in this Prospectus/Consent Solicitation
Statement. Whitetree's historical balance sheet data as of September 30, 1994
and 1993 and statement of operations data for the period from June 1, 1993
(inception) through September 30, 1993 are derived from Whitetree's audited
financial statements which are not included herein. Whitetree's consolidated
financial information is qualified by and should be read in conjunction with
Whitetree's consolidated financial statements and notes thereto included
elsewhere in this Prospectus/Consent Solicitation Statement. The unaudited pro
forma combined financial data is qualified in its entirety by reference to, and
should be read in conjunction with, the unaudited pro forma condensed combining
financial statements and notes thereto included elsewhere in this
Prospectus/Consent Solicitation Statement. The unaudited pro forma combined
statement of income data combines Ascend's historical consolidated results of
operations data for each of the three years in the period ended December 31,
1996 with Whitetree's historical consolidated results of operations data for
each of the three years in the period ended September 30, 1996, giving effect
to the Merger as if it had occurred at the beginning of each period presented.
The unaudited pro forma combined balance sheet data combines Ascend's
historical consolidated balance sheet data as of December 31, 1996 with
Whitetree's historical consolidated balance sheet data as of September 30,
1996, giving effect to the Merger as if it had occurred as of December 31,
1996. The unaudited pro forma combined financial information is not necessarily
indicative of the consolidated operating results or financial position that
would have occurred had the Merger been consummated at the beginning of the
periods presented, nor is it necessarily indicative of future operating results
or financial position. See "Unaudited Pro Forma Condensed Combining Financial
Statements."
14
<PAGE>
ASCEND SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
Net sales................. $549,297 $152,604 $39,655 $16,215 $ 7,236
Gross profit.............. 357,071 99,308 26,268 10,628 3,797
Operating income (loss)... 174,536 39,300 5,151 (462) (4,202)
Net income (loss)......... 113,111 27,535 6,550 (365) (4,064)
Net income (loss) per
share.................... $ 0.89 $ 0.25 $ 0.07 $ 0.00 $ (0.34)
Number of shares used in
per share calculation.... 127,809 111,362 94,583 83,117 12,051
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital..................... $467,883 $262,750 $46,107 $10,578 $ 8,037
Total assets........................ 651,866 370,014 60,857 15,362 11,041
Total stockholders' equity.......... 547,450 324,987 50,675 12,122 9,100
</TABLE>
WHITETREE SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 1, 1993
YEAR ENDED SEPTEMBER 30, (INCEPTION) TO
-------------------------- SEPTEMBER 30,
1996 1995 1994 1993
-------- ------- ------- --------------
<S> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS
DATA:
Net sales.......................... $ 11,680 $ 292 $ -- $ --
Gross profit....................... 2,570 100 -- --
Operating loss..................... (8,346) (6,250) (2,537) (104)
Net loss........................... (8,457) (6,230) (2,500) (104)
Net loss attributable to common
stock............................. (10,271) (7,287) (3,007) (104)
Net loss attributable to common
stock per share................... $ (3.77) $ (3.40) $ (1.57) $(0.25)
Number of shares used in per share
calculation....................... 2,723 2,141 1,912 413
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1996 1995 1994 1993
-------- -------- ------- -----
<S> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital (deficit)................. $ 3,749 $ 925 $ 2,428 $ (35)
Total assets.............................. 11,977 3,836 3,319 36
Mandatorily redeemable convertible
preferred stock.......................... 25,555 11,703 5,646 74
Total stockholders' equity (deficit)...... (20,488) (10,314) (3,059) (104)
</TABLE>
15
<PAGE>
ASCEND AND WHITETREE
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED PRO FORMA COMBINED
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales............................................ $560,977 $152,896 $39,655
Gross profit......................................... 359,641 99,408 26,268
Net income........................................... 108,204 23,175 5,130
Net income per share (2)............................. $ 0.84 $ 0.21 $ 0.05
Shares used in per share computations (2)............ 128,760 112,132 95,134
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital.................................................... $475,292
Total assets....................................................... 670,343
Total stockholders' equity......................................... 556,817
</TABLE>
- --------
(1) See "Unaudited Pro Forma Condensed Combining Financial Statements."
(2) Net loss and net loss per share attributable to common stock for Whitetree
has not been presented since all of Whitetree's mandatorily redeemable
convertible preferred stock, which will convert into the right to receive
Ascend Common Stock upon consummation of the Merger, has been assumed to be
converted to common stock in the unaudited pro forma combining balance
sheet as of December 31, 1996 and for the unaudited pro forma combining
statements of income for each of the three years in the period ended
December 31, 1996 as if the Merger had been consummated on a pooling of
interests basis at the beginning of each period presented.
16
<PAGE>
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth (1) historical net income per share and
historical book value per share data of Ascend; (2) historical net loss per
share and historical book value (deficit) per share data of Whitetree;
(3) unaudited pro forma combined net income per share and unaudited pro forma
book value per share data of Ascend after giving effect to the Merger on a
pooling of interests basis; and (4) unaudited equivalent pro forma combined net
income per share and unaudited equivalent pro forma combined book value per
share data of Whitetree based on the Common Conversion Number of approximately
.0734 of a share of Ascend Common Stock for each share of Whitetree Common
Stock. See "The Merger Agreement--Conversion of Securities." The information in
the table should be read in conjunction with the audited consolidated financial
statements of Ascend and Whitetree and the notes thereto included elsewhere in
this Prospectus/Consent Solicitation Statement. The unaudited pro forma
combined financial data are not necessarily indicative of the net income per
share or book value per share that would have been achieved had the Merger been
consummated as of the beginning of the periods presented and should not be
construed as representative of such amounts for any future dates or periods.
<TABLE>
<CAPTION>
HISTORICAL ASCEND WHITETREE EQUIVALENT
-------------------- PRO FORMA PRO FORMA
ASCEND WHITETREE (4) COMBINED (1)(2) COMBINED (1)(2)(3)
------ ------------- --------------- --------------------
<S> <C> <C> <C> <C>
Net income (loss) per
share:
For the year ended
December 31, 1996 for
Ascend and September
30, 1996 for
Whitetree:
1996................ $0.89 $(3.11) $0.84 $0.06
1995................ 0.25 (2.91) 0.21 0.02
1994................ 0.07 (1.31) 0.05 0.00
Book value per share
at (4):
December 31, 1996 for
Ascend and
September 30, 1996
for Whitetree........ 4.58 (7.06) 4.62 0.34
</TABLE>
- --------
(1) Whitetree has a September 30 fiscal year end and, accordingly, the
Whitetree statements of operations for the years ended September 30, 1996,
1995 and 1994 have been combined with Ascend consolidated statements of
income for the calendar years ended December 31, 1996, 1995 and 1994. In
order to conform Whitetree's fiscal year end to Ascend's calendar fiscal
year end, Whitetree's first quarter ended December 31, 1996 has not been
presented.
(2) Ascend and Whitetree anticipate that the combined company will incur
Merger-related expenses totaling approximately $2.2 million. Such expenses
include investment advisory fees, legal and accounting expenses and other
transaction costs. These costs are expected to be charged to the operations
of Ascend in the quarter in which the Merger is consummated. The effects of
these costs have not been reflected in the historical or pro forma net
income per share data but are reflected in the pro forma book value per
share data as of December 31, 1996.
(3) The Whitetree equivalent pro forma combined per share amounts are
calculated by multiplying the Ascend pro forma combined per share amounts
by the Common Conversion Number of approximately .0734 of a share of Ascend
Common Stock for each share of Whitetree Common Stock.
(4) Net loss and net loss per share attributable to common stock for Whitetree
has not been presented since all of Whitetree's mandatorily redeemable
convertible preferred stock, which will convert into the right to receive
Ascend Common Stock upon consummation of the Merger, has been assumed to be
converted to common stock in the unaudited pro forma combining balance
sheet as of December 31, 1996 and for the unaudited pro forma combining
statements of income for each of the three years in the period ended
December 31, 1996 as if the Merger had been consummated on a pooling of
interests basis at the beginning of each period presented.
(5) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. Ascend pro forma book value per share is computed by dividing
pro forma stockholders' equity, including the effect of pro forma
adjustments, by the pro forma number of shares of Ascend Common Stock which
would have been outstanding had the Merger been consummated as of each
balance sheet date.
17
<PAGE>
MARKET PRICE INFORMATION
Neither the Whitetree Common Stock nor any series of the Whitetree Preferred
Stock is traded in an established public market.
The Ascend Common Stock is quoted on The Nasdaq National Market under the
symbol "ASND."
The table below sets forth, for the calendar quarters indicated, the reported
high and low closing sale prices of Ascend Common Stock as reported on The
Nasdaq National Market. Ascend Common Stock began trading on The Nasdaq
National Market on May 13, 1994. The prices of Ascend Common Stock reflect all
stock splits effected prior to the date hereof.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
Second Quarter (commencing May 13)........................... $ 2.03 $ 1.41
Third Quarter................................................ 3.47 1.61
Fourth Quarter............................................... 5.56 2.72
1995
First Quarter................................................ 8.22 4.94
Second Quarter............................................... 13.00 7.84
Third Quarter................................................ 21.56 12.25
Fourth Quarter............................................... 40.63 16.50
1996
First Quarter................................................ 57.00 32.25
Second Quarter............................................... 70.63 51.75
Third Quarter ............................................... 67.81 41.75
Fourth Quarter............................................... 73.88 60.13
1997
First Quarter (through March 11)............................. 80.25 50.75
</TABLE>
On February 14, 1997, the last full trading day prior to the public
announcement of the Merger Agreement, the last sale price of Ascend Common
Stock as reported on The Nasdaq National Market was $64.25 per share. As of
February 14, 1997, there were approximately 1147 stockholders of record of
Ascend Common Stock.
On March 11, 1997, the most recent practicable date prior to the mailing of
this Prospectus/Consent Solicitation Statement, the last sale price of Ascend
Common Stock as reported on The Nasdaq National Market was $56.00 per share.
Because the market price of Ascend Common Stock is subject to fluctuation,
the number of the shares of Ascend Common Stock that holders of Whitetree
Capital Stock will receive in the Merger (and the market value of those Ascend
shares) may increase or decrease prior to the Effective Time.
WHITETREE SHAREHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
ASCEND COMMON STOCK.
Neither Ascend nor Whitetree has paid any cash dividends on their respective
capital stock since their respective inceptions. Following the Merger, Ascend
intends to retain any future earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future.
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RISK FACTORS
The following risk factors should be considered by holders of Whitetree
Capital Stock in evaluating whether to approve the Merger Agreement and
thereby become holders of Ascend Common Stock. These factors should be
considered in conjunction with the other information included in this
Prospectus/Consent Solicitation Statement. This Prospectus/Consent
Solicitation Statement contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in these forward-looking statements as a result of a variety of
factors, including those set forth below and elsewhere in this
Prospectus/Consent Solicitation Statement.
RISKS RELATING TO THE MERGER
Integration of Certain Operations and Technologies. The managements of
Ascend and Whitetree have entered into the Merger Agreement with the
expectation that the Merger will result in beneficial synergies for Ascend and
Whitetree. See "The Merger--Reasons for the Merger; Recommendation of the
Whitetree Board of Directors." Achieving the anticipated benefits of the
Merger will depend in part upon whether the integration of the two companies'
businesses is accomplished in an efficient and effective manner, and there can
be no assurance that this will occur. The combination of the two companies
will require, among other things, integration of the companies' respective
technologies and coordination of their research and development efforts. There
can be no assurance that such integration will be accomplished smoothly or
successfully. If significant difficulties are encountered in the integration
of the existing technologies or the development of new products and
technologies, resources could be diverted from new product development, and
delays could result in new product introductions. The difficulties of such
integration may be increased by the necessity of coordinating organizations
with distinct cultures. The integration of certain operations following the
Merger will require the dedication of management and other personnel resources
which may temporarily distract attention from the day-to-day business of the
combined company. Failure to successfully accomplish the integration and
development of the two companies' operations and technologies could have a
material adverse effect on the combined company's business, financial
condition or results of operations.
Transaction Charges. Ascend and Whitetree anticipate that the combined
company will incur Merger-related expenses totaling approximately $2.2
million. Such expenses include investment advisory fees, legal and accounting
expenses and other transaction costs. These costs are expected to be charged
to the operations of Ascend in the quarter in which the Merger is consummated.
This amount is a preliminary estimate only and therefore subject to change.
There can be no assurance that the combined company will not incur additional
charges to reflect costs associated with the Merger. See "--Integration of
Recent Acquisitions" and "Selected Historical and Unaudited Pro Forma
Financial Data."
RISKS RELATING TO ASCEND
Fluctuations in Quarterly Operating Results. Ascend has experienced rapid
quarterly growth in net sales principally due to the emergence of several
markets for remote networking products, increased market acceptance of
Ascend's products and the expansion of Ascend's product line and distribution
channels. Due to the evolving nature of the markets for Ascend's products, as
well as the likelihood of increased competition, there can be no assurance
that Ascend's rate of growth in net sales will continue or that Ascend will be
able to sustain profitability in the future. Ascend's quarterly operating
results are affected by a wide variety of factors, including competition, the
mix of products sold, the mix of distribution channels employed, Ascend's
success in developing, introducing and shipping new products, price reductions
for Ascend's products, changes in the levels of inventory held by third party
resellers, the timing of orders from and shipments to customers, seasonality
and general economic conditions. Ascend expects that its gross margins could
be affected in future periods by price adjustments as a result of increased
competition. Ascend also expects that its gross margins could be adversely
affected in future periods by increased sales of its Pipeline products as a
percentage of net sales. These products have lower gross margins than Ascend's
other products. In addition, Ascend's use of third parties to distribute
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its products to certain end-user customers may adversely affect Ascend's gross
margins. Ascend typically operates with a relatively small backlog. As a
result, quarterly sales and operating results generally depend on the volume
and timing of and ability to fulfill orders received within the quarter, which
are difficult to forecast. A significant portion of Ascend's expense levels is
relatively fixed in advance based in large part on Ascend's forecasts of
future sales. If sales are below expectations in any given quarter, the
adverse impact of the shortfall on Ascend's operating results may be magnified
by Ascend's inability to adjust spending to compensate for the shortfall.
Ascend may also increase spending in response to competition or to pursue new
market opportunities. Accordingly, there can be no assurance that Ascend will
be able to sustain profitability in the future, particularly on a quarter-to-
quarter basis.
Dependence on the Internet Access Market; Developing Markets; Market
Acceptance of Ascend's Products. The recent growth in Ascend's net sales, to a
certain extent, has been largely attributable to the use of its products for
Internet and Intranet access. Sales of Ascend's MAX products, which are used
as point-of-presence termination ("POP") devices by Internet service providers
("ISPs"), accounted for approximately 82%, 63% and approximately 26% of
Ascend's net sales in 1996, 1995 and 1994, respectively. Similarly, sales of
Ascend's Pipeline products, which are used for Internet and Intranet access by
service subscribers, were approximately 12%, 20% and approximately 10% of net
sales in 1996, 1995 and 1994, respectively. The market for Internet and
Intranet access products is new and evolving, and it is difficult to predict
its size or future growth rate. Ascend believes that sales of its MAX and
Pipeline products will depend in large part upon a robust industry and
infrastructure for providing Internet and Intranet access and upon sustained
adoption by end-user customers of the Internet for commerce and communication.
There can be no assurance that this industry and infrastructure will develop
or that this adoption will occur. Ascend believes competition in these markets
will increase significantly in the future and could adversely affect Ascend's
business, results of operations and financial condition.
In addition, market acceptance of Ascend's products for applications other
than Internet access is important to Ascend's success. Specifically, Ascend's
products are targeted at access to corporate backbone networks and local area
networks ("LANs") by remote offices, telecommuters and mobile users,
videoconferencing and multimedia access facilities. Ascend's success in
generating significant sales in these emerging markets will depend in part on
its ability to educate users about the benefits of Ascend's technology and to
develop effective distribution channels to address these markets. These
markets are diverse and rapidly evolving, and it is difficult to predict their
potential size or future growth rate. Moreover, Ascend's limited resources
relative to certain of its competitors may restrict its ability to remain
current with respect to developments in these markets and to effectively
pursue marketing activities in multiple markets simultaneously. Accordingly,
there can be no assurance that Ascend's products will be widely accepted in
these new markets or that Ascend will be able to identify additional markets.
The inability of Ascend to continue to penetrate the various markets for its
products or to successfully expand the markets for its products would have a
material adverse effect on its business, results of operations and financial
condition.
Reliance on Sales to Internet Service Providers. In North America, Ascend
sells a substantial percentage of its products, particularly its MAX products,
to ISPs. Sales to ISPs accounted for approximately 20% and 21% of Ascend's net
sales in 1996 and 1995, respectively. Sales to one of these ISPs, UUNET,
accounted for approximately 7% and 11% of net sales in 1996 and 1995,
respectively. Because Ascend's products are being used to enhance or extend
the Internet access infrastructure of the ISPs, Ascend expects that sales to
any particular ISP may vary considerably from period to period. Accordingly,
there can be no assurance that sales to these entities, individually or as a
group, will equal or exceed historical levels in any future period. Any
development that would result in a substantial decrease or delay in sales to
one or more of these entities, including actions by competitors or
technological changes, could have a material adverse effect on Ascend's
business, results of operations and financial condition.
Integration of Recent Acquisitions. Ascend has completed several
acquisitions of businesses, products and technologies since the beginning of
1995. These have included the acquisition of Morning Star Technologies, Inc.,
NetStar, Inc., Subspace Communications, Incorporated and StonyBrook Services,
Inc., which were completed in 1996, as well as the acquisition of InterCon
Systems Corporation, which was completed in February
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1997. Ascend anticipates that it may acquire additional businesses, products
or technologies in the future, although there are currently no agreements with
respect to such transactions. Achieving the anticipated benefits of past and
future acquisition transactions will depend in part upon whether the
integration of the acquired companies' businesses with Ascend's businesses is
accomplished in an efficient and effective manner, and there can be no
assurance that this will occur. The combination of Ascend with such acquired
companies will require, among other things, integration of the companies'
respective product offerings and technology and coordination of their research
and development, sales and marketing and financial reporting efforts. There
can be no assurance that such integration will be accomplished smoothly or
successfully. If significant difficulties are encountered in the integration
of the existing product lines and technology, resources could be diverted from
new product development, and delays may occur in new product introductions.
The integration of product lines could also cause confusion or dissatisfaction
among existing customers of Ascend and the acquired companies. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations with distinct cultures.
The integration of certain operations following an acquisition will require
the dedication of management and other personnel resources which may
temporarily distract attention from the day-to-day business of Ascend. Failure
to successfully accomplish the integration of the operations of Ascend and the
acquired companies could have a material adverse effect on Ascend's business,
financial condition or results of operations.
New Product Development and Timely Introduction of New and Enhanced
Products. The markets for Ascend's products are characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. Inherent in the product
development process are a number of risks. The development of new,
technologically advanced products is a complex and uncertain process requiring
high levels of innovation, as well as the accurate anticipation of
technological and market trends. The introduction of new or enhanced products
also may require Ascend to manage the transition from older products in order
to minimize disruption in customer ordering patterns, avoid excessive levels
of older product inventories and ensure that adequate supplies of new products
can be delivered to meet customer demand. There can be no assurance that
Ascend will successfully develop, introduce or manage the transition of new
products. Products may contain undetected or unresolved software errors when
they are first introduced or as new versions are released. There can be no
assurance that, despite extensive testing, software errors will not be found
in new products or upgrades after commencement of commercial shipments of new
or enhanced products. The inability of such products to gain market acceptance
or problems associated with new product transitions could adversely affect
Ascend's operating results, particularly on a quarterly basis.
Competition. In the wide area network ("WAN") and Internet access market,
Ascend's primary competitors are Cisco Systems Inc. ("Cisco"), U.S. Robotics
Corporation ("U.S. Robotics") and Shiva Corporation ("Shiva"). Cisco has
substantially greater financial, marketing and technical resources than
Ascend. Recently, Cascade Communications has begun offering products to the
WAN and Internet access market. In the WAN and Internet backbone switching
market, Ascend's primary competitors are Cisco and Digital Equipment
Corporation, each of which has substantially greater financial, marketing and
technical resources than Ascend. In the remote LAN and Internet subscriber
access market, competition is widespread, although few companies have
positioned their products specifically as digital bandwidth on demand network
access systems. Ascend's primary competitors in this market are Gandalf,
Cisco, Shiva and 3Com Corporation ("3Com"). In the videoconferencing and
multimedia access market, competitors include Teleos Communications (a
subsidiary of Madge Networks, Inc. ("Madge")), Adtran and Promptus
Communications (a subsidiary of GTI).
Competitive factors in the remote network access market include core
technology, breadth of product features, scalability of products, product
quality and functionality, pricing, marketing and distribution resources,
international certifications and technical service and support. Ascend expects
additional competition from existing competitors and from a number of
companies that may enter Ascend's existing and future markets. Some of
Ascend's current and potential competitors have substantially greater
financial, marketing and technical resources than Ascend. Many also have
established relationships with current and potential customers for Ascend's
products. Increased competition could result in price reductions, reduced
profit margins or loss of
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market share, each of which would adversely affect Ascend's operating results.
There can be no assurance that Ascend will be able to continue to compete
successfully against current and future competitors as bandwidth on demand
markets evolve and competition increases.
Management of Growth. Ascend is currently experiencing rapid growth and
expansion, which has placed, and will continue to place, a significant strain
on its administrative, operational and financial resources and increased
demands on its systems and controls. This growth has resulted in a continuing
increase in the level of responsibility for both existing and new management
personnel. Ascend anticipates that its continued growth will require it to
recruit and hire a substantial number of new engineering, sales and marketing
and managerial personnel. There can be no assurance that Ascend will be
successful at hiring or retaining these personnel. Ascend's ability to manage
its growth successfully will also require Ascend to continue to expand and
improve its operational, management and financial systems and controls and to
expand its manufacturing capacity. If Ascend's management is unable to manage
growth effectively, Ascend's business, results of operations and financial
condition may be materially and adversely affected.
Reliance on Third Party Telecommunications Carriers, Value-Added Resellers
and Distributors. Ascend's sales, to a significant degree, are made through
telecommunications carriers, value-added resellers ("VARs") and distributors.
Accordingly, Ascend is dependent upon the continued viability and financial
stability of these companies. While Ascend has contractual relationships with
many of its telecommunications carriers, VARs and distributors, these
agreements do not require the telecommunications carriers, VARs or
distributors to purchase Ascend's products and can be terminated by the
telecommunications carriers, VARs or distributors at any time. There can be no
assurance that any of Ascend's telecommunications carriers, VARs and
distributors will continue to market Ascend's products. Ascend's
telecommunication carrier customers, VARs and distributors generally offer
products of several different companies, including products that are
competitive with Ascend's products. Accordingly, there is a risk that these
telecommunications carriers, VARs and distributors may give higher priority to
products of other suppliers, thus reducing their efforts to sell Ascend's
products. Any special distribution arrangements and product pricing
arrangements that Ascend may implement in one or more distribution channels
for strategic purposes could adversely affect gross profit margins for its
products.
Dependence on Key Personnel. Ascend's success depends to a significant
degree upon the continuing contributions of its key management, sales,
marketing and product development personnel. Ascend does not have employment
contracts with its key personnel and does not maintain any key person life
insurance policies. The loss of key management or technical personnel could
adversely affect Ascend. Ascend believes that its future success will depend
in large part upon its ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that Ascend will be
successful in attracting and retaining such personnel. Failure to attract and
retain key personnel could have a material adverse effect on Ascend's
business, results of operations and financial condition.
Tariff and Regulatory Matters. Rates for telecommunications services are
governed by tariffs of licensed carriers that are subject to regulatory
approval. Future changes in these tariffs could have a material effect on
Ascend's business. For example, should tariffs for public switched digital
services increase in the future relative to tariffs for private leased
services, the cost-effectiveness of Ascend's products would be reduced, and
its business and results of operations could be adversely affected. In
addition, Ascend's products must meet standards and receive certification for
connection to the public telecommunications network prior to their sale. In
the United States, Ascend's products must comply with Part 15(a) (industrial
equipment), Part 15(b) (residential equipment) and Part 68 (analog lines) of
the Federal Communications Commission's regulations. Ascend's products also
must be certified by domestic telecommunications carriers. In countries
outside the United States, Ascend's products are subject to a wide variety of
governmental review and certification requirements. In addition, customers
outside the United States typically require that Ascend's products receive
certification from their country's primary telecommunications carriers. Any
future inability to obtain on a timely basis or retain domestic certification
or foreign regulatory approvals could have a material adverse effect on
Ascend's business and results of operations.
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Dependence on Contract Manufacturers and Single-Source Suppliers. Ascend's
production operations consist primarily of materials planning and procurement,
quality control and final assembly, burn-in and testing of certain products.
Ascend relies on independent contractors to manufacture certain of Ascend's
products or components and subassemblies used in Ascend's products to its
specifications. Ascend is also dependent upon single or limited source
suppliers for a number of components and parts used in its products, including
certain key microprocessors and integrated circuits. There can be no assurance
that these independent contractors and suppliers will be able to meet Ascend's
future requirements for manufactured products, components and subassemblies.
Ascend generally purchases single or limited source components pursuant to
purchase orders and has no guaranteed supply arrangements with these
suppliers. In addition, the availability of many of these components to Ascend
is dependent in part on Ascend's ability to provide its suppliers with
accurate forecasts of its future requirements. Ascend has generally been able
to obtain adequate supplies of parts and components in a timely manner from
existing sources and endeavors to maintain inventory levels adequate to guard
against interruptions in supplies. Ascend believes that there are alternative
suppliers or alternative components for all of the components contained in its
products. However, any extended interruption in the supply of any of the key
components currently obtained from a single or limited source or the time
necessary to transition a replacement supplier's product or a replacement
component into Ascend's products could disrupt its operations and have a
material adverse effect on Ascend's operating results in any given period.
Ascend purchases certain components from suppliers outside the United States;
however, all such purchases are denominated in U.S. dollars and Ascend
believes all such components or alternate components are available from
suppliers within the United States. Ascend may also be subject to increases in
component costs, which could also have a material adverse effect on its
operating results.
Dependence on Proprietary Technology. Ascend's success and ability to
compete depend in part upon its proprietary technology. Ascend relies on a
combination of patent, copyright and trade secret laws and non-disclosure
agreements to protect its proprietary technology. Ascend currently holds
several United States patents and a foreign patent and has patent applications
pending. There can be no assurance that patents will be issued with respect to
pending or future patent applications or that Ascend's patents will be upheld
as valid or will prevent the development of competitive products. In addition,
Ascend has generally entered into confidentiality or license agreements with
its employees, VARs, distributors, customers and potential customers and
limits access to the distribution of its software, documentation and other
proprietary information. There can be no assurance that the steps taken by
Ascend to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or that Ascend's competitors will not
independently develop technologies that are substantially equivalent or
superior to Ascend's technology. In addition, the laws of some countries do
not protect proprietary rights to the same extent as do the laws of the United
States. Ascend is also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of others. From time
to time, Ascend has received claims of infringement of other parties'
proprietary rights. Although Ascend believes that all such claims received to
date are immaterial, there can be no assurance that third parties will not
assert infringement claims in the future with respect to current or future
products or that any such claims will not require Ascend to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses can be obtained on
commercially reasonable terms.
International Sales. Ascend's international sales accounted for
approximately 48%, 29% and 20% of Ascend's net sales in 1996, 1995 and 1994,
respectively. International sales are expected to continue to account for a
significant portion of Ascend's net sales in future periods. International
sales are subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable and potentially adverse tax consequences. Ascend depends on third
party resellers for a substantial portion of its international sales. Certain
of these third party resellers also act as resellers for competitors of Ascend
and could devote greater effort and resources to marketing competitive
products. The loss of certain of these third party resellers could have a
material adverse effect on Ascend's business and results of operations.
Although Ascend's sales are denominated in U.S. dollars, fluctuations in
currency exchange rates could cause Ascend's products to become
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relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. Furthermore, future
international activity may result in foreign currency denominated sales, and,
in such event, gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations may
contribute to fluctuations in Ascend's results of operations. In addition,
sales in Europe and certain other parts of the world typically are adversely
affected in the third quarter of each calendar year as many customers and end-
users reduce their business activities during the summer months. These
seasonal factors may have an effect on Ascend's business, results of
operations and financial condition.
Potential Issuance of Preferred Stock; Anti-Takeover Provisions. The Board
of Directors of Ascend (the "Ascend Board") has the authority to issue up to
2,000,000 shares of Preferred Stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The rights of the holders of
the Ascend Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of the Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of Ascend, thereby
delaying, deferring or preventing a change in control of Ascend. Furthermore,
such Preferred Stock may have other rights, including economic rights, senior
to the Ascend Common Stock, and as a result, the issuance of such stock could
have a material adverse effect on the market value of the Ascend Common Stock.
Ascend has no present plans to issue shares of Preferred Stock. Ascend may in
the future adopt other measures that may have the effect of delaying,
deferring or preventing a change of control of Ascend. Certain of such
measures may be adopted without any further vote or action by Ascend's
stockholders. Ascend is also afforded the protections of Section 203 of the
Delaware General Corporation Law (the "DGCL"), which could delay or prevent a
change in control of Ascend, impede a merger, consolidation or other business
combination involving Ascend or discourage a potential acquiror from making a
tender offer or otherwise attempting to obtain control of Ascend.
Volatility of Stock Price. Ascend's Common Stock has experienced significant
price volatility and such volatility may occur in the future, particularly as
a result of quarter-to-quarter variations in the actual or anticipated
financial results of Ascend or of other companies in the networking industry
or announcements by Ascend or its competitors regarding new product
introductions or other developments affecting Ascend. In addition, the market
has experienced extreme price and volume fluctuations that have affected the
market price of many technology companies' stocks and that have been unrelated
or disproportionate to the operating performance of these companies.
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CONSENT OF SHAREHOLDERS OF WHITETREE
This Prospectus/Consent Solicitation Statement contains certain information
set forth more fully in the Merger Agreement attached hereto as Annex A and is
qualified in its entirety by reference to the Merger Agreement, which is
hereby incorporated herein by reference. The Merger Agreement and the Consent
should be read carefully by each Whitetree shareholder in deciding whether to
consent to the proposed Merger.
GENERAL
This Prospectus/Consent Solicitation Statement is being furnished to holders
of Whitetree Capital Stock in connection with the solicitation by Whitetree of
shareholder consent to the authorization and approval of the Merger Agreement,
the Agreement of Merger, the establishment of the Escrow Fund, the appointment
of Geoffrey Yang as Shareholder Agent, and related matters.
RECORD DATE AND OUTSTANDING SHARES
Shareholders of record of Whitetree Capital Stock at the close of business
on February 14, 1997, the Record Date, are entitled to authorize and approve
the Merger Agreement, Agreement of Merger, establishment of the Escrow Fund
and the appointment of Geoffrey Yang as Shareholder Agent. On the Record Date,
there were 70 Whitetree shareholders of record and 2,899,720 shares of
Whitetree Common Stock and 10,285,601 shares of Whitetree Preferred Stock
issued and outstanding.
CONSENT REQUIRED
Approval of the Merger requires the consent of holders of (i) a majority of
the outstanding shares of Whitetree Common Stock entitled to vote and (ii) a
majority of the outstanding shares of Whitetree Preferred Stock entitled to
vote. The directors and executive officers of Whitetree and certain of their
affiliates have entered into agreements with Ascend whereby they have agreed
to vote their shares of Whitetree Capital Stock in favor of approval of the
Merger and any matter which could reasonably be expected to facilitate the
Merger, and, in connection therewith, have granted irrevocable proxies to the
Board of Directors of Ascend (the "Ascend Board") covering approximately
1,658,383 shares of Whitetree Common Stock, or approximately 57% of the
outstanding Common Stock as of the Record Date and approximately 8,081,482
shares of Whitetree Preferred Stock, or 79% of the outstanding Whitetree
Preferred Stock as of the Record Date. See "The Merger--Voting Agreements."
Shareholders of Whitetree should complete, sign and date the Consent and
return the Consent by both facsimile and overnight courier or hand-delivery to
Whitetree, Inc., 1371 Shorebird Way, Mountain View, California, 94043,
Attention M. Denise Savoie (Facsimile: (415) 855-0864) by March 19, 1997.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS THEREOF UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. See "The Merger
Agreement--Conversion of Securities."
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THE MERGER
The following discussion of the parties' reasons for the Merger contains
forward-looking statements which involve risks and uncertainties. The actual
results of Ascend, Whitetree and the combined company could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus/Consent Solicitation Statement.
BACKGROUND OF THE MERGER
The acquisition of complementary businesses and product lines is an
important part of Ascend's overall business strategy. Ascend continually
evaluates potential acquisition opportunities and considers potential
alliances, combinations and other strategic transactions with other
participants in the networking industry.
On October 18, 1996, Whitetree retained DMG as its financial advisor to
contemporaneously pursue a possible private placement of Whitetree's
securities and to look into the possibilities of Whitetree being acquired by a
third party.
On December 26, 1996, Mory Ejabat, Ascend's President and Chief Executive
Officer, Jeanette Symons, Executive Vice President, Advanced Products and
Technology Group and Chief Technical Officer of Ascend, and Kingston Duffie,
Whitetree's Chief Technology Officer, met and discussed Whitetree's future
technology plans. At a special meeting held on January 10, 1997, the Whitetree
Board generally discussed the merits of Whitetree being acquired or entering
into a business combination or similar transaction. On January 13, 1997, Mr.
Ejabat and Mr. Duffie continued technology discussions in a meeting at Ascend.
On January 15, 1997, Mr. Ejabat, Bernard Schneider, Ascend's Vice President,
Strategic Business Development, and William H. Kind, Ascend's Vice President,
Engineering, met with Maureen Lawrence, Whitetree's President and Chief
Executive Officer, Mr. Duffie, Kathryn Hill, Vice President of Engineering at
Whitetree, M. Denise Savoie, Whitetree's Vice President of Business Operations
and Chief Financial Officer, and Kurt Bauer, Whitetree's Vice President of
Marketing and Business Development and discussed Whitetree's WS3000 product
and the possibility of a strategic relationship between Ascend and Whitetree.
At a special meeting held on January 17, 1997, the Whitetree Board further
discussed the merits of Whitetree being acquired or entering into a business
combination or similar transaction. On January 21, 1997, Mr. Ejabat and
Robert K. Dahl, Ascend's Vice President, Finance and Chief Financial Officer,
met with Ms. Lawrence and expressed Ascend's interest in entering into a
strategic relationship with Whitetree and became involved in substantive
discussions with Ms. Lawrence concerning the possibility of acquiring
Whitetree. On January 22, 1997 and on January 25, 1997, at special meetings of
the Whitetree Board, representatives of Whitetree's financial advisor reported
on discussions with potential acquirors regarding possible strategic
combinations with Whitetree. Thereafter, on January 29, 1997, Mr. Dahl met
with representatives of Whitetree's financial advisor to discuss the terms of
a potential business combination between Ascend and Whitetree.
During the period from January 29, 1997 to January 31, 1997, Mr. Ejabat had
individual telephone conversations with each of the members of the Ascend
Board concerning the possibility of acquiring Whitetree and to report on the
results of Mr. Dahl's discussion with Whitetree's financial advisor. On
January 31, 1997, Mr. Ejabat and Ms. Lawrence further discussed the terms of a
potential business combination between Ascend and Whitetree and agreed on the
basis upon which Ascend would conduct its due diligence review of Whitetree.
Later on January 31, 1997, at a special meeting of the Whitetree Board,
Ms. Lawrence reviewed with the Whitetree Board discussions with Ascend
regarding the possible acquisition of Whitetree. On February 2, 1997,
Whitetree's financial advisors reviewed in detail with the Whitetree Board
proposed terms for an acquisition of Whitetree by Ascend, and the Whitetree
Board authorized management to proceed with negotiations with representatives
of Ascend.
Beginning on February 8, 1997 and continuing until February 14, 1997,
representatives of Ascend and its counsel and accountants met with
representatives of Whitetree, its counsel and accountants to complete various
aspects of Ascend's due diligence review of Whitetree's business, financial
and legal affairs. On February 10,
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1997, members of Ascend's and Whitetree's management teams met to prepare a
term sheet outlining the terms of a possible business combination between
Ascend and Whitetree. Beginning on February 10, 1997 and continuing until
February 14, 1997, Ascend and Whitetree, and their respective counsel,
negotiated the terms of the Merger Agreement.
On February 14, 1997, the Ascend Board, by unanimous written consent in lieu
of a meeting, unanimously approved the Merger Agreement and related matters
and authorized Ascend's management to proceed with the Merger. On February 14,
1997, at a special meeting of the Whitetree Board, (i) representatives of
Whitetree's financial advisor reported on the financial terms proposed by
Ascend and other business terms of the proposed Merger, (ii) Whitetree's legal
counsel reviewed with the Whitetree Board the proposed terms of the Merger
Agreement, and (iii) representatives of Whitetree's financial adviser provided
financial analyses relating to the proposed Merger and delivered its written
fairness opinion. At the meeting, the Whitetree Board approved the Merger
Agreement and related matters and authorized Whitetree's management to proceed
with the Merger. Roger Evans, who is a member of both the Whitetree Board and
the Ascend Board, was not present at this meeting and recused himself from all
Whitetree Board discussions pertaining to the Merger. On February 14, 1997,
following the special meeting of the Whitetree Board and the execution of the
unanimous written consent by the Ascend Board approving the Merger Agreement,
Ascend, Sub and Whitetree executed the Merger Agreement.
On February 18, 1997, prior to the opening of trading on The Nasdaq National
Market, Ascend issued a news release announcing the Merger.
REASONS FOR THE MERGER; RECOMMENDATION OF THE WHITETREE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF WHITETREE RECOMMENDS THAT THE SHAREHOLDERS OF
WHITETREE EXECUTE AND RETURN CONSENTS FOR APPROVAL OF THE MERGER AGREEMENT AND
THE OTHER MATTERS SET FORTH IN THE CONSENT FOR THE REASONS SET FORTH BELOW.
ASCEND'S REASONS FOR THE MERGER
The Ascend Board unanimously approved the Merger Agreement by written
consent dated February 14, 1997. The Ascend Board believes that consummation
of the Merger is in the best interests of Ascend.
In arriving at its unanimous decision to approve the Merger Agreement, the
Ascend Board reviewed with Ascend's management a number of factors that
supported the consideration to be paid by Ascend in the Merger. Among the
factors that the Ascend Board considered were (i) information concerning
Ascend's and Whitetree's respective businesses, historical financial
performance, operations and products, including possible future product
releases; (ii) Whitetree's technology and the anticipated leverage between
Whitetree's switch products and Ascend's products; (iii) an analysis of the
relative value that Whitetree's technology and products might contribute to
the future business of the combined company; (iv) a comparison of the
financial terms of comparable merger and acquisition transactions; (v) the
compatibility of the management and businesses of Ascend and Whitetree;
(vi) reports from Ascend's management and legal advisors on specific terms of
the relevant agreements, including the Merger Agreement and other matters; and
(vii) Ascend's and Whitetree's historical financial condition and results of
operations.
WHITETREE'S REASONS FOR THE MERGER
The Whitetree Board approved the terms and provisions of the Merger
Agreement at its special meeting held on February 14, 1997. The Whitetree
Board believes the terms of the Merger Agreement and the Merger are fair and
recommends that the Whitetree shareholders approve the Merger Agreement, the
Agreement of Merger, the establishment of the Escrow Fund and the appointment
of Geoffrey Yang as the shareholder agent for the Escrow Fund.
Whitetree expects that the Merger will allow Ascend and Whitetree to share
the result of their combined research and development activities and the
benefits of their combined sales and marketing efforts. Whitetree also
believes that the Merger will allow savings in general and administrative as
well as sales and marketing expenses by enabling Whitetree to utilize Ascend's
infrastructure and therefore invest more in research and
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development than it would otherwise be able to invest. Finally, the Merger is
expected to provide liquidity for Whitetree's shareholders through their
ownership of Ascend Common Stock which is quoted on The Nasdaq National Stock
Market.
In the course of deliberations regarding the sale of Whitetree to Ascend,
the Whitetree Board met with its financial and legal advisors and reviewed the
anticipated benefits summarized above and a number of additional factors
relevant to the Merger. In particular, at meetings of the Whitetree Board held
on January 10, 1997, January 17, 1997, January 22, 1997, January 25, 1997,
January 31, 1997, February 2, 1997 and February 14, 1997, the Whitetree Board
considered, among other things: (i) an evaluation of the prospects of
Whitetree on a stand-alone basis, (ii) Whitetree's immediate and projected
cash needs and the availability from third parties of funding required for
Whitetree to continue to operate on a stand-alone basis; (iii) the anticipated
timing for the introduction of Whitetree's next generation product; (iv) an
evaluation of other strategic alternatives potentially available to Whitetree,
including other merger opportunities; (v) information concerning, and their
knowledge of, Whitetree's and Ascend's respective business, prospects,
historical financial performances and conditions, operations, technologies,
managements, competitive positions, products, customers and future development
plans; (vi) the historical market prices, volatility and trading information
with respect to Ascend Common Stock; (vii) the consideration to be received by
Whitetree shareholders in the Merger and the market value of the shares of
Ascend Common Stock to be issued in exchange for Whitetree Capital Stock and
upon exercise of outstanding Whitetree Options and Whitetree Warrants; (viii)
the terms of the Merger Agreement; (ix) the compatibility of the managements
and businesses of Whitetree and Ascend, as well as the fact that certain
members of Whitetree's senior management would manage the operations relating
to Whitetree's products and business for the combined company; (x) the fact
that the Merger is expected to qualify as a tax-free reorganization; and (ix)
an opinion of Whitetree's financial advisor, DMG, rendered to the Whitetree
Board on February 14, 1997, to the effect that the Common Conversion Number
was fair from a financial point of view to the holders of Whitetree Common
Stock.
The Whitetree Board also considered a variety of potentially negative
factors in its deliberations concerning the Merger, including, among other
things; (i) the potential disruption of Whitetree's business that might result
from employee uncertainty and lack of focus following announcement of the
Merger and during the integration of the operations of Ascend and Whitetree;
(ii) the possibility that the Merger might not be consummated, and the effects
of the public announcement of the Merger on Whitetree's sales and operating
results, its ability to attract and retain key management, marketing and
technical personnel and the progress of certain of its development projects;
(iii) the slower growth of Ascend's revenues compared to the potential growth
of Whitetree's revenues as a stand-alone entity; (iv) the possibility of
management disruption associated with the Merger and the risk that, despite
the efforts of the combined company, the combined company may not be able to
retain key technical, sales and management personnel of Whitetree; (v) the
risk that the benefits sought to be achieved by the Merger will not be
achieved; (vi) the ability of Whitetree to remain as a stand-alone company;
and (vii) other risks described above under "Risk Factors."
In view of the wide variety of factors considered by the Whitetree Board,
the Whitetree Board did not find it practical to, and did not, quantify or
otherwise assign relative weights to the specific factors considered. After
taking into consideration all of the factors set forth above, among others,
the Whitetree Board determined (with the exception of director Roger Evans
who, as a director of Ascend, recused himself from all Whitetree Board
discussions and decisions pertaining to the Merger) that the Merger was fair
to and in the best interests of Whitetree and its shareholders and that
Whitetree should proceed with the Merger.
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OPINION OF WHITETREE'S FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of October 18, 1996 pursuant to
which Whitetree engaged DMG to contemporaneously pursue a possible private
placement of Whitetree's securities and look into the possibilities of
Whitetree being acquired by a third party (the "Engagement Letter"), DMG
provided a financial fairness opinion to the Whitetree Board in connection
with the Merger. DMG was selected by the Whitetree Board to act as Whitetree's
financial advisor based on DMG's qualifications, expertise and reputation and
its knowledge of the business and affairs of Whitetree. At the special meeting
of the Whitetree Board on February 14, 1997, DMG rendered its written opinion
(the "Opinion"), that as of such date, based upon and subject to the various
considerations set forth in the Opinion, the Common Conversion Number pursuant
to the Merger Agreement was fair from a financial point of view to the holders
of shares of Whitetree Common Stock.
THE FULL TEXT OF THE OPINION WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON
THE SCOPE OF THE REVIEW UNDERTAKEN BY DMG IN RENDERING THE OPINION, IS
ATTACHED AS ANNEX B TO THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT.
WHITETREE SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION CAREFULLY
AND IN ITS ENTIRETY IN CONJUNCTION WITH THIS PROSPECTUS/CONSENT SOLICITATION
STATEMENT. THE OPINION IS DIRECTED TO THE WHITETREE BOARD AND ADDRESSES ONLY
THE FAIRNESS OF THE COMMON CONVERSION NUMBER FROM A FINANCIAL POINT OF VIEW TO
HOLDERS OF SHARES OF WHITETREE COMMON STOCK AS OF THE DATE OF THE OPINION, AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF WHITETREE COMMON STOCK
AS TO WHETHER TO SIGN AND RETURN THE CONSENT. THE OPINION DOES NOT ADDRESS THE
FAIRNESS OF THE SERIES D CONVERSION NUMBER TO HOLDERS OF WHITETREE PREFERRED
STOCK. THE SUMMARY OF THE OPINION SET FORTH IN THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINION.
In connection with rendering the Opinion, DMG, among other things: (i)
analyzed certain internal financial statements and other financial and
operating data concerning Whitetree prepared by the management of Whitetree,
(ii) analyzed certain financial projections relating to Whitetree prepared by
the management of Whitetree, (iii) discussed the past and current operations
and financial condition and the prospects (including the projected funding
requirements) of Whitetree with senior executives of Whitetree, (iv) analyzed
certain publicly available financial statements and other information of
Ascend, (v) analyzed certain financial projections relating to Ascend prepared
by the management of Ascend, (vi) discussed the past and current operations
and financial condition and the prospects of Ascend with senior executives of
Ascend, (vii) analyzed the pro forma impact of the Merger on the earnings per
share, consolidated capitalization and other financial ratios of Ascend,
(viii) reviewed the reported prices and trading activity of Ascend Common
Stock, (ix) compared the financial performance of Ascend and the prices and
trading activity of Ascend Common Stock with that of certain other comparable
publicly traded companies and their securities, (x) participated in
discussions and negotiations among representatives of Whitetree and Ascend and
their legal advisors, (xi) contacted and participated in discussions with
parties other than Ascend regarding a potential sale of or other business
combination involving Whitetree, (xii) reviewed the Merger Agreement, and
(xiii) performed such other analyses and considered such other factors as they
deemed appropriate.
DMG assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by it for purposes of the
Opinion. With respect to the financial projections, it assumed that such
projections had been reasonably prepared on bases reflecting the best
currently available estimates and judgements of the future financial
performance of Ascend and Whitetree, respectively. DMG did not opine on the
value or viability of Whitetree as a stand-alone, independent entity or the
availability of funding to support the operations of Whitetree as a stand-
alone, independent entity. DMG did not make any independent valuation or
appraisal of the assets, liabilities or technology of Ascend or Whitetree,
respectively, nor was it furnished with any such appraisals. DMG assumed that
the Merger would be accounted for as a "pooling-of-interests" business
combination in accordance with U.S. Generally Accepted Accounting Principles
and that the Merger would be consummated in accordance with the terms set
forth in the Merger Agreement. The Opinion is based on economic, market and
other conditions as in effect on, and the information made available to it as
of, the date of the Opinion.
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Pursuant to the Engagement Letter, DMG provided advisory services and the
Opinion in connection with the Merger and Whitetree has agreed to pay to DMG a
$1.5 million fee based on the aggregate value of the transaction plus expenses
if the Merger is consummated. In addition, Whitetree also has agreed to
indemnify DMG and its affiliates, their respective directors, officers, agents
and employees and each person, if any, controlling DMG or any of its
affiliates against certain liabilities and expenses, including certain
liabilities under the federal securities laws, related to DMG's engagement. In
the past, DMG and its affiliates have provided financial advisory services for
Ascend.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of February 14, 1997, directors and executive officers of Ascend and
their affiliates may be deemed to be beneficial owners of approximately 4.4%
of the outstanding shares of Ascend Common Stock. See "Information Concerning
Ascend--Security Ownership of Certain Beneficial Owners and Management."
Ascend stockholders are not required to approve the Merger.
As of February 14, 1997, directors and executive officers of Whitetree and
their affiliates may be deemed to be beneficial owners of approximately 57% of
the outstanding shares of Whitetree Common Stock and 79% of the outstanding
shares of Whitetree Preferred Stock. See "Information Concerning Whitetree--
Security Ownership of Certain Beneficial Owners and Management."
Three Whitetree officers, who also are directors of Whitetree, Maureen
Lawrence, President and Chief Executive Officer, Kingston Duffie, Chief
Technology Officer, and M. Denise Savoie, Vice President of Business
Operations and Chief Financial Officer, and one additional director of
Whitetree, Dr. David Liddle, hold shares of Whitetree Common Stock pursuant to
stock purchase agreements which provide that all such shares are immediately
released from a repurchase option in favor of Whitetree in the event of a
merger of Whitetree in which immediately after such merger, less than 51% of
Whitetree's Capital Stock is owned by persons who owned in the aggregate at
least 51% of Whitetree's Capital Stock immediately before such merger. Because
the Merger involves a change in ownership of more than 51% of Whitetree's
Capital Stock, 106,062 shares of Whitetree Common Stock held by Ms. Lawrence,
10,775 shares of Whitetree Common Stock held by Mr. Duffie, 11,285 shares of
Whitetree Common Stock held by Ms. Savoie and 32,083 shares of Whitetree
Common Stock held by Dr. Liddle are subject to immediate release from the
repurchase option in favor of Whitetree assuming that the Merger is
consummated on April 1, 1997. In addition, an aggregate of 88,077 shares held
by other holders of Whitetree Common Stock will be released from a repurchase
option in favor of Whitetree assuming that the Merger is consummated on April
1, 1997.
The directors and executive officers of Whitetree and certain of their
affiliates are obligated to vote or direct the vote of all of the outstanding
shares of Whitetree Capital Stock over which they have voting control (i) in
favor of the approval and adoption of the Merger Agreement and the Merger and
any matter which could reasonably be expected to facilitate the Merger and
(ii) against any proposal made in opposition to or competition with the
consummation of the Merger which would or could reasonably be expected to,
prohibit or discourage the Merger. See "The Merger--Voting Agreements."
As a condition to the consummation of the Merger, Maureen Lawrence, Kingston
Duffie and Kathryn Hill, each of whom is an executive officer of Whitetree,
will accept employment with Ascend. Ascend has agreed to provide each of Mr.
Duffie and Ms. Hill with an annual base salary of $170,000; an annual bonus,
which is based on Ascend's performance, and may be equal to up to $51,000; and
options to purchase up to 60,000 shares of Ascend Common Stock under Ascend's
1989 Stock Option Plan. Ascend has agreed to provide Ms. Lawrence with an
annual base salary of $200,000; an annual bonus, which is based on Ascend's
corporate performance and may be equal to up to $100,000; and options to
purchase up to 100,000 shares of Ascend Common Stock under Ascend's 1989 Stock
Option Plan.
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Roger Evans is a member of both the Whitetree Board and the Ascend Board.
Mr. Evans was not present at the special meeting of the Whitetree Board on
February 14, 1997 when the Whitetree Board approved the Merger Agreement and
related matters, and he recused himself from all Whitetree Board discussions
relating to the Merger.
Under the Merger Agreement, Ascend is required to provide indemnification to
the directors and officers of Whitetree against certain liabilities. See "The
Merger Agreement--Certain Covenants and Agreements."
The foregoing interests of the directors, executive officers and certain
shareholders of Whitetree in the Merger may mean that such persons have a
personal interest in the Merger which may not be identical to the interests of
other Whitetree shareholders.
VOTING AGREEMENTS
In connection with the execution of the Merger Agreement, each of the
directors and executive officers of Whitetree, and certain of their affiliates
who, as of February 14, 1997, together held approximately 57% of the
outstanding shares of Whitetree Common Stock and approximately 79% of the
outstanding shares of Whitetree Preferred Stock, entered into Voting
Agreements pursuant to which such persons agreed, among other things, (i) to
vote their shares of Whitetree Capital Stock, and to execute written consents
with respect to such shares, in favor of approval of the Merger Agreement and
the Merger and any matter which could reasonably be expected to facilitate the
Merger and against any proposal made in opposition to or competition with the
Merger or which would, or could reasonably be expected to, prohibit or
discourage the Merger, (ii) not to transfer, pledge, sell, exchange or offer
to transfer or sell or otherwise dispose of or encumber any shares of
Whitetree Capital Stock, and (iii) not to enter into any agreement to do any
of the foregoing prior to the earliest of the Effective Time or the
termination of the Merger Agreement.
Concurrently with the execution of each Voting Agreement, each such
shareholder delivered to Ascend an irrevocable proxy pursuant to which such
shareholder has appointed the Ascend Board as such shareholder's proxy to vote
all shares of Whitetree Capital Stock owned by such shareholder (and to
execute written consents with respect to such shares) in a manner consistent
with the Voting Agreement. Each such irrevocable proxy first becomes effective
on the fifth business day following the commencement of Whitetree's consent
solicitation if prior to such time the party to the Voting Agreement has not
delivered to Whitetree a written consent in favor of the Merger.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to the consummation of the
Merger that Ascend shall have received a letter from Ernst & Young LLP,
Ascend's independent auditors, and Whitetree shall have received a letter from
Price Waterhouse LLP, Whitetree's independent accountants, as to their
concurrence with the conclusion of the respective company's management
regarding the appropriateness of pooling of interests accounting for the
Merger under Accounting Principles Board Opinion No. 16, if the Merger is
consummated in accordance with the Merger Agreement. Under pooling of
interests accounting, the recorded assets and liabilities of Ascend and
Whitetree will be carried forward to the combined company at their recorded
amounts, income of the combined company will include income of Ascend and loss
of Whitetree for the entire fiscal year in which the combination occurs and
the reported income of the separate companies for prior periods will be
combined and restated as income of the combined company. Consummation of the
Merger is conditioned upon the written confirmation of such letters at the
Effective Time. See "The Merger Agreement--Conditions to Closing" and
"Unaudited Pro Forma Condensed Combining Financial Statements."
To help ensure that the parties meet the prerequisites for pooling of
interests accounting treatment, each of the affiliates of Whitetree has
executed and delivered to Ascend a written agreement to the effect that such
person will not sell, transfer or otherwise reduce his or her interest or risk
in his or her shares of Whitetree Capital
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Stock or Ascend Common Stock during the period commencing on February 14, 1997
and ending on the date that Ascend publishes financial statements which
reflect 30 days of combined operations of Ascend and Whitetree (the "Combined
Results"), subject to certain de minimis exceptions. In addition, Ascend has
agreed to close the trading window provided for under the Ascend Insider
Trading Policy not less than 30 days prior to the Closing Date and not to
reopen such trading window until after Ascend publishes the Combined Results.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain federal income tax considerations
of the Merger that are applicable to holders of Whitetree Capital Stock.
Whitetree shareholders should be aware that the following discussion does not
deal with all federal tax consequences that may result from the Merger,
including the survival or availability of any tax attributes or elections of
Whitetree as a result of the Merger, and does not deal with all federal income
tax considerations that may be relevant to particular Whitetree shareholders
in light of their particular circumstances, such as shareholders who are
dealers in securities, who are foreign persons or who acquired their Whitetree
Capital Stock through stock option or stock purchase programs or in other
compensatory transactions. In addition, the following discussion generally
does not address the tax consequences of other transactions effectuated prior
to, at the time of or after the Merger (whether or not such transactions are
in connection with the Merger) including, without limitation, the exercise of
options, warrants or similar rights to purchase stock, or the exchange,
assumption or substitution of options, warrants or similar rights to purchase
Whitetree Capital Stock for rights to purchase Ascend Common Stock.
Furthermore, no foreign, state or local tax considerations are addressed
herein. This discussion is based on legal authorities in existence as of the
date hereof. No assurances can be given that future legislation, regulations,
administrative pronouncements or court decisions will not significantly change
the law and materially affect the conclusions expressed herein. Any such
change, even though made after consummation of the Merger, could be applied
retroactively. ACCORDINGLY, ALL WHITETREE SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES OF THE MERGER TO THEM.
The Merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Code. Subject to the limitations and qualifications
described herein, and assuming the Merger so qualifies, then the following tax
consequences should generally result:
(a) No gain or loss should be recognized by holders of Whitetree Capital
Stock upon their receipt in the Merger of Ascend Common Stock in exchange
therefor;
(b) The aggregate tax basis of the Ascend Common Stock received in the
Merger should be the same as the aggregate tax basis of Whitetree Capital
Stock surrendered in exchange therefor;
(c) The holding period of the Ascend Common Stock received in the Merger
should include the period for which the Whitetree Capital Stock surrendered
in exchange therefor was held, provided that the Whitetree Capital Stock is
held as a capital asset at the Effective Date;
(d) A shareholder who exercises dissenter's rights with respect to a
share of Whitetree Capital Stock and receives payment for such share in
cash will generally recognize capital gain or capital loss (if such share
was held as a capital asset at the Effective Date), measured by the
difference between the holder's basis in such share and the amount of cash
received, provided, however, the payment is neither essentially equivalent
to a dividend within the meaning of Section 302 of the Code nor has the
effect of a distribution of a dividend within the meaning of Section
356(a)(2) of the Code (collectively a "Dividend Equivalent Transaction"). A
sale of shares pursuant to an exercise of dissenter's rights will generally
not be a Dividend Equivalent Transaction if, as a result of such exercise,
the shareholder exercising dissenter's rights owns no shares of Ascend
Common Stock (either actually or constructively within the meaning of
Section 318 of the Code) after such sale; and
(e) Neither Ascend, Whitetree nor Sub should recognize gain or loss as a
result of the Merger.
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The parties are not requesting a ruling from the Internal Revenue Service
("IRS") regarding the consequences of the Merger. It is a condition to the
respective obligations of the parties to consummate the Merger that Whitetree
receive an opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, and Ascend receive an opinion of Gray Cary Ware & Freidenrich, A
Professional Corporation, to the effect that the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code. Such
opinions (the "Tax Opinions") neither bind the IRS nor preclude the IRS from
adopting a contrary position. In addition, this discussion and the Tax
Opinions will be subject to certain assumptions and qualifications and will be
based on the truth and accuracy of certain representations and warranties made
by Ascend, Sub, Whitetree and certain shareholders of Whitetree.
Of particular importance to the above discussion and the Tax Opinions are
certain assumptions, representations and warranties relating to the
satisfaction of the "continuity of interest" requirement for reorganization
treatment. To satisfy the continuity of interest requirement, Whitetree
shareholders must not, pursuant to a plan or intent existing at or prior to
the Merger, dispose of or transfer so much of either (i) their Whitetree
Capital Stock in anticipation of the Merger or (ii) the Ascend Common Stock to
be received in the Merger (collectively "Planned Dispositions"), such that the
Whitetree shareholders, as a group, would no longer have a meaningful
continuing equity interest in Ascend after the Merger. Planned Dispositions
include, among other things, disposition of shares pursuant to the exercise of
dissenters' rights. Although it is uncertain as to what constitutes sufficient
continuity of interest, 50% continuity should satisfy the requirement.
Irrespective of the reorganization status of the Merger, a recipient of
shares of Ascend Common Stock would recognize income or gain to the extent
such shares were considered to be received in exchange for services or
property other than solely Whitetree Capital Stock. Gain would also be
recognized to the extent an Whitetree shareholder was treated as receiving
(directly or indirectly) consideration other than Ascend Common Stock in
exchange for his or her Whitetree Capital Stock.
A successful IRS challenge to the reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in an Whitetree shareholder recognizing gain or loss with respect
to each share of Whitetree Capital Stock equal to the difference between the
shareholder's basis in such share and the fair market value, as of the
Effective Date, of the Ascend Common Stock received in exchange therefor. A
shareholder's aggregate basis in the Ascend Common Stock so received would
equal its fair market value, and his or her holding period for such stock
would begin the day after the Merger.
REGULATORY REQUIREMENTS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. Ascend and
Whitetree filed notification and report forms under the HSR Act with the FTC
and the Antitrust Division on February 25, 1997, together with a request for
early termination of the applicable 30-day waiting period. At any time before
or after the Effective Time, the Antitrust Division or the FTC could take such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the consummation of the Merger or
seeking divestiture of substantial assets of Ascend or Whitetree. At any time
before or after the Effective Time, and notwithstanding that the HSR Act
waiting period has expired, any state could take such action under the
antitrust laws as it deems necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or
seeking divestiture of Whitetree or businesses of Ascend or Whitetree. Private
parties also may seek to take legal action under the antitrust laws under
certain circumstances.
Based on information available to them, Ascend and Whitetree believe that
the Merger can be effected in compliance with federal and state antitrust
laws. However, there can be no assurance that a challenge to the consummation
of the Merger on antitrust grounds will not be made or that, if such a
challenge were made, Ascend and Whitetree would prevail or would not be
required to accept certain conditions, including certain divestitures, in
order to consummate the Merger. In this regard, it is a condition to the
obligation of the parties to consummate the Merger that no temporary
restraining order, preliminary or permanent injunction or other order
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issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger or limiting
or restricting Ascend's or Whitetree's conduct or operation of the business of
Ascend or Whitetree after the Merger shall have been issued and be in effect,
nor shall any proceeding brought by a domestic administrative agency or
commission or other domestic governmental entity, seeking any of the foregoing
be pending; nor shall there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal or prevents or
prohibits the Merger. Pursuant to the Merger Agreement, Ascend and Whitetree
have agreed to use all reasonable efforts to consummate and make effective the
transactions contemplated by the Merger Agreement including cooperating fully
with each other to resolve any competitive issues relating to or arising under
the HSR Act, including all litigation resulting from such issues; provided,
however, that neither Ascend or Whitetree is obligated to divest or hold
separate any portion of their respective businesses or otherwise take action
that could reasonably have a material adverse effect on Ascend or Whitetree.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Ascend Common Stock received by Whitetree shareholders in the
Merger will be freely transferable, except that shares of Ascend Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
for purposes of Rule 145 under the Securities Act) of Whitetree at the time
the transaction is submitted for a vote to Whitetree shareholders. Persons who
may be deemed to be affiliates of Whitetree generally include individuals or
entities that control, are controlled by, or are under common control with,
such party and may include certain officers and directors of such party as
well as principal shareholders of such party. Rule 145(d) under the Securities
Act requires that, for specified periods, sales made by affiliates of
Whitetree be made in compliance with the volume limitations, manner of sale
provisions and current information requirements of Rule 144 under the
Securities Act. The volume limitations should not pose any material
limitations on any Whitetree shareholder who owns less than one percent of
Ascend's outstanding Common Stock after the Merger (approximately 1,215,531
shares of Ascend Common Stock as of February 28, 1977 after giving effect to
the shares to be issued in the Merger) unless, pursuant to Rule 144, such
shareholder's shares are required to be aggregated with those of another
shareholder. Pursuant to the Merger Agreement the directors, executive
officers, and certain shareholders of Whitetree have executed and delivered to
Ascend an agreement to the effect that such person will not offer to sell or
otherwise dispose of any of the shares of Ascend Common Stock issued to such
person in or pursuant to the Merger in violation of the Securities Act or the
rules and regulations promulgated by the SEC thereunder.
NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the Merger that the shares of Ascend Common Stock to be
issued pursuant to the Merger Agreement and required to be reserved for
issuance in connection with the Merger be approved for quotation on The Nasdaq
National Market. Ascend has begun preparation of an application for listing of
such shares of Ascend Common Stock on The Nasdaq National Market.
DISSENTERS' RIGHTS
THE FOLLOWING SUMMARY OF APPRAISAL RIGHTS UNDER CALIFORNIA LAW IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA GENERAL
CORPORATION LAW, THE COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS ANNEX C.
FAILURE TO FOLLOW STRICTLY THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA GENERAL CORPORATION LAW MAY RESULT IN THE LOSS, TERMINATION OR
WAIVER OF DISSENTERS' RIGHTS. A HOLDER OF WHITETREE CAPITAL STOCK WHO SIGNS A
CONSENT APPROVING AND AUTHORIZING THE MERGER AGREEMENT WILL NOT HAVE A RIGHT
TO DISSENT FROM THE MERGER AGREEMENT.
Under the CGCL each holder of Whitetree Capital Stock as of the Record Date
is entitled to demand and receive payment of the fair market value of all or
any portion of such holder's shares of Whitetree Capital Stock pursuant to
Chapter 13 of the CGCL ("Dissenting Shares") if the Merger is consummated. The
statutory fair market value of such shares is determined as of February 17,
1997, the day before the first announcement of the
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terms of the Merger. Any holder of Whitetree Capital Stock who elects to
perfect such shareholder's dissenters' rights and demands payment of the fair
value of such shareholder's shares of Whitetree Capital Stock must strictly
comply with Chapter 13 of the CGCL. The following summary does not purport to
be complete and is qualified in its entirety by reference to Chapter 13 of the
CGCL, the text of which is attached hereto as Annex C and is incorporated
herein by reference. Any holder of shares of Whitetree Capital Stock
considering demanding dissenters' rights is advised to consult legal counsel.
Dissenters' rights will not be available unless and until the Merger (or a
similar business combination) is consummated. To perfect the right to dissent
and receive the statutory fair market value of such shareholder's shares, the
shareholder must abstain from voting by not returning an executed Consent in
favor of the Merger.
Within 10 days after the date of approval of the Merger, Whitetree will mail
to each holder of Whitetree Capital Stock who did not return an executed
Consent notice (the "Notice") of the approval of the Merger by the Whitetree
shareholders, accompanied by a copy of Sections 1300, 1302, 1303 and 1304 of
the CGCL. The Notice also will state the price determined by Whitetree to be
the statutory fair market value of the Dissenting Shares and a brief
description of the procedure to be followed by a shareholder who elects to
dissent. The statement of price constitutes an offer by Whitetree to purchase
at the price stated any Dissenting Shares.
Any dissenting Whitetree shareholder who desires that Whitetree purchase
such shareholder's shares of Whitetree Capital Stock must make written demand
upon Whitetree for the purchase of such shares within 30 days after the Notice
was mailed to the shareholder. The shareholder's demand must state the number
and class of shares held of record by the dissenting Whitetree shareholder
which the shareholder demands that Whitetree purchase, as well as a statement
by the dissenting Whitetree shareholder as to what such shareholder claims the
statutory fair market value of such shares was as of the day prior to the
announcement of the Merger. Such statement of fair market value constitutes an
offer by the dissenting Whitetree shareholder to sell the shares at such
price. FAILING TO RETURN AN EXECUTED CONSENT DOES NOT CONSTITUTE SUCH WRITTEN
DEMAND.
Within the same 30-day period following the mailing of the Notice, the
dissenting Whitetree shareholder must submit to Whitetree or its transfer
agent for endorsement certificates for any shares of Whitetree Capital Stock
which the dissenting Whitetree shareholder demands Whitetree purchase. If
Whitetree and the dissenting Whitetree shareholder agree that the shares are
Dissenting Shares and agree upon the price of the Dissenting Shares, the
dissenting Whitetree shareholder is entitled to the agreed price with interest
at the legal rate on judgments from the date of such agreement. Payment must
be made within 30 days of the later of the date of the agreement between the
Whitetree shareholder and Whitetree or the date all statutory and contractual
conditions to the Merger are satisfied.
If Whitetree denies that the shares are Dissenting Shares, or Whitetree and
the dissenting Whitetree shareholder cannot agree as to the fair market value
of such shares, such dissenting Whitetree shareholder may file within six
months of the date of mailing of the Notice, but not thereafter, a complaint
in the superior court for the proper county demanding judicial determination
of such matters. Whitetree then will be required to make any payments in
accordance with such judicial determination. If the complaint is not filed
within the specified six-month period, the dissenting Whitetree shareholder's
rights pursuant to Chapter 13 of the CGCL terminate.
Dissenting Shares lose their status as such if (i) the Merger is not
consummated; (ii) the Dissenting Shares are transferred or are surrendered for
conversion into shares of another class; (iii) Whitetree denies that the
shares are Dissenting Shares or the dissenting Whitetree shareholder and
Whitetree do not agree as to the fair market value of such shares, and the
dissenting Whitetree shareholder does not file a complaint within six months
of the date the Notice was mailed; or (iv) the dissenting Whitetree
shareholder withdraws, with the consent of Whitetree, such shareholder's
demand for purchase of such shareholder's Dissenting Shares.
At the Effective Date, the shares of Whitetree Capital Stock held by a
Whitetree shareholder exercising such shareholder's dissenters' rights will be
canceled, and such shareholder will be entitled to no further rights except
the right to receive payment of the fair market value of such shareholder's
shares of Whitetree Capital Stock. However, if the dissenting Whitetree
shareholder fails to perfect or withdraws or loses such shareholder's rights
as a dissenter with respect to such shareholder's shares of Whitetree Capital
Stock, such shareholder's shares of Whitetree Capital Stock will be exchanged
for Ascend Common Stock as provided for in the Merger Agreement.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Prospectus/Consent
Solicitation Statement and incorporated herein by reference. Such summary is
qualified in its entirety by reference to the Merger Agreement. Shareholders
of Whitetree are urged to read the Merger Agreement in its entirety for a more
complete description of the Merger. The Merger Agreement, rather than the
summary set forth herein, will control the terms of the Merger and the rights
of the parties and the shareholders of Whitetree thereunder.
THE MERGER
The Merger Agreement provides that, following the approval of the Merger
Agreement by the shareholders of Whitetree, and the satisfaction or waiver of
the other conditions to the Merger, Sub will be merged with and into
Whitetree, with Whitetree continuing as the Surviving Corporation and becoming
a wholly-owned subsidiary of Ascend.
If all conditions to the Merger are satisfied or waived, the Merger will
become effective upon the latest of: (i) the date and time of the filing of
the Agreement of Merger and related Officers' Certificates with the Secretary
of State of the State of California, (ii) the date and time of the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware, or
(iii) such other date and time as is provided in the Agreement of Merger.
CONVERSION OF SECURITIES
Upon consummation of the Merger, pursuant to the Merger Agreement, the
shares of Whitetree Capital Stock which either (a) are issued and outstanding
at the Effective Time or (b) would be outstanding upon exercise of the
Whitetree Options or upon conversion of Whitetree securities which are
convertible into Whitetree Capital Stock (including all warrants to purchase
Whitetree Capital Stock (each a "Whitetree Warrant"), if any, which remain
outstanding at the Effective Time) shall be converted, in the aggregate, into
the right to receive (or options to acquire, in the case of Whitetree Options)
a certain number of shares of Ascend Common Stock (the "Merger
Consideration"). The Merger Consideration shall be determined as follows: (i)
if the average of the last sale price of Ascend Common Stock as reported by
the Nasdaq National Market for the five (5) consecutive trading days
immediately preceding the Closing Date (the "Ascend Average Stock Price") is
equal to or greater than $60.00 and equal to or less than $80.00, the Merger
Consideration shall be 1,100,000 shares of Ascend Common Stock; (ii) if the
Ascend Average Stock Price is greater than $80.00, the Merger Consideration
shall be adjusted so that it is equal to the quotient of $88,000,000 divided
by the Ascend Average Stock Price; and (iii) if the Ascend Average Stock Price
is less than $60.00, the Merger Consideration shall be adjusted so that it is
equal to the quotient of $66,000,000 divided by the Ascend Average Stock
Price. If the Ascend Average Stock Price is greater than $91.11 and Ascend
does not agree to fix the Merger Consideration at 970,000 shares of Ascend
Common Stock, Whitetree shall have the right to terminate the Merger
Agreement; and if the Ascend Average Stock Price is less than $48.89 and
Whitetree does not agree to fix the Merger Consideration at 1,350,000 shares
of Ascend Common Stock, Ascend shall have the right to terminate the Merger
Agreement.
Subject to the foregoing limitations, each share of Whitetree Capital Stock
which is issued and outstanding at the Effective Time shall be converted into
the consideration set forth below:
(i) Each share of Series D Preferred Stock which is issued and
outstanding as of the Effective Time (other than shares owned by Ascend and
its wholly-owned subsidiaries and other than Dissenting Shares) shall be
converted into the right to receive a fraction of a fully paid and non-
assessable share of Ascend Common Stock that is equal to the quotient of
(A) $7.68, divided by (B) the Ascend Average Stock Price (the "Series D
Conversion Number").
(ii) Each share of Whitetree Common Stock, Series A Preferred Stock,
Series B Preferred Stock, and Series C Preferred Stock which is issued and
outstanding as of the Effective Time (other than shares owned by Ascend and
its wholly-owned subsidiaries and other than Dissenting Shares) shall be
converted into the
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right to receive a fraction of a fully paid and non-assessable share of
Ascend Common Stock that is equal to the quotient of (A) the Merger
Consideration, less the aggregate number of shares of Ascend Common Stock
issuable to holders of Series D Preferred Stock, as described above,
divided by (B) the sum of the aggregate number of shares of Whitetree
Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock which are issued and outstanding as of the Effective Time
(other than shares owned by Ascend and its wholly-owned subsidiaries) and
the aggregate number of shares of Whitetree Common Stock which are issuable
upon exercise of the Whitetree Options and Whitetree Warrants other than
Whitetree Warrants to purchase Series D Preferred Stock (the "Common
Conversion Number"). Solely for purposes of clauses (A) and (B), no shares
of Whitetree Capital Stock shall be deemed to be Dissenting Shares.
The following table sets forth the approximate Common Conversion Number and
Series D Conversion Number applicable to, and the approximate value of the
Ascend Common Stock to be received in exchange for each share of Whitetree
Capital Stock, at various Ascend Average Stock Prices. The conversion numbers
and valuations contained in the table assume no change in Whitetree's capital
structure since February 14, 1997 and the cash exercise prior to the Effective
Time of all Whitetree Warrants except Whitetree Warrants to purchase Series D
Preferred Stock. Dollar values in the table are based on the Average Ascend
Stock Price and may not reflect actual market value realizable by shareholders
of Whitetree.
<TABLE>
<CAPTION>
WHITETREE COMMON STOCK,
SERIES A PREFERRED STOCK,
SERIES B PREFERRED STOCK AND
SERIES C PREFERRED STOCK SERIES D PREFERRED STOCK
------------------------------------- ------------------------------
DOLLAR VALUE OF
ASCEND COMMON STOCK
RECEIVED PER SHARE DOLLAR VALUE OF
OF WHITETREE ASCEND COMMON STOCK
CAPITAL STOCK RECEIVED PER
(OTHER THAN SERIES D SHARE OF
COMMON SERIES D PREFERRED CONVERSION SERIES D
ASCEND AVERAGE STOCK PRICE CONVERSION NUMBER STOCK) NUMBER PREFERRED STOCK
-------------------------- ----------------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C>
$91.11.................. .0647 $5.89 .0843 $7.68
80.00.................. .0736 5.89 .0960 7.68
70.00.................. .0728 5.09 .1097 7.68
64.25.................. .0721 4.63 .1195 7.68
60.00.................. .0716 4.30 .1280 7.68
56.00.................. .0767 4.30 .1371 7.68
48.89.................. .0878 4.30 .1571 7.68
</TABLE>
The number of shares to be issued to each holder of Whitetree Capital Stock
exchanged pursuant to the Merger Agreement who would otherwise be entitled to
receive a fraction of a share of Ascend Common Stock (after taking into
account all of the Whitetree Capital Stock delivered by such holder) shall be
rounded up to the nearest whole share. All such shares of Whitetree Capital
Stock, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have any
rights with respect thereto, except the right to receive the shares of Ascend
Common Stock upon the surrender of such certificate in accordance with the
procedures detailed below, without interest. See "The Merger Agreement--
Conversion of Securities."
Upon the consummation of the Merger, each Whitetree Warrant which is
outstanding at the Effective Time and which has not theretofore been
exercised, will be treated as if such Whitetree Warrant had been exercised
immediately prior to the Effective Time pursuant to the net exercise
provisions thereof, and will automatically be converted, without further
action by Whitetree or the holder thereof, into the right to receive that
number of shares of Ascend Common Stock into which the shares of Whitetree
Capital Stock issuable pursuant to the net exercise provisions of such
Whitetree Warrant would be converted in the Merger.
Upon the consummation of the Merger, each share of Sub common stock issued
and outstanding immediately prior to the Effective Time will be converted into
one share of common stock of the Surviving Corporation.
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As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail transmittal forms and exchange instructions to each holder of
record of Whitetree Capital Stock to be used to surrender and exchange
certificates evidencing shares of Whitetree Capital Stock for certificates
evidencing the shares of Ascend Common Stock to which such holder has become
entitled. After receipt of such transmittal forms, each holder of certificates
formerly representing Whitetree Capital Stock will be able to surrender such
certificates to the Exchange Agent, and each such holder will receive in
exchange therefor certificates evidencing the number of whole shares of Ascend
Common Stock to which such holder is entitled. Such transmittal forms will be
accompanied by instructions specifying other details of the exchange. WHITETREE
SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
ESCROW AND INDEMNIFICATION
At the Effective Time, Ascend will deposit into escrow certificates
representing five percent (5%) of the shares of Ascend Common Stock issuable to
the holders of Whitetree Capital Stock as of the Effective Time, on a pro rata
basis. If any of the Whitetree Options are exercised after the Effective Time
and before the end of the Escrow Period, five percent (5%) of the shares of
Ascend Common Stock issuable upon the exercise of such options will be added to
the Escrow Fund. At the end of the Escrow Period (as defined below), if any
Whitetree Options have not been exercised, such options will be subject to
similar adjustment, and the number of shares of Ascend Common Stock issuable
upon the exercise of such options will be reduced in proportion to any
reduction in the number of shares of Ascend Common Stock received by holders of
Whitetree Options assumed by Ascend which are exercised prior to the
termination of the Escrow Fund.
The Escrow Fund will be deposited with an institution (the "Escrow Agent")
designated by Ascend and reasonably acceptable to the party serving as agent
for the Whitetree shareholders (the "Shareholder Agent"). The Escrow Fund will
be available to indemnify Ascend and certain related parties for specified
damages that Ascend and certain related parties have incurred or reasonably
anticipate incurring by reason of the breach by Whitetree of any
representation, warranty, covenant or obligation of Whitetree contained in the
Merger Agreement (the "Damages"). Claims against the Escrow Fund shall be
Ascend's sole remedy following the Merger for any such breaches. Ascend's right
to receive shares from the Escrow Fund is subject to certain limitations. The
Escrow Fund will continue in existence until the earlier of (i) 5 p.m.,
California time, one year following the Closing Date or (ii) the filing with
the SEC of Ascend's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 or (iii) the release of Ascend's Annual Report to
Stockholders for the fiscal year ended December 31, 1997 (the "Escrow Period");
provided, however, that six (6) months after the Closing Date, if there are no
pending or disputed claims, fifty percent (50%) of the number of shares
comprising the Escrow Fund less any payments made to Ascend and certain related
parties as a consequence of any Damages shall be released to the former
shareholders of Whitetree on a pro rata basis.
Notwithstanding the foregoing, Ascend may not receive any shares from the
Escrow Fund unless and until the aggregate amount of Damages exceeds $100,000.
To receive any Escrow Shares, notice of Damages must be delivered to the Escrow
Agent and the Shareholder Agent and if the Shareholder Agent disputes the
claim, the matter must be resolved by binding arbitration. For the purpose of
compensating Ascend for its Damages, the Escrow Shares shall be valued at a
price equal to the Ascend Average Stock Price.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties by Whitetree, Ascend and Sub relating to, among other things, (i)
due organization, valid existence, good standing and similar corporate matters;
(ii) capital structure; (iii) the authorization, execution, delivery and
enforceability of the Merger Agreement, the consummation of the transactions
contemplated by the Merger Agreement and certain related matters; (iv) the
absence of conflicts under charter documents or by-laws, required consents or
approvals, and the absence of violations of any instruments or law. In
addition, the Merger Agreement contains certain representations by Ascend
concerning (i) the absence of any material undisclosed liabilities or any
material
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<PAGE>
adverse effect on the business, assets, properties, liabilities, financial
condition, operations or results of operations of Ascend and its subsidiaries
taken as a whole and (ii) documents and financial statements filed by Ascend
with the SEC and the accuracy of information contained therein; and
representations and warranties by Whitetree concerning (i) the accuracy of the
financial statements prepared by Whitetree; (ii) the absence of material
undisclosed liabilities; (iii) the absence of any material adverse effect
relating to the business, assets, properties, liabilities, financial
condition, operations or results of operations of Whitetree and its
subsidiaries; (iv) taxes, tax returns and audits; (v) tangible assets and real
properties; (vi) intellectual property; (vii) bank accounts; (viii) certain
employment and labor matters; (ix) agreements, contracts and commitments;
(x) litigation; (xi) environmental matters, hazardous materials and hazardous
materials activities; (xii) employee benefit plans; (xiii) compliance with
laws; (xiv) governmental authorizations; (xv) insurance; (xvi) matters
affecting the availability of pooling of interests accounting; (xvii) powers
of attorney; (xviii) director and officer indemnification rights and claims;
(xix) restrictions on business activities; (xx) the absence of "golden
parachutes;" (xxi) matters relating to the due diligence process; and (xxii)
the accuracy and completeness of Whitetree's representations, warranties,
statements, schedules and certificates.
CERTAIN COVENANTS AND AGREEMENTS
Pursuant to the Merger Agreement, Whitetree has agreed that, during the
period from the date of the Merger Agreement until the Effective Time, except
as otherwise consented to in writing by Ascend or as contemplated by the
Merger Agreement, Whitetree and it subsidiaries will: (i) carry on their
respective businesses in the ordinary course in substantially the same manner
as previously conducted; (ii) pay their respective debts and taxes when due
subject to good faith disputes over such debts or taxes, and pay or perform
other obligations when due; (iii) preserve intact their respective present
business relationships; (iv) not accelerate, amend or change the period of
exercisability of options granted under any employee stock plan, except as
required pursuant to the plan or any related agreement; (v) not transfer or
license or otherwise extend, amend or modify any rights to their respective
intellectual property, other than in the ordinary course of business
consistent with past practices; (vi) not declare or pay any dividends on or
make other distributions in respect of any of their respective capital stock,
not effect certain other changes in their respective capitalization, and not
purchase or otherwise acquire, directly or indirectly, any shares of its
capital stock except from former employees, directors and consultants in
accordance with agreements providing for the repurchase of shares in
connection with the termination of service; (vii) not issue, or authorize or
propose the issuance of, any shares of their respective capital stock or
securities convertible into shares of their respective capital stock, or any
subscriptions, rights, warrants, or options to acquire, or other agreements
obligating any of them to issue any such shares or other convertible
securities, subject to certain exceptions; (viii) not engage in any material
acquisition; (ix) subject to certain exceptions, not sell, lease, license or
otherwise dispose of material properties or assets; (x) not increase the
compensation payable to their respective officers or employees (except for
increases consistent with past practices), grant additional severance or
termination pay or enter into employment agreements with officers or any non-
officer employee or enter into any collective bargaining agreement or
establish, adopt, enter into or amend any plan for the benefit of their
respective directors, officers or employees, subject to certain exceptions;
(xi) not revalue any of their respective assets, including writing down the
value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business; (xii) not incur indebtedness for money
borrowed (or guarantees thereof) other than indebtedness incurred under
existing lines of credit consistent with prior practice; (xiii) not amend
their respective charter documents or bylaws; (xiv) not incur, with certain
exceptions, material capital expenditures; (xv) not enter into or amend any
agreements pursuant to which any third party is granted exclusive marketing or
manufacturing rights with respect to any Whitetree product (xvi) not amend or
terminate any material contract, agreement or license to which any of them is
a party except in the ordinary course of business; (xvii) not waive or release
any material right or claim, except in the ordinary course of business;
(xviii) not initiate any litigation or arbitration proceeding; (xix) not
compromise or otherwise settle or adjust any assertion or claim of deficiency
in taxes, extend the statute of limitations with any tax authority or file any
pleading in court in any tax litigation; (xx) not change their respective
accounting or personnel policies; (xxi) not grant any power of attorney or
similar right; (xxii) not take any action that would or is reasonably likely
to result in any of its representations and warranties made in the Merger
Agreement becoming untrue;
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<PAGE>
(xxiii) promptly notify Ascend of any event or occurrence not in the ordinary
course of business where such event or occurrence would result in a beach of
any covenant of Whitetree or cause any representation or warranty of Whitetree
to be untrue; and (xxiv) confer on a regular basis with Ascend on operational
matters of materiality.
The Merger Agreement also provides for certain additional agreements among
the parties to the Merger, including but not limited to the following:
No Solicitation. Whitetree has agreed that it will not, directly or
indirectly, through any officer, director, employee, representative or agent
(i) solicit, initiate or encourage any inquiries or proposals that constitute,
or could reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, share exchange, business combination, sale of substantial
assets, sale of shares of capital stock (including without limitation pursuant
to a tender offer) or similar transactions or series of transactions involving
Whitetree, other than the transactions contemplated by the Merger Agreement
(any of the foregoing inquiries or proposals being referred to as an
"Acquisition Proposal"), (ii) engage in negotiations or discussions concerning,
or provide any non-public information to any person or entity relating to, any
Acquisition Proposal, or (iii) agree to, approve or recommend any Acquisition
Proposal. Whitetree is required to notify Ascend (orally and in writing) within
24 hours after receipt of any Acquisition Proposal, a third party's intent to
make an Acquisition Proposal, or any request for non-public information or
access to its properties, books or records in connection with an Acquisition
Proposal.
Third-Party Consents. Each party has agreed to use its reasonable efforts to
obtain the consents, waivers and approvals under the contracts to which it or
any of its subsidiaries is a party as may be required in connection with the
Merger.
Notice of Certain Events. Each party has agreed to give prompt notice to the
other of the occurrence of any event which is likely to cause any
representation or warranty in the Merger Agreement to be untrue in any material
respect at or prior to the Effective Time and to give prompt notice of any
failure to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with under the Merger Agreement.
Tax Free Reorganization. Ascend and Whitetree each have agreed to use its
best efforts to cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Pooling. Ascend and Whitetree each have agreed to use its best efforts to
cause the business combination to be effected by the Merger to be accounted for
as a pooling of interests. In this regard, Ascend has agreed to limit trading
under the Ascend Insider Trading Policy and Whitetree has agreed to cause its
affiliates to enter into pooling agreements. Pursuant to such pooling
agreements, Whitetree's affiliates have agreed not to sell, exchange, transfer,
pledge, distribute, make any gift or otherwise dispose of or grant any option,
establish any "short" or put-equivalent position or enter into any similar
transaction until after Ascend publicly announces financial results covering at
least thirty (30) days of combined operations of Ascend and Whitetree, subject
to a limited exception if the transfer meets a "de minimis" test. In addition,
it is a condition to the parties' obligation to consummate the Merger that each
shall have received a letter from its respective independent accountants as to
their concurrence with the conclusion of the respective company's management
regarding the appropriateness of pooling of interests accounting for the Merger
under Accounting Principals Board Opinion No. 16 if the Merger is consummated
in accordance with the Merger Agreement.
Assumption of Whitetree Options. Ascend has agreed that upon consummation of
the Merger, each then-outstanding Whitetree Option will be assumed by Ascend
and will be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under such Whitetree Option, the same number of
shares of Ascend Common Stock (rounded down to the nearest whole share) as the
holder of such Whitetree Option would have been entitled to receive pursuant to
the Merger had such holder exercised such Whitetree Option in full immediately
prior to the consummation of the Merger, at a price per share (rounded up to
the nearest whole cent) equal to the per share exercise price of such Whitetree
Option as in effect immediately prior to the Effective
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Time divided by the Common Conversion Number. Following the Effective Time,
Ascend will issue to each holder of a Whitetree Option a document evidencing
the assumption of such Whitetree Option by Ascend.
Ascend has agreed to file a registration statement on Form S-8 for the
Ascend Common Stock issuable with respect to Whitetree Options assumed by
Ascend no later than three (3) business days after the Closing Date.
Indemnification and Insurance. The Merger Agreement provides that Whitetree
shall and, from and after the Effective Time, Ascend and the Surviving
Corporation shall, indemnify, defend and hold harmless each person who was an
officer or director of Whitetree or any of its subsidiaries as of the date of
the Merger Agreement or had been such an officer or director at any time prior
to the date thereof (or who becomes a director or officer of Whitetree or any
of its subsidiaries prior to the Effective Time) (each an "Indemnified Party")
against all losses, claims, damages, costs, expenses, liabilities or judgments
or amounts that are paid in settlement with the approval of the indemnifying
party (which approval shall not be unreasonably withheld) of or in connection
with any claim, action, suit, proceeding or investigation based in whole or in
part on, or arising in whole or in part out of, the fact that such person is
or was a director, officer or employee of Whitetree or any subsidiary of
Whitetree, whether pertaining to any matter existing or occurring at or prior
to the Effective Time and whether asserted or claimed prior to, or at or
after, the Effective Time ("Indemnified Liabilities"), including, without
limitation, all Indemnified Liabilities based in whole or in part on, or
arising in whole or in part out of, or pertaining to the Merger Agreement or
the transactions contemplated thereby, in each case to the full extent that a
corporation is permitted under the CGCL to indemnify its own directors,
officers or employees, as the case may be. In addition, Whitetree, Ascend and
the Surviving Corporation, as the case may be, will pay expenses in advance of
the final disposition of any such action or proceeding to each Indemnified
Party to the full extent permitted by law upon receipt of certain
undertakings. After the Effective Time, Ascend and the Surviving Corporation
will fulfill, assume and honor in all respects the indemnification obligations
of Whitetree pursuant to Whitetree's Amended and Restated Articles of
Incorporation.
Confidentiality and Non-Disclosure. In connection with the Merger each of
Ascend and Whitetree have provided to the other certain confidential
information concerning their respective businesses. The parties have agreed
that unless and until the Merger is consummated, all such information shall be
held in strict confidence and used solely for the purpose of evaluating the
Merger and the transactions contemplated by the Merger Agreement and the
planning for the implementation of the Merger. If the Merger is consummated,
only Ascend shall have the right to disclose Ascend's and Whitetree's
confidential information. If, however, the Merger is not consummated, each
party shall be obligated to return the other party's confidential information
and destroy any analyses, studies or other documents that they have prepared
using the other party's confidential information. Ascend and Whitetree have
agreed that in the event of a breach of the confidentiality provisions, the
non-breaching party shall be entitled to equitable relief.
Further Action. Each of the parties has agreed to use its reasonable efforts
to take all actions necessary, proper or advisable to consummate the Merger
and all transactions contemplated thereunder; including without limitation the
making of all necessary government filings.
CONDITIONS TO CLOSING
The Merger Agreement also provides that consummation of the Merger is
subject to the fulfillment or waiver of a number of conditions at or prior to
the Effective Time. The following are conditions to both parties' obligations
to consummate the Merger: (i) receipt by Whitetree of all requisite
shareholder approvals; (ii) receipt by the parties of all necessary government
approvals and the expiration or early termination of all antitrust review
periods; (iii) the absence of any legal or regulatory restraint preventing the
consummation of the Merger; (iv) receipt by Ascend and Whitetree of
substantially identical written tax opinions from their counsel to the effect
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code; and (v) receipt by Ascend and Whitetree of letters from
their respective accountants as to their concurrence with the conclusion of
the respective company's management regarding the appropriateness of pooling
of interests accounting for the Merger.
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The obligation of Ascend to consummate the Merger is subject to the
following further conditions: (i) the accuracy in all material respects of
Whitetree's representations and warranties as of February 14, 1997 and the
continued accuracy in all material respects of Whitetree's representations and
warranties concerning its intellectual property as of the Closing Date
(subject to certain limited exceptions), and the delivery of an appropriate
certificate by Whitetree to such effect; (ii) compliance by Whitetree in all
material respects with its covenants and agreements under the Merger
Agreement, and the delivery of an appropriate certificate by Whitetree to such
effect; (iii) receipt of all necessary third party consents to the Merger;
(iv) acceptance of employment with Ascend by, and the execution and delivery
of confidentiality and inventions assignment agreements by, Maureen Lawrence,
Kingston Duffie and Kathryn Hill, each a Whitetree executive officer and
(v) the delivery of certain ancillary agreements by affiliates of Whitetree.
The obligation of Whitetree to consummate the Merger is subject to the
following further conditions: (i) the accuracy of Ascend's representations and
warranties in all material respects as of February 14, 1997 and the delivery
of an appropriate certificate by Ascend to such effect; (ii) compliance by
Ascend in all material respects with its covenants and agreements under the
Merger Agreement, and the delivery of an appropriate certificate by Ascend to
such effect; (iii) authorization of the Ascend Common Stock to be issued in
the Merger for listing on The Nasdaq National Market; and (iv) absence of any
material adverse effect on the business, assets (including intangible assets),
properties, liabilities (contingent or otherwise), financial condition,
operations or results of operations of Ascend with its subsidiaries taken as a
whole and the delivery of an appropriate certificate by Ascend to such effect.
Any of the conditions in the Merger Agreement may be waived by the party
benefited thereby, except those conditions imposed by law.
RELATED MATTERS AFTER THE MERGER
At the Effective Time the Amended and Restated Articles of Incorporation and
Bylaws of Whitetree, as in effect immediately prior to the Effective Time,
will be the Articles of Incorporation and Bylaws of the Surviving Corporation.
The directors and officers of Sub immediately prior to the Effective Time
will be the initial officers and directors of the Surviving Corporation.
TERMINATION
The Merger Agreement is subject to termination by mutual written consent of
Ascend and Whitetree and at the option of either Ascend or Whitetree if the
Merger is not consummated by May 31, 1997, unless the waiting period pursuant
to the HSR Act has not expired, in which event the Merger Agreement shall not
be terminable until September 30, 1997. The Merger Agreement also is subject
to termination by Ascend or Whitetree if a court of competent jurisdiction or
other governmental entity permanently enjoins, restrains or otherwise
prohibits the Merger. In addition, (i) Ascend may terminate the Merger
Agreement if the Ascend Average Stock Price is less than $48.89 and Whitetree
does not agree to fix the Merger Consideration at 1,350,000 shares of Ascend
Common Stock; and (ii) Whitetree may terminate the Merger Agreement if the
Ascend Average Stock Price is greater than $91.11 and Ascend does not agree to
fix the Merger Consideration at 970,000 shares of Ascend Common Stock.
In the event of any termination of the Merger Agreement by either Ascend or
Whitetree as provided above, the Merger Agreement will become void and there
will be no liability or obligation, except to the extent that such termination
results from the willful breach by a party of any of its representations,
warranties or covenants set forth in the Merger Agreement.
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AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time by action taken or
authorized by the respective Boards of Directors of Ascend and Whitetree, but
after approval by the shareholders of Whitetree of the matters presented in
connection with the Merger, no amendment shall be made which by law requires
further approval by such shareholders, without such further approval. Ascend
and Whitetree, by action taken or authorized by their respective Boards of
Directors, may extend the time for performance of the obligations or other
acts of the other parties to the Merger Agreement, may waive inaccuracies in
the representations or warranties contained in the Merger Agreement and may
waive compliance with any agreements or conditions contained in the Merger
Agreement.
EXPENSES
Ascend, Sub and Whitetree shall each pay its own costs and expenses incurred
with respect to the negotiation, execution and delivery of the Merger
Agreement and the exhibits thereto. In the event the Merger is consummated,
all investment banking, legal, accounting, broker's and finder's fees incurred
by Whitetree in connection with the Merger shall be borne by the Surviving
Corporation; provided, however, that unless otherwise agreed to by Ascend, the
Surviving Corporation shall not be responsible for any legal or accounting or
similar fees incurred in connection with the Merger to the extent such fees
are in excess of $200,000.
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INFORMATION CONCERNING ASCEND
The following Information Concerning Ascend section contains forward-looking
statements which involve risks and uncertainties. Ascend's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of a variety of factors, including those factors set
forth under "Risk Factors" and elsewhere in this Prospectus/Consent
Solicitation Statement.
BUSINESS
Ascend develops, manufactures, markets, sells and supports a broad range of
high-speed integrated remote networking products that enable its customers to
build: (i) Internet access systems consisting of point-of-presence ("POP")
termination equipment for Internet service providers ("ISPs") and remote site
Internet access equipment for Internet subscribers; (ii) high speed Internet
Protocol ("IP") switches for application in telecommunications carriers and
ISP backbone networks (iii) extensions and enhancements to corporate backbone
networks that facilitate access to these networks by remote offices,
telecommuters and mobile computer users; and (iv) videoconferencing and
multimedia access facilities. These products support existing digital and
analog networks.
Ascend has four product families, each of which is focused on a major
application segment: MAX products for wide area network ("WAN") access to
corporate backbone networks, Internet access in POPs and multimedia access
facilities; GRF products for high performance IP switching in carrier and ISP
backbone networks; Pipeline and NetWarp products for telecommuting, remote
office access and Internet access by individual sites or users; and Multiband
products for videoconferencing and multimedia networks. Ascend's products
offer integrated security and network management functionality. These products
support a wide variety of application interfaces, switched digital services,
digital modem services and digital and analog access line types. This wide
range of connectivity and interoperability options significantly increases the
number of telecommunication carrier, ISP POP, corporate and individual sites
that can benefit from Ascend's products. Ascend's products are distributed and
serviced globally and Ascend maintains marketing and sales relationships with
ISPs, including UUNET, PSI, BBN, MCI, Demon Internet (UK) and IIJ (Japan),
with major telecommunications carriers, including AT&T, Sprint, MCI, GTE,
Pacific Bell, Southwestern Bell, British Telecom, France Telecom, Deutsche
Telekom and NTT in Japan, with video equipment providers, including
Compression Labs, PictureTel and VTEL, and with value-added resellers and
distributors throughout the world.
APPLICATIONS
As a consequence of the availability of a broad range of network services, a
new class of internetworking applications has emerged. Four such applications
include WAN and Internet access; WAN and Internet backbone switching; remote
local area network ("LAN") and Internet subscriber access; and
videoconferencing and multimedia access.
WAN and Internet Access. The WAN and Internet access markets are driven by
the growth of switched digital services offered by telecommunications carriers
and by the growth of dial-up internetworking offered through Internet service
providers, public information network providers, private network service
providers and large corporate telecommunications centers. WAN and Internet
access requires managed, high capacity, high density termination of digital
and analog switched connections and flexible communications to the appropriate
backbone network or the Internet through LAN or WAN circuit or frame relay
connections.
WAN and Internet Backbone Switching. The WAN and Internet backbone switching
markets are driven by the high growth of the Internet due to increases in the
number of individual Internet subscribers and the number of corporations using
the Internet as a virtual private network. This growing traffic on the
Internet has
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put increased demands on the backbone equipment at the core of WAN and
Internet networks. Today's backbone switches must handle millions of packets
of data per second and simultaneously communicate with the approximately
46,000, and growing, peer devices that form the foundation of today's
Internet.
Remote LAN and Internet Subscriber Access. The remote office and
telecommuting/SOHO market is driven primarily by the need for organizations to
increase the productivity of network users by extending their corporate
backbone network beyond its dedicated leased digital circuit boundaries to
remote offices, telecommuters, mobile computer users, vendors and customers.
The Internet access market is driven by the need for organizations and
individuals to have switched digital connections to Internet services such as
inter-company electronic mail, file transfers and the World Wide Web. Remote
LAN and Internet subscriber access requires managed, cost-effective
connections that can be established and terminated as needed, at sufficient
bandwidth.
Videoconferencing and Multimedia Access. Today's videoconferencing market is
driven by corporate demands for better and more efficient communications,
thereby enhancing video room system access and worker productivity. With the
emergence of the desktop video market, the demand for high performance
switched connectivity allowing intra-company as well as inter-company video
access equipment has grown. The multimedia market is driven by an array of
emerging multimedia access applications which include multimedia banking,
telemedicine and distance learning.
Coincident with the demand for connectivity driven by these applications has
been the need for integrated security. In addition, connectivity equipment
must contain sophisticated bandwidth management technology to address the
significant connectivity challenges posed by the large variety of network
services, communications protocols and application-specific requirements.
Furthermore, connectivity equipment must have the reliability and scalability
demanded by large telecommunications carriers and ISPs which provide these
services on a worldwide basis.
THE ASCEND SOLUTION
Ascend provides the major components of a remote networking solution: access
equipment for the remote site, access equipment for the edge of the network,
and high speed backbone switching equipment for the core of the network.
Ascend's access and backbone systems establish high-speed transparent
connections whose bandwidth, duration and destination can be adjusted to suit
user application needs.
Ascend's remote LAN and Internet subscriber access products and WAN and
Internet access products integrate digital modem technology in addition to
switched digital technology, allowing dynamic selection of analog or digital
dial-up services and a seamless transition and integration of digital and
analog services within a telecommunications carrier, corporation or an ISP's
network. Ascend's products also provide integrated network management and
security functionality.
Ascend's product families incorporate scaleable, modular software and
hardware architectures that facilitate rapid, flexible customer deployments.
This scalability and modularity also has allowed Ascend to rapidly develop new
products and additional features. Hardware platforms range from lower cost
systems using general purpose microprocessors to high-performance scaleable
systems with state-of-the-art RISC processors. All products have integrated
hardware and software platforms that can be configured into a wide variety of
systems to suit customers' specific needs for capacity, functionality and cost
effectiveness.
ASCEND STRATEGY
Ascend's objective is to maintain a leadership position in the market for
remote networking systems using the following strategies:
Focus on Targeted Applications Markets. Ascend's first product family, the
Multiband family, was introduced in February 1991. By focusing on
videoconferencing and working closely with telecommunications carriers such as
AT&T, MCI and Sprint, Ascend became a market leader in bandwidth on demand
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videoconferencing access. Building on this success and on the existing
Multiband technology, Ascend introduced the MAX product family in late 1992.
The MAX family of products supports WAN, Internet and multimedia access
applications, and has been widely deployed by ISPs. In 1996, 1995 and 1994,
the MAX product family accounted for approximately 82%, 63% and 26% of
Ascend's net sales, respectively. In late 1996, Ascend introduced the MAX TNT,
a carrier class, high-speed/high-capacity WAN access switch that is the newest
member of the MAX product family. In late 1993, to address the expanding
remote LAN and Internet access market, Ascend leveraged the technology
incorporated in its MAX and Multiband product families and introduced a new
product family of remote site access equipment, the Pipeline family of
products. In 1996, 1995 and 1994, the Pipeline product family accounted for
approximately 12%, 20% and 10% of Ascend's net sales, respectively. In late
1996, Ascend introduced the GRF product family of high performance IP
switches. The GRF is the first product family to be introduced by Ascend's
High Performance Networking Division (formerly NetStar, Inc.), based in
Minneapolis, Minnesota. Also in late 1996, to continue to enhance its
offerings to the remote LAN and Internet access market, Ascend introduced the
NetWarp product family of high performance ISDN terminal adapters. Ascend will
continue to monitor future trends and evolving applications, and intends to
enhance and expand its range of product offerings to suit the particular
network access requirements of significant new applications markets.
Provide "Any to Any" Connectivity. Ascend believes that its products must
support and enable interoperability among common network services and
interfaces. Ascend currently supports major network services including analog
modem, ISDN BRI, ISDN PRI, dedicated digital services up to and including
SONET(OC12--622 KB/second), Frame Relay, emerging xDSL networks and other
derivatives. In addition, Ascend currently supports major equipment interfaces
such as serial cabling interfaces (V.35), 10/100 MB Ethernet, FDDI, as well as
very high speed interfaces such as HIPPI and HISSI. Ascend intends to support
additional application cabling interfaces, digital access lines and analog and
digital services when such offerings become necessary to satisfy the needs of
end-user customers in the targeted applications markets.
Leverage Strategic Distribution and Marketing Relationships. Since its
inception in 1989, Ascend has developed close relationships with important
value-added resellers ("VARs"), distributors, ISPs, telecommunications
carriers and applications equipment manufacturers around the world to support
marketing and sales activities in each of its targeted applications markets.
Ascend leverages the capabilities, resources, expertise and market presence of
these strategic partners to bring Ascend's products to market rapidly and to
respond to developments in these markets. Ascend intends to develop similar
strategic relationships with additional partners in the future with the aim of
obtaining comparable benefits.
Focus on Global Markets and Applications. Organizations around the world
utilize the applications targeted by Ascend's products, often across national
borders. To achieve continued success, Ascend's products must support analog
and digital services available in the major industrial countries throughout
the world and enable interoperability of these services. Ascend intends to
continue to invest in product development aimed at these global markets.
Ascend currently markets and sells its products outside of North America in
Europe, Asia, the Pacific Basin and Latin and South America. Ascend intends to
support telecommunications services in additional countries as those services
become available.
Exploit Flexible Product Architecture For Rapid Time to Market. All of
Ascend's products leverage integrated core software components. This core
software is designed to be extensible to accommodate new applications, cabling
interfaces, digital access lines and carrier digital services. The software
currently operates on three different families of microprocessors, from
relatively low-cost processors, such as the Intel 80C18 and Motorola's 68xxx,
to state-of-the-art RISC-based processors such as the Intel i960, and is
designed to be ported to other microprocessors in the future. In addition,
Ascend has designed its hardware architecture in a modular fashion so that it
can use elements of this architecture in future products. This flexibility,
portability and modularity are intended to facilitate a relatively short
product design and development cycle and to enable Ascend to address new
applications markets and support new network services offered by
telecommunications carriers.
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CURRENT PRODUCTS
Ascend has developed four product families based on an integrated software-
based architecture intended to permit its products to: (i) connect to the
major types of analog and digital access lines worldwide; (ii) connect to
widely available dedicated line services, switched digital service, and
digital modem services; (iii) connect to the major types of telecommunications
services worldwide; (iv) provide support for different types of applications
and application interfaces; and (v) accommodate network growth and application
expansion in a scaleable fashion.
Ascend provides integrated firewall and encryption security software for its
products. In addition, Ascend's products also support local and remote
management of the access equipment, the access line interface and the
application interface. Ascend products can be managed from a central location
using either Ascend's proprietary remote management protocols or standards-
based Simple Network Management Protocol ("SNMP").
MAX
Ascend introduced its first MAX products in late 1992. Sales of MAX products
accounted for approximately 82%, 63% and 26% of Ascend's net sales in 1996,
1995 and 1994, respectively. Products in the MAX product family range from the
low-end MAX 200+ to the recently introduced MAX TNT, a carrier class, high-
speed/high-capacity WAN access switch. The entire MAX family of integrated
access servers provide bandwidth on demand for WAN, Internet and multimedia
access over common sets of digital access lines. Each MAX product supports a
modular card and backplane system that allows users to configure each unit
according to application and bandwidth requirements. MAX products can be
configured with HDLC and digital modem cards to act as a central site remote
LAN access server, allowing up to 672 simultaneous remote users to dial into
the corporate backbone network or ISP network. MAX 2000 and 4000 series units
can be configured with Multiband cards, providing up to 36 high-speed inverse
multiplexing ports for central site videoconferencing, dedicated circuit
backup and disaster recovery, dedicated circuit overflow and load balancing,
high speed bulk file transfer, high quality audio transmission and other
applications. MAX product family features include:
. Wide capacity range from MAX 200+ (8 sessions) to MAX TNT (672
sessions).
. High density digital modem support (72 per MAX 4004; 672 per multi-shelf
MAX TNT).
. Frame relay connectivity via a high speed serial connection (1 X 8Mbps
per MAX 4004; 4 X 53Mbps per MAX TNT), connection to a local frame relay
switch or integrated T1 CSU/DSU (4 X 24 DS0s per MAX 4000; 128 X 24 DS0s
per MAX TNT) access to a remote switch.
. Dynamic Bandwidth Allocation (MP, MPP, BACP) and Inverse Multiplexing
(AIM, BONDING) support facilitates the needs of modern remote access and
videoconferencing environments.
. The TNT can accommodate a full DS3, and has 10/100Mbps Ethernet, HSSI,
FDDI, V.35, POTS, E1/T1/PRI, Digital Modem, Unchannelized T1 redundant
AC or DC power supply and hot-swappable modules.
. Translation of traditional T1/PRI signaling to out-of-band ISDN
signaling for support of voice services offered through a PBX.
. Support of network access from multiple diverse network carriers and
unique hardware provides load-based, circuit-level automatic backup and
overflow accommodation for fault-tolerance.
. Heterogeneous network access, providing T1, ISDN PRI and ISDN BRI
concurrently in the same device to optimize bandwidth utilization and
cost. Low-bandwidth, low-cost ISDN BRI access lines may be used as
backup for a T1 access line. ISDN BRI may also provide ISDN to the
desktop for desktop videoconferencing.
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Ascend has obtained certification for MAX products in approximately 35
countries and has applied for certification in several other countries. Low
and mid-level MAX units generally range in list price from $2,400 to $30,000,
with units fully configured with digital modems ranging up to approximately
$60,000. MAX TNT units generally range in list price from $60,000 for a basic
configuration to $300,000 for a multi-shelf configuration.
GRF
Ascend introduced its first GRF products in September 1996. The GRF family
of high-performance IP switches enables telecommunications carriers and ISPs
to offer cost-effective competitive network access and backbone services. The
GRF's unique architecture combines its Layer-3 switch with intelligent IP
forwarding media cards to deliver scaleable performance up to 10 million
packets per second. The GRF products are equipped to handle the high-bandwidth
requirements of demanding network environments, such as the Internet.
The GRF easily integrates into existing networks using industry-standard LAN
and WAN interfaces. Network designers can place the GRF into their backbone
network to consolidate equipment, increase port density, increase packet
handling and router handling capacity and reduce the cost of ownership.
The GRF family includes the GRF 400 and GRF 1600. Introduced in September
1996, the GRF 400 offers 4 Gb/s bandwidth to support up to four media cards
and forward up to 2.8 million packets per second. Ascend announced its newest
IP switching product, the GRF 1600, in February 1997. The GRF 1600 has 16 Gb/s
bandwidth to support up to 16 media cards and deliver scaleable performance of
up to 10 million packets per second.
GRF IP switch features include:
. Support for industry-standard media types such as HSSI, 10/100 Base-T,
ATM OC3c, IP/SONET OC-3cf, ATM OC-12c, FDDI, CDDI and HPPI.
. Quick Branch Routing Technology (QBRT) for hardware-assisted full route
table lookup of up to 150,000 routes in less than 2.5 microseconds.
. Full suite of routing protocols including multicast, BGP3/4 and IS-IS.
. High-availability features including redundant load-balancing power
supplies, redundant load-balancing fans (GRF 1600), hot swappable media
cards and remote access and reboot.
The GRF 400 is now available with a base unit price of approximately
$15,650. The GRF 1600 base unit is scheduled to be available in North America
in the second quarter of 1997 at a starting price of approximately $32,000.
Media cards for the GRF 400 and GRF 1600 are currently available at prices
ranging from $13,500 to $25,000. A typical system configuration is $96,000.
Pipeline and NetWarp
Ascend introduced its first Pipeline products in late 1993. Sales of
Pipeline products accounted for approximately 12%, 20% and 10% of Ascend's net
sales in 1996, 1995 and 1994, respectively. The Pipeline product family
provides access equipment for remote office, telecommuting, SOHO and Internet
access. Pipeline products incorporate standards-based LAN routing and bridging
protocols transmitted over switched or dedicated digital services, and include
inverse multiplexing functionality to allow users to obtain higher data rates
than are available from individual digital access lines and switched digital
circuits.
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Pipeline products support the major types of digital access lines and
provide interoperability between different access line types. Certain of the
Pipeline features enabling remote LAN access include:
. Security protocols such as Challenge Handshake Authentication Protocol
("CHAP"), Password Authentication Protocol ("PAP") and UNIX Syslog.
Security protocols are crucial to ensure the integrity of the backbone
network.
. Support of additional security capabilities including call-back and
filtering on a per-caller basis.
. Packet-level inverse multiplexing for greater performance than can be
obtained over single channel connections.
. Support for key encapsulation protocols including PPP, MP and Ascend's
and other companies' proprietary encapsulation protocols.
. Support for data compression over WANs for improved performance.
. Support of protocol spoofing to minimize connect-time costs over the WAN
and to maximize remote site performance.
. Call Detail Recording ("CDR") for billing and monitoring purposes.
. Filter-based call establishment and termination to ensure that
connections are active only for the duration required for the
application.
. Telnet and SNAP network management capabilities.
Members of the Pipeline product family include the low-end Pipeline 25-PX
and Pipeline 25-FX, the mid-range Pipeline 50 and Pipeline 75, and the
Pipeline 130, which may be used for high-end remote LAN access or as a small
central site WAN access device. The low-end products in the Pipeline product
family are targeted at the telecommuting and Internet access market and are
designed for the less technically sophisticated user. Ascend distributes these
products through channels targeted at such users. These products have yielded
lower gross margins than Ascend's other products. Ascend has obtained
certification for Pipeline products in approximately 30 countries and has
applied for certification in several other countries. Pipeline 25-PX units
generally range in list price from $595 to $695. Pipeline 50 units generally
range in list price from $895 to $1,695 and Pipeline 130 units generally range
in list price from $1,895 to $1,995.
In late 1996, to enhance its offerings in the remote LAN and Internet access
market, Ascend introduced the NetWarp product family of high performance ISDN
terminal adapters ("TAs"). NetWarp products address the burgeoning market of
home users who want high-speed ISDN access to the Internet. NetWarp products
are designed to address the three primary end-user requirements for ISDN dial-
up: performance, low cost and easy installation. The NetWarp ISDN terminal
adapters support all three Windows environments: Windows 3.x, Windows/NT and
Windows 95. To facilitate installation and ease of set-up, NetWarp products
are plug and play capable and include automatic switch protocol detection to
eliminate error-prone manual configuration required in existing TA-type
products. NetWarp units generally range in list price from $169 to $349.
Multiband
Ascend introduced its first Multiband products in February 1991 and
introduced a cost-reduced product, the Multiband Plus, in May 1992. In 1995,
Ascend introduced the Multiband VSX, a less expensive, reduced functionality
version of its Multiband Plus product. Sales of Multiband products accounted
for approximately 5%, 15% and 58% of Ascend's net sales in 1996, 1995 and
1994, respectively. The Multiband family is focused primarily on
videoconferencing and multimedia applications. This family of bandwidth on
demand controllers provides global bandwidth on demand at speeds from 56
kbit/s to 4 Mbit/s using switched digital services.
The Multiband Plus product supports four simultaneous high-speed digital
connections, connecting to applications using serial ports. The product
incorporates inverse multiplexing, dynamic bandwidth allocation,
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global connectivity and comprehensive management capabilities to allow users
to create bandwidth on demand network solutions primarily for
videoconferencing and multimedia applications. Multiband Remote Port Modules
("RPM") facilitate bandwidth distribution within a facility by extending
serial data ports from Multiband products over unshielded twisted pair wiring
to applications throughout a facility for distances up to 3,400 feet.
Certain of the key Multiband features enabling videoconferencing access
include:
. Inverse multiplexing.
. Support for all major inverse multiplexing standards, including BONDING.
. Remote management capability on all models.
. Integrated SNMP management with direct Ethernet access.
. Support for all major videoconferencing dialing protocols, such as RS-
366, extended Switched Digital Services Applications Forum ("SDSAF"),
V.25 bis and X.21 for international compatibility.
. Support for dual paired ports to interoperate with the installed base of
videoconferencing systems that do not support inverse multiplexing.
. Compatibility with the major brands of videoconferencing equipment.
Ascend has obtained country certifications for Multiband Plus products in
approximately 24 countries and has applied for certification in several other
countries. Multiband VSX units generally range in list price from $1,200 to
$7,500. Multiband Plus units generally range in list price from $7,000 to
$12,000.
TECHNOLOGY
Ascend has developed a core software architecture that is modular and
portable. This software is used throughout all products and runs on three
different hardware microprocessors: Intel 80C188, Intel RISC i960 and Motorola
68xxx. The key capabilities of Ascend's technology are:
WAN Protocol Software. Ascend products connect to and manage wide area
communications for a variety of digital and analog access lines and switched
and leased digital services worldwide. Each digital or analog access line and
digital service has specific connect and disconnect protocols. Ascend's
products support 36 WAN protocols and five wide area digital access
interfaces. These protocols include 20 different ISDN call signaling protocols
worldwide.
Bandwidth Management Software. Ascend's products manage WAN bandwidth over a
variety of digital services, digital access lines and user applications.
Ascend's products support several bandwidth on demand technologies which allow
dynamic changes in bandwidth during a communications session, including Ascend
Inverse Multiplexing ("AIM"), and industry standard inverse multiplexing, such
as BONDING, as well as software data compression.
Remote LAN Access Software. Ascend's products incorporate standards used in
remote LAN access including Point-to-Point Protocol ("PPP") and Multilink PPP
("MP"). Ascend has also developed proprietary extensions to the standard
protocols by optimizing them for remote LAN access. These include MPP,
Ascend's Multipoint Point-to-Point Protocol.
Standards-Based Security. Ascend's products support many standard and
extended methods for providing security and access control for WAN access,
including CHAP, PAP, Extended TACACS, Radius and UNIX Syslog.
Application Specific Software. Ascend's products support a wide variety of
application equipment, such as videoconferencing equipment, routers, T1
multiplexers and PBXs, and a wide variety of application cabling, such as
serial ports and unshielded twisted pair wiring. Ascend's Multiband product
family implements the
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videoconferencing protocol RS-366 and is compatible with videoconferencing
equipment manufactured by Compression Labs, PictureTel, VTEL, British Telecom,
GPT Panasonic and others. In addition, Ascend's products support network
management, remote diagnostics and a wide variety of advanced security
protocols.
MARKETING AND SALES
Ascend's marketing and sales objective is to ensure that subscribers to
network services and users of applications equipment requiring such services
are aware of the capabilities and benefits of Ascend's products. To accomplish
this objective Ascend has developed and maintains marketing and sales
relationships with VARs, distributors, ISPs, major telecommunications carriers
and applications equipment manufacturers who, in turn, market and sell
Ascend's products to end-user customers. Ascend's sales force also sells
products directly to certain end-user customers.
The primary role of Ascend's sales force is to: (i) provide support to the
VARs, distributors, ISPs, telecommunications carriers and applications
equipment manufacturers; (ii) assist ISPs and end-user customers in addressing
complex network and Internet access problems; (iii) differentiate the features
and capabilities of Ascend's products from competitive offerings; and (iv)
continually monitor and understand ISPs' and end-user customers' evolving
needs for network services.
Ascend also has several marketing programs to support the sale and
distribution of its products. The objective of these programs is to inform
VARs, distributors, ISPs, telecommunications carriers, applications equipment
manufacturers and end-user customers about the capabilities and benefits
available with the use of Ascend's remote networking equipment. The programs
include participation in industry trade shows and technical conferences,
design and presentation of technology seminars, publication of customer
newsletters and technical and educational articles for the trade press and
other industry journals and frequent communications with the installed base of
end-user customers regarding evolving applications for Ascend's products.
Internet Service Providers
Ascend's MAX and Pipeline products are sold through its direct, VAR and
distributor channels to ISPs. Ascend has relationships with many major ISPs
worldwide, including UUNET, PSI, BBN, MCI, Demon Internet (UK) and IIJ
(Japan). UUNET, which first commenced volume purchases of Ascend's products in
1995, accounted for approximately 7% and 11% of net sales in 1996 and 1995,
respectively.
Value-Added Resellers and Distributors
In North America, Ascend employs a two-tier reseller channel strategy. As
part of this strategy, Ascend maintains contractual relationships with and
sells its products to VARs and end-users around the world through three large
distributors: Merisel, Ingram and Tech Data. In addition, Ascend has entered
into non-exclusive agreements with approximately 87 premier VARs to sell and
service Ascend's products. The terms of the agreements generally are for
periods not in excess of 12 months, subject to annual renewals and earlier
termination by either party with prior notice. VARs and distributors are
entitled to periodically return unsold inventory to Ascend. Returns are
subject to a maximum limit and may be subject to a minimum restocking
requirement. To date such inventory returns have not been material.
Telecommunications Carriers
Ascend's products are sold and serviced by major telecommunications carriers
around the world, including AT&T, Sprint, MCI, GTE, Pacific Bell, Southwestern
Bell, U.S. West, Ameritech, British Telecom, France Telecom, Deutsche Telekom
and NTT in Japan. Sales to telecommunications carriers are made on open
account and are subject to Ascend's standard terms and conditions of sale.
Certain of the telecommunications carriers are entitled to periodically
exchange unsold inventory for other products offered by Ascend, subject to a
maximum exchange limit and subject to a minimum restocking requirement for
returned inventory. To date, such inventory exchanges have not been material.
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<PAGE>
Applications Equipment Manufacturers
Ascend's products are also sold and serviced by several applications
equipment manufacturers, including Lucent Technologies, Inc. ("Lucent"),
Northern Telecom, Inc., Alcatel and NEC. Under its agreement with Lucent,
Ascend provides its Multiband, MAX and Pipeline products for resale by Lucent
under the Lucent label. Lucent may, at any time, cancel orders for product
delivery which it has placed with Ascend, subject to the payment of specified
minimum amounts. In addition, Ascend has entered into agreements with
applications equipment manufacturers and integrators of videoconferencing
equipment, including Compression Labs, PictureTel, VTEL and Panasonic, which
authorize these companies to resell Ascend's products using Ascend's
identification label. These videoconferencing applications equipment
manufacturers are not obligated to purchase minimum volumes of product, and
they may cancel orders placed with Ascend at any time prior to scheduled
payment.
North American Sales and Marketing Organization
As of December 31, 1996, Ascend's North America sales and marketing
organization included 265 individuals, including managers, sales
representatives, and technical and administrative support personnel. Ascend
has 44 sales offices located in the following metropolitan areas: Atlanta,
Boston, Chicago, Cincinnati, Cleveland, Columbus, Durham, Dallas, Denver,
Hartford, Houston, Indianapolis, Kansas City, Los Angeles, Minneapolis, New
York, Orlando, Phoenix, Portland, Providence, Salt Lake City, San Francisco,
Seattle, St. Louis, Tampa, Toronto, Vancouver and Washington D.C. Ascend
intends to continue to recruit highly trained individuals for its North
America sales organization.
International Sales
Ascend's international sales have been principally export sales and
currently are made through approximately 200 telecommunications carriers,
Internet service providers, VARs and distributors servicing approximately 50
countries, including Japan, Germany, the United Kingdom, France, Sweden,
Belgium, Italy, Spain, Hong Kong, Australia, Singapore, Korea, Taiwan and
China. The carriers, VARs and distributors generally provide system
installation, technical assistance and support to end-user customers within
their area of responsibility. Generally, international telecommunications
carriers, VARs and distributors have non-exclusive rights to sell and market
Ascend's products within their respective countries.
As of December 31, 1996, Ascend's international sales organization included
101 individuals, including managers, sales representatives and technical and
administrative support personnel. Ascend has sales offices in the United
Kingdom, Germany, France, Belgium, Japan, Hong Kong, Singapore and Australia.
International sales accounted for approximately 48%, 29% and 20% of net
sales in 1996, 1995 and 1994, respectively (see Note 1 of Notes to
Consolidated Financial Statements). International sales are made in United
States dollars and are subject to government controls and other risks
associated with international business activities. See "Risk Factors--
International Sales." To date, Ascend has not experienced any material
difficulties or interruptions with respect to its international business
activities.
TECHNICAL ASSISTANCE AND SUPPORT
A high level of continuing technical assistance and support is important to
Ascend's objective of developing long-term relationships with customers. The
majority of these technical assistance and support activities are related to
installations and network configuration issues and are primarily provided by
third parties distributing Ascend's products. Ascend supports its sales
personnel and customers by providing telephone support and remote access to
customer installations through Ascend's Technical Assistance Centers in
Alameda, California and
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<PAGE>
Sophia Antipolis, France. Remote access is accomplished either through a
digital dial-up network connection directly to a customer's installation or
through a modem connection to the control port of the customer's system. The
connection allows Ascend's technical support personnel to remotely analyze and
correct software, installation and configuration problems. Ascend also offers
on-site installation and technical assistance for fixed fees, which to date
have not been significant.
Ascend's products have standard warranties of up to 12 months. Ascend has a
variety of comprehensive and flexible hardware and software maintenance and
support programs available for products no longer under warranty, with
services ranging from time and materials remote service support to 24-hour on-
site support, depending on the end-user customer preference. Ascend also
offers various training courses for its third party resellers and end-user
customers. To date, revenues attributable to customer service, support and
training services have not been significant.
RESEARCH AND DEVELOPMENT
Ascend believes that its future success depends in part on its ability to
continue to enhance its existing products and to develop new products that
maintain technological competitiveness. Ascend also believes its product
development activities should be directed to solving the practical needs of
its customers. Ascend monitors changing customer needs and works closely with
users of network access products, including ISPs, telecommunications carriers,
applications equipment manufacturers, VARs and distributors, end-user
customers and market research organizations to monitor changes in the
marketplace. Ascend intends to remain dedicated to industry standards and to
continue to support emerging WAN protocol standards and carrier services.
Ascend's software and hardware architecture is modular in design,
facilitating a relatively short product design and development cycle and
reducing the time to market for new products and features. Ascend has utilized
this architectural design to develop and introduce numerous product models and
enhancements since the introduction of its first products in 1991. Ascend
intends to continue to utilize this architectural design to develop and
introduce additional products and enhancements in the future.
Ascend and its major customers test new products prior to their general
commercial availability. Ascend conducts both internal testing and beta
testing with selected customers. To date, Ascend has not experienced any
material product returns or software or hardware defects.
Ascend has expanded its research and development expertise by acquiring key
technologies and core competencies through mergers with and acquisitions of
public and private companies in the networking industry. In 1997, Ascend
acquired InterCon Systems Corporation ("InterCon"), a leading developer of
client software products for both the corporate and ISP markets and has
entered into an agreement to acquire Whitetree, Inc. ("Whitetree") a developer
and manufacturer of high-speed switching products. In December 1996, Ascend
acquired StonyBrook Services, Inc. ("StonyBrook"), a developer of network
management software. In August 1996, Ascend acquired NetStar, Inc.
("NetStar"), a developer and manufacturer of high performance, high speed IP
network switches. In August 1996, Ascend acquired Subspace Communications,
Inc. ("Subspace"), a developer of PC-based data and telecommunications
products for the home and small office environments. In March 1996, Ascend
acquired Morning Star Technologies, Inc. ("Morning Star"), a developer of
network routing software and advanced network security products.
Ascend is currently undertaking development efforts for each of its product
families. MAX development efforts include improving network access and network
management capabilities as well as improving price/performance. Pipeline
development efforts include digital and analog integration, support of
additional WAN protocols and cost reduction engineering. Multiband development
efforts include integration of emerging multimedia access applications such as
multimedia banking, telemedicine and distance learning as well as improving
price/performance.
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<PAGE>
Schedules for high technology products are inherently difficult to predict,
and there can be no assurance that Ascend will achieve its scheduled first
customer shipment dates. Also, there can be no assurance that Ascend's product
development efforts will result in commercially successful products, or that
Ascend's products will not be rendered obsolete by changing technology or new
product announcements by other companies.
Ascend's research and development expenditures were $40.3 million, $12.4
million and $6.1 million in 1996, 1995 and 1994, respectively. Research and
development expenditures are expensed as incurred. At December 31, 1996, 210
full-time employees were engaged in research and development. During 1996,
Ascend added development facilities in Columbus, Ohio; Fremont, California;
Minneapolis, Minnesota; and Bohemia, New York.
COMPETITION
The market for remote networking systems is highly competitive and subject
to rapid technological change. Ascend expects competition to persist and
increase in the future. Ascend's current competitors can be divided into four
groups: manufacturers of WAN and Internet access equipment, manufacturers of
high speed switching equipment for backbone networks, manufacturers of remote
LAN and Internet subscriber access equipment and manufacturers of bandwidth on
demand products addressing the needs of the videoconferencing and multimedia
market.
In the WAN and Internet access market, Ascend's primary competitors are
Cisco, U.S. Robotics and Shiva. Cisco has substantially greater financial,
marketing and technical resources than Ascend. In the WAN and Internet
backbone switching market, Ascend's primary competitor is Cisco. In the remote
LAN access and Internet subscriber access market, competition is widespread,
although few companies have positioned their products specifically as digital
bandwidth on demand network access systems. Ascend's primary competitors in
this market are Gandalf, Cisco, Shiva and 3Com. In the videoconferencing and
multimedia access market, competitors include Teleos Communications (a
subsidiary of Madge), Adtran and Promptus Communications (a subsidiary of
GTI).
Competitive factors in the remote networking market include core technology,
breadth of product features, scalability of products, product quality and
functionality, pricing, marketing and distribution resources, international
certifications and technical service and support. Ascend believes it presently
competes favorably with respect to each of these factors and is positioned to
respond to anticipated competitive actions.
Competitive factors in the high speed switching market include support for
standards-based protocols, the need for multiple interfaces, the ability to
handle the size and dynamic nature of the Internet addressing infrastructure,
and throughput measured in packets per second. Ascend believes it presently
competes favorably with respect to each of these factors and is positioned to
respond to anticipated competitive actions.
Ascend expects additional competition from existing competitors and from a
number of other companies that may enter Ascend's existing and future markets.
The additional competition could adversely affect Ascend's business, results
of operations and financial condition. Some of Ascend's current and potential
competitors have substantially greater financial, marketing and technical
resources than Ascend.
MANUFACTURING AND QUALITY
Ascend has received the International Standard Organization ("ISO") 9001
certification for quality. Ascend's manufacturing operations consist primarily
of materials planning and procurement, final assembly, burn-in, final system
testing and quality control. Ascend designs all of the hardware sub-assemblies
for its products and uses the services of contract manufacturers to build
these sub-assemblies and certain of its products to Ascend's specifications.
Ascend presently uses a variety of independent third party contract assembly
companies to perform printed circuit board assembly and in-circuit testing.
Ascend installs its proprietary software into the electronically erasable
programmable read only memory ("EEPROM") of its systems in order to configure
products to meet customer needs and to maintain quality control and system
security. The manufacturing process enables Ascend to configure the hardware
and software in combinations to meet a wide
54
<PAGE>
variety of individual customer requirements. Ascend uses automated testing
equipment and burn-in procedures, as well as comprehensive inspection, testing
and statistical process control testing by technicians, to assure the quality
and reliability of its products. To date, Ascend has not experienced
significant product defects or customer returns of products.
Although Ascend generally uses standard parts and components for its
products, certain components including certain key microprocessors and
integrated circuits, are presently available only from a single source or from
limited sources. Ascend has no supply commitments from its vendors and
generally purchases components on a purchase order basis as opposed to
entering into long term procurement agreements with vendors. Ascend has
generally been able to obtain adequate supplies of components in a timely
manner from current vendors or, when necessary to meet production needs, from
alternate vendors. Ascend believes that, in most cases, alternate vendors can
be identified if current vendors are unable to fulfill needs. However, delays
or failure to identify alternate vendors, if required, or a reduction or
interruption in supply or a significant increase in the price of components
could adversely affect Ascend's revenues and financial results and could
adversely impact customer relations.
Ascend increased its manufacturing capacity in 1996, 1995 and 1994 by adding
additional facilities and personnel and will continue to increase its
manufacturing capacity as needed. Ascend's financial results could be
adversely affected if it encounters delays or for any other reason does not
expand manufacturing capacity as required.
PROPRIETARY RIGHTS
Ascend's success and ability to compete is dependent in part upon its
proprietary technology, although Ascend believes that its success is more
dependent upon its technical expertise than its proprietary rights. Ascend
relies on a combination of patent, copyright and trade secret laws and non-
disclosure agreements to protect its proprietary technology. Ascend generally
enters into confidentiality or license agreements with its employees,
distributors, customers and potential customers and limits access to its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by Ascend in this regard will be adequate to
prevent misappropriation of its technology or that Ascend's competitors will
not independently develop technologies that are substantially equivalent or
superior to Ascend's technology. In addition, the laws of some foreign
countries do not protect Ascend's proprietary rights to the same extent as do
the laws of the United States. Ascend is also subject to the risk of adverse
claims and litigation alleging infringement of the intellectual property
rights of others. From time to time Ascend has received claims of infringement
of other parties' proprietary rights. There can be no assurance that third
parties will not assert infringement claims in the future with respect to
Ascend's current or future products or that any such claims will not require
Ascend to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.
EMPLOYEES
As of December 31, 1996, Ascend employed 721 persons, including 366 in sales
and marketing, 83 in manufacturing, 210 in engineering and 62 in finance and
administration. Of these, 88 were employed outside of North America. None of
Ascend's employees is represented by a labor union. Ascend has experienced no
work stoppages and believes its relationship with its employees is good.
Ascend's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product development
personnel. Ascend does not have employment contracts with its key personnel
and does not maintain any key person life insurance policies. The loss of key
management or technical personnel could adversely affect Ascend.
55
<PAGE>
Ascend is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a significant strain on its
administrative, operational and financial resources and increased demands on
its systems and controls. This growth has resulted in a continuing increase in
the level of responsibility for both existing and new management personnel.
Ascend anticipates that its continued growth will require it to recruit and
hire a substantial number of new engineering, sales, marketing and managerial
personnel. There can be no assurance that Ascend will be successful at hiring
or retaining these personnel. Ascend's ability to manage its growth
successfully will also require Ascend to continue to expand and improve its
operational, management and financial systems and controls and to expand its
manufacturing capacity. If Ascend's management is unable to manage growth
effectively, Ascend's business, results of operations and financial condition
may be materially and adversely affected.
PROPERTIES
Ascend's principal administrative, engineering, manufacturing, marketing and
sales facilities total approximately 250,000 square feet and are located in
four buildings in Alameda, California. Ascend occupies its current facilities
under leases which expire at various dates through December 2001. In addition,
Ascend leases sales offices and development centers in the metropolitan areas
of Atlanta, Boston, Chicago, Cincinnati, Cleveland, Columbus, Durham, Dallas,
Denver, Hartford, Houston, Indianapolis, Kansas City, Los Angeles,
Minneapolis, New York, Orlando, Phoenix, Portland, Providence, Salt Lake City,
San Francisco, Seattle, St. Louis, Tampa, Toronto, Vancouver and Washington
D.C. Ascend expects that it will require additional facilities over the next
few years, and Ascend believes that additional space will be available.
MANAGEMENT
Ascend's directors and executive officers are as follows:
<TABLE>
<CAPTION>
EMPLOYEE
NAME AGE POSITION SINCE
---- --- -------- --------
<C> <C> <S> <C>
Mory Ejabat........................... 46 President, Chief 1990
Executive Officer and
Director
Curtis N. Sanford..................... 38 Senior Vice President, 1990
International Sales and
General Manager of
International Operations
Robert K. Dahl........................ 56 Vice President, Finance, 1994
Chief Financial
Officer and Director
Michael Hendren....................... 50 Senior Vice President, 1994
North America Sales
Anthony Stagno........................ 56 Vice President, 1992
Manufacturing
Michael J. Johnson.................... 44 Controller and Chief 1994
Accounting Officer
Jeanette Symons....................... 34 Executive Vice 1989
President, Advanced
Products and Technology
Group and Chief
Technical Officer
Bernard Schneider..................... 40 Vice President, 1995
Strategic Business
Development
William H. Kind....................... 41 Vice President, 1996
Engineering
Betsy S. Atkins....................... 42 Director
Roger L. Evans........................ 51 Director
C. Richard Kramlich................... 61 Director
James P. Lally........................ 51 Director
Martin Schoffstall.................... 36 Director
</TABLE>
Mr. Ejabat joined Ascend in January 1990 as Vice President, Operations, and
he served in this capacity until December 1992. From December 1992 until March
1994, he served as Executive Vice President. From March 1994 until June 1995,
he served as President, Chief Operating Officer and a director of Ascend.
Since June 1995, he has served as President, Chief Executive Officer and a
director of Ascend. From January 1979 to
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June 1989, Mr. Ejabat was employed by Micom Systems, Inc., a data
communications equipment manufacturer, where he served in various management
capacities, including Vice President for Wide Area Communications Products and
Vice President of Development and Operations.
Mr. Sanford joined Ascend in January 1990 as Vice President, International.
From January 1993 until May 1994 he served as Vice President, Worldwide
Marketing and International Sales. From May 1994 to December 1995 he served as
Vice President, International Sales. Since December 1995, he has served as
Senior Vice President, International Sales and General Manager of
International Operations. From June 1980 to December 1989, Mr. Sanford was
employed by BBN Communications Corporation, a data communications equipment
manufacturer, and was Director, Far East Operations at the end of his
employment there.
Mr. Dahl joined Ascend in January 1994 as Vice President, Finance and Chief
Financial Officer. He has served as a director of Ascend since July 1995. From
May 1991 to December 1993, Mr. Dahl was a private investor and a principal in
Dahl-De Vivo Management Co., a private investment firm. From January 1991 to
May 1991, he was employed as Executive Vice President and Chief Financial
Officer for Digital Microwave Corporation. From January 1988 to December 1990,
Mr. Dahl was Senior Vice President, Chief Financial Officer and a member of
the Board of Directors of American President Cos., Ltd., a diversified
transportation company. From July 1986 to December 1987, he was employed by
Ungermann-Bass, Inc., a networking equipment supplier, as Executive Vice
President and Chief Financial Officer and also served as a member of its Board
of Directors. From June 1979 to July 1986, he was employed as Vice President
and Chief Financial Officer of ROLM Corporation, a manufacturer of customer
premises communications equipment.
Mr. Hendren joined Ascend in May 1994 as Vice President, North American
Sales. Since December 1995, he has served as Senior Vice President, North
America Sales. From January 1990 to April 1994, Mr. Hendren was employed by
ACC Corp., a communications equipment manufacturer, and was Vice President of
Sales at the end of his employment there.
Mr. Stagno joined Ascend in January 1992 as Director, Quality Assurance, and
since July 1994 has served as Vice President, Manufacturing. From November
1989 to December 1991, Mr. Stagno was employed by MiniMed Technologies, an
electronic medical instruments manufacturer, and was Director, Quality
Assurance at the end of his employment there.
Mr. Johnson joined Ascend in May 1994 as Controller and Chief Accounting
Officer. From December 1992 to May 1994, Mr. Johnson was Vice President of
Finance and Chief Financial Officer for Skylawn Corporation. From October 1990
to November 1992, he was employed as Controller and Chief Accounting Officer
for Itel Rail Corporation, a rail car leasing, maintenance, and transportation
company. From July 1987 to September 1990, Mr. Johnson was Vice President and
Chief Financial Officer of the Oakland Tribune, Inc., a newspaper publisher.
From May 1981 to June 1987, he was employed as Controller of Baron Data
Systems, Inc., a computer software and equipment manufacturer.
Ms. Symons is a co-founder of Ascend and served as Director of Engineering
from Ascend's inception until March 1994. From March 1994 to June 1995, Ms.
Symons served as Assistant Vice President, Engineering. From June 1995 to
January 1997 she served as Vice President, Engineering and Chief Technical
Officer. Since January 1997, she has served as Executive Vice President,
Advanced Products and Technology Group and Chief Technical Officer. From
October 1983 to December 1988, she was employed as an engineer by Hayes
Microcomputer Products, Inc., a data communications equipment manufacturer.
Mr. Schneider joined Ascend in June 1995 as Vice President, Marketing and
served in this capacity until July 1996. Since July 1996, Mr. Schneider has
served as Vice President, Strategic Business Development. From July 1990 to
June 1995, Mr. Schneider was Director of Data Product Management of Sprint
Corp., a telecommunications equipment provider. From October 1983 to July
1990, Mr. Schneider was Director, Telecommunications for United Stationers, an
office products company.
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Mr. Kind joined Ascend in October 1996 as Vice President, Engineering. From
October 1995 to October 1996, Mr. Kind was Senior Director of Engineering at
Cisco. From October 1985 to June 1995, Mr. Kind served in various senior
engineering management positions in the Networking Division of Hewlett Packard
in Roseville, California.
Ms. Atkins has served as a director of Ascend since August 1989. Ms. Atkins
was President and Chief Executive Officer of Nellson Candies, Inc. from 1990
to 1993. From August 1989 to January 1990, she was Vice President of Marketing
and Sales for Ascend. From 1987 to 1988, she was Vice President of Marketing
for Unisys Corporation, a computer manufacturer.
Mr. Evans has served as a director of Ascend since April 1989. Mr. Evans has
been a special limited partner of Greylock Capital Limited Partnership, a
venture capital partnership, since 1989, and has been a general partner of
Greylock Management Corporation since 1991. From October 1988 until joining
Greylock, Mr. Evans was a consultant. From 1985 until October 1988, he served
as President and Chief Executive Officer of Micom Systems, Inc., a
manufacturer of data communications equipment. Mr. Evans also serves on the
Board of Directors of HNC Software, Inc. and several private companies,
including Whitetree.
Mr. Kramlich has served as a director of Ascend since February 1990. Mr.
Kramlich has been a general partner of New Enterprise Associates, a venture
capital firm, since June 1978. Mr. Kramlich also serves on the Board of
Directors of Chalone, Inc., Macromedia, Inc., Neopath, Inc., Silicon Graphics,
Inc., SyQuest Technology, Inc. and Telebit Corporation.
Mr. Schoffstall has served as a director of Ascend since June 1996. Mr.
Schoffstall is a founder of Epicenter, Inc., an Internet gaming company, and
has served as its President and Chairman of the Board of Directors since its
inception in April 1996. Mr. Schoffstall is a co-founder of PSINet Inc.
("PSINet"), an Internet access and service provider, and served as PSINet's
Senior Vice President from February 1995 to April 1996 and as director and
Chief Technical Officer of PSINet from its inception in 1988 to April 1996.
Mr. Schoffstall also served as Vice President and Treasurer of PSINet from
1988 to February 1995. Prior to forming PSINet, Mr. Schoffstall was co-founder
and, from 1987 to 1989, served as Vice President for Technology and Marketing,
of NYSERNet (New York State Education and Research Network). Mr. Schoffstall
co-authored the national standard network management software, SNMP.
Mr. Lally has served as a director of Ascend since April 1989. Mr. Lally has
been a general partner at Kleiner Perkins Caufield & Byers, a venture capital
firm, since September 1981. Mr. Lally also serves on the Board of Directors of
NetFRAME Systems, Inc.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information is qualified by
and should be read in conjunction with Ascend's consolidated financial
statements and notes thereto included elsewhere in this Prospectus/Consent
Solicitation Statement. The consolidated statement of operations data for the
years ended December 31, 1996, 1995 and 1994 and the balance sheet data as of
December 31, 1996 and 1995 set forth below are derived from the consolidated
financial statements included elsewhere in this Prospectus/Consent
Solicitation Statement. The consolidated statement of operations data for the
years ended December 31, 1993 and 1992 and the consolidated balance sheet data
as of December 31, 1994, 1993 and 1992 are derived from audited consolidated
financial statements which are not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales........................ $549,297 $152,604 $39,655 $16,215 $ 7,236
Cost of sales.................... 192,226 53,296 13,387 5,587 3,439
-------- -------- ------- ------- -------
Gross profit................... 357,071 99,308 26,268 10,628 3,797
Operating expenses:
Research and development....... 40,291 12,400 6,139 3,092 2,480
Sales and marketing............ 111,599 35,447 11,409 5,790 4,305
General and administrative..... 16,745 9,129 3,569 2,208 1,214
Purchased research and
development................... -- 3,032 -- -- --
Costs of merger................ 13,900 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses..... 182,535 60,008 21,117 11,090 7,999
-------- -------- ------- ------- -------
Operating income (loss).......... 174,536 39,300 5,151 (462) (4,202)
Interest, net.................... 11,879 5,122 969 97 138
-------- -------- ------- ------- -------
Income (loss) before income
taxes........................... 186,415 44,422 6,120 (365) (4,064)
Provision (benefit) for income
taxes........................... 73,304 16,887 (430) -- --
-------- -------- ------- ------- -------
Net income (loss)................ $113,111 $ 27,535 $ 6,550 $ (365) $(4,064)
======== ======== ======= ======= =======
Net income (loss) per share...... $ 0.89 $ 0.25 $ 0.07 $ 0.00 $ (0.34)
======== ======== ======= ======= =======
Number of shares used in per
share calculation............... 127,809 111,362 94,583 83,117 12,051
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $467,883 $262,750 $46,107 $10,578 $ 8,037
Total assets......................... 651,866 370,014 60,857 15,362 11,041
Total stockholders' equity........... 547,450 324,987 50,675 12,122 9,100
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Ascend develops, manufactures, markets, sells and supports a broad range of
high-speed integrated remote networking products that enable its customers to
build: (i) Internet access systems consisting of POP termination equipment for
ISPs and remote site Internet access equipment for Internet subscribers; (ii)
high speed IP switches for application in telecommunications carriers and ISP
backbone networks; (iii) extensions and enhancements to corporate backbone
networks that facilitate access to these networks by remote offices,
telecommuters and mobile computer users; and (iv) videoconferencing and
multimedia access facilities. These products support
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<PAGE>
existing digital and analog networks. Net sales have increased due to the
market acceptance of MAX and Pipeline products and continuing acceptance of
the Multiband product family, and due to the expansion of Ascend's domestic
and international distribution network.
Ascend acquired four companies in the year ended December 31, 1996. In
December 1996, Ascend acquired StonyBrook Services, Inc. ("StonyBrook"), a
developer of network management software. In August 1996, Ascend acquired
NetStar, Inc. ("NetStar"), a developer and manufacturer of high performance,
high speed IP network switches, and Subspace Communications, Inc.
("Subspace"), a manufacturer of PC-based data and telecommunications products
for the home and small office environments. In March 1996, Ascend acquired
Morning Star Technologies, Inc. ("Morning Star"), a manufacturer of network
routing software and advanced network security products. (See Note 8 to the
Financial Statements). In addition, in 1997 Ascend acquired InterCon Systems
Corporation ("InterCon"), a leading developer of client software products for
both the corporate and ISP markets. (See Note 10 to the Financial Statements).
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net sales represented by certain line items from Ascend's consolidated
statements of income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net sales......................................... 100% 100% 100%
Cost of sales..................................... 35 35 34
------- ------- -------
Gross profit.................................... 65 65 66
Operating expenses:
Research and development........................ 7 8 15
Sales and marketing............................. 20 23 29
General and administrative...................... 3 6 9
Purchased research and development.............. - 2 -
Costs of merger................................. 3 - -
------- ------- -------
Total operating expenses...................... 33 39 53
------- ------- -------
Operating income.................................. 32 26 13
Interest, net..................................... 2 3 2
------- ------- -------
Income before income taxes........................ 34 29 15
Provision (benefit) for income taxes.............. 13 11 (1)
------- ------- -------
Net income........................................ 21% 18% 16%
======= ======= =======
</TABLE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Sales. Net sales for 1996 increased 260% to $549.3 million as compared
to $152.6 million in 1995, which increased 285% from $39.7 million in 1994.
International sales (sales outside of North America) increased to $261.4
million in 1996 as compared to $43.9 million in 1995 and to $7.9 million in
1994 and accounted for 48%, 29% and 20% of net sales in 1996, 1995 and 1994,
respectively.
The growth in net sales during 1996 and 1995 was attributable primarily to
an increase in unit shipments as a result of market acceptance of Ascend's MAX
and Pipeline product families and the expansion of the domestic and
international distribution network. The increase in unit shipments of the MAX
family of products was primarily attributable to the growth in business from
ISPs and increased demand for corporate WAN access applications. The MAX
product family accounted for approximately 82% of net sales in 1996 as
compared to approximately 63% in 1995 and approximately 26% in 1994. The
Pipeline product family accounted for
60
<PAGE>
approximately 12% of net sales in 1996 as compared to approximately 20% of net
sales in 1995, but increased in absolute dollars for the same time period. The
Pipeline product family accounted for approximately 10% of net sales in 1994.
The increase in net sales of the Pipeline family of products from 1994 to 1996
was principally due to growth in Ascend's VAR and distributor channels and
increased demand for remote and Internet access products by end-user
customers. Net sales of Ascend's Multiband products accounted for
approximately 5% of net sales in 1996 compared to approximately 15% of net
sales in 1995 and approximately 58% of net sales in 1994. The decreases in
Multiband net sales as a percentage of total net sales were due to the rapid
increase in sales of Ascend's MAX and Pipeline products.
In North America, Ascend relies on third party distribution channels,
including VARs and distributors, major telecommunications carriers and
applications equipment manufacturers for a substantial portion of its net
sales. Sales to these third party distribution channels accounted for
approximately 31%, 48% and 64% of Ascend's net sales in 1996, 1995 and 1994,
respectively. AT&T, a telecommunications carrier, accounted for approximately
3%, 5% and 15% of net sales in 1996, 1995 and 1994, respectively. Also, UUNET,
an ISP that first commenced volume purchases of Ascend's products in 1995,
accounted for approximately 7% and 11% of net sales in 1996 and 1995,
respectively. International sales (sales outside of North America) are made
through telecommunications carriers, ISPs, VARs and distributors, and
accounted for 48%, 29% and 20% of net sales in 1996, 1995 and 1994,
respectively. There can be no assurance that sales to these entities or any of
Ascend's other customers will remain at or exceed historical levels in any
future period.
Gross Margin. Gross margin was 65% for 1996 and 1995 compared to 66% for
1994. The decrease in gross margin between 1994 and 1995 was primarily due to
increased unit shipments of the Pipeline family of products which has a lower
gross margin than the Multiband and MAX products. In the past, gross margins
have been affected by the mix of products sold and the mix of distribution
channels used by Ascend. In the future, Ascend's gross margins may be affected
by several factors, including the mix of products sold, the price of products
sold, the introduction of new products with lower gross margins, the
distribution channels used, price competition, increases in material costs and
changes in other components of cost of sales.
Research and Development. Research and development expenses increased to
$40.3 million in 1996 compared to $12.4 million in 1995 and $6.1 million in
1994. These increases were primarily due to the addition of engineering
personnel, payments for consulting services in connection with developing and
enhancing Ascend's existing and new products and payments for consulting
services related to filing applications and product testing required to obtain
governmental approvals to resell Ascend's products outside of North America.
In 1996, research and development expenses increased in part through the
addition of engineering personnel as a result of Ascend's mergers and
acquisitions. Research and development expenses as a percentage of net sales
decreased to 7% in 1996 from 8% in 1995 and 15% in 1994, primarily due to
increased net sales. Ascend expects that spending for research and development
will increase in absolute dollars in 1997 but may continue to vary as a
percentage of net sales.
Sales and Marketing. Sales and marketing expenses were $111.6 million, $35.4
million and $11.4 million for 1996, 1995 and 1994, respectively. These
increases in expenses were primarily due to the addition of sales, marketing
and technical support personnel, increased commissions, expenditures for
demonstration and loaner equipment used by customers and expenses associated
with opening additional sales offices in North America, Europe and Asia and
the Pacific Basin. The growth in sales, marketing and technical support
personnel was primarily due to the need to manage the activities of an
increased number of VARs, distributors, end-user customers and to the
introduction of several new products. Sales and marketing expenses as a
percentage of net sales, however, decreased to 20% in 1996 from 23% in 1995
and 29% in 1994, primarily due to increased net sales. Ascend expects that
sales and marketing expenses will increase in absolute dollars in 1997 but may
continue to vary as a percentage of net sales.
General and Administrative. General and administrative expenses increased to
$16.7 million in 1996 as compared to $9.1 million in 1995 and $3.6 million in
1994. These increases were primarily due to the addition of finance and
administrative personnel, bonus compensation paid to Ascend's employees,
increased costs for insurance and contract personnel associated with
information systems service and support, and increased costs associated with
being a public company. General and administrative expenses as a percent of
net sales decreased
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<PAGE>
to 3% in 1996 from 6% in 1995 and 9% in 1994, primarily due to increased net
sales. Ascend expects that spending for general and administrative activities
will increase in absolute dollars in 1997 but may continue to vary as a
percentage of net sales.
Purchased Research and Development. Purchased research and development costs
were $3.0 million for 1995. These costs were for the purchase of technology
and related assets associated with the DaynaLINK product family from Dayna
Communications, Inc. on September 1, 1995. The acquisition provides technology
and expertise that Ascend is using to enhance and expand the functionality of
its MAX family of products.
Costs of Merger. For the year ended December 31, 1996, Ascend charged to
operations one-time merger costs of approximately $13.9 million. These costs
principally related to the acquisition of NetStar during 1996 and consist
primarily of investment banking and professional fees and other direct costs
associated with the merger. Of the $13.9 million in one-time merger costs,
approximately $7.5 million are not deductible for income tax purposes and
approximately $11.5 million have been paid as of December 31, 1996.
Interest Income. Interest income increased to $11.9 million in 1996 compared
to $5.1 million in 1995 and $969,000 in 1994. The increase in interest income
during 1996 and 1995 is due primarily to the investment of proceeds from
Ascend's public offerings of its common stock which were completed in August
1995 and May 1994, proceeds from the exercise of stock options and issuance of
common stock in connection with Ascend's employee and outside director stock
plans and cash from operations.
Provision for Income Taxes. The provision for income taxes for 1996 was
$73.3 million, an effective tax rate of 39.3%, compared to an effective tax
rate of 38% and 0% for 1995 and 1994, respectively. Ascend's effective tax
rate for 1996 was impacted by approximately $7.5 million of non-deductible
one-time merger costs associated with the NetStar, Morning Star, Subspace and
StonyBrook acquisitions. Ascend's effective tax rate of 38% for the year ended
December 31, 1995 approximates the net effective statutory federal and state
rates adjusted for tax exempt interest income and the tax benefits associated
with Ascend's Foreign Sales Corporation. The provision for income taxes for
1994 reflects the utilization of Ascend's net operating loss carryforwards,
which were substantially utilized as of December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Ascend's principal sources of liquidity included
$408.9 million of cash and cash equivalents, short-term investments and
investments and an unsecured $15.0 million revolving line of credit which
expires in November 1997. There were no borrowings under the line of credit in
1996. The increase in cash and cash equivalents of $66.9 million for 1996 was
principally due to $103.6 million of proceeds from, and tax benefits related
to, the exercise of stock options and issuance of common stock in connection
with Ascend's employee and outside director stock plans and by $54.5 million
of funds provided by operations, offset by $89.1 million of funds used in
investment activities and $2.1 million of repayment of notes payable. The net
cash provided by operating activities for 1996 was primarily due to net income
and increases in accounts payable, accrued liabilities and accrued
compensation and related liabilities offset by increases in accounts
receivable, inventories and other assets.
Net cash used in investing activities of $89.1 million for 1996 related
primarily to expenditures for furniture, fixtures and equipment of $38.7
million and net purchases of investments of $52.6 million. Financing
activities provided $101.5 million for 1996, primarily due to $103.6 million
of proceeds from, and tax benefits related to, the exercise of stock options
and issuance of common stock in connection with Ascend's employee and outside
director stock plans less $2.1 million used to repay notes payable.
At December 31, 1996, Ascend had $467.9 million in working capital. Ascend
currently has no significant capital commitments other than commitments under
facilities and operating leases. Ascend believes that its available sources of
funds and anticipated cash flow from operations will be adequate to finance
current operations, anticipated investments and capital expenditures for at
least the next 12 months.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 14, 1997,
with respect to the beneficial ownership of Ascend Common Stock by (i) each
director of Ascend, (ii) the individuals who served as the Chief Executive
Officer of Ascend in 1996, and the four other highest compensated executive
officers of Ascend whose salary and bonus for the year ended December 31, 1996
exceeded $100,000, (iii) all directors and executive officers of Ascend as a
group, and (iv) each person known by Ascend to own more than 5% of Ascend
Common Stock.
<TABLE>
<CAPTION>
SHARES OWNED(1)
------------------------
NUMBER PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERS OF SHARES OF CLASS
- ------------------------------------- --------- ----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Mory Ejabat.......................................... 1,416,729(2) 1.17%
Roger L. Evans....................................... 1,018,279(3) *
c/o Greylock Capital Limited Partnership
One Federal Street
Boston, MA 02110
Robert K. Dahl....................................... 859,920(4) *
C. Richard Kramlich.................................. 166,618(5) *
c/o New Enterprise Associates
235 Montgomery Street, Suite 1025
San Francisco, CA 94104
Betsy S. Atkins...................................... 95,504(6) *
James P. Lally....................................... 141,808(7) *
c/o Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Curtis N. Sanford.................................... 633,501(8) *
Jeanette Symons...................................... 1,073,765(9) *
Michael Hendren...................................... 475,841(10) *
Martin Schoffstall................................... 1,600 *
Directors and executive officers as a group (13
persons)............................................. 6,608,372(11) 4.4
5% STOCKHOLDERS
FMR Corp............................................. 8,035,720(12) 6.68
82 Devonshire Street
Boston, MA 02109
</TABLE>
- --------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all
shares of Ascend Common Stock shown as beneficially owned by them,
subject to community property laws, where applicable. Unless otherwise
indicated, the individuals in the table may be contacted c/o Ascend
Communications, Inc., One Ascend Plaza, 1701 Harbor Bay Parkway, Alameda,
CA 94502.
(2) Mr. Ejabat is the President, Chief Executive Officer and a director of
Ascend. Includes 1,323,844 shares which are subject to options
exercisable within 60 days of February 14, 1997 and 4,000 shares held as
trustee of a trust for the benefit of his children.
(3) Mr. Evans is a director of Ascend. Includes (i) 910,279 shares held as
trustee of the Roger Evans and Jacqueline Evans Family Trust, dated
March 8, 1989; and (ii) 108,000 shares which are subject to options
exercisable within 60 days of February 14, 1997.
(4) Mr. Dahl is Vice President, Finance, Chief Financial Officer, Secretary
and a director of Ascend. Includes 614,452 shares which are subject to
options exercisable within 60 days of February 14, 1997.
(5) Mr. Kramlich is a director of Ascend. Includes 60,000 shares which are
subject to options exercisable within 60 days of February 14, 1997.
(6) Ms. Atkins is a director of Ascend. Includes 30,000 shares which are
subject to options exercisable within 60 days of February 14, 1997 and
37,182 shares held by her husband.
(7) Mr. Lally is a director of Ascend. Includes 108,000 shares which are
subject to options exercisable within 60 days of February 14, 1997.
(8) Mr. Sanford is Senior Vice President, International Sales and General
Manager of International Operations of Ascend. Includes 456,687 shares
which are subject to options exercisable within 60 days of February 14,
1997. Also includes 4,000 shares owned by Mr. Sanford's child.
(9) Ms. Symons is Executive Vice President, Advanced Products and Technology
Group and Chief Technical Officer of Ascend. Includes 895,093 shares
which are subject to options exercisable within 60 days of February 14,
1997.
(10) Mr. Hendren is Senior Vice President, North America Sales of Ascend.
Includes 475,841 shares which are subject to options exercisable within
60 days of February 14, 1997.
(11) Includes 4,796,700 shares which are subject to options exercisable within
60 days of February 14, 1997.
(12) Based solely on a Schedule 13G filed with the Commission on February 10,
1997.
63
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of Ascend in 1996 and the four other most highly
compensated executive officers of Ascend as of December 31, 1996, whose total
salary and bonus for 1996 exceeded $100,000, for services in all capacities to
Ascend during 1996:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION OTHER AWARDS
NAME AND PRINCIPAL ---------------------- NON-CASH OPTIONS
POSITION YEAR SALARY BONUS COMPENSATION(2) (SHARES)
------------------ ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Mory Ejabat............... 1996 $327,928 $487,500 $ 3,983 400,000
President and Chief
Executive Officer 1995 233,103 230,000 4,740 1,023,840
1994 163,015 81,505 5,159 186,664
Curtis N. Sanford ........ 1996 541,051 -- 4,860 150,000
Senior Vice President,
International Sales and 1995 333,465 -- 4,860 251,680
General Manager of
International Operations 1994 135,500 67,675 4,824 160,000
Michael Hendren .......... 1996 325,227 -- -- 150,000
Senior Vice President,
North America Sales 1995 331,029 -- -- 170,000
1994 128,026 -- -- 680,000
Robert K. Dahl ........... 1996 290,960 435,000 14,272 350,000
Vice President, Finance, 1995 201,803 200,000 19,290 401,680
Chief Financial Officer
and Secretary 1994 135,000 70,000 26,130 866,664
Jeanette Symons .......... 1996 200,000 300,000 3,240 300,000
Executive Vice President,
Advanced 1995 141,500 141,500 3,240 501,760
Products and Technology
Group and 1994 105,000 21,000 -- 106,664
Chief Technical Officer
</TABLE>
- --------
(1) Total amount of personal benefits paid to each executive officer during
the year was less than the lesser of (i) $50,000 or (ii) 10% of the
officer's total reported salary and bonus.
(2) Represents interest waived by Ascend which had accrued on full-recourse
notes from the executive officer during the fiscal year. See "Certain
Relationships and Related Transactions."
64
<PAGE>
The following table provides the specified information concerning grants of
options to purchase Ascend Common Stock made during 1996 to the persons named
in the Summary Compensation Table:
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
GRANTED TO OF STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(3)
GRANTED IN FISCAL PRICE PER EXPIRATION ----------------------------
NAME (SHARES)(1) YEAR SHARE(2) DATE 5% 10%
---- ----------- ---------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mory Ejabat............. 400,000 5.2% $61.875 12/16/06 $ 15,565,142 $ 39,445,126
Curtis N. Sanford....... 150,000 1.9 61.875 12/16/06 5,836,928 14,791,922
Michael Hendren......... 50,000 .6 65.9375 5/29/06 2,073,387 5,254,370
100,000 1.3 61.875 12/16/06 3,891,286 9,861,281
Robert K. Dahl.......... 350,000 4.5 61.875 12/16/06 13,619,499 34,514,485
Jeanette Symons......... 300,000 3.9 61.875 12/16/06 11,673,857 29,583,844
</TABLE>
- --------
(1) All options granted in 1996 were granted under Ascend's 1989 Stock Option
Plan. Options generally vest, in the case of new employees, as to 1/4th of
the subject shares on the first anniversary of the employee's hire date,
and an additional 1/48th of the subject shares upon completion of each
succeeding full month of continuous employment with Ascend thereafter.
Subsequent options granted to an employee typically vest as to 1/48th of
the subject shares upon completion of each full month of continuous
employment following the date of grant. The Ascend Board of Directors
retains discretion to modify the terms, including the price, of
outstanding options.
(2) All options were granted with an exercise price equal to the fair market
value per share of the Ascend Common Stock on the date of grant, as
determined by the Ascend.
(3) Potential gains are net of the exercise price but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with the rules of the Securities and Exchange
Commission and do not represent Ascend's estimate or projection of the
future market price of Ascend Common Stock. Actual gains, if any, on stock
option exercises are dependent on the future financial performance of
Ascend, overall market conditions and the option holders' continued
employment through the vesting period.
The following table provides the specified information concerning exercises
of options to purchase Ascend Common Stock in 1996, and unexercised options
held as of December 31, 1996, by the persons named in the Summary Compensation
Table:
AGGREGATE OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/96(1) AT 12/31/96(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mory Ejabat............. 231,774 $13,807,206 275,626 1,052,556 $13,241,739 $30,995,331
Curtis N. Sanford....... -- -- 152,686 304,001 8,235,108 6,670,642
Michael Hendren......... 250,584 13,668,269 39,167 486,249 1,887,783 19,818,764
Robert K. Dahl.......... 41,520 2,689,254 65,660 616,500 1,998,260 9,997,125
Jeanette Symons......... -- -- 288,204 606,889 15,947,470 16,050,970
</TABLE>
- --------
(1) Options granted under Ascend's 1989 Stock Option Plan are generally
immediately exercisable subject to a repurchase right in favor of Ascend
which lapses as the option vests.
(2) Valuation based on the difference between the option exercise price and
the fair market value of Ascend's Common Stock on December 31, 1996 (which
was $62.125 per share, based on the closing sales price of the stock on
The Nasdaq National Market).
65
<PAGE>
Employment Contracts and Termination and Change of Control Arrangements
In June 1995, Ascend entered into an employment agreement with Robert Ryan,
former Chief Executive Officer of Ascend, pursuant to which Mr. Ryan would
remain an employee of Ascend until June 1997; Ascend would continue to pay Mr.
Ryan at his then-current salary until June 1996 and thereafter would pay Mr.
Ryan $84,000 per year; Mr. Ryan would participate in Ascend's 1995 bonus
program for its executive officers; Mr. Ryan would continue to participate in
Ascend's benefit plans and Mr. Ryan would receive an option to purchase
400,000 shares of Ascend Common Stock. This option was granted to Mr. Ryan on
June 6, 1995.
Certain options granted under Ascend's 1989 Stock Option Plan or under
Ascend's 1994 Directors Plan contain provisions pursuant to which the unvested
portions of outstanding options become immediately exercisable and fully
vested upon a merger of Ascend in which Ascend's stockholders do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of Ascend or its successor, if the successor corporation fails to
assume the outstanding options or substitute options for the successor
corporation's stock to replace the outstanding options. The outstanding
options will terminate to the extent they are not exercised as of consummation
of the merger, or assumed or substituted for by the successor corporation.
Director Compensation
For each meeting of the Ascend Board which they attend, directors are
reimbursed for reasonable travel expenses incurred. Pursuant to Ascend's 1994
Outside Directors Stock Option Plan, all directors who are not employees of
Ascend are automatically granted non-qualified stock options to purchase
Ascend Common Stock upon their initial appointment to the Ascend Board and
thereafter on an annual basis. The grant on initial appointment is for an
option to purchase 192,000 shares and the annual grant is for an option to
purchase 48,000 shares. Such options generally become vested and exercisable
in equal annual installments over a four-year period beginning on the date of
grant.
Certain Relationships and Related Transactions
During 1994, Ascend accepted full-recourse notes, bearing interest at 5.4%
per annum, from certain executive officers and key employees in payment of the
exercise price for options granted in January 1994. Ascend waived an aggregate
of approximately $43,000, $33,000 and $30,000 of interest which had accrued on
these notes during 1994, 1995 and 1996, respectively. The Company received
notes with principal amounts of $105,000, $487,500, $90,000 and $60,000 from
Mr. Ejabat, Mr. Dahl, Mr. Sanford and Ms. Symons, respectively.
For a description of the compensation of officers of Ascend, see "Executive
Compensation and Other Matters."
To date, Ascend has made no loans to officers, directors, principal
stockholders or other affiliates other than as described above or other than
advances of reimbursable expenses. All such transactions, including loans, are
subject to approval by a majority of Ascend's independent and disinterested
directors.
66
<PAGE>
INFORMATION CONCERNING WHITETREE
The following Information Concerning Whitetree section provides information
on the business of Whitetree on a stand-alone basis and does not describe the
business of Whitetree if the Merger is consummated. The following Business
section also contains forward-looking statements which involve risks and
uncertainties. Whitetree's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those factors set forth in this Prospectus/Consent
Solicitation Statement.
BUSINESS
Whitetree develops and markets networking products that are designed to
enable next generation local area networks ("LANs") and wide area networks
("WANs"). Whitetree also has established expertise in Asynchronous Transfer
Mode ("ATM") technology, and is leveraging its technical expertise in both
LANs and WANs to develop next generation packet and/or cell gigabit-speed
connection-oriented switching products. Whitetree's products permit differing
protocol-based LAN/WAN equipment to co-exist on the same network, eliminating
the need for "forklift" upgrades. Whitetree's solutions position it to benefit
from the growth in the LAN/WAN switching markets, including the upgrade to
higher speed networks (e.g., Gigabit Ethernet).
INDUSTRY BACKGROUND
Current business and technology trends such as the corporate embrace of
client/server systems and the emergence of multimedia technologies are forcing
enterprise networks to transmit more information than ever before. Enterprise
data traffic has been growing rapidly as personal computers, workstations and
servers have become more powerful and the number of devices connected to
networks has increased. Concurrently, software developers have built upon
hardware advances to develop increasingly powerful and bandwidth-intensive
applications (including the integration of voice, video and data). As
companies' data access and communication have become "mission critical," new
technologies have emerged to support multimedia communication and to avoid
network congestion and performance bottlenecks.
Ethernet was developed in the 1970's for the corporate LAN market and has
dominated that market since the early 1980's. Ethernet is a packet-based,
connectionless technology operating at 10 megabits per second ("Mbps"), whose
success can be attributed to broad industry adoption resulting in high
interoperability between vendors and low cost resulting from high volumes.
ATM was developed in the 1980's by the telecommunication carrier industry in
order to address the need to integrate increasingly disparate carrier
networks. ATM is expected to displace Frame Relay as the dominant technology
for delivering and switching data traffic in public and private WANs. ATM is a
cell-based connection-oriented technology whose appeal can be attributed to
its ability to scale to any bandwidth, to support the QoS demanded by new
applications (such as video conferencing), and to support a seamless
integration of the LAN and WAN. Due to ATM's ability to address many of the
shortcomings in Ethernet technology, by the early 1990's ATM had been embraced
by many in the LAN industry as the successor to Ethernet.
Starting in 1993 with the introduction of Fast Ethernet and, more recently,
announcements of Gigabit Ethernet, it has been demonstrated that traditional
Ethernet can scale to higher speeds. This addresses the most urgent
shortcoming previously facing Ethernet-based LANs. This has resulted in
widespread disputes over the relative levels of deployment of ATM and Ethernet
technology and, more importantly, the advantages of each of these technologies
in various segments of the LAN market (from the backbone to the desktop).
While this debate continues, currently there is broad agreement that ATM and
Ethernet technologies will coexist in LANs, with the boundary differing from
network to network.
Driven by the growth of the Internet, the most recent LAN technology
development has been the announcement of a variety of competing technologies
intended to exploit connection oriented technologies for
67
<PAGE>
scaling networks to very large sizes. These layer 3 switching concepts (e.g.,
Ipsilon's IP switching, Cisco's Tag Switching, ATM Forum's MPOA, Toshiba's
cell switch router) all incorporate ATM switching.
Major problems facing corporate LANs include:
. complexity created by the co-existence of Ethernet and ATM;
. potential inability of connectionless switching to scale cost-
effectively beyond gigabit speeds;
. confusion regarding appropriate technology for various parts of the
network; and
. investment risk associated with "making the wrong technology choice" as
rapid technology evolution continues.
THE WHITETREE SOLUTION
Whitetree's technology is driven by the objective of supporting and
simplifying the co-existence of Ethernet and ATM in the LAN. By supporting
both Ethernet and ATM in every product, and hiding the necessary complexity
inside those products, Whitetree believes that its products offer an
attractive and easily deployed solution to users.
Whitetree's first product, the WS3000(TM), supports the co-existence of
Ethernet (at 10Mbps) and ATM (at 25Mbps) at the corporate desktop with
connections to either Ethernet or ATM backbones. This addresses the need for
co-existence of Ethernet and ATM at the very edge of corporate LAN.
Whitetree's focus for follow-on technologies and products is to support the
same co-existence at other points in corporate LAN. Whitetree's MAGIC
technology is being used in Whitetree's WS4000(TM) product family to support
Ethernet/ATM co-existence in intermediate (Fast Ethernet at 10Mbps; ATM at
155Mbps) and backbone (Ethernet at 1 Gbps; ATM at 622Mbps and above)
applications. Whitetree is building on industry standards to help assure
seamless interoperability with leading vendors' products -- especially as new
standards emerge, such as layer 3 switching.
Whitetree's products and technologies also enable multimedia applications
including both Ethernet and ATM. Presently, Whitetree is working with
complementary application developers and equipment providers to offer LAN
telephony solutions.
WHITETREE STAND-ALONE STRATEGY
Whitetree's strategy heretofore has been to build on its core ATM
technological expertise to enable and simplify the co-existence of ATM and
Ethernet on LANs. Key elements of that strategy are highlighted below:
Continue Introduction of Innovative, Differentiated Products. Whitetree
combines LAN and ATM switching architectures on a single platform, and seeks
to improve features and price performance through advances in software and
hardware. Whitetree's flagship product, the WS3000(TM) Workgroup Switch, has
auto-sensing capabilities that can support either ATM25 or Ethernet on each
port. Whitetree hopes to utilize its MAGIC chipsets, combined with software
enhancements, to introduce innovative, differentiated products for emerging
high-speed LAN switching markets.
Become Leader in Emerging, High Growth LAN Switch Markets. Whitetree's
latest technologies integrate cell and packet switching capabilities up to and
beyond gigabit levels. Whitetree currently has multiple advanced chips under
development. Through the use of Whitetree's connection oriented technology,
Whitetree believes that the MAGIC chip can achieve wire-speed gigabit packet
switching at a cost comparable to today's Fast Ethernet switches. Whitetree
believes that the early release of its connection-oriented, layer 3 switching
products will position Whitetree to take advantage of markets such as Gigabit
Ethernet.
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Broaden Product Portfolio to Address Entire LAN Switching Market. Whitetree
intends to leverage its core technologies to expand the breadth of its switch
product offerings. Whitetree will continue to enhance its workgroup switching
products while utilizing its advanced, high-speed chipset design to be used in
switching products for the high-growth LAN workgroup and backbone, WAN access
point and WAN core switching markets.
Provide Greater Intelligence Throughout LANs. Network intelligence is
increasingly being distributed throughout the LAN. Cisco's Tag Switching and
Ipsilon's IP switching are examples of this trend. Whitetree intends to
accelerate this distribution of network intelligence by providing cost-
effective layer 3 switching capabilities at all levels of the network, from
the desktop to the WAN core.
Leverage Established Distribution Channel. Whitetree has established OEM and
distribution partnerships with various companies, including Madge, Mitsui &
Co., Ltd. ("Mitsui") and Toshiba. These partners have significant customer
relationships already in place and provide such customers with worldwide
service and support. These relationships have permitted Whitetree to more
quickly penetrate the LAN and ATM switch markets and to reduce the expenses of
product introduction, marketing and support. Whitetree believes that it can
use this established distribution channel to ramp up sales of new products
more quickly.
CURRENT PRODUCTS
The Whitetree WS3000(TM) Workgroup Switch. Whitetree's first product, the
WS3000(TM) Workgroup Switch, is a stackable, high performance switch that
provides switched Ethernet and ATM25 to the desktop.
The WS3000(TM) Workgroup Switch provides:
. 12 desktop ports which automatically adapt between Ethernet and ATM25 in
any combination;
. scalable performance up to 6.4 Gbps average aggregate capacity with
Stacking Bus;
. high-speed networking capability with optional Network Option slots
providing connectivity to backbone ATM switch/router, server, client or
end station; and
. ATM Forum-compliant LAN emulation.
The Whitetree WS2500(TM) Workgroup Switch. The WS2500(TM) Workgroup Switch
is a 12-port switch that provides low-cost ATM25 connectivity for the
workgroup. The switch also includes two Network Option slots that can be
equipped with ATM155 Network Option modules or the Stacking Bus module. While
the WS2500(TM) interoperates with Whitetree's WS3000(TM), the ATM-only version
is designed for network environments where migration to ATM25 is well underway
and simplicity and lower cost are desired. As with the WS3000(TM) switch, the
WS2500(TM) provides wire-speed cell switching of 1.1 million cells per second,
as well as comprehensive management software.
Features
Adaptable Switching. The WS3000(TM) Workgroup Switch delivers 12 desktop
ports for automatic adaptability between switched Ethernet and ATM25, easing
the migration from Ethernet to ATM-based networking. The switch can support
any combination of half- or full-duplex Ethernet and ATM25, without user
intervention, minimizing the cost and complexity of migrating to ATM.
Stackable Architecture. Each workgroup switch employs a stackable
architecture, allowing up to 12 WS3000s(TM) or WS2500s(TM) to be
interconnected, thereby delivering 144 Ethernet or ATM25 desktop ports.
Whitetree's high-speed Stacking Bus module provides wire speed connectivity
for all 144 ports, at an average throughput of 6.4 Gbps. The Stacking Bus
module, in combination with the connectivity and performance of Whitetree's
workgroup switches, can deliver an average aggregate throughput of 6.4
Gigabits per second to 144 ports. In addition to 12 desktop ports, each
workgroup switch is equipped with two Network Option slots.
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Either of the Network Option slots can be populated with a Stacking Bus
module. Furthermore, the workgroup switch has a low profile--1.75 inches (4.45
cm) high. A stack of 12 switches with 144 desktop ports and 12 network ports
is only 21 inches (53.4 cm) high.
Extensive Network Options. Whitetree provides a portfolio of options to
expand the scope and capabilities of its products:
. ATM155 interfaces are options in Whitetree's WS2500(TM) and WS3000(TM)
products.
. Fast Ethernet interfaces are options in the WS3000(TM), enabling
autosensing, port-by-port adaptability between 10Mbps/100Mbps
(Ethernet/Fast Ethernet).
. Whitetree plans to introduce T1 ATM Network Option modules to position
the WS3000(TM) switch as a WAN access device, with Whitetree's LANES(TM)
enabling extended emulated LANs over the WAN.
Transparent Interoperability For Existing and Future Network Designs. ATM
Forum-compliant LAN Emulation features built into every WS3000(TM) allow ATM
switching to be integrated with Ethernet networking. LANES(TM) is Whitetree's
high-performance implementation of the LAN Emulation specification issued by
the ATM Forum. LANES(TM) include the LAN Emulation Server (LES), Broadcast and
Unknown Server (BUS), LAN Emulation Configuration Server (LECS) and LAN
Emulation Client (LEC) components as defined by the ATM Forum LAN Emulation
over ATM, Version 1.0 specification. LANES(TM) can provide LAN Emulation
services to a switch, a switch stack or an entire network. The LAN Emulation
features of the WS3000(TM) also enable the configuration of logical workgroups
eliminating the physical constraints of local area network designs. This
ability is derived from the LANES(TM) capability of the WS3000(TM) to
logically emulate the attributes of a physical LAN irrespective of its
physical location in the network. Each WS3000(TM) can support multiple ELANs
in a switch or across a network.
Configuration and Standards-Based Management. The WS3000(TM) is designed for
true plug-and-play installation and automatic configuration. The self-learning
nature of the workgroup switch makes "hands-free" configuration possible in
many network applications. Advanced network applications are configured using
Whitetree's comprehensive and intuitive Windows-based configuration management
system, the Whitetree WM1000(TM) Element Management Utility. The WS3000(TM) is
SNMP Vl-compliant and can be configured and managed through SNMP-based
management applications or any web browser. In addition, Whitetree's Command
Interpreter ("CI") can be used for managing Whitetree workgroup switches. The
Whitetree CI can be accessed via a console port or telnet session.
DEVELOPMENT EFFORTS
Whitetree currently is building upon its technical expertise in both the LAN
and WAN to develop next generation packet and/or cell gigabit-speed
connection-oriented switching products. Whitetree believes that its next-
generation products will cost-effectively advance Whitetree's feature set and
support significantly more technologies (including Fast Ethernet, Gigabit
Ethernet, ATM155/622 and beyond gigabit, and Frame Relay).
Whitetree intends to build upon its software and hardware technology to
enhance the feature set of its existing products and lower costs, and plans to
improve the functionality of its entire product line. Specific proposed
enhancements include the addition of fault-tolerance to LANES(TM), evolution
of the workgroup management software and further enhancements to the plug-and-
play capabilities (including PNNI).
Whitetree also is completing work on its MAGIC technology, which is based on
a single chip. Through the use of Whitetree's connection-oriented technology,
Whitetree believes that the MAGIC chip will be able to achieve wire-speed
gigabit packet switching at a cost comparable to today's Fast Ethernet
switches. Whitetree plans to use this technology in products for the LAN
workgroup and backbone, WAN access point and WAN core switching markets.
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MANUFACTURING, SALES AND DISTRIBUTION
Whitetree outsources its procurement and manufacturing operations through
close partnerships with leading, well-established companies. In August 1996,
Whitetree began working with Flextronics to manufacture Whitetree's products.
Prior to this, Whitetree used a smaller, local contract manufacturer which
experienced difficulties in the manufacturing process which resulted in
significantly lower profit margins for Whitetree. Whitetree believes that its
relationship with Flextronics is good, and Whitetree has experienced no
problems to date. Whitetree uses Hamilton-Hallmark to procure supply parts.
Whitetree's products are sold worldwide through VARs, distributors and OEMs,
supported by a reseller program. Whitetree's existing distribution plan is to
market and sell through indirect channels. Since the introduction of its
Reseller Program in August 1995, Whitetree has developed more than 40 VAR
relationships.
COMPETITION
Whitetree believes that it is the only company that offers products with
port-by-port auto-sensing capability. While Whitetree knows of no direct
competitor to this technology, several companies, including Cisco, 3Com
Corporation, Bay Networks, Cabletron Systems and Madge, are major network
equipment vendors that provide end-to-end system solutions. In addition, Xylan
Corporation provides switching products, primarily targeted at the LAN
backbone. Further competitors in the ATM market include FORE Systems, IBM and,
to a lesser extent, ATML and First Virtual Corporation. In addition to the
major network equipment providers, several start-up companies are attempting
to develop Gigabit Ethernet products. These start-ups include, among others,
Rapid City, Packet Engines, Starridge, Prominet and Alteon Networks.
TECHNOLOGY ALLIANCES AND PARTNERSHIPS
Whitetree has established a number of alliances to extend the reach of its
vision of networking technology. In 1994, Whitetree entered a relationship
with Madge, a supplier of intelligent Token Ring networking products and
technology, for a multi-faceted partnership that includes OEM relationships,
joint-technology development, and Madge taking an equity stake in Whitetree.
Sales to Madge accounted for 67% of Whitetree's net sales in fiscal 1996, and
48% of Whitetree's net sales in fiscal 1995.
In July 1995, Whitetree announced a strategic relationship with Mitsui,
Japan's leading trading Company, that includes worldwide distribution and
joint marketing of Whitetree's technology. Mitsui is the exclusive distributor
of Whitetree's products throughout the Japanese market. Mitsui's distribution
partners, include AdamNet, INS Engineering, NEC, Nihon Unisys and Toshiba,
which also resell Whitetree products via the agreement with Mitsui. Sales to
Mitsui accounted for 23% of Whitetree's net sales in fiscal 1996, and 25% of
Whitetree's net sales in fiscal 1995.
Whitetree also has established reseller relationships with ATM adapter card
vendors. The relationship with Madge currently allows for Whitetree to resell
Madge's ATM25 and ATM155 network interface cards (NICs) and Whitetree has a
similar relationship with Adaptec, Interphase and Efficient Networks.
Whitetree's WS3000(TM) product has been used by Apple Computer to develop
ATM multimedia middleware and is included in Apple's Developer Toolkit.
EMPLOYEES
As of December 31, 1996, Whitetree employed 65 persons. None of Whitetree's
employees is represented by a labor union. Whitetree has experienced no work
stoppages and believes its relationship with its employees is good.
Whitetree's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product development
personnel. Whitetree does not have employment contracts with its key personnel
and only maintains a key person life insurance policy on Kingston Duffie,
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Whitetree's Chief Technology Officer. The loss of key management or technical
personnel could have a material adverse affect on Whitetree.
PROPERTIES
Whitetree's principal administrative, engineering, manufacturing, marketing
and sales facilities total approximately 38,500 square feet and are located in
Mountain View, California. Whitetree occupies its current facilities under a
lease that expires in 2002. In addition, Whitetree leases sales offices in
Bethesda, Maryland, San Ramon, California, the U.K. and France.
MANAGEMENT
The members of Whitetree's management team and their ages and positions are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Maureen Lawrence 48 President, Chief Executive Officer and
Director
Kingston Duffie 36 Chief Technology Officer and Director
M. Denise Savoie 41 Vice President of Business Operations and
Chief Financial Officer and Director
Allen Adolph 48 Vice President of Operations
Kurt Bauer 37 Vice President of Marketing and Business
Development
Kathryn Hill 40 Vice President of Engineering
Roger Evans 51 Director
Dr. David Liddle 51 Director
Andrew Marcuvitz 46 Director
Geoffrey Yang 37 Director
</TABLE>
Maureen Lawrence joined Whitetree in January 1994 and currently serves as
its President and Chief Executive Officer. Before joining Whitetree, she was
Vice President and General Manager of the Adaptive Division of N.E.T., an
early developer of ATM technology. Prior to N.E.T., Ms. Lawrence spent a year
at the venture capital firm Institutional Venture Partners, where she was
responsible for analyzing potential communications investments. In addition,
Ms. Lawrence has served as Vice President of Marketing and Service for
Vitalink Communications, a provider of wide-area internetworking products, and
Vice President of Marketing for Chipcom Corporation. Ms. Lawrence has a
Bachelor of Science degree in Engineering Physics from the University of
Toledo, Ohio, and a Master of Science degree in electrical engineering from
Lowell University in Massachusetts.
Kingston Duffie is one of the founders of Whitetree and currently serves as
its Chief Technology Officer. Prior to founding Whitetree, Mr. Duffie was
Executive Director of ATM Customer Premise Equipment Business Strategies for
NetExpress, Inc., a pioneer in telecommunications and wide-area networking
technologies such as X.25, ISDN, facsimile and ATM. While at NetExpress, Mr.
Duffie developed the technical and business strategies for its ATM products
and led a team that developed one of the world's first ATM switches for public
carrier applications. Prior to NetExpress, he was President of Origin
Technologies, which specialized in ISDN development activities. Mr. Duffie
also has held senior engineering and management positions at Northern Telecom
and Bell Northern Research. Mr. Duffie represents Whitetree at the ATM Forum.
He holds a Bachelor of Science degree in engineering physics from Queens
University in Kingston, Ontario and a Master of Science degree in electronic
engineering from McGill University in Montreal.
M. Denise Savoie is one of the founders of Whitetree and currently serves as
its Vice President of Business Operations and Chief Financial Officer. Prior
to founding Whitetree, she held a number of management positions at
NetExpress, Inc. Ms. Savoie was Director of ATM development, where she was
responsible for all systems testing and product documentation. As Director of
software application development at NetExpress, she was
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responsible for products related to facsimile and image processing. She also
worked as Manager of Systems and Procedures for DHL Cargo, a subsidiary of DHL
Inc., an overnight delivery company. Ms. Savoie earned her Bachelor of Arts
degree in economics from the University of Michigan and in art from Whitman
College in Washington.
Allen Adolph joined Whitetree in July 1994 and currently serves as its Vice
President of Operations. Mr. Adolph came to Whitetree from the Adaptive
Division of N.E.T. where he was responsible for implementing a manufacturing
quality system which received ISO 9002 certification. He was later named
Director of Operations for both the Adaptive Division and the Networks
Products Group of N.E.T. Mr. Adolph has held positions as Director of
Manufacturing and Materials for Qantel Business Systems and Data products
Corporation. He is recognized as a C.P.I.M. by APICS. Mr. Adolph has a
Bachelor of Science degree in business administration and operations research
from California State University.
Kurt Bauer joined Whitetree in December 1994 and currently serves as its
Vice President of Marketing and Business Development. Prior to joining
Whitetree, Mr. Bauer served as Director of Marketing at N.E.T. At N.E.T. he
was responsible for marketing at the company's Adaptive Division. Previous to
N.E.T., Mr. Bauer was with Advanced Computer Communications (ACC), a
manufacturer of wide-area internetworking products, where he was responsible
for the company's overall marketing organization. Before ACC, Mr. Bauer was
with Vitalink Communications/Network Systems Corporation, a leading
internetworking company, where he managed all product marketing of the
company's network systems and network management products. He also has held
engineering and product marketing positions with Tymnet, TeleSciences, and GTE
Government Systems. Mr. Bauer earned a Bachelor of Science degree in
electrical engineering from the University of Missouri, Rolla, in 1981. He
also attended graduate school at the University of Missouri and Santa Clara
University.
Kathryn Hill joined Whitetree in August 1996 and currently serves as its
Vice President of Engineering. Prior to joining Whitetree, Ms. Hill was Vice
President of Research & Development for the Vivid Division of Newbridge
Networks, Inc. Prior to Newbridge Networks, Ms. Hill held senior engineering
management positions at Hughes Network Systems, and software programming
positions at Magnavox Government & Industrial Electronics, and General Railway
Signal Co. Ms. Hill received a Bachelor of Science degree in mathematics from
the Rochester Institute of Technology in New York.
Roger Evans has served as a Whitetree Board member since October 1993. Mr.
Evans has been a special limited partner of Greylock Capital Limited
Partnership, a venture capital partnership, since 1989, and has been a general
partner of Greylock Management Corporation since 1991. From October 1988 until
joining Greylock, Mr. Evans was a consultant. From 1985 until October 1988, he
served as President and Chief Executive Officer of Micom Systems, Inc., a
manufacturer of data communications equipment. Mr. Evans also serves on the
Board of Directors of Ascend, HNC Software, Inc. and several private
companies.
Dr. David Liddle has served as a Whitetree Board member since July 1995. He
is President and CEO of Interval Research Corporation which he co-founded with
Paul Allen in March of 1992. Interval Research performs research and advanced
development in the areas of information, interaction, communications and
computer science. Dr. Liddle was also founder, President and CEO of Metaphor,
Inc. Following IBM's acquisition of Metaphor in 1991, Dr. Liddle became Vice
President, new systems business development, Personal Systems at IBM
Corporation. Prior to founding Metaphor in 1982, Dr. Liddle spent ten years at
the Xerox Palo Alto Research Center in the Information Products Group. Dr.
Liddle is Consulting Professor of Computer Science and of Electrical
Engineering at Stanford University. He is a Director of Sybase, Inc.,
Broderbund Software, Inc. and Ticketmaster Group, Inc.
Andrew Marcuvitz has served as a Whitetree Board member since May 1993.
Since 1990 Mr. Marcuvitz has been a general partner of Matrix Partners. Prior
to joining Matrix Partners, Mr. Marcuvitz was the Vice President of Research
and Development at Apollo Corporation, a company which he helped found.
Mr. Marcuvitz holds board seats in a number of privately held companies
including Wildfire Communications, Vivo Software, FASTech Integration,
Prominet, NetCore and Novera Software.
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Geoffrey Yang has served as a Whitetree Board member since May 1993. Mr.
Yang currently serves as a general partner of Institutional Venture Partners,
which he joined in 1987. Besides Whitetree, he is a director of Applied
Digital Access, Excite, GW Corn, Golfweb, MMC Networks, Netlink, Wavespan and
Whistle Communications.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information is qualified by
and should be read in conjunction with Whitetree's consolidated financial
statements and notes thereto included elsewhere in this Prospectus/Consent
Solicitation Statement. The consolidated statement of operations data set
forth below for the years ended September 30, 1996, 1995 and 1994 and the
balance sheet data set forth below at September 30, 1996 and 1995 are derived
from the consolidated financial statements included elsewhere in this
Prospectus/Consent Solicitation Statement. The consolidated statement of
operations data set forth below for the period from June 1, 1993 (inception)
to September 30, 1993 and the consolidated balance sheet data as of September
30, 1993 and 1994 are derived from audited consolidated financial statements
which are not included herein. The consolidated statement of operations data
set forth below for the three months ended December 31, 1996 and 1995 and the
consolidated balance sheet data set forth below at December 31, 1996 are
derived from Whitetree's unaudited consolidated financial statements included
elsewhere in this Prospectus/Consent Solicitation Statement which, in
Whitetree's opinion, reflect all adjustments necessary for a fair presentation
of results for those periods and as of that date. The results for the three
months ended December 31, 1996 are not necessarily indicative of the results
to be expected for the entire year.
<TABLE>
<CAPTION>
THREE MONTHS JUNE 1, 1993
ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30, (INCEPTION) TO
-------------------- -------------------------- SEPTEMBER 30,
1996 1995 1996 1995 1994 1993
--------- --------- -------- ------- ------- --------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Net sales............. $ 2,784 $ 1,394 $ 11,680 $ 292 $ -- $ --
Gross profit.......... 822 262 2,570 100 -- --
Operating loss........ (3,026) (1,825) (8,346) (6,250) (2,537) (104)
Net loss.............. (3,052) (1,861) (8,457) (6,230) (2,500) (104)
Net loss attributable
to common stock...... (3,684) (2,150) (10,271) (7,287) (3,007) (104)
Net loss attributable
to common stock per
share................ $ (1.27) $ (0.83) $ (3.77) $ (3.40) $ (1.57) $(0.25)
Number of shares used
in per share
calculation.......... 2,895 2,584 2,723 2,141 1,912 413
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------------
1996 1996 1995 1994 1993
------------ -------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital (deficit)... $ 419 $ 3,749 $ 925 $ 2,428 $ (35)
Total assets................ 8,296 11,977 3,836 3,319 36
Mandatorily redeemable
preferred stock............ 26,187 25,555 11,703 5,646 74
Total stockholders' equity.. (24,171) (20,488) (10,314) (3,059) (104)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Whitetree develops and markets networking products that are designed to
enable next generation LANs and WANs. Whitetree also has established expertise
in ATM technology, and is leveraging its technical expertise in both LANs and
WANs to develop next generation packet and/or cell gigabit-speed connection-
oriented switching products. Whitetree's first product, the WS3000(TM)
Workgroup Switch, is a stackable, high performance switch that provides
switched Ethernet and ATM25 to the desktop. Whitetree's products permit
differing protocol-based LAN/WAN equipment to co-exist on the same network,
eliminating the need for "forklift" upgrades. Whitetree
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believes that its cost-effective solutions position it to benefit from the
growth, in the LAN/WAN switching markets, including the upgrade to higher
speed networks (e.g., Gigabit Ethernet).
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH
THE THREE MONTHS ENDED DECEMBER 31, 1995
Net Sales. Net sales for the first quarter ended December 31, 1996 were $2.8
million, an increase of 100% over net sales of $1.4 million for the first
fiscal quarter of 1996. The increase in net sales is primarily due to the
continued development of distribution channels as a result of increased sales
and marketing efforts. Sales to one original equipment manufacturer (OEM)
customer for the first fiscal quarter ended December 31, 1996 increased by
$1.0 million as compared to the first fiscal quarter of 1996. Additional
increases are primarily due to the expansion of the value added reseller (VAR)
channel.
Gross Margin. Gross margin was 30% for the first fiscal quarter of 1997,
compared to 19% in the first fiscal quarter of 1996. The increase in margin is
primarily due to decreased warranty costs, decreased inventory reserves and
decreased material costs. The decrease in warranty and inventory reserves are
due to stabilization of the product as the product was in its early stages of
manufacturing during the first fiscal quarter of 1996. The decreases in
material costs has been market driven.
Research and Development. Research and development expenses increased 40% to
$1.4 million in the first fiscal quarter of 1997 from $1.0 million in the
first fiscal quarter of 1996. This increase was primarily due to the addition
of engineering personnel. Research and development decreased as a percent of
sales from 70% in the first fiscal quarter of 1996 to 49% of net sales for the
first fiscal quarter of 1997. The decrease was due to increased net sales.
Sales and Marketing. Sales and marketing expenses increased 134% to $2.0
million in the first fiscal quarter of 1997 from $0.8 million in the first
fiscal quarter of 1996. The increase in expenses is primarily due to the
addition of sales and marketing personnel and increased commissions. The
growth in sales and marketing was primarily due to the resources required to
expand the distribution channels. Sales and marketing expenses as a percent of
sales increased to 71% in the first fiscal quarter of 1997 from 60% in the
first fiscal quarter of 1996. This increase is due to building an
infrastructure to support anticipated future increases in sales.
General and Administrative. General and administrative expenses increased
87% to $0.5 million in the first fiscal quarter of 1997 from $0.3 million in
the first fiscal quarter of 1996. This increase was primarily due to increases
in finance and administrative personnel. The growth in finance and
administration was necessary to accommodate the growth in Whitetree personnel
and net sales. General and administrative expenses decreased as a percent of
sales to 18% in the first fiscal quarter of 1997 from 19% in the first fiscal
quarter of 1996.
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
Net Sales. Net sales for fiscal 1996 increased to $11.7 million as compared
to $0.3 million in fiscal 1995. There were no revenues in fiscal 1994.
International sales (sales outside of North America) increased to $11 million
in 1996 as compared to $0.2 million in 1995 and accounted for 94% and 65% of
net sales in 1996 and 1995, respectively.
The growth in net sales during fiscal 1996 was due to an increase in
shipments of ATM and Ethernet network switches and related accessories. The
increase in unit shipments was primarily attributable to the introduction of
Whitetree's products to market in the last fiscal quarter of 1995.
Whitetree relies on distribution channels, including VARs and OEMs, for a
substantial majority of its net sales. Net sales to VARs accounted for
approximately 32% and 52% in fiscal 1996 and 1995, respectively. Net sales to
OEMs accounted for 67% and 48% in fiscal 1996 and 1995, respectively. During
fiscal 1996, two customers accounted for 67% and 23%, respectively, of
Whitetree's net sales. During fiscal 1995, two customers accounted for 48% and
25%, respectively, of Whitetree's net sales. There can be no assurance that
sales to these entities or any of Whitetree's other customers will remain at
or exceed historical levels in any future period.
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Gross Margin. Gross margin decreased to 22% in fiscal year 1996 from 34% in
fiscal year 1995. The decrease in gross margin from 1995 to 1996 was primarily
due to increased warranty costs, increased inventory reserves and scrap due to
engineering change orders. All of these increases were directly related to
stabilizing the product for manufacturing. As problems were resolved and
changes to the product made, the gross margins gradually increased throughout
the year.
Research and Development. Research and development expenses increased
slightly to $4.2 million in fiscal 1996 compared to $4.1 million in fiscal
1995 and $1.7 million in fiscal 1994. The increase from 1994 to 1995 was
primarily due to increased engineering personnel, prototypes and material
costs related to product development, and payments of consulting fees in
connection with developing and enhancing Whitetree's products. Although
research and development expenses were relatively consistent in fiscal 1996
and fiscal 1995, there were significant reductions in prototype and material
cost in fiscal 1996 compared to fiscal 1995 that were substantially offset by
significant increases in engineering personnel during fiscal 1996. Research
and development expenses as a percent of net sales decreased to 36% in fiscal
1996 from 1407% in fiscal 1995, primarily due to increased net sales.
Sales and Marketing. Sales and marketing expenses were $5.2 million in
fiscal 1996 compared to $1.3 million in fiscal 1995 and $0.4 million in fiscal
1994. These increases were primarily due to the addition of sales, marketing
and technical support personnel, and increased commissions. The growth in
sales, marketing and technical support was primarily due to the introduction
of Whitetree's products and establishing distribution channels for these
products. Sales and marketing expenses decreased as a percent of net sales to
44% in fiscal 1996 from 453% in fiscal 1995, primarily due to increased net
sales.
General and Administrative. General and administrative expenses increased to
$1.5 million in fiscal 1996 as compared to $0.9 million in fiscal 1995 and
$0.4 million in fiscal 1994. These increases are primarily due to the addition
of finance and administrative personnel and increased consulting costs related
to the development of policies and procedures necessary to build an
infrastructure to support the growth of net sales. General and administrative
expenses decreased as a percent of sales to 13% in fiscal 1996 from 315% in
fiscal 1995, primarily due to increased net sales.
Interest Income. Interest income increased to $128,000 in fiscal 1996
compared to $100,000 in fiscal 1995 and $64,000 in fiscal 1994. This increase
in interest income is primarily due to the investment of proceeds from
Whitetree's Preferred Stock offerings in November 1994, January 1996 and May
1996.
Interest Expense. Interest expense increased to $239,000 in fiscal 1996
compared to $80,000 in fiscal 1995 and $27,000 in fiscal 1994. These increases
are primarily due to Whitetree's entry into capital lease obligations related
to the acquisition of property, plant and equipment.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, Whitetree's principal source of liquidity was $2.7
million of cash and cash equivalents. The increase in cash and cash
equivalents of $1.9 million during fiscal year 1996 was due to proceeds of $12
million from the issuance of Preferred Stock and the exercise of stock
options, offset by $9.3 million of funds used in operations and $1.1 million
in expenditures for furniture, fixtures and equipment. Whitetree issued two
series of Preferred Stock during the year, Series C Preferred Stock in January
and May 1996 for $5.1 million and Series D Preferred Stock in May 1996 for
$6.8 million. The net cash used from operations in fiscal year 1996 was
primarily due to increases in the net loss, accounts receivable, and
inventory, partially offset by increases in accounts payable and accrued
liabilities.
76
<PAGE>
At September 30, 1996, Whitetree had $3.7 million in working capital and had
no significant capital commitments other than commitments under facilities and
capital leases. Based on Whitetree's forecasts for September 30, 1996 with
respect to anticipated costs of operations and cash flow from operations and
based upon a commitment with respect to the revolving line of credit described
below, at September 30, 1996 Whitetree had sufficient capital to finance
operations, anticipated investments and capital expenditures through
September 30, 1997. At December 31, 1996, Whitetree had $0.4 million in
working capital, and no significant capital commitments other than commitments
under facilities and capital leases. In February 1997, Whitetree secured a
revolving line of credit with a bank which provides for borrowings of up to $3
million based on 80% of eligible accounts receivable up to $2.5 million, plus
a $0.5 million non-formula limit. Based on Whitetree's current forecasts with
respect to anticipated costs of operations and cash flow from operations and
after taking into account borrowings currently available under this line of
credit, Whitetree believes that additional sources of equity or debt financing
would be required in order to finance current operations, anticipated
investments and capital expenditures for the next twelve months.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Whitetree Capital Stock as of February 14, 1997 by (i) all
persons and entities known by Whitetree to be beneficial owners of more than
5% of Whitetree's Capital Stock, (ii) each director and each executive officer
of Whitetree serving at the end of Whitetree's last fiscal year ended
September 30, 1996, and (iii) all directors and executive officers of
Whitetree serving at the end of Whitetree's last fiscal year ended September
30, 1996 as a group.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME PRIOR TO MERGER(1) OF OUTSTANDING(2)
---- ------------------ -----------------
<S> <C> <C>
Matrix Partners (3)...................... 2,866,775 21.7%
Andrew Marcuvitz
1000 Western Street, Suite 4500
Waltham, MA 02154
Institutional Venture Partners (3)....... 2,866,775 21.7%
Geoffrey Yang
3000 Sand Hill Road, Suite 2-290
Menlo Park, CA 94025
Greylock Limited Partnership (3)......... 2,531,775 19.2%
Roger Evans
755 Page Mill Road, Suite B-140
Palo Alto, CA 94304
Madge Networks, Inc. .................... 1,256,631 9.5%
2310 North First Street
San Jose, CA 95131
Maureen Lawrence (4)..................... 550,998 4.2%
Kingston Duffie (5)...................... 538,463 4.1%
M. Denise Savoie (6)..................... 285,223 2.2%
Wayne Martson ........................... 101,188 *
Allen Adolph (7)......................... 88,125 *
Kurt Bauer (8)........................... 77,604 *
Kathryn Hill (9)......................... 12,500 *
Dr. David Liddle ........................ 110,000 *
All directors and executive officers as a
group (11 persons)(10).................. 10,029,426 75.5%
</TABLE>
- --------
(1) Includes Whitetree Common Stock and Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock
as though converted into Whitetree Common Stock on a 1-for-1 basis, and
shares issuable upon exercise of stock options within 60 days of February
14, 1997.
77
<PAGE>
(2) The percent of outstanding has been calculated in accordance with Rule
13-d under the Exchange Act. Under this Rule, certain shares may be
deemed to be beneficially owned by more than one person. In addition,
shares are deemed to be beneficially owned by a person if the person has
the right to acquire the shares within 60 days of the date as of which
the information is provided; in computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the amount
of shares beneficially owned by such person by reason of these
acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in the above table does not necessarily reflect the
person's actual voting power at any particular date.
(3) Includes 28,736 shares of Series C Preferred Stock, as though converted
into Whitetree Common Stock on a 1-for-1 basis, issuable upon the cash
exercise of a warrant to purchase Series C Preferred Stock.
(4) Includes 523,465 shares held as trustee for the Lawrence Trust under an
agreement dated December 15, 1995. Also includes 27,533 shares subject to
options exercisable within 60 days of February 14, 1997.
(5) Includes 21,263 shares subject to options exercisable within 60 days of
February 14, 1997.
(6) Includes 273,833 shares held as co-trustee for the J.D. Duffie and M.D.
Savoie Trust under Agreement dated January 13, 1995. Also includes 11,390
shares subject to options exercisable within 60 days of February 14,
1997.
(7) Includes 13,125 shares subject to options exercisable within 60 days of
February 14, 1997.
(8) Includes 16,354 shares subject to options exercisable within 60 days of
February 14, 1997.
(9) Includes 12,500 shares subject to options exercisable within 60 days of
February 14, 1997.
(10) Includes 102,165 shares subject to options exercisable within 60 days of
February 14, 1997.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive of Whitetree in fiscal 1996 and the five other most highly
compensated executive officers of Whitetree as of September 30, 1996, whose
total salary and bonus in fiscal 1996 exceeded $100,000, for all services in
all capacities to Whitetree during fiscal 1996:
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS OPTIONS COMPENSATION
---- ---- -------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Maureen Lawrence.................. 1996 $159,808 $-- 188,800 $--
President and CEO 1995 140,000 -- -- --
1994 96,923 -- 509,100 --
Kingston Duffie................... 1996 139,046 -- 145,800 --
Chief Technical Officer 1995 119,999 -- -- --
1994 115,845 -- -- --
Wayne Martson..................... 1996 181,461 -- 17,800 --
Vice President of Sales 1995 130,024 -- -- --
1994 48,077 -- 135,760 --
Allen Adolph...................... 1996 134,345 -- 60,000 --
Vice President of Operations 1995 111,999 -- -- --
1994 21,538 -- 75,000 --
M. Denise Savoie.................. 1996 121,425 -- 78,100 --
Vice President of Business
Operations and CFO 1995 100,000 -- -- --
1994 83,387 -- -- --
Kurt Bauer........................ 1996 130,538 -- 50,000 --
Vice President of Marketing and
Business 1995 90,384 -- 125,000 --
Development 1994 -- -- -- --
</TABLE>
78
<PAGE>
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
% OF PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM
UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ------------------ ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Maureen Lawrence........ 188,800(1) 18.21% $1.400 9/1/06 $166,230 $421,258
Kingston Duffie......... 145,800(1) 14.06 1.400 9/1/06 128,370 325,315
Wayne Martson........... 17,800(1) 1.72 1.400 9/1/06 15,672 39,716
Allen Adolph............ 35,000(2) 3.37 0.175 10/11/05 3,852 9,762
25,000(1) 2.41 1.400 9/1/06 22,011 55,781
M. Denise Savoie........ 78,100(1) 7.53 1.400 9/1/06 68,763 174,260
Kurt Bauer.............. 50,000(1) 4.82 1.400 9/1/06 44,023 111,562
</TABLE>
- --------
(1) Vests at the rate of 1/48 of the shares at the beginning of each month
beginning October 1, 1996 and ending October 1, 2000.
(2) Vests 1/4 upon the first anniversary of the grant date and then at the
rate of 1/48 per month.
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS AT FISCAL YEAR- VALUE OF UNEXERCISED
END IN-THE-MONEY OPTIONS
SHARES (#) AT 9/30/96(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Maureen Lawrence........ -- $ -- -- 188,800 $ -- $ --
Kingston Duffie......... -- -- -- 145,800 -- --
Wayne Martson........... 135,760 $176,488 -- 17,800 -- --
Allen Adolph............ -- -- 40,625 94,375 $52,813 $87,563
M. Denise Savoie........ -- -- -- 78,100 -- --
Kurt Bauer.............. 61,250 32,250 -- 113,750 -- 78,094
</TABLE>
- --------
(1) Valuation based on the difference between the option exercise price and
the fair market value of Whitetree's Common Stock on September 30, 1996.
The valuation of Whitetree Options in this table does not reflect any
change in the value of such options since such date as a consequence of
the Merger.
79
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The unaudited pro forma condensed combining statements of operations combine
Ascend's historical consolidated statements of income for each of the three
years in the period ended December 31, 1996 with Whitetree's historical
consolidated results of operations for each of the three years in the period
ended September 30, 1996, giving effect to the Merger as if it had occurred at
the beginning of each period presented on a pooling of interests basis. The
unaudited pro forma condensed combining balance sheet combines Ascend's
historical consolidated balance sheet as of December 31, 1996 with Whitetree's
historical consolidated balance sheet as of September 30, 1996, giving effect
to the Merger as if it had occurred on December 31, 1996. The historical
financial information of Ascend has been derived from the audited consolidated
financial statements for each of the three years in the period ended December
31, 1996 which are included elsewhere herein and should be read in conjunction
with such financial statements and the notes thereto. The historical financial
information of Whitetree has been derived from the audited consolidated
financial statements for each of the three years in the period ended September
30, 1996 which are included elsewhere herein and should be read in conjunction
with such financial statements and the notes thereto. The pro forma
information is not necessarily indicative of the consolidated operating
results or financial position that would have occurred had the Merger been
consummated at the beginning of the periods presented, nor is it necessarily
indicative of future operating results or financial position.
80
<PAGE>
ASCEND AND WHITETREE
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
ASCEND WHITETREE ADJUSTMENTS COMBINED
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...... $213,970 $ 2,703 $ -- $216,673
Short-term investments......... 159,181 -- -- 159,181
Accounts receivable, net....... 103,145 866 -- 104,011
Receivable from related party.. -- 3,094 -- 3,094
Inventories.................... 49,241 3,055 -- 52,296
Deferred income taxes.......... 33,489 -- 6,500 39,989
Other current assets........... 13,273 301 -- 13,574
-------- -------- -------- --------
Total current assets......... 572,299 10,019 6,500 588,818
Investments...................... 35,771 -- -- 35,771
Furniture, fixtures and
equipment, net.................. 40,034 1,865 -- 41,899
Other assets..................... 3,762 93 -- 3,855
-------- -------- -------- --------
Total assets................... $651,866 $ 11,977 $ 6,500 $670,343
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............... $ 43,268 $ 3,065 $ -- $ 46,333
Accrued liabilities............ 39,003 3,845 2,200 45,048
Accrued compensation and
related liabilities........... 22,145 -- -- 22,145
-------- -------- -------- --------
Total current liabilities.... 104,416 6,910 2,200 113,526
Mandatory redeemable convertible
preferred stock................. -- 25,555 (25,555) --
Commitments
Stockholders' equity (deficit):
Common stock................... 119 181 (180) 120
Additional paid-in capital..... 412,227 -- 22,357 434,584
Accretion of preferred stock
redemption value.............. -- (3,378) 3,378 --
Retained earnings.............. 135,652 (17,291) 4,300 122,661
Notes receivable from
stockholders.................. (548) -- -- (548)
-------- -------- -------- --------
Total stockholders' equity
(deficit)................... 547,450 (20,488) 29,855 556,817
-------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)................... $651,866 $ 11,977 $ 6,500 $670,343
======== ======== ======== ========
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
81
<PAGE>
ASCEND AND WHITETREE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------
ASCEND WHITETREE ADJUSTMENTS COMBINED
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
Net sales............................. $549,297 $11,680 $ -- $560,977
Cost of sales......................... 192,226 9,110 -- 201,336
-------- ------- ------- --------
Gross profit........................ 357,071 2,570 -- 359,641
Operating expenses:
Research and development............ 40,291 4,176 -- 44,467
Sales and marketing................. 111,599 5,197 -- 116,796
General and administrative.......... 16,745 1,543 -- 18,288
Costs of Merger..................... 13,900 -- -- 13,900
-------- ------- ------- --------
Total operating expenses.......... 182,535 10,916 -- 193,451
-------- ------- ------- --------
Operating income (loss)............... 174,536 (8,346) -- 166,190
Interest income (expense), net........ 11,879 (111) -- 11,768
-------- ------- ------- --------
Income (loss) before income taxes..... 186,415 (8,457) -- 177,958
Provision (benefit) for income taxes.. 73,304 -- (3,550) 69,754
-------- ------- ------- --------
Net income (loss)..................... $113,111 $(8,457) $ 3,550 $108,204
======== ======= ======= ========
Net income (loss) per share........... $ 0.89 $ (3.11) $ 0.84
======== ======= ========
Number of shares used in per share
calculation.......................... 127,809 2,723 128,760
======== ======= ========
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
82
<PAGE>
ASCEND AND WHITETREE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
ASCEND WHITETREE ADJUSTMENTS COMBINED
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
Net sales............................. $152,604 $ 292 $ -- $152,896
Cost of sales......................... 53,296 192 -- 53,488
-------- ------- ------- --------
Gross profit........................ 99,308 100 -- 99,408
Operating expenses:
Research and development............ 12,400 4,107 -- 16,507
Sales and marketing................. 35,447 1,323 -- 36,770
General and administrative.......... 9,129 920 -- 10,049
Purchased research and development.. 3,032 -- -- 3,032
-------- ------- ------- --------
Total operating expenses.......... 60,008 6,350 -- 66,358
-------- ------- ------- --------
Operating income (loss)............... 39,300 (6,250) -- 33,050
Interest income, net.................. 5,122 20 -- 5,142
-------- ------- ------- --------
Income (loss) before income taxes..... 44,422 (6,230) -- 38,192
Provision (benefit) for income taxes.. 16,887 -- (1,870) 15,017
-------- ------- ------- --------
Net income (loss)..................... $ 27,535 $(6,230) $ 1,870 $ 23,175
======== ======= ======= ========
Net income (loss) per share........... $ 0.25 $ (2.91) $ 0.21
======== ======= ========
Number of shares used in per share
calculation.......................... 111,362 2,141 112,132
======== ======= ========
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
83
<PAGE>
ASCEND AND WHITETREE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------
ASCEND WHITETREE ADJUSTMENTS COMBINED
------- --------- ----------- --------
<S> <C> <C> <C> <C>
Net sales............................. $39,655 $ -- $ -- $39,655
Cost of sales......................... 13,387 -- -- 13,387
------- ------- ------- -------
Gross profit........................ 26,268 -- -- 26,268
Operating expenses:
Research and development............ 6,139 1,723 -- 7,862
Sales and marketing................. 11,409 369 -- 11,778
General and administrative.......... 3,569 445 -- 4,014
------- ------- ------- -------
Total operating expenses.......... 21,117 2,537 -- 23,654
------- ------- ------- -------
Operating income (loss)............... 5,151 (2,537) -- 2,614
Interest income, net.................. 969 37 -- 1,006
------- ------- ------- -------
Income (loss) before income taxes..... 6,120 (2,500) -- 3,620
Provision (benefit) for income taxes.. (430) -- (1,080) (1,510)
------- ------- ------- -------
Net income (loss)..................... $ 6,550 $(2,500) $ 1,080 $ 5,130
======= ======= ======= =======
Net income (loss) per share........... $ 0.07 $ (1.31) $ 0.05
======= ======= =======
Number of shares used in per share
calculation.......................... 94,583 1,912 95,134
======= ======= =======
</TABLE>
- --------
See accompanying notes to Unaudited Pro Forma Condensed Combining Financial
Statements.
84
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
NOTE A: The adjustments to the unaudited pro forma condensed combining
balance sheet give effect to the assumed issuance of 1,100,000 shares of
Ascend Common Stock as if the Merger had been consummated as of December 31,
1996 and an anticipated charge for Merger-related expenses totaling
approximately $2.2 million. Such Merger-related expenses include investment
advisory fees, legal and accounting expenses and other transaction costs. The
unaudited pro forma condensed combining statements of income do not reflect
these non-recurring charges, which Ascend anticipates will be recorded during
the quarter in which the merger is consummated. The unaudited pro forma
condensed combining statements of income also include adjustments to give
effect to the recording of the income tax benefit of net operating losses
incurred by Whitetree in the period in which such net operating losses were
incurred assuming such net operating losses could have been used to offset net
operating income derived by Ascend. The pro forma combined per share amounts
in the unaudited pro forma condensed combining statements of income are based
upon the historical weighted average number of shares of common stock and
dilutive common stock equivalents of Ascend outstanding during each period
presented. In addition, the shares of Ascend Common Stock to be issued in
connection with the Merger, based on the equivalent weighted average shares
and the dilutive common share equivalents of Whitetree outstanding during each
period presented, are treated as outstanding during each such period.
NOTE B: The unaudited pro forma condensed combining financial statements do
not include adjustments to conform the accounting policies of Whitetree to
those followed by Ascend. The nature and extent of such adjustments, if any,
will be based upon further study and analysis and are not expected to be
significant in relationship to the consolidated financial statements of
Ascend.
NOTE C: Certain financial statement balances of Whitetree have been
reclassified to conform with the Ascend financial statement presentation.
NOTE D: Whitetree has a September 30 fiscal year end and, accordingly, the
Whitetree statements of operations for the years ended September 30, 1996,
1995 and 1994 have been combined with Ascend statements of income for the
calendar years ended December 31, 1996, 1995 and 1994.
NOTE E: Net loss and net loss per share attributable to common stock for
Whitetree has not been presented since all of Whitetree's convertible
preferred stock, which will convert into the right to receive Ascend Common
Stock upon consummation of the merger, has been assumed to be converted to
common stock in the unaudited pro forma combining balance sheet as of December
31, 1996 and for the unaudited pro forma combining statements of income for
each of the three years in the period ended December 31, 1996 as if the merger
had been consummated on a pooling of interests basis at the beginning of each
period presented.
85
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF WHITETREE CAPITAL STOCK
AND HOLDERS OF ASCEND CAPITAL STOCK
Whitetree is incorporated under the laws of California, and Ascend is
incorporated under the laws of Delaware. After consummation of the Merger,
former shareholders of Whitetree, whose rights as shareholders of a California
corporation were governed by the CGCL, will become stockholders of Ascend, and
their rights as stockholders of a Delaware corporation will be governed by the
Delaware General Corporation Law ("DGCL"). The following summarizes the chief
differences between (i) DGCL and the CGCL and (ii) between the charter
documents of Whitetree and Ascend, that could materially affect the rights of
shareholders of Whitetree after consummation of the Merger. This summary is
qualified in its entirety by reference to the full text of such documents,
copies of which are incorporated by reference in this Prospectus/Consent
Solicitation Statement.
Annual Meeting. Both the Whitetree Bylaws and the Ascend Bylaws require that
an annual shareholder meeting be held each year at a time designated by the
respective Boards of Directors.
Number of Directors. Under the CGCL, as long as a California corporation has
more than three (3) or more shareholders of record, the number of directors of
the corporation cannot be reduced below three (3). Subject to this three-
director minimum, a bylaw or amendment of the articles of incorporation
specifying or changing a fixed number of directors or the maximum or minimum
number of directors or changing from a fixed to a variable board or vice versa
may only be adopted by the approval of a majority of the outstanding shares;
provided, however, that a bylaw or amendment of the articles of incorporation
reducing the fixed number of directors or the minimum number of directors to a
number less than five (5) cannot be adopted if the votes cast against its
adoption at a meeting or the shares not consenting in the case of action by
written consent are equal to more than sixteen and two-thirds percent (16
2/3%) of the outstanding shares entitled to vote. Under the DGCL, by contrast,
a Delaware corporation may have a board of directors consisting of one or more
members, and the exact number of directors, which is not subject under the
DGCL to any limits analogous to the CGCL, is set in the corporation's
certificate of incorporation or bylaws. The Ascend Bylaws provide that the
authorized number of Ascend directors shall be six (6) and, thereafter shall
be fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors.
The Whitetree Bylaws, by comparison, provide that (i) the authorized number of
Whitetree directors shall not be less than four (4) nor more than seven (7)
(the "Whitetree Range"), (ii) the exact number of Whitetree directors shall be
seven (7), until changed within the Whitetree Range, by an amendment of the
Bylaws, adopted by the Whitetree shareholders or by the Whitetree Board, and
(iii) that the Whitetree Range may be changed, or a definite number of
authorized Whitetree directors may be substituted for the Whitetree Range, by
an amendment of the Whitetree Articles of Incorporation or the Whitetree
Bylaws, subject to the provisions of the CGCL described in the proviso of the
second sentence of this paragraph.
Cumulative Voting for Directors. Under the DGCL, stockholders of a Delaware
corporation do not have the right to cumulate their votes in elections of
directors unless such corporation's certificate of incorporation expressly
provides for cumulative voting. Under California law, by contrast,
shareholders of a private California corporation have the right to cumulate
their votes in elections of directors unless such corporation's articles of
incorporation expressly eliminates the right to cumulative voting. The Ascend
Restated Certificate of Incorporation (the "Ascend Certificate of
Incorporation" or the "Certificate of Incorporation of Ascend") does not
provide for cumulative voting. Accordingly, Ascend stockholders do not have
the right to cumulate their votes in elections of directors. The Whitetree
Amended and Restated Articles of Incorporation (the "Whitetree Articles of
Incorporation or the "Articles of Incorporation of Whitetree") do not
eliminate cumulative voting. Accordingly, Whitetree shareholders have the
right to cumulate their votes in elections of directors, subject to giving
notice of the intent to cumulate votes prior to the voting as required by
Whitetree's Bylaws.
Board of Directors Meetings. Under the CGCL, meetings of the board of
directors of a California corporation, unless otherwise provided in such
corporation's articles of incorporation or bylaws, may be called by the chair
of the board, the president, any vice president, the secretary or any two (2)
directors. The DGCL imposes no requirements as to calling board of directors
meetings, and so such requirements are as set forth in a
86
<PAGE>
Delaware corporation's certificate of incorporation or bylaws. The Whitetree
Bylaws (i) do not impose any frequency requirements as to regular meetings of
the Whitetree Board, and (ii) do not contain, nor do the Whitetree Articles of
Incorporation contain, any provision inconsistent with the provisions of the
CGCL described in the first sentence of this paragraph. Similarly, the Ascend
Bylaws (i) do not provide for any organizational meetings of the Ascend Board,
(ii) do not impose any frequency requirements as to regular meetings of the
Ascend Board, and (iii) provide that special meetings of the Ascend Board may
be called by one-third of the directors then in office (rounded up to the
nearest whole number) or by the chief executive officer.
Director Voting. Under the CGCL, a quorum of a California corporation's
board of directors is equal to a majority of the authorized number of such
corporation's directors unless such corporation's articles of incorporation or
bylaws provide for a lesser number, provided, however, that such lesser number
cannot be less than the larger of (i) one-third ( 1/3) of the authorized
number of directors or (ii) two (2). A California corporation's articles of
incorporation may require more than a majority of the authorized number of
directors (up to and including all of the directors) for a quorum. Under the
DGCL, a quorum of a Delaware corporation's board of directors is equal to a
majority of the total number of directors unless such corporation's
certificate of incorporation provides for a lesser number, which in no case
can be less than one-third ( 1/3) of the total number of directors (unless the
total number of directors is one (1), in which case one (1) director shall
constitute a quorum). A Delaware corporation's certificate of incorporation or
bylaws may impose a quorum requirement equal to more than the majority of the
total number of directors (up to and including all of the directors). The
respective boards of directors of either a California corporation under the
CGCL or a Delaware corporation under the DGCL may act by unanimous written
consent without a meeting. The Whitetree Articles of Incorporation are silent
with respect to what constitutes a quorum of the Whitetree Board. The
Whitetree Bylaws expressly state that a majority of the authorized number of
Whitetree directors shall constitute a quorum and that the action of a
majority of Whitetree directors present at any meeting at which there is a
quorum, when duly assembled, is valid as a corporate act. Similarly, the
Ascend Certificate of Incorporation is silent with respect to what constitutes
a quorum of the Ascend Board, and the Ascend Bylaws expressly state that a
majority of the authorized number of Ascend directors shall constitute a
quorum and that the action or decision of a majority of Ascend directors
present at a duly held meeting at which a quorum is present shall be regarded
as a valid act of the Ascend Board.
Removal of Directors. Under CGCL, a director of a California corporation may
be removed without cause by a majority of the outstanding shares; provided,
however, that no such director may be removed (unless the entire board is
removed) when the votes cast against removal, or not consenting in writing to
the removal, would be sufficient to elect the director if voted cumulatively
at an election at which the same total number of votes were cast (or, if the
action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of the director's
most recent election were then being elected. Under the DGCL, except with
respect to corporations which have a classified board of directors or which
have cumulative voting, a director may be removed with or without cause by a
majority of the outstanding shares then entitled to vote at an election of
directors.
Elimination of Stockholders' Ability to Act by Written Consent Without A
Meeting. Whitetree shareholders may act by written consent without a meeting,
while Ascend stockholders may not. Under the CGCL, a California corporation's
articles of incorporation may eliminate its shareholders ability to act by
written consent without a meeting. Similarly, under the DGCL, a Delaware
corporation may eliminate its stockholders' ability to act by written consent
without a meeting by so providing in its certificate of incorporation.
Ascend's Certificate of Incorporation expressly eliminates its stockholders'
ability to act by written consent without a meeting. Whitetree's Articles of
Incorporation do not contain a similar provision.
Record Date. Under the CGCL, a California corporation in its bylaws may
provide procedures for establishing a record date to determine which
shareholders are entitled to notice of a meeting or to vote thereat or are
entitled to give consent to corporate action without a meeting; provided,
however, that such date shall not
87
<PAGE>
be more than 60 nor less than 10 days prior to the date of such meeting nor
more than 60 days prior to such action without a meeting. The DGCL contains a
similar provision. Neither the Whitetree Bylaws nor the Ascend Bylaws contain
any provision regarding the establishment of a record date which is
inconsistent with the CGCL or DGCL, respectively.
Advance Notice for Shareholder Proposals. The CGCL does not specify whether
a shareholder of a California corporation needs to provide the corporation's
board of directors with advance notice of a shareholder proposal at an annual
meeting of shareholders. The DGCL, by contrast, allows a Delaware corporation
to provide in its bylaws that a stockholder must provide notice of a
stockholder proposal to the corporation's board of directors up to one hundred
twenty (120) days in advance of the anniversary of the date on which the
immediately preceding year's proxy statement was sent to the corporation's
stockholders. The Ascend Bylaws provide that a stockholder proposal to be
presented at an annual meeting must be received by Ascend not less than one
hundred twenty (120) days in advance of the date Ascend's proxy statement was
released to stockholders in connection with the preceding year's annual
meeting of stockholders. The Whitetree Bylaws do not impose any advance notice
requirement for shareholder proposals at its annual meeting of shareholders.
Special Meetings of Shareholders. The CGCL provides that special meetings of
shareholders may be called by the board, the chairman of the board, the
president or the holders of shares entitled to cast not less than ten percent
(10%) of the votes at the meeting or such other persons as may be provided in
the corporation's articles of incorporation or bylaws. The DGCL provides that
special meetings of stockholders may be called the board of directors or by
such person or persons as are authorized in the certificate of incorporation
or bylaws. As a result, depending on the provisions of a corporation's
certificate of incorporation or bylaws, its stockholders may not have the
ability to call a special meeting, thus limiting the stockholders' ability to
act at other than an annual meeting. The Whitetree Articles of Incorporation
and Bylaws do not contain any provisions inconsistent with the CGCL provisions
set forth above in the first sentence of this paragraph. Ascend's Certificate
of Incorporation and Bylaws provide that special meetings of stockholders may
be called by Ascend's Board of Directors or the holders of not less than ten
percent (10%) of all of the shares entitled to cast votes at the meeting.
Amendment of Charter Documents. Under the CGCL approval of shareholders
holding at least a majority of the voting shares of Whitetree is required to
amend the Whitetree Articles of Incorporation. Similarly, under the DGCL, a
majority of the stockholders of Ascend can amend any or all of the provisions
of the Ascend Certificate of Incorporation.
Amendment of Bylaws. The Whitetree Bylaws may be amended by holders of a
majority of voting shares entitled to vote or by a majority of the directors
except that a majority of directors may not change the Whitetree Range. The
Ascend Bylaws may be amended by holders of sixty-six and two-thirds percent
(66 2/3%) of the voting shares entitled to vote or by a majority of the
directors.
Director Liability and Indemnification. The DGCL is generally more favorable
to directors than the CGCL. The significant differences in directors'
protection between the CGCL and the DGCL today deal with limitation of
liability and indemnification.
The CGCL and the DGCL both permit a corporation to adopt provisions
eliminating personal monetary liability of directors, and both impose certain
restrictions on the corporation's right to eliminate such liability. The CGCL
prohibits elimination of liability for a broader class of acts than does the
DGCL, including: reckless disregard of duty in the face of a serious risk of
injury to the corporation or its shareholders and acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's obligations to the corporation. Elimination of liability for
such acts would be permitted under the DGCL, unless a court concluded that
such exculpation was void as contrary to public policy. As a result, directors
of a California corporation have a greater likelihood of a possible
shareholder challenge to the elimination of their monetary liability.
Both the CGCL and the DGCL now allow corporations to authorize in their
charter documents and bylaws broader indemnification of officers and directors
than is provided to such persons by statute. Both states also
88
<PAGE>
allow corporations to expand indemnification of their directors and officers
through written agreements. However, a California corporation may not
indemnify as to the following matters for which the DGCL permits
indemnification, at least in some circumstances: (i) matters as to which a
person is adjudged liable to the corporation in the performance of his or her
duties (unless the court expressly authorizes indemnity); (ii) amounts paid in
settlements of pending derivative actions if the court has not approved the
settlement; (iii) expenses incurred in defending a pending derivative action
if the court has not approved the settlement; (iv) matters for which
indemnification is inconsistent with provisions in the corporation's articles
of incorporation or bylaws or an agreement, resolution of the shareholders, or
condition expressly imposed by a court in approving a settlement; and (v) any
acts for which elimination of liability is prohibited, including those
described above.
Further, the standard of care required to be met prior to allowing director
indemnification under the CGCL is higher than under the DGCL, and the
procedures required to obtain such indemnification are more restrictive.
Accordingly, a director's right of indemnification is broader and more certain
under the DGCL.
Restriction on Sales of Stock. Neither the Ascend Certificate of
Incorporation and Bylaws nor the Whitetree Articles of Incorporation and
Bylaws provide for any restrictions on the transfer of outstanding shares,
other than those imposed by federal securities laws for shares offered under
certain exempt transactions.
Preferred Stock. Under its Certificate of Incorporation, Ascend is
authorized to issue preferred stock; however, the rights of such stock are
subject to determination by the Ascend Board and have not yet been
established, and no such shares of Ascend Preferred Stock have been issued, no
such shares are currently outstanding and no such shares will be issued in the
Merger. The outstanding series of Whitetree Preferred Stock have certain
redemption rights, dividend entitlements, liquidation preferences, and
conversion options which are not applicable to Ascend Common Stock. Certain
terms of the outstanding Whitetree Preferred Stock are summarized below.
REDEMPTION
At the option of shareholders of Whitetree Preferred Stock, Whitetree must
redeem up to one-third, one-third and all, on September 30, 1998, 1999, and
2000, respectively, of the then outstanding shares of Series A Preferred Stock
at $1.61, $1.77, and $1.95 per share, respectively, of Series B Preferred
Stock at $2.60, $2.82, and $3.10 per share, respectively, of Series C
Preferred Stock at $4.76, $5.17 and $5.61 per share, respectively, and of
Series D Preferred Stock at $9.25, $10.36 and $11.60 per share, respectively,
plus any declared but unpaid dividends.
VOTING
Each share of Whitetree Preferred Stock has voting rights equal to an
equivalent number of shares of common stock into which it is convertible and
votes together as one class with the Whitetree Common Stock; provided,
however, that (i) the holders of Whitetree Preferred Stock voting as a class
are entitled to elect 3 of the directors of Whitetree, and (ii) pursuant to
the California General Corporation Law, any merger must be approved by the
outstanding shares of Whitetree Common Stock and Whitetree Preferred Stock
voting as separate classes. In addition, so long as shares of the Whitetree
Preferred Stock remain outstanding, the Company shall not, without the
affirmative vote or written consent of a majority of the holders of Whitetree
Preferred Stock, (i) redeem, repurchase, or otherwise acquire for value any of
the Whitetree Common Stock or any other capital stock of the Company, (ii)
authorize or issue or obligate itself to issue any other equity security
senior to or on parity with the Whitetree Preferred Stock, (iii) increase or
decrease the total number of authorized shares of Whitetree Preferred Stock,
or (iv) amend Whitetree's Amended and Restated Articles of Incorporation or
Bylaws. Upon conversion of their shares of Whitetree Preferred Stock into
shares of Ascend Common Stock as a result of the Merger, holders of Whitetree
Preferred Stock will have no separate class vote as to such action or
transactions, but will have one vote per share of Ascend Common Stock as to
all matters submitted to a vote of the holders of Ascend Common Stock.
89
<PAGE>
DIVIDENDS
Holders of Whitetree Series A, B, C and D Preferred Stock are entitled to
receive noncumulative dividends at the per annum rate of $0.07, $0.12, $0.24
and $0.54 per share, respectively, together with dividends at the same rate as
dividends paid with respect to the Whitetree Common Stock when and if declared
by the Whitetree Board. Whitetree shall make no distribution to holders of
Whitetree Common Stock until dividends on Whitetree Preferred Stock have been
paid. No dividends were declared by the Whitetree Board through February 28,
1997.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of Whitetree,
including a consolidation or merger of Whitetree where the beneficial owners
of the Whitetree Common Stock and Whitetree Preferred Stock own less than 51%
of the resulting voting power of the surviving entity, the holders of Series
A, B, C and D Preferred Stock are entitled to receive an amount of $1.00,
$1.75, $3.48 and $7.68 per share, respectively, plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
Whitetree Common Stock. The remaining assets, if any, shall be distributed
ratably among the holders of the Whitetree Common Stock and Series A, B, C and
D Preferred Stock, based on the number of shares held (assuming conversion of
the Series A, B, C and D Preferred Stock). Notwithstanding the foregoing, if
the funds available for distribution upon the liquidation, dissolution or
winding up of Whitetree would result in each holder of Whitetree Preferred
Stock receiving at least $3.00 per share, then the holders of the Whitetree
Common Stock and Whitetree Preferred Stock shall share ratably in all
distributions made in connection with such event; provided that if such
distributions would result in (i) the holders of Series C Preferred Stock
receiving less than $3.48 per share then such holders shall be entitled to
receive $3.48 per share and (ii) the holders of Series D Preferred Stock
receiving less than $7.68 per share, then such holders shall be entitled to
receive $7.68 per share.
CONVERSION
Each share of Whitetree Preferred Stock is convertible, at the option of the
holder, into one share of Whitetree Common Stock, subject to adjustment for
dilution. Each share of Whitetree Preferred Stock automatically converts into
the number of shares of Whitetree Common Stock into which such shares are
convertible at the then effective conversion price upon the closing of a
public offering of common stock at a per share price of at least $7.68 per
share with gross proceeds of at least $7,500,000, or upon the vote of the
holders of two-thirds of the then outstanding shares of Whitetree Preferred
Stock. At September 30, 1996, Whitetree had reserved 5,195,320, 2,894,586,
1,548,986 and 897,556 shares of Whitetree Common Stock for the conversion of
Series A, B, C and D Preferred Stock, respectively. Additionally, Whitetree
had reserved 130,320, 27,428, 86,208 and 6,891 shares of Series A, B, C, and D
Preferred Stock, respectively, for the exercise of certain warrants. In the
case of specified business combinations involving Whitetree whereby Whitetree
Common Stock is converted into other securities or property, Whitetree must
make provision for the holders of Whitetree Preferred Stock then outstanding
to convert such stock into the kind and amount of shares of stock and other
securities and property receivable upon such business combination by a holder
of the number of shares of Whitetree Common Stock into which Whitetree
Preferred Stock might have been converted immediately prior thereto. In
addition, Whitetree must make appropriate provisions as part of and as a
condition to the effectiveness of any such business combination that the
rights of the holders of Whitetree Preferred Stock will be applicable, as
nearly as may be, after such business combination.
----------------
The foregoing summary does not purport to be a complete statement of the
rights of holders of Ascend Capital Stock and Whitetree Capital Stock under,
and is qualified in its entirety by reference to, the DGCL and the CGCL, the
Ascend Certificate of Incorporation and Ascend Bylaws, and the Whitetree
Amended and Restated Articles of Incorporation and Whitetree Bylaws copies of
which are attached hereto as Annex D and Annex E, respectively. See
"Description of Ascend Capital Stock" for a summary of certain other rights
relating to the Ascend Common Stock.
90
<PAGE>
DESCRIPTION OF ASCEND CAPITAL STOCK
The authorized capital stock of Ascend consists of 400,000,000 shares of
Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share.
COMMON STOCK
As of February 28, 1997, there were approximately 120,453,082 shares of
Ascend Common Stock outstanding held of record by approximately 1144
stockholders.
The holders of Ascend Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders.
Accordingly, holders of a majority of the shares of Ascend Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Ascend Board of Directors
(the "Ascend Board") out of funds legally available therefor. In the event of
a liquidation, dissolution or winding up of Ascend, holders of Ascend Common
Stock are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Ascend Common Stock have no preemptive, conversion or redemption
rights. All of the outstanding shares of Ascend Common Stock are, and the
shares to be issued in connection with the Merger when issued will be, fully
paid and non-assessable.
The transfer agent for Ascend Common Stock is The First National Bank of
Boston.
CERTAIN CHARTER PROVISIONS
The Ascend Certificate of Incorporation and Bylaws contain certain
provisions that could have the effect of delaying, deferring or preventing a
change in control of Ascend. See "Comparison of Rights of Holders of Whitetree
Capital Stock and Holders of Ascend Capital Stock."
PREFERRED STOCK
As of February 28, 1997, there were no shares of Ascend Preferred Stock
outstanding. The Ascend Board has the authority, without further action by the
stockholders, to issue such Preferred Stock in one or more series and to fix
the designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater
than the rights of the Ascend Common Stock. The Ascend Board, without
stockholder approval, can issue Preferred Stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of Ascend Common Stock. Preferred Stock could thus be issued
quickly with terms calculated to delay or prevent a change in control of
Ascend or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Ascend Common Stock. At present, Ascend has no plans to issue any of
the Preferred Stock.
LEGAL MATTERS
The validity of the shares of Ascend Common Stock to be issued in connection
with the Merger will be passed upon for Ascend by Gray Cary Ware &
Freidenrich, A Professional Corporation, Palo Alto, California. As of the date
hereof, attorneys at Gray Cary Ware & Freidenrich participating in this matter
beneficially own approximately 3,501 shares of Ascend Common Stock.
91
<PAGE>
EXPERTS
The consolidated financial statements of Ascend as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996,
included in this Prospectus/Consent Solicitation Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
appearing elsewhere herein and have been so included in reliance upon the
report given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Whitetree as of September 30, 1995
and 1996, and for each of the three years in the period ended September 30,
1996 included in this Prospectus/Consent Solicitation Statement have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
92
<PAGE>
INDEX TO ASCEND COMMUNICATIONS, INC. AND WHITETREE, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ASCEND COMMUNICATIONS, INC.
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1996................. F-3
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996............................................................ F-4
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1994, 1995 and 1996......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
WHITETREE, INC.
Report of Independent Accountants......................................... F-19
Consolidated Balance Sheets at September 30, 1995 and 1996 and December
31, 1996 (unaudited)..................................................... F-20
Consolidated Statements of Operations for the Years Ended September 30,
1994, 1995 and 1996 and the three months ended December 31, 1995 and 1996
(unaudited).............................................................. F-21
Consolidated Statements of Shareholders' Deficit for the Years Ended
September 30, 1994, 1995 and 1996 and the three months ended December 31,
1996 (unaudited)......................................................... F-22
Consolidated Statements of Cash Flows for the Years Ended September 30,
1994, 1995 and 1996 and the three months ended December 31, 1995 and 1996
(unaudited).............................................................. F-23
Notes to Consolidated Financial Statements................................ F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ascend Communications, Inc.
We have audited the accompanying consolidated balance sheets of Ascend
Communications, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 21(b).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ascend Communications, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Walnut Creek, California
January 24, 1997, except Note 10 as to which
the date is February 14, 1997
F-2
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $213,970 $147,050
Short-term investments..................................... 159,181 90,843
Accounts receivable, less allowance for uncollectible
accounts of $2,000 and $900 at December 31, 1996 and 1995,
respectively.............................................. 103,145 31,238
Inventories................................................ 49,241 26,868
Deferred income taxes...................................... 33,489 9,370
Other current assets....................................... 13,273 2,408
-------- --------
Total current assets................................... 572,299 307,777
Investments.................................................. 35,771 51,515
Furniture, fixtures and equipment, net....................... 40,034 10,108
Other assets................................................. 3,762 614
-------- --------
Total assets........................................... $651,866 $370,014
======== ========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
</TABLE>
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 43,268 $ 13,571
Accrued liabilities....................................... 39,003 20,861
Accrued compensation and related liabilities.............. 22,145 6,419
Notes payable............................................. -- 4,176
-------- --------
Total current liabilities............................. 104,416 45,027
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares-2,000
No shares issued or outstanding......................... -- --
Common stock, $.001 par value:
Authorized shares-400,000
119,417 shares issued (113,211--1995)................... 119 113
Additional paid-in capital................................ 412,227 302,110
Retained earnings......................................... 135,652 23,312
Notes receivable from stockholders........................ (548) (548)
-------- --------
Total stockholders' equity............................ 547,450 324,987
-------- --------
Total liabilities and stockholders' equity............ $651,866 $370,014
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales........................................... $549,297 $152,604 $39,655
Cost of sales....................................... 192,226 53,296 13,387
-------- -------- -------
Gross profit...................................... 357,071 99,308 26,268
Operating expenses:
Research and development.......................... 40,291 12,400 6,139
Sales and marketing............................... 111,599 35,447 11,409
General and administrative........................ 16,745 9,129 3,569
Purchased research and development................ -- 3,032 --
Costs of merger................................... 13,900 -- --
-------- -------- -------
Total operating expenses........................ 182,535 60,008 21,117
-------- -------- -------
Operating income.................................... 174,536 39,300 5,151
Interest income, net................................ 11,879 5,122 969
-------- -------- -------
Income before income taxes.......................... 186,415 44,422 6,120
Provision (benefit) for income taxes................ 73,304 16,887 (430)
-------- -------- -------
Net income.......................................... $113,111 $ 27,535 $ 6,550
======== ======== =======
Net income per share................................ $ 0.89 $ 0.25 $ 0.07
======== ======== =======
Number of shares used in per share calculation...... 127,809 111,362 94,583
======== ======== =======
</TABLE>
See accompanying notes
F-4
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS RECEIVABLE
----------------- -------------- PAID-IN (ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) STOCKHOLDERS TOTAL
------- -------- ------- ------ ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 61,256 $ 18,228 11,471 $ 11 $ 4,656 $(10,773) $ -- $ 12,122
Issuance of common
stock, net of issuance
costs.................. -- -- 717 1 6,606 -- -- 6,607
Conversion of preferred
stock into common
stock, NetStar......... (61,256) (18,228) 61,226 62 18,166 -- -- --
Issuance of common stock
in initial public
offering, net of
issuance costs......... -- -- 17,456 18 25,157 -- -- 25,175
Conversion of warrants
into common stock,
NetStar................ -- -- 503 -- -- -- -- --
Issuances of common
stock under stock
option plans........... -- -- 6,117 6 1,009 -- (794) 221
Net income.............. -- -- -- -- -- 6,550 -- 6,550
------- -------- ------- ---- -------- -------- ----- --------
Balance at December 31,
1994................... -- -- 97,490 98 55,594 (4,223) (794) 50,675
Tax benefit related to
exercise of stock
options................ -- -- -- -- 7,803 -- -- 7,803
Payments from
stockholders........... -- -- -- -- -- -- 246 246
Issuance of warrants to
purchase shares of
common stock, NetStar.. -- -- -- -- 134 -- -- 134
Issuance of common stock
under employee stock
option and stock
purchase plans......... -- -- 1,724 1 2,134 -- -- 2,135
Issuance of common stock
in initial public
offering, net of
issuance costs,
NetStar................ -- -- 1,347 1 24,715 -- -- 24,716
Issuance of common stock
in public offering, net
of issuance costs...... -- -- 12,650 13 211,730 -- -- 211,743
Net income.............. -- -- -- -- -- 27,535 -- 27,535
------- -------- ------- ---- -------- -------- ----- --------
Balance at December 31,
1995................... -- -- 113,211 113 302,110 23,312 (548) 324,987
Tax benefit related to
exercise of stock
options................ -- -- -- -- 64,551 -- -- 64,551
Effect of poolings...... -- -- 1,350 2 6,504 (771) -- 5,735
Exercise of warrants,
NetStar................ -- -- 399 -- 7,904 -- -- 7,904
Issuance of common stock
under employee stock
option and stock
purchase plans......... -- -- 4,457 4 31,158 -- -- 31,162
Net income.............. -- -- -- -- -- 113,111 -- 113,111
------- -------- ------- ---- -------- -------- ----- --------
Balance at December 31,
1996................... -- $ -- 119,417 $119 $412,227 $135,652 $(548) $547,450
======= ======== ======= ==== ======== ======== ===== ========
</TABLE>
See accompanying notes
F-5
<PAGE>
ASCEND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income.................................... $ 113,111 $ 27,535 $ 6,550
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 8,801 3,083 1,002
Deferred income taxes....................... (22,654) (6,389) (2,981)
Allowance for uncollectible accounts........ 1,100 200 650
Changes in operating assets and liabilities:
Accounts receivable....................... (73,007) (23,560) (4,931)
Inventories............................... (22,373) (20,467) (4,543)
Other current assets...................... (10,865) (1,332) (753)
Other assets.............................. (3,148) (173) (102)
Accounts payable and accrued liabilities.. 47,839 25,473 6,285
Accrued compensation and related
liabilities.............................. 15,726 5,196 631
--------- --------- --------
Net cash provided by operating
activities............................. 54,530 9,566 1,808
--------- --------- --------
Investing activities:
Purchases of investments.................... (245,431) (161,119) (71,208)
Maturities and sales of investments......... 192,837 47,709 46,995
Purchases of furniture, fixtures and
equipment.................................. (38,703) (10,286) (2,260)
Effect of business combinations............. 2,202 -- --
--------- --------- --------
Net cash used in investing activities... (89,095) (123,696) (26,473)
--------- --------- --------
Financing activities:
Proceeds from issuance of common stock,
net........................................ 39,066 238,728 32,003
Proceeds from notes receivable from
stockholders............................... -- 246 --
Proceeds from (repayment of) notes payable.. (2,132) 3,730 --
Tax benefit related to exercise of stock
options.................................... 64,551 7,803 --
--------- --------- --------
Net cash provided by financing
activities............................. 101,485 250,507 32,003
--------- --------- --------
Net increase in cash and cash equivalents..... 66,920 136,377 7,338
Cash and cash equivalents, beginning of year.. 147,050 10,673 3,335
--------- --------- --------
Cash and cash equivalents, end of year........ $ 213,970 $ 147,050 $ 10,673
========= ========= ========
Supplemental disclosure of cash flow
information:
Income tax payments......................... $ 34,095 $ 8,152 $ 1,381
========= ========= ========
Supplemental schedule of noncash investing and
financing activities information:
Notes receivable related to exercise of
stock options.............................. $ -- $ -- $ 794
========= ========= ========
Exercise of warrants in exchange for
retirement of notes payable................ $ 2,068 $ -- $ --
========= ========= ========
</TABLE>
See accompanying notes
F-6
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Company--Ascend Communications, Inc. ("Ascend" or the "Company")
develops, manufactures, markets, sells and supports a broad range of high-
speed integrated remote networking products that enable its customers to
build: (i) Internet access systems consisting of point-of-presence ("POP")
termination equipment for Internet service providers ("ISPs") and remote site
Internet access equipment for Internet subscribers; (ii) high speed IP
switches for application in telecommunications carriers and ISP backbone
networks; (iii) extensions and enhancements to corporate backbone networks
that facilitate access to these networks by remote offices, telecommuters and
mobile computer users; and (iv) videoconferencing and multimedia access
facilities. These products support existing digital and analog networks.
Basis of Presentation--The consolidated financial statements include the
accounts of Ascend and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
As more fully described in Note 8, in August 1996, the Company merged with
NetStar, Inc. ("NetStar"). The merger has been accounted for as a pooling of
interests, and the historical consolidated financial statements of the Company
for all periods prior to the merger have been restated to include the
financial position, results of operations and cash flows of NetStar.
Cash and Cash Equivalents--Cash and cash equivalents consist of demand
deposits and commercial paper in highly liquid short-term instruments with
original maturities of three months or less from the date of purchase and are
stated at cost, which approximates market. Substantially all of the Company's
cash and cash equivalents are maintained by four major financial institutions.
Short-Term Investments and Investments--The Company adopted SFAS 115 in
January 1994. Accordingly, management determines the appropriate
classification of debt securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. On November 15, 1995, the FASB
staff issued a Special Report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities. In
accordance with provisions in that Special Report, the Company chose to
reclassify securities from held-to-maturity to available-for-sale. At the date
of transfer, the fair value of all of the Company's investments approximated
their cost. Available-for-sale securities are carried at amounts which
approximate fair value, with unrealized gains and losses, net of tax, recorded
in stockholders' equity until disposition. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale debt
and equity securities are included in interest and other income. At December
31, 1996 and 1995, the Company's investments consisted primarily of
obligations of the U.S. government ($23,401,000--1996 and $13,000,000--1995),
states and political subdivisions ($156,948,000--1996 and $114,698,000--1995),
U.S. corporate securities ($9,500,000--1996 and $14,660,000--1995) and foreign
debt securities ($5,103,000--1996 and None--1995). Unrealized gains and losses
for 1996, 1995 and 1994 were not material.
Accounts Receivable--The Company sells and distributes a substantial
percentage of its products to Internet service providers, value-added
resellers and distributors, and local and long-distance telecommunications
carriers, throughout North America, Europe, and Asia and the Pacific Basin.
Accounts receivable are principally from these customers. The Company conducts
ongoing credit evaluations of its customers and maintains an allowance for
doubtful accounts.
Inventories--Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. The Company provides for obsolete
inventories in the period when obsolescence is determined to have occurred.
F-7
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
Depreciation--Furniture, fixtures and equipment are recorded at cost.
Depreciation is provided using the straight-line method over estimated useful
lives of three to four years.
Major Customers and Revenues by Geographic Area--No customer accounted for
more than 10% of net sales in 1996. One customer accounted for 11% of net
sales in 1995. A second customer accounted for 15% of net sales in 1994. Net
sales were derived from customers based in the following geographic areas (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
North America..................................... $287,849 $108,662 $31,781
Europe............................................ 104,582 19,818 5,957
Asia and Pacific Basin............................ 152,371 24,124 1,917
Latin and South America........................... 4,495 -- --
-------- -------- -------
$549,297 $152,604 $39,655
======== ======== =======
</TABLE>
Revenue Recognition--The Company recognizes revenue from product sales upon
shipment provided that no significant customer and post-contract support
obligations remain and collection of the related receivable is deemed
probable. The Company defers recognition of revenue on initial shipments of
certain new products until such products have been tested in the marketplace.
The Company accounts for all costs relating to customer and post-contract
support obligations, which are not significant in amount, at the time of
shipment by accruing such costs. In addition, the Company provides for
potential product returns and estimated warranty costs in the period of the
sale.
The Company's revenue recognition policy is in compliance with the American
Institute of Certified Public Accountants' Statement of Position 91-1,
Software Revenue Recognition.
Key Suppliers--The Company is dependent on single or limited source
suppliers for certain components used in its products. The Company has
generally been able to obtain adequate supplies of these components. In
addition, the Company believes that there are alternative suppliers for the
components used in its products. However, an extended interruption in the
supply of the components currently obtained from single or limited source
suppliers could adversely effect the Company's business and results of
operations.
Research and Development--Costs to develop the Company's products are
expensed as incurred in accordance with Statement of Financial Accounting
Standards No. 2, Accounting for Research and Development Costs, which
establishes accounting and reporting standards for research and development.
Software Development Costs--The Company accounts for software development
costs in accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. The Company's products include a software component. The Company has
expensed substantially all software development costs to date as such
development costs have been incurred prior to the Company's products attaining
technological feasibility.
Stock-Based Compensation--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). In accordance with the
provisions of SFAS 123, the Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans and,
accordingly, has not recognized compensation cost in connection with such
plans. Note 5 to the consolidated financial statements contains a
F-8
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
summary of the pro forma effects to reported net income and net income per
share for 1996 and 1995 as if the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS 123.
Net Income Per Share--Net income per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the initial public offering price
during the twelve-month period prior to the initial public offering have been
included in the calculation as if they were outstanding for all periods prior
to the initial public offering (using the treasury stock method). The
difference between primary and fully diluted earnings per share is not
material for all periods presented.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Reclassifications--Certain 1994 and 1995 balances have been reclassified to
conform to the 1996 presentation.
2. BALANCE SHEET DETAILS (IN THOUSANDS)
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- --------
<S> <C> <C>
Finished goods............................................. $ 6,854 $ 10,687
Products in process........................................ 6,992 8,001
Raw materials and supplies................................. 35,395 8,180
------- --------
$49,241 $ 26,868
======= ========
</TABLE>
Furniture, Fixtures and Equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Computer equipment........................................ $ 26,967 $ 7,836
Laboratory equipment...................................... 10,060 3,119
Furniture and fixtures.................................... 16,573 3,942
-------- -------
53,600 14,897
Less accumulated depreciation........................... (13,566) (4,789)
-------- -------
$ 40,034 $10,108
======== =======
</TABLE>
F-9
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET DETAILS (IN THOUSANDS) (CONTINUED)
Accrued Liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Income taxes payable........................................ $ 6,298 $ 8,419
Other accrued liabilities................................... 19,849 5,570
Customer deposits........................................... 12,856 6,872
------- -------
$39,003 $20,861
======= =======
</TABLE>
3. NOTES PAYABLE
In June 1995, NetStar issued $4,200,000 of convertible notes payable
("Bridge Notes") in a private placement. In connection with this financing,
NetStar also issued warrants to the holders of the Bridge Notes to purchase
297,343 shares of common stock. During 1996, $2,068,000 of principal
outstanding under the Bridge Notes was exchanged for 130,713 shares of the
Company's common stock. The remaining $2,132,000 was repaid during 1996.
4. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, under which the
liability method is used to calculate deferred income taxes. Under this
method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and income tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The realization of
deferred tax assets is based on historical tax positions and expectations
about future taxable income.
The following is a geographical breakdown of consolidated income before
income taxes (including intercompany revenue and expenses) by income tax
jurisdiction (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
United States........................................ $183,766 $43,977 $6,120
Foreign.............................................. 2,649 445 --
-------- ------- ------
Total.............................................. $186,415 $44,422 $6,120
======== ======= ======
</TABLE>
F-10
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $ 80,395 $17,782 $ 1,582
State.......................................... 14,623 5,316 969
Foreign........................................ 940 178 --
-------- ------- -------
Total current................................ 95,958 23,276 2,551
Deferred:
Federal........................................ (19,597) (5,572) (2,649)
State.......................................... (3,057) (817) (332)
-------- ------- -------
Total deferred (benefit)..................... (22,654) (6,389) (2,981)
-------- ------- -------
Total provision (benefit).................... $ 73,304 $16,887 $ (430)
======== ======= =======
</TABLE>
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of income is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate....................... $65,245 $15,548 $ 2,081
State rate, net of federal benefit........... 11,690 2,617 428
Tax-exempt interest.......................... (3,168) (1,097) --
Foreign Sales Corporation benefit............ (4,842) (466) --
Non-deductible merger expenses............... 2,625 -- --
Utilization of net operating loss
carryforwards and credits................... -- -- (3,824)
Other........................................ 1,754 285 885
------- ------- -------
Total tax provision....................... $73,304 $16,887 $ (430)
======= ======= =======
Effective tax rate........................... 39.3 % 38.0 % 0.0 %
======= ======= =======
</TABLE>
F-11
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Reserve for uncollectible accounts........................ $ 2,305 $1,623
Reserve for warranties and inventories.................... 8,080 1,462
Purchased research and development........................ 673 1,176
State taxes............................................... 716 421
Customer deposits......................................... 12,238 --
Net operating loss carryovers and tax credits of acquired
companies................................................ 7,507 3,496
Other..................................................... 1,970 1,192
------- ------
Total net deferred tax assets........................... $33,489 $9,370
======= ======
</TABLE>
5. STOCKHOLDERS' EQUITY
Public Offering--In August 1995, the Company completed a public offering of
its common stock consisting of 12,650,000 shares at $17.625 per share, with
proceeds, net of issuance costs, of approximately $211,743,000 (issuance costs
were approximately $11,213,000). On September 25, 1995, and May 29, 1996, the
Company's stockholders approved amendments to the Company's Certificate of
Incorporation that increased the authorized common stock from 50,000,000 to
200,000,000 and 200,000,000 to 400,000,000 shares, respectively.
Stock Splits--In May, October and December of 1995, the Company's Board of
Directors approved two-for-one stock splits, payable in the form of a stock
dividend to all stockholders of record. All shares and per share data in the
accompanying consolidated financial statements have been retroactively
adjusted to reflect these stock splits.
Preferred Stock--The Company's Board of Directors has the authority to issue
these shares in one or more series and to fix the rights, preferences,
privileges and restrictions of ownership. At December 31, 1996, there were no
outstanding shares of preferred stock.
Notes Receivable--Notes receivable from stockholders resulted from the
purchase of common stock from the Company pursuant to the exercise of stock
options. Such notes are due on demand, bear interest at 5.4% and are secured
by certain common shares.
Warrants--As of December 31, 1996, warrants to purchase 66,531 shares of
common stock with exercise prices ranging from $3.53 to $29.66 were
outstanding. The warrants expire at various dates ranging from 1997 to 2000.
1994 Employee Stock Purchase Plan--In March 1994, the Board of Directors
approved an Employee Stock Purchase Plan under which eligible employees may
purchase common stock at a price equal to 85% of the lower of the fair market
value of the common stock at the beginning or end of each offering period.
Participation in the offering is limited to 10% of an employee's compensation
(not to exceed amounts allowed by the Internal Revenue Code), may be
terminated at any time by the employee and automatically ends on termination
of employment with the Company. A total of 2,800,000 shares of common stock
have been reserved for issuance
F-12
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
under this plan and the first offering commenced on the effective date of the
Company's initial public offering of shares of its common stock and continued
through January 31, 1995. Subsequent six-month offering periods commenced on
each February 1 and August 1 thereafter. During 1996 and 1995, 86,870 and
252,120 shares of common stock were issued under this plan, respectively.
1989 Stock Option Plan--The Company has a Stock Option Plan under which a
total of 45,000,000 shares of common stock have been reserved for issuance to
employees, officers, directors and consultants of the Company. Options granted
to date are immediately exercisable and unvested shares are subject to
repurchase by the Company. Options and unvested shares typically vest ratably
over four years from the date of grant. In the event option holders cease to
be employed by the Company, all unvested options are forfeited and all vested
options may be exercised within a 30-day period after termination; the Company
also has the right to repurchase any unvested (but issued) shares if the
holder is no longer employed by the Company. As of December 31, 1996, options
to purchase approximately 476,091 shares had been exercised but were not
vested.
Stock options are granted at not less than the fair market value of common
stock on the date of grant. All options expire no later than ten years from
the date of grant, except options granted to 10% stockholders, which have a
maximum term of five years. The exercise price of stock options granted to a
stockholder possessing 10% or more of the total combined voting power of all
classes of stock may not be less than 110% of the fair market value of common
stock on the date of grant. As of December 31, 1996, no options had been
granted to 10% stockholders.
The Company has adopted SFAS 123 which was issued in October 1995. In
accordance with the provisions of SFAS 123, the Company applies APB Opinion 25
and related Interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost. If the Company had elected
to recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS 123, net income and net income per share
would have been reduced to the pro forma amounts indicated in the table below
(in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
------------ -----------
<S> <C> <C>
Net income--as reported............................ $ 113,111 $ 27,535
Net income--pro forma.............................. $ 68,266 $ 19,247
Net income per share--as reported.................. $ 0.89 $ 0.25
Net income per share--pro forma.................... $ 0.54 $ 0.18
</TABLE>
The effect on net income and earnings per share is not expected to be
indicative of the effects on net income and earnings per share in future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1995
------ ------
<S> <C> <C>
Expected volatility............................................ 0.610 0.610
Risk-free interest rate........................................ 6.20% 6.05%
Expected life of options in years.............................. 3.0 3.0
Expected dividend yield........................................ 0.00% 0.00%
</TABLE>
F-13
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
these subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not provide a
reliable single measure of the fair value of its employee stock options.
The following table summarizes activity under the Company's 1989 Stock
Option Plan from December 31, 1993 through December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance at December 31, 1993.......................... 7,238,839 $ 0.15
Granted............................................. 5,530,234 1.70
Exercised........................................... (6,116,928) 0.18
Forfeited........................................... (845,548) 0.39
----------
Balance at December 31, 1994.......................... 5,806,597 1.03
Granted............................................. 11,196,310 15.76
Exercised........................................... (1,451,494) 1.01
Forfeited........................................... (586,266) 6.39
----------
Balance at December 31, 1995.......................... 14,965,147 12.04
Granted............................................. 7,716,873 54.44
Exercised........................................... (4,294,248) 6.53
Forfeited........................................... (233,084) 29.45
----------
Balance at December 31, 1996.......................... 18,154,688 $30.70
==========
Outstanding options exercisable and vested at December
31, 1996............................................. 2,966,733 $12.57
==========
Options available for grant at December 31, 1996...... 14,267,495
==========
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 is
$24.05 and $6.78 per share, respectively.
F-14
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OUTSTANDING LIFE PRICE AND VESTED PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 5.06........... 1,717,617 4.89 $ 1.34 760,180 $ 0.98
5.81.................. 1,521,193 7.77 5.81 591,625 5.81
7.28- 11.13........... 2,278,192 7.94 10.07 615,462 10.26
14.13- 21.75........... 2,319,250 8.06 17.30 476,752 17.01
25.13- 35.25........... 2,220,794 8.85 32.92 462,607 32.94
35.38- 43.50........... 2,326,956 9.30 41.26 32,604 37.35
43.75- 58.25........... 2,191,955 9.37 51.43 1,455 60.55
59.00- 63.38........... 2,316,500 9.80 61.82 671 59.39
64.75- 73.88........... 1,262,231 9.61 68.13 25,377 66.07
---------- ---------
18,154,688 2,966,733
========== =========
</TABLE>
1994 Outside Directors Stock Option Plan--In March 1994, the Board of
Directors approved an Outside Directors Stock Option Plan under which
directors of the Company who are not officers or employees of the Company may
receive nonstatutory options to purchase shares of common stock of the
Company. A total of 2,000,000 shares of common stock have been reserved for
issuance under this plan, and options to purchase 384,000, 640,000 and 320,000
shares of common stock were granted during 1996, 1995 and 1994, respectively,
at weighted average exercise prices of $61.50, $10.25 and $1.63 per share,
respectively. During 1996, options to purchase 76,000 shares of common stock
were exercised at a weighted average exercise price of $7.98 per share. During
1995, options to purchase 20,000 shares of common stock were exercised at a
weighted average exercise price of $1.63 per share.
1996 Restricted Stock Plan--In October 1996, the Board of Directors approved
a Restricted Stock Plan under which employees and consultants of the Company
who are not officers or directors of the Company may receive shares of common
stock of the Company. A total of 200,000 shares of common stock have been
reserved for issuance under this plan, and 25,000 shares of common stock were
granted during 1996 at a purchase price of $1.00 per share.
Reserved for Future Issuance--As of December 31, 1996, the Company has
reserved the following shares of its common stock for future issuance:
<TABLE>
<S> <C>
1989 Stock Option Plan............................................ 32,422,183
1994 Outside Directors Stock Option Plan.......................... 1,904,000
1994 Employee Stock Purchase Plan................................. 2,461,010
1996 Restricted Stock Plan........................................ 200,000
----------
Total shares reserved......................................... 36,987,193
==========
</TABLE>
F-15
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RETIREMENT PLAN
In July 1993, the Company established a profit sharing plan, which has been
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all employees who meet certain minimum eligibility requirements.
The Company does not contribute to the plan. Eligible employees can contribute
amounts to the plan via payroll withholdings, subject to certain limitations.
7. COMMITMENTS
Leases--The Company leases office and warehouse space under noncancelable
operating leases. Rent expense on these operating leases was $4,051,000,
$1,164,000 and $636,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
In March 1996, the Company entered into an agreement to lease 13 acres of
land located in Alameda, California. Certain buildings currently being used
for the Company's headquarters have been constructed on the land. The lessor
has funded approximately $24.9 million for the land and construction of the
buildings. The lease has an initial term of three years and an option to renew
for two years, subject to the lessor's consent. The rent obligation for the
lease commenced in December 1996. At any time during the term of the lease,
the Company may purchase the land and buildings. If the Company does not
exercise its purchase option at the end of the lease, the Company has
guaranteed a residual value of approximately $22.4 million.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1997............................................................... $ 4,053
1998............................................................... 3,480
1999............................................................... 2,705
2000............................................................... 2,403
2001 and beyond.................................................... 2,330
-------
Total minimum lease payments....................................... $14,971
=======
</TABLE>
Line of Credit--The Company entered into a $15,000,000 bank line of credit
agreement in November 1995, which expires in November 1997. Interest is
computed at the bank's prime rate or 1.0% over LIBOR, at the option of the
Company. There is a commitment fee of 0.2% on the unused portion of the line
of credit. The line of credit requires the Company to maintain certain
financial ratios, minimum net worth and profitability on a quarterly and year-
to-date basis. There were no borrowings under the line of credit agreement
during 1996.
8. BUSINESS COMBINATIONS
In August 1996, the Company acquired NetStar, a developer and manufacturer
of high performance, high speed IP network routers, in a transaction that was
accounted for as a pooling of interests. The Company issued approximately
3,869,000 shares of its common stock to NetStar shareholders in exchange for
all outstanding NetStar shares. Outstanding options and warrants to purchase
NetStar common stock were exchanged for options and warrants to purchase
approximately 535,000 and 203,000 shares, respectively, of the Company's
common stock. The Company's historical consolidated financial statements for
prior periods have been restated to reflect the financial position and results
of operations of NetStar.
F-16
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BUSINESS COMBINATIONS (CONTINUED)
NetStar had a fiscal year that ended on September 30. NetStar's statements
of operations for the years ended September 30, 1995 and 1994 have been
combined with the Company's statements of income for the years ended December
31, 1995 and 1994, respectively. In order to conform NetStar's year end to
Ascend's year end, the consolidated statement of income for the year ended
December 31, 1996 excludes the results of operations for the three months
ended December 31, 1995 for NetStar. Accordingly, an adjustment has been made
to retained earnings for the year ended December 31, 1996 for the exclusion of
NetStar's net loss (including the tax benefit to the Company) of approximately
$660,000 for the three months ended December 31, 1995.
Separate results of operations for the periods prior to the merger with
NetStar are as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, -------------------------
1996 1995 1994
-------------- ------------ -----------
<S> <C> <C> <C>
Net Sales:
Ascend......................... $214,423 $149,590 $ 39,343
NetStar........................ 2,754 3,014 312
-------- ------------ -----------
Total........................ $217,177 $152,604 $ 39,655
======== ============ ===========
Net Income:
Ascend......................... $ 50,742 $ 30,573 $ 8,699
NetStar........................ (5,833) (4,898) (3,785)
-------- ------------ -----------
Total........................ 44,909 25,675 4,914
Adjustment to reflect elimination
of income tax valuation
allowance....................... 2,215 1,860 1,636
-------- ------------ -----------
Net income, as restated.......... $ 47,124 $ 27,535 $ 6,550
======== ============ ===========
</TABLE>
In December 1996, the Company acquired StonyBrook Services, Inc.
("StonyBrook"), a developer of network management software, in a transaction
that was accounted for as a pooling of interests. The Company issued
approximately 480,000 shares of its common stock to StonyBrook shareholders in
exchange for all outstanding StonyBrook shares.
In August 1996, the Company acquired Subspace Communications, Inc.
("Subspace"), a manufacturer of PC-based data and telecommunications products
for the home and small office environments, in a transaction that was
accounted for as a pooling of interests. The Company issued approximately
90,000 shares of its common stock to Subspace shareholders for all outstanding
Subspace shares.
In March 1996, the Company acquired Morning Star Technologies, Inc.
("Morning Star"), a manufacturer of network routing software and advanced
network security products, in a transaction that was accounted for as a
pooling of interests. The Company issued approximately 440,000 shares of its
common stock to Morning Star shareholders in exchange for all outstanding
Morning Star shares.
The results of operations of StonyBrook, Subspace and Morning Star, which
have not been material in relation to those of the Company, are included in
the consolidated results of operations for periods subsequent to the
acquisition. The Company's historical consolidated financial statements prior
to the combinations have not been restated to reflect the financial results of
these acquisitions as these results were not material to the Company.
F-17
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended December 31,
1996:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------
SEPT.
MARCH 31, JUNE 30, 30, DEC. 31,
--------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Net sales............................... $92,028 $125,149 $154,629 $177,491
Gross profit............................ 59,462 80,440 100,665 116,504
Operating income........................ 28,408 41,989 41,325 62,814
Net income.............................. 19,386 27,738 24,894 41,093
Net income per share.................... 0.15 0.22 0.20 0.32
1995
Net sales............................... $20,716 $ 29,591 $ 40,909 $ 61,388
Gross profit............................ 13,507 19,082 26,546 40,173
Operating income........................ 4,121 7,376 8,301 19,502
Net income.............................. 2,832 4,810 6,436 13,457
Net income per share.................... 0.03 0.05 0.06 0.11
</TABLE>
10. SUBSEQUENT EVENTS
On February 14, 1997, the Company entered into an agreement to acquire
Whitetree, Inc. ("Whitetree"), a privately held provider of high speed
switching products, in a transaction that is to be accounted for as a pooling
of interests. Based on the market prices at the time of signing, the Company
would issue a total of approximately 1,100,000 shares of its common stock to
Whitetree shareholders, warrantholders and option holders in exchange for all
outstanding Whitetree shares and warrants and upon the exercise of all
Whitetree options assumed by the Company. The actual number of shares to be
issued in connection with the transaction is subject to adjustment depending
upon the average last sale price of the Company's common stock on The Nasdaq
National Market for the five days preceding the closing date and will be no
fewer than 970,000 nor more than 1,350,000 common shares.
Whitetree has a fiscal year that ends on September 30. Whitetree's
statements of operations for the years ended September 30, 1996, 1995 and 1994
will be combined with the Company's statements of income for the years ended
December 31, 1996, 1995 and 1994, respectively. In order to conform
Whitetree's year end to the Company's year end, the consolidated statement of
income for the year ended December 31, 1996 will exclude the results of
operations for the three months ended December 31, 1996 for Whitetree.
F-18
<PAGE>
ASCEND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
10. SUBSEQUENT EVENTS (CONTINUED)
The following unaudited pro forma summary includes the historical operations
of the Company and the historical operations of Whitetree for all periods
presented. The unaudited pro forma summary does not purport to be indicative
of what would have occurred had the acquisition been made at the beginning of
the periods presented or the results which may occur in the future.
Unaudited pro forma summary results of operations (in thousands except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales......................................... $560,977 $152,896 $39,655
Net income........................................ 108,204 23,175 5,130
Net income per share.............................. $ 0.84 $ 0.21 $ 0.05
Shares used in per share computations............. 128,760 112,132 95,134
</TABLE>
In February 1997, the Company acquired substantially all of the outstanding
stock of InterCon Systems Corporation. The purchase price consisted of a cash
payment of $12,000,000 and the assumption of approximately $9,000,000 of
liabilities. The Company is currently in the process of allocating the
purchase price.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Whitetree, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Whitetree, Inc. and its subsidiary at September 30, 1995 and 1996 and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
November 22, 1996, except for Note 9, which is
as of January 10, 1997
F-20
<PAGE>
WHITETREE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........ $ 821,000 $ 2,703,000 $ 979,000
Short-term investments 787,000 -- --
Accounts receivable, net of
allowance for doubtful accounts
of $0, $120,000 and $220,000,
respectively.................... 113,000 201,000 184,000
Accounts receivable from related
party (Note 8).................. 69,000 3,094,000 1,486,000
Other receivable -- 665,000 393,000
Inventories (Note 2)............. 988,000 3,055,000 2,375,000
Prepaid expenses and other
current assets.................. 107,000 301,000 208,000
------------ ------------ ------------
Total current assets........... 2,885,000 10,019,000 5,625,000
Property and equipment, net (Note
2)................................ 929,000 1,865,000 2,578,000
Other assets....................... 22,000 93,000 93,000
------------ ------------ ------------
$ 3,836,000 $ 11,977,000 $ 8,296,000
============ ============ ============
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
- -----------------------------------
Current liabilities:
Accounts payable................. $ 857,000 $ 3,065,000 $ 1,267,000
Accrued expenses................. 365,000 956,000 1,462,000
Accrued warranty................. 11,000 1,020,000 1,080,000
Deferred revenue................. 321,000 691,000 408,000
Current portion of capitalized
lease obligations (Note 3)...... 406,000 538,000 989,000
------------ ------------ ------------
Total current liabilities...... 1,960,000 6,270,000 5,206,000
Capitalized lease obligations, net
of current portion (Note 3)....... 487,000 504,000 924,000
Deferred rent -- 136,000 150,000
------------ ------------ ------------
Total liabilities.............. 2,447,000 6,910,000 6,280,000
------------ ------------ ------------
Mandatorily redeemable convertible
preferred stock (Note 4).......... 11,703,000 25,555,000 26,187,000
------------ ------------ ------------
Commitments (Note 3)
Shareholders' deficit (Notes 5 and
6):
Common stock; $0.001 par value;
20,000,000 shares authorized;
2,421,307, 2,902,826 and
2,881,629 shares issued and
outstanding..................... 84,000 181,000 182,000
Accretion of preferred stock
redemption value................ (1,564,000) (3,378,000) (4,010,000)
Accumulated deficit.............. (8,834,000) (17,291,000) (20,343,000)
------------ ------------ ------------
Total shareholders' deficit.... (10,314,000) (20,488,000) (24,171,000)
------------ ------------ ------------
$ 3,836,000 $ 11,977,000 $ 8,296,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
WHITETREE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------- ------------------------
1994 1995 1996 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................... $ -- $ 152,000 $ 1,156,000 $ 692,000 $ 446,000
Sales to related
parties................ -- 140,000 10,524,000 702,000 2,338,000
----------- ----------- ------------ ----------- -----------
Total sales........... -- 292,000 11,680,000 1,394,000 2,784,000
----------- ----------- ------------ ----------- -----------
Cost of sales........... -- (81,000) (670,000) (486,000) (221,000)
Cost of sales to related
parties................ -- (111,000) (8,440,000) (646,000) (1,741,000)
----------- ----------- ------------ ----------- -----------
Total cost of sales... -- (192,000) (9,110,000) (1,132,000) (1,962,000)
----------- ----------- ------------ ----------- -----------
Gross profit.......... -- 100,000 2,570,000 262,000 822,000
----------- ----------- ------------ ----------- -----------
Operating expenses:
Research and
development.......... 1,723,000 4,107,000 4,176,000 978,000 1,374,000
Selling and
marketing............ 369,000 1,323,000 5,197,000 842,000 1,974,000
General and
administrative....... 445,000 920,000 1,543,000 267,000 500,000
----------- ----------- ------------ ----------- -----------
Total operating
expenses........... 2,537,000 6,350,000 10,916,000 2,087,000 3,848,000
----------- ----------- ------------ ----------- -----------
Loss from operations.... (2,537,000) (6,250,000) (8,346,000) (1,825,000) (3,026,000)
Interest and other
income, net............ 64,000 100,000 128,000 22,000 20,000
Interest expense........ (27,000) (80,000) (239,000) (58,000) (46,000)
----------- ----------- ------------ ----------- -----------
Net loss................ (2,500,000) (6,230,000) (8,457,000) (1,861,000) (3,052,000)
Accretion of mandatorily
redeemable convertible
preferred stock........ (507,000) (1,057,000) (1,814,000) (289,000) (632,000)
----------- ----------- ------------ ----------- -----------
Net loss attributable to
common stock........... $(3,007,000) $(7,287,000) $(10,271,000) $(2,150,000) $(3,684,000)
=========== =========== ============ =========== ===========
Net loss attributable to
common stock per
share.................. $ (1.57) $ (3.40) $ (3.77) (0.83) (1.27)
=========== =========== ============ =========== ===========
Shares used to compute
net loss attributable
to common stock per
share.................. 1,912,000 2,141,000 2,723,000 2,584,000 2,895,000
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
WHITETREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ACCRETION OF
COMMON STOCK PREFERRED STOCK
------------------- REDEMPTION ACCUMULATED
SHARES AMOUNT VALUE DEFICIT TOTAL
--------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1993................... 958,033 $ 1,000 $ -- $ (104,000) $ (103,000)
Accretion of preferred
stock redemption
value.................. -- -- (507,000) -- (507,000)
Issuance of common stock
for cash............... 1,113,058 51,000 -- -- 51,000
Net loss................ -- -- -- (2,500,000) (2,500,000)
--------- -------- ----------- ------------ ------------
Balance at September 30,
1994................... 2,071,091 52,000 (507,000) (2,604,000) (3,059,000)
Accretion of preferred
stock redemption
value.................. -- -- (1,057,000) -- (1,057,000)
Issuance of common stock
pursuant to exercise of
options................ 308,500 26,000 -- -- 26,000
Issuance of common stock
for services........... 41,716 6,000 -- -- 6,000
Net loss................ -- -- -- (6,230,000) (6,230,000)
--------- -------- ----------- ------------ ------------
Balance at September 30,
1995................... 2,421,307 84,000 (1,564,000) (8,834,000) (10,314,000)
Accretion of preferred
stock redemption
value.................. -- -- (1,814,000) -- (1,814,000)
Issuance of common stock
pursuant to exercise of
stock options.......... 474,510 82,000 -- -- 82,000
Issuance of common stock
for services........... 27,009 19,000 -- -- 19,000
Purchase of shares
pursuant to repurchase
agreement (Note 5)..... (20,000) (4,000) -- -- (4,000)
Net loss................ -- -- -- (8,457,000) (8,457,000)
--------- -------- ----------- ------------ ------------
Balance at September 30,
1996................... 2,902,826 181,000 (3,378,000) (17,291,000) (20,488,000)
Accretion of preferred
stock redemption value
(unaudited)............ -- -- (632,000) -- (632,000)
Issuance of common stock
pursuant to exercise of
stock options
(unaudited)............ 83 -- -- -- --
Issuance of common stock
for services
(unaudited)............ 2,930 4,000 -- -- 4,000
Purchase of shares
pursuant to repurchase
agreement (unaudited)
(Note 9)............... (24,210) (3,000) -- -- (3,000)
Net loss (unaudited).... -- -- -- (3,052,000) (3,052,000)
--------- -------- ----------- ------------ ------------
Balance at December 31,
1996 (unaudited)....... 2,881,629 $182,000 $(4,010,000) $(20,343,000) $(24,171,000)
========= ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
WHITETREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------- ------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(2,500,000) $(6,230,000) $(8,457,000) $(1,861,000) $(3,052,000)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 110,000 331,000 866,000 123,000 360,000
Loss on disposal of
property and
equipment.......... -- -- -- -- 153,000
Common stock issued
for services....... -- 6,000 19,000 10,000 4,000
Warrants issued in
connection with
notes payable...... -- -- 90,000 -- --
Changes in assets
and liabilities:
Accounts
receivable....... -- (113,000) (88,000) (152,000) 17,000
Receivable from
related party.... -- (69,000) (3,025,000) (381,000) 1,608,000
Other receivable.. -- -- (665,000) -- 272,000
Inventories....... -- (988,000) (2,067,000) (555,000) 680,000
Prepaid expenses
and other
assets........... (60,000) (57,000) (265,000) (83,000) 93,000
Accounts payable.. 79,000 773,000 2,208,000 (20,000) (1,798,000)
Accrued expenses.. 98,000 278,000 591,000 421,000 506,000
Accrued warranty.. -- -- 1,009,000 68,000 60,000
Deferred revenue.. -- 321,000 370,000 (176,000) (283,000)
Deferred rent..... -- -- 136,000 -- 14,000
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities..... (2,273,000) (5,748,000) (9,278,000) (2,606,000) (1,366,000)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchase of short-term
investments.......... -- (787,000) -- -- --
Proceeds from sale of
short-term
investments.......... -- -- 787,000 365,000 --
Proceeds from the sale
of property and
equipment............ -- -- -- -- 27,000
Purchase of property
and equipment........ (18,000) (129,000) (1,134,000) (99,000) (250,000)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities..... (18,000) (916,000) (347,000) 266,000 (223,000)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Principal payments on
capitalized lease
obligations.......... (67,000) (263,000) (519,000) (109,000) (132,000)
Proceeds from issuance
of notes payable..... -- -- 3,270,000 2,000,000 --
Proceeds from issuance
of mandatorily
redeemable
convertible preferred
stock................ 5,005,000 5,000,000 8,678,000 -- --
Proceeds from issuance
of common stock, net
of repurchases....... 51,000 26,000 78,000 48,000 (3,000)
----------- ----------- ----------- ----------- -----------
Net cash
provided by
financing
activities..... 4,989,000 4,763,000 11,507,000 1,939,000 (135,000)
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 2,698,000 (1,901,000) 1,882,000 (401,000) (1,724,000)
Cash and cash
equivalents at
beginning of period.... 24,000 2,722,000 821,000 821,000 2,703,000
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 2,722,000 $ 821,000 $ 2,703,000 $ 420,000 $ 979,000
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 27,000 $ 77,000 $ 115,000 $ 58,000 $ 26,000
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES:
Acquisition of
property and
equipment under
capitalized leases... $ 617,000 $ 606,000 $ 668,000 $ 133,000 $ 1,003,000
Accretion of preferred
stock redemption
value................ $ 507,000 $ 1,057,000 $ 1,814,000 $ 289,000 $ 632,000
Conversion of notes
payable into
preferred stock...... $ 60,000 $ -- $ 3,270,000 $ -- $ --
Warrant to purchase
Series C preferred
stock issued in
connection with notes
payable.............. $ -- $ -- $ 90,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Whitetree, Inc. (hereinafter referred to in these Notes to the Consolidated
Financial Statements of Whitetree as the "Company") develops and markets high
value, cost-effective desktop local area network products based on
Asynchronous Transfer Mode ("ATM") and Ethernet technologies. The Company was
incorporated in California in May 1993. In May 1996, the Company incorporated
a foreign subsidiary, Whitetree International, Inc. There was no activity in
the foreign subsidiary during 1996.
The Company has incurred losses during the period from inception (May 18,
1993) through September 30, 1996. The Company has been pursuing additional
capital, and in January 1997 secured a line of credit with a bank providing
for borrowings of up to $3,000,000 (see Note 9). Management believes that
existing capital resources will be sufficient to fund its cash needs through
fiscal 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All material intercompany accounts and
transactions have been eliminated.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet at December 31, 1996 and the statements of
operations and cash flows for the three months ended December 31, 1995 and
1996 and the statement of shareholders' deficit for the three months ended
December 31, 1996 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the results at such date
and for such periods. The data disclosed in these Notes to the Financial
Statements for these periods is unaudited.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents, and investments with original
maturity dates greater than three months to be short-term investments. At
September 30, 1995, the Company maintained certificates of deposit, totaling
$787,000, as collateral for short-term letters of credit which the Company
entered into with a major supplier. This requirement did not exist at
September 30, 1996.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivables which are generally not
collateralized. The Company limits its exposure to credit loss by placing its
cash, cash equivalents and short-term investments under professional
management. With respect to accounts receivable, the Company performs ongoing
credit evaluations of its customers' financial condition and maintains an
allowance for doubtful accounts based upon the expected collectibility of
total accounts receivable. To date, the Company has not experienced
F-25
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
material losses resulting from uncollected receivables. Two customers, both
related parties, accounted for 76% and 16%, respectively, of total accounts
receivable at September 30, 1996. Three customers accounted for 38%, 18% and
11%, respectively, of total accounts receivable at September 30, 1995. Three
customers accounted for 52%, 17% and 13%, respectively, of total accounts
receivable at December 31, 1996.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally 3 years. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the remaining lease term. The cost of
equipment acquired under capital leases is amortized over its useful life.
Repair and maintenance costs are charged to expense as incurred.
REVENUE RECOGNITION
Revenue from product sales is recognized upon product shipment provided no
significant obligations remain and collectibility is probable. The Company
provides to certain resellers limited rights of return and price protection on
unsold inventory when specific conditions exist. Reserves for estimated
warranty repairs, product returns and retroactive price adjustments are
recorded when the product is shipped. Such reserves are estimated based on
historical rates of returns and allowances, distributor inventory levels and
other related factors. Additionally, the Company, in certain circumstances,
requires prepayment of a percentage of the sales value upon placement of a
sales order. Such prepayments are recorded as deferred revenue and recognized
upon shipment.
Export sales to Europe and Asia are generally transacted in U.S. dollars and
represented 68% and 25%, respectively, of sales in fiscal 1996 and 40% and
25%, respectively, of sales in fiscal 1995. During the three months ended
December 31, 1996, export sales to Europe and Asia represented 68% and 28%,
respectively, of sales in that period. During the three months ended December
31, 1995, export sales to Europe and Asia represented 51% and 39%,
respectively, of sales in that period. During fiscal 1996, two related party
customers accounted for 67% and 23%, respectively, of the Company's sales.
During fiscal 1995, two related party customers accounted for 48% and 25%,
respectively, of the Company's sales.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating loss and research and development credit carryforwards. A valuation
allowance is provided against deferred tax assets unless it is more likely
than not that they will be realized, either through the generation of future
taxable income or through carryback potential.
NET LOSS ATTRIBUTABLE TO COMMON STOCK PER SHARE
Net loss per share is computed based on the weighted average number of
common shares outstanding during the period and the net loss attributable to
Common Shareholders, including the accretion of preferred stock redemption
value.
F-26
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash, trade
accounts receivable, receivables from related parties and accounts payable,
the carrying amounts approximate fair value due to the relatively short
maturity of these instruments. The carrying amount of capital lease
obligations approximates fair value based on rates available to the Company
for similar maturities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Adoption of SFAS 121 is not expected to
have a material impact on the Company's financial position or results of
operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), which
establishes a fair value method of accounting for stock based compensation
plans, and requires additional disclosures for those companies who elect not
to adopt the new method of accounting. The Company is required to adopt SFAS
123 in fiscal 1997. The Company has elected to continue to measure
compensation costs using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees and to comply with the pro
forma disclosure requirements of SFAS 123.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- DECEMBER 31,
1995 1996 1996
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Raw materials...................... $ 642,000 $ 647,000 $ 917,000
Work-in-process.................... 222,000 227,000 215,000
Finished goods..................... 124,000 2,181,000 1,243,000
---------- ----------- -----------
$ 988,000 $ 3,055,000 $ 2,375,000
========== =========== ===========
Property and equipment:
Purchased software................. $ 465,000 $ 562,000 $ 637,000
Computer equipment and machinery... 814,000 1,967,000 2,060,000
Furniture and fixtures............. 91,000 394,000 536,000
Leasehold improvements -- 249,000 949,000
---------- ----------- -----------
1,370,000 3,172,000 4,182,000
Less: accumulated depreciation and
amortization........................ (441,000) (1,307,000) (1,604,000)
---------- ----------- -----------
$ 929,000 $ 1,865,000 $ 2,578,000
========== =========== ===========
</TABLE>
F-27
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--LEASE COMMITMENTS:
Substantially all of the Company's property and equipment have been acquired
under capital leases, with lease terms ranging from 29 months to 42 months.
The lease agreements require the Company to pay sales taxes, property taxes,
insurance and maintenance costs.
The Company leases its facility under a non-cancelable operating lease which
expires in 2002 and requires payment of property taxes, insurance, maintenance
and utilities. Rent expense was $84,000, $94,000 and $405,000 for the years
ended September 30, 1994, 1995 and 1996, respectively. Rent expense was
$51,000 and $77,000 for the three months ended December 31, 1995 and 1996,
respectively.
Future minimum lease payments under noncancelable leases at September 30,
1996 were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Fiscal year:
1997............................................... $ 603,000 $ 571,000
1998............................................... 440,000 531,000
1999............................................... 91,000 554,000
2000............................................... -- 577,000
2001............................................... -- 601,000
Thereafter......................................... -- 697,000
---------- ----------
Total minimum lease payments....................... 1,134,000 $3,531,000
==========
Less: amount representing interest................. (92,000)
----------
Present value of capitalized lease obligations..... 1,042,000
Less: current portion.............................. (538,000)
----------
Long-term portion of capitalized lease
obligations....................................... $ 504,000
==========
</TABLE>
F-28
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 11,100,000 shares of $0.001 par value preferred stock, of which
5,500,000, 3,000,000, 1,600,000 and 1,000,000 shares are designated Series A,
B, C and D, respectively. The following table sets forth the activity with
respect to the Company's preferred stock.
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
Balance at September 30, 1993 (deposit for 1994 stock
issuance)........................................... -- $ 74,000
Issuance of Series A preferred stock for cash...... 5,005,000 5,005,000
Issuance of Series A preferred stock upon
conversion of notes payable....................... 60,000 60,000
Accretion of preferred stock redemption value...... -- 507,000
---------- -----------
Balance at September 30, 1994........................ 5,065,000 5,646,000
Issuance of Series B preferred stock for cash...... 2,857,144 5,000,000
Accretion of preferred stock redemption value...... -- 1,057,000
---------- -----------
Balance at September 30, 1995........................ 7,922,144 11,703,000
Issuance of Series B preferred stock for cash...... 10,014 18,000
Issuance of Series C preferred stock for cash...... 523,125 1,820,000
Issuance of Series C preferred stock upon
conversion of notes payable....................... 939,653 3,270,000
Issuance of Series D preferred stock for cash...... 890,665 6,840,000
Accretion of preferred stock redemption value...... -- 1,814,000
Warrants to purchase Series C preferred stock
issued in connection with notes payables.......... -- 90,000
---------- -----------
Balance at September 30, 1996........................ 10,285,601 25,555,000
Accretion of preferred stock redemption value
(unaudited)....................................... -- 632,000
---------- -----------
Balance at December 31, 1996 (unaudited)............. 10,285,601 $26,187,000
========== ===========
</TABLE>
The rights with respect to the Series A, B, C and D preferred stock are as
follows:
REDEMPTION
At the option of shareholders of Series A, B, C and D preferred stock, the
Company must redeem up to one-third, one-third and all, on September 30, 1998,
1999, and 2000, respectively, of the then outstanding shares of Series A
preferred stock at $1.61, $1.77, and $1.95 per share, respectively, of Series
B preferred stock at $2.60, $2.82, and $3.10 per share, respectively, of
Series C preferred stock at $4.76, $5.17 and $5.61 per share, respectively,
and of Series D preferred stock at $9.25, $10.36 and $11.60 per share,
respectively, plus any declared but unpaid dividends.
VOTING
Each share of Series A, B, C and D preferred stock has voting rights equal
to an equivalent number of shares of common stock into which it is convertible
and votes together as one class with the common stock subject to certain
restrictions and limitations.
F-29
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED):
DIVIDENDS
Holders of Series A, B, C and D preferred stock are entitled to receive
noncumulative dividends at the per annum rate of $0.07, $0.12, $0.24 and $0.54
per share, respectively, together with dividends at the same rate as dividends
paid with respect to the Company's outstanding common stock when and if
declared by the Board of Directors. The Company shall make no distribution to
holders of common stock until Series A, B, C and D dividends have been paid.
No dividends were declared by the Board through December 31, 1996.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a consolidation or merger of the Company where the beneficial owners
of the Company's common stock and preferred stock own less than 51% of the
resulting voting power of the surviving entity, the Series A, B, C and D
preferred stock shareholders are entitled to receive an amount of $1.00,
$1.75, $3.48 and $7.68 per share, respectively, plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
common stock. The remaining assets, if any, shall be distributed ratably among
the holders of the common stock and Series A, B, C and D preferred stock,
based on the number of shares held (assuming conversion of the Series A, B, C
and D). Notwithstanding the foregoing, if the funds available for distribution
upon the liquidation, dissolution or winding up of the Company would result in
each holder of the Company's preferred stock receiving at least $3.00 per
share, then the holders of the Company's common stock and preferred stock
shall share ratably in all distributions made in connection with such event;
provided that if such distributions would result in (i) the holders of Series
C preferred stock receiving less than $3.48 per share then such Series C
holders shall be entitled to receive $3.48 per share and (ii) the holders of
Series D preferred stock receiving less than $7.68 per share, then such Series
D holders shall be entitled to receive $7.68 per share.
CONVERSION
Each share of Series A, B, C and D preferred stock is convertible, at the
option of the holder, into one share of common stock, subject to adjustment
for dilution. Each share of Series A, B, C and D preferred stock automatically
converts into the number of shares of common stock into which such shares are
convertible at the then effective conversion price upon the closing of a
public offering of common stock at a per share price of at least $7.68 per
share with gross proceeds of at least $7,500,000, or upon the vote of the
holders of two-thirds of the then outstanding shares of preferred stock. At
September 30, 1996, the Company reserved 5,195,320, 2,894,586, 1,548,986 and
897,556 shares of common stock for the conversion of Series A, B, C and D
preferred stock, respectively. Additionally, the Company reserved 130,320,
27,428, 86,208 and 6,891 shares of Series A, B, C, and D preferred stock,
respectively, for the exercise of certain warrants (see Note 5 "Common Stock
and Warrants").
NOTE 5--COMMON STOCK AND WARRANTS:
During fiscal year 1994, 1995 and 1996 and the three months ended December
31, 1996, the Company sold 1,113,058, 308,500, 474,510 and 83 shares,
respectively, of common stock to certain employees. The shares sold are
subject to a right of repurchase by the Company subject to vesting, which is
generally over a 4 year period from date of purchase or grant date, as
applicable, until vesting is complete. At December 31, 1996, there were
688,292 shares unvested and therefore subject to repurchase.
In connection with certain capital leases, the Company issued warrants to
lessors. In January 1994, warrants were issued to purchase 130,320 shares of
Series A preferred stock at $1.00 per share and in February 1995,
F-30
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--COMMON STOCK AND WARRANTS (CONTINUED):
warrants were issued to purchase 27,428 shares of Series B preferred stock at
$1.75 per share. Additionally, in April 1996, warrants were issued to purchase
6,891 shares of Series D preferred stock at $7.68 per share. The value of the
warrants was determined to be nominal on the date of grant. The warrants are
exercisable at any time prior to their expiration in 2005 and 2006,
respectively. No warrants had been exercised at December 31, 1996.
During October 1995 and January 1996, the Company issued warrants to purchase
86,208 shares of the Company's Series C preferred stock with an exercise price
of $3.48 per share. The Company recognized interest expense of $90,000 in
fiscal 1996, representing the estimated fair value of these warrants. These
warrants are exercisable at any time prior to their expiration in 1999 and
2000. No warrants had been exercised at December 31, 1996.
F-31
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCK OPTIONS:
In October 1993, the Board of Directors and shareholders adopted the 1993
Stock Option Plan (the "Plan") which provides for granting up to 1,858,009
incentive stock options ("ISOs") and nonqualified stock options ("NSOs") for
shares of common stock to employees and consultants of the Company. In
accordance with the Plan, the stated exercise price shall not be less than
100% and 85% of the estimated fair market value of common stock on the date of
grant for ISOs and NSOs, respectively, as determined by the Board of Directors
in reliance on independent valuation, as applicable. The Plan provides that
the options shall be exercisable over a period not to exceed ten years.
Options generally vest ratably over four years from the date of grant.
A summary of the Plan's activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS ------------------------
AVAILABLE PRICE
FOR GRANT SHARES PER SHARE
---------- --------- -------------
<S> <C> <C> <C>
Balance at September 30, 1993......... 1,858,009 -- --
Options granted...................... (905,360) 905,360 $0.10
Options exercised.................... -- (509,100) $0.10
Options canceled..................... -- --
---------- ---------
Balance at September 30, 1994......... 952,649 396,260 $0.10
Options granted...................... (491,000) 491,000 $0.10 -$0.175
Options exercised.................... -- (308,500) $0.10 -$0.175
Options canceled..................... 25,000 (25,000)
---------- ---------
Balance at September 30, 1995......... 486,649 553,760 $0.10 -$0.175
Additional shares authorized 1,000,000 --
Options granted...................... (1,037,050) 1,037,050 $0.175-$1.40
Options exercised.................... -- (454,510) $0.10 -$1.40
Options canceled..................... 56,250 (56,250) $0.175-$0.70
---------- ---------
Balance at September 30, 1996......... 505,849 1,080,050 $0.10 -$1.40
Options granted (unaudited).......... (225,500) 225,500 $1.40
Options exercised (unaudited)........ -- (83) $1.40
Options canceled (unaudited)......... 31,626 (7,417) $0.10 -$0.175
---------- ---------
Balance at December 31, 1996
(unaudited).......................... 311,975 1,298,000 $0.10 -$1.40
========== =========
Vested at December 31, 1996--134,823.
</TABLE>
At December 31, 1996, there were 688,292 shares purchased under the Plan and
subject to repurchase by the Company (see Note 5).
F-32
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES:
Because the Company has incurred net operating losses since inception, no
current tax provision has been recorded. Deferred tax assets, for which a full
valuation allowance has been provided due to the uncertainty of realization
based on currently available information, comprise the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $ 2,100,000 $ 5,000,000
Research and development credits................... 350,000 500,000
Other.............................................. 500,000 1,000,000
----------- -----------
Total deferred tax assets.......................... 2,950,000 6,500,000
Valuation allowance................................ (2,950,000) (6,500,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At September 30, 1996, the Company had approximately $14,000,000 and
$5,000,000 of net operating loss carryforwards for federal and California tax
reporting purposes, respectively, available to offset future taxable income;
such carryforwards expire through 2010.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses that can be carried forward may be impaired or limited in
certain circumstances. Events which may cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative stock ownership change of more than 50% over a
three year period. The Company incurred such a change in October 1993. The
value of the Company was sufficient not to impair the availability of the net
operating loss carryforwards. During 1996, the Company experienced additional
stock ownership changes which could limit the utilization of its net operating
loss and research and development carryforwards in future periods.
NOTE 8--RELATED PARTY TRANSACTIONS:
In December 1994, the Company entered into a development and resale OEM
agreement with a shareholder, under which the Company and the shareholder will
coordinate the development of new products. In connection with the agreement,
this shareholder was granted an option to purchase 468,439 shares of Series C
preferred stock at $3.48 per share. In January 1996, the Company sold 362,300
shares of Series C preferred stock to this shareholder at $3.48 per share upon
a partial exercise of the option. This shareholder purchased an additional
106,139 shares of Series C preferred stock at $3.48 per share in May and June
1996.
In June 1995, the Company entered into a resale agreement with a different
shareholder, under which the shareholder will market and distribute the
Company's products. Pursuant to this agreement, the shareholder maintains
standard price protection and warranty.
F-33
<PAGE>
WHITETREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
NOTE 9--SUBSEQUENT EVENTS:
LINE OF CREDIT
In January 1997, the Company secured a revolving line of credit with a bank,
which provides for borrowings of up to $3,000,000. Borrowings of up to
$2,500,000 are based on 80% of eligible accounts receivable plus a $500,000
nonformula sublimit. Borrowings under the line of credit bear interest at the
bank's prime rate plus 1% and are secured by all of the Company's assets. The
line of credit expires in February 1998. The line-of-credit agreement requires
the Company to comply with certain financial covenants, including the
maintenance of specified minimum ratios.
MERGER WITH ASCEND COMMUNICATIONS, INC. (UNAUDITED)
On February 14, 1997, the Company entered into an Agreement and Plan of
Merger with Ascend Communications, Inc. ("Ascend"). Upon the effectiveness of
the Agreement, the Company's shareholders will exchange all of their shares of
common and preferred stock for shares of common stock of Ascend on a business
combination to be accounted for as a pooling of interests.
F-34
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ASCEND COMMUNICATIONS, INC.,
A DELAWARE CORPORATION,
ASCEND ACQUISITION CORPORATION II,
A DELAWARE CORPORATION AND A WHOLLY-OWNED
SUBSIDIARY OF ASCEND COMMUNICATIONS, INC.,
AND
WHITETREE, INC.,
A CALIFORNIA CORPORATION
DATED AS OF FEBRUARY 14, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I THE MERGER............................................. A-1
Section 1.1 The Merger............................................. A-1
Section 1.2 Closing; Effective Time of the Merger.................. A-1
Section 1.3 Effects of Merger...................................... A-2
Section 1.4 Directors and Officers................................. A-2
ARTICLE II CONVERSION OF SECURITIES............................... A-2
Section 2.1 Conversion of Capital Stock............................ A-2
Section 2.2 Exchange of Certificates............................... A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF WHITETREE............ A-6
Organization, Standing and Power; Qualification;
Section 3.1 Subsidiaries........................................... A-6
Organization, Standing and Power and Qualification of
Section 3.2 the Whitetree Subsidiaries............................. A-7
Section 3.3 Whitetree Capital Structure............................ A-7
Section 3.4 Authority.............................................. A-8
Section 3.5 Financial Statements................................... A-9
Section 3.6 Absence of Undisclosed Liabilities..................... A-9
Section 3.7 Accounts Receivable.................................... A-9
Section 3.8 Inventory.............................................. A-9
Section 3.9 Absence of Certain Changes or Events................... A-9
Section 3.10 Taxes.................................................. A-10
Section 3.11 Tangible Assets and Real Property...................... A-11
Section 3.12 Intellectual Property.................................. A-12
Section 3.13 Bank Accounts.......................................... A-13
Section 3.14 Contracts.............................................. A-13
Section 3.15 Employees and Consultants.............................. A-14
Section 3.16 Labor Difficulties..................................... A-14
Section 3.17 Trade Regulation....................................... A-14
Section 3.18 Environmental Matters.................................. A-14
Section 3.19 Employee Benefit Plans................................. A-15
Section 3.20 Compliance with Laws................................... A-16
Section 3.21 Litigation............................................. A-16
Section 3.22 Indemnification Claims................................. A-16
Section 3.23 Restrictions on Business Activities.................... A-17
Section 3.24 Governmental Authorization............................. A-17
Section 3.25 Insurance.............................................. A-17
Section 3.26 Payments Resulting from Mergers........................ A-17
Section 3.27 Pooling of Interests................................... A-17
Section 3.28 Power of Attorney...................................... A-17
Section 3.29 Certain Documents...................................... A-17
Section 3.30 No Misrepresentation................................... A-18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ASCEND AND SUB....... A-18
Section 4.1 Organization........................................... A-18
Section 4.2 Ascend Capital Structure............................... A-18
Section 4.3 Authority; No Conflict; Required Filings and Consents.. A-19
Section 4.4 SEC Filings; Financial Statements...................... A-19
Section 4.5 Absence of Undisclosed Liabilities..................... A-20
Section 4.6 Absence of Certain Changes or Events................... A-20
Section 4.7 Interim Operations of Sub.............................. A-20
Section 4.8 Pooling of Interests................................... A-20
Section 4.9 Litigation............................................. A-20
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE V CONDUCT OF BUSINESS.................................... A-21
Section 5.1 Covenants of Whitetree................................. A-21
Section 5.2 Cooperation............................................ A-22
ARTICLE VI ADDITIONAL AGREEMENTS.................................. A-23
Section 6.1 No Solicitation........................................ A-23
Section 6.2 Registration Statement; Information Statement.......... A-23
Section 6.3 Governmental Filings................................... A-24
Section 6.4 Consents............................................... A-24
Section 6.5 Access to Information.................................. A-24
Section 6.6 Legal Conditions to Merger............................. A-24
Section 6.7 Tax-Free Reorganization................................ A-25
Section 6.8 Pooling Accounting..................................... A-25
Section 6.9 Affiliate Agreements................................... A-25
Section 6.10 Stock Options.......................................... A-25
Section 6.11 Registration........................................... A-26
Section 6.12 Expenses............................................... A-26
Section 6.13 Brokers or Finders..................................... A-26
Section 6.14 Employee Arrangements.................................. A-26
Section 6.15 Voting Agreements...................................... A-27
Section 6.16 Indemnification and Insurance.......................... A-27
Section 6.17 Additional Agreements; Reasonable Efforts.............. A-27
Section 6.18 Notification of Certain Matters........................ A-28
ARTICLE VII CONDITIONS TO MERGER................................... A-28
Conditions to Each Party's Obligation to Effect the
Section 7.1 Merger................................................. A-28
Additional Conditions to Obligations of Ascend and
Section 7.2 Sub.................................................... A-29
Section 7.3 Additional Conditions to Obligations of Whitetree...... A-30
ARTICLE VIII TERMINATION AND AMENDMENT.............................. A-30
Section 8.1 Termination............................................ A-30
Section 8.2 Effect of Termination.................................. A-30
Section 8.3 Amendment.............................................. A-31
Section 8.4 Extension; Waiver...................................... A-31
ARTICLE IX ESCROW AND INDEMNIFICATION............................. A-31
Section 9.1 Survival of Representations and Warranties............. A-31
Section 9.2 Escrow Arrangements.................................... A-31
ARTICLE X CONFIDENTIALITY AND NON-DISCLOSURE..................... A-35
Section 10.1 Evaluation Material.................................... A-35
Section 10.2 Use of Evaluation Material............................. A-35
Section 10.3 Mandatory Disclosure................................... A-35
Section 10.4 Return of Evaluation Material.......................... A-36
Section 10.5 No Public Announcement................................. A-36
Section 10.6 Injunctive Relief...................................... A-36
ARTICLE XI GENERAL PROVISIONS..................................... A-36
Section 11.1 Notices................................................ A-36
Section 11.2 Interpretation......................................... A-37
Section 11.3 Counterparts........................................... A-38
Section 11.4 Severability........................................... A-38
Nonsurvival of Representations, Warranties and
Section 11.5 Agreements............................................. A-38
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 11.6 Entire Agreement....................................... A-38
Section 11.7 Governing Law.......................................... A-38
Section 11.8 Assignment............................................. A-38
Section 11.9 Third Party Beneficiary................................ A-38
Exhibits
Exhibit A Due Diligence Request List
Exhibit B Form of Pooling Agreement
Exhibit C Form of Affiliate Agreement
Exhibit D Form of Voting Agreement and Irrevocable Proxy
Form of Confidentiality and Inventions Assignment
Exhibit E Agreement
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of February 14,
1997, by and among Ascend Communications, Inc., a Delaware corporation
("Ascend"), Ascend Acquisition Corporation II, a Delaware corporation and a
wholly-owned subsidiary of Ascend ("Sub"), and Whitetree, Inc., a California
corporation ("Whitetree").
WHEREAS, the Boards of Directors of Ascend, Sub and Whitetree (i) deem it
advisable and in the best interests of each corporation and its respective
stockholders and shareholders that Ascend and Whitetree combine in order to
advance the long-term business interests of Ascend and Whitetree, and (ii)
have approved this Agreement, the Merger (as defined in Section 1.1) and the
other transactions contemplated by this Agreement;
WHEREAS, the combination of Ascend and Whitetree shall be effected by the
terms of this Agreement through a transaction in which Sub will merge with and
into Whitetree, Whitetree will become a wholly-owned subsidiary of Ascend and
the Whitetree shareholders will become stockholders of Ascend;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Subject to the provisions of this Agreement and in
accordance with the California General Corporation Law (the "CGCL") and the
Delaware General Corporation Law (the "DGCL"), Sub shall be merged with and
into Whitetree (the "Merger"). As a result of the Merger, the outstanding
shares of capital stock of Sub and Whitetree shall be converted or cancelled
in the manner provided in Article II of this Agreement; the separate corporate
existence of Sub shall cease; and Whitetree shall be the surviving corporation
in the Merger and shall become a subsidiary of Ascend.
Section 1.2 Closing; Effective Time of the Merger. The closing of the Merger
(the "Closing") will take place at 10:00 a.m., California time, on a date to
be specified by Ascend and Whitetree (the "Closing Date"), which shall be no
later than the second business day after satisfaction (or waiver in accordance
with Section 8.4) of all conditions set forth in Article VII, at the offices
of Gray Cary Ware & Freidenrich, A Professional Corporation, 400 Hamilton
Avenue, Palo Alto, CA 94301, unless another date or place is agreed to in
writing by Ascend and Whitetree. It is the intent of the parties that the
Closing occur, and the Merger become effective, on or before April 1, 1997, or
as promptly as practicable thereafter. Subject to the provisions of this
Agreement, (i) an agreement of merger (the "California Agreement of Merger")
shall be duly prepared, executed and acknowledged by Sub and by Whitetree as
the Surviving Corporation (as defined in Section 1.3(a)) and simultaneously
with or as soon as practicable following the Closing delivered to the
Secretary of State of the State of California (the "California Secretary of
State") for filing, along with certificates of the officers of the Constituent
Corporations (as defined in Section 1.3(a)) ("Officers' Certificates"), and
(ii) a certificate of merger (the "Delaware Certificate of Merger") shall be
duly prepared, executed and acknowledged by Whitetree and simultaneously with
or as soon as practicable following the Closing delivered to the Secretary of
State of the State of Delaware (the "Delaware Secretary of State") for filing.
The Merger shall become effective upon the latest of: (a) the date and time of
the filing of the California Agreement of Merger and the Officers'
Certificates
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with the California Secretary of State, (b) the date and time of the filing of
the Delaware Certificate of Merger with the Delaware Secretary of State or (c)
such other date and time as is provided in the California Agreement of Merger
(the "Effective Time").
Section 1.3 Effects of Merger.
(a) At the Effective Time: (i) the separate existence of Sub shall cease and
Sub shall be merged with and into Whitetree (Sub and Whitetree are sometimes
referred to collectively herein as the "Constituent Corporations" and
Whitetree is sometimes referred to herein as the "Surviving Corporation");
(ii) the Amended and Restated Articles of Incorporation and Bylaws of
Whitetree as in effect immediately prior to the Effective Time shall be the
Articles of Incorporation and Bylaws of the Surviving Corporation until
amended in accordance with the terms thereof and in accordance with applicable
law.
(b) The Merger shall have the effects set forth in this Agreement and in the
CGCL and the DGCL. Without limiting the generality of the foregoing, from and
after the Effective Time, the Surviving Corporation shall possess all the
rights, privileges, powers and franchises of a public as well as of a private
nature, and be subject to all the restrictions, disabilities and duties of
each of the Constituent Corporations; and all and singular rights, privileges,
powers and franchises of each of the Constituent Corporations, and all
property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation, and
all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of the Constituent Corporations, and the
title to any real estate vested by deed or otherwise, in either of the
Constituent Corporations, shall not revert or be in any way impaired; but all
rights of creditors and all liens upon any property of either of the
Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall thereafter attach
to the Surviving Corporation, and may be enforced against it to the same
extent as if such debts and liabilities had been incurred by it.
Section 1.4 Directors and Officers. The directors and officers of Sub
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, and shall hold office in accordance
with the Articles of Incorporation and Bylaws of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 Conversion of Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the Constituent Corporations
or any holder of any shares of Whitetree Capital Stock (as defined in Section
2.1(c)(ii)) or capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock of the Surviving Corporation.
(b) Cancellation of Ascend-Owned Stock. All shares of Whitetree Capital
Stock that are owned by Ascend, Sub or any other wholly-owned Subsidiary
(as defined in Section 11.2) of Ascend shall be cancelled and retired and
shall cease to exist and no stock of Ascend or other consideration shall be
delivered in exchange therefor.
(c) Whitetree Capital Stock; Escrow Amount. The shares of Whitetree
Capital Stock which either (i) are issued and outstanding at the Effective
Time or (ii) would be outstanding upon exercise of the Whitetree stock
options assumed pursuant to Section 2.1(d) (the "Whitetree Stock Options")
or upon conversion of Whitetree securities which are convertible into
Whitetree Capital Stock (including all
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Whitetree warrants, if any, which remain outstanding at the Effective Time)
(other than shares to be cancelled in accordance with Section 2.1(b)) shall
be converted, in the aggregate, into the right to receive (or options to
acquire, in the case of Whitetree Stock Options) the number of shares of
common stock, $0.001 par value, of Ascend ("Ascend Common Stock"), set
forth in Section 2.1(f) (the "Merger Consideration"). In no event shall the
total number of shares of Ascend Common Stock issued by Ascend to holders
of Whitetree Capital Stock, Whitetree Stock Options and Whitetree
convertible securities in the Merger and upon exercise of assumed Whitetree
Stock Options and conversion of Whitetree convertible securities exceed the
number provided by Section 2.1(f). Subject to the foregoing limitations,
each such issued and outstanding share of Whitetree Capital Stock shall be
converted into the consideration set forth below:
(i) Each share of Whitetree Series D Convertible Preferred Stock, par
value $0.001 per share (the "Whitetree Series D Preferred Stock"),
which is issued and outstanding as of the Effective Time (other than
shares to be cancelled in accordance with Section 2.1(b) and other than
Dissenting Shares (as defined in Section 2.1(h))) shall be converted
into the right to receive a fraction of a fully paid and non-assessable
share of Ascend Common Stock that is equal to the quotient of (A)
$7.68, divided by (B) the Ascend Average Stock Price as defined below
(the "Series D Conversion Number").
(ii) Each share of Whitetree Common Stock, par value $0.001 per share
("Whitetree Common Stock"), Whitetree Series A Convertible Preferred
Stock, par value $0.001 per share ("Whitetree Series A Preferred
Stock"), Whitetree Series B Convertible Preferred Stock, par value
$0.001 per share ("Whitetree Series B Preferred Stock"), and Whitetree
Series C Convertible Preferred Stock, par value $0.001 per share
("Whitetree Series C Preferred Stock") (collectively with the Whitetree
Series D Preferred Stock, "Whitetree Capital Stock"), which is issued
and outstanding as of the Effective Time (other than shares to be
cancelled in accordance with Section 2.1(b) and other than Dissenting
Shares) shall be converted into the right to receive a fraction of a
fully paid and non-assessable share of Ascend Common Stock that is
equal to the quotient of (A) the Merger Consideration, less the
aggregate number of shares of Ascend Common Stock issuable to holders
of Whitetree Series D Preferred Stock pursuant to the immediately
preceding clause (i), divided by (B) the sum of the aggregate number of
shares of Whitetree Common Stock, Whitetree Series A Preferred Stock,
Whitetree Series B Preferred Stock and Whitetree Series C Preferred
Stock which are issued and outstanding as of the Effective Time (other
than shares to be cancelled in accordance with Section 2.1(b)) and the
aggregate number of shares of Whitetree Common Stock which are issuable
upon exercise of the Whitetree Stock Options to be assumed by Ascend
pursuant to Sections 2.1(d) and 6.10 of this Agreement (the "Common
Conversion Number"). Solely for purposes of clauses (A) and (B) of this
Section 2.1(c)(ii), no shares of Whitetree Capital Stock shall be
deemed to be Dissenting Shares.
All such shares of Whitetree Capital Stock, when so converted, shall no
longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any
such shares shall cease to have any rights with respect thereto, except the
right to receive the shares of Ascend Common Stock upon the surrender of
such certificate in accordance with Section 2.2, without interest.
Notwithstanding anything herein to the contrary, five percent (5%) of the
shares comprising the Merger Consideration shall be segregated and deducted
therefrom and established as an Escrow Amount (the "Escrow Amount"). The
Escrow Amount shall be held in accordance with and subject to the
provisions of Article IX of this Agreement. The Escrow Amount shall be held
as collateral for the indemnification obligations of the persons who were
holders of Whitetree securities and options immediately prior to the
Effective Time under Article IX of this Agreement.
(d) Whitetree Stock Options. All then outstanding Whitetree Stock Options
shall be assumed by Ascend in accordance with Section 6.10.
(e) Warrant Conversion. Each warrant to acquire shares of Whitetree
Capital Stock (each an "Whitetree Warrant"), which is outstanding at the
Effective Time and which has not theretofore been exercised, shall be
treated as if such Whitetree Warrant had been exercised immediately prior
to the
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Effective Time pursuant to the net exercise provisions thereof, and shall
automatically be converted, without further action by Whitetree or the
holder thereof, into the right to receive that number of shares of Ascend
Common Stock into which the shares of Whitetree Capital Stock issuable
pursuant to the net exercise provisions of such Whitetree Warrant would be
converted pursuant to this Section 2.1.
(f) Merger Consideration; Adjustment of Merger Consideration. Subject to
the provisions of Section 2.1(g):
(i) If the Ascend Average Stock Price is equal to or greater than
$60.00 and equal to or less than $80.00, the Merger Consideration shall
be one million one hundred thousand (1,100,000) shares of Ascend Common
Stock.
(ii) If the Ascend Average Stock Price is greater than $80.00, the
Merger Consideration shall be adjusted so that it is equal to the
quotient of eighty-eight million dollars ($88,000,000) divided by the
Ascend Average Stock Price; provided, however, that if the Ascend
Average Stock Price is greater than $91.11 and Ascend does not agree to
fix the Merger Consideration at nine hundred seventy thousand (970,000)
shares of Ascend Common Stock, Whitetree shall have the right to
terminate this Agreement, and the provisions of Section 8.2 shall
apply.
(iii) If the Ascend Average Stock Price is less than $60.00, the
Merger Consideration shall be adjusted so that it is equal to the
quotient of sixty-six million dollars ($66,000,000) divided by the
Ascend Average Stock Price; provided; however, that if the Ascend
Average Stock Price is less than $48.89 and Whitetree does not agree to
fix the Merger Consideration at one million three hundred fifty
thousand (1,350,000) shares of Ascend Common Stock, Ascend shall have
the right to terminate this Agreement, and the provisions of Section
8.2 shall apply.
(iv) For the purposes of this Agreement the "Ascend Average Stock
Price" shall mean the average of the last sale price of Ascend Common
Stock as reported by the NASDAQ National Market for the five (5)
consecutive trading days ending on the last trading day immediately
preceding the Closing Date.
(g) Adjustments. If between the date of this Agreement and the Effective
Time, the outstanding shares of Ascend Common Stock or Whitetree Capital
Stock shall have been changed into a different number of shares or a
different class or series by reason of any reclassification,
recapitalization, split-up, stock dividend, stock combination, exchange of
shares, readjustment or otherwise, then the Series D Conversion Number and
the Common Conversion Number shall be correspondingly adjusted; provided,
however, that no adjustment shall be made unless such changes have been
made in compliance with the requirements of Section 5.1 or the requirements
thereof have been waived by Ascend.
(h) Dissenting Shares. Notwithstanding any provision of this Agreement to
the contrary, each outstanding share of Whitetree Capital Stock held by a
holder exercising dissenter's, appraisal or other similar rights
("Dissenter's Rights") with respect to such shares pursuant to Chapter 13
or other applicable provisions of the CGCL, who has not effectively
withdrawn or lost such rights (a "Dissenting Share"), shall not be
converted into or represent a right to receive shares of Ascend Common
Stock pursuant to this Article II, but the holder thereof shall be entitled
only to such rights as are granted by the applicable provisions of the
CGCL; provided, however, that each Dissenting Share held by a person at the
Effective Time who shall, after the Effective Time, lose such Dissenter's
Rights or withdraw such demand for appraisal or payment of fair market
value pursuant to the CGCL, shall be deemed to be converted, as of the
Effective Time, into the right to receive shares of Ascend Common Stock
pursuant to this Article II. Whitetree shall give Ascend (i) prompt notice
and copies of all notices of dissent, demands for appraisal or payment of
fair market value, withdrawals of demands for appraisal or payment of fair
market value, and other instruments received by Whitetree relating to the
exercise of Dissenter's Rights received by Whitetree and (ii) the
opportunity to direct all negotiations and proceedings with respect thereto
under the CGCL. Whitetree will not, except with the prior written consent
of Ascend, voluntarily make any payment with
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respect to any demands for appraisal or payment of fair market value and
will not, except with the prior written consent of Ascend, settle or offer
to settle any such demands.
Section 2.2 Exchange of Certificates. The procedures for exchanging
outstanding shares of Whitetree Capital Stock for Ascend Common Stock pursuant
to the Merger are as follows:
(a) Exchange Agent. As of the Effective Time, Ascend shall deposit with
an exchange agent designated by Ascend, reasonably acceptable to Whitetree
(the "Exchange Agent"), for the benefit of the holders of shares of
Whitetree Capital Stock, for exchange in accordance with Article II of this
Agreement, through the Exchange Agent, certificates representing the Merger
Consideration (such shares of Ascend Common Stock, together with any
dividends or distributions with respect thereto, being hereinafter referred
to as the "Exchange Fund") issuable pursuant to Article II of this
Agreement in exchange for outstanding shares of Whitetree Capital Stock.
The Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the Ascend Common Stock held by it from time to
time hereunder.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Whitetree Capital Stock (each a
"Certificate" and collectively, the "Certificates") whose shares were
converted pursuant to Article II of this Agreement into the right to
receive shares of Ascend Common Stock (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to
the Exchange Agent and shall be in such form and have such other provisions
as Ascend and Whitetree may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for
certificates representing whole shares of Ascend Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to
such other agent or agents reasonably acceptable to Whitetree as may be
appointed by Ascend, together with such letter of transmittal, duly
executed, and such other documents as may be reasonably required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive
in exchange therefor a certificate representing that number of whole shares
of Ascend Common Stock which such holder has the right to receive pursuant
to the provisions of Section 2.1 (with any fraction of a share rounded in
accordance with Section 2.2(e)), and the Certificate so surrendered shall
immediately be cancelled. In the event of a transfer of ownership of
Whitetree Capital Stock which is not registered in the transfer records of
Whitetree, a certificate representing the proper number of shares of Ascend
Common Stock may be issued to a transferee if the Certificate representing
such Whitetree Capital Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer
and by evidence that any applicable stock transfer taxes have been paid.
Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of
Ascend Common Stock as contemplated by this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Ascend Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the
shares of Ascend Common Stock represented thereby until the holder of
record of such Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the record holder of the certificates representing
whole shares of Ascend Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time previously
paid with respect to such shares of Ascend Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender and a
payment date subsequent to surrender payable with respect to such shares of
Ascend Common Stock.
(d) No Further Ownership Rights in Whitetree Capital Stock. All shares of
Ascend Common Stock issued upon the surrender for exchange of shares of
Whitetree Capital Stock in accordance with the terms hereof shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of
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Whitetree Capital Stock, subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distributions with a
record date prior to the Effective Time which may have been declared or
made by Whitetree on such shares of Whitetree Capital Stock in accordance
with the terms of this Agreement on or prior to the date hereof and which
remain unpaid at the Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Whitetree Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason,
they shall be cancelled and exchanged as provided in this Section 2.2.
(e) No Fractional Shares. No certificate or scrip representing fractional
shares of Ascend Common Stock shall be issued upon the surrender for
exchange of the Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of
Ascend. Notwithstanding any other provision of this Agreement, the number
of shares to be issued to each holder of shares of Whitetree Capital Stock
exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of Ascend Common Stock (after taking into
account all the Certificates delivered by such holder) shall be rounded up
to the nearest whole share.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the shareholders of Whitetree for one year after
the Effective Time shall be delivered to Ascend, upon demand, and any
former shareholders of Whitetree who have not previously complied with this
Section 2.2 shall thereafter look only to Ascend for payment of their claim
for Ascend Common Stock, and any dividends or distributions with respect to
Ascend Common Stock.
(g) No Liability. Neither the Exchange Agent, Ascend, Sub nor Whitetree
shall be liable to any holder of shares of Whitetree Capital Stock or
Ascend Common Stock, as the case may be, with respect to any shares of
Ascend Common Stock (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(h) Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue
in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of
Ascend Common Stock and any dividends or other distributions with respect
to Ascend Common Stock to which such holder is entitled.
(i) Transfer Taxes. No transfer taxes shall be payable by any shareholder
of Whitetree in respect of the issuance of the Ascend Common Stock under
this Section 2.2, except that if any Ascend Common Stock is to be issued in
a name other than that in which the Certificate surrendered has been
registered, it shall be a condition of such issuance that the person
requesting such issuance shall pay to Ascend any transfer taxes payable by
reason thereof, or of any prior transfer of such surrendered Certificate,
or establish to the satisfaction of Ascend that such taxes have been paid
or are not payable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF WHITETREE
Except as set forth in the disclosure schedule delivered by Whitetree to
Ascend on or before the date of this Agreement (which disclosure schedule
shall be organized into numbered sections corresponding with the section
numbers of this Agreement) (the "Whitetree Disclosure Schedule"), Whitetree
represents and warrants to Ascend as follows:
Section 3.1 Organization, Standing and Power; Qualification;
Subsidiaries. Whitetree is a corporation duly organized, validly existing and
in good standing under the laws of the State of California; has all requisite
corporate power to own, lease and operate its properties and to carry on its
business as currently being conducted and as currently proposed to be
conducted; is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified and in good standing
would have a material adverse effect on
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the business, assets (including intangible assets), properties, liabilities
(contingent or otherwise), financial condition, operations, or results of
operation of Whitetree and its Subsidiaries (the "Whitetree Subsidiaries")
taken as a whole (an "Whitetree Material Adverse Effect"); and except for the
shares of the Whitetree Subsidiaries listed in Section 3.1 of the Whitetree
Disclosure Schedule, Whitetree does not directly or indirectly own any equity
or similar interest in, or any interest convertible or exchangeable or
exercisable for any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity. Whitetree
has delivered true and correct copies of the Amended and Restated Articles of
Incorporation and Bylaws of Whitetree, each as amended to date, to Ascend.
Whitetree is not in violation of any of the provisions of the Amended and
Restated Articles of Incorporation, or Bylaws.
Section 3.2 Organization, Standing and Power and Qualification of the
Whitetree Subsidiaries. Each of the Whitetree Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of its
state of incorporation; has all requisite corporate power to own, lease and
operate its properties and to carry on its business as currently being
conducted and as currently proposed to be conducted; is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to
be so qualified and in good standing would have a Whitetree Material Adverse
Effect. Whitetree has delivered to Ascend true and correct copies of the
Articles of Incorporation and Bylaws of each of the Whitetree Subsidiaries,
each as amended to date; and none of the Whitetree Subsidiaries is in
violation of any of the provisions of its Articles of Incorporation or Bylaws.
Section 3.3 Whitetree Capital Structure.
(a) The authorized capital stock of Whitetree consists of 20,000,000 shares
of Whitetree Common Stock and 11,100,000 shares of Preferred Stock, par value
$0.001 per share ("Whitetree Preferred Stock"). As of the date of this
Agreement, (i) 2,899,720 shares of Whitetree Common Stock and 10,285,601
shares of Whitetree Preferred Stock (5,065,000 shares of Whitetree Series A
Preferred Stock, 2,867,158 shares of Whitetree Series B Preferred Stock,
1,462,778 shares of Whitetree Series C Preferred Stock, and 890,665 shares of
Series D Preferred Stock) are issued and outstanding, all of which are validly
issued, fully paid and nonassessable; (ii) no shares of Whitetree Common Stock
or Whitetree Preferred Stock are held in the treasury of Whitetree or by any
of the Whitetree Subsidiaries; (iii) 2,858,009 shares of Whitetree Common
Stock are reserved for issuance under Whitetree's 1993 Incentive Stock Plan
(the "1993 Plan") (1,236,250 shares of which are subject to outstanding
options and 284,030 shares of which are available) (iv) 130,320 shares of
Whitetree Series A Preferred Stock are reserved for issuance pursuant to
certain outstanding warrants; (v) 27,428 shares of Whitetree Series B
Preferred Stock are reserved for issuance pursuant to certain outstanding
warrants; (vi) 86,208 shares of Whitetree Series C Preferred Stock are
reserved for issuance pursuant to certain outstanding warrants; and
(vii) 14,703 shares of Whitetree Series D Stock are reserved for issuance
pursuant to certain outstanding warrants. Section 3.3(a) of the Whitetree
Disclosure Schedule sets forth the record holders of the Whitetree Capital
Stock and of options, warrants and other securities exercisable for or
convertible into shares of Whitetree Capital Stock (the "Securityholders
List"). The Securityholder List sets forth both the amount and type of
Whitetree security held by each such holder. All shares of Whitetree Common
Stock and Whitetree Preferred Stock subject to issuance as specified above,
upon issuance on the terms and conditions specified in the instruments
pursuant to which they are issuable, shall be duly authorized, validly issued,
fully paid and nonassessable. There are no obligations, contingent or
otherwise, of Whitetree or any of the Whitetree Subsidiaries to repurchase,
redeem or otherwise acquire any shares of Whitetree Capital Stock or the
capital stock of any of the Whitetree Subsidiaries or make any investment (in
the form of a loan, capital contribution or otherwise) in any of the Whitetree
Subsidiaries or any other entity. All of the outstanding shares of capital
stock of each of the Whitetree Subsidiaries are duly authorized, validly
issued, fully paid and nonassessable, and all such shares are owned by
Whitetree free and clear of all security interests, liens, claims, pledges,
agreements, limitations on Whitetree's voting rights, charges or other
encumbrances of any nature.
(b) Except as set forth in Section 3.3(a), there are no equity securities of
any class of Whitetree or any of the Whitetree Subsidiaries, or any security
exchangeable into or exercisable for such equity securities, issued, reserved
for issuance or outstanding. Except as set forth in Section 3.3(a), there are
no options, warrants, equity
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securities, calls, rights, commitments or agreements of any character to which
Whitetree or any of the Whitetree Subsidiaries is a party or by which it is
bound obligating Whitetree or any of the Whitetree Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares
of capital stock of Whitetree or any of the Whitetree Subsidiaries or
obligating Whitetree or any of the Whitetree Subsidiaries to grant, extend,
accelerate the vesting of or enter into any such option, warrant, equity
security, call, right, commitment or agreement, and, except for the Voting
Agreements and related proxies contemplated by this Agreement, there are no
voting trusts, proxies or other agreements or understandings with respect to
the shares of capital stock of Whitetree.
Section 3.4 Authority.
(a) Whitetree has all requisite corporate power and authority to enter into
this Agreement and the other documents required to be executed and delivered
by Whitetree hereunder (collectively, the "Whitetree Transaction Documents")
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the other Whitetree Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by the Board of Directors of Whitetree and,
prior to the Closing will have been duly authorized by the shareholders of
Whitetree, and no other corporate proceedings on the part of Whitetree, its
shareholders or directors are necessary to authorize the execution and
delivery of this Agreement or the Whitetree Transaction Documents. This
Agreement and the other Whitetree Transaction Documents have been duly
executed and delivered by Whitetree and constitute the valid and binding
obligations of Whitetree, enforceable against Whitetree in accordance with
their terms, except as such enforceability may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to
creditors' rights generally, and general principles of equity.
(b) The execution and delivery by Whitetree of this Agreement and the other
Whitetree Transaction Documents do not, and the consummation of the
transactions contemplated hereby and thereby will not, (i) conflict with, or
result in any violation or breach of any provision of the Amended and Restated
Articles of Incorporation or Bylaws of Whitetree, (ii) conflict with, or
result in any violation of or breach of any provision of the Articles of
Incorporation and Bylaws any of the Whitetree Subsidiaries, (iii) result in
any violation or breach of, or constitute (with or without notice or lapse of
time, or both) a default under, or give rise to a right of termination,
cancellation or acceleration of any material obligation or loss of any benefit
under any note, mortgage, indenture, lease, contract or other agreement or
obligation to which Whitetree or any of the Whitetree Subsidiaries is a party
or by which Whitetree or any of the Whitetree Subsidiaries or any of their
respective properties or assets may be bound, or (iv) conflict with or violate
any judgment, order, decree, statute, law, ordinance, rule or regulation or
any material permit, concession, franchise or license applicable to Whitetree,
any of the Whitetree Subsidiaries or any of their respective properties or
assets, except in the case of (iii) for any such conflicts, violations,
defaults, terminations, cancellations or accelerations which would not be
reasonably likely to have a Whitetree Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity (as defined in Section
11.2) is required by or with respect to Whitetree or any of the Whitetree
Subsidiaries in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (i)
the filing of a pre-merger notification report under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the
filing by Ascend of the Registration Statement (as defined in Section 6.2)
with the Securities and Exchange Commission (the "SEC") in accordance with the
Securities Act of 1933, as amended (the "Securities Act"), (iii) the filing of
the California Agreement of Merger and related certificates with and by the
California Secretary of State in accordance with the CGCL and the Delaware
Certificate of Merger with the Delaware Secretary of State in accordance with
the DGCL, (iv) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the laws of any foreign country, and (v)
such other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not be reasonably likely to have a
Whitetree Material Adverse Effect.
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Section 3.5 Financial Statements. Whitetree has delivered to Ascend copies
of Whitetree's audited consolidated financial statements (balance sheet,
statement of operations, statement of shareholders equity, and statement of
cash flows) for the years ended September 30, 1995 and 1996 and unaudited
interim consolidated financial statements as at, and for the one-month periods
ended, October 31, 1996, November 30, 1996, December 31, 1996 and January 31,
1997 (collectively, the "Whitetree Financial Statements"). The Whitetree
Financial Statements were prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved, except for the absence of required footnotes in the interim
Whitetree Financial Statements. The Whitetree Financial Statements present
fairly in all material respects the financial position of Whitetree as of the
respective dates and the results of Whitetree's operations and cash flows for
the periods indicated, except that the interim Whitetree Financial Statements
are subject to normal and recurring year-end audit adjustments which will not
be material in amount. Whitetree maintains and will continue until the
Effective Time to maintain a standard system of accounting established and
administered in accordance with GAAP.
Section 3.6 Absence of Undisclosed Liabilities. Neither Whitetree nor any of
the Whitetree Subsidiaries has any liabilities, either accrued or contingent
(whether or not required to be reflected in financial statements in accordance
with GAAP), and whether due or to become due, other than (i) liabilities
reflected or provided for on the balance sheet as of January 31, 1997 (the
"Whitetree Balance Sheet") contained in the Whitetree Financial Statements,
(ii) liabilities specifically described in this Agreement or Section 3.6 of
the Whitetree Disclosure Schedule, and (iii) normal or recurring liabilities
incurred since January 31, 1997 in the ordinary course of business consistent
with past practices.
Section 3.7 Accounts Receivable. The accounts receivable shown on the
Whitetree Balance Sheet arose in the ordinary course of business and have been
collected or are reasonably expected to be collectible in the book amounts
thereof, less an amount not in excess of the allowance for doubtful accounts
and returns provided for in the Whitetree Balance Sheet. The accounts
receivable of Whitetree arising after the date of the Whitetree Balance Sheet
and before the date of this Agreement arose in the ordinary course of business
and have been collected or will be collectible in the book amounts thereof,
less allowances for doubtful accounts and returns determined in accordance
with the past practices of Whitetree. None of such accounts receivable is
subject to any valid and material claim of offset or recoupment or
counterclaim, and Whitetree has no knowledge of any specific facts that would
be likely to give rise to any such claim; no material amount of such accounts
receivable is contingent upon the performance by Whitetree or any of the
Whitetree Subsidiaries of any obligation; and no agreement for deduction or
discount has been made with respect to any such accounts receivable.
Section 3.8 Inventory. The inventories shown on the Whitetree Balance Sheet,
or thereafter acquired by Whitetree consist of items of a quantity and quality
usable or salable in the ordinary course of Whitetree's business. Since
January 31, 1997, Whitetree has continued to replenish inventories in a normal
and customary manner consistent with past practices. The value at which
inventories are carried reflect the inventory valuation policy of Whitetree,
which is consistent with its past practice and in accordance with GAAP. Due
provision has been made on the books of Whitetree, consistent with past
practices, to provide for all slow-moving, obsolete, or unusable inventories
at their estimated useful or scrap values, and such inventory reserves are
adequate to provide for such slow-moving, obsolete or unusable inventory and
inventory shrinkage.
Section 3.9 Absence of Certain Changes or Events. Except as set forth in
Section 3.9 of the Whitetree Disclosure Schedule, and except as reflected in
the Whitetree Financial Statements, since January 31, 1997, Whitetree and the
Whitetree Subsidiaries have conducted their respective businesses in the
ordinary course and in a manner consistent with past practices, and have not:
(a) suffered any event or occurrence that has had or could reasonably be
expected to have a Whitetree Material Adverse Effect;
(b) suffered any damage, destruction or loss, whether covered by
insurance or not, adversely affecting its properties or business;
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(c) granted any increase in the compensation payable or to become payable
by Whitetree or any of the Whitetree Subsidiaries to their respective
officers or employees, except for compensation increases granted in the
ordinary course of business and in a manner consistent with past practices
to the non-officer employees of Whitetree and the Whitetree Subsidiaries in
connection with such employees' annual performance review;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of its capital stock or
declared any direct or indirect redemption, retirement, purchase or other
acquisition of such shares, except for purchases of stock from terminated
non-officer employees in the ordinary course of business and in a manner
consistent with past practices, as itemized in Section 3.9(d) of the
Whitetree Disclosure Schedule;
(e) issued any shares of its capital stock or any warrants, rights, or
options for, or entered into any commitment relating to such capital stock,
except for issuances made in the ordinary course of business and in a
manner consistent with past practices (including issuances made upon
exercises and conversions of employee stock options);
(f) made any change in the accounting methods or practices it follows,
whether for general financial or tax purposes, or any change in
depreciation or amortization policies or rates;
(g) sold, leased, abandoned or otherwise disposed of any real property or
machinery, equipment or other operating property except in the ordinary
course of business and in a manner consistent with past practices and in an
amount that is not material to Whitetree and the Whitetree Subsidiaries
taken as a whole;
(h) sold, assigned, transferred, licensed or otherwise disposed of any
patent, trademark, trade name, brand name, copyright (or pending
application for any patent, trademark or copyright), invention, work of
authorship, process, know-how, formula or trade secret or interest
thereunder or other material intangible asset, except for non-exclusive
licenses which were granted in the ordinary course of business and in a
manner consistent with past practices and in an amount that is not material
to Whitetree and the Whitetree Subsidiaries taken as a whole;
(i) entered into any material commitment or transaction (including
without limitation any borrowing or capital expenditure);
(j) incurred any liability, except in the ordinary course of business and
consistent with past practice and except liabilities contemplated by
clauses (i) through (iii) of Section 3.6 of this Agreement;
(k) permitted or allowed any of its property or assets to be subjected to
any mortgage, deed of trust, pledge, lien, security interest or other
encumbrance of any kind, except for liens for current taxes not yet due and
purchase money security interests incurred in the ordinary course of
business;
(l) made any capital expenditure or commitment for additions to property,
plant or equipment individually in excess of twenty-five thousand dollars
($25,000) or in the aggregate in excess of fifty thousand dollars
($50,000);
(m) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or
arrangement with any of its officers, directors or shareholders or any
affiliate of any of the foregoing, other than employee compensation and
benefits and reimbursement of employment related business expenses incurred
in the ordinary course of business;
(n) agreed to take any action described in this Section 3.9 or which
would constitute a breach of any of the representations or warranties of
Whitetree contained in this Agreement; or
(o) taken any other action that would have required the consent of Ascend
pursuant to Section 5.1 of this Agreement had such action occurred after
the date of this Agreement.
Section 3.10 Taxes. As used in this Agreement, the terms "Tax" and,
collectively, "Taxes" mean any and all federal, state and local taxes of any
country, assessments and other governmental charges, duties, impositions
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and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed
with respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity.
(a) Whitetree has prepared and timely filed all returns, estimates,
information statements and reports required to be filed with any taxing
authority ("Returns") relating to any and all Taxes concerning or
attributable to Whitetree or its operations with respect to Taxes for any
period ending on or before the Closing Date and such Returns have been
completed in all material respects in accordance with applicable law or an
adequate reserve has been made for such Taxes on the Whitetree Balance
Sheet.
(b) Whitetree, as of the Closing Date: (i) will have paid all Taxes shown
to be payable on such Returns covered by Section 3.10(a) and (ii) will have
withheld with respect to its employees all Taxes required to be withheld.
(c) There is no Tax deficiency outstanding or assessed against Whitetree
that is not reflected as a liability on the Whitetree Balance Sheet.
(d) Whitetree has no material liabilities for unpaid Taxes that have not
been accrued for or reserved on the Whitetree Balance Sheet, whether
asserted or unasserted, contingent or otherwise.
(e) Whitetree is not a party to any tax-sharing agreement or similar
arrangement with any other party, or any contractual obligation to pay any
Tax obligations of, or with respect to any transaction relating to, any
other person or to indemnify any other person with respect to any Tax.
(f) Section 3.10 of the Whitetree Disclosure Schedule sets forth the date
or dates through which the IRS has examined the federal tax returns of
Whitetree and the date or dates through which any foreign, state, local or
other taxing authority has examined any other tax returns of Whitetree.
Section 3.10 of the Whitetree Disclosure Schedule also contains a complete
list of each year for which any federal, state, local or foreign tax
authority has obtained or has requested an extension of the statute of
limitations from Whitetree and lists each tax case of Whitetree currently
pending in audit, at the administrative appeals level or in litigation.
Section 3.10 of the Whitetree Disclosure Schedule further lists the date
and issuing authority of each statutory notice of deficiency, notice of
proposed assessment and revenue agent's report issued to Whitetree within
the last twelve (12) months. Except as set forth in Section 3.10 of the
Whitetree Disclosure Schedule, neither the IRS nor any foreign, state,
local or other taxing authority has, since Whitetree's inception, examined
or is in the process of examining any federal, foreign, state, local or
other tax returns of Whitetree. To the knowledge of Whitetree, neither the
IRS nor any foreign, state, local or other taxing authority is now
asserting or threatening to assert any deficiency or claim for additional
taxes (or interest thereon or penalties in connection therewith) except as
set forth on Section 3.10 of the Whitetree Disclosure Schedule.
Section 3.11 Tangible Assets and Real Property.
(a) Each of Whitetree and the Whitetree Subsidiaries own or lease all
tangible assets and properties which are necessary for the conduct of their
respective businesses as currently conducted and as currently planned to be
conducted or which are reflected on the Whitetree Balance Sheet or acquired
since the date of the Whitetree Balance Sheet ("Material Tangible Assets").
The Material Tangible Assets are in good operating condition and repair,
except as would be expected in the ordinary course of business.
(b) Each of Whitetree and the Whitetree Subsidiaries have good and
marketable title to all Material Tangible Assets that they own, free and clear
of all mortgages, liens, pledges, charges or encumbrances of any kind or
character, except for liens for current taxes not yet due and payable,
purchase money security interests, mechanics and other statutory liens and
possible minor liens which do not in any case materially detract from the
value of the property subject thereto or materially impair the operations of
Whitetree, and which have arisen in the ordinary course of business.
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(c) Assuming the due execution and delivery thereof by the other parties
thereto, all leases of Material Tangible Assets to which Whitetree or any of
the Whitetree Subsidiaries is a party are in full force and effect and are
valid, binding and enforceable in accordance with their respective terms,
except as such enforceability may be limited by (i) bankruptcy laws and other
similar laws affecting creditors' rights generally and (ii) general principles
of equity, regardless of whether asserted in a proceeding in equity or at law.
True and correct copies of all such leases have been provided to Ascend.
(d) Neither Whitetree nor any of the Whitetree Subsidiaries owns real
property. Section 3.11 of the Whitetree Disclosure Schedule sets forth a true
and complete list of all real property leased by Whitetree and each of the
Whitetree Subsidiaries. Assuming the due execution and delivery thereof by the
other parties thereto, all such real property leases are in full force and
effect and are valid, binding and enforceable in accordance with their
respective terms, except as such enforceability may be limited by (i)
bankruptcy laws and other similar laws affecting creditors' rights generally
and (ii) general principles of equity, regardless of whether asserted in a
proceeding in equity or at law. True and correct copies all such of real
property leases have been provided to Ascend.
Section 3.12 Intellectual Property.
(a) Whitetree and the Whitetree Subsidiaries own, or are licensed or
otherwise possess legally enforceable rights to use, all patents, trademarks,
trade names, service marks, copyrights and mask works, and any applications
for and registrations of such patents, trademarks, trade names, service marks,
copyrights and mask works and all processes, formulae, methods, schematics,
technology, know-how, computer software programs or applications and tangible
or intangible proprietary information or material that are necessary to
conduct the business of Whitetree and the Whitetree Subsidiaries as currently
conducted (all of which are referred to as the "Whitetree Intellectual
Property Rights").
(b) Section 3.12 of the Whitetree Disclosure Schedule contains an accurate
and complete list of (i) all patents and patent applications and all
trademarks, trade names, service marks and registered copyrights, included in
the Whitetree Intellectual Property Rights, including the jurisdictions in
which each such Whitetree Intellectual Property Right has been issued or
registered or in which any such application for such issuance and registration
has been filed, (ii) all licenses, sublicenses, distribution agreements and
other agreements to which Whitetree or any of the Whitetree Subsidiaries is a
party and pursuant to which any person is authorized to use any Whitetree
Intellectual Property Rights or has the right to manufacture, reproduce,
market or exploit any product of Whitetree or any of the Whitetree
Subsidiaries (an "Whitetree Product") or any adaptation, translation or
derivative work based on any Whitetree Product or any portion thereof, (iii)
all licenses, sublicenses and other agreements to which Whitetree or any of
the Whitetree Subsidiaries is a party and pursuant to which Whitetree or any
of the Whitetree Subsidiaries is authorized to use any third party technology,
trade secret, know-how, process, patent, trademark or copyright, including
software ("Licensed Intellectual Property"), which is incorporated in or forms
a part of any Whitetree Product, (iv) all joint development agreements to
which Whitetree or any of the Whitetree Subsidiaries is a party, and (v) all
agreements with Governmental Entities or other third parties pursuant to which
Whitetree or any of the Whitetree Subsidiaries has obtained funding for
research and development activities.
(c) Neither Whitetree nor any of the Whitetree Subsidiaries is, nor will
either of them be, as a result of the execution and delivery of this Agreement
or the performance of any obligation under this Agreement, in breach of any
license, sublicense or other material agreement relating to the Whitetree
Intellectual Property Rights or Licensed Intellectual Property.
(d) Neither Whitetree nor any of the Whitetree Subsidiaries (i) has received
notice that it has been sued in any suit, action or proceeding which involves
a claim of infringement of any patent, trademark, service mark, copyright,
trade secret or other proprietary right of any third party; (ii) has knowledge
that the manufacturing, marketing, licensing or sale of any Whitetree Product
infringes any patent, trademark, service mark, copyright, trade secret or
other proprietary right of any third party; and (iii) has knowledge of any
claim challenging or
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questioning the validity or effectiveness of any license or agreement relating
to any Whitetree Intellectual Property Rights or Licensed Intellectual
Property.
(e) All designs, drawings, specifications, source code, object code,
documentation, flow charts and diagrams incorporating, embodying or reflecting
any Whitetree Product at any stage of its development (the "Whitetree
Components") were written, developed and created solely and exclusively by
employees of Whitetree or the Whitetree Subsidiaries without the assistance of
any third party or were created by third parties who assigned ownership of
their rights with respect thereto to Whitetree by means of valid and
enforceable agreements, copies of which have been provided at Whitetree's
offices to Ascend. Whitetree and the Whitetree Subsidiaries have at all times
used commercially reasonable efforts to treat the Whitetree Products and
Whitetree Components as containing trade secrets and have not disclosed or
otherwise dealt with such items in such a manner as to cause the loss of such
trade secrets by their release into the public domain.
(f) Each person currently or formerly employed by Whitetree or any of the
Whitetree Subsidiaries (including independent contractors, if any) that has or
had access to confidential information of Whitetree or any of the Whitetree
Subsidiaries has executed and delivered to Whitetree a confidentiality and
non-disclosure agreement substantially in the form previously provided to
Ascend. To the best of Whitetree's knowledge, neither the execution nor the
delivery of any such agreement, nor the carrying on of the business of
Whitetree and the Whitetree Subsidiaries as currently conducted by any such
person, as an employee or independent contractor, has or will conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any of such
persons is obligated.
Section 3.13 Bank Accounts. Section 3.13 of the Whitetree Disclosure
Schedule sets forth the names and locations of all banks and other financial
institutions at which Whitetree and the Whitetree Subsidiaries maintain
accounts of any nature, the type of accounts maintained at each such
institution and the names of all persons authorized to draw thereon or make
withdrawals therefrom.
Section 3.14 Contracts.
(a) Except as set forth in Section 3.14 of the Whitetree Disclosure
Schedule, neither Whitetree nor any of the Whitetree Subsidiaries is a party
or subject to any agreement, obligation or commitment, written or oral:
(i) that calls for any fixed and/or contingent payment or expenditure or
any related series of fixed and/or contingent payments or expenditures by
or to Whitetree or any of the Whitetree Subsidiaries totaling more than
fifty thousand dollars ($50,000) in any calendar year;
(ii) with agents, advisors, salesmen, sales representatives, independent
contractors or consultants that are not cancelable by it on no more than
sixty (60) days' notice and without liability, penalty or premium;
(iii) that restricts Whitetree or any of the Whitetree Subsidiaries from
carrying on anywhere in the world any portion of their respective
businesses as currently conducted;
(iv) to provide funds to or to make any investment in any other person or
entity (in the form of a loan, capital contribution or otherwise);
(v) with respect to obligations as guarantor, surety, co-signer,
endorser, co-maker, indemnitor or otherwise in respect of the obligation of
any other person or entity;
(vi) for any line of credit, standby financing, revolving credit or other
similar financing arrangement;
(vii) with any distributor, original equipment manufacturer value added
remarketer or other person for the distribution of any of the Whitetree
Products; or
(viii) that is otherwise material to the business, financial results of
operations or prospects of Whitetree and the Whitetree Subsidiaries taken
as a whole.
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(b) To the best of Whitetree's knowledge, no party to any such contract,
agreement or instrument has expressed its intention to cancel, withdraw,
modify or amend such contract, agreement or instrument.
(c) Neither Whitetree nor any of the Whitetree Subsidiaries is in default
under or in breach or violation of, nor is there any valid basis for any claim
of default by Whitetree or any of the Whitetree Subsidiaries under, or breach
or violation by Whitetree or any of the Whitetree Subsidiaries of, any
contract, commitment or restriction to which Whitetree or any of the Whitetree
Subsidiaries is a party or by which Whitetree or any of the Whitetree
Subsidiaries or any of their respective properties or assets is bound or
affected, except for such breaches, violations and claims of default as would
not be reasonably likely, either individually or in the aggregate, to have a
Whitetree Material Adverse Effect. To the best of Whitetree's knowledge, no
other party is in default under or in breach or violation of, nor, to the best
of Whitetree's knowledge, is there any valid basis for any claim of default by
any other party under, or any breach or violation by any other party of, any
contract, commitment, or restriction to which Whitetree or any of the
Whitetree Subsidiaries is a party or by which Whitetree or any of the
Whitetree Subsidiaries or any of their respective properties or assets is
bound or affected, except for such breaches, violations and claims of default
as would not be reasonably likely, either individually or in the aggregate, to
have a Whitetree Material Adverse Effect.
Section 3.15 Employees and Consultants. Section 3.15 of the Whitetree
Disclosure Schedule contains a list of the names of all current employees and
current consultants of Whitetree and the Whitetree Subsidiaries.
Section 3.16 Labor Difficulties. Neither Whitetree nor any of the Whitetree
Subsidiaries is engaged in any unfair labor practice or in violation of any
applicable laws respecting employment, employment practices or terms and
conditions of employment. There is no unfair labor practice complaint against
Whitetree or any of the Whitetree Subsidiaries pending, or to the best of
Whitetree's knowledge threatened, before any Governmental Entity. There is no
strike, labor dispute, slowdown, or stoppage pending, or to the best of
Whitetree's knowledge threatened, against Whitetree or any of the Whitetree
Subsidiaries. Neither Whitetree nor any of the Whitetree Subsidiaries is now
and neither entity has ever been subject to any union organizing activities.
Neither Whitetree nor any of the Whitetree Subsidiaries has ever experienced
any work stoppage or other labor difficulty. To the best of Whitetree's
knowledge, except as set forth in Section 3.16 of the Whitetree Disclosure
Schedule, no employee of Whitetree or any of the Whitetree Subsidiaries
intends to leave his or her employment, whether as a result of the
transactions contemplated by this Agreement or otherwise.
Section 3.17 Trade Regulation. Neither Whitetree nor any of the Whitetree
Subsidiaries has terminated its relationship with or refused to ship Whitetree
Products to any dealer, distributor, third party marketing entity or customer
which had theretofore paid or been obligated to pay Whitetree or any of the
Whitetree Subsidiaries in excess of twenty five thousand dollars ($25,000)
over any consecutive twelve (12) month period. To the best of Whitetree's
knowledge, all of the prices charged by Whitetree and the Whitetree
Subsidiaries in connection with the marketing or sale of any Whitetree
Products or services have been in compliance with all applicable laws and
regulations. No claims have been asserted or, to the best of Whitetree's
knowledge, threatened against Whitetree or any of the Whitetree Subsidiaries
with respect to the wrongful termination of any dealer, distributor or any
other marketing entity, discriminatory pricing, price fixing, unfair
competition, false advertising, or any other material violation of any laws or
regulations relating to anti-competitive practices or unfair trade practices
of any kind, and, to the best of Whitetree's knowledge, no specific situation,
set of facts, or occurrence provides any basis for any such claim.
Section 3.18 Environmental Matters.
(a) Except as set forth in Section 3.18 of the Whitetree Disclosure
Schedule, no material amount of any substance that has been designated by
applicable law or regulation to be radioactive, toxic, hazardous or otherwise
a danger to health or the environment (a "Hazardous Material"), excluding
office, janitorial and other immaterial supplies, is present, as a result of
the actions of Whitetree or any of the Whitetree Subsidiaries or, to the best
of Whitetree's knowledge, as a result of any actions of any third party or
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water, that Whitetree or any of the
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Whitetree Subsidiaries has at any time owned, operated, occupied or leased. To
the best of Whitetree's knowledge, no underground storage tanks are present
under any property that Whitetree or any of the Whitetree Subsidiaries has at
any time owned, operated, occupied or leased.
(b) At no time has Whitetree or any of the Whitetree Subsidiaries
transported, stored, used, manufactured, disposed of, released or exposed its
employees or others to Hazardous Materials in violation of any law, rule,
regulation or treaty promulgated by any Governmental Entity (collectively,
"Hazardous Materials Activities").
(c) Whitetree and the Whitetree Subsidiaries currently hold all
environmental approvals, permits, licenses, clearances and consents (the
"Environmental Permits") necessary for the conduct of the business of
Whitetree and the Whitetree Subsidiaries as such business is currently being
conducted.
(d) No action, proceeding, writ, injunction or claim is pending or, to the
best of Whitetree's knowledge, threatened concerning any Environmental Permit
or any Hazardous Materials Activity of Whitetree or any of the Whitetree
Subsidiaries. Neither Whitetree nor any of the Whitetree Subsidiaries is aware
of any fact or circumstance which could involve Whitetree or any of the
Whitetree Subsidiaries in any environmental litigation or impose upon
Whitetree or any of the Whitetree Subsidiaries any liability concerning
Hazardous Materials Activities that could have a Whitetree Material Adverse
Effect.
Section 3.19 Employee Benefit Plans.
(a) Section 3.19 of the Whitetree Disclosure Schedule lists (i) all employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), (ii) all bonus, stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance and other similar employee benefit plans, and (iii) all unexpired
severance agreements, written or otherwise, for the benefit of, or relating
to, any current or former employee of Whitetree or any trade or business
(whether or not incorporated) which is a member or which is under common
control with Whitetree within the meaning of Section 414 of the Code (each an
"ERISA Affiliate") (together, the "Whitetree Employee Plans").
(b) With respect to each Whitetree Employee Plan, Whitetree has made
available to Ascend, a true and correct copy of (i) such Whitetree Employee
Plan and (ii) each trust agreement and group annuity contract, if any,
relating to such Whitetree Employee Plan.
(c) With respect to the Whitetree Employee Plans, individually and in the
aggregate, no event has occurred, and there exists no condition or set of
circumstances in connection with which Whitetree could be subject to any
liability, except for such conditions and circumstances as would not be
reasonably likely, either individually or in the aggregate, to have a
Whitetree Material Adverse Effect.
(d) With respect to the Whitetree Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions
have not been made or properly accrued and there are no unfunded benefit
obligations which have not been accounted for by reserves on the financial
statements or books of Whitetree.
(e) Neither Whitetree nor any of the Whitetree Subsidiaries is a party to
any oral or written (i) union or collective bargaining agreement, (ii)
agreement with any officer or other key employee of Whitetree or any of the
Whitetree Subsidiaries, the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
Whitetree or any of the Whitetree Subsidiaries of the nature contemplated by
this Agreement, (iii) agreement with any officer of Whitetree or any of the
Whitetree Subsidiaries providing any term of employment or compensation
guarantee extending for a period longer than six months from the date hereof
or for the payment of compensation in excess of $100,000 per annum, or
(iv) agreement or plan, including any stock option plan, stock appreciation
right plan, restricted stock plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any
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of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement.
(f) Except as set forth in Section 3.19 of the Whitetree Disclosure
Schedule, all Whitetree Employee Plans comply with and are and have been
operated in accordance with each applicable provision of ERISA, the Code,
other federal statutes, state law (including, without limitation, state
insurance law) and the regulations and rules promulgated pursuant thereto or
in connection therewith. Each Whitetree Employee Plan which is a group health
plan (within the meaning of Section 5000(b)(1) of the Code) complies with and
has been maintained and operated in accordance with each of the requirements
of Section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA.
(g) True and complete copies of each Whitetree Employee Plan, summary plan
descriptions, all material communications to employees regarding any Whitetree
Employee Plan, annual reports on Form 5500, and each agreement, instrument and
commitment referred to herein and any related contracts, insurance policies or
other agreements or documentation necessary or appropriate for the customary
operation, amendment, modification or termination of any Whitetree Employee
Plan, have been made available to Ascend, including a description of the
material terms of any unwritten Whitetree Employee Plan. All of the foregoing
are legally valid, binding, in full force and effect, and there are no
defaults thereunder; and none of the rights of Whitetree or any ERISA
Affiliate thereunder will be impaired by this Agreement or the consummation of
the transactions contemplated hereby. The annual reports on Form 5500 made
available to Ascend fully and accurately set forth the financial condition of
each Whitetree Employee Plan.
(h) Neither Whitetree nor any ERISA Affiliate, nor any officer, director,
agent or employee of Whitetree or any ERISA Affiliate has made any oral or
written statement regarding any Whitetree Employee Plan which could result in
additional liability to Ascend, Whitetree or any ERISA Affiliate, whether
direct or indirect, in excess of any current or potential liability of
Whitetree or any ERISA Affiliate as of the Closing Date.
(i) Except as required by Section 4980B of the Code, neither Whitetree nor
any ERISA Affiliate has promised any former employee or other individual not
employed by Whitetree or any ERISA Affiliate medical or other benefit
coverage, and neither Whitetree nor any ERISA Affiliate maintains or
contributes to any plan or arrangement providing medical benefits, life
insurance or other welfare benefits to former employees, their spouses or
dependents or any other individual not employed by Whitetree or any ERISA
Affiliate.
Section 3.20 Compliance with Laws. Each of Whitetree and the Whitetree
Subsidiaries has complied in all material respects with all material
applicable federal, state, local and foreign statutes, laws and regulations,
and is not in violation of, and has not received any notices of violation with
respect to, any such statute, law or regulation, with respect to the conduct
of its business or the ownership or operation of its business, including,
without limitation, the federal Foreign Corrupt Practices Act and all United
States statutes, laws and regulations as from time to time govern the license
and delivery of technology and products abroad by persons subject to the
jurisdiction of the United States.
Section 3.21 Litigation. Except as set forth in Section 3.21 of the
Whitetree Disclosure Schedule, there is no action, suit, proceeding, claim,
arbitration or investigation pending before any agency, court or tribunal, or
to the best of Whitetree's knowledge, threatened, against Whitetree or any of
the Whitetree Subsidiaries or any of their respective properties or officers
or directors (in their capacities as such). There is no judgment, decree or
order against Whitetree or any of the Whitetree Subsidiaries or, to the best
of Whitetree's knowledge, any of their respective directors or officers (in
their capacities as such) that could prevent, enjoin or materially alter or
delay any of the transactions contemplated by this Agreement, or that could
reasonably be expected to have a Whitetree Material Adverse Effect.
Section 3.22 Indemnification Claims. Section 3.22 of the Whitetree
Disclosure Schedule sets forth a list of all persons who are parties to
director, officer and/or employee indemnification agreements with Whitetree or
any of the Whitetree Subsidiaries (the "Indemnification Agreements"). Except
as set forth in Section 3.22 of the
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Whitetree Disclosure Schedule, there are no outstanding claims under any of
the Indemnification Agreements or under any indemnification rights granted
pursuant to the Articles of Incorporation or Bylaws of Whitetree or any of the
Whitetree Subsidiaries (as currently in effect); and to the best of
Whitetree's knowledge, there are no facts or circumstances that either now, or
with the passage of time, could reasonably be expected to provide a basis for
a claim under any such Indemnification Agreement or under any indemnification
rights granted pursuant to the Articles of Incorporation or Bylaws of
Whitetree or any of its Subsidiaries.
Section 3.23 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon Whitetree or any of the
Whitetree Subsidiaries which has or could reasonably be expected to have the
effect of prohibiting or materially impairing any current business practice of
Whitetree or any of the Whitetree Subsidiaries, or the conduct of business by
Whitetree or any of the Whitetree Subsidiaries as currently conducted.
Section 3.24 Governmental Authorization. Each of Whitetree and the Whitetree
Subsidiaries has obtained each governmental consent, license, permit, grant or
other authorization of a Governmental Entity that is required for the
operation of its business as currently conducted (collectively, the "Whitetree
Authorizations"), and all such Whitetree Authorizations are in full force and
effect, except for such Whitetree Authorizations that, if not obtained by
Whitetree, would not be reasonably likely, either individually or in the
aggregate, to have a Whitetree Material Adverse Effect.
Section 3.25 Insurance. Section 3.25 of the Whitetree Disclosure Schedule
contains a list of all policies of insurance maintained by Whitetree and the
Whitetree Subsidiaries. There is no material claim pending under any of such
policies as to which coverage has been questioned, denied or disputed by the
underwriters of such policies. All premiums due and payable under all such
policies have been paid, and Whitetree and the Whitetree Subsidiaries are
otherwise in compliance with the terms of such policies. Whitetree has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
Section 3.26 Payments Resulting from Mergers. Neither the consummation nor
announcement of any transaction contemplated by this Agreement will (either
alone or upon the occurrence of any additional or further acts or events)
result in any material payment (whether of severance pay or otherwise)
becoming due from Whitetree or any of the Whitetree Subsidiaries to any
director, officer, employee or former employee thereof under (i) any
management, employment, deferred compensation, severance (including any
payment, right or benefit resulting from a change in control), bonus or other
contract for personal services with any officer, director or employee or any
plan, agreement or understanding similar to any of the foregoing, or any
"rabbi trust" or similar arrangement, or (ii) material benefit under any
Whitetree Employee Plan being established or becoming accelerated, vested or
payable.
Section 3.27 Pooling of Interests. To the best of Whitetree's knowledge,
except as set forth in Section 3.27 of the Whitetree Disclosure Schedule
neither Whitetree nor any of the Whitetree Subsidiaries nor any of director,
officer or shareholder of Whitetree or any of the Whitetree Subsidiaries has
taken any action which could reasonably be expected to impair Ascend's ability
to account for the Merger as a pooling of interests.
Section 3.28 Power of Attorney. Except as set forth in Section 3.28 the
Whitetree Disclosure Schedule, Whitetree has not granted to any person a power
of attorney or similar authorization that is currently in effect or authority.
Section 3.29 Certain Documents. Whitetree has furnished to Ascend, or its
representatives, for its examination Whitetree's and the Whitetree
Subsidiaries' minute books. The minute books of Whitetree and each of the
Whitetree Subsidiaries accurately reflect in all material aspects all actions
taken to this date by the shareholders, boards of directors and committees of
Whitetree and the Whitetree Subsidiaries. Whitetree has used its good faith
best efforts to deliver or make available to Ascend true and complete copies
of all documents and information requested by Ascend in its due diligence
request lists of February 4, 1997, copies of which are
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attached hereto as Exhibit A, other than documents and information concerning
matters which are not material to the business of Whitetree and its
Subsidiaries taken as a whole.
Section 3.30 No Misrepresentation. No representation or warranty by
Whitetree in this Agreement, and no statement, certificate or schedule
furnished or to be furnished by or on behalf of Whitetree pursuant to this
Agreement, when taken together, contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make such statements, in light of the circumstances
under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ASCEND AND SUB
Except as set forth in the Ascend SEC Reports (as defined in Section
4.4(a)), Ascend and Sub represent and warrant to Whitetree as follows:
Section 4.1 Organization. Each of Ascend, Sub and Ascend's other
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power to own, lease and operate its property and to carry
on its business as now being conducted and as proposed to be conducted, and is
duly qualified to do business and is in good standing as a foreign corporation
in each jurisdiction in which the failure to be so qualified would have a
material adverse effect on the ability of Ascend or Sub to consummate the
transactions contemplated in this Agreement or on the business, assets
(including intangible assets), properties, liabilities (contingent or
otherwise), financial condition, operations or results of operations of Ascend
taken together with its Subsidiaries as a whole (an "Ascend Material Adverse
Effect"). Each of Ascend and Sub has made available to Whitetree copies of its
Certificate of Incorporation and Bylaws as in effect as of the date of this
Agreement.
Section 4.2 Ascend Capital Structure.
(a) The authorized capital stock of Ascend consists of 400,000,000 shares of
Ascend Common Stock and 2,000,000 shares of preferred stock, $.001 par value
("Ascend Preferred Stock"). As of January 31, 1997: (i) 119,893,147 shares of
Ascend Common Stock were issued and outstanding, all of which are duly
authorized, validly issued, fully paid and nonassessable; (ii) no shares of
Ascend Common Stock were held in the treasury of Ascend or by Subsidiaries of
Ascend; (iii) approximately 18,753,391 shares of Ascend Common Stock were
reserved for future issuance pursuant to stock options granted and outstanding
under Ascend's stock option plans (the "Ascend Option Plans") and rights
outstanding under Ascend's employee stock purchase plan (the "Ascend Purchase
Plan"). As of the date of this Agreement, none of the shares of Ascend
Preferred Stock are issued and outstanding. The authorized capital stock of
Sub consists of 1,000 shares of common stock, par value $.001 per share ("Sub
Common Stock"), of which 100 shares are issued and outstanding. All of the
outstanding shares of capital stock of Sub are duly authorized, validly
issued, fully paid and nonassessable, and all such shares are owned by Ascend
free and clear of all security interests, liens, claims, pledges, agreements,
limitations on Ascend's voting rights, charges or other encumbrances of any
nature.
(b) Except as set forth in Section 4.2(a), there are no equity securities of
any class of Ascend, or any security exchangeable into or exercisable for such
equity securities, issued, reserved for issuance or outstanding. Except as set
forth in this Section 4.2, there are no options, warrants, equity securities,
calls, rights, commitments or agreements of any character to which Ascend is a
party or by which it is bound obligating Ascend to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
Ascend or obligating Ascend to grant, extend, accelerate the vesting of or
enter into any such option, warrant, equity security, call, right, commitment
or agreement. To the best knowledge of Ascend, there are no voting trusts,
proxies or other agreements or understandings with respect to the shares of
capital stock of Ascend.
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(c) The shares of Ascend Common Stock to be issued pursuant to the Merger,
when issued, will be duly authorized, validly issued, fully paid, and
nonassessable, and free of and not subject to any preemptive rights or rights
of first refusal created by statute or the Certificate of Incorporation or
Bylaws of Ascend or any agreement to which Ascend is a party or by which it is
bound.
Section 4.3 Authority; No Conflict; Required Filings and Consents.
(a) Ascend and Sub have all requisite corporate power and authority to enter
into this Agreement and the other documents required to be executed and
delivered by Ascend or Sub hereunder (collectively, the "Ascend Transaction
Documents") and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the other Ascend
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Ascend and Sub, respectively. This Agreement and the Ascend
Transaction Documents to which they are parties have been duly executed and
delivered by Ascend and Sub and constitute the valid and binding obligations
of Ascend and Sub, respectively, enforceable in accordance with their terms,
except as such enforceability may be limited by (i) bankruptcy laws and other
similar laws affecting creditors' rights generally and (ii) general principles
of equity, regardless of whether asserted in a proceeding in equity or at law.
(b) The execution and delivery of this Agreement by Ascend and Sub and the
other Ascend Transaction Documents do not, and the consummation of the
transactions contemplated hereby or thereby will not, (i) conflict with, or
result in any violation or breach of any provision of the Certificate of
Incorporation or Bylaws of Ascend or Sub, (ii) result in any violation or
breach of, or constitute (with or without notice or lapse of time, or both) a
default (or give rise to a right of termination, cancellation or acceleration
of any obligation or loss of any material benefit) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which Ascend or Sub
is a party or by which either of them or any of their properties or assets may
be bound, or (iii) conflict with or violate any permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Ascend or Sub or any of its or their properties or assets,
except in the case of (ii) and (iii) for any such conflicts, violations,
defaults, terminations, cancellations or accelerations which would not be
reasonably likely to have an Ascend Material Adverse Effect.
(c) The outstanding shares of Sub Common Stock are the only shares of Sub
capital stock entitled to vote with respect to the Merger, and the approval of
this Agreement by the holders of a majority of the issued and outstanding
shares of Sub Common Stock is the only approval of Sub stockholders required
for the consummation of the Merger, no other class vote of any series or class
of Sub capital stock being required. No consent, approval, order or
authorization of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to Ascend or any of its
Subsidiaries in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (i)
the filing of a pre-merger notification report under the HSR Act and, in the
case of this Agreement and the transactions contemplated hereby, (ii) the
filing by Ascend of the Registration Statement with the SEC in accordance with
the Securities Act, (iii) the filing of the California Agreement of Merger and
related certificates with the California Secretary of State in accordance with
the CGCL and the Delaware Certificate of Merger with the Delaware Secretary of
State in accordance with the DGCL, (iv) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable federal and state securities laws and the laws of any foreign
country and (v) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not be reasonably likely
to have an Ascend Material Adverse Effect.
Section 4.4 SEC Filings; Financial Statements.
(a) Ascend has filed and made available to Whitetree all forms, reports and
documents required to be filed by Ascend with the SEC since December 31, 1994
other than registration statements on Form S-8 (collectively, the "Ascend SEC
Reports"). The Ascend SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Exchange
Act of 1934, as amended, and (ii) did not at the
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time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in such Ascend SEC Reports or necessary in order to make the statements
in such Ascend SEC Reports, in the light of the circumstances under which they
were made, not misleading. None of Ascend's Subsidiaries is required to file
any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Ascend SEC Reports, including any Ascend
SEC Reports filed after the date of this Agreement until the Closing, complied
or will comply as to form in all material respects with the applicable
published rules and regulations of the SEC with respect thereto, was or will
be prepared in accordance with GAAP applied on a consistent basis throughout
the periods involved (except as may be indicated in the notes to such
financial statements or, in the case of unaudited statements, as permitted by
Form 10-Q promulgated by the SEC) and fairly presented or will present the
consolidated financial position of Ascend and its Subsidiaries as at the
respective dates and the consolidated results of its operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements do not contain notes and were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount. The unaudited consolidated balance sheet of Ascend as of
December 31, 1996 is referred to herein as the "Ascend Balance Sheet." Since
September 30, 1996, there has been no change in Ascend's accounting policies
except as described in the notes to Ascend's consolidated financial statements
and except as required by changes to GAAP and SEC accounting principles.
Section 4.5 Absence of Undisclosed Liabilities. Except as disclosed in
writing to Whitetree or as disclosed in the Ascend SEC Reports, or as
reflected in the Amber Balance Sheet, and except for liabilities in connection
with the acquisitions of StonyBrook Services, Inc. and InterCon Systems
Corporation, Ascend and its Subsidiaries do not have any liabilities, either
accrued or contingent (whether or not required to be reflected in financial
statements in accordance with GAAP), and whether due or to become due, which
individually or in the aggregate would be reasonably likely to have an Ascend
Material Adverse Effect other than (i) liabilities reflected in the Ascend
Balance Sheet and (ii) normal or recurring liabilities incurred since
September 30, 1996, in the ordinary course of business consistent with past
practices.
Section 4.6 Absence of Certain Changes or Events. Except as disclosed in
writing to Whitetree or as disclosed in the Ascend SEC Reports, or as
reflected in the Amber Balance Sheet, and except for the acquisitions of
StonyBrook Services, Inc. and InterCon Systems Corporation, since September
30, 1996, Ascend has conducted its business only in the ordinary course and in
a manner consistent with past practice and, since such date, there has not
been: (i) any Ascend Material Adverse Effect; (ii) any damage, destruction or
loss (whether or not covered by insurance) with respect to Ascend having an
Ascend Material Adverse Effect; (iii) any material change by Ascend in its
accounting methods, principles or practices to which Whitetree has not
previously consented in writing; (iv) any revaluation by Ascend of any of its
assets having an Ascend Material Adverse Effect; or (v) any sale of a material
amount of property except in the ordinary course.
Section 4.7 Interim Operations of Sub. Sub was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement, has engaged in
no other business activities and has conducted its operations only as
contemplated by this Agreement.
Section 4.8 Pooling of Interests. To the best of Ascend's knowledge, neither
Ascend nor any Subsidiary of Ascend nor any director, officer or stockholder
of Ascend or any Subsidiary of Ascend has taken any action which could
reasonably be expected to impair Ascend's ability to account for the Merger as
a pooling of interests.
Section 4.9 Litigation. There is no action, suit, proceeding, claim,
arbitration or investigation pending, or to the best knowledge of Ascend,
threatened, against Ascend or Sub which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay any of the transactions
contemplated by this Agreement.
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ARTICLE V
CONDUCT OF BUSINESS
Section 5.1 Covenants of Whitetree. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, Whitetree agrees (and shall cause each of the
Whitetree Subsidiaries) to carry on its business and that of the Whitetree
Subsidiaries in the usual, regular and ordinary course in substantially the
same manner as previously conducted except to the extent that Ascend shall
otherwise consent or request, to pay its debts and taxes when due, subject to
good faith disputes over such debts or taxes, to pay or perform its other
obligations when due, and, to the extent consistent with such business, to use
all reasonable efforts consistent with past practices and policies to (i)
preserve intact its present business organization, (ii) keep available the
services of its present officers and key employees and (iii) preserve its
relationships with customers, suppliers, distributors, licensors, licensees
and others having business dealings with it. Whitetree shall promptly notify
Ascend of any event or occurrence not in the ordinary course of business of
Whitetree and any of the Whitetree Subsidiaries where such event or occurrence
would result in a breach of any covenant of Whitetree set forth in this
Agreement or cause any representation or warranty of Whitetree set forth in
this Agreement to be untrue as of the date of, or giving effect to, such event
or occurrence; provided, however, that any failure by Whitetree to provide
such notice shall not in and of itself give rise to a right in favor of Ascend
to terminate this Agreement. Except as expressly contemplated by this
Agreement, neither Whitetree nor any of the Whitetree Subsidiaries shall,
without the prior written consent of Ascend:
(a) transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the Whitetree Intellectual Property Rights
other than in the ordinary course of business consistent with past
practices;
(b) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service by such party;
(c) issue, deliver or sell or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options
to acquire, or other agreements or commitments of any character obligating
it to issue any such shares or other convertible securities (except for
exercises and conversions of securities outstanding on the date of this
Agreement and other than in the ordinary course of business consistent with
past practices);
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership or other business organization or division, or otherwise
acquire or agree to acquire any assets other than acquisitions involving
aggregate consideration of not more than fifty thousand dollars ($50,000)
and inventory purchased in the ordinary course of business consistent with
past practices;
(e) sell, lease, license or otherwise dispose of any of its properties or
assets except for transactions entered into in the ordinary course of
business consistent with past practice;
(f) take any action to: (i) increase or agree to increase the
compensation payable or to become payable to its officers or employees
(except for compensation increases granted in the ordinary course of
business and in a manner consistent with past practices, to the non-officer
employees of Whitetree and the Whitetree Subsidiaries in connection with
such employees' annual performance reviews), (ii) grant any severance or
termination pay to, or enter into any employment or severance agreements
with, any officer or employee, (iii) enter into any collective bargaining
agreement, or (iv) establish, adopt, enter into or amend in any material
respect any bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension,
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retirement, deferred compensation, employment, termination, severance or
other plan, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees;
(g) revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable other than in the
ordinary course of business;
(h) except for an accounts receivable line of credit for up to $3,000,000
to be entered into with Imperial Bank, incur any indebtedness for borrowed
money or guarantee any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire any debt securities or
guarantee any debt securities of others, other than indebtedness incurred
under outstanding lines of credit in the ordinary course of business
consistent with past practice;
(i) amend or propose to amend its Amended and Restated Articles of
Incorporation, Articles of Incorporation or Bylaws;
(j) incur or commit to incur any capital expenditures which individually
exceeds fifty thousand dollars ($50,000), other than the existing
commitments set forth in the Whitetree Disclosure Schedule;
(k) enter into or amend any agreements pursuant to which any third party
is granted exclusive marketing or manufacturing rights with respect to any
Whitetree Product;
(l) amend or terminate any material contract, agreement or license to
which it is a party except in the ordinary course of business;
(m) accelerate, amend or change the period of exercisability of options
or restricted stock granted under any employee stock plan of Whitetree or
authorize cash payments in exchange for any options granted under any of
such plans except as required by the terms of such plans or any related
agreements in effect as of the date of this Agreement;
(n) waive or release any material right or claim, except in the ordinary
course of business;
(o) initiate any litigation or arbitration proceeding;
(p) compromise or otherwise settle or adjust any assertion or claim of a
deficiency in taxes (or interest thereon or penalties in connection
therewith), extend the statute of limitations with any tax authority or
file any pleading in court in any tax litigation or any appeal from an
asserted deficiency;
(q) change any of Whitetree's accounting policies and practices, except
such changes as may be required in the opinion of Whitetree's management to
respond to economic or market conditions or as may be required by the rules
of the Institute of Certified Public Accountants or Financial Accounting
Standards Board or by applicable governmental authorities;
(r) change its personnel policies;
(s) grant any person a power of attorney or similar authority; or
(t) take, or agree in writing or otherwise to take, any of the actions
described in subsections (a) through (s) above, or any action which is
reasonably likely to make any of its representations or warranties
contained in this Agreement untrue or incorrect in any material respect on
the date made (to the extent so limited) or as of the Effective Time.
Section 5.2 Cooperation. Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Ascend and Whitetree shall
confer on a regular and frequent basis with one or more representatives of the
other party to report operational matters of materiality and the general
status of ongoing operations and shall promptly provide the other party or its
counsel with copies of all filings made by such party with any Governmental
Entity in connection with this Agreement, the Merger and the other
transactions contemplated hereby.
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ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 No Solicitation.
(a) From and after the date of this Agreement until earlier of the Effective
Time or the termination of this Agreement by its terms, Whitetree shall not,
directly or indirectly through any officer, director, employee, representative
or agent of Whitetree or otherwise, (i) solicit, initiate, or encourage any
inquiries or proposals that constitute, or could reasonably be expected to
lead to, a proposal or offer for a merger, consolidation, share exchange,
business combination, sale of all or substantially all assets, sale of shares
of capital stock (including without limitation by way of a tender offer) or
similar transactions involving Whitetree other than the transactions
contemplated by this Agreement (any of the foregoing inquiries or proposals
being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage
or participate in negotiations or discussions concerning, or provide any
information to any person or entity relating to, any Acquisition Proposal, or
(iii) agree to, enter into, accept, approve or recommend any Acquisition
Proposal.
(b) Whitetree shall notify Ascend immediately (and no later than 24 hours)
after receipt by Whitetree (or its advisors) of any Acquisition Proposal or
any request for information in connection with an Acquisition Proposal or for
access to the properties, books or records of Whitetree by any person or
entity that informs Whitetree that it is considering making, or has made, an
Acquisition Proposal. Such notice shall be made orally and in writing and
shall indicate in reasonable detail the identity of the offeror and the terms
and conditions of such proposal, inquiry or contact.
Section 6.2 Registration Statement; Information Statement.
(a) Whitetree hereby covenants and agrees that the information supplied and
to be supplied to Ascend by Whitetree for inclusion in the registration
statement of Ascend on Form S-4 pursuant to which shares of Ascend Common
Stock issued in the Merger will be registered with the SEC (the "Registration
Statement") shall not contain, either at the time such information is provided
to Ascend or at the time the Registration Statement is declared effective by
the SEC, any untrue statement of a material fact or omit to state any material
fact required to be stated in the Registration Statement or necessary in order
to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied and to be supplied by Whitetree for inclusion in the information
statement/prospectus (the "Information Statement") to be sent to the
shareholders of Whitetree in connection with the solicitation of the written
consent of the shareholders of Whitetree concerning the approval of this
Agreement and the Merger (the "Whitetree Shareholder Consents") shall not, on
the date the Information Statement is first mailed to shareholders of
Whitetree, on the date the Whitetree Shareholder Consents are required to be
returned to Whitetree, or at the Effective Time, contain any statement which,
at such time and in light of the circumstances under which it was made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made in the
Information Statement not false or misleading or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of the Whitetree Shareholder Consents which has
become false or misleading. If at any time prior to the Effective Time any
event relating to Whitetree, any of the Whitetree Subsidiaries or any of their
respective officers, directors or affiliates should be discovered by Whitetree
which should be set forth in an amendment to the Registration Statement or a
supplement to the Information Statement, Whitetree shall promptly inform
Ascend.
(b) Ascend hereby covenants and agrees that the information supplied and to
be supplied by Ascend for inclusion or incorporation by reference in the
Registration Statement shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact
or omit to state any material fact required to be stated in the Registration
Statement or necessary in order to make the statements in the Registration
Statement, in light of the circumstances under which they were made, not
misleading. The information supplied and to be supplied by Ascend for
inclusion or incorporation by reference in the Information
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Statement shall not, on the date the Information Statement is first mailed to
shareholders of Whitetree, on the date the Whitetree Shareholder Consents are
required to be returned to Whitetree, or at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
shall be made, is false or misleading with respect to any material fact, or
omit to state any material fact necessary in order to make the statements made
in the Information Statement not false or misleading; or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of the Whitetree Shareholder Consents which
has become false or misleading. If at any time prior to the Effective Time any
event relating to Ascend or any of its officers, directors or affiliates
should be discovered by Ascend which should be set forth in an amendment to
the Registration Statement or a supplement to the Information Statement,
Ascend shall promptly inform Whitetree.
Section 6.3 Governmental Filings. As promptly as practicable after the
execution of this Agreement, Ascend shall prepare and file with the SEC the
Registration Statement. Ascend shall use its best efforts to respond to any
comments of the SEC, to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing, and to
cause the Prospectus contained in the Registration Statement to be mailed to
Whitetree's shareholders at the earliest practicable time. As promptly as
practicable after the date of this Agreement, Ascend and Whitetree shall
prepare and file any other filings required under any other federal or state
laws (including blue sky laws) relating to the Merger and the transactions
contemplated by this Agreement, including, without limitation, under the HSR
Act (the "Other Filings"). Whitetree will notify Ascend promptly of the
receipt of any request for additional information under the HSR Act and will
supply Ascend with copies of all correspondence between Whitetree or any of
its representatives, on the one hand, and any government officials. The
Registration Statement and the Other Filings shall comply in all material
respects with all applicable requirements of law. As promptly as practicable
after the execution of this Agreement, under the direction and subject to the
review and approval of Ascend, Whitetree shall prepare and, after receiving
the authorization of Ascend, distribute the Information Statement to its
shareholders for the purpose of soliciting the Whitetree Shareholders. The
Information Statement shall include the recommendation of the Board of
Directors of Whitetree in favor of the Merger and this Agreement. Whenever any
event occurs which is required to be set forth in an amendment or supplement
to the Registration Statement, the Information Statement or any other filing,
Ascend or Whitetree, as the case may be, shall promptly inform the other of
such occurrence and cooperate in filing with the applicable government
officials, and/or mailing to shareholders of Whitetree, such amendment or
supplement.
Section 6.4 Consents. Each of Ascend and Whitetree shall use its best
efforts to obtain all necessary consents, waivers and approvals under its
respective material agreements, contracts, licenses and leases as may be
necessary or advisable to consummate the Merger and the other transactions
contemplated by this Agreement.
Section 6.5 Access to Information. Upon reasonable notice, Whitetree shall
afford to the officers, employees, accountants, counsel and other
representatives of Ascend, reasonable access, during normal business hours
during the period prior to the Effective Time, to all its and the Whitetree
Subsidiaries' properties, books, contracts, commitments and records and,
during such period, Whitetree shall furnish promptly to Ascend (i) a copy of
each report, schedule, registration statement and other document filed or
received by it during such period from any Governmental Entity and (ii) all
other information concerning the business, properties and personnel of
Whitetree and each of the Whitetree Subsidiaries as Ascend may reasonably
request. No information or knowledge obtained in any investigation pursuant to
this Section 6.5 shall affect or be deemed to modify any representation or
warranty contained in this Agreement or the conditions to the obligations of
the parties to consummate the Merger.
Section 6.6 Legal Conditions to Merger. Each of Ascend and Whitetree will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Merger (which
actions shall include, without limitation, furnishing all information required
under the HSR Act and in connection with approvals of or filings with any
other Governmental Entity) and will promptly cooperate with and furnish
information to each other in connection with any such requirements imposed
upon any of them or any of their Subsidiaries in connection with the Merger.
Each of Ascend and Whitetree will, and will cause
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its Subsidiaries to, take all reasonable actions necessary (i) to obtain (and
will cooperate with each other in obtaining) any consent, authorization, order
or approval of, or any exemption by, any Governmental Entity or other public
third party, required to be obtained or made by Whitetree, Ascend or any of
their Subsidiaries in connection with the Merger or the taking of any action
contemplated by this Agreement, (ii) to lift, rescind or mitigate the effect
of any injunction or restraining order or other order adversely affecting its
ability to consummate the transactions contemplated hereby, (iii) to fulfill
all conditions applicable to Ascend, Whitetree or Sub pursuant to this
Agreement, and (iv) to prevent, with respect to a threatened or pending
temporary, preliminary or permanent injunction or other order, decree or
ruling or statute, rule, regulation or executive order, the entry, enactment
or promulgation thereof, as the case may be.
Section 6.7 Tax-Free Reorganization. Ascend and Whitetree shall each use its
best efforts to cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code.
Section 6.8 Pooling Accounting. Each of Ascend and Whitetree agrees not to
take any action and to use its best efforts to cause its respective affiliates
not to take any action after the date of this Agreement that would adversely
affect the ability of Ascend to treat the business combination to be effected
by the Merger as a pooling of interests, and each of Ascend and Whitetree
agrees to take such actions and to use its best efforts to cause its
respective affiliates to take such actions as may be reasonably required to
negate the impact of any past actions that would adversely impact the ability
of Ascend to treat the business combination to be effected by the Merger as a
pooling of interests. Whitetree shall cause its affiliates to sign and deliver
to Ascend a customary "pooling letter", substantially in the form attached
hereto as Exhibit B; and Ascend shall close the trading window provided for
under the Ascend Insider Trading Policy not less than 30 days prior to the
Closing Date and shall not reopen the trading window until such time as Ascend
has published (within the meaning of Accounting Series Release No. 130, as
amended, of the SEC) in an effective registration statement, Annual Report on
Form 10-K, Quarterly Report on Form 10-Q or Current Report on Form 8-K filed
with the SEC, or any publicly disclosed quarterly earnings report or press
release or other authorized public disclosure by Ascend, financial results
covering at least 30 days of combined post-Merger operations of Ascend and
Whitetree.
Section 6.9 Affiliate Agreements. Upon the execution of this Agreement,
Whitetree will provide Ascend with a list of those persons who are, in the
reasonable knowledge and judgment of Whitetree, after consultation with legal
counsel, "affiliates" of Whitetree, within the meaning of Rule 145 (each such
person who is an "affiliate" of Whitetree within the meaning of Rule 145 is
referred to herein as an "Whitetree Affiliate") promulgated under the
Securities Act ("Rule 145"). Whitetree shall provide Ascend with such
information and documents as Ascend shall reasonably request for purposes of
reviewing such list and shall notify Ascend in writing regarding any change in
the identity of such Whitetree Affiliates prior to the Closing Date. Whitetree
shall use its reasonable efforts to deliver or cause to be delivered to Ascend
by the date of this Agreement from each of the Whitetree Affiliates, an
executed Affiliates Agreement, substantially in the form attached hereto as
Exhibit C, by which each such Whitetree Affiliate agrees to comply with the
applicable requirements of Rule 145 ("Affiliates Agreement"). Ascend shall be
entitled to place appropriate legends on the certificates evidencing any
Ascend Common Stock to be received by such Whitetree Affiliates pursuant to
the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for the Ascend Common Stock, consistent
with the terms of the Affiliates Agreements.
Section 6.10 Stock Options.
(a) At the Effective Time, each Whitetree Stock Option, whether vested or
unvested, shall be, in connection with the Merger, assumed by Ascend. Each
Whitetree Stock Option so assumed by Ascend under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth
in the 1993 Plan and/or as provided in the respective option agreements
governing such Whitetree Stock Option immediately prior to the Effective Time,
except that (i) such Whitetree Stock Option shall be exercisable for that
number of whole shares of Ascend Common Stock equal to that number of shares
of Ascend Common Stock (rounded down to the nearest whole share) into which
the number of shares of Whitetree Common Stock subject to such Whitetree Stock
Option immediately prior to the Effective Time would be converted under
Section 2.1; (ii) the per share
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exercise price for the shares of Ascend Common Stock issuable upon exercise of
such assumed Whitetree Stock Option shall be equal to the (A) per share
exercise price of such Whitetree Stock Option as in effect immediately prior
to the Effective Time divided by (B) the Common Conversion Number (rounded up
to the nearest whole cent); and (iii) in the case of any assumed Whitetree
Stock Option that remains unexercised as of the termination of the Escrow
Period (as defined in Section 9.2(b)), the number of shares of Ascend Common
Stock issuable upon the exercise of such assumed Whitetree Stock Option shall
be reduced in proportion to any reduction in the number of shares of Ascend
Common Stock received by holders of the Whitetree Stock Options assumed by
Ascend which are exercised prior to the Expiration Date (as defined in Section
9.2) as a result of any distribution made to Ascend pursuant to Article IX of
this Agreement.
(b) Ascend shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Ascend Common Stock to satisfy the exercise
of the assumed Whitetree Stock Options in full.
(c) It is the intention of the parties that the Whitetree Stock Options
assumed by Ascend qualify after the Effective Time as incentive stock options,
as defined in Section 422 of the Code, to the extent that such Whitetree Stock
Options qualified as incentive stock options immediately prior to the
Effective Time.
Section 6.11 Registration. Ascend shall prepare and file with the SEC and
shall use its best efforts to cause to become effective, a registration
statement on Form S-8 with respect to the shares of Ascend Common Stock
issuable upon exercise of the Assumed Options not later than three (3)
business days after the Closing Date.
Section 6.12 Expenses. The parties shall each pay their own legal,
accounting and other similar out-of-pocket expenses related to the
negotiation, preparation and carrying out of this Agreement and the
transactions herein contemplated. If the Merger is consummated, legal and
accounting fees and expenses and other similar out-of-pocket expenses incurred
by Whitetree and the Whitetree shareholders relating to the negotiation,
preparation and carrying out of this Agreement and the transactions herein
contemplated shall be borne by the Surviving Corporation and shall be paid at
the Effective Time to the person or persons designated by Whitetree. Unless
otherwise agreed by Ascend, a maximum total amount of two hundred thousand
dollars ($200,000) shall be borne by the Surviving Corporation and the
balance, if any, shall be borne by the Whitetree shareholders; provided that
the foregoing limitation shall not apply if an HSR second request is received
by the parties (in which case the parties shall negotiate in good faith a
mutually acceptable limitation). A schedule of all such fees and expenses to
be incurred through the Closing shall be submitted to Ascend prior to the
Closing.
Section 6.13 Brokers or Finders. Each of Ascend and Whitetree represents, as
to itself, its Subsidiaries and its affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar
fee in connection with any of the transactions contemplated by this Agreement,
except Deutsche Morgan Grenfell, whose fees and expenses will be paid by the
Surviving Corporation at the Effective Time, and each of Ascend and Whitetree
agrees to indemnify and hold the other harmless from and against any and all
claims, liabilities or obligations with respect to any other fees, commissions
or expenses asserted by any person on the basis of any act or statement
alleged to have been made by such party or its affiliates.
Section 6.14 Employee Arrangements. Ascend shall offer, or cause the
Surviving Corporation to offer, employment with the Surviving Corporation
after the Closing to the employees of Whitetree who are listed in Annex 6.14
hereto. All such Whitetree employees accepting employment with the Surviving
Corporation shall be eligible for the same employee benefit plans, on the same
terms, as other employees of Ascend of comparable rank and length of service.
In determining eligibility for benefits which depend on length of service,
Ascend shall provide each such Whitetree employee with full credit for the
period of such employee's service with Whitetree (other than with respect to
new options, if any, granted by Ascend to such Whitetree employees). Except as
set forth in this Section 6.14, the terms of employment of such Whitetree
employees shall be determined by agreement of Ascend (or the Surviving
Corporation, as the case may be) and each such employee.
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The employees of Whitetree who are not listed on Annex 6.14 hereto will be
entitled to the severance arrangement described on Annex 6.14.
Section 6.15 Voting Agreements. Whitetree shall cause each director and
officer of Whitetree and (and the affiliates thereof) to execute and deliver
to Ascend, by the date of this Agreement, voting agreements and irrevocable
proxies in the forms annexed hereto as Exhibit D (the "Voting Agreements"),
agreeing, among other things, to vote in favor of the Merger.
Section 6.16 Indemnification and Insurance.
(a) Whitetree shall and, from and after the Effective Time, Ascend and the
Surviving Corporation shall, indemnify, defend and hold harmless each person
who is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, a director or officer of Whitetree or any
of the Whitetree Subsidiaries (the "Indemnified Parties") against all losses,
claims, damages, costs, expenses, liabilities or judgments or amounts that are
paid in settlement with the approval of the indemnifying party (which approval
shall not be unreasonably withheld) of or in connection with any claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director or officer of Whitetree or any of the Whitetree Subsidiaries, whether
pertaining to any matter existing or occurring at or prior to the Effective
Time and whether asserted or claimed prior to, or at or after, the Effective
Time ("Indemnified Liabilities") including, without limitation, all losses,
claims, damages, costs, expenses, liabilities or judgments based in whole or
in part on, or arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, in each case to the full
extent a corporation is permitted under the CGCL to indemnify its own
directors and officers, as the case may be. In addition, Whitetree, Ascend and
the Surviving Corporation, as the case may be, will pay expenses in advance of
the final disposition of any such action or proceeding to each Indemnified
Party to the full extent permitted by law upon receipt of any undertaking
contemplated by Section 317(f) of the CGCL). Without limiting the foregoing,
in the event any such claim, action, suit, proceeding or investigation is
brought against any Indemnified Party (whether arising before or after the
Effective Time), (i) the Indemnified Parties may retain counsel satisfactory
to them and Whitetree (or them and Ascend and the Surviving Corporation after
the Effective Time), (ii) Whitetree (or after the Effective Time, Ascend and
the Surviving Corporation) shall pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received, and (iii) Whitetree (or after the Effective Time, Ascend and the
Surviving Corporation) will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that none of Whitetree, Ascend
or the Surviving Corporation shall be liable for any settlement of any claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld. Any indemnified party wishing to claim indemnification
under this Section 6.16, upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify Whitetree, Ascend or the
Surviving Corporation (but the failure so to notify an Indemnifying Party
shall not relieve it from any liability which it may have under this Section
6.16 except to the extent such failure prejudices such party), and shall
deliver to Whitetree (or after the Effective Time, Ascend and the Surviving
Corporation) the undertaking contemplated by Section 317(f) of the CGCL. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is, under applicable standards
of professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnified Parties. The obligations of the
parties set forth in this Section 6.16(a) shall be in the furtherance of and
not in limitation of the succeeding paragraphs of this Section 6.16.
(b) From and after the Effective Time, the Surviving Corporation and Ascend
will fulfill, assume and honor in all respects the obligations of Whitetree
pursuant to Whitetree's Amended and Restated Articles of Incorporation and any
indemnification agreement between Whitetree and any of Whitetree's directors
and officers existing and in force as of the Effective Time.
Section 6.17 Additional Agreements; Reasonable Efforts. Subject to the terms
and conditions of this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to
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consummate and make effective the transactions contemplated by this Agreement,
subject to the appropriate vote of shareholders of Whitetree described in
Section 7.1(a), including cooperating fully with the other party, including by
provision of information and making all necessary filings under the HSR Act.
Ascend and Whitetree will use their reasonable best efforts to resolve any
competitive issues relating to or arising under the HSR Act or any other
federal or state antitrust or fair trade law raised by any Governmental
Entity. If such offers are not accepted by such Governmental Entity, Ascend
(with Whitetree's cooperation) shall pursue all litigation resulting from such
issues. The parties hereto will consult and cooperate with one another, and
consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, memoranda, briefs, arguments, opinions
and proposals made or submitted by or on behalf of any party hereto in
connection with proceedings under or relating to the HSR Act or any other
federal or state antitrust or fair trade law. In the event of a challenge to
the transactions contemplated by this Agreement pursuant to the HSR Act,
Ascend and Whitetree shall use all reasonable efforts to defeat such
challenge, including by institution and defense of litigation, or to settle
such challenge on terms that permit the consummation of the Merger; provided,
however, that nothing herein shall require either party to agree to divest or
hold separate any portion of its business or otherwise take action that could
reasonably be expected to have an Material Adverse Effect on Ascend or a
Material Adverse Effect on Whitetree. In case, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purposes
of this Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either of
the Constituent Corporations, the proper officers and directors of each party
to this Agreement shall take all such necessary action.
Section 6.18 Notification of Certain Matters. Whitetree shall give prompt
notice to Ascend, and Ascend and Sub shall give prompt notice to Whitetree, of
the occurrence, or failure to occur, of any event, which occurrence or failure
to occur, if uncured, would be likely to cause the failure of any of the
conditions set forth in Article VII of this Agreement.
ARTICLE VII
CONDITIONS TO MERGER
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the
following conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite votes of holders of Whitetree Capital
Stock (including any requisite class votes) pursuant to the CGCL.
(b) Governmental Approvals. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated, and no action shall have been instituted by the Department of
Justice or Federal Trade Commission challenging or seeking to enjoin the
consummation of the Merger, which action shall not have been withdrawn or
terminated. All authorizations, consents, orders or approvals of any
Governmental Entity required to consummate the transactions contemplated by
this Agreement, the absence of which would be reasonably likely to result
in an Ascend Material Adverse Effect or a Whitetree Material Adverse
Effect, shall have been obtained and be in effect.
(c) Securities Requirements. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order. All permits and other
authorizations required (if any) under applicable state blue sky laws for
the issuance of shares of Ascend Common Stock pursuant to the Merger, shall
have been obtained.
(d) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger or limiting or
restricting Ascend's or Whitetree's
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conduct or operation of the business of Ascend or Whitetree after the
Merger shall have been issued and be in effect, nor shall any proceeding
brought by a domestic administrative agency or commission or other domestic
Governmental Entity, seeking any of the foregoing be pending; nor shall
there be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger which makes
the consummation of the Merger illegal or prevents or prohibits the Merger.
(e) Tax Opinions. Ascend and Whitetree shall each have received written
opinions, dated as of the Closing Date, from their respective counsel Gray
Cary Ware & Freidenrich, A Professional Corporation, and Wilson Sonsini
Goodrich & Rosati, in form and substance reasonably satisfactory to them to
the effect that the Merger will be treated for federal income tax purposes
as a tax-free reorganization within the meaning of Section 368(a) of the
Code. In rendering such opinion, counsel may rely upon reasonable
representations and certificates of Ascend, Sub, Whitetree and certain
shareholders of Whitetree, and the parties to this Agreement agree to make,
and to use reasonable efforts to cause the shareholders of Whitetree to
make, such representations and deliver such certificates.
(f) Pooling. Ascend shall have received from Ernst & Young, LLP and
Whitetree shall have received from Price Waterhouse LLP, a letter, dated as
of the Effective Date, confirming the appropriateness of pooling of
interest accounting for the Merger under Accounting Principles Board
Opinion No. 16 if the Merger is closed and consummated in accordance with
this Agreement.
Section 7.2 Additional Conditions to Obligations of Ascend and Sub. The
obligations of Ascend and Sub to effect the Merger are subject to the
satisfaction of each of the following additional conditions, any of which may
be waived in writing exclusively by Ascend and Sub:
(a) Representations and Warranties. The representations and warranties of
Whitetree set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement, and the representations
and warranties contained in Section 3.12 shall be also true and correct in
all material respects as of the Closing Date as though made on and as of
the Closing Date, except (i) for changes contemplated by this Agreement,
(ii) in the case of the representations and warranties contained in Section
3.12, for such breaches thereof, inaccuracies therein or omissions
therefrom as could not reasonably be expected to materially impair the
value to Ascend of the transactions contemplated by this Agreement and
(iii) in cases of the other representations and warranties of Whitetree
contained in this Agreement, for such breaches thereof, inaccuracies
therein or omissions therefrom as could not be expected, either
individually or in the aggregate, to have a Whitetree Material Adverse
Effect; and Ascend shall have received a certificate signed on behalf of
Whitetree by an executive officer of Whitetree to such effect.
(b) Performance of Obligations. Whitetree shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and Ascend shall have received a
certificate signed on behalf of Whitetree by an executive officer of
Whitetree to such effect.
(c) Ancillary Agreements and Documentation. Ascend shall have received
(i) executed Affiliate Agreements and Pooling Letters from each of the
Whitetree Affiliates; (ii) confidentiality and inventions assignment
agreements signed by Maureen Lawrence, Kingston Duffie, and Kathy Hill,
each in substantially the form attached hereto as Exhibit E, and each such
confidentiality and inventions assignment agreement shall be in full force
and effect; (iii) executed employment offer acceptance letters from each of
Maureen Lawrence, Kingston Duffie, and Kathy Hill; and (iv) an update of
the Securityholder List, current as of the Closing Date.
(d) Third-Party Consents and Waivers. Whitetree shall have provided all
notices to third parties, and shall have received all third-party consents
or waivers, required for or in connection with the consummation of the
transactions contemplated by this Agreement under any contract set forth
(or required to be set forth) in Section 3.4 of the Whitetree Disclosure
Schedule or to be obtained pursuant to Section 6.4, including the Master
Lease Agreement dated January 1, 1994 with Comdisco.
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Section 7.3 Additional Conditions to Obligations of Whitetree. The
obligation of Whitetree to effect the Merger is subject to the satisfaction of
each of the following additional conditions, any of which may be waived, in
writing, exclusively by Whitetree:
(a) Representations and Warranties. The representations and warranties of
Ascend and Sub set forth of this Agreement shall be true and correct in all
material respects as of the date of this Agreement, except (i) for changes
contemplated by this Agreement and (ii) for such breaches of, inaccuracies
in or omissions from such representations and warranties as could not be
expected to have an Ascend Material Adverse Effect; and Whitetree shall
have received a certificate signed on behalf of Ascend by an executive
officer of Ascend to such effect.
(b) Performance Obligations. Ascend and Sub shall have performed in all
material respects all obligations required to be performed by them under
this Agreement at or prior to the Closing Date; and Whitetree shall have
received a certificate signed on behalf of Ascend by an executive officer
of Ascend to such effect.
(c) Nasdaq National Market Listing. The shares of the Ascend Common Stock
to be issued in the Merger shall have been approved for quotation on the
Nasdaq National Market.
(d) No Ascend Material Adverse Effect. No Ascend Material Adverse Effect
shall have occurred, and Whitetree shall have received a certificate signed
on behalf of Ascend by an executive officer of Ascend to such effect.
Notwithstanding anything herein to the contrary, neither a decrease in the
market price or trading volume of Ascend Common Stock nor the failure of
Ascend to meet the earnings predictions of equity analysts as reflected in
the First Call consensus estimate for any period ending (or for which
earnings are released) after the date of this Agreement and prior to the
Closing Date shall be deemed by themselves to constitute an Ascend Material
Adverse Effect.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time (with respect to Section 8.1(b) through Section 8.1(d),
by written notice by the terminating party to the other party):
(a) by the mutual written consent of Ascend and Whitetree;
(b) by Ascend pursuant to Section 2.1(f)(ii) or by Whitetree pursuant to
Section 2.1(f)(i);
(c) by either Ascend or Whitetree if the Merger shall not have been
consummated by May 31, 1997; provided, however, that if the Merger shall
not have been consummated due to the waiting period (or any extension
thereof) under the HSR Act not having expired or been terminated, or due to
an action having been instituted by the Department of Justice or Federal
Trade Commission challenging or seeking to enjoin the consummation of the
Merger, then such date shall be extended to September 30, 1997, and
provided further that the right to terminate this Agreement under this
Section 8.1(c) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or resulted in
the failure of the Merger to occur on or before such date; or
(d) by either Ascend or Whitetree if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other action, in each case having the effect
of permanently restraining, enjoining or otherwise prohibiting the Merger,
except, if the party relying on such order, decree or ruling or other
action has not complied with its obligations under Article VI of this
Agreement.
Section 8.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 8.1, this Agreement shall forthwith become
void and of no effect, and there shall be no liability or obligation on the
part of Ascend, Whitetree, Sub or their respective officers, directors,
stockholders, shareholders or affiliates,
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except to the extent that such termination results from the willful breach by
a party of any of its representations, warranties or covenants set forth in
this Agreement; provided, however, that the provisions of Article X concerning
the confidentiality of certain information shall remain in full force and
effect and survive any termination of this Agreement.
Section 8.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. This
Agreement may be amended by the parties hereto, by action taken or authorized
by their respective Boards of Directors, at any time before or after approval
of the matters presented in connection with the Merger by the shareholders of
Whitetree, but, after any such approval, no amendment shall be made which by
law requires further approval by such shareholders without such further
approval.
Section 8.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
ARTICLE IX
ESCROW AND INDEMNIFICATION
Section 9.1 Survival of Representations and Warranties. All of Whitetree's
representations, warranties, covenants and agreements contained in this
Agreement or in any instrument delivered pursuant to this Agreement
(including, without limitation, the Whitetree Disclosure Schedule) shall
survive the Merger and continue until the earlier of (i) 5:00 p.m., California
time, one year following the Closing Date, (ii) the filing with the SEC of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997 and (iii) the release of the Company's Annual Report to Stockholders for
the fiscal year ended December 31, 1997 (the "Expiration Date").
Section 9.2 Escrow Arrangements.
(a) Escrow Fund. At the Effective Time the Whitetree shareholders will be
deemed to have received and deposited with the Escrow Agent (as defined below)
that number of shares of Ascend Common Stock (the "Initial Escrow Amount")
that is equal to their proportionate share of the Escrow Amount (which share
shall not include that portion of the Escrow Amount which is allocated for
contribution by holders of Whitetree Stock Options assumed by Ascend), plus a
proportionate share of any additional shares as may be issued to such
shareholders in respect of such shares upon any stock split, stock dividend or
recapitalization effected by Ascend after the Effective Time and prior to the
Expiration Date, without any act of any Whitetree shareholder. As soon as
practicable after the Effective Time, the Initial Escrow Amount, without any
act of any Whitetree shareholder, will be deposited with an institution
designated by Ascend and reasonably acceptable to the Shareholder Agent (as
defined in Section 9.2(g) below)) as escrow agent (the "Escrow Agent"). The
Initial Escrow Amount, together with other shares deposited in respect of
Whitetree Stock Options assumed by Ascend, shall constitute an escrow fund
(the "Escrow Fund") and shall be governed by the terms set forth herein and in
an escrow agreement to be entered into by and among, Ascend, the Shareholder
Agent and the Escrow Agent on terms which are reasonably acceptable to Ascend
and the Shareholder Agent (the "Escrow Agreement"), and at Ascend's cost and
expense. The portion of the Escrow Amount contributed on behalf of each
Whitetree shareholder shall be in proportion to the aggregate number of shares
of Ascend Common Stock which such holder would otherwise be entitled under
Section 2.1. Upon the exercise of any Whitetree Option between the Effective
Time and the Expiration Date, five percent (5%) of the shares of Ascend Common
Stock issued upon such exercise shall be added and deposited to the Escrow
Fund upon such exercise, and at the expiration of the
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Escrow Period (as defined in Section 9.2(b)), any Whitetree Stock Options not
so exercised as of the expiration of the Escrow Period shall be adjusted in
accordance with Section 6.10(a)(iii). The Escrow Fund shall be the sole and
exclusive remedy available to compensate Ascend and its affiliates for any
claims, losses, liabilities, damages, deficiencies, costs and expenses,
including reasonable attorneys' fees and expenses, and expenses of
investigation and defense (determined in each case, net of (i) any recoveries
with respect to such amounts under existing insurance policies, (ii) tax
benefits received by Ascend as a result of such items, (iii) indemnities from
third parties in respect of such amounts, and (iv) in the case of amounts
arising from claims by a third party, the amount of any recovery or settlement
received by Ascend, Whitetree, or any of their Subsidiaries in respect of
counterclaims (to the extent such counterclaims arise out of the facts giving
rise to third party's claim), cross-claims, third-party complaints, or other
actions for indemnification, contribution or reimbursement) (hereinafter
individually a "Loss" and collectively "Losses"), incurred by Ascend, its
officers, directors, or affiliates (including the Surviving Corporation)
directly as a result of any inaccuracy or breach of a representation,
warranty, covenant or agreement of Whitetree contained in this Agreement (as
modified by the Whitetree Disclosure Schedule), or any instrument delivered
pursuant to this Agreement. Ascend shall act in good faith and in a
commercially reasonable manner to mitigate all Losses it may suffer. Ascend
and Whitetree each acknowledge that such Losses, if any, would relate to
unresolved contingencies existing at the Effective Time, which if resolved at
the Effective Time would have led to a reduction in the aggregate Merger
Consideration. Ascend may not receive any shares from the Escrow Fund (and no
adjustment shall be made pursuant to Section 6.10(a)(iii)) unless and until
Officer's Certificates (as defined in Section 9.2(d) below) identifying
Losses, the aggregate amount of which exceed a value of one hundred thousand
dollars ($100,000), have been delivered to the Escrow Agent as provided in
Section 9.2(e); in such case, Ascend may recover from the Escrow Fund (and
adjustment may be made pursuant to Section 6.10(a)(iii) with respect to)
Losses to Ascend.
(b) Escrow Period; Distribution upon Termination of Escrow Period. Subject
to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
California time, on the Expiration Date (the "Escrow Period"); provided,
however, that on the six-month anniversary of the Closing Date, 50% of the
number of shares comprising the Escrow Fund less any payments under this
Article IX made on account of any Loss shall be released from the Escrow Fund
and distributed to the Whitetree shareholders and those individuals who have
on or prior to the six-month anniversary of the Closing Date exercised the
Whitetree Stock Options assumed by Ascend (the "Escrow Release"); and
provided, further, that the Escrow Release shall not occur and the Escrow
Period shall not terminate with respect to such amount (or some portion
thereof) that is necessary in the reasonable judgment of Ascend, subject to
the objection of the Shareholder Agent and the subsequent arbitration of the
matter in the manner provided in Section 9.2(f) hereof, to satisfy any
unsatisfied claims concerning facts and circumstances existing prior to the
contemplated date of the Escrow Release or the termination of such Escrow
Period, as the case may be, each as specified in an Officer's Certificate
delivered to the Escrow Agent prior to the contemplated date of the Escrow
Release or termination of such Escrow Period. As soon as all such claims have
been resolved, the Escrow Agent shall deliver to the shareholders of Whitetree
the amount which is subject to the Escrow Release or at the end of the Escrow
Period the remaining portion of the Escrow Fund not required to satisfy such
claims. Deliveries of Escrow Amounts to the shareholders and option holders of
Whitetree pursuant to this Section 9.2(b) shall be made in proportion to their
respective original contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
(i) Any shares of Ascend Common Stock or other equity securities issued
or distributed by Ascend (including shares issued upon a stock split) ("New
Shares") in respect of Ascend Common Stock in the Escrow Fund which have
not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of shares of Ascend
Common Stock which have been released from the Escrow Fund shall not be
added to the Escrow Fund but shall be distributed to the record holders
thereof. Cash dividends on Ascend Common Stock shall not be added to the
Escrow Fund but shall be distributed to the record holders thereof.
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(ii) Each Whitetree shareholder and each individual who, prior to the
Expiration Date, has exercised the Whitetree Stock Options assumed by
Ascend shall have voting rights with respect to the shares of Ascend Common
Stock contributed to the Escrow Fund by such party (and on any voting
securities added to the Escrow Fund in respect of such shares of Ascend
Common Stock).
(d) Claims Upon Escrow Fund.
(i) Upon receipt by the Escrow Agent at any time on or before the last
day of the Escrow Period of a certificate signed by any officer of Ascend
(an "Officer's Certificate"): (A) stating that Ascend has paid or properly
accrued or reasonably anticipates that it will have to pay or accrue
Losses, and (B) specifying in reasonable detail the individual items of
Loss included in the amount so stated, the date each such item was paid or
properly accrued, or the basis for such anticipated liability, and the
nature of the misrepresentation, breach of warranty or covenant to which
such item is related, the Escrow Agent shall, subject to the provisions of
Section 9.2(e) hereof, deliver to Ascend out of the Escrow Fund, as
promptly as practicable, shares of Ascend Common Stock held in the Escrow
Fund in an amount equal to such Losses.
(ii) For the purposes of determining the number of shares of Ascend
Common Stock to be delivered to Ascend out of the Escrow Fund pursuant to
Section 9.2(d)(i) hereof, the shares of Ascend Common Stock and the
adjustment to the number of options issuable under Section 6.10(a)(iii)
shall be valued at the Ascend Average Stock Price. Ascend and the
Shareholder Agent shall certify such value in a certificate signed by both
Ascend and the Shareholder Agent, and shall deliver such certificate to the
Escrow Agent.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered by Ascend to the Shareholder Agent and for a period of thirty (30)
days after such delivery, the Escrow Agent shall make no delivery to Ascend of
any Escrow Amounts pursuant to Section 9.2(d) hereof unless the Escrow Agent
shall have received written authorization from the Shareholder Agent to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of shares of Ascend Common Stock from the Escrow
Fund in accordance with Section 9.2(d) hereof, provided that no such payment
or delivery may be made if the Shareholder Agent shall object in a written
statement (the "Shareholders Agent Notice") to the claim made in the Officer's
Certificate, and such statement shall have been delivered to the Escrow Agent;
with a copy to Ascend, prior to the expiration of such thirty (30) day period.
(f) Resolution of Conflicts; Arbitration.
(i) In case the Shareholder Agent shall so object in writing to any claim
or claims made in any Officer's Certificate, the Shareholder Agent and
Ascend shall attempt in good faith to agree upon the rights of the
respective parties with respect to each of such claims. If the Shareholder
Agent and Ascend should so agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties and shall be furnished to the
Escrow Agent. The Escrow Agent shall be entitled to rely on any such
memorandum and distribute shares of Ascend Common Stock from the Escrow
Fund in accordance with the terms thereof.
(ii) If no such agreement is reached within thirty (30) days following
receipt by the Escrow Agent of the Shareholders Agent Notice, either Ascend
or the Shareholder Agent may demand arbitration of the matter unless the
amount of the damage or Loss is at issue in pending litigation with a third
party, in which event arbitration shall not be commenced until such amount
is ascertained or both parties agree to arbitration; and in either such
event the matter shall be settled by arbitration conducted by three
arbitrators. Ascend and the Shareholder Agent shall each select one
arbitrator, and the two arbitrators so selected shall select a third
arbitrator, each of which arbitrators shall be independent and have at
least ten years relevant experience. The arbitrators shall set a limited
time period and establish procedures designed to reduce the cost and time
for discovery while allowing the parties an opportunity, adequate in the
sole judgment of the arbitrators, to discover relevant information from the
opposing parties about the subject matter of the dispute. The arbitrators
shall rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys fees and costs, to the
same extent as a court of competent law or
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equity, should the arbitrators determine that discovery was sought without
substantial justification or that discovery was refused or objected to
without substantial justification. The decision of a majority of the three
arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this
Agreement, and notwithstanding anything in Section 9.2(e) hereof, the
Escrow Agent shall be entitled to act in accordance with such decision and
make or withhold payments out of the Escrow Fund in accordance therewith.
Such decision shall be written and shall be supported by written findings
of fact and conclusions which shall set forth the award, judgment, decree
or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. Any such arbitration shall be held in San
Mateo or Santa Clara Counties, California under the rules then in effect of
the Judicial Arbitration and Mediation Services, Inc. For purposes of this
Section 9.2(f), in any arbitration hereunder in which any claim or the
amount thereof stated in the Officer's Certificate is at issue, Ascend
shall be deemed to be the Non-Prevailing Party in the event that the
arbitrators award Ascend less than the sum of one-half (1/2) of the
disputed amount plus any amounts not in dispute; otherwise, the
shareholders of Whitetree as represented by the Shareholder Agent shall be
deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative costs of the arbitration, and the expenses, including
without limitation, reasonable attorneys' fees and costs, incurred by the
other party to the arbitration.
(g) Shareholder Agent of the Shareholders; Power of Attorney.
(i) At the Effective Time, and without further act of any party, Geoffrey
Yang shall be appointed as agent and attorney-in-fact (the "Shareholder
Agent") for each shareholder of Whitetree (except such shareholders, if
any, as shall have perfected their appraisal or dissenters' rights under
the CGCL), for and on behalf of shareholders of Whitetree, to give and
receive notices and communications, to authorize delivery to Ascend of
shares of Ascend Common Stock from the Escrow Fund in satisfaction of
claims by Ascend, to object to such deliveries, to agree to, negotiate,
enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of
Shareholder Agent for the accomplishment of the foregoing. Such agency may
be changed by the shareholders of Whitetree from time to time upon not less
than thirty (30) days prior written notice to Ascend; provided that the
Shareholder Agent may not be removed unless holders of at least a majority
in an interest of the Escrow Fund agree to such removal and to the identity
of the substituted agent. Any vacancy in the position of Shareholder Agent
may be filled by approval of the holders of a majority in interest of the
Escrow Fund. No bond shall be required of the Shareholder Agent, and the
Shareholder Agent shall not receive compensation for his or her services.
Notices or communications to or from the Shareholder Agent relating to the
Escrow Fund shall constitute notice to or from each of the shareholders of
Whitetree.
(ii) The Shareholder Agent shall not be liable for any act done or
omitted hereunder as Shareholder Agent while acting in good faith. The
shareholders of Whitetree on whose behalf the Escrow Amount was contributed
to the Escrow Fund shall severally indemnify the Shareholder Agent and hold
the Shareholder Agent harmless against any loss, liability or expense
incurred without negligence or bad faith on the part of the Shareholder
Agent and arising out of or in connection with the acceptance or
administration of the Shareholder Agent's duties hereunder, including the
reasonable fees and expenses of any legal counsel retained by the
Shareholder Agent.
(h) Actions of the Shareholder Agent. A decision, act, consent or
instruction of the Shareholder Agent relating to the Escrow Fund shall
constitute a decision of all Whitetree shareholders, and shall be final,
binding and conclusive upon each of such shareholders, and the Escrow Agent
and Ascend may rely upon any such decision, act, consent or instruction of the
Shareholder Agent as being the decision, act, consent or instruction of each
shareholder of Whitetree. In the absence of bad faith, the Escrow Agent and
Ascend are hereby relieved from any liability to any person for any acts done
by them in accordance with such decision, act, consent or instruction of the
Shareholder Agent.
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(i) Third-Party Claims. In the event Ascend becomes aware of a third-party
claim which Ascend believes may result in a demand against the Escrow Fund,
Ascend shall notify the Shareholder Agent of such claim, and the Shareholder
Agent, as representative for the shareholders of Whitetree, shall be entitled,
at their expense, to participate in any defense of such claim. Ascend shall
have the right in its sole discretion to settle any such claim; provided,
however, that except with the consent of the Shareholder Agent, no settlement
of any such claim with third-party claimants shall alone be determinative of
the amount of any claim against the Escrow Fund. In the event that the
Shareholder Agent has consented to any such settlement and acknowledged that
the claim is a valid claim against the Escrow Fund, the Shareholder Agent
shall have no power or authority to object under any provision of this Article
IX to the amount of any claim by Ascend against the Escrow Fund with respect
to such settlement.
ARTICLE X
CONFIDENTIALITY AND NON-DISCLOSURE
Section 10.1 Evaluation Material. In connection with the Merger and the
transactions contemplated by this Agreement, Whitetree has provided to Ascend
and Ascend has provided to Whitetree (in each case the providing party is
herein referred to as the "Disclosing Company" and the receiving party is
herein referred to as the "Receiving Party") certain documents and information
(including information in verbal, visual, written and/or electronic format)
relating to the Disclosing Company's business, which are not generally
available to others, and are protected by the Disclosing Company against
unrestricted disclosure to others ("Evaluation Material"). Evaluation Material
shall not include any document or information that (a) was known to the
Receiving Company prior to the commencement of any disclosure of Evaluation
Material by the Disclosing Company or its Representatives (as defined in
Section 10.2) to the Receiving Company; (b) was or is independently developed
by the Receiving Company without use of Evaluation Material; (c) is now or
hereafter becomes available to the public other than as a consequence of a
breach by the Receiving Party of its obligations under this Article X and (d)
is or becomes available to the Receiving Company on a nonconfidential basis
from a source (other than the Disclosing Company) which, to the best of the
Receiving Company's knowledge after due inquiry, is not prohibited from
disclosing such information to the Receiving Company by a legal, contractual
or fiduciary obligation to the Disclosing Company.
Section 10.2 Use of Evaluation Material. Unless and until the Merger is
consummated, all Evaluation Material will be used solely for the purpose of
evaluating the Merger and the transactions contemplated by this Agreement and
the planning for the implementation of the Merger and such Evaluation Material
shall be kept strictly confidential by the Receiving Company and those of its
directors, officers, employees and advisors to whom disclosure is necessary
for the performance of such evaluation and such planning (collectively
referred to as the "Representatives"), it being understood that these
Representatives have been or shall be informed of the confidential nature of
the Evaluation Material and shall agree to be bound by the provisions of this
Article X, and to refrain from disclosing and to not disclose the Evaluation
Material to any other person. Without limiting the generality of the
foregoing, upon the consummation of the Merger, only Ascend shall be permitted
to disclose the Evaluation Material of both Ascend and Whitetree. The
Receiving Company shall cause its Representatives to observe the terms of this
Article X, and the Receiving Company shall be responsible for any breach of
this Article X by any of its Representatives.
Section 10.3 Mandatory Disclosure. In the event that the Receiving Company
or any of its Representatives become legally compelled (by deposition,
interrogatory, request for documents, subpoena, civil investigative demand,
other demand or request by a governmental agency or other application of
statutes, rules and regulations under the Federal securities laws or similar
process) to disclose any of the Evaluation Material, the Receiving Company
shall provide the Disclosing Company with prompt prior written notice of such
requirement prior to such disclosure. In the event that a protective order or
other remedy is not obtained, or that the Disclosing Company waives compliance
with the provision hereof, the Receiving Company agrees to furnish only that
portion of the Evaluation Material which the Receiving Company is legally
required to furnish and, where appropriate, to exercise its best efforts to
obtain assurances that confidential treatment will be accorded such Evaluation
Material.
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Section 10.4 Return of Evaluation Material. If a Merger is not consummated
or if the Disclosing Company so requests, the Receiving Company shall promptly
return to the Disclosing Company all copies of Evaluation Material in its
possession or in the possession of its Representatives which consists of
written or visual material, and the Receiving Company shall destroy all copies
of any analyses, compilations, studies or other documents prepared by the
Receiving Company or for the Receiving Company's use containing any Evaluation
Material. Notwithstanding the return or destruction of the Evaluation
Material, each party and its Representatives shall continue to be bound by its
obligations of confidentiality and other obligations hereunder. Any
destruction required pursuant to this Section 10.4 shall be certified in
writing to the applicable party by an authorized officer supervising such
destruction.
Section 10.5 No Public Announcement. Except with the prior written consent
of Ascend, Whitetree shall not issue any press release or other public
statement with respect to the Merger, this Agreement or the other transactions
contemplated hereby.
Section 10.6 Injunctive Relief. Ascend and Whitetree understand and agree
that money damages will not be a sufficient remedy for any breach of this
Article X by either party or any of their respective Representatives and that
the non-breaching party shall be entitled to equitable relief, including
injunction and specific performance, as a remedy for any such breach. Such
remedies shall not be deemed to be the exclusive remedies for a breach of this
Article X but shall be in addition to all other remedies available at law or
in equity.
ARTICLE XI
GENERAL PROVISIONS
Section 11.1 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or by
commercial delivery service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with confirmation of receipt) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Ascend or Sub, to:
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, CA 94502
Attention: Robert Dahl
Fax: (510) 769-6001
with a copy to:
Gray Cary Ware & Freidenrich, A Professional Corporation
400 Hamilton Ave.
Palo Alto, CA 94301
Attention: Thomas W. Furlong, Esq. & Rod J. Howard, Esq.
Fax: (415) 327-3699
(b) if to Whitetree, to:
Whitetree, Inc.
1371 Shorebird Way
Mountain View, CA 94043
Attention: Maureen Lawrence
Fax: (415) 855-0864
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with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Thomas C. DeFilipps, Esq.
Fax: (415) 493-6811
(c) if to the Shareholder Agent, to:
Geoffrey Yang
3000 Sand Hill Road, #2-290
Menlo Park, CA 94025
Fax: (415) 854-5762
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Thomas C. DeFilipps, Esq.
Fax: (415) 493-6811
(d) If to the Shareholders or Option Holders (as defined in Section 6.10
hereof) to: the address of such Holder as set forth in the stock
transfer books and other applicable records of Whitetree.
Section 11.2 Interpretation. When a reference is made in this Agreement to a
section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement," "the date hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to February 14, 1997. The table
of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. In determining whether a Whitetree Material Adverse Effect or
an Ascend Material Adverse Effect exists materiality shall be determined on
the basis of the applicable party and all of its subsidiaries, taken together
as a whole, and not on the basis of the party or any single Subsidiary alone;
and in determining whether the breach or failure of any representation and
warranty to be true, or the breach of any covenant or agreement, could
reasonably be expected or would be reasonably likely to have a Whitetree
Material Adverse Effect or an Ascend Material Adverse Effect, either
individually or in the generate, all breaches and failures of all
representations, warranties, covenants and agreements by such party in this
Agreement shall be aggregated and considered. Reference to a party's
"knowledge" means actual knowledge of such party and its Subsidiaries after
reasonable inquiry of such party's and its Subsidiaries' directors, officers,
and other management-level employees who could reasonably be expected to have
knowledge of such matters. As used in this Agreement, the term "Governmental
Entity" means any (i) nation, state, commonwealth, province, territory,
county, municipality, district or other jurisdiction of any nature; (ii)
federal, state, local, municipal, foreign or other government; or (iii)
governmental or quasi-governmental authority of any nature (including any
governmental division, department, agency, commission, official, organization,
and any court or other tribunal), and the term "Subsidiary" means, with
respect to any party, any corporation, at least a majority of the securities
or other interests having by their terms ordinary voting power to elect a
majority of the Board of Directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
owned or controlled by such party or by any one or more of its Subsidiaries,
or by such party and one or more of its Subsidiaries.
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Section 11.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
Section 11.4 Severability. In the event that any provision of this
Agreement, or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
Section 11.5 Nonsurvival of Representations, Warranties and
Agreements. Except as explicitly set forth in this Agreement, none of the
representations, warranties and agreements in this Agreement or in any closing
certificate delivered pursuant to this Agreement shall survive the Closing and
the Effective Time.
Section 11.6 Entire Agreement. This Agreement (including the documents and
the instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings both written and oral,
among the parties with respect to the subject matter hereof (including,
without limitation, that certain Letter Agreement dated February 10, 1997 and
that certain Confidential Disclosure Agreement by and between Ascend and
Whitetree, dated January 14, 1997).
Section 11.7 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of California without regard to any
applicable conflicts of law except that the DGCL shall, to the extent
applicable, govern the procedures to be taken hereunder to effect the Merger.
Section 11.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
Section 11.9 Third Party Beneficiary. Nothing contained in this Agreement is
intended to confer upon any person other than the parties hereto and their
respective successors and permitted assigns, any rights, remedies or
obligations under, or by reason of this Agreement, except that the persons who
are shareholders of Whitetree immediately prior to the Effective Time of the
Merger (and their successors and assigns) are express intended third party
beneficiaries of Articles I and II, Section 6.10, Article IX, and, to the
extent relevant to any of the foregoing, Article XI and as such are entitled
to rely on the provisions hereof as if a party hereto.
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IN WITNESS WHEREOF, each of Ascend, Sub and Whitetree has caused this
Agreement to be signed by its respective officer thereunto duly authorized,
and the Shareholder Agent has signed this Agreement, as of the date first
written above.
ASCEND COMMUNICATIONS, INC. WHITETREE, INC.
/s/ Michael Johnson /s/ Maureen Lawrence
By: _________________________________ By: _________________________________
Title: Controller and Chief Title: Chief Executive Officer and
Accounting Officer President
ASCEND ACQUISITION CORPORATION II SHAREHOLDER AGENT
/s/ Rod J. Howard /s/ Geoffrey Yang
By: _________________________________ _____________________________________
Title: Vice President and Assistant Geoffrey Yang
Secretary
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EXHIBIT B
POOLING AGREEMENT
February 14, 1997
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, California 94502
Ladies and Gentlemen:
I understand that an Agreement and Plan of Merger dated as of February 14,
1997 (the "Merger Agreement") has been entered into by and among Ascend
Communications, Inc. ("Ascend"), Ascend Acquisition Corporation II ("Sub") and
Whitetree, Inc. ("Whitetree"), and that the Merger Agreement provides for the
merger of Sub with and into Whitetree (the "Merger"). I also understand that
the Merger is intended to be accounted for as a pooling of interests pursuant
to Opinion No. 16 of the Accounting Principles Board.
I have been advised that as of the date of this Pooling Agreement I may be
deemed to be an "affiliate" of Whitetree, as the term "affiliate" is used in,
and for purposes of, Accounting Series Releases Nos. 130 and 135, as amended,
of the Securities and Exchange Commission, although nothing contained herein
should be construed as an admission of such status.
In consideration of the mutual agreements, provisions and covenants set
forth in the Merger Agreement and hereinafter in this Pooling Agreement, I
represent and agree as follows:
1. Pooling Requirements. From the date hereof until the earlier of the
Effective Time of the Merger or the termination of the Merger Agreement,
except as permitted below, I will not sell, transfer or otherwise dispose of,
or reduce my interest in or risk relating to, any shares of Ascend Common
Stock or Whitetree capital stock presently beneficially owned by me. In
addition, except as permitted below, I will not (except to a revocable trust
of which I or members of my immediate family are the beneficiary) sell,
exchange, transfer, pledge, distribute or otherwise dispose of, or grant any
option, establish any "short" or put-equivalent position with respect to, or
otherwise reduce (through derivatives or otherwise) my interests in or risk
relating to, any Ascend Common Stock issued to me in the Merger or otherwise
beneficially owned by me until after such time as Ascend has published (within
the meaning of Accounting Series Release No. 130, as amended, of the
Securities and Exchange Commission) in an effective registration statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q or Current Report on
Form 8-K filed with the Securities and Exchange Commission, or any publicly
disclosed quarterly earnings report or press release or other authorized
public disclosures by Ascend, financial results covering at least 30 days of
combined post-Merger operations of Ascend and Whitetree (the "Pooling Holding
Period"). Nevertheless, I understand that beginning on the date of this
Agreement and ending at the expiration of the Pooling Holding Period, I will
be permitted to sell, exchange, transfer, pledge, distribute or otherwise
dispose of, or reduce my interest in or risk relating to, an amount of
Whitetree capital stock and Ascend Common Stock not more than the de minimis
amount permitted by the Securities and Exchange Commission in its rules and
releases relating to pooling-of-interests accounting treatment, subject to the
advance concurrence of Ascend and Whitetree and each of their independent
auditors.
2. Miscellaneous.
(a) This Pooling Agreement shall be governed by and construed in accordance
with the internal laws of the State of California applicable to agreements to
be performed wholly within such state.
(b) This Pooling Agreement shall be binding on my successors and assigns,
including my heirs, executors, administrators, trustees and personal
representatives.
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(c) The undersigned acknowledges, understands and agrees that the
representations, warranties and covenants of the undersigned set forth above
will be relied upon by both Ascend and Whitetree and their respective
affiliates, legal counsel and accountants, and that substantial losses and
damages may be incurred by such persons if any such representation, warranty
or covenant is inaccurate or breached.
(d) If a court of competent jurisdiction determines that any provision of
this Pooling Agreement is not enforceable or enforceable only if limited in
time, scope or otherwise, this Pooling Agreement shall continue in full force
and effect with such provision stricken or so limited.
(e) This Pooling Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same document.
(f) This Pooling Agreement shall not be modified or amended, or any right
hereunder waived or any obligation excused, except by a written instrument
signed by both parties.
(g) I have carefully read this Pooling Agreement and discussed its
requirements, to the extent the undersigned believed necessary, with my
counsel or counsel for Whitetree.
Very truly yours,
_____________________________________
Signature
_____________________________________
Print Name
Accepted:
Ascend Communications, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
Dated: February 14, 1997
AB-2
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EXHIBIT C
AFFILIATE AGREEMENT
February 14, 1997
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, California 94502
Ladies and Gentlemen:
I understand that an Agreement and Plan of Merger dated as of February 14,
1997 (the "Merger Agreement") has been entered into by and among Ascend
Communications, Inc. ("Ascend"), Ascend Acquisition Corporation II ("Sub") and
Whitetree, Inc. ("Whitetree"), and that pursuant to the Merger Agreement, Sub
will merge with and into Whitetree, Whitetree will become a wholly-owned
subsidiary of Ascend and the shareholders of Whitetree will become
stockholders of Ascend (the "Merger").
I also understand that in accordance with the Agreement, the shares of
Whitetree capital stock owned by the undersigned at the Effective Time (as
defined in the Merger Agreement) shall be converted into shares of common
stock, $0.001 par value, of Ascend ("Ascend Common Stock") in the manner and
in the amounts described in the Merger Agreement.
In consideration of the mutual agreements, provisions and covenants set
forth in the Merger Agreement and hereinafter in this Affiliate Agreement, the
undersigned represents and agrees as follows:
1. Rule 145. The undersigned will not offer, sell, pledge, transfer or
otherwise dispose of any of the shares of Ascend Common Stock issued to the
undersigned in the Merger unless at such time either: (i) such transaction
shall be permitted pursuant to the provisions of Rule 145 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"); (ii) the
undersigned shall have furnished to Ascend an opinion of counsel, satisfactory
to Ascend, to the effect that no registration under the Securities Act would
be required in connection with the proposed offer, sale, pledge, transfer or
other disposition; or (iii) a registration statement under the Securities Act
covering the proposed offer, sale, pledge, transfer or other disposition shall
be effective under the Securities Act.
2. Legends.
(a) The undersigned understands that all certificates representing Ascend
Common Stock deliverable to the undersigned pursuant to the Merger shall bear
a legend substantially as follows:
"The shares represented by this certificate may not be offered, sold,
pledged, transferred or otherwise disposed of except in accordance with the
requirements of the Securities Act of 1933, as amended, and the other
conditions specified in the Affiliate Agreement dated as of February 14,
1997 between the holder of this certificate and Ascend Communications, Inc.
("Ascend"), and the Pooling Agreement dated as of February 14, 1997 between
the holder of this certificate and Ascend, copies of which agreements may
be inspected by the holder of the certificate at the offices of Ascend, One
Ascend Plaza, 1701 Harbor Bay Parkway, Alameda, California 94502 or
furnished by Ascend to the holder of this certificate upon written request
and without charge."
(b) The undersigned also understands that unless the transfer by the
undersigned of shares of Ascend Common Stock has been registered under the
Securities Act or is a sale made in conformity with the provisions of Rule
145, Ascend reserves the right to put the following legend on the certificate
issue to my transferee:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, and were acquired from a person who
received such shares in a transaction to which Rule 145
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promulgated under the Securities Act of 1933, as amended, applies. The
shares have been acquired by the holder not with a view to, or for resale
in connection with, any distribution thereof within the meaning of the
Securities Act of 1933, as amended, and may not be sold, pledged or
otherwise transferred except in accordance with an exemption from the
registration requirements of the Securities Act of 1933, as amended."
It is understood and agreed that the legends set forth in paragraphs (a) and
(b) above shall be removed by delivery of substitute certificates without such
legends if I, the undersigned, shall have delivered to Ascend a copy of a
letter from the staff of the Securities and Exchange Commission, or an opinion
of counsel in form and substance reasonably satisfactory to Ascend, to the
effect that such legends are not required for purposes of the Securities Act.
Ascend, in its discretion, may cause stop transfer orders to be placed with
its transfer agent with respect to the certificates for the shares of Ascend
Common Stock which are required to bear the foregoing legends.
3. Miscellaneous.
(a) This agreement shall be governed by and construed in accordance with the
internal laws of the State of California applicable to agreements to be
performed wholly within such state.
(b) This agreement shall be binding on the undersigned's successors and
assigns, including his or her heirs, executors, administrators, trustees, and
personal representatives.
(c) The undersigned, has carefully read this agreement and discussed its
requirements, to the extent the undersigned believed necessary, with counsel
for the undersigned or counsel for Whitetree. The undersigned acknowledges,
understands and agrees that the representations, warranties and covenants of
the undersigned set forth above will be relied upon by Ascend and Whitetree
and their respective affiliates, legal counsel and accountants, and that
substantial losses and damages may be incurred by such persons if any of such
representations, warranties or covenants are inaccurate or breached.
(d) If a court of competent jurisdiction determines that any provision of
this Affiliate Agreement is not enforceable or enforceable only if limited in
time, scope or otherwise, this Affiliate Agreement shall continue in full
force and effect with such provision stricken or so limited.
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(e) This Affiliate Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same document. This Affiliate Agreement shall not
be modified or amended, or any right hereunder waived or any obligation
excused, except by a written instrument signed by both parties.
Very truly yours,
_____________________________________
Signature
_____________________________________
Print Name
Accepted:
ASCEND COMMUNICATIONS, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
Dated: February 14, 1997
AC-3
<PAGE>
EXHIBIT D
VOTING AGREEMENT
This Voting Agreement ("Agreement") is made and entered into as of February
14, 1997 by and between Ascend Communications, Inc., a Delaware corporation
("Ascend"), and the undersigned director, executive officer, or affiliate of
Whitetree, Inc., a California corporation ("Whitetree").
RECITALS
Concurrently with the execution of this Agreement, Ascend, Ascend
Acquisition Corporation II, a Delaware corporation and a wholly-owned
subsidiary of Ascent ("Sub"), and Whitetree have entered into an Agreement and
Plan of Merger dated as of February 14, 1997 (the "Merger Agreement"),
providing for the merger of Sub with and into Whitetree (the "Merger"),
pursuant to which Whitetree will become a wholly-owned subsidiary of Ascend.
The shareholder named on the signature page hereof (the "Shareholder") is the
beneficial holder of record of the number and class of shares of the
outstanding capital stock, of Whitetree ("Whitetree Capital Stock"), as is
indicated on the final page of this Agreement (the "Shares"). In connection
with the Merger, Ascend will acquire the Shareholder's entire equity interest
in Whitetree and the Shareholder will receive in exchange an equity interest
in Ascend. In consideration of and to induce the execution of the Merger
Agreement by Ascend, the Shareholder agrees not to sell or otherwise dispose
of any shares of Whitetree stock held by the Shareholder and to vote the
Shares so as to facilitate consummation of the Merger as more fully described
below.
NOW, THEREFORE, in consideration of the mutual promises and the mutual
covenants and agreements contained herein, the parties agree as follows:
1. Agreement to Retain Shares. The Shareholder agrees not to transfer,
pledge, sell, exchange or offer to transfer or sell or otherwise dispose of or
encumber any of the Shares or to make any offer or agreement relative thereto
at any time prior to the Expiration Date, as defined herein. The "Expiration
Date" shall mean the earlier of (i) the date and time on which the Merger
shall become effective in accordance with the terms and provisions of the
Merger Agreement or (ii) the date on which the Merger Agreement shall be
terminated pursuant to the Merger Agreement.
2. Agreement to Vote Shares. At any meeting of the Whitetree shareholders
called with respect to any of the following, and at any adjournment thereof,
and on every action approval by written consent of the shareholders of
Whitetree with respect to any of the following, the Shareholder shall vote the
Shares: (i) in favor of approval of the Merger Agreement and the Merger and
any matter which could reasonably be expected to facilitate the Merger and
(ii) against approval of any proposal made in opposition to or competition
with consummation of the Merger and the Merger Agreement, against any merger,
consolidation, share exchange, sale of securities or assets, reorganization,
recapitalization or other business combination involving Whitetree and any
other party (other than Ascend and its affiliates), against any liquidation,
or winding up of Whitetree and against any other matter which would, or could
reasonably be expected to, prohibit or discourage the Merger (each of the
foregoing is referred to as an "Opposing Proposal"). The Shareholder, as the
holder of voting stock of Whitetree shall be present in person or by proxy, at
all meetings of shareholders of Whitetree so that all Shares are counted for
the purposes of determining the presence of a quorum at such meetings. This
Agreement is intended to bind the Shareholder only with respect to the
specific matters set forth herein, and shall not prohibit the Shareholder from
action in accordance with his fiduciary duties as an officer or director of
Whitetree.
3. Irrevocable Proxy. Concurrently with the execution of this Agreement, the
Shareholder agrees to deliver to Ascend a proxy in the form attached hereto as
Annex A (the "Proxy"), which shall be irrevocable to the extent provided
therein; provided that the Proxy shall be revoked upon termination of this
Agreement in accordance with its terms.
4. Additional Purchases. For purposes of this Agreement (including, without
limitation, the recitals hereto), the term "Shares" shall include any shares
of Whitetree capital stock which the Shareholder purchases or as to
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which the Shareholder otherwise acquires voting power after the execution of
this Agreement and prior to the Expiration Date.
5. Representations, Warranties and Covenants of the Shareholder. The
Shareholder hereby represents, warrants and covenants to Ascend the following:
(a) Ownership of Shares. Except as specifically described on Annex B to
this Agreement (if any), the Shareholder (i) is the holder and beneficial
owner of the Shares, which at the date hereof and at all times until the
Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances, (ii) does not beneficially own any shares of
stock of Whitetree other than the Shares and (iii) has full power and
authority to make, enter into, deliver and carry out the terms of this
Agreement and the Proxy.
(b) No Voting Trusts and Agreements. The Shareholder will not, and will
not permit any entity under the Shareholder's control to, deposit any
shares of Whitetree capital stock held by the Shareholder or such entity in
a voting trust or subject any shares of Whitetree capital stock held by the
Shareholder or such entity to any arrangement or agreement with respect to
the voting of such shares of capital stock, other than agreements entered
into with Ascend.
(c) No Proxy Solicitations. The Shareholder will not, and will not permit
any entity under the Shareholder's control to, (a) solicit proxies or
become a participant in a "solicitation" (as such term is defined in Rule
14a-11 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), with respect to an Opposing Proposal or otherwise encourage or
assist any party in taking or planning any action which would compete with,
restrain or otherwise serve to interfere with or inhibit the timely
consummation of the Merger in accordance with the terms of the Merger
Agreement, (b) initiate a shareholders' vote or action by consent of
Whitetree shareholders or (c) become a member of a "group" (as such term is
used in Section 13(d) of the Exchange Act) with respect to any voting
securities of Whitetree with respect to an Opposing Proposal.
6. Representations, Warranties and Covenants of Ascend. Ascend represents,
warrants and covenants to the Shareholder as follows:
(a) Due Authorization. This Agreement has been authorized by all
necessary corporate action on the part of Ascend and has been duly executed
by a duly authorized officer of Ascend.
(b) Validity; No Conflict. This Agreement constitutes the legal, valid
and binding obligation of Ascend. Neither the execution of this Agreement
by Ascend nor the consummation of the transactions contemplated hereby will
result in a breach or violation of the terms of any agreement by which
Ascend is bound or of any decree, judgment, order, law or regulation now in
effect of any court or other governmental body applicable to Ascend.
7. Additional Documents. The Shareholder and Ascend hereby covenant and
agree to execute and deliver any additional documents necessary or desirable,
in the reasonable opinion of Ascend's legal counsel or the Shareholder, as the
case may be, to carry out the intent of this Agreement.
8. Consent and Waiver. The Shareholder hereby gives any consent or waivers
that are reasonably required for the consummation of the Merger under the
terms of any agreement to which the Shareholder is a party or pursuant to any
rights the Shareholder may have.
9. Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns,
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<PAGE>
but, except as otherwise specifically provided herein, neither this
Agreement nor any of the rights, interests or obligations of the parties
hereto may be assigned by any of the parties without the prior written
consent of the other.
(c) Amendments and Modifications. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
(d) Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Ascend will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of the Shareholder set forth herein. Therefore, it is agreed
that, in addition to any other remedies which may be available to Ascend
upon such violation, Ascend shall have the right to enforce such covenants
and agreements by specific performance, injunctive relief or by any other
means available to it at law or in equity.
(e) Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by commercial overnight courier service, by confirmed telecopy, or
sent by mail (registered or certified mail, postage prepaid, return receipt
requested) to the respective parties as follows:
(i)if to Ascend, to
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, CA 94502
Attention: Mike Johnson
Controller & Chief Accounting Officer
Facsimile No.: (510) 747-2638
with a copy to:
Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, California 94301
Attention: Rod J. Howard, Esq.
Facsimile No.: (415) 327-3699
(ii)if to Shareholder, to
the address for notice set forth on the last page hereof
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Thomas C. DeFilipps, Esq.
Facsimile No.: (415) 496-4086
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
(f) Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of California without giving
effect to principles of conflicts of law.
(g) Entire Agreement. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understanding between the parties with respect to such
subject matter.
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<PAGE>
(h) Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
(i) Effect of Headings. This section headings herein are for convenience
only and shall not affect the construction or interpretation of this
Agreement.
(j) Termination. Notwithstanding anything else in this Agreement, this
Agreement and the Proxy, and all obligations of the Shareholder under either
of them, shall automatically terminate as of the Expiration Date.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
ASCEND COMMUNICATIONS, INC.
By: _____________________________
Its: ____________________________
SHAREHOLDER
By: _____________________________
Its: ____________________________
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<PAGE>
ANNEX A
IRREVOCABLE PROXY
The undersigned holder of shares of capital stock (the "Shareholder") of
Whitetree, Inc., a California corporation ("Whitetree"), hereby irrevocably
appoints and constitutes the members of the Board of Directors of Ascend
Communications, Inc., a Delaware corporation ("Ascend"), and each of them (the
"Proxyholders"), the agents and proxies of the undersigned, with full power of
substitution and resubstitution, to the full extent of the undersigned's
rights with respect to the shares of capital stock of Whitetree beneficially
owned by the undersigned, which shares are listed below (the "Shares"), and
any and all other shares or securities issued or issuable in respect thereof
on or after the date hereof and prior to the date this proxy terminates, to
vote the Shares as follows:
If within five business days after the commencement by Whitetree of the
solicitation of shareholder written consents for the adoption and approval of
the Merger Agreement (as such term is defined below), the Shareholder shall
not have executed and delivered to Whitetree a duly and validly signed and
dated consent adopting and approving the Merger Agreement, and upon written
notice to Whitetree with a copy to Whitetree's counsel and prior to
termination of this proxy, the agents and proxies named above are empowered to
exercise all voting and other rights (including, without limitation, the power
to execute and deliver written consents with respect to the Shares) of the
undersigned at every annual, special or adjourned meeting of Whitetree
shareholders, and in every written consent in lieu of such a meeting, or
otherwise,
1. In favor of approval of the Merger (as defined in the Voting Agreement
dated February 14, 1997 between the Shareholder and Ascend (the "Voting
Agreement")) and that certain Agreement and Plan of Merger (the "Merger
Agreement") dated as of February 14, 1997 by and among Ascend, Ascend
Acquisition Corporation II, a Delaware corporation and a wholly-owned
subsidiary of Ascend ("Sub"), and Whitetree, and any matter that could
reasonably be expected to facilitate the Merger, and
2. Against (i) approval of any proposal made in opposition to or competition
with consummation of the Merger and the Merger Agreement, (ii) any merger,
consolidation, sale of assets, reorganization or recapitalization with any
other party, (iii) any liquidation, or winding up of Whitetree and (iv) any
other matter which would, or could reasonably be expected to, prohibit or
discourage the Merger.
The Proxyholders may not exercise this proxy on any other matter. The
undersigned shareholder may vote the Shares on all such other matters.
The proxy granted by the Shareholder to the Proxyholders hereby is granted
as of the date of this Agreement in order to secure the obligations of the
Shareholders set forth in Section 2 of the Voting Agreement, and is
irrevocable and coupled with an interest in such obligations and in the
interests in Whitetree to be purchased and sold pursuant the Merger Agreement.
This proxy will terminate upon the termination of the Voting Agreement in
accordance with its terms.
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares and any and all other shares or securities issued or
issuable in respect thereof on or after the date hereof are hereby revoked and
no subsequent proxies will be given until such time as this proxy shall be
terminated in accordance with its terms.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. The undersigned shareholder
authorizes the Proxyholders to file this proxy and any substitution with the
Secretary of Whitetree and with any Inspector of Elections at any meeting of
the shareholders of Whitetree.
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This proxy is irrevocable and shall survive the insolvency, incapacity, death
or liquidation of the undersigned.
Dated: , 1997
Signature of Shareholder: ____________________
Print name of Shareholder: ___________________
Shares beneficially owned:
-------- shares of Whitetree Common Stock
-------- shares of Whitetree Series A
-------- Preferred Stock
shares of Whitetree Series B
-------- Preferred Stock
shares of Whitetree Series C
-------- Preferred Stock
shares of Whitetree Series D
Preferred Stock
ADA-2
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ANNEX B
[LETTERHEAD OF DEUTSCHE MORGAN GRENFELL TECHNOLOGY GROUP]
February 14, 1997
Board of Directors
Whitetree, Inc.
1371 Shorebird Way
Mountain View, CA 94043
Members of the Board:
We understand that Ascend Communications, Inc. ("Ascend"), Whitetree, Inc.
("Whitetree"), and Whitetree Acquisition Corporation ("Merger Sub"), a wholly-
owned subsidiary of Ascend, have entered into an Agreement and Plan of Merger,
dated as of the date hereof (the "Merger Agreement"), which provides, among
other things, for the merger (the "Merger") of Merger Sub with and into
Whitetree. Pursuant to the Merger, Whitetree will become a wholly-owned
subsidiary of Ascend and each issued and outstanding share of common stock of
Whitetree (assuming the conversion of all outstanding Preferred Stock and
Warrants of Whitetree into Whitetree Common Stock prior to the Effective Time
of the Merger) (the "Whitetree Common Stock"), other than shares to which
dissenters' rights have been perfected, shall be converted into the right to
receive a fraction (the "Exchange Ratio") of a share of common stock of Ascend
(the "Ascend Common Stock") pursuant to a certain formula set forth in the
Merger Agreement. The terms and conditions of the Merger are more fully set
forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the holders of
Whitetree Common Stock.
For purposes of the opinion set forth herein, we have:
i. analyzed certain internal financial statements and other financial and
operating data concerning Whitetree prepared by the management of
Whitetree;
ii. analyzed certain financial projections relating to Whitetree prepared
by the management of Whitetree;
iii. discussed the past and current operations and financial condition and
the prospects (including the projected funding requirements) of
Whitetree with senior executives of Whitetree;
iv. analyzed certain publicly available financial statements and other
information of Ascend;
v. analyzed certain financial projections relating to Ascend prepared by
the management of Ascend;
vi. discussed the past and current operations and financial condition and
the prospects of Ascend with senior executives of Ascend;
vii. analyzed the pro forma impact of the Merger on the earnings per share,
consolidated capitalization and other financial ratios of Ascend;
viii. reviewed the reported prices and trading activity for the Ascend
Common Stock;
ix. compared the financial performance of Ascend and the prices and trading
activity of the Ascend Common Stock with that of certain other
comparable publicly-traded companies and their securities;
x. participated in discussions and negotiations among representatives of
Whitetree and Ascend and their legal advisors;
xi. contacted and participated in discussions with parties other than
Ascend regarding a potential sale of or other business combination
involving the Company;
xii. reviewed the Merger Agreement; and
xiii. performed such other analyses and considered such other factors as we
have deemed appropriate.
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We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of
Ascend and Whitetree, respectively. We have been instructed by the Board of
Directors of Whitetree to pursue only a sale of the Company. We are not making
any judgment about and our opinion does not address the value or viability of
the Company as a stand-alone, independent entity or the availability of
funding to support the operations of the Company as a stand-alone, independent
entity. We have not made any independent valuation or appraisal of the assets,
liabilities or technology of Ascend or Whitetree, respectively, nor have we
been furnished with any such appraisals. We have assumed that the Merger will
be accounted for as a "pooling-of-interests" business combination in
accordance with U.S. Generally Accepted Accounting Principles and will be
consummated in accordance with the terms set forth in the Merger Agreement.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Whitetree in
connection with this transaction and will receive a fee for our services. In
the past, Deutsche Morgan Grenfell and its affiliates have provided financial
advisory services for Ascend.
It is understood that this letter is for the information of the Board of
Directors of Whitetree only and may not be used for any other purpose without
our prior written consent. In addition, we express no recommendation or
opinion as to how the holders of Whitetree Common Stock should vote at the
shareholders' meeting held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of Whitetree Common Stock.
Very truly yours,
DEUTSCHE MORGAN GRENFELL INC.
/s/ Ethan M. Topper
By: _________________________________
Ethan M. Topper
Managing Director
/s/ William J.B. Brady, III
By: _________________________________
William J.B. Brady, III
Managing Director
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<PAGE>
ANNEX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
(S) 1300 RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED
a. If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation is a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
b. As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
c. As used in this chapter, "dissenting shareholder" means the record holder
of dissenting shares and includes a transferee of record.
(S) 1301 DEMAND FOR PURCHASE
a. If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the
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procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status
as dissenting shares under Section 1309.
b. Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the cast of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
c. The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
(S) 1302 ENDORSEMENT OF SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S) 1303 AGREED PRICE--TIME FOR PAYMENT
a. If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
b. Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304 DISSENTER'S ACTION TO ENFORCE PAYMENT
a. If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
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b. Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
c. On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305 APPRAISER'S REPORT--PAYMENT--COSTS
a. If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
b. If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
c. Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
d. Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
e. The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(S) 1306 DISSENTING SHAREHOLDER'S STATUS AS CREDITOR
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307 DIVIDENDS PAID AS CREDIT AGAINST PAYMENT
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S) 1308 CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
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(S) 1309 TERMINATION OF DISSENTING SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
a. The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
b. The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
c. The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
d. The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S) 1310 SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S) 1311 EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
(S) 1312 ATTACKING VALIDITY OF REORGANIZATION OR MERGER
a. No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof, but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
b. If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter, but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
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c. If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
organization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more as to a reorganization shall
have the burden of proving that the transaction is just and reasonable as to
the shareholders of any party so controlled.
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ANNEX D
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
WHITETREE, INC.
The undersigned, Denise Savoie and Mario M. Rosati, hereby certify that:
ONE: They are the duly elected Vice President and Secretary, respectively,
of the corporation.
TWO: The Articles of Incorporation of the corporation shall be amended and
restated to read in full as follows:
I.
The name of this corporation is Whitetree, Inc. (the "Corporation").
II.
The purpose of this Corporation is to engage in any lawful act or activity
for which a Corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is 31,100,000
shares. 20,000,000 shares shall be Common Stock with a par value of $0.001 per
share and 11,100,000 shares shall be Preferred Stock with a par value of
$0.001 per share, of which 5,500,000 shares of the Preferred Stock are
designated Series A Convertible Participating Preferred Stock ("Series A
Preferred"), 3,000,000 shares of the Preferred Stock are designated Series B
Convertible Participating Preferred Stock ("Series B Preferred"), 1,600,000
shares of the Preferred Stock are designated Series C Convertible
Participating Preferred Stock ("Series C Preferred") and 1,000,000 shares of
the Preferred Stock are designated Series D Convertible Participating
Preferred Stock ("Series D Preferred").
IV.
The rights, preferences, privileges and restrictions granted to or imposed
upon the Common Stock and Preferred Stock are as follows:
A. PREFERRED STOCK
Section 1. Dividends. The holders of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock shall be entitled to receive, out of funds legally available
therefor, non-cumulative dividends at the per annum rate of $.07, $.12, $.24
and $.54 per share, respectively, subject to declaration thereof by the
Corporation's Board of Directors, together with dividends at the same rate as
dividends (other than dividends paid in additional shares of Common Stock) are
paid with respect to the Common Stock (treating each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock as being equal to the number of shares of Common
Stock into which each such share of Preferred Stock could be converted
pursuant to the provisions of Section 4 hereof with such number determined as
of the record date for the determination of holders of Common Stock entitled
to receive such dividend). No dividends may be paid on, nor may any other
distribution be made upon, any shares
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of capital stock (other then the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock) in any fiscal
year in which the Corporation has not declared and paid the noncumulative
dividend provided for in this Section 1 on the Preferred Stock.
Section 2. Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, each holder of outstanding shares
of Preferred Stock and Common Stock shall be entitled to be paid out of the
assets of the Company available for distribution to stockholders, whether such
assets are capital, surplus, or earnings as follows: (i) First, the holders of
the outstanding shares of Preferred Stock shall receive an amount in cash
equal to $1.00 per share for each share of Series A Preferred Stock, $1.75 per
share for each share of Series B Preferred Stock, $3.48 for each share of
Series C Preferred Stock and $7.68 for each share of Series D Preferred Stock
(adjusted appropriately for stock splits, stock dividends and the like)
together with any declared but unpaid dividends to which the holders of
outstanding shares of Preferred Stock are entitled pursuant to Section 1
hereof, before any payment shall be made to the holders of any class of Common
Stock or of any other stock ranking on liquidation junior to the Preferred
Stock; provided, however, that if, upon any liquidation, dissolution or
winding up of the Company, the amounts payable with respect to the Preferred
Stock and any other stock ranking as to any such distribution on a parity with
the Preferred Stock are not paid in full, the holders of the Preferred Stock
and such other stock shall share ratably in any distribution of assets in
proportion to the full respective preferential amounts to which they are
entitled; and (ii) Second, the holders of the outstanding shares of Preferred
Stock shall share ratably with the holders of the outstanding shares of Common
Stock and any other capital stock of the Corporation in the distribution, in
cash, of the assets of the Company remaining for distribution to stockholders,
whether such assets are capital, surplus or earnings (the "Residual Assets")
as if each share of Preferred Stock had been converted into the number of
shares of Common Stock issuable upon the conversion of a share of Preferred
Stock immediately prior to any such liquidation, dissolution or winding up of
the Corporation; provided, however, that if the holders of the Preferred Stock
would receive $3.00 or more per share if no distribution was made under clause
(i) and all of the assets of the Corporation were distributed pursuant to
clause (ii) hereof, (taking into account the rights of holders of any other
class or series of capital stock of the Company entitled to share in such
distribution), then the holders of Preferred Stock shall not be entitled to
any distribution under clause (i) and shall only be entitled to receive their
ratable share of any distribution under clause (ii) above. Notwithstanding the
foregoing, in the event that assets of the Corporation are distributed
pursuant to the proviso in the immediately preceding sentence and the assets
available for distribution to shareholders are less than $3.48 per share in
the case of the Series C Preferred Stock and $7.68 per share in the case of
the Series D Preferred Stock (treating each share of Preferred Stock as if
converted into Common Stock, and adjusted appropriately for stock splits,
stock dividends and the like), then the holders of Series C Preferred Stock
and Series D Preferred Stock shall receive $3.48 and $7.68 (adjusted
appropriately for stock splits, stock dividends and the like) for each share
of Series C Preferred Stock and Series D Preferred Stock, as the case may be,
and the remaining assets will be distributed in accordance with clause
(ii) above among the holders of Series A Preferred Stock, Series B Preferred
Stock and Common Stock.
(b) A consolidation or merger of the Corporation (except (i) into or with a
wholly-owned subsidiary of the Corporation with requisite shareholder approval
or (ii) a merger in which the beneficial owners of the Corporation's capital
stock immediately prior to such transaction hold no less than fifty-one
percent (51%) of the voting power in the resulting entity) or a sale of all or
substantially all of the assets of the Corporation shall be regarded as a
liquidation, dissolution or winding up of the affairs of the Corporation
within the meaning of this Section 2; provided, however, that each holder of
the Preferred Stock shall have the right to elect the benefits of the
provisions of Section 4(i) hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the Corporation pursuant to this Section 2.
Section 3. Voting Power. Except as otherwise expressly provided herein or as
required by law, the holder of each share of Preferred Stock shall be entitled
to vote on all matters. Each share of Preferred Stock shall entitle the holder
thereof to such number of votes per share as shall equal the number of shares
of Common Stock into
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which each share of Preferred Stock is then convertible. Except as otherwise
expressly provided herein (including without limitation the provisions of
Section 6 hereof) or as required by law, the holders of shares of the
Preferred Stock and the Common Stock shall vote together as a single class on
all matters.
Section 4. Conversion. The holders of the Preferred Stock shall have the
following conversion rights:
(a) Voluntary Conversion. A holder of shares of Preferred Stock shall be
entitled, at any time and from time to time after the date hereof, to cause
any or all of such shares to be converted into shares of Common Stock,
initially at a conversion price equal to $1.00 per share of Common Stock
for each share of Series A Preferred Stock, $1.75 per share of Common Stock
for each share of Series B Preferred Stock, $3.48 per share of Common Stock
for each share of Series C Preferred Stock, and $7.68 per share of Common
Stock for each share of Series D Preferred Stock which prices shall be
adjusted as hereinafter provided (and, as so adjusted, are each hereinafter
sometimes referred to as the "Conversion Price"), with each share of
Preferred Stock being valued for such purpose at $1.00 per share of
Series A Preferred Stock, $1.75 per share of Series B Preferred Stock,
$3.48 per share of Series C Preferred Stock and $7.68 per share of Series D
Preferred Stock. If a holder of Preferred Stock elects to convert Preferred
Stock at a time when there are any accrued and unpaid dividends or other
amounts due on such shares, such dividends and other amounts shall be paid
in full by the Corporation in connection with such conversion.
(b) Automatic Conversion. Each share of Preferred Stock outstanding shall
automatically be converted into the number of shares of Common Stock into
which such shares are convertible at the then effective Conversion Price
(I) immediately upon the closing of an underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933 covering the offer and sale of Common Stock of the Corporation to the
public in which the proceeds received by the Corporation, net of
underwriting discounts and commissions, equal or exceed $7,500,000 at a per
share sale price to the public of at least $7.68 per share, as
appropriately adjusted for stock dividends, stock splits and the like (a
"Qualified Public Offering"), and (II) upon the vote of holders of two-
thirds (2/3rds) of the then outstanding shares of Preferred Stock. If any
Preferred Stock is automatically converted at a time when there are any
declared and unpaid dividends or other amounts due on such shares, such
dividends and other amounts shall be paid in full by the Corporation in
connection with such conversion. Upon the automatic conversion of the
Preferred Stock, the holders of such Preferred Stock shall surrender the
certificates representing such shares at the office of the Corporation or
of its transfer agent. Upon surrender of such certificates there shall be
issued and delivered to such Holder, promptly at such office and in his
name as shown on such surrendered certificate or certificates, or the name
of his designee, a certificate or certificates for the number of shares of
Common Stock into which the shares of the Preferred Stock surrendered were
convertible on the date on which such automatic conversion occurred,
together with cash in an amount equal to all dividends declared or accrued
but unpaid on, and any and all other amounts owing with respect to, the
shares of Preferred Stock converted, to and including the time of
conversion.
(c) Voluntary Conversion Procedures. Any holder of Preferred Stock
desiring to convert such shares into shares of Common Stock shall surrender
the certificate or certificates representing the Preferred Stock being
converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), at the
principal executive office of the Corporation or the offices of the
transfer agent for the Preferred Stock or such office or offices in the
continental United States of an agent for conversion as may from time to
time be designated by notice to the holders of the Preferred Stock by the
Corporation, accompanied by written notice of conversion. Such notice of
conversion shall specify (i) the number of shares of Preferred Stock to be
converted, (ii) the name or names in which such holder wishes the
certificate or certificates for Common Stock and for any Preferred Stock
not to be so converted to be issued and (iii) the address to which such
holder wishes delivery to be made of such new certificates to be issued
upon such conversion. Upon surrender of a certificate representing
Preferred Stock for conversion, the Corporation shall issue and send by
hand delivery, by courier or by first class mail (postage prepaid) to the
holder thereof or to such holder's designee, at the address designated by
such holder, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled
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upon conversion. In the event that there shall have been surrendered a
certificate or certificates representing Preferred Stock, only part of
which are to be converted, the Corporation shall issue and send to such
holder or such holder's designee, in the manner set forth in the preceding
sentence, a new certificate or certificates representing the number of
Preferred Stock which shall not have been converted.
(d) Effective Date of Conversion. The issuance by the Corporation of
shares of Common Stock upon a conversion of Preferred Stock into shares of
Common Stock made at the option of the holder thereof pursuant to Section
4(a) hereof shall be effective as of the surrender of the certificate or
certificates for the Preferred Stock to be converted, duly assigned or
endorsed for transfer to the Corporation (or accompanied by duly executed
stock powers relating thereto). The issuance by the Corporation of shares
of Common Stock upon a conversion of Preferred Stock into Common Stock
pursuant to Section 4(b)(I) hereof shall not be deemed to be effective
until immediately prior to the closing of the Qualified Public Offering.
The issuance by the Corporation of shares of Common Stock upon a conversion
of Preferred Stock into Common Stock pursuant to Section 4(b)(II) hereof
shall be effective as of the surrender for conversion of a certificate or
certificates for two thirds ( 2/3rds) of the then outstanding shares of
Preferred Stock, duly assigned or endorsed for transfer to the Corporation
(or accompanied by duly executed stock powers relating thereto). On and
after the effective date of conversion, the person or persons entitled to
receive the Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common
Stock.
(e) Fractional Shares. The Corporation shall not be obligated to deliver
to holders of Preferred Stock any fractional share of Common Stock issuable
upon any conversion of such Preferred Stock, but in lieu thereof may make a
cash payment in respect thereof in any manner permitted by law.
(f) Reservation of Common Stock. The Corporation shall at all times
reserve and keep available out of its authorized and unissued Common Stock,
solely for issuance upon the conversion of Preferred Stock as herein
provided, free from any preemptive rights or other obligations, such number
of shares of Common Stock as shall from time to time be issuable upon the
conversion of all the Preferred Stock then outstanding provided that the
shares of Common Stock so reserved shall not be reduced or affected in any
manner whatsoever so long as any Preferred Stock are outstanding. The
Corporation shall prepare and shall use its best efforts to obtain and keep
in force such governmental or regulatory permits or other authorizations as
may be required by law, and shall comply with all requirements as to
registration, qualification or listing of the Common Stock, in order to
enable the Corporation lawfully to issue and deliver to each holder of
record of Preferred Stock such number of shares of its Common Stock as
shall from time to time be sufficient to effect the conversion of all
Preferred Stock then outstanding and convertible into shares of Common
Stock.
(g) Adjustments to Conversion Price. The Conversion Price in effect from
time to time shall be subject to adjustment as follows:
(I) Stock Dividends Subdivisions and Combinations. Upon the issuance
of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, the subdivision of
outstanding shares of Common Stock into a greater number of shares of
Common Stock, or the combination of outstanding shares of Common Stock
into a smaller number of shares of the Common Stock, the Conversion
Price shall, simultaneously with the happening of such dividend,
subdivision or split be adjusted by multiplying the then effective
Conversion Price by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
event and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such event. An adjustment
made pursuant to this Section 4(g)(I) shall be given effect, upon
payment of such a dividend or distribution, as of the record date for
the determination of stockholders entitled to receive such dividend or
distribution (on a retroactive basis) and in the case of a subdivision
or combination shall become effective immediately as of the effective
date thereof.
(II) Sale of Common Stock. In the event the Corporation shall at any
time or from time to time while the Preferred Stock is outstanding
issue, sell or exchange any shares of Common Stock (including shares
held in the Corporation's treasury but excluding up to 1,858,009 shares
of Common
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Stock issued to officers, directors, employees, consultants or agents
of the Corporation pursuant to the Corporation's Stock Plan or upon the
exercise of options issued pursuant to such Stock Plan (the "Excluded
Shares")), for a consideration per share less than the Conversion Price
in effect immediately prior to the issuance, sale or exchange of such
shares, then, and thereafter successively upon each such issuance, sale
or exchange, the Conversion Price in effect immediately prior to the
issuance, sale or exchange of such shares shall forthwith be reduced to
an amount determined by multiplying the Conversion Price by a fraction:
(A) the numerator of which shall be (i) the number of shares of
Common Stock of all classes outstanding immediately prior to the
issuance of such additional shares of Common Stock (excluding
treasury shares but including all shares of Common Stock issuable
upon conversion or exercise of any outstanding Preferred Stock,
options, warrants, rights or convertible securities), plus (ii) the
number of shares of Common Stock which the net aggregate
consideration received by the Corporation for the total number of
such additional shares of Common Stock so issued would purchase at
the Conversion Price (prior adjustment), and
(B) the denominator of which shall be (i) the number of share of
Common Stock of all classes outstanding immediately prior to the
issuance of such additional shares of Common Stock (excluding
treasury shares but including all shares of Common Stock issuable
upon conversion or exercise of any outstanding Preferred Stock,
options, warrants, rights or convertible securities), plus (ii) the
number of such additional shares of Common Stock so issued.
(III) Sale of Options Rights or Convertible Securities. In the event
the Corporation shall at any time or from time to time while the
Preferred Stock is outstanding, issue options, warrants or rights to
subscribe for shares of Common Stock (other than any options for
Excluded Shares granted to officers, directors, employees, consultants
or agents of the Corporation pursuant to the Corporation's Stock Plan),
or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined by dividing the
Net Aggregate Consideration (as determined below) by the aggregate
number of shares of Common Stock that would be issued if all such
options, warrants, rights or convertible securities were exercised or
converted to the fullest extent permitted by their terms) less than the
Conversion Price in effect immediately prior to the issuance of such
options or rights or convertible or exchangeable securities, the
Conversion Price in effect immediately prior to the issuance of such
options, warrants or rights or securities shall be reduced to an amount
determined by multiplying the Conversion Price by a fraction:
(A) the numerator of which shall be (i) the number of shares of
Common Stock of all classes outstanding immediately prior to the
issuance of such options, rights or convertible securities
(excluding treasury shares but including all shares of Common Stock
issuable upon conversion or exercise of any outstanding Preferred
Stock, options, warrants, rights or convertible securities), plus
(ii) the number of shares of Common Stock which the total amount of
consideration received by the Corporation for the issuance of such
options, warrants, rights or convertible securities plus the minimum
amount set forth in the terms of such security as payable to the
Corporation upon the exercise or conversion thereof (the "Net
Aggregate Consideration") would purchase at the Conversion Price
prior to adjustment, and
(B) the denominator of which shall be (i) the number of shares of
Common Stock of all classes outstanding immediately prior to the
issuance of such options, warrants, rights or convertible securities
(excluding treasury shares but including all shares of Common Stock
issuable upon conversion or exercise of any outstanding Preferred
Stock, options, warrants, rights or convertible securities), plus
(ii) the aggregate number of shares of Common Stock that would be
issued if all such options, warrants, rights or convertible
securities were exercised or converted.
(IV) Expiration or Change in Price. If the consideration per share
provided for in any options or rights to subscribe for shares of Common
Stock or any securities exchangeable for or convertible into shares of
Common Stock, changes at any time, the Conversion Price in effect at
the time of such
D-5
<PAGE>
change shall be readjusted to the Conversion Price which would have
been in effect had such options or convertible securities provided for
such changed consideration per share (determined as provided in Section
4(g)(III) hereof), at the time initially granted, issued or sold;
provided, that such adjustment of the Conversion Price will be made
only as and to the extent that the Conversion Price effective upon such
adjustment remains less than or equal to the Conversion Price that
would be in effect if such options, rights or securities had not been
issued. No adjustment of the Conversion Price shall be made under this
Section 4 upon the issuance of any additional shares of Common Stock
which are issued pursuant to the exercise of any warrants, options or
other subscription or purchase rights or pursuant to the exercise of
any conversion or exchange rights in any convertible securities if an
adjustment shall previously have been made upon the issuance of such
warrants, options or other rights. Any adjustment of the Conversion
Price shall be disregarded if, as, and when the rights or convertible
securities which gave rise to such adjustment expire or are canceled
without having been exercised, so that the Conversion Price effective
immediately upon such cancellation or expiration shall be equal to the
Conversion Price in effect at the time of the issuance of the expired
or canceled warrants, options, rights or convertible securities, with
such additional adjustments as would have been made to that Conversion
Price had the expired or canceled warrants, options, rights or
convertible securities not been issued.
(h) Other Adjustments. In the event the Corporation shall make or issue,
or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities
of the Corporation other than shares of Common Stock, then and in each such
event lawful and adequate provision shall be made so that the holders of
Preferred Stock shall receive upon conversion thereof in addition to the
number of shares of Common Stock receivable thereupon, the number of
securities of the Corporation which they would have received had their
Preferred Stock been converted into Common Stock on the date of such event
and had they thereafter, during the period from the date of such event to
and including the Conversion Date (as that term is herein defined),
retained such securities receivable by them as aforesaid during such
period, giving application to all adjustments called for during such period
under this Section 4 as applied to such distributed securities.
If the Common Stock issuable upon the conversion of the Preferred Stock
shall be changed into the same or different number of shares of any class
or classes of stock, whether by reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend provided for above,
or a reorganization, merger, consolidation or sale of assets provided for
elsewhere in this Section 4), then and in each such event the holder of
each share of Preferred Stock shall have the right thereafter to convert
such share into the kind and amount of shares of stock and other securities
and property receivable upon such reorganization, reclassification or other
change, by holders of the number of shares of Common Stock into which such
shares of Preferred Stock might have been converted immediately prior to
such reorganization, reclassification or change, all subject to further
adjustment as provided herein.
(i) Mergers and Other Reorganizations. If at any time or from time to
time there shall be a capital reorganization of the Common Stock (other
than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 4) or a merger or consolidation of
the Corporation with or into another Corporation or the sale of all or
substantially all of the Corporation's properties and assets to any other
person, then, as a part of and as a condition to the effectiveness of such
reorganization, merger, consolidation or sale, lawful and adequate
provision shall be made so that the holders of the Preferred Stock shall
thereafter be entitled to receive upon conversion of the Preferred Stock
the number of shares of stock or other securities or property of the
Corporation or of the successor Corporation resulting from such merger or
consolidation or sale, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization, merger,
consolidation, or sale. In any such case, appropriate provisions shall be
made as part of and as a condition to the effectiveness of such
reorganization, merger, consolidation or sale with respect to the rights of
the holders of the Preferred Stock after the reorganization, merger,
consolidation or sale to the end that the provisions of this Article IV
(including, without limitation, provisions for liquidation preference,
voting power and adjustment of the Conversion Price and the number
D-6
<PAGE>
of shares purchasable upon conversion of the Preferred Stock) shall
thereafter be applicable, as nearly as may be, with respect to any shares
of stock or securities delivered in respect of the Preferred Stock.
Each holder of Preferred Stock upon the occurrence of a capital
reorganization, merger or consolidation of the Corporation or the sale of
all or substantially all its assets and properties as such events are more
fully set forth in the first paragraph of this Section 4(i), shall have the
option of electing treatment of his shares of Preferred Stock under either
this Section 4(i) or Section 2(b) hereof, notice of which election shall be
submitted in writing to the Corporation at its principal offices no later
than ten (10) days before the effective date of such event, provided that
any such notice shall be effective if given not later than fifteen (15)
days after the date of the corporation's notice, pursuant to Section 8,
with respect to such event.
(j) Notices. In each case of an adjustment or readjustment of the
Conversion Price, the Corporation will furnish each holder of Preferred
Stock with a certificate, prepared by the chief financial officer of the
Corporation, showing such adjustment or readjustment, and stating in detail
the facts upon which such adjustment or readjustment is based.
Section 5. Redemption.
(a) At the written election of any holder of Preferred Stock made not less
than 30 days prior to each of September 30, 1998, 1999 and 2000, the
Corporation shall call for redemption, and shall redeem from such holder not
later than 30 days after whichever September shall be applicable, (i) on each
of the first two such redemption dates, up to 33 1/3% of the shares of
Preferred Stock held by such holder on September 30, 1998, and (ii) on the
last such redemption date, up to the balance of Preferred Stock held by such
holder, at a redemption price per share equal to $1.61, $1.77 and $1.95 for
each share of Series A Preferred Stock; $2.60, $2.82 and $3.10 for each share
of Series B Preferred Stock; $4.76, $5.17 and $5.61 for each share of Series C
Preferred Stock; and $9.25, $10.36 and $11.60 for each share of Series D
Preferred Stock, in the case of shares redeemed on September 30, 1998, 1999
and 2000, respectively (appropriately adjusted, in each case, to take account
of any stock dividend, stock split, combination of shares, reclassification or
other similar event with respect to the Preferred Stock), plus an amount equal
to all declared but unpaid dividends on each share of Preferred Stock to and
including the time of redemption (the "Redemption Price").
(b) If the Corporation does not have sufficient funds legally available to
redeem all shares for which redemption is requested hereunder, then it shall
redeem such shares on a pro-rata basis among the holders of the Preferred
Stock in proportion to the shares of Preferred Stock then held by them to the
extent possible and shall redeem the remaining shares to be redeemed as soon
as sufficient funds are legally available. In the event that the Corporation
fails to redeem shares for which redemption is requested pursuant to section
5(a), then during the period from the applicable redemption date through the
date on which such shares are redeemed, the Redemption Price of such shares
shall bear interest at a per annum rate of 12%; provided, however, no such
interest shall be charged or accrue to the extent that redemption pursuant to
this Section 5 is unlawful.
Section 6. Restrictions and Limitations.
(a) So long as any shares of the Preferred Stock remain outstanding, the
Corporation shall not without the affirmative vote or written consent of the
holders of majority in interest of the then outstanding shares of the
Preferred Stock (adjusted appropriately for stock splits, stock dividends and
the like):
(i) Redeem, purchase or otherwise acquire for value (or pay into or set
aside for a sinking fund for such purpose) any of the Common Stock of any
class or any other capital stock of the Corporation (other than the
Preferred Stock); provided, however, that this restriction shall not apply
to the repurchase or redemption of shares of Common stock issued pursuant
to stock repurchase agreements with the Corporation's employees under which
the Corporation has the option to repurchase such Shares upon the
occurrence of certain events, including the termination of employment and
involuntary transfers by operation of law, so long as the repurchase price
paid by the Corporation does not exceed the purchase price paid to the
Corporation of such shares or the purchase is approved by unanimous vote of
the Board of Directors of the Corporation;
D-7
<PAGE>
(ii) Authorize or issue or obligate itself to issue, any other equity
security senior to or on a parity with the Preferred Stock as to
liquidation preferences, redemptions, or dividend rights or with any
special voting rights;
(iii) Increase or decrease (other than by conversion as permitted hereby)
the total number of authorized shares of Preferred Stock;
(iv) Authorize any merger or consolidation of the Corporation with or
into any other Corporation or entity (except into or with a wholly-owned
subsidiary of the Corporation with the requisite shareholder approval),
authorized the liquidation, dissolution or winding up of the Corporation,
or authorize the sale of substantially all of the assets of the
Corporation; or
(v) Amend the Articles of Incorporation or By-Laws of the Corporation or
take any other action or enter into any other agreements which could
prohibit or conflict with the Corporation's obligations hereunder with
respect to the holders of the Preferred Stock.
Section 7. No Reissuance of Preferred Stock. No share or shares of the
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired, and eliminated from the shares which the Corporation shall
be authorized to issue. The Corporation may from time to time take such
appropriate corporation action as may be necessary to reduce the authorized
number of shares of the Preferred Stock accordingly.
Section 8. Notices of Record Date. In the event (i) the Corporation
establishes a record date to determine the holders of any class of securities
who are entitled to receive any dividend or other distribution, or (ii) there
occurs any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, and any transfer of all or substantially all
of the assets of the Corporation to any other Corporation, or any other entity
or person, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to each holder of Preferred
Stock at least twenty (20) days prior to the record date specified therein, a
notice specifying (a) the date of such record date for the purpose of such
dividend or distribution and a description of such dividend or distribution,
(b) the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective, and (c) the time, if any, that is to be fixed, as to when
the holders of record of Common Stock (or other securities) shall be entitled
to exchange their shares of Common Stock (or other securities) for securities
or other property deliverable upon such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up.
Section 9. Other Rights. Except as otherwise provided in these Articles of
Incorporation, each share of Preferred Stock and each share of Common Stock
shall be identical in all respects, shall have the same powers, preferences
and rights, without preference of any such class or share over any other such
class or share, and shall be treated as a single class of stock for all
purposes.
B. COMMON STOCK
Section 1. Relative Rights of Preferred Stock and Common Stock. All
preferences, voting powers, relative, participating, optional or other special
rights and privileges and qualifications, limitations, or restrictions of the
Common Stock are expressly made subject and subordinate to those that may be
fixed with respect to any shares of the Preferred Stock.
Section 2. Voting Rights. Except as otherwise required by law or these
Articles of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of stock held by such stockholder of record on the books
of the Corporation for the election of directors and on all matters submitted
to a vote of stockholders of the Corporation. Except as otherwise required by
law or these Articles of Incorporation, the holders of Common Stock and
Preferred Stock shall vote together as a single class on all matters submitted
to the stockholders for a vote.
D-8
<PAGE>
Section 3. Dividends. Subject to the preferential rights of the Preferred
Stock, if any, the holders of shares of Common Stock shall be entitled to
receive, when, as and if declared by the Board of Directors of the
Corporation, out of the assets of the Corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of
capital stock.
Section 4. Repurchase of Shares. In connection with repurchases by this
Corporation of its Common Stock, pursuant to its agreements with certain of
the holders thereof, Sections 502 and 503 of the California General
Corporation Law shall not apply in whole or in part with respect to such
repurchases.
V.
ELECTION OF DIRECTORS
Notwithstanding anything else set forth herein:
Section 1. Number of Directors. The authorized number of directors of the
Corporation shall not be less than five (5) and not more than seven (7). The
number of directors within these limits shall be fixed, and may be changed
from time to time, by the board of directors or stockholders of the
Corporation, in the manner provided in the Corporation's by-laws.
Section 2. Election of Directors.
(a) The holders of the Preferred Stock, voting as a separate class, shall
be entitled to elect three (3) of the directors of the Corporation;
(b) The holders of the Common Stock, voting as a separate class, shall be
entitled to elect one (1) of the directors of the Corporation; and
(c) The holders of the Preferred Stock and the Common Stock, voting
together as a single class, shall be entitled to elect all other directors
of the Corporation.
VI.
Section 1. Limitation of Directors' Liability. The liability of the
directors of this Corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
Section 2. Indemnification of Corporate Agents. This Corporation is
authorized to indemnify its agents to the fullest extent permissible under
California law. For purposes of this provision, the term "agent" has the
meaning set forth in Section 317 of the California Corporations Code.
Section 3. Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right
of indemnification or limitation of liability of an agent of this Corporation
relating to acts or omissions occurring prior to such repeal or modification.
THREE: The foregoing amendment and restatement of the Articles of
Incorporation has been approved by the Board of Directors.
FOUR: The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the required vote of the shareholders
in accordance with Section 902 of the Corporations Code. The total number of
outstanding shares entitled to vote with respect to the amendment is
2,763,737 shares of Common Stock and 9,278,783 shares of Preferred Stock. The
number of shares voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was a majority of the outstanding
shares of Common Stock, voting as a separate class, and a majority of the
Preferred Stock, voting as a separate class.
D-9
<PAGE>
We declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge. Executed at Palo Alto, California on May 10, 1996.
/s/ Denise Savoie
-------------------------------
Denise Savoie, Vice President
D-10
<PAGE>
We declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge. Executed at Palo Alto, California on May 10, 1996.
/s/ Mario M. Rosati
-------------------------------------
Mario M. Rosati, Secretary
D-11
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
Denise Savoie and Thomas DeFilipps certify that:
1. They are the Vice President and Secretary, respectively, of
Whitetree, Inc., a California corporation (the "Corporation").
2. Article IV.A. Section 4(g)(II) of the Amended and Restated Articles of
Incorporation of the Corporation is amended to read as follows:
"(II) Sale of Common Stock. In the event the Corporation shall at any time
or from time to time while the Preferred Stock is outstanding, issue, sell
or exchange any shares of Common Stock (including shares held in the
Corporation's treasury but excluding up to 2,858,009 shares of Common Stock
issued to officers, directors, employees, consultants or agents of the
Corporation pursuant to the Corporation's Stock Plan or upon the exercise
of options issued pursuant to such Stock Plan (the "Excluded Shares")), for
a consideration per share less than the Conversion Price in effect
immediately prior to the issuance, sale or exchange of such shares, then,
and thereafter successively upon each such issuance, sale or exchange, the
Conversion Price in effect immediately prior to the issuance, sale or
exchange of such shares shall forthwith be reduced to an amount determined
by multiplying the Conversion Price by a fraction;"
and Article IV.A. Section 4(g)(II)(A) and (B) shall remain unchanged.
3. The foregoing amendment of the Amended and Restated Articles of
Incorporation has been duly approved by the Board of Directors.
4. The foregoing amendment of the Amended and Restated Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the California Corporations Code. The total
number of outstanding shares of the Common Stock of the Corporation is
2,901,505, and the total number of outstanding shares of the Preferred Stock
of the Corporation is 10,275,587. The number of shares of the Common Stock
voting in favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than 50%. The number of shares of the
Preferred Stock voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Date: September 30, 1996
/s/ Denise Savoie
-------------------------------------
Denise Savoie, Vice President
/s/ Thomas C. DeFilipps
-------------------------------------
Thomas C. DeFilipps, Secretary
D-12
<PAGE>
ANNEX E
BYLAWS
OF
WHITETREE, INC.
<PAGE>
BYLAWS OF
WHITETREE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I--CORPORATE OFFICES........................................ E-1
1.1 PRINCIPAL OFFICE............................................. E-1
1.2 OTHER OFFICES................................................ E-1
ARTICLE II--MEETINGS OF SHAREHOLDERS................................ E-1
2.1 PLACE OF MEETINGS ........................................... E-1
2.2 ANNUAL MEETING............................................... E-1
2.3 SPECIAL MEETING.............................................. E-1
2.4 NOTICE OF SHAREHOLDERS' MEETINGS............................. E-2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................. E-2
2.6 QUORUM....................................................... E-3
2.7 ADJOURNED MEETING; NOTICE.................................... E-3
2.8 VOTING....................................................... E-3
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT............ E-4
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...... E-4
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS.. E-5
2.12 PROXIES...................................................... E-5
2.13 INSPECTORS OF ELECTION....................................... E-5
ARTICLE III--DIRECTORS.............................................. E-6
3.1 POWERS....................................................... E-6
3.2 NUMBER OF DIRECTORS.......................................... E-6
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS..................... E-6
3.4 RESIGNATION AND VACANCIES.................................... E-7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..................... E-7
3.6 REGULAR MEETINGS............................................. E-7
3.7 SPECIAL MEETINGS; NOTICE..................................... E-7
3.8 QUORUM....................................................... E-8
3.9 WAIVER OF NOTICE............................................. E-8
3.10 ADJOURNMENT.................................................. E-8
3.11 NOTICE OF ADJOURNMENT........................................ E-8
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............ E-8
3.13 FEES AND COMPENSATION OF DIRECTORS........................... E-8
3.14 APPROVAL OF LOANS TO OFFICERS................................ E-9
ARTICLE IV--COMMITTEES.............................................. E-9
4.1 COMMITTEES OF DIRECTORS...................................... E-9
4.2 MEETINGS AND ACTION OF COMMITTEES............................ E-9
ARTICLE V--OFFICERS................................................. E-10
5.1 OFFICERS..................................................... E-10
5.2 ELECTION OF OFFICERS......................................... E-10
5.3 SUBORDINATE OFFICERS......................................... E-10
5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................... E-10
5.5 VACANCIES IN OFFICES......................................... E-10
5.6 CHAIRMAN OF THE BOARD........................................ E-10
5.7 PRESIDENT.................................................... E-11
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
5.8 VICE PRESIDENTS.................................................. E-11
5.9 SECRETARY........................................................ E-11
5.10 CHIEF FINANCIAL OFFICER.......................................... E-11
ARTICLE VI--INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS......................................................... E-12
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................ E-12
6.2 INDEMNIFICATION OF OTHERS........................................ E-12
6.3 PAYMENT OF EXPENSES IN ADVANCE................................... E-12
6.4 INDEMNITY NOT EXCLUSIVE.......................................... E-12
6.5 INSURANCE INDEMNIFICATION........................................ E-12
6.6 CONFLICTS........................................................ E-13
ARTICLE VII--RECORDS AND REPORTS.......................................... E-13
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER..................... E-13
7.2 MAINTENANCE AND INSPECTION OF BYLAWS............................. E-13
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS............ E-14
7.4 INSPECTION BY DIRECTORS.......................................... E-14
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER............................ E-14
7.6 FINANCIAL STATEMENTS............................................. E-14
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................... E-15
ARTICLE VIII--GENERAL MATTERS............................................. E-15
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING............ E-15
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS........................ E-15
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED................ E-15
8.4 CERTIFICATES FOR SHARES.......................................... E-15
8.5 LOST CERTIFICATES................................................ E-16
8.6 CONSTRUCTION; DEFINITIONS........................................ E-16
ARTICLE IX--AMENDMENTS.................................................... E-16
9.1 AMENDMENT BY SHAREHOLDERS........................................ E-16
9.2 AMENDMENT BY DIRECTORS........................................... E-16
</TABLE>
ii
<PAGE>
BYLAWS
OF
WHITETREE, INC.
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state
and the corporation has one or more business offices in such state, then the
board of directors shall fix and designate a principal business office in the
State of California.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the board of directors. In the absence of
any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of shareholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the second
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day. At the meeting, directors shall be
elected, and any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the shareholders may be called at any time by the board
of directors, or by the chairman of the board, or by the president, or by one
or more shareholders holding shares in the aggregate entitled to cast not less
than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the board
of directors or the president or the chairman of the board, then the request
shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president
or the secretary of the corporation. The officer receiving the request shall
cause notice to be promptly given to the shareholders entitled to vote, in
accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a
meeting will be held at the time requested by the person or persons calling
the meeting, so long as that time is not less than thirty-five (35) nor more
than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after receipt of the request, then the person or
persons requesting the
E-1
<PAGE>
meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when
a meeting of shareholders called by action of the board of directors may be
held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) (or, if
sent by third-class mail pursuant to Section 2.5 of theses bylaws, thirty
(30)) nor more than-sixty (60) days before the date of the meeting. The notice
shall specify the place, date, and hour of the meeting and (i) in the case of
a special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the
shareholders (but subject to the provisions of the next paragraph of this
Section 2.4 any proper matter may be presented at the meeting for such
action). The notice of any meeting at which directors are to be elected shall
include the name of any nominee or nominees who, at the time of the notice,
the board intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a director or indirect
financial interest, pursuant to Section 310 of the Corporations Code of
California (the "Code"), (ii) an amendment of the articles of incorporation,
pursuant to Section 902 of the Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of the Code, (iv) a voluntary
dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, pursuant to Section 2007 of the Code, then the
notice shall also state the general nature of that proposal.
2.5 MANNER OF GIVING NOTICE: AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only
if the corporation has outstanding shares held of record by five hundred (500)
or more persons (determined as provided in Section 605 of the code) on the
record date for the shareholders' meeting, or (iv) by telegraphic or other
written communication. Notices not personally delivered shall be sent charges
prepaid and shall be addressed to the shareholder at the address of that
shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice. If no such address
appears on the corporation's books or is given, notice shall be deemed to have
been given if sent to that shareholder by mail or telegraphic or other written
communication to the corporation's principal executive office, or if published
at least once in a newspaper of general circulation in the county where that
office is located. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other
means of written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by
the United States Postal Service marked to indicate that the United States
Postal Service is unable to deliver the notice to the shareholder at that
address, then all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
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2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the share
entitled to vote thereat constitutes a quorum for the transaction of business
at all meetings of shareholders. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave
less than a quorum, if any action taken (other than adjournment) is approved
by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting
except as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if
the time and place are announced at the meeting at which the adjournment is
taken. However, if a new record date for the adjourned meeting is fixed or if
the adjournment is for more than forty-five (45) days from the date set for
the original meeting, then notice of the adjourned meeting shall be given.
Notice of any such adjourned meeting shall be given to each shareholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting
the corporation may transact any business which might have been transacted at
the original meeting.
2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice or by ballot; provided, however, that
any election for directors must be by ballot if demanded by any shareholder at
the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to
a vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number or a
vote by classes is required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate
a number of votes greater than the number of votes which such shareholder
normally is entitled to cast) if the candidates' names have been placed in
nomination prior to commencement of the voting and the shareholder has given
notice prior to commencement of the voting of the shareholder's intention to
cumulate votes. If any shareholder has given such a notice, then every
shareholder entitled to vote may cumulate votes for candidates in nomination
either (i) by giving one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which that
shareholder's shares are
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normally entitled or (ii) by distributing the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit.
The candidates receiving the highest number of affirmative notes, up to the
number of directors to be elected, shall be elected; votes against any
candidate and votes withheld shall have no legal effect.
2.9 VALIDATION OF MEETINGS: WAIVER OF NOTICE CONSENT
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though
they had been taken at a meeting duly held after regular call and notice, if a
quorum be present either in person or by proxy, and if, either before or after
the meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the
purpose of any annual or special meeting of shareholders, except that if
action is taken or proposed to be taken for approval of any of those matters
specified in the second paragraph of Section 2.4 of these bylaws, the waiver
of notice or consent or approval shall state the general nature of the
proposal. All such waivers, consents, and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of notice
of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened. Attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
Code to be included in the notice of the meeting but not so included, if that
objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take that action at a meeting at which
all shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective only
if signed by the holders of all outstanding shares of the class, classes or
series of stock entitled to vote for the election of such director. However, a
director may be elected at any time to fill any vacancy on the board of
directors, provided that it was not created by removal of a director and that
it has not been filled by the directors, by the written consent of the holders
of a majority of the outstanding shares of the class, classes or series of
stock entitled to vote for the election of such director.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received
by the secretary of the corporation before written consents of the number of
shares required to authorize the proposed action have been filed with the
secretary.
If the consents of all shareholders entitled to vote have not been solicited
in writing and if the unanimous written consent of all such shareholders has
not been received, then the secretary shall give prompt notice of the
corporate action approved by the shareholders without a meeting. Such notice
shall be given to those shareholders entitled to vote who have not consented
in writing and shall be given in the manner specified in Section 2.5 of these
bylaws. In the case of approval of (i) a contract or transaction in which a
director has a direct or indirect financial interest, pursuant to Section 310
of the Code, (ii) indemnification of a corporate "agent," pursuant to
Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
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2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days
before the date of any such meeting nor more than sixty (60) days before any
such action without a meeting, and in such event only shareholders of record
on the date so fixed are entitled to notice and to vote or to give consents,
as the case may be, notwithstanding any transfer of any shares on the books of
the corporation after the record date, except as otherwise provided in the
Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held; and
(b) the record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action
by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken,
shall be at the close of business on the day on which the board adopts the
resolution relating to that action, or the sixtieth (60th) day before the
date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized
by a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's attorney-
in-fact. A validly executed proxy which does not state that it is irrevocable
shall continue in full force and effect unless (i) the person who executed the
proxy revokes it prior to the time of voting by delivering a writing to the
corporation stating that the proxy is revoked or by executing a subsequent
proxy and presenting it to the meeting or by voting in person at the meeting,
or (ii) written notice of the death or incapacity of the maker of that proxy
is received by the corporation before the vote pursuant to that proxy is
counted; provided, however, that no proxy shall be valid after the expiration
of eleven (11) months from the date of the proxy, unless otherwise provided in
the proxy. The dates contained on the forms of proxy presumptively determine
the order of execution, regardless of the postmark dates on the envelopes in
which they are mailed. The revocability of a proxy that states on its face
that it is irrevocable shall be governed by the provisions of Sections 705(e)
and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present
at the meeting shall determine whether one (1) or three (3) inspectors are to
be appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
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Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code and any limitations in the articles of
incorporation and these bylaws relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less than four (4)
nor more than seven (7). The exact number of directors shall be seven (7)
until changed, within the limits specified above, by a bylaw amending this
Section 3.2, duly adopted by the board of directors or by the shareholders.
The indefinite number of directors may be changed, or a definite number may be
fixed without provision for an indefinite number, by a duly adopted amendment
to the articles of incorporation or by an amendment to this bylaw duly adopted
by the vote or written consent of holders of a majority of the outstanding
shares entitled to vote, provided, however, that an amendment reducing the
fixed number or the minimum number of directors to a number less than five (5)
cannot be adopted if the votes cast against its adoption at a meeting, or the
shares not consenting in the case of an action by written consent, are equal
to more than sixteen and two-thirds percent (16 2/3%) of the outstanding
shares entitled to vote thereon. No amendment may change the stated maximum
number of authorized directors to a number greater than two (2) times the
stated minimum number of directors minus one (1).
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Directors shall be elected at each annual meeting of shareholders to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified. Any or
all of the directors may be removed without cause if the removal is approved
by the holders of a majority of the outstanding shares entitled to vote with
respect to such removal.
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3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless
the notice specifies a later time for that resignation to become effective. If
the resignation of a director is effective at a future time, the board of
directors may elect a successor to take office when the resignation becomes
effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors originally elected by the same series, class or classes of
shares who could elect an individual to fill such vacancy on the Board of
Directors, though less than a quorum, except that a vacancy created by the
removal of a director by the vote or written consent of the shareholders or by
court order may be filled by only the vote of a majority of the outstanding
shares entitled to vote thereon represented at a duly held meeting at which a
quorum is present, or by unanimous written consent of all shares entitled to
vote thereon. Each director so elected shall hold office until the next annual
meeting of shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if
the shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election other
than to fill a vacancy created by removal, if by written consent, shall
require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of California that has been designated from time to time
by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of California that has been designated in the notice of the meeting or,
if not stated in the notice or if there is no notice, at the principal
executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if the
times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director
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who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose or the
place of the meeting, if the meeting is to be held at the principal executive
office of the corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which
a director has a direct or indirect material financial interest), Section 311
of the Code (as to appointment or committees), Section 317(e) of the Code (as
to indemnification of directors), the articles of incorporation, and other
applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or (ii) who attends the meeting
without protesting, prior thereto or at its commencement, the lack of notice
to such directors. All such waivers, consents, and approvals shall be filed
with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special
meeting of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.7 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of
the board of directors. Such written consent and any counterparts thereof
shall be filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall
not be constructed to preclude any director from serving the corporation in
any other capacity as an officer, agent, employee or otherwise and receiving
compensation for those services.
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3.14 APPROVAL OF LOANS TO OFFICERS*
The corporation may, upon the approval of the board of directors alone, make
loans of money or property to, or guarantee the obligations of, any officer of
the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guaranties
provided that (i) the board of directors determines that such a loan or
guaranty or plan may reasonably be expected to benefit the corporation, (ii)
the corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the Code) on the date of approval by
the board of directors, and (iii) the approval of the board of directors is by
a vote sufficient without counting the vote of any interested director or
directors.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the
vote of a majority of the authorized number of directors. Any committee, to
the extent provided in the resolution of the board, shall have all the
authority of the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the board
or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the
board of directors; or
(g) the appointment of any other committees of the board of directors or
the members of such committees.
In addition, a committee shall not have the authority of the board with
respect to approval of loans to officers and indemnification of officers and
directors.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those
bylaws as are necessary to substitute the committee and its members for the
board of directors and its members, provided, however, that the time of
regular meetings of committees may be determined either by resolution of the
board of directors or by resolution of the committee, that special meetings
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* This section is effective only if it has been approved by the shareholders
in accordance with Section 315(b) and 152 of the Code.
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of committees may also be called by resolution of the board of directors, and
that notice of special meetings of committees shall also be given to all
alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed in
accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer
under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to appoint,
such other officers as the business of the corporation may require, each of
whom shall hold office for such period, have such authority, and perform such
duties as are provided in these bylaws or as the board of directors may from
time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except
in case of an officer chosen by the board of directors, by any officer upon
whom such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice to
the rights, if any, of the corporation under any contract to which the officer
is a party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed
in these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if present,
preside at meetings of the board of directors and exercise and perform such
other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
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5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence of
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the president. The vice presidents
shall have such other powers and perform such other duties as from time to
time may be prescribed for them respectively by the board of directors, these
bylaws, the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or
by these bylaws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding (as defined in Section 317(a) of the Code), arising by reason of
the fact that such person is or was an agent of the corporation. For purposes
of this Article VI, a "director" or "officer" of the corporation includes any
person (i) who is or was a director or officer of the corporation, (ii) who is
or was serving at the request of the corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was a director or officer of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other
than directors and officers) against expenses (as defined in Section 317(a) of
the Code), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was
an agent of the corporation. For purposes of this Article VI, an "employee" or
"agent" of the corporation (other than a director or officer) includes any
person (i) who is or was an employee or agent of the corporation, (ii) who is
or was serving at the request of the corporation as an employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was an employee or agent of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance
of the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled
to be indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation against any liability asserted against or incurred by such
person in such capacity or arising out of such person's status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
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6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(1) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or
other amounts were paid, which prohibits or otherwise limits
indemnification; or
(2) That it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its
shareholders listing the names and addresses of all shareholders and the
number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and
has filed a Schedule 14B with the Securities and Exchange Commission relating
to the election of directors, may (i) inspect and copy the records of
shareholders' names, addresses, and shareholdings during usual business hours
on five (5) days' prior written demand on the corporation, (ii) obtain from
the transfer agent of the corporation, on written demand and on the tender of
such transfer agent's usual charges for such list, a list of the names and
addresses of the shareholders who are entitled to vote for the election of
directors, and their shareholders, as of the most recent record date for which
that list has been compiled or as of a date specified by the shareholder after
the date of demand. Such list shall be made available to any such shareholder
by the transfer agent on or before the later of five (5) days after the demand
is received or five (5) days after the date specified in the demand as the
date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as
amended to date, which bylaws shall be open to inspection by the shareholders
at all reasonable times during office hours. If the principal executive office
of the corporation is outside the State of California and the corporation has
no principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of
these bylaws as amended to date.
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7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written
form, and the accounting books and records shall be kept either in written
form or in any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary
corporation of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the
physical properties of the corporation and each of its subsidiary
corporations. Such inspection by a director may be made in person or by an
agent or attorney. The right of inspection includes the right to copy and make
extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of
the fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal
year and in the manner specified in Section 2.5 of these bylaws for giving
notice to shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in
financial position for the fiscal year, and (iv) any report of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit
from the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long as the
shares of the corporation are held by fewer than one hundred (100) holders of
record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year,
deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of a balance sheet as of the end of such fiscal year and an
income statement and statement of changes in financial position for such
fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
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The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation,
or any other person authorized by the board of directors or the president or a
vice president, is authorized to vote, represent, and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority herein granted may be exercised either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a
meeting), the board of directors may fix, in advance, a record date, which
shall not be more than sixty (60) days before any such action. In that case,
only shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except
as otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close
of business on the day on which the board adopts the applicable resolution or
the sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders
for payment of money, notes or other evidences of indebtedness that are issued
in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
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provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the chairman of
the board or the vice chairman of the board or the president or a vice
president and by the chief financial officer or an assistant treasurer or the
secretary or an assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that
officer, transfer agent or registrar before that certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares shall
be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the; corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of
the replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of
these bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the
corporation, then the authorized number of directors may be changed only by an
amendment of the articles of incorporation. Any amendment of these Bylaws that
affects a particular class or series of stock in a manner different from its
impact on other classes or series shall require the approval of the holders of
a majority of the outstanding shares of the affected class or series.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing
the authorized number of directors (except to fix the authorized number of
directors pursuant to a bylaw providing for a variable number of directors),
may be adopted, amended or repealed by the board of directors. Any amendment
of these Bylaws that affects the manner in which directors are elected or
removed, or vacancies in the board of directors are filled, must be approved
by the shareholders.
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