<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1998
REGISTRATION NO. 333-62281
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ASCEND COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3661 94-3092033
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NO.)
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 769-6001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MORY EJABAT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASCEND COMMUNICATIONS, INC.
ONE ASCEND PLAZA
1701 HARBOR BAY PARKWAY
ALAMEDA, CALIFORNIA 94502
(510) 769-6001
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
THOMAS W. FURLONG, ESQ. DAVID T. BREWSTER, ESQ.
ROD J. HOWARD, ESQ. SKADDEN, ARPS, SLATE, MEAGHER
JON C. PERRY, ESQ. & FLOM LLP
GRAY CARY WARE & FREIDENRICH LLP ONE BEACON STREET
400 HAMILTON AVENUE BOSTON, MASSACHUSETTS 02108
PALO ALTO, CALIFORNIA 94301 (617) 573-4800
(650) 328-6561
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and certain
other conditions under the Merger Agreement are met or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share....... 20,000,000 $43.25 $865,000,000 $255,200
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Based upon an estimate of the maximum number of shares of the Common Stock
of the Registrant issuable in the merger described herein.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) under the Securities Act of 1933, as amended
(the "Securities Act"), and based upon the average of the high and low
sale prices of shares of the common stock of Stratus Computer, Inc. on The
New York Stock Exchange on August 24, 1998.
(3) Filing fee paid with the previous filing of this Registration Statement on
Form S-4.
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[STRATUS COMPUTER, INC. LOGO APPEARS HERE]
September 11, 1998
To Our Stockholders:
You are cordially invited to attend a special meeting of the stockholders of
Stratus Computer, Inc. ("Stratus") to be held on Monday, October 19, 1998 at
2:00 p.m., local time, at the offices of Stratus, 55 Fairbanks Boulevard,
Marlborough, Massachusetts (the "Stratus Special Meeting"). Enclosed are a
Notice of Special Meeting of Stockholders, a Prospectus/Proxy Statement and a
Proxy relating to the Stratus Special Meeting.
At the Stratus Special Meeting you will be asked to consider and vote upon a
proposal described in the Prospectus/Proxy Statement to approve and adopt the
Agreement and Plan of Merger, dated as of August 3, 1998 (the "Merger
Agreement"), by and among Ascend Communications, Inc. ("Ascend"), Wildcard
Merger Corporation, a wholly owned subsidiary of Ascend ("Sub"), and Stratus,
pursuant to which Sub will merge with and into Stratus and Stratus will
survive such merger (the "Merger") as a wholly owned subsidiary of Ascend. In
the Merger, holders of outstanding shares of common stock, par value $.01 per
share, of Stratus ("Stratus Common Stock") will receive 0.75 of a share of
common stock, par value $.001 per share, of Ascend for each share of Stratus
Common Stock held by them.
The Prospectus/Proxy Statement provides you with detailed information
concerning the Merger and related matters. Please give all of this information
your careful attention.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF STRATUS HAS
UNANIMOUSLY DETERMINED THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF
STRATUS AND ITS STOCKHOLDERS AND APPROVED THE MERGER AGREEMENT. THE BOARD OF
DIRECTORS OF STRATUS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF STRATUS
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Morgan Stanley & Co. Incorporated, Stratus' financial advisor in connection
with the Merger, has rendered an opinion to the Board of Directors of Stratus
that, as of the date of such opinion, the consideration to be paid to Stratus'
stockholders in connection with the Merger is fair to such stockholders (other
than Ascend or any wholly owned subsidiary of Ascend) from a financial point
of view.
All stockholders are invited to attend the Stratus Special Meeting in
person. Approval and adoption of the Merger Agreement requires the affirmative
vote of the holders of at least two-thirds of the outstanding shares of
Stratus Common Stock.
In order that your shares may be represented at the Stratus Special Meeting,
you are urged to promptly complete, sign, date and return the accompanying
Proxy in the enclosed envelope, whether or not you plan to attend the Stratus
Special Meeting. If you attend the Stratus Special Meeting in person, you may,
if you wish, vote personally on all matters brought before the Stratus Special
Meeting even if you have previously returned your Proxy.
Sincerely yours,
/s/ Bruce I. Sachs
_____________________________________
Bruce I. Sachs
President and Chief Executive
Officer
<PAGE>
STRATUS COMPUTER, INC.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 19, 1998
----------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Stratus
Computer, Inc. ("Stratus") will be held on Monday, October 19, 1998 at 2:00
p.m., local time, at the offices of Stratus, 55 Fairbanks Boulevard,
Marlborough, Massachusetts (the "Stratus Special Meeting"), for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of August 3, 1998 (the "Merger Agreement"), by
and among Ascend Communications, Inc. ("Ascend"), Wildcard Merger Corporation,
a wholly owned subsidiary of Ascend ("Sub"), and Stratus, pursuant to which
Sub will merge with and into Stratus and Stratus will survive such merger (the
"Merger") as a wholly owned subsidiary of Ascend. In the Merger, holders of
outstanding shares of common stock, par value $.01 per share, of Stratus
("Stratus Common Stock") will receive 0.75 of a share of common stock, par
value $.001 per share, of Ascend for each share of Stratus Common Stock held
by them, other than shares of Stratus Common Stock owned at the time the
Merger becomes effective by Stratus, Ascend, or their respective subsidiaries
and shares of Stratus Common Stock as to which appraisal rights have been duly
asserted and perfected under the Massachusetts Business Corporation Law (the
"MBCL"), all as more fully described in the accompanying Prospectus/Proxy
Statement.
2. To transact such other business as may properly come before the Stratus
Special Meeting or at any adjournments or postponements thereof.
If the Merger Agreement is approved and adopted by the stockholders at the
Stratus Special Meeting and the Merger is effected by Stratus, Ascend and Sub,
any stockholder (i) who files with Stratus before the taking of the vote on
approval and adoption of the Merger Agreement, written objection to the Merger
Agreement stating that such stockholder intends to demand payment for his or
her shares if the Merger is effected and (ii) whose shares are not voted in
favor of approval and adoption of the Merger Agreement, has or may have the
right to demand in writing from Stratus, within twenty days after the date of
mailing to him or her of notice in writing that the Merger has become
effective, payment for his or her shares and an appraisal of the value
thereof. Stratus and any such stockholder shall in such cases have the rights
and duties and shall follow the procedures set forth in Sections 85 to 98,
inclusive, of the MBCL.
Stockholders of record at the close of business on September 4, 1998 are
entitled to notice of the Stratus Special Meeting and to vote thereat. All
stockholders are cordially invited to attend the Stratus Special Meeting.
By order of the Board of Directors
/s/ EILEEN CASAL
----------------------------------
EILEEN CASAL, Assistant Clerk
Marlborough, Massachusetts
September 11, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE STRATUS SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE
NEED BE AFFIXED IF MAILED IN THE UNITED STATES. PLEASE DO NOT SEND STOCK
CERTIFICATES AT THIS TIME.
<PAGE>
ASCEND COMMUNICATIONS, INC.
PROSPECTUS
STRATUS COMPUTER, INC.
PROXY STATEMENT
----------------
This Prospectus/Proxy Statement (the "Prospectus/Proxy Statement") is being
furnished to stockholders of Stratus Computer, Inc., a Massachusetts
corporation ("Stratus"), in connection with the solicitation of proxies by the
Board of Directors of Stratus (the "Stratus Board") from the holders of
outstanding shares of common stock, par value $.01 per share, of Stratus
("Stratus Common Stock"), for use at a special meeting of the stockholders of
Stratus to be held on Monday, October 19, 1998 at 2:00 p.m., local time, at
the offices of Stratus, 55 Fairbanks Boulevard, Marlborough, Massachusetts
(the "Stratus Special Meeting"), or at any adjournments or postponements
thereof.
At the Stratus Special Meeting, holders of Stratus Common Stock will be
asked to consider and vote upon a proposal described in this Prospectus/Proxy
Statement to approve and adopt the Agreement and Plan of Merger, dated as of
August 3, 1998 (the "Merger Agreement"), by and among Ascend Communications,
Inc., a Delaware corporation ("Ascend"), Wildcard Merger Corporation, a
Delaware corporation and a wholly owned subsidiary of Ascend ("Sub"), and
Stratus, pursuant to which Sub will merge with and into Stratus and Stratus
will survive such merger (the "Merger") as a wholly owned subsidiary of
Ascend. In the Merger, holders of outstanding shares of Stratus Common Stock
will receive 0.75 of a share of common stock, par value $.001 per share, of
Ascend ("Ascend Common Stock") for each share of Stratus Common Stock held by
them (the "Exchange Ratio"), and each outstanding option or right to purchase
Stratus Common Stock ("Stratus Options") under the Stratus Amended and
Restated (January 1983) Stock Option Plan, the Stratus Amended and Restated
Employee Stock Purchase Plan, the Stratus Amended and Restated Non-Qualified
Common Stock Option Plan and the Stratus 1997 Non-Qualified Common Stock
Option Plan (collectively, the "Stratus Stock Plans") will be assumed by
Ascend and will become an option or right to purchase shares of Ascend Common
Stock, with appropriate adjustments based on the Exchange Ratio to the number
of shares issuable thereunder and the exercise price thereof. Based upon
Stratus' capitalization as of September 4, 1998, the Merger Agreement provides
that Ascend will issue approximately 21,110,459 shares of Ascend Common Stock
in exchange for all of the outstanding shares of Stratus Common Stock and all
outstanding and unexercised options and rights to purchase Stratus Common
Stock.
Ascend has filed a Registration Statement on Form S-4 (together with all
exhibits 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 20,000,000 shares of Ascend
Common Stock to be issued pursuant to the Merger Agreement.
This Prospectus/Proxy Statement constitutes (a) the Prospectus of Ascend
filed as part of the Registration Statement and (b) the Proxy Statement of
Stratus relating to the Stratus Special Meeting called to vote on the approval
and adoption of the Merger Agreement. All unaudited pro forma condensed
combined financial information herein has been prepared by Ascend using
historical financial information regarding Ascend and Stratus, which in turn
was furnished by Ascend and Stratus, respectively. This Prospectus/Proxy
Statement and the accompanying form of proxy is first being mailed to the
stockholders of Stratus on or about September 11, 1998.
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED CAREFULLY BY THE STOCKHOLDERS OF STRATUS IN
EVALUATING THE PROPOSAL TO BE VOTED ON AT THE STRATUS SPECIAL MEETING 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 CRIMINAL OFFENSE.
----------------
The date of this Prospectus/Proxy Statement is September 11, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 1
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION.......................... 2
INFORMATION PROVIDED BY ASCEND AND STRATUS................................ 2
SUMMARY................................................................... 3
The Companies........................................................... 3
The Merger.............................................................. 4
The Stratus Special Meeting............................................. 4
Reasons for the Merger.................................................. 5
Recommendation of the Stratus Board..................................... 5
Opinion of Financial Advisor to Stratus................................. 6
Interests of Certain Persons in the Merger.............................. 6
Certain United States Federal Income Tax Consequences of the Merger..... 6
Accounting Treatment.................................................... 6
Regulatory Requirements................................................. 6
Restrictions on Resale of Ascend Common Stock........................... 7
Appraisal Rights........................................................ 7
Operations After the Merger............................................. 7
Certain Provisions of the Merger Agreement.............................. 7
Comparison of Stockholder Rights........................................ 9
Selected Historical and Unaudited Pro Forma Condensed Combined Financial
Data................................................................... 10
Comparative Historical and Unaudited Pro Forma Per Share Data........... 13
Market Price Information................................................ 14
RISK FACTORS.............................................................. 16
Risks Relating to the Merger............................................ 16
Risks Relating to Ascend................................................ 19
THE STRATUS SPECIAL MEETING............................................... 27
Date, Time and Place.................................................... 27
Purpose................................................................. 27
Stratus Record Date..................................................... 27
Required Vote........................................................... 27
Proxies................................................................. 27
Adjournment of the Stratus Special Meeting.............................. 28
Exchange of Stratus Certificates........................................ 28
THE MERGER................................................................ 30
Background of the Merger................................................ 30
Reasons for the Merger.................................................. 34
Recommendation of the Stratus Board..................................... 37
Opinion of Financial Advisor to Stratus................................. 37
Interests of Certain Persons in the Merger.............................. 41
Certain United States Federal Income Tax Consequences of the Merger .... 43
Accounting Treatment.................................................... 44
Regulatory Requirements................................................. 44
Restrictions on Resale of Ascend Common Stock........................... 45
Nasdaq National Market Quotation........................................ 45
Appraisal Rights........................................................ 46
Delisting and Deregistration of Stratus Common Stock After the Merger... 48
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
OPERATIONS AFTER THE MERGER............................................... 49
THE MERGER AGREEMENT...................................................... 51
Form of the Merger...................................................... 51
Conversion of Securities................................................ 51
Representations and Warranties.......................................... 52
Certain Covenants and Agreements........................................ 52
Conditions to the Merger................................................ 56
Termination; Termination Fees and Expenses.............................. 56
Amendment and Waiver.................................................... 58
INFORMATION CONCERNING ASCEND............................................. 59
INFORMATION CONCERNING STRATUS............................................ 59
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.............. 60
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION.............................................................. 64
COMPARISON OF RIGHTS OF STRATUS STOCKHOLDERS AND ASCEND STOCKHOLDERS...... 65
DESCRIPTION OF ASCEND CAPITAL STOCK....................................... 70
Common Stock............................................................ 70
Certain Charter Provisions.............................................. 70
Ascend Preferred Stock.................................................. 70
OWNERSHIP OF STRATUS COMMON STOCK......................................... 71
LEGAL MATTERS............................................................. 72
EXPERTS................................................................... 72
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING OF STRATUS
STOCKHOLDERS............................................................. 72
MANAGEMENT AND ADDITIONAL INFORMATION..................................... 72
ANNEX A--AGREEMENT AND PLAN OF MERGER..................................... A-1
ANNEX B--OPINION OF MORGAN STANLEY & CO. INCORPORATED..................... B-1
ANNEX C--SECTIONS 85 THROUGH 98 INCLUSIVE OF THE MASSACHUSETTS BUSINESS
CORPORATION LAW.......................................................... C-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Ascend and Stratus are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. The reports, proxy statements and other information filed by
Ascend and Stratus 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. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330. The
Commission maintains a website (the "Commission Website") that contains
reports, proxy and information statements and other information regarding
Ascend and Stratus. The address of the Commission Website is
http://www.sec.gov. Ascend Common Stock is quoted on The Nasdaq National
Market, and Stratus Common Stock is quoted on The New York Stock Exchange, The
Chicago Stock Exchange, The Boston Stock Exchange and The Pacific Exchange
(the "Stratus Exchanges"). 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, and reports and other information concerning Stratus also can be
inspected at the offices of The New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
Ascend has filed with the Commission the Registration Statement on Form S-4
with respect to the shares of Ascend Common Stock to be issued pursuant to the
Merger Agreement. This Prospectus/Proxy 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/Proxy 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.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Ascend are incorporated
by reference in this Prospectus/Proxy Statement:
1. Ascend's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, as amended by Form 10-K/A;
2. Ascend's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1998 and June 30, 1998;
3. The description of Ascend's capital stock contained in Ascend's
Registration Statement on Form 8-A filed on March 31, 1993;
4. Ascend's Proxy Statement on Schedule 14A filed on April 8, 1998;
5. Ascend's Current Report on Form 8-K filed on July 2, 1998; and
6. Ascend's Current Report on Form 8-K filed on August 14, 1998.
The following Stratus documents filed with the Commission by Stratus are
incorporated by reference in this Prospectus/Proxy Statement:
1. Stratus' Annual Report on Form 10-K for the fiscal year ended December
28, 1997;
2. Stratus' Quarterly Reports on Form 10-Q for the quarters ended March
29, 1998 and June 28, 1998;
3. Stratus' Proxy Statement on Schedule 14A filed on March 19, 1998; and
4. Stratus' Current Report on Form 8-K filed on August 5, 1998.
1
<PAGE>
All documents and reports subsequently filed by Ascend or Stratus pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this Prospectus/Proxy Statement and prior to the effective time of the Merger
(the "Effective Time") shall be deemed to be incorporated by reference in this
Prospectus/Proxy Statement and to be part hereof from the dates of filing of
such documents or reports. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus/Proxy Statement to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus/Proxy Statement.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF
STRATUS COMMON STOCK, TO WHOM THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED,
UPON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, IN THE CASE OF DOCUMENTS
RELATING TO ASCEND OR SUB, DIRECTED TO ASCEND COMMUNICATIONS, INC., ONE ASCEND
PLAZA, 1701 HARBOR BAY PARKWAY, ALAMEDA, CALIFORNIA 94502 (TELEPHONE NUMBER
(510) 769-6001), ATTENTION: INVESTOR RELATIONS, OR, IN THE CASE OF DOCUMENTS
RELATING TO STRATUS, DIRECTED TO STRATUS COMPUTER, INC., 55 FAIRBANKS
BOULEVARD, MARLBOROUGH, MASSACHUSETTS 01752 (TELEPHONE NUMBER (508) 460-2000),
ATTENTION: INVESTOR RELATIONS. IN ORDER TO ASSURE TIMELY DELIVERY OF THE
REQUESTED MATERIAL BEFORE THE STRATUS SPECIAL MEETING, ANY REQUEST SHOULD BE
MADE PRIOR TO OCTOBER 12, 1998.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
THIS PROSPECTUS/PROXY STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF
STRATUS AND ASCEND AND THE EXPECTED IMPACT OF THE MERGER ON ASCEND'S FINANCIAL
PERFORMANCE. SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE WITHOUT LIMITATION THOSE RISKS DETAILED IN THE "RISK FACTORS" SECTION
OF THIS PROSPECTUS/PROXY STATEMENT AND SUCH OTHER RISK FACTORS AS MAY BE
DETAILED FROM TIME TO TIME IN STRATUS' OR ASCEND'S PUBLIC ANNOUNCEMENTS AND
COMMISSION FILINGS.
INFORMATION PROVIDED BY ASCEND AND STRATUS
The information set forth in this Prospectus/Proxy Statement concerning
Ascend and Sub has been provided by Ascend, and the information set forth in
this Prospectus/Proxy Statement concerning Stratus has been provided by
Stratus.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT
IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ASCEND OR STRATUS. THIS
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF ASCEND OR STRATUS SINCE THE DATE HEREOF OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
Ascend and Cascade are registered trademarks of Ascend. Stratus is a
registered trademark of Stratus. S2 is a trademark of S2 Systems, Inc. TCAM is
a trademark of TCAM Systems, Inc. This Prospectus/Proxy Statement also may
include other trademarks and trade names which are the property of their
respective owners.
2
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus/Proxy Statement. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained in this
Prospectus/Proxy Statement and the Annexes hereto. Stockholders of Stratus are
urged to read this Prospectus/Proxy Statement and the Annexes hereto in their
entirety. This Prospectus/Proxy Statement contains a number of forward-looking
statements which reflect the current views of Ascend and/or Stratus with
respect to future events that are expected to have an effect on their future
individual or combined financial performance, including but not limited to
forward-looking statements regarding the expected benefits and synergies of the
proposed Merger and the reasons for the Merger. 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 and Stratus
in this Prospectus/Proxy Statement reflect all stock splits of Ascend Common
Stock and Stratus Common Stock effected prior to the date hereof.
THE COMPANIES
Ascend. Ascend develops, manufactures and sells wide area networking
solutions for telecommunications carriers, Internet service providers ("ISPs")
and corporate customers worldwide that enable them to build: (i) Internet
access systems consisting of point-of-presence termination ("POP") equipment
for ISPs and remote site Internet access equipment for Internet subscribers;
(ii) telecommunications carrier and ISP backbone networks utilizing high speed
Frame Relay, Asynchronous Transfer Mode ("ATM") and Internet Protocol ("IP")
switches for application; (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. Ascend's products support existing digital and
analog networks.
Ascend was incorporated in California in 1989 and reincorporated in Delaware
in 1994. Ascend's principal executive 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.
Stratus. Stratus was founded in 1980. Stratus' objective is to be the premier
supplier of hardware, software and services solutions to targeted
telecommunications and enterprise server markets where continuous availability
is a critical need. Continuous availability, as compared to the term "high
availability," refers to Stratus systems' ability to substantially reduce the
two main sources of downtime: (i) downtime due to unexpected system failures
such as hardware or operating system crashes; and (ii) downtime associated with
shutting down a system for planned maintenance and upgrade procedures. Stratus
systems are used primarily for on-line transaction processing, message
switching, communications control, distributed computing and other interactive
applications in which system availability and data integrity are critical.
Stratus competes in two major market areas: (1) telecommunications where
service providers use Stratus systems at critical points in their networks and
operations support systems; and (2) enterprise server applications which
support enterprise-wide computing in a client/server architecture. Five key
telecommunications applications have been targeted: (i) Internet
infrastructure; (ii) intelligent network services; (iii) home location
register; (iv) local number availability; and (v) network operations support
systems. Enterprise server applications are found in electronic commerce,
financial services, retail, travel, healthcare and gaming industries.
The principal executive offices of Stratus are located at 55 Fairbanks
Boulevard, Marlborough, Massachusetts 01752, and its telephone number at that
location is (508) 460-2000.
3
<PAGE>
Sub. Sub was incorporated in Delaware in 1998 for the purpose of effecting
the combination of Ascend and Stratus by means of the Merger. Sub has no
material assets and has not engaged in any activities except in connection with
the proposed combination of Ascend and Stratus. Sub's principal executive
offices are located at One Ascend Plaza, 1701 Harbor Bay Parkway, Alameda,
California 94502, and its telephone number is (510) 769-6001.
THE MERGER
Upon consummation of the Merger pursuant to the Merger Agreement, Sub will
merge with and into Stratus and Stratus will continue as the surviving
corporation (the "Surviving Corporation") and become a wholly owned subsidiary
of Ascend. In addition, each issued and outstanding share of Stratus Common
Stock (other than shares held by Stratus, Ascend or their respective
subsidiaries and any Dissenting Shares (as defined herein)), together with each
associated right (a "Right") issued under the Rights Agreement dated as of
December 4, 1990 between Stratus and The First National Bank of Boston (the
"Rights Agreement"), will be converted into the right to receive 0.75 of a
fully paid and nonassessable share of Ascend Common Stock (which amount will be
proportionately adjusted for any stock split or stock dividend effected between
the date of the Merger Agreement and the Effective Time). See "The Merger
Agreement--Conversion of Securities."
At the Effective Time, any outstanding, but unexercised, options or rights to
purchase Stratus Options under any of the Stratus Stock Plans will be assumed
by Ascend and will become options or rights to acquire shares of Ascend Common
Stock, adjusted to reflect the Exchange Ratio. See "The Merger Agreement--
Certain Covenants and Agreements--Assumption of Stratus Options."
The Merger Agreement provides that following the Merger, Mr. Bruce I. Sachs,
President and Chief Executive Officer of Stratus, will become an executive
officer of Ascend. See "The Merger--Interests of Certain Persons in the
Merger."
It is anticipated that the Merger will become effective as promptly as
practicable after the requisite stockholder approval has been obtained and all
other conditions to the Merger have been satisfied or waived. If the Merger is
not consummated by January 31, 1999, Stratus and Ascend each has the right
(subject to certain limitations) to terminate the Merger Agreement. See "The
Merger Agreement--Termination; Termination Fees and Expenses."
THE STRATUS SPECIAL MEETING
Date, Time and Place. The Stratus Special Meeting is scheduled to be held on
Monday, October 19, 1998 at 2:00 p.m., local time, at the offices of Stratus,
55 Fairbanks Boulevard, Marlborough, Massachusetts 01752.
Purpose. At the Stratus Special Meeting, holders of Stratus Common Stock will
be asked to consider and vote upon (i) a proposal described in this
Prospectus/Proxy Statement to approve and adopt the Merger Agreement, pursuant
to which Sub will merge with and into Stratus and Stratus will survive the
Merger as a wholly owned subsidiary of Ascend and (ii) such other matters as
may properly be brought before the Stratus Special Meeting, including any
motion to adjourn the Stratus Special Meeting to a later date. In the Merger,
holders of outstanding shares of Stratus Common Stock will have the right to
receive 0.75 of a share of Ascend Common Stock for each share of Stratus Common
Stock held by them.
Stratus Record Date. The Stratus Board has fixed the close of business on
September 4, 1998 as the record date (the "Stratus Record Date") for the
determination of stockholders entitled to notice of and to vote at the Stratus
Special Meeting. As of the Stratus Record Date, there were 24,061,522 shares of
Stratus Common Stock issued and outstanding, net of treasury stock, held by
approximately 1,281 holders of record.
4
<PAGE>
Required Vote. The affirmative vote of the holders of at least two-thirds of
the issued and outstanding shares of Stratus Common Stock entitled to vote at
the Stratus Special Meeting is required to approve and adopt the Merger
Agreement. Each holder of record of Stratus Common Stock on the Stratus Record
Date is entitled to cast one vote per share of Stratus Common Stock held by
such holder.
As of the Stratus Record Date, directors and executive officers of Stratus
and their affiliates had the right to vote approximately 8.24% of all issued
and outstanding shares of Stratus Common Stock entitled to vote at the Stratus
Special Meeting.
Proxies. All shares of Stratus Common Stock represented by properly executed
proxies received prior to or at the Stratus Special Meeting will, unless such
proxies shall have been revoked, be voted in accordance with the instructions
indicated thereon. If no instructions are indicated on a properly executed
proxy, the shares will be voted FOR approval and adoption of the Merger
Agreement. See "The Stratus Special Meeting--Proxies."
Exchange of Stratus Certificates. Promptly after the Effective Time,
BankBoston, N.A. (the "Exchange Agent") will mail to each holder of record of
Stratus Common Stock whose shares were converted into the right to receive
shares of Ascend Common Stock (i) a duly executed letter of transmittal and
(ii) instructions for use in effecting the surrender of certificates
representing Stratus Common Stock ("Stratus Certificates") in exchange for
Ascend Common Stock. The transmittal instructions will describe the procedures
for surrendering Stratus Certificates. Upon surrender of a Stratus Certificate
for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such Stratus 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 Merger Agreement, and the Stratus Certificate so
surrendered shall immediately be canceled.
HOLDERS OF STRATUS COMMON STOCK SHOULD NOT SUBMIT THEIR STRATUS CERTIFICATES
FOR EXCHANGE UNLESS AND UNTIL THEY HAVE RECEIVED THE TRANSMITTAL INSTRUCTIONS
AND A FORM OF LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
REASONS FOR THE MERGER
The Ascend Board and the Stratus Board believe that a convergence of
traditional telecommunications and data networking is occurring, and that
telecommunications carriers increasingly desire to tightly integrate their
voice and data networks. The Ascend Board and the Stratus Board believe that
the Merger, by combining Ascend's strengths in the data networking market with
Stratus' strengths in the traditional voice networking market, will enable
Ascend to deliver network solutions to telecommunications carriers who want to
create more tightly integrated and optimized networks capable of carrying both
voice and data traffic, and will give Ascend a market reach that exceeds the
current market reach of either Ascend or Stratus. In addition, the Stratus
Board believes that the Merger will be beneficial to Stratus and Stratus
stockholders for the reasons described below under the caption "The Merger--
Reasons for the Merger." For risks related to the Merger and Ascend following
the Merger, see "Risk Factors."
RECOMMENDATION OF THE STRATUS BOARD
AFTER CAREFUL CONSIDERATION, THE STRATUS BOARD HAS UNANIMOUSLY DETERMINED THE
MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF STRATUS AND ITS STOCKHOLDERS
AND APPROVED THE MERGER AGREEMENT. THE STRATUS BOARD UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF STRATUS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
See "The Merger--Reasons for the Merger" and "The Merger--Recommendation of
the Stratus Board."
5
<PAGE>
OPINION OF FINANCIAL ADVISOR TO STRATUS
At the August 2, 1998 meeting of the Stratus Board, Morgan Stanley & Co.
Incorporated ("Morgan Stanley") rendered its oral opinion that, as of such date
and based upon and subject to the various considerations set forth in its
opinion, the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to holders of Stratus Common Stock (other than Ascend
or any wholly owned subsidiary of Ascend). Morgan Stanley delivered to the
Stratus Board a written opinion dated August 2, 1998 confirming its oral
opinion. See "The Merger--Opinion of Financial Advisor to Stratus."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Stratus Board with respect to the
Merger Agreement, stockholders of Stratus should be aware that certain members
of Stratus' management and the Stratus Board have certain interests in the
Merger that are in addition to the interests of the stockholders of Stratus
generally. The Stratus Board was aware of these interests and considered them,
among other matters, in approving the Merger Agreement. See "The Merger--
Interests of Certain Persons in the Merger."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is a condition to the consummation of the Merger that Stratus receive an
opinion from its tax counsel, Skadden, Arps, Slate, Meagher & Flom LLP
("SASM&F"), and that Ascend receive an opinion from its tax counsel, Gray Cary
Ware & Freidenrich LLP ("GCW&F"), to the effect that, based upon certain facts,
representations and assumptions, the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The issuance of such opinions is conditioned on, among
other things, such tax counsels' receipt of representation letters from each of
Stratus, Ascend and Sub, in each case, in form and substance reasonably
satisfactory to each such tax counsel. No ruling has been (or will be) sought
from the Internal Revenue Service (the "IRS") with respect to the Merger.
Assuming the Merger constitutes a reorganization within the meaning of Section
368(a) of the Code, no gain or loss will be recognized for United States
federal income tax purposes by holders of Stratus Common Stock (except with
respect to cash received by holders of Stratus Common Stock in lieu of
fractional shares of Ascend Common Stock). See "The Merger--Certain United
States Federal Income Tax Consequences of the Merger" and "The Merger
Agreement--Conditions to the Merger." Holders of Stratus Common Stock are urged
to consult their tax advisors as to the specific tax consequences to them of
the Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" transaction for accounting
and financial reporting purposes, in accordance with generally accepted
accounting principles. Accordingly, a determination of the fair value of
Stratus' assets and liabilities will be made in order to allocate the purchase
price to the assets acquired and the liabilities assumed. In connection with
the Merger, it is anticipated that Ascend will take a one-time charge
consisting of a write-off of in-process research and development, estimated to
be approximately $305 million. The purchase price allocation, including the
one-time charge for write-off of in-process research and development, is
subject to revision when additional information concerning asset and liability
valuation is obtained. Upon consummation of the Merger, Ascend plans to divest
certain lines of business of Stratus. Ascend is in the early stages of
determining the financial impact of divesting such operations and upon
consummation of the Merger will separately account for the results of
operations and assets of these lines of business. See "The Merger--Accounting
Treatment" and "Operations After the Merger."
REGULATORY REQUIREMENTS
The Merger is subject to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), which provide that
certain transactions may not be consummated until required
6
<PAGE>
information and materials have been furnished to the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the Federal Trade
Commission (the "FTC") and certain waiting periods have expired or been early
terminated. On August 21, 1998, Stratus and Ascend filed the required
information and materials with the Antitrust Division and the FTC and requested
early termination of the waiting period under the HSR Act. In addition, similar
filings relating to compliance with antitrust regulations have been made in
Germany, Ireland and Sweden. The requirements of the HSR Act will be satisfied
if the Merger is consummated within one year from the termination of the
waiting period. See "The Merger -- Regulatory Requirements."
RESTRICTIONS ON RESALE OF ASCEND COMMON STOCK
The shares of Ascend Common Stock issuable to stockholders of Stratus upon
consummation of the Merger will have been registered under the Securities Act
at the Effective Time. Such shares will be freely transferable without
restriction by those Stratus stockholders who are not deemed to be "affiliates"
of Ascend or Stratus, as that term is defined in the rules under the Securities
Act.
Shares of Ascend Common Stock received pursuant to the Merger by those
stockholders of Stratus who are deemed to be "affiliates" of Stratus or Ascend
may be resold without registration under the Securities Act only as permitted
by Rule 145 under the Securities Act or as otherwise permitted under the
Securities Act. See "The Merger--Restrictions on Resale of Ascend Common
Stock."
APPRAISAL RIGHTS
Under the Massachusetts Business Corporation Law (the "MBCL"), each holder of
shares of Stratus Common Stock is entitled to object to the Merger and demand
payment for such holder's shares of Stratus Common Stock. See "The Merger--
Appraisal Rights" and Annex C hereto.
OPERATIONS AFTER THE MERGER
Stratus will be divided into four business units: a telecommunications
business unit; an enterprise computer business unit; and two business units
focused on financial and enterprise software (the TCAM Systems business unit
and the S2 Systems business unit, respectively). Ascend contemplates that
following the Merger the telecommunications business unit of Stratus will be
integrated into Ascend and the non-telecommunications business units will be
set up as separate subsidiaries and will then be divested. It is anticipated
that, subject to certain requirements that must be satisfied for the Merger to
qualify as a tax-free reorganization, definitive agreements relating to such
divestitures will be negotiated by the end of 1998 and closed within three
months of signing such definitive agreements, but in no event later than 12
months following the consummation of the Merger. See "Operations After the
Merger" and "Risk Factors."
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
No Solicitation. Stratus has agreed that, from and after the date of the
Merger Agreement until the earlier of the Effective Time or the termination of
the Merger Agreement it shall not, directly or indirectly, through any officer,
director, employee, representative, agent, or affiliate, (i) solicit, initiate,
or encourage any Competing Offers (as defined herein), (ii) engage in
negotiations or discussions concerning, or provide any non-public information
to any person or entity relating to, any Competing Offer, or (iii) agree to,
accept, approve, recommend or consummate a Competing Offer. However, Stratus or
the Stratus Board is not prevented from (i) furnishing non-public information
to, or entering into discussions or negotiations with, any person or entity in
connection with an unsolicited bona fide written Competing Offer by such person
or entity or recommending such an unsolicited bona fide written competing offer
to the stockholders of Stratus, if and only to the extent that (a) such
Competing Offer would, if consummated, result in a transaction that would, in
the reasonable good faith judgment of the Stratus Board, after consultation
with its financial advisors, be more favorable to the Stratus stockholders from
a financial point of view than the Merger and, in the reasonable good faith
judgment of the
7
<PAGE>
Stratus Board after consultation with its financial advisors, the person or
entity making such Competing Offer appears to have the financial means, or the
ability to obtain the necessary financing, to conclude such transaction (a
"Superior Proposal"), (b) the failure to take such action would, in the
reasonable good faith judgment of the Stratus Board after consultation with
outside corporate counsel, be contrary to the fiduciary duties of Stratus'
directors to the Stratus stockholders under applicable law, and (c) prior to
furnishing non-public information to, or entering into discussions or
negotiations with, such person or entity, the Stratus Board receives from such
person or entity an executed confidentiality agreement not materially less
restrictive to such person or entity than those contained in the Mutual
Nondisclosure and Confidentiality Agreement dated June 15, 1998 between Ascend
and Stratus; or (ii) accepting or agreeing to a Superior Proposal or
consummating a transaction contemplated by a Superior Proposal (provided that
Stratus has given Ascend 48 hours notice prior to accepting or agreeing to such
Superior Proposal); or (iii) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a Competing Offer.
"Competing Offer" means any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, sale or purchase of substantial assets or stock, tender or
exchange offer, or other business combination or change in control or similar
transaction involving such party, other than the transactions contemplated or
permitted by the Merger Agreement.
Termination and Termination Fee. The Merger Agreement may be terminated under
certain circumstances at any time prior to the Effective Time, including, among
other things, termination (i) by mutual written consent of Ascend and Stratus;
(ii) by either Ascend or Stratus if the Merger shall not have been consummated
by January 31, 1999, unless the party whose failure to fulfill any obligation
under the Merger Agreement has been the cause of or resulted in the failure of
the Merger to occur on or before such date; (iii) by either Ascend or Stratus
if a final court order prohibiting the Merger has been issued; (iv) by either
Ascend or Stratus if, at the Stratus Special Meeting, the requisite vote of
Stratus stockholders in favor of the Merger Agreement and approval of the
Merger shall not have been obtained; (v) by Ascend if (a) the Stratus Board
shall have withdrawn or modified its recommendation of the Merger Agreement or
the Merger in a manner adverse to Ascend or shall have resolved or publicly
announced or disclosed its intention to do so; (b) the Stratus Board shall have
recommended a Superior Proposal to the stockholders of Stratus or shall have
resolved or publicly announced its intention to recommend or accept a Superior
Proposal; or (c) a tender offer or exchange offer which if completed would
result in the ownership by any person and such person's affiliates of 50% or
more of the outstanding shares of Stratus Common Stock shall have been
commenced and the Stratus Board shall have filed a Statement on Form 14D-9
recommending acceptance of such tender or exchange offer or shall have resolved
or publicly announced its intention to recommend acceptance of such tender or
exchange offer; (vi) by either Ascend or Stratus if a breach of any
representation, warranty, covenant or agreement on the part of the other party
set forth in the Merger Agreement shall have occurred which if uncured would
cause any representation or warranty of the other party to be untrue; or (vii)
by Stratus if it shall have accepted, approved or resolved to accept or approve
a Superior Proposal in compliance with the terms of the Merger Agreement.
Stratus has agreed to pay Ascend a termination fee of $36,759,995 (the
"Termination Fee") if the Merger Agreement is terminated: (i) by Ascend if (a)
the Stratus Board shall have withdrawn or modified its recommendation of the
Merger Agreement or the Merger in a manner adverse to Ascend or shall have
resolved or publicly announced or disclosed its intention to do so, (b) the
Stratus Board shall have recommended a Superior Proposal to the stockholders of
Stratus or shall have resolved or publicly announced its intention to recommend
or accept a Superior Proposal, or (c) a tender offer or exchange offer which if
completed would result in the ownership by any person and such person's
affiliates of 50% or more of the outstanding shares of Stratus Common Stock
shall have been commenced and the Stratus Board shall have filed a Statement on
Form 14D-9 recommending acceptance of such tender or exchange offer or shall
have resolved or publicly announced its intention to recommend acceptance of
such tender or exchange offer; (ii) by Stratus if Stratus accepts, approves or
resolves to accept or approve a Superior Proposal; or (iii) by Stratus or
Ascend as a result of the
8
<PAGE>
failure to obtain the requisite vote for adoption of the Merger Agreement and
approval of the Merger by the stockholders of Stratus and (a) at the time of
such failure an Alternative Transaction (as defined herein) involving Stratus
shall have been announced or publicly proposed and (b) within one year of such
failure Stratus or the Stratus Board accepts, recommends or enters into or
announces any definitive or preliminary agreement or letter of intent with
respect to an Alternative Transaction, amends or otherwise takes an action
under the Rights Agreement which has the effect of rendering the Rights
Agreement inapplicable to an Alternative Transaction, or redeems the Rights so
as to facilitate an Alternative Transaction, or an Alternative Transaction is
consummated. The Termination Fee shall be payable: (i) in the case of
termination by Stratus in the circumstances described in clause (ii) of the
immediately preceding sentence, prior to the effectiveness of such termination;
(ii) in the case of termination by Ascend in the circumstances described in
clause (i) of the immediately preceding sentence, promptly after such
termination; and (iii) in the case of termination by either party in the
circumstances described in clause (iii) of the immediately preceding sentence,
when the Stratus Board accepts, recommends or enters into any agreement with
respect to an Alternative Transaction, amends the Rights Agreement or redeems
the rights so as to facilitate an Alternative Transaction, or an Alternative
Transaction is consummated. See "The Merger Agreement--Termination; Termination
Fees and Expenses."
Conditions to the Merger. The consummation of the Merger is subject to the
satisfaction of certain conditions, including the following: (i) the Merger
Agreement shall have been approved and adopted by the requisite vote of holders
of Stratus Common Stock pursuant to the MBCL; (ii) the waiting period required
by the HSR Act, and any other material waiting periods under applicable foreign
laws shall have expired or been terminated and no action by the Antitrust
Division, the FTC or any foreign governmental entity challenging or seeking to
enjoin the consummation of the Merger shall be pending or have been instituted;
(iii) all governmental approvals and filings required for the Merger, the
absence of which would be reasonably likely to have a material adverse effect
on either party or on the parties' ability to complete the Merger, shall have
been obtained or made; (iv) 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, and all required state securities
laws authorizations shall have been received; (v) there shall be no order,
injunction or other legal or regulatory restraint or prohibition in effect
preventing or prohibiting the consummation of the Merger or restricting the
conduct of either Ascend's or Stratus' business after the consummation of the
Merger; (vi) each of Ascend and Stratus shall have received opinions from their
respective counsel to the effect that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code for United
States federal income tax purposes; (vii) the shares of Ascend Common Stock to
be issued in the Merger shall have been authorized for quotation on The Nasdaq
National Market; (viii) Ascend, Sub and Stratus shall have performed, in all
material respects, all obligations they are required to perform at or prior to
the closing date of the Merger; (ix) the provisions of the Rights Agreement and
all Rights issued thereunder shall not apply to Ascend or the Merger, and (x)
the parties' representations and warranties shall be accurate in all material
respects when made and as of the closing date of the Merger. See "The Merger
Agreement--Conditions to the Merger."
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Rights of Stratus Stockholders and Ascend Stockholders"
for a summary of the material differences between the rights of holders of
Ascend Common Stock and Stratus Common Stock.
9
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
Ascend's selected historical balance sheet data as of December 31, 1997, and
1996 and selected historical statements of operations data for each of the
three years in the period ended December 31, 1997 are derived from Ascend's
audited consolidated financial statements incorporated by reference in this
Prospectus/Proxy Statement. Ascend's selected historical balance sheet data as
of December 31, 1995, 1994 and 1993 and selected historical statements of
operations data for each of the two years in the period ended December 31, 1994
are derived from Ascend's audited consolidated financial statements not
included nor incorporated by reference herein. Ascend's selected historical
financial statements data is qualified by and should be read in conjunction
with such financial statements and the notes thereto incorporated by reference
in this Prospectus/Proxy Statement. Stratus' selected historical balance sheet
data as of December 28, 1997 and December 29, 1996 and selected historical
statements of operations data for each of the three years in the period ended
December 28, 1997 are derived from Stratus' audited consolidated financial
statements incorporated by reference in this Prospectus/Proxy Statement.
Stratus' selected historical balance sheet data as of December 31, 1995,
January 1, 1995 and January 2, 1994 and selected historical statements of
operations data for each of the two fiscal years in the period ended January 1,
1995 are derived from Stratus' audited consolidated financial statements not
included nor incorporated by reference herein. Stratus' selected historical
financial statements data is qualified by and should be read in conjunction
with such financial statements and notes thereto incorporated by reference in
this Prospectus/Proxy Statement. The selected unaudited pro forma condensed
combined financial data is qualified in its entirety by reference to, and
should be read in conjunction with, the unaudited pro forma condensed combined
financial statements and notes thereto included elsewhere in this
Prospectus/Proxy Statement. The unaudited pro forma condensed combined
statements of operations data combines Ascend's historical consolidated results
of operations data for the year ended December 31, 1997 and the six months
ended June 30, 1998 with Stratus' historical consolidated results of operations
data for the year ended December 28, 1997 and the six months ended June 28,
1998, respectively, giving effect to the Merger as if it had occurred as of
January 1, 1997. The unaudited pro forma condensed combined balance sheet data
combines Ascend's historical consolidated balance sheet data as of June 30,
1998 with Stratus' historical consolidated balance sheet data as of June 28,
1998, giving effect to the Merger as if it had occurred as of June 30, 1998.
The unaudited pro forma condensed combined financial data set forth below does
not purport to represent what the consolidated results of operations or
financial position of Ascend would actually have been if the Stratus
acquisition and related transaction had in fact occurred on such date or to
project the future consolidated results of operations or financial condition of
Ascend. See "Unaudited Pro Forma Condensed Combined Financial Information."
10
<PAGE>
ASCEND SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF
OPERATIONS DATA:
Revenues............... $ 632,469 $1,167,352 $890,273 $287,438 $89,715 $ 23,175
Gross profit........... 405,540 753,782 578,528 185,579 57,215 14,172
Operating income
(loss)................ 163,285 (67,981) 284,818 77,378 15,468 (3,182)
Net income (loss)...... 111,457 (124,374) 183,890 52,945 15,816 (2,978)
Net income (loss) per
share--Basic.......... $ 0.58 $ (0.66) $ 1.03 $ 0.33 $ 0.11 $ (0.04)
Net income (loss) per
share--Diluted........ $ 0.55 $ (0.66) $ 0.94 $ 0.30 $ 0.11 $ (0.04)
Number of shares used
in per share
calculation--Basic.... 193,802 189,129 178,630 162,181 142,486 77,469
Number of shares used
in per share
calculation--Diluted.. 203,886 189,129 196,246 175,216 148,516 77,469
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE
SHEET DATA:
Working capital........ $ 686,928 $ 745,949 $652,447 $331,937 $ 92,415 $ 20,844
Total assets........... 1,390,229 1,137,894 922,127 481,873 126,620 31,432
Total stockholders'
equity................ 1,187,591 969,256 767,233 411,293 103,154 23,550
STRATUS SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED ------------------------------------------------------------
JUNE 28, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1, JANUARY 2,
1998 1997 1996 1995 1995 1994
---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS
OF OPERATIONS DATA:
Revenues............... $ 298,350 $ 688,275 $609,329 $587,922 $576,556 $513,680
Gross profit........... 114,788 310,685 269,771 284,732 321,961 292,811
Operating income....... 5,567 82,140 50,134 12,068 69,678 25,416
Net income............. 7,294 74,114 43,520 17,338 60,982 16,607
Net income per share--
Basic................. $ 0.30 $ 3.15 $ 1.86 $ 0.74 $ 2.53 $ 0.71
Net income per share--
Diluted............... $ 0.29 $ 3.01 $ 1.83 $ 0.73 $ 2.47 $ 0.70
Number of shares used
in per share
calculation--Basic.... 23,928 23,522 23,437 23,417 24,132 23,271
Number of shares used
in per share
calculation--Diluted.. 24,824 24,635 23,774 23,757 24,649 23,769
<CAPTION>
JUNE 28, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1, JANUARY 2,
1998 1997 1996 1995 1995 1994
---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE
SHEET DATA:
Working capital........ $ 390,178 $ 383,875 $325,724 $292,993 $324,431 $299,293
Total assets........... 697,380 750,361 638,921 607,809 613,410 558,531
Long-term obligations
and deferrals......... 1,163 887 3,634 7,168 10,150 13,743
Total stockholders'
equity................ 599,592 600,776 519,484 478,391 490,152 435,960
</TABLE>
11
<PAGE>
ASCEND AND STRATUS SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1998 1997
-------------- ------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS
OF OPERATIONS DATA:
Revenues........................................ $930,819 $1,855,627
Gross profit.................................... 520,328 1,064,467
Net income (loss)............................... 116,108 (55,546)
Net income (loss) per share--Basic.............. $ 0.55 $ (0.27)
Net income (loss) per share--Diluted............ $ 0.52 $ (0.27)
Number of shares used in per share calculation--
Basic.......................................... 211,748 206,771
Number of shares used in per share calculation--
Diluted........................................ 222,504 206,771
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Working capital................................................... $ 961,106
Total assets...................................................... 2,124,638
Long-term obligations and deferrals............................... 1,163
Total stockholders' equity........................................ 1,708,212
</TABLE>
- --------
(1) See "Unaudited Pro Forma Condensed Combined Financial Information."
12
<PAGE>
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth (i) historical net income (loss) per share and
historical book value per share data of Ascend; (ii) historical net income per
share and historical book value per share data of Stratus; (iii) unaudited pro
forma condensed combined net income (loss) per share and unaudited pro forma
condensed combined book value per share data of Ascend after giving effect to
the Merger; and (iv) unaudited equivalent pro forma condensed combined net
income (loss) per share and unaudited equivalent pro forma condensed combined
book value per share data of Stratus based on the Exchange Ratio of 0.75 of a
share of Ascend Common Stock for each share of Stratus Common Stock. See "The
Merger Agreement--Conversion of Securities." The information in the table
should be read in conjunction with the audited and unaudited consolidated
financial statements of Ascend and Stratus and the notes thereto incorporated
by reference in this Prospectus/Proxy Statement and the unaudited pro forma
condensed combined financial data and notes thereto included elsewhere herein.
The unaudited pro forma condensed combined financial data is not necessarily
indicative of the net income (loss) 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>
STRATUS EQUIVALENT
HISTORICAL(1) PRO FORMA PRO FORMA
--------------- CONDENSED CONDENSED
ASCEND STRATUS COMBINED(2)(4)(5) COMBINED(2)(3)(4)(5)
------ ------- ----------------- --------------------
<S> <C> <C> <C> <C>
Net income (loss) per
share--Diluted:
For the six months
ended June 30, 1998.. $ 0.55 $ 0.29 $ 0.52 $0.39
For the year ended De-
cember 31:
1997................ (0.66) 3.01 (0.27) (0.20)
1996................ 0.94 1.83
1995................ 0.30 0.73
Book value per share at:
June 30, 1998(4).... $ 6.06 $24.96 $ 7.98 $5.99
</TABLE>
- --------
(1) 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.
(2) The pro forma condensed combined 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 June 30,
1998. Upon consummation of the Merger, Ascend plans to divest certain lines
of business of Stratus. As of the date of this filing, Ascend was in the
early stages of determining the impact of divesting such operations and
accordingly, the above pro forma information does not include any
adjustments relating to the planned sale of the lines of business.
(3) The Stratus equivalent pro forma condensed combined per share amounts are
calculated by multiplying the pro forma condensed combined per share
amounts by the Exchange Ratio of 0.75 of a share of Ascend Common Stock for
each share of Stratus Common Stock.
(4) See "Unaudited Pro Forma Condensed Combined Financial Information."
(5) Pro forma diluted net income (loss) per share is computed using the
weighted-average number of shares of common stock outstanding, after the
issuance of Ascend Common Stock to acquire the outstanding shares of
Stratus Common Stock and also gives effect to any dilutive options and
warrants. Dilutive options and warrants are excluded from the computation
during loss periods as their effect is antidilutive.
13
<PAGE>
MARKET PRICE INFORMATION
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 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>
1996
First Quarter................................................ $58.38 $28.75
Second Quarter............................................... 71.25 47.75
Third Quarter................................................ 68.75 38.25
Fourth Quarter............................................... 75.25 57.50
1997
First Quarter................................................ 80.25 40.11
Second Quarter............................................... 60.00 36.13
Third Quarter................................................ 56.81 30.00
Fourth Quarter............................................... 35.69 22.00
1998
First Quarter................................................ 38.75 24.38
Second Quarter............................................... 51.81 36.13
Third Quarter (through September 4, 1998).................... 55.06 32.63
Stratus Common Stock is quoted on The New York Stock Exchange, The Chicago
Stock Exchange, The Boston Stock Exchange and The Pacific Exchange under the
symbol "SRA."
The table below sets forth, for the calendar quarters indicated, the reported
high and low sale prices of Stratus Common Stock as reported on The New York
Stock Exchange. Stratus Common Stock began trading on The New York Stock
Exchange on December 21, 1989. The prices of Stratus Common Stock reflect all
stock splits effected prior to the date hereof.
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
First Quarter................................................ $34.88 $25.13
Second Quarter............................................... 32.13 26.25
Third Quarter................................................ 29.88 16.63
Fourth Quarter............................................... 27.75 19.00
1997
First Quarter................................................ 35.13 26.38
Second Quarter............................................... 50.38 30.13
Third Quarter................................................ 60.75 48.00
Fourth Quarter............................................... 50.31 31.00
1998
First Quarter................................................ 50.88 32.50
Second Quarter............................................... 46.69 22.88
Third Quarter (through September 4, 1998).................... 36.19 21.44
</TABLE>
14
<PAGE>
The following table sets forth the closing prices per share of Ascend Common
Stock on The Nasdaq National Market and the Stratus Common Stock on The New
York Stock Exchange on July 31, 1998, the last full trading date prior to the
public announcement of the signing of Merger Agreement, and on September 4,
1998, the last practicable trading date for which information is available
before the printing of this Prospectus/Proxy Statement, and the equivalent per
share prices for Stratus Common Stock based on the Ascend Common Stock prices
multiplied by the Exchange Ratio of 0.75:
<TABLE>
<CAPTION>
ASCEND STRATUS
COMMON COMMON STRATUS
STOCK STOCK EQUIVALENT
------ ------- ----------
<S> <C> <C> <C>
July 31, 1998...................................... $44.47 $28.88 $33.35
September 4, 1998.................................. $38.75 $27.81 $29.06
</TABLE>
As of the Stratus Record Date, there were approximately 2,501 stockholders of
record of Ascend Common Stock, and approximately 1,281 stockholders of record
of Stratus Common Stock.
Stratus stockholders are advised to obtain current market quotations for
Ascend Common Stock and Stratus Common Stock. No assurance can be given as to
the market prices of Ascend Common Stock and Stratus Common Stock at any time
before the Effective Time or as to the market price of Ascend Common Stock at
any time thereafter. Because the Exchange Ratio is fixed, the Exchange Ratio
will not be adjusted to compensate Stratus stockholders for decreases in the
market price of Ascend Common Stock which could occur before the Merger becomes
effective. See "Risk Factors--Risks Associated with Fixed Exchange Ratio."
Following the Merger, all Stratus Common Stock will be owned by Ascend and,
as a result, Stratus Common Stock will no longer be traded on the Stratus
Exchanges.
Neither Ascend nor Stratus 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.
15
<PAGE>
RISK FACTORS
The following risk factors should be considered by holders of Stratus Common
Stock in evaluating whether to approve and adopt the Merger Agreement and
thereby acquire shares of Ascend Common Stock. These factors should be
considered in conjunction with the other information included and incorporated
by reference in this Prospectus/Proxy Statement. This Prospectus/Proxy
Statement contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. 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/Proxy Statement.
RISKS RELATING TO THE MERGER
Integration of Operations and Technologies. Ascend intends to integrate the
telecommunications business of Stratus into Ascend. Achieving the anticipated
benefits of the Merger will depend in large part upon whether the integration
of Stratus' telecommunications business into Ascend is accomplished in an
efficient and effective manner. The integration of Stratus' telecommunications
business into Ascend will require, among other things, integration of the
products, technologies, manufacturing operations, research and development
activities, distribution channels, management information systems and key
personnel of Stratus' telecommunications business into Ascend. Because certain
aspects of Stratus' telecommunications business have not historically been
separated from the non-telecommunications businesses of Stratus, Ascend may
encounter unforseen difficulties in separating and integrating these aspects
of the telecommunications business. There can be no assurance that the
integration of Stratus' telecommunications business will be accomplished in an
efficient and effective manner, if at all. If significant difficulties are
encountered in the integration, it could have a material adverse effect on the
business, results of operations and financial condition of Ascend.
The integration of operations and technologies following the Merger will
require the dedication of management and other personnel which may distract
their attention from the day-to-day business of Ascend, the development or
acquisition of new technologies, and the pursuit of other business acquisition
opportunities. The difficulties of integrating Ascend and Stratus may be
increased by the necessity of coordinating organizations with distinct
cultures and widely dispersed operations. Successful integration of the two
companies' sales and marketing organizations will require the sales and
marketing personnel of each company to learn about the often technically-
complex products, services and technologies of the other company. In addition,
as commonly occurs with mergers of technology companies, during the pre-merger
and integration phases, competitors may undertake initiatives to attract
customers and recruit key employees through various incentives which could
have a material adverse effect on the business, results of operations and
financial condition of Ascend.
Divestiture of Non-Telecommunications Businesses. Ascend intends to divest
the non-telecommunications businesses of Stratus. It is anticipated that,
subject to certain requirements that must be satisfied for the Merger to
qualify as a tax free reorganization, definitive agreements relating to such
divestitures will be negotiated by the end of 1998 and closed within three
months of signing such definitive agreements, but in no event later than 12
months following the consummation of the Merger. These businesses will consist
of an enterprise computer business unit and two business units focused on
financial and enterprise software (the TCAM Systems business unit and the S2
Systems business unit, respectively). These businesses accounted for 56% and
59% of Stratus' revenues in 1997 and the first six months of 1998,
respectively. Ascend will be required to finance these businesses until it
completes the divestitures. To the extent these businesses require
unanticipated financing, there could be a material adverse effect on the
business, results of operations and financial condition of Ascend. As of the
date of this Prospectus/Proxy Statement, Ascend is in the early stages of
determining the financial impact of divesting these businesses, and Ascend has
determined a preliminary purchase price allocation for these businesses. There
can be no assurances that either the preliminary allocation or the amount
received for these businesses on their divesture will approximate the final
allocation of the purchase price. To the extent that either the preliminary
purchase price allocation or the consideration received from the divestiture
of these businesses differs from their final purchase price allocation, an
adjustment to goodwill will be recorded in Ascend's financial statements.
While the amortization of any increased goodwill will have no effect on
Ascend's operating cash flow, such amortization could have a material adverse
effect on Ascend's reported earnings per share. As of the
16
<PAGE>
date of this Prospectus/Proxy Statement, Ascend and Stratus have begun
discussions with potential acquirors for these businesses. However, no
definitive agreements to divest any of these businesses have been reached.
There can be no assurance that Ascend will be able to find acquirors for the
non-telecommunications businesses of Stratus nor any assurance as to the
amount any such acquiror will be willing to pay for the business to be sold.
Failure to sell such businesses within 12 months of the consummation of the
Merger or at an adequate sales price could have a material adverse effect on
the business, results of operations and financial condition of Ascend.
The businesses to be divested share common technology, personnel and other
aspects of operations with one another and with the telecommunications
business of Stratus. Ascend may encounter unforseen difficulties in separating
these businesses, which could diminish the value of the businesses to a
potential acquiror or complicate or limit the ability of Ascend to complete a
divestiture. For instance, these businesses share common intellectual property
rights, some of which are pursuant to licences and other agreements with third
parties that may preclude acquirors of the businesses from utilizing such
intellectual property if such businesses are divested without the permission
of the third parties. Failure to successfully separate these businesses could
have a material adverse effect on the business, results of operations and
financial condition of Ascend.
The value of the businesses to be divested depends in large part upon the
retention of key employees in those businesses. Due to the uncertainty
surrounding the future of these businesses, there is substantial risk that
such key employees will consider alternative employment opportunities and will
be particularly susceptible to recruiting efforts by competitors. The loss of
such key employees could materially adversely affect the ability of Ascend to
sell such businesses and the price a potential acquiror is willing to pay for
such businesses.
Customers. There can be no assurance that carriers, resellers and potential
end users of Ascend's and Stratus' products will continue their current or
historical buying patterns without regard to the announced Merger and other
recent industry developments. Certain customers may defer purchasing decisions
as they evaluate the proposed Merger, other merger and product announcements
in the data and voice networking sectors, changes and regulatory developments
in the telecommunications industry, Ascend's future product strategy and
current and anticipated product offerings of Ascend's and Stratus'
competitors. Customers may ultimately decide to purchase competitors' products
in lieu of Ascend's or Stratus' products. Stratus and, to a lesser extent,
Ascend have each historically depended upon a limited number of customers for
a significant portion of their respective businesses. Consequently, decisions
by a relatively small number of customers to defer their purchasing decisions
or to purchase products elsewhere could have a material adverse effect on the
business, results of operations and financial condition of Ascend. In
addition, by increasing the breadth of Ascend's and Stratus' existing product
offerings, the Merger may make it more difficult for Ascend to enter into new,
or to maintain existing relationships, including customer relationships, with
strategic partners, some of whom may view Ascend as a more direct competitor
than such strategic partners view Ascend or Stratus as independent companies.
Ascend has made assumptions about prospective revenues from both current and
future customers that would result from Ascend offering integrated products
addressing both the voice and data networking markets. For the foregoing
reasons, as well as technological uncertainty, competition and other general
industry and economic factors, there can be no assurance that Ascend will
achieve such revenues.
Dependence on Retention and Integration of Key Employees. The success of
Ascend following the Merger is dependent at least in part on the retention and
integration of the key management, sales, marketing and engineering and other
technical employees of Stratus' telecommunications business into Ascend, and
on the retention of key personnel in the Stratus businesses to be divested
following the Merger. Competition for qualified personnel in the computer and
telecommunications industry is intense, and competitors often use aggressive
tactics to recruit key employees during the period leading up to a merger and
during the integration phase following a merger. While each of Ascend and
Stratus is engaged in ongoing efforts to retain key employees, it may be more
difficult for Ascend to retain such employees after the Merger. In particular,
upon the consumation of the Merger, unvested stock options held by directors
and certain executive officers of Stratus will immediately vest. Certain other
options held by executive officers of Stratus and all options held by other
employees of Stratus which would vest within two years of the consummation of
the Merger had such officer or employee been employed for such period will
become vested upon consummation of the Merger as if such
17
<PAGE>
officer or employee had been employed for such period. The acceleration of
such options could potentially reduce the retention incentive provided by such
options. Further, Bruce I. Sachs, who is currently President and Chief
Executive Officer of Stratus and who will be appointed as the senior manager
of the business unit of Ascend that will include the telecommunications
business of Stratus, has an employment agreement with Stratus that permits Mr.
Sachs to voluntarily terminate his employment within one year of the Effective
Time and receive from Ascend a payment equal to two years' base pay and
certain other benefits. While it is anticipated that Ascend will implement
retention arrangements for key Stratus employees, there can be no assurance
that key employees will remain with Ascend. The loss of services of any key
employees of Stratus could have a material adverse effect on the business,
results of operations and financial condition of Ascend. See "The Merger--
Interests of Certain Persons in the Merger."
Conflicts of Interest. In considering the recommendation to adopt and
approve the Merger by the Stratus Board, the stockholders of Stratus should be
aware that certain officers and directors of Stratus may be deemed to have
conflicts of interest with respect to the Merger. The Stratus Board believes
that it has appropriately considered such conflicts of interest, together with
other relevant factors, when recommending the Merger to the stockholders of
Stratus. In particular, upon the consummation of the Merger, unvested stock
options held by directors and certain executive officers of Stratus will
immediately vest. Certain other options held by executive officers of Stratus
and all options held by other employees of Stratus which would vest within two
years of the consummation of the Merger had such officer or employee been
employed for such period will become vested upon consummation of the Merger as
if such officer or employee had been employed for such period. Further, Mr.
Sachs will be appointed as a senior manager of the business unit of Ascend
that will include the telecommunications business of Stratus. Mr. Sachs and
Maurice L. Castonguay, Vice President of Finance and Administration and Chief
Financial Officer of Stratus, each have employment agreements amended in
connection with the Merger that provide for severance payments upon
termination of their employment following the Effective Time (including a
termination of employment or resignation within one year of the Effective
Time). In addition, pursuant to the Merger Agreement, Stratus will be
permitted to amend its severance policy prior to the Effective Time to provide
additional severance payments for up to 50 key employees. Finally, pursuant to
the Merger Agreement, Ascend has agreed to indemnify and provide directors'
and officers' liability insurance for the directors and officers of Stratus
for six years following the Effective Time. See "The Merger--Interests of
Certain Persons in the Merger."
Risks Associated with Fixed Exchange Ratio. As a result of the Merger, each
outstanding share of Stratus Common Stock will be converted into the right to
receive 0.75 of a share of Ascend Common Stock. Because the Exchange Ratio is
fixed, it will not increase or decrease due to fluctuations in the market
price of either Ascend Common Stock or Stratus Common Stock. The specific
dollar value of the consideration to be received by Stratus stockholders in
the Merger will depend on the market price of Ascend Common Stock at the
Effective Time. The market prices of Ascend Common Stock and Stratus Common
Stock as of a recent date are set forth herein under "Summary--Market Price
Information." Stratus stockholders are advised to obtain recent market
quotations for Ascend Common Stock and Stratus Common Stock. Ascend Common
Stock and Stratus Common Stock historically have been subject to substantial
price volatility. No assurance can be given as to the market prices of Ascend
Common Stock or Stratus Common Stock at any time before the Effective Time or
as to the market price of Ascend Common Stock at any time thereafter. See
"Summary--Market Price Information."
Substantial Costs and Expenses Resulting from the Merger. Ascend estimates
it will incur substantial costs and expenses in connection with the Merger.
These costs and expenses consist of two components. The first component is
estimated to be approximately $116 million, and will include regulatory filing
costs, the fees of financial advisors, attorneys, accountants, financial
printers and proxy solicitors, costs associated with Stratus' previously
announced restructuring to reduce employee headcount by approximately 350
positions, costs associated with Ascend's announced plans to further reduce
the employee headcount at Stratus by approximately 150 positions and the
elimination of redundant facilities following the consummation of the Merger.
These costs will be accounted for as an addition to the purchase price paid by
Ascend in the Merger. Ascend also expects to incur a write-off of in-process
research and development estimated to be approximately $305 million, which
will
18
<PAGE>
be charged to operations in the quarter in which the Merger is consummated.
There can be no assurance that Ascend will not incur additional material
charges in order to reflect additional costs associated with the Merger.
Purchase Method of Accounting. The Merger will be accounted for under the
purchase method of accounting. The total estimated purchase price relating to
the Merger has been allocated on a preliminary basis to the assets acquired
and liabilities assumed based on Ascend's estimates of their respective fair
values. To the extent this purchase price exceeds the fair value of the net
tangible assets acquired at the Effective Time, Ascend will allocate the
purchase price, based on an independent valuation, to intangible assets that
include purchased in-process research and development and acquired technology,
with the remainder allocated to goodwill. While the amortization of acquired
technology and goodwill will have no effect on Ascend's operating cash flow,
such amortization may have an adverse effect on Ascend's reported earnings per
share. The allocation of purchase price is subject to change pending a final
analysis of the value of the assets acquired and liabilities assumed and
divestiture of Stratus' non-telecommunications businesses. The impact of such
changes could be material and any increases in the amounts allocated to
acquired technology and goodwill resulting from changes could increase the
negative effect of such amortization on Ascend's earnings per share.
Consents and Waivers. Stratus has contracts with many of its suppliers,
customers, licensors, licensees and other business partners relating to, among
other things, certain intellectual property rights. Some of the contracts to
which Stratus is a party contain provisions requiring the consent, waiver or
approval of the other party or parties thereto upon a change of control of
Stratus, including upon the consummation of the Merger. Stratus has agreed to
use all reasonable efforts to obtain such consents, waivers and approvals.
However, there can be no assurance that Stratus will be able to obtain all
such consents, waivers and approvals. Failure to obtain such consents, waivers
and approvals could have a material adverse effect on the business, results of
operations and financial condition of Ascend after the Merger.
RISKS RELATING TO ASCEND
General Risks. The operating results of Ascend may be affected by various
trends and factors including, but not limited to, adverse changes in
conditions in the specific markets for Ascend's and Stratus' products,
conditions in the broader market for computer, telecommunications and data and
voice communications products and services, and conditions in the domestic or
global economy generally; governmental regulation or intervention affecting
communications or data and voice networking; fluctuations in foreign exchange
rates; and the factors listed herein. Ascend and Stratus participate in a
highly volatile and rapidly growing industry which is characterized by, among
other things, vigorous competition for market share from both start-up
companies and well-capitalized communications companies and rapid
technological development carried out amidst uncertainty over adoption of
industry standards, the evolution of public and private data and voice
networks, customer requirements and demand and protection of intellectual
property rights. This environment could result in aggressive pricing practices
which could reduce Ascend's revenues and gross margin. The ability of Ascend
to compete in this environment depends upon a number of competitive and market
factors and is subject to the risks set forth in this Prospectus/Proxy
Statement and other factors beyond the control of the management.
Fluctuations in Quarterly Operating Results. Ascend and Stratus have in the
past experienced significant fluctuations in their quarterly operating
results. Ascend's quarterly operating results may in the future be affected by
a wide variety of factors, including competition, the mix of products sold,
the mix of distribution channels employed, success in developing, introducing
and shipping new products, price reductions for 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 and Stratus each typically operates with a relatively small backlog. As
a result, quarterly sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received within the quarter, which
are difficult to forecast. Both Ascend and Stratus have historically
experienced a disproportionate share of sales in the last month of the
quarter. Accordingly, the cancellation or delay of even a small percentage of
customer purchases could have a material adverse effect on Ascend's results of
operations in a quarter and cause it to fail to meet financial expectations. A
significant portion of Ascend's and Stratus' expense levels are relatively
fixed in advance based in large part on their forecasts of
19
<PAGE>
future sales. If sales are below expectations in any given quarter, the
adverse impact of the shortfall on the operating results of Ascend may be
magnified by their inability to adjust spending to compensate for the
shortfall. Due to the rapidly changing nature of the markets for Ascend's and
Stratus' products, as well as the likelihood of increased competition, there
can be no assurance that Ascend will continue to experience growth in net
sales or that Ascend will be able to sustain profitability in the future.
The gross margins of Stratus have historically been lower than the gross
margins of Ascend, and accordingly, Ascend believes that its gross margins
following the Merger will be lower than Ascend's historical gross margins. In
addition, Ascend expects that its gross margins could be adversely affected in
future periods by price adjustments as a result of increased competition, by
changes in product mix and distribution channels and by changes in the cost of
goods sold.
Dependence on the Internet Access and Telecommunications Carrier
Markets. The growth in Ascend's net sales has been primarily attributable to
the use of its access and switching products in connection with the Internet,
Intranets and data networking networks operated by ISPs and telecommunications
carriers. The growth in Stratus' telecommunications business has been
primarily attributable to the use of its SS7 switching products by
telecommunications carriers interested in establishing "intelligent" voice
networks capable of offering enhanced services such as local number
portability and voice mail. Ascend has entered into the Merger Agreement with
the expectation that the combination of Ascend's and Stratus' products will
not only allow Ascend to continue to sell into these markets, but will also
allow Ascend to sell products to ISPs and telecommunications carriers who want
to create more tightly integrated and optimized networks capable of carrying
both voice and data traffic. Ascend's success in generating significant sales
in all of these markets will depend in part on its ability to educate users
about the benefits of its technologies and to develop effective distribution
channels to address these markets. The markets for the types of products
offered by Ascend and Stratus and to be offered by Ascend are new and
evolving, and it is difficult to predict their size or future growth rate.
Sales of Ascend's products will likely depend in large part upon the continued
growth in demand for Internet and Intranet access and data networks, the
convergence of voice and data networks, sustained adoption by end-user
customers of the Internet for commerce and communication and continued
acceptance of Ascend's and Stratus' products. There can be no assurance that
the networking industry and infrastructure will continue to develop, that the
adoption by end-user customers of the Internet for commerce and communication
will occur or that acceptance of Ascend's and Stratus' products will continue.
Ascend believes that competition in these markets will increase significantly
in the future. Any adverse development regarding the Internet and related
industries, the data or voice network equipment markets, adoption of the
Internet or acceptance of Ascend's or Stratus' products could have a material
adverse effect on the business, results of operations and financial condition
of Ascend.
Ascend sells a substantial percentage of its products to ISPs and
telecommunications carriers, while the telecommunications business of Stratus
sells nearly all of its products to telecommunications carriers. The level of
Ascend's sales, if any, to any particular ISP or carrier may vary considerably
from period to period. Accordingly, there can be no assurance that sales in
any future period by Ascend to these entities, individually or as a group,
will equal or exceed historical levels of Ascend or Stratus. Any development
that would result in a substantial decrease or delay in sales to one or more
of these entities, including actions by competitors, technological changes or
regulation affecting the growth of network infrastructure, could have a
material adverse effect on the business, results of operations and financial
condition of Ascend.
New Product Development and Timely Introduction of New and Enhanced
Products. The markets for Ascend's and Stratus' products are characterized by
rapidly changing technologies, evolving industry standards, frequent new
product introductions and short product life cycles. 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, to avoid excessive
levels of older product inventories and to 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
20
<PAGE>
software or hardware errors when they are first introduced or as new versions
are released. There can be no assurance that, despite extensive testing,
software or hardware 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 have a material adverse effect on the
business, results of operations, or financial condition of Ascend.
Competition. Ascend mainly competes in four segments of the data networking
market: (i) wide area network ("WAN") and Internet access, (ii) WAN and
Internet backbone switching, (iii) remote local area network ("LAN") access
and Internet subscriber access, and (iv) videoconferencing and multimedia
access. Ascend competes in one or more of these market segments with Cisco
Systems, Inc., 3Com Corporation, Newbridge Networks, Inc., Shiva Corporation,
Northern Telecom, Inc. ("Nortel"), Lucent Technologies Inc. ("Lucent") and
many others.
Both Stratus' telecommunications and non-telecommunications businesses face
intense competition from a growing number of companies who offer a wide
spectrum of business-class servers and employ a variety of techniques aimed at
maintaining system and data availability. Most of these companies offer their
products and services to the same markets targeted by Stratus, including the
telecommunications market. Stratus' primary competitors in the computer
business are Compaq Computer Corporation (as a result of its acquisition of
Tandem Computers, Inc.), Hewlett-Packard Company ("HP"), International
Business Machines Corporation and Sun Microsystems, Inc., and its competitors
in the telecommunications business are Ericsson LM Tel. Co. Ad., Nortel,
Tekelec, Lucent, and Societe Alcatel CIT.
Competitive factors in the network equipment markets serviced by Ascend and
Stratus include core technology, breadth of product features, breadth of
network services supported, conformance to industry standards, scalability of
products, product quality and reliability, pricing, marketing and distribution
resources, international certifications and technical service and customer
support. In addition, customers of networking products are increasingly
demanding integrated, end-to-end product portfolios from a single vendor.
Ascend expects additional competition in all of the foregoing lines of
business from existing competitors and from a number of other companies that
may enter Ascend's and Stratus' existing and Ascend's future markets. Certain
of Ascend's and Stratus' current and potential competitors have substantially
greater financial, marketing and technical resources than they do. Many of
Ascend's current and potential competitors also have established relationships
with Ascend's current and potential customers, and 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. The inability
of Ascend to continue to penetrate the various markets for its products or to
successfully expand the markets for its products and increased competition
could result in price reductions, reduced profit margins and loss of market
share, each of which could have a material adverse effect on the business,
results of operations and financial condition of Ascend. There can be no
assurance that Ascend will be able to continue to compete successfully against
current and future competitors as markets evolve and competition increases.
Acquisitions of complementary businesses and technologies, including
technologies and products under development, have been a significant part of
Ascend's business strategy. Certain of Ascend's and Stratus' major competitors
have been engaged in business combinations. Not only will Ascend compete with
its competitors for acquisition opportunities, but acquisitions by competitors
are likely to create entities with increased market shares, customer bases,
technology and marketing expertise, sales force size and/or proprietary
technology in product markets in which Ascend will compete. These developments
could have a material adverse effect on Ascend's ability to compete in such
segments.
Management of Growth. Ascend has experienced rapid growth and expansion in
the past, which has placed, and may continue to place, a significant strain on
Ascend's 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 existing and new management
personnel of Ascend. Continued growth of Ascend
21
<PAGE>
would require Ascend to recruit and hire a substantial number of new
engineering, technical support, sales, marketing and managerial personnel.
Competition for such highly-qualified personnel is intense. There can be no
assurance that Ascend will be successful at hiring or retaining these
personnel. The ability of Ascend to manage its growth successfully will also
require it to expand and improve its operational, management and financial
systems and controls and to expand its manufacturing capacities. If management
is unable to manage growth effectively, there could be a material adverse
effect on the business, results of operations and financial condition of
Ascend.
Integration of Acquisitions. Ascend has completed several acquisitions of
businesses, products and technologies, including the acquisition of Cascade
Communications Corp. ("Cascade") that was completed in 1997. Ascend may
acquire additional businesses, products or technologies in the future,
although there are no agreements with respect to such transactions as of the
date of this Prospectus/Proxy Statement. Achieving the anticipated benefits of
past and future acquisition transactions will require, among other things,
integration of the companies' respective products, technologies, management
information systems, distribution channels and key personnel 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
in an efficient or effective manner. 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 in new
product introductions could occur. 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
which may distract their attention from the day-to-day business of Ascend.
Failure to accomplish successfully the integration of the operations of Ascend
with the operations of the acquired companies could have a material adverse
effect on the business, results of operations or financial condition of
Ascend. In addition, if Ascend uses Ascend Common Stock as consideration in
future acquisitions, the percentage ownership in Ascend held by its
stockholders at the time of any such acquisition will be diluted.
Reliance on Third Party Telecommunications Carriers, Value-Added Resellers
and Distributors. Ascend's and Stratus' sales are, to a significant degree,
made through telecommunications carriers, value-added resellers ("VARs") and
distributors. Accordingly, Ascend will be dependent upon the continued
viability and financial stability of these companies. While each of Ascend and
Stratus has contractual relationships with many telecommunications carriers,
VARs and distributors, these agreements do not require the telecommunications
carriers, VARs or distributors to purchase Ascend's or Stratus' products and
can be terminated by the telecommunications carrier, VAR or distributor at any
time. There can be no assurance that any of the telecommunications carriers,
VARs and distributors will continue to market Ascend's products. The
telecommunication carriers (to the extent they are resellers) VARs and
distributors, generally offer products of several different companies,
including products that are competitive with Ascend's and Stratus' products.
Accordingly, there is a risk that these telecommunications carriers 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, sales, marketing or technical
personnel could adversely affect Ascend. The future success of Ascend will
depend in large part upon its ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel. Competition for such
highly-qualified 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
the business, results of operations and financial condition of Ascend.
22
<PAGE>
Dependence on Contract Manufacturers and Single-Source Suppliers. Ascend's
production operations currently consist primarily of materials planning and
procurement, quality control and final assembly, burn-in and testing of
certain products. Stratus' production operations currently consist primarily
of complete manufacturing operations in its manufacturing facility located in
Ireland. Ascend anticipates after the Merger it will continue to produce
products in the same manner as Ascend and Stratus have done historically.
Ascend and Stratus rely on independent contractors to manufacture certain of
their products or components and subassemblies used in their products to their
specifications, and Ascend will continue to do so. Ascend and Stratus are
dependent upon single or limited source suppliers for a number of components
and parts used in their respective 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 or that
such parties will continue to manufacture such items. Ascend and Stratus
generally purchase single or limited source components pursuant to purchase
orders and have no guaranteed supply arrangements with these suppliers. In
addition, the availability of many of these components to Ascend will be
dependent in part on their ability to provide their respective suppliers with
accurate forecasts of their future requirements. 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 the business, results of
operation or financial condition of Ascend in any given period. Ascend and
Stratus purchase certain components from suppliers outside the United States,
and certain of these purchases are not denominated in U.S. dollars, exposing
Ascend and Stratus to foreign currency risk. Ascend may also be subject to
increases in component costs, which could also have a material adverse effect
on Ascend.
Stratus has begun development of future products based in part on a new
microprocessor, code named "Merced," currently being developed by HP and Intel
Corporation. There can be no assurance that the Merced microprocessor will be
released as scheduled or that there will be sufficient quantities of the
Merced microprocessor to fulfill all of Ascend's requirements. Delays in the
release date of the Merced microprocessor or limits on the quantity of Merced
microprocessors available could have a material adverse effect on the
business, results of operations and financial condition of Ascend.
Irish Manufacturing Operations. Stratus' manufacturing operations are
located outside the United States in Dublin, Ireland, and Ascend expects that
it will continue the manufacture of Stratus' telecommunications business
products at this location following consummation of the Merger. These
operations are subject to all of the risks inherent in conducting operations
outside of the United States, including exchange controls, currency
fluctuations, investment policies, regulations governing repatriation of cash,
social and political risks, taxation and other factors. Stratus' earnings from
products manufactured and sold by the Ireland manufacturing subsidiary are
currently subject to a 10% tax rate through December 2010. The Republic of
Ireland has recently been under pressure from the European Community to reduce
its use of favorable tax rates as an incentive for attracting business
operations to Ireland. There can be no assurance that the favorable tax rates
currently applicable to Stratus' manufacturing operations will continue or
that they will not be repealed. If either the favorable tax rates applicable
to Stratus' manufacturing operations were to change or the IRS were to
challenge Stratus' accounting for its profits from such manufacturing
operations as a result of the IRS's audit of Stratus currently in process or
otherwise, it could have a material adverse effect on the business, results of
operations and financial condition of Ascend.
International Sales. Ascend's international sales accounted for
approximately 31%, 35%, 23% and 20% of net sales in its 1997, 1996, 1995 and
1994 fiscal years, respectively and approximately 30% for the six months ended
June 30, 1998. Stratus' international sales accounted for approximately 58%,
55%, 51% and 46% of net sales in its 1997, 1996, 1995 and 1994 fiscal years,
respectively and approximately 63% for the six months ended June 28, 1998.
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 adverse developments in foreign
economies, 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. Stratus and Ascend have experienced a decline in revenue
attributable to weak demand
23
<PAGE>
for their products and services in Asia. There can be no assurances that such
weakened demand will not continue. Ascend and Stratus both depend on third
party resellers for a substantial portion of their international sales. Certain
of these third party resellers also act as resellers for competitors of Ascend
and Stratus 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 the business, results of operations and
financial condition of Ascend. Because Ascend's international sales and a
portion of Stratus' international sales are denominated in U.S. dollars,
fluctuations in currency exchange rates could cause Ascend's and Stratus'
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country.
Stratus' international sales denominated in foreign currency accounted for
approximately 28% of net sales in its 1997 fiscal year. Gains and losses on the
conversion to U.S. dollars of accounts receivable arising from foreign currency
denominated sales and accounts payable arising from international operations
may contribute to fluctuations in results of operations of Ascend. 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 could have a material adverse effect on the business, results of
operations and financial condition of Ascend.
Litigation. Stratus and Ascend are each regularly involved in litigation and
each company is subject to the risk of adverse claims and litigation generally
from third parties. Although Ascend and Stratus believe that all claims
received to date are immaterial, due to the uncertainties associated with any
litigation, the ultimate outcome cannot be determined. Accordingly, there can
be no assurance that such claims or litigation will be resolved in Ascend's or
Stratus' favor or that third parties will not assert claims or that Ascend will
not otherwise become involved in litigation in the future. Any claims against
or litigation involving Ascend could have a material adverse effect on the
business, results of operations, and financial condition of Ascend.
Dependence on Proprietary Technology. The success and ability of Ascend to
compete will depend in part upon its proprietary technologies and continued
development and acquisition of additional proprietary technologies. Ascend and
Stratus rely on a combination of patent, copyright and trade secret laws and
non-disclosure agreements to protect their respective proprietary technologies.
Ascend currently holds several United States patents and a foreign patent and
has patent applications pending. Stratus has a number of patents and patent
applications that are currently pending for certain of its existing products.
There can be no assurance that patents will be issued with respect to pending
or future patent applications of Ascend or Stratus or that Ascend's or Stratus'
patents will be upheld as valid or will prevent the development of competitive
products. In addition, Ascend and Stratus have generally entered into
confidentiality and/or license agreements with their employees, VARs,
distributors, customers and potential customers. There can be no assurance that
the steps taken by Ascend or Stratus to protect their proprietary rights will
be adequate to prevent misappropriation of their technologies or that
competitors will not independently develop technologies that are substantially
equivalent or superior to their technologies. 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 will also be subject to the risk of adverse claims
and litigation alleging infringement of the intellectual property rights of
others. From time to time, Ascend and Stratus have received claims of
infringement of other parties' proprietary rights. Although Ascend and Stratus
believe 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 of Ascend or Stratus 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. In addition, many of Ascend's and Stratus' products are designed to
include software or other intellectual property licensed from third parties.
There can be no assurance that Ascend will be able to consistently secure
third-party rights necessary to offer competitive products. The loss of
software or other rights currently used in the companies' products, or the
inability to obtain other such rights needed to offer competitive products in
the future, might require significant changes in, or otherwise disrupt or delay
the distribution of those products.
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 adverse
24
<PAGE>
effect on Ascend's business, results of operations or financial condition. 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 or Stratus' products would be reduced, and Ascend's business,
results of operations and financial condition 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.
Ascend's and Stratus' 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 the business, results of
operations and financial condition of Ascend.
Year 2000 Compliance Risks. Many computer systems were not designed to
handle any dates beyond the Year 1999, and therefore computer hardware and
software may need to be modified prior to the Year 2000 in order to remain
functional. Most of Ascend's and Stratus' current release software and
hardware is Year 2000 compliant and those that are not are expected to be Year
2000 compliant by mid-1999.
Stratus is in the process of conducting an internal review of all systems
and contacting all software suppliers to determine major areas of exposure to
Year 2000 issues. Although Stratus' core financial and reporting systems have
been identified as being Year 2000 compliant due to their recent
implementation, a number of applications in the financial and information
system area are not Year 2000 compliant. In the manufacturing area, Stratus is
in the process of correcting areas of exposure.
Ascend is also in the process of conducting an internal review of all
systems and contacting software suppliers to determine major areas of
exposures and is in the process of correcting areas of exposure to Year 2000
issues. Ascend does not currently have a contingency plan in the event that it
is unable to make its systems Year 2000 compliant. Ascend has not determined
an estimate of the costs required to correct non-complying features and such
costs could have a material adverse effect on Ascend's business, results of
operations and financial condition.
Ascend is concerned that many enterprises will be devoting a substantial
portion of their information systems spending to resolving this upcoming Year
2000 problem. This may result in spending being diverted from networking
solutions over the next three years. Additionally, Ascend may have to devote
resources to providing the Year 2000 solution for its own products. The Year
2000 issue could lower demand for Ascend products while increasing their
costs. These factors could have a material adverse effect on the business,
results of operations and financial condition of Ascend. There can be no
assurance that systems operated by third parties that interface with or
contain Ascend's products will timely achieve Year 2000 compliance. In the
third-party area, Stratus has begun contacting its major third parties. Most
of these parties have stated that they intend to be Year 2000 compliant by
2000. Any failure of these third parties' systems to timely achieve Year 2000
compliance could have a material adverse effect on the business, results of
operations and financial condition of Ascend.
Potential Issuance of Ascend Preferred Stock; Anti-Takeover Provisions. The
Ascend Board has the authority to issue up to 2,000,000 shares of preferred
stock (the "Ascend 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 Ascend Preferred Stock that may be issued in
the future. The issuance of the Ascend 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 Ascend 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
25
<PAGE>
Ascend Preferred Stock. See "Description of Ascend Capital Stock--Ascend
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 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,
announcements by Ascend or its competitors regarding new product introductions
or other developments affecting Ascend, or changes in financial estimates by
public market analysts. 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. These broad market fluctuations may
adversely affect the market price of Ascend's Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse
effect on the business, results of operations and financial condition of
Ascend.
26
<PAGE>
THE STRATUS SPECIAL MEETING
DATE, TIME AND PLACE
This Prospectus/Proxy Statement is being furnished to holders of Stratus
Common Stock in connection with the solicitation of proxies by the Stratus
Board for use at the Stratus Special Meeting scheduled to be held on Monday,
October 19, 1998 at 2:00 p.m., local time, at the offices of Stratus, 55
Fairbanks Boulevard, Marlborough, Massachusetts, and at any adjournments or
postponements thereof.
This Prospectus/Proxy Statement and the accompanying form of proxies are
first being mailed to stockholders of Stratus, on or about September 11, 1998.
PURPOSE
At the Stratus Special Meeting, holders of Stratus Common Stock will
consider and vote upon (i) a proposal described in this Prospectus/Proxy
Statement to approve and adopt the Merger Agreement pursuant to which Sub will
merge with and into Stratus and Stratus will survive the Merger as a wholly
owned subsidiary of Ascend and (ii) such other matters as may properly be
brought before the Stratus Special Meeting, including any motion to adjourn
the Stratus Special Meeting to a later date to permit further solicitation of
proxies if necessary to establish a quorum or to obtain additional votes, or
any adjournments or postponements thereof. In the Merger, holders of
outstanding shares of Stratus Common Stock will have the right to receive 0.75
of a share of Ascend Common Stock for each share of Stratus Common Stock held
by them.
AFTER CAREFUL CONSIDERATION, THE STRATUS BOARD HAS UNANIMOUSLY DETERMINED
THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF STRATUS AND ITS
STOCKHOLDERS AND APPROVED THE MERGER AGREEMENT. THE STRATUS BOARD UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF STRATUS VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT. See "The Merger--Recommendation of the Stratus Board."
STRATUS RECORD DATE
The Stratus Board has fixed the close of business on September 4, 1998 as
the Stratus Record Date for the determination of stockholders entitled to
notice of and to vote at the Stratus Special Meeting. As of the Stratus Record
Date, there were 24,061,522 shares of Stratus Common Stock issued and
outstanding, net of treasury stock, held by approximately 1,281 holders of
record.
REQUIRED VOTE
A majority of the outstanding shares of Stratus Common Stock entitled to
vote at the Stratus Special Meeting must be present, either in person or by
proxy, to constitute a quorum at the Stratus Special Meeting.
The affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of Stratus Common Stock entitled to vote at the Stratus
Special Meeting is required to approve and adopt the Merger Agreement. Each
holder of record of Stratus Common Stock on the Stratus Record Date is
entitled to cast one vote per share of Stratus Common Stock held by such
holder.
As of the Stratus Record Date, directors and executive officers of Stratus
and their affiliates had the right to vote approximately 8.24% of all issued
and outstanding shares of Stratus Common Stock entitled to vote at the Stratus
Special Meeting. Such persons have indicated to Stratus that they intend to
vote all of such shares in favor of approval and adoption of the Merger
Agreement.
PROXIES
All shares of Stratus Common Stock represented by properly executed proxies
received prior to or at the Stratus Special Meeting will, unless such proxies
shall have been revoked, be voted in accordance with the
27
<PAGE>
instructions indicated thereon. If no instructions are indicated on a properly
executed proxy, the shares will be voted for approval and adoption of the
Merger Agreement. Stockholders are urged to mark the box on the proxy to
indicate how their shares are to be voted.
If an executed proxy is returned and the stockholder has abstained from
voting on approval and adoption of the Merger Agreement, the shares
represented by such proxy will be considered present at the meeting for
purposes of determining a quorum and for purposes of calculating the vote, but
will not be considered to have been voted in favor of approval and adoption of
the Merger Agreement. If an executed proxy is returned by a broker holding
shares of Stratus Common Stock in street name which indicates that the broker
does not have discretionary authority as to certain shares to vote on any
matter (a so-called "broker non-vote"), such shares will be considered present
at the meeting for purposes of determining the presence of a quorum and of
calculating the vote, but will not be considered to have been voted in favor
of approval and adoption of the Merger Agreement. Because the Merger requires
the affirmative vote of at least two-thirds of the shares of Stratus Common
Stock issued and outstanding and entitled to vote at the Stratus Special
Meeting, abstentions and broker non-votes will have the same effect as a vote
against approval and adoption of the Merger Agreement.
It is not expected that any matter other than those referred to herein will
be brought before the Stratus Special Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to such matters, unless authority to do so is
withheld in the proxy.
Any Stratus stockholder who executes and returns a proxy may revoke such
proxy at any time before it is voted by (i) notifying in writing the Assistant
Clerk of Stratus at 55 Fairbanks Boulevard, Marlborough, Massachusetts 01752,
(ii) granting a subsequent proxy or (iii) appearing in person and voting at
the Stratus Special Meeting. Attendance at the Stratus Special Meeting will
not in and of itself constitute revocation of a proxy.
The expenses incurred in connection with the printing and mailing of this
Prospectus/Proxy Statement will be shared equally by Stratus and Ascend.
Stratus has retained Kissel Blake, Inc. at an estimated cost of $10,000 plus
reimbursement of expenses, to assist in the solicitation of proxies by
telephone. Stratus and Kissel Blake, Inc. will also request banks, brokers,
and other intermediaries holding shares beneficially owned by others to send
this Prospectus/Proxy Statement to and obtain proxies from such beneficial
owners and will reimburse such holders for their reasonable expenses in so
doing.
ADJOURNMENT OF THE STRATUS SPECIAL MEETING
In the event that there are not sufficient votes to approve and adopt the
Merger Agreement at the time of the Stratus Special Meeting, such proposal
could not be approved unless the Stratus Special Meeting was adjourned in
order to permit further solicitation of additional proxies from Stratus
stockholders. Proxies that are being solicited by the Stratus Board grant the
discretionary authority to vote for any such adjournment. A majority of the
voting power represented and voting at the Stratus Special Meeting is required
to approve any such adjournment whether or not a quorum is present at the
Stratus Special Meeting.
An adjournment of the Stratus Special Meeting may be necessary because the
limited time between the mailing of the Prospectus/Proxy Statement and the
Stratus Special Meeting may result in the lack of a quorum at the Stratus
Special Meeting. In addition, the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares of Stratus Common Stock is
required to approve and adopt the Merger Agreement, and not merely a majority
of the shares present and voting in person or by proxy. To obtain the
requisite vote, it may be necessary to adjourn the Stratus Special Meeting to
solicit additional proxies.
EXCHANGE OF STRATUS CERTIFICATES
Promptly after the Effective Time, the Exchange Agent will mail to each
holder of record of Stratus Common Stock whose shares were converted into the
right to receive shares of Ascend Common Stock (i) a duly executed letter of
transmittal and (ii) instructions for use in effecting the surrender of
Stratus Certificates in
28
<PAGE>
exchange for Ascend Common Stock. The transmittal instructions will describe
the procedures for surrendering Stratus Certificates. Upon surrender of a
Stratus Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, the holder of such Stratus 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 Merger Agreement, and the Stratus Certificate
so surrendered shall immediately be canceled.
HOLDERS OF STRATUS COMMON STOCK SHOULD NOT SUBMIT THEIR STRATUS CERTIFICATES
FOR EXCHANGE UNLESS AND UNTIL THEY HAVE RECEIVED THE TRANSMITTAL INSTRUCTIONS
AND A FORM OF LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
29
<PAGE>
THE MERGER
Certain statements made in the following paragraphs regarding the potential
benefits that could result from the Merger are forward-looking statements
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. Such risks and uncertainties are set forth under
"Risk Factors" and elsewhere in this Prospectus/Proxy Statement. To the extent
this section of the Prospectus/Proxy Statement relates to the Merger
Agreement, the following description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, which is
attached as Annex A hereto and is incorporated herein by reference. While
Stratus and Ascend believe that such description covers the material terms of
the Merger Agreement, all stockholders of Stratus are urged to read the Merger
Agreement in its entirety.
BACKGROUND OF THE MERGER
On March 13, 1998, Bruce I. Sachs, President and Chief Executive Officer of
Stratus, contacted Mory Ejabat, President and Chief Executive Officer of
Ascend to discuss the interoperability or joint development of Stratus' SS7
switches (the intelligent management of a telephone network) with Ascend's
remote access products for a particular Stratus customer.
On March 16, 1998, Mr. Sachs contacted Mr. Ejabat to discuss the
interoperability of the Ascend remote access product line with the Stratus SS7
gateway and an upcoming Stratus press release. Mr. Ejabat agreed that Ascend
would participate in Stratus' upcoming press release. Mr. Ejabat and Mr. Sachs
agreed to continue discussing the feasibility of joint development of Ascend
and Stratus products.
On March 17, 1998, Stratus issued a press release regarding core
technologies that enable interoperability between advanced voice and data
services and the public switched telephone network.
In April and May 1998, Mr. Ejabat, Michael F.G. Ashby, Executive Vice
President and Chief Financial Officer of Ascend, and certain other members of
Ascend senior management undertook a review of the voice and data networking
industry, including an analysis of potential acquisitions or combinations. As
a part of its review, Ascend conferred with Deutsche Morgan Grenfell ("DMG")
with respect to various alternative transactions. Mr. Ejabat authorized DMG to
contact a select group of identified strategic partners on a "no names" basis
to determine their interest in a possible business combination.
On May 7, 1998, Ascend engaged DMG to act as its financial advisor in
connection with several potential strategic business combinations unrelated to
Stratus.
On May 21, 1998, the Ascend Board of Directors held a regularly scheduled
meeting attended by members of Ascend's senior management. Mr. Ejabat updated
the Ascend Board on consolidation trends in the data networking industry as
well as industry trends leading towards the integration of voice and data
networks. The Ascend Board discussed a variety of strategic transactions with
companies that have products and technologies that were complimentary to that
of Ascend. The Ascend Board authorized management to continue to explore
potential strategic transactions, including business combinations. In
addition, the Ascend Board authorized management to obtain more detailed
information regarding such potential strategic transactions so that the Board
could better assess the relative merits of each proposed transaction.
On June 9, 1998, Mr. Ejabat and Jeanette Symons, Chief Technology Officer of
Ascend, held an unscheduled meeting with Mr. Sachs at the SuperCom Trade Show.
Mr. Ejabat indicated to Mr. Sachs that he wanted to discuss the possibility of
a strategic relationship.
On June 11 and 12, 1998, Mr. Sachs and Mr. Castonguay discussed with the
Stratus Board various matters including the fact that Mr. Ejabat wanted to
discuss and explore a possible strategic relationship with Stratus.
30
<PAGE>
With the Stratus Board's authorization, Mr. Sachs contacted Mr. Ejabat for
further discussions, which resulted in Mr. Ejabat asking Ms. Symons to visit
Stratus on June 12, 1998.
On June 12, 1998, Ms. Symons met with the following Stratus representatives:
Mr. Sachs, Rod Randall, Vice President of Worldwide Marketing and
Telecommunications Software, Steve Kiely, Vice President of Platform Products,
Ron Staub, Vice President of Telecommunications Engineering and Ali Kafel,
Director, Telecommunications Marketing. The parties discussed present product
plans and reviewed certain public information regarding Stratus. As a result
of the foregoing discussions, both companies agreed that an exchange of
certain confidential information would be useful. Later that same day, Mr.
Ejabat arranged a follow-up meeting with Messrs. Sachs and Castonguay.
On June 15, 1998, Ascend and Stratus entered into a confidentiality
agreement governing the exchange of non-public information between the
parties. On the same day, Messrs. Ejabat, Ashby, Sachs and Castonguay
discussed the possibility of a strategic business combination, including
product and operational synergies and business and financial strengths. The
parties made available to each other a variety of public and nonpublic
information and documents concerning Ascend and Stratus.
Mr. Sachs reported to the Stratus Board on his discussions with Ascend
concerning a possible strategic relationship at a special meeting on the
evening of June 15, 1998.
On June 16, 1998, Mr. Ejabat contacted Mr. Sachs to inform him that Ascend
would evaluate the information recently exchanged. Both parties agreed that
the potential merits of a strategic business combination might be further
evaluated in the future, but further evaluation would not go forward at this
time.
On June 17, 1998, Stratus issued a press release announcing that its second
quarter results would be below expectations of the investment community.
On June 18, 1998, Ascend senior management met with Salomon Smith Barney
("SSB") to discuss consolidation trends in the voice and data networking
industry and to evaluate strategic alternatives available to Ascend.
On June 23, 1998, Morgan Stanley discussed with Messrs. Sachs and Castonguay
certain strategic alternatives.
In late June 1998, DMG reorganized as an on-going business entity.
Thereafter, Ascend consulted with SSB as its financial advisor in connection
with a potential strategic business combination.
On July 2, 1998, Ken Fehrnstrom, Vice President of Business Development of
Ascend, requested that SSB help Ascend evaluate Stratus as a strategic
business combination and prepare preliminary analyses including various
valuation models.
On July 7, 1998, Messrs. Sachs and Ejabat discussed the feasibility of a
strategic business combination. Messrs. Sachs and Ejabat discussed the data
and voice markets in general and the business impact of a potential strategic
business combination. Messrs. Sachs and Ejabat agreed that they may continue
these discussions after Ascend's scheduled earnings release. Separately on
that day, Messrs. Ashby and Fehrnstrom met with SSB to review its evaluation
of a potential strategic business combination between Ascend and Stratus.
Ascend requested SSB to prepare additional valuation models relating to the
proposed business combination.
On July 14, 1998, the Ascend Board held a special meeting by telephone
conference attended by members of Ascend senior management. Mr. Ejabat
reported on the status of discussions with potential strategic partners other
than Stratus. Mr. Ejabat also updated the Ascend Board on the status of
discussions with Stratus. Mr. Ejabat discussed the relative merits of each
strategic partner, including an assessment of product line, technology and
market position. Mr. Ejabat addressed questions and comments of the Ascend
Board with respect to each strategic partner discussed in this meeting. At the
conclusion of the discussion, the Ascend Board authorized and
31
<PAGE>
instructed management to continue the discussions with Stratus regarding a
possible business combination. Following this meeting, Mr. Ejabat contacted
Mr. Sachs to discuss a schedule of future meetings.
On July 14, 1998 Ascend issued a press release reporting its second quarter
financial results for 1998.
On July 16, 1998, senior members of the management teams of Ascend and
Stratus met to discuss the possibility of a strategic business combination.
Discussions were held regarding Stratus' financial performance and a proposed
management structure following a strategic business combination. The parties
discussed the possibility of divesting the non-telecommunications business
units of Stratus.
On July 17, 1998, Messrs. Ashby and Castonguay held a teleconference meeting
with Ascend's and Stratus' independent auditors to discuss accounting issues
associated with a possible strategic business combination. On July 17, 1998,
Ascend supplied Stratus with a preliminary due diligence checklist to be used
should the parties decide to pursue a strategic business combination.
On July 19, 1998, Mr. Ejabat met with Mr. Sachs to discuss concerns
regarding the recent decline in the price of Stratus Common Stock. At this
meeting, Mr. Ejabat also indicated the price per share of Stratus Common Stock
that Ascend was considering for any proposal it may make to acquire Stratus.
Mr. Sachs told Mr. Ejabat that he would not support a transaction at such a
price. Based on this conversation, Ascend ceased discussions with Stratus
regarding a strategic business combination.
On July 21, 1998, Stratus engaged Morgan Stanley to act as financial advisor
in connection with various acquisitions Stratus was considering, as well as a
possible transaction between Stratus and Ascend.
On July 21, 1998, at a regularly scheduled meeting of the Stratus Board
attended by Morgan Stanley, Mr. Sachs reported on the status of discussions
with Ascend, including the price per share of Stratus Common Stock that Ascend
was considering. The Stratus Board indicated that they would not support a
transaction at that price and instructed Mr. Sachs to advise Mr. Ejabat of
that information. Mr. Sachs contacted Mr. Ejabat to report that the Stratus
Board would not support a strategic business transaction at that price.
On July 22, 1998, Messrs. Ejabat and Sachs discussed further a possible
strategic business combination of Ascend and Stratus, including the price per
share of Stratus Common Stock to be paid in any such combination. In the
course of that discussion, Mr. Ejabat asked Mr. Sachs if Mr. Sachs would
recommend an exchange ratio of 0.75 of a share of Ascend Common Stock for each
share of Stratus Common Stock to the Stratus Board, subject to approval of the
Ascend Board, due diligence and other satisfactory conditions. Mr. Sachs
indicated that he would recommend that exchange ratio to the Stratus Board.
At a special meeting of the Stratus Board held via conference telephone on
July 22, 1998, Mr. Sachs discussed the status of discussions with Ascend,
including the proposed 0.75 exchange ratio. The Stratus Board authorized Mr.
Sachs to continue discussing a possible business combination with Ascend.
From July 22-23, 1998, members of Ascend management held an off-site meeting
for the purpose of considering strategic issues relating to the long-term
position of Ascend.
On July 23, 1998, at the Ascend off-site meeting, the Ascend executive
committee discussed the possibility of a strategic business combination with
Stratus, subject to further discussion with the Ascend Board and due
diligence. Mr. Ejabat discussed the proposed 0.75 exchange ratio matter
further with the Ascend senior management team and scheduled an Ascend Board
Meeting to discuss the matter further. On that same day, Mr. Sachs contacted
Mr. Ejabat to report that he had been authorized by the Stratus Board to
continue discussions regarding a strategic business combination at the
proposed exchange ratio. Following this discussion, Mr. Ashby contacted
Mr. Castonguay to discuss a schedule for future meetings.
On July 24, 1998, the Ascend Board held a special meeting in which members
of Ascend's senior management reported on the status of discussions with
Stratus, including a recommended exchange ratio of 0.75
32
<PAGE>
of a share of Ascend Common Stock, and the feasibility of a strategic business
combination. The Ascend Board discussed, among other things, the possible
timing, structure and terms of such a transaction. Ascend's legal counsel
described to the Ascend Board the fiduciary duties applicable to directors in
considering a strategic business combination. The Ascend Board authorized and
instructed management to continue to explore a possible strategic business
combination, to pursue further discussions and to begin due diligence with
Stratus.
On July 25, 1998, Ascend presented Stratus with a proposal regarding the
timing, structure and terms of a strategic business combination. The proposal
served as the basis for discussion between members of senior management of
both companies. The parties made preliminary arrangements to begin the legal
due diligence process.
On July 26, 1998, the parties commenced due diligence.
Between July 26 and July 31, 1998, the parties conducted a series of due
diligence meetings in which each party and its financial, legal and accounting
advisors reviewed documents and held due diligence discussions with the other
party and its advisors. As a part of this process, Messrs. Ejabat and Ashby
and other members of senior management of Ascend met with Messrs. Sachs,
Castonguay and other members of senior management of Stratus to discuss the
proposed timing, structure and terms of a strategic business combination.
Representatives of the parties' financial advisors participated in some of
these meetings and also held additional meetings to review and obtain
information concerning the companies.
On July 27, 1998, GCW&F, counsel to Ascend, distributed a draft of the
Merger Agreement and other related agreements to Stratus, SSB, Morgan Stanley
and SASM&F, counsel to Stratus. Discussions concerning the draft merger
agreement occurred on a daily basis between the legal representatives of
Ascend and Stratus and certain members of each company's management team until
execution of the Merger Agreement on August 3, 1998.
On July 28, 1998, Ascend engaged SSB to act as its financial advisor in
connection with a possible strategic business combination with Stratus.
On July 29, 1998, Messrs. Ejabat and Sachs discussed further details of the
proposed structure following a strategic business combination, including plans
regarding the non-telecommunications business units of Stratus.
Later that same day, the Ascend Board held a special meeting by telephone
conference attended by members of Ascend's senior management and
representatives of SSB and GCW&F. Ascend's senior management reported on the
status of the negotiations between Ascend and Stratus. SSB delivered a
preliminary financial and business analysis of Stratus and the potential
business combination. Representatives of SSB delivered an analysis of certain
financial considerations of the proposed transaction. Representatives of
senior management presented a report to the Ascend Board regarding the due
diligence investigation of Stratus and management's financial and business
analysis of the proposed transaction. A discussion among the members of the
Ascend Board ensued regarding these matters and issues related to the proposed
Merger Agreement and related documents. The Ascend Board authorized management
to complete due diligence and negotiations regarding documentation and
finalize a proposal for consideration by the Ascend Board.
On July 31, 1998, the Ascend Board held a special meeting by telephone
conference led by Ms. Symons. Ms. Symons instructed the Board on the product
synergies and the related investor relations presentation following a
strategic business combination.
On July 31, 1998, the Stratus Board held a special meeting attended by
members of Stratus' senior management and representatives of Morgan Stanley
and SASM&F at the Boston offices of SASM&F. Mr. Sachs reported on the status
of the negotiations between Ascend and Stratus. Morgan Stanley delivered a
preliminary financial and business analysis of the potential business
combination. SASM&F reviewed the preliminary terms of the then-current draft
of the Merger Agreement and related documents and presented other information
33
<PAGE>
concerning the proposed transaction. Representatives of SASM&F provided each
member of the Stratus Board with a copy of the then-current draft of the
Merger Agreement. Representatives of Morgan Stanley provided each member of
the Stratus Board with their analysis of certain financial considerations of
the proposed transaction. Representatives of senior management discussed the
due diligence investigation of Ascend and management's financial and business
analysis of the proposed transaction. The Stratus Board authorized management
to continue its negotiations with respect to the proposed transaction, the
Merger Agreement and related documents.
On the morning of August 2, 1998, the Stratus Board held a special meeting
by telephone conference attended by members of Stratus' senior management and
representatives of Morgan Stanley and SASM&F. Mr. Sachs reviewed the status of
the negotiations between Ascend and Stratus and related matters.
Representatives of SASM&F described to the Stratus Board the fiduciary duties
applicable to directors in considering a strategic business combination.
Representatives of SASM&F reviewed the terms of the Merger Agreement and
related documents and presented other information concerning the proposed
transaction. Representatives of Morgan Stanley described the financial
analysis performed by Morgan Stanley with respect to the possible combination
with Ascend and then delivered the oral opinion of Morgan Stanley, later
confirmed in writing to the effect, that the Exchange Ratio was fair to
Stratus stockholders from a financial point of view. Following discussion, the
Stratus Board unanimously determined the Merger to be fair and in the best
interest of Stratus and its stockholders and approved the Merger Agreement and
related documents.
In the evening on August 2, 1998, the Ascend Board held a special meeting by
telephone conference attended by members of Ascend's senior management and
representatives of SSB and GCW&F. Prior to the meeting, Ascend's counsel
provided each member of the Ascend Board with the then current draft of the
Merger Agreement and related documents. The Ascend Board considered the
proposed Merger Agreement, related documents and the transactions contemplated
thereby. Mr. Ejabat summarized the status of negotiations. Representatives of
SSB described the financial analysis performed by SSB with respect to the
possible combination with Stratus, and then delivered the oral opinion of SSB,
later confirmed in writing, to the effect that, the Exchange Ratio was fair to
Ascend from a financial point of view. Following discussion, the Ascend Board
then concluded that the Merger was in the best interest of Ascend and
unanimously approved the Merger Agreement and related documents.
On August 2, 1998, representatives of GCW&F and SASM&F continued the final
negotiation and drafting of the Merger Agreement and related documents
overnight, and in the morning of August 3, 1998, the Merger Agreement was
signed and delivered, and a press release was issued by the parties announcing
the Merger.
REASONS FOR THE MERGER
Ascend's Reasons for the Merger
In reaching their decision to approve the Merger Agreement and the Merger,
the Ascend Board consulted with its management teams and advisors and
independently considered the proposed Merger Agreement and the transactions
contemplated thereby. Based upon, among other things, this review, the Ascend
Board approved the Merger Agreement and the transactions contemplated thereby.
The strategic basis for the Merger is Ascend's belief that a convergence of
traditional telecommunications and data networking is occurring, and that
telecommunications carriers increasingly desire to tightly integrate their
voice and data networks. Ascend believes that the strong growth in the
Internet and other data traffic has created and will continue to create strong
demand by carriers for data networks, both public and private, that offer
enterprises and consumers higher speeds, lower costs and enhanced services.
Ascend expects that these data networks will over time come to dominate
telecommunications networks and will support not only the current data
networking applications such as electronic mail and file transfer, but will
also support networking applications like voice and fax transmission.
To optimize network access and coverage, these data networks will be
integrated with the carrier's traditional voice networks. In recent years,
carriers have begun to enhance these voice networks to offer
34
<PAGE>
additional services such as local number portability, caller ID and voice
mail. Ascend expects that this trend to create "intelligent" voice networks
will continue and that a natural extension of these networks will be to
integrate these voice networks more closely with data networks and to migrate
many of the features offered by these networks to the data networks,
particularly as voice communications over the data networks increase.
Accordingly, Ascend believes that the Merger will enable it to deliver
network solutions that will permit the carriers to optimally integrate their
voice and data networks. Some additional attributes of the Merger are expected
to be as follows:
(i) Ascend will be a leader in the telecommunications and networking
industry, with combined 1997 pro forma revenues of $1.9 billion and
$931 million for the six months ended June 30, 1998, over 4,710
employees and a global presence in over 35 countries and territories.
Ascend is recognized as a market leader in access concentrators and
frame relay, IP and ATM switches, while Stratus is recognized as a
market leader in SS7 switches.
(ii) Ascend will not only continue to offer the data and voice products of
each of Ascend and Stratus, but will be able to combine Ascend's data
networking expertise with Stratus' voice networking expertise to offer
network solutions that will allow carriers to integrate their voice
and data networks. These solutions are expected to include:
(a) the integration of Ascend's access products with Stratus' SS7
switch to create an Internet gateway application, enabling carriers to
redirect data and voice traffic and relieve the traffic congestion they
are currently experiencing; and
(b) the integration of voice capabilities and SS7 intelligence from
Stratus into Ascend's access and core switching products, enabling the
integration of voice and data traffic on a single platform.
(iii) Ascend believes that the combination of the research and development
activities and personnel of Ascend and Stratus gives Ascend the
research and development strengths that will be required to create
the network solutions that will be demanded by carriers driving the
voice and data networking convergence.
(iv) Ascend will have a market reach that exceeds the current market reach
of either Ascend or Stratus because Ascend will have access to
Stratus' customer base, and Stratus' telecommunication business, which
will be retained by Ascend, will have access to Ascend's customer
base. This is expected to accelerate deployment of the products of
Ascend into Ascend's and Stratus' core customer accounts. Specific
distribution advantages that are expected to be enjoyed by Ascend
include:
(a) distribution of Stratus' telecommunications products through the
combined direct sales force (Ascend has a direct sales force of 224,
which is 3 times the size of Stratus' sales force dedicated to
Stratus' telecommunications products, and this sales force already has
exposure to Internet gateway applications like those offered by
Stratus as a result of recently announced products by Ascend); and
(b) Ascend's strong presence with the competitive local exchange
carriers ("CLECs"), the new carriers and the ISPs, Stratus' strong
presence with traditional carriers and both companies' strong presence
with telecommunications equipment providers such as Lucent, Bell
Communications Research Inc. and NEC Corporation.
The foregoing assessment of the Merger is based on Ascend's expectations
about future performance of Ascend. After the Merger, there can be no
assurances that any of the results, efficiencies or opportunities described in
this Prospectus/Proxy Statement will be achieved. See "Risk Factors--Risks
Relating to the Merger."
In reaching its decision to approve the Merger Agreement and the issuance of
shares of Ascend Common Stock in connection with the Merger, the Ascend Board
also considered, among other things, the following factors:
(i) the effect on stockholder value of a combination with Stratus, in
light of the financial condition and prospects of Ascend and Stratus and
the current economic and industry environment, including, but not limited
to, (a) other possible strategic alternatives for Ascend and (b) the
possibility of synergies from
35
<PAGE>
combining Ascend's and Stratus' product lines, research and development
programs and sales and marketing organizations;
(ii) the results of the due diligence investigations by Ascend's
management and legal, financial and accounting advisors concerning the
business, technology, products, operations, financial condition and
prospects of Stratus;
(iii) its knowledge of the business operations, properties, assets,
financial condition and operating results of Stratus;
(iv) Ascend's future prospects and whether such prospects could be
significantly enhanced by the Merger and the anticipated operating results
of Stratus;
(v) the terms and conditions of the Merger Agreement, which were the
product of extensive arm's length negotiations (see "The Merger
Agreement");
(vi) the compatibility of the respective business philosophies and
corporate cultures of Ascend and Stratus;
(vii) the management resources available to address the management needs
of Ascend and such management's experience at managing operations at
different locations and integrating acquisitions; and
(viii) the impact of the Merger on Ascend's and Stratus' customers,
suppliers and employees.
The Ascend Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to:
(i) the possible adverse impact that Stratus' near-term operating results
could have on Ascend;
(ii) the difficulty of managing separate operations at different
geographic locations;
(iii) the risk that despite the efforts of Ascend, key technical,
marketing and management personnel might not choose to remain employed by
Ascend;
(iv) the risk that the operations of the two companies would not be
successfully integrated; and
(v) the other risks associated with Ascend's businesses and with the
Merger described under "Risk Factors," as well as certain risks identified
in other recent business combinations in the networking industry.
The Ascend Board believed that certain of these risks were unlikely to
occur, while others could be avoided or mitigated by Ascend, and that,
overall, these risks were outweighed by the potential benefits of the Merger.
The foregoing discussion of the information and factors considered by the
Ascend Board is not intended to be exhaustive but is believed to include all
material factors considered by the Ascend Board. In view of the variety of
factors considered in connection with its evaluation of the Merger, the Ascend
Board did not find it practicable to and did not quantify or otherwise assign
relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the Ascend Board may have
given different weight to different factors.
Stratus' Reasons for the Merger
AFTER CAREFUL CONSIDERATION, THE STRATUS BOARD HAS UNANIMOUSLY DETERMINED
THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF STRATUS AND ITS
STOCKHOLDERS AND APPROVED THE MERGER AGREEMENT. THE STRATUS BOARD UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF STRATUS VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
In reaching this determination, the Stratus Board considered a variety of
factors, including, among other things:
(i) information relating to the business, assets, management, competitive
position and financial prospects of Stratus and Ascend, including the
prospects of Stratus if it were to continue as an independent company;
36
<PAGE>
(ii) the possibility of strategic alternatives to the Merger for
enhancing long-term stockholder value, including the possibility of
transactions with other potential strategic merger partners or the
possibility of continuing as an independent company while restructuring
Stratus in a manner similar to that contemplated after the Merger;
(iii) the fact that a close working relationship between Ascend and
Stratus and shared technology would allow Ascend to offer end-to-end
service delivery across IP and ATM networks after the Merger;
(iv) Ascend's name recognition in the Internet domain;
(v) the complementary products, channels, partners, technology and
critical skills of Stratus and Ascend;
(vi) the potential for entry into new markets by Ascend after the Merger,
which markets are unavailable to either Stratus or Ascend as stand-alone
companies;
(vii) the increased potential for Ascend and Stratus to create the next
generation of carrier switch architectures;
(viii) significant enhancement of the strategic and market position of
the combined companies beyond that achievable by Stratus alone;
(ix) recent market prices of Stratus Common Stock and Ascend Common
Stock, as well as market prices of Stratus Common Stock and Ascend Common
Stock during the past several years;
(x) current industry, market and economic conditions;
(xi) a review with Stratus Board's outside counsel of the terms of the
Merger Agreement, including circumstances in which either Stratus or Ascend
may terminate the Merger Agreement (and the fees associated therewith) and
the closing conditions to the Merger contained therein;
(xii) the opinion of Morgan Stanley that the consideration to be paid to
the holders of Stratus Common Stock pursuant to the Merger is fair to such
stockholders from a financial point of view; and
(xiii) the structure of the Merger which generally will permit holders of
Stratus Common Stock to have their shares converted into Ascend Common
Stock on a "tax-free" basis.
The above factors were considered collectively by the Stratus Board without
giving specific weight to any particular factor and without specifically
characterizing the factors as "positive," "negative," or "neutral" to its
determinations, in connection with its assessment of the benefits of the
Merger.
RECOMMENDATION OF THE STRATUS BOARD
AFTER CAREFUL CONSIDERATION, THE STRATUS BOARD HAS UNANIMOUSLY DETERMINED
THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF STRATUS AND ITS
STOCKHOLDERS AND HAS APPROVED THE MERGER AGREEMENT. THE STRATUS BOARD
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF STRATUS VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR TO STRATUS
Morgan Stanley was retained by Stratus to act as financial advisor in
connection with the Merger. Morgan Stanley is an internationally recognized
investment banking firm and was selected by Stratus based on Morgan Stanley's
qualifications and expertise in the industry.
At the August 2, 1998 meeting of the Stratus Board, Morgan Stanley rendered
its oral opinion that, as of such date and based upon and subject to the
various considerations set forth in its opinion, the Exchange Ratio pursuant
to the Merger Agreement is fair from a financial point of view to holders of
Stratus Common Stock
37
<PAGE>
(other than Ascend or any wholly owned subsidiary of Ascend). Morgan Stanley
delivered to the Stratus Board a written opinion dated August 2, 1998
confirming its oral opinion (the "Morgan Stanley Opinion").
THE FULL TEXT OF THE MORGAN STANLEY OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND THE
LIMITS OF THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS
PROSPECTUS/PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF
SHARES OF STRATUS COMMON STOCK ARE URGED TO, AND SHOULD, READ THE MORGAN
STANLEY OPINION CAREFULLY AND IN ITS ENTIRETY. THE MORGAN STANLEY OPINION IS
ADDRESSED TO THE STRATUS BOARD AND ADDRESSES THE FAIRNESS OF THE EXCHANGE
RATIO PURSUANT TO THE MERGER AGREEMENT FROM A FINANCIAL POINT OF VIEW TO THE
HOLDERS OF STRATUS COMMON STOCK AND THE MORGAN STANLEY OPINION DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER; NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF STRATUS AS TO HOW STRATUS' STOCKHOLDERS
SHOULD VOTE AT THE STRATUS SPECIAL MEETING. THE SUMMARY OF THE MORGAN STANLEY
OPINION SET FORTH IN THIS PROSPECTUS/PROXY STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MORGAN STANLEY OPINION.
In rendering the Morgan Stanley Opinion, Morgan Stanley, among other things,
(i) reviewed certain publicly available financial statements and other
information of Stratus and Ascend, respectively; (ii) reviewed certain
internal financial statements and other financial and operating data
concerning Stratus prepared by the management of Stratus; (iii) analyzed
certain financial projections prepared by the management of Stratus;
(iv) discussed the past and current operations and financial condition and the
prospects of Stratus, including information related to certain strategic,
financial and operational benefits anticipated from the Merger, with senior
executives of Stratus; (v) discussed the past and current operations and
financial condition and the prospects of Ascend, including information
relating to certain strategic, financial and operational benefits from the
Merger, with senior executives of Ascend; (vi) reviewed the pro forma impact
of the Merger on Ascend's earnings per share and other financial ratios; (vii)
reviewed the reported prices and trading activity for Stratus Common Stock and
Ascend Common Stock; (viii) discussed with the senior managements of Stratus
and Ascend certain research analyst projections for Stratus and Ascend,
respectively; (ix) compared the financial performance of Stratus and Ascend
and the prices and trading activity of Stratus Common Stock and Ascend Common
Stock with that of certain comparable publicly-traded companies and their
securities; (x) reviewed the financial terms, to the extent publicly
available, of certain comparable acquisition transactions; (xi) participated
in discussions and negotiations among representatives of Stratus and Ascend
and their financial and legal advisors; (xii) reviewed the draft Merger
Agreement dated August 2, 1998 between Stratus and Ascend; and (xiii)
performed such other analyses as Morgan Stanley deemed appropriate.
In rendering the Morgan Stanley Opinion, Morgan Stanley assumed and relied
upon without independent verification the accuracy and completeness of the
information reviewed by it for the purposes of the Morgan Stanley Opinion.
With respect to the financial projections, including the information relating
to certain strategic, financial and operational benefits anticipated to result
from the Merger provided by Stratus and Ascend, Morgan Stanley assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the prospects of Stratus and Ascend,
respectively. In addition, Morgan Stanley assumed that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement,
including, among other things, that the Merger will be treated as a tax-free
reorganization pursuant to the Code. Morgan Stanley did not make any
independent valuation or appraisal of the assets or liabilities of Stratus,
nor had it been furnished with any such appraisals. The Morgan Stanley Opinion
is necessarily based on economic, market and other conditions as in effect on,
and the information made available to it as of, the date of its opinion.
The following is a brief summary of certain analyses performed by Morgan
Stanley and reviewed with the Stratus Board on July 31, 1998. On August 2,
1998, Morgan Stanley reaffirmed its opinion, as of such date and
38
<PAGE>
based upon and subject to the various considerations set forth in its written
opinion as to the fairness from a financial point of view of the Exchange
Ratio to holders of Stratus Common Stock.
Historical Common Stock Performance. Morgan Stanley's analysis of Stratus
Common Stock performance consisted of an historical analysis of closing prices
and trading volumes over the period from January 1, 1997 to July 30, 1998.
During that period, based on closing prices on The New York Stock Exchange,
Stratus Common Stock achieved a high closing price of $58.81 on September 8,
1997 and a low closing price of $21.75 on July 24, 1998. Additionally, Morgan
Stanley noted that Stratus Common Stock closed at a price of $23.06 on July
28, 1998, the last trading day prior to news stories of pending merger
discussions.
Morgan Stanley's analysis of Ascend Common Stock performance consisted of an
historical analysis of closing prices and trading volumes over the period from
January 1, 1997 to July 30, 1998. During that period, based on closing prices
on The Nasdaq National Market, Ascend Common Stock achieved a high closing
price of $78.75 on January 20, 1997 and a low closing price of $22.65 on
November 10, 1997. Additionally, Morgan Stanley noted that Ascend Common Stock
closed at a price of $51.50 on July 30, 1998.
Comparative Stock Price Performance. Morgan Stanley performed an historical
analysis of closing prices from January 1, 1997 to July 30, 1998 of: Stratus
Common Stock; the Standard & Poor's 500 Index (the "S&P 500 Index"); and an
index of comparable computer companies ("Stratus Comparable Companies")
consisting of Sun Microsystems, Inc., Silicon Graphics, Inc., Data General
Corp. and Sequent Computer Systems, Inc. Morgan Stanley compared the
performance of such companies and indexes to the performance of Stratus Common
Stock during such period. Morgan Stanley observed that over the period from
January 1, 1997 to July 30, 1998, Stratus Common Stock increased 3%, the S&P
500 Index increased 54% and the index of Stratus Comparable Companies
decreased 1%.
Morgan Stanley also performed an historical analysis of closing prices from
January 1, 1997 to July 30, 1998 of: Ascend Common Stock; the S&P 500 Index;
an index of comparable network equipment companies ("Ascend Comparable
Companies") consisting of ADC Telecommunications, ADTRAN Inc., Advanced Fibre
Communications, Cisco Systems, Inc., Lucent, Newbridge Networks Corp., Nortel
and Tellabs, Inc. Morgan Stanley compared the performance of such companies
and indexes to the performance of Ascend Common Stock during such period.
Morgan Stanley observed that over the period from January 1, 1997 to July 30,
1998, Ascend Common Stock decreased 17%, the S&P 500 Index increased 54% and
the index of Ascend Comparable Companies increased 66%.
Comparable Public Company Analysis. As part of its analysis, Morgan Stanley
compared certain publicly available financial information of Stratus
Comparable Companies and applied these statistics to the financial performance
of Stratus. Such financial information included price to earnings multiples,
the ratio of the price to earnings multiple to the forecasted long-term
earnings growth rate, and the market capitalization to revenue multiple, based
on First Call median earnings per share ("EPS") forecasts and research
analysts' estimates of forward operating performance.
Such analyses indicated that as of July 29, 1998 and based on a compilation
of First Call estimates, Stratus traded at 41.2 times forecasted earnings for
the calendar year 1998, 12.5 times forecasted earnings for the calendar year
1999, (representing a multiple of 1.0 times its forecasted, long-term earnings
growth rate), and market capitalization represented 0.5 times forecasted
revenues for calendar year 1998. These multiples compared to a range of
multiples based on 1998 forecasted earnings (18.7 to 58.9 times), 1999
earnings (11.2 to 14.7 times), the ratio of the price to 1999 earnings
multiple to the forecasted, long-term growth rates (0.6 to 1.2 times), and
multiple of market capitalization to forecasted revenues (0.4 to 1.8 times)
for Stratus Comparable Companies.
As part of its analysis, Morgan Stanley also compared certain available
financial information of Ascend Comparable Companies and applied these
statistics to the financial performance of Ascend. Such financial information
included price to earnings multiples, the ratio of the price to earnings
multiple to the forecasted long-
39
<PAGE>
term earnings growth rate, and market capitalization to revenue multiple based
on First Call median EPS forecasts and research analysts' estimates of forward
operating performance.
Such analyses indicated that as of July 29, 1998 and based on a compilation
of First Call estimates, Ascend traded at 42.9 times forecasted earnings for
the calendar year 1998, 32.2 times forecasted earnings for 1999 (representing
a multiple of 1.3 times its forecasted, long-term earnings growth rate) and
7.4 times its forecasted revenues for 1998. These multiples compared to a
range of multiples based on 1998 forecasted earnings (21.9 to 52.0 times),
1999 earnings (18.3 to 43.5 times), the ratio of the price to 1999 earnings
multiple to the forecasted, long-term growth rates (0.6 to 2.2 times), and
multiple of market capitalization to forecasted 1998 revenues (0.9 to 12.2
times) for the Ascend Comparable Companies.
No company utilized in the comparable public company analysis or the
comparable stock price performance is identical to Stratus or Ascend.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of Stratus or Ascend and other factors that could
affect the public trading value of the companies to which they are being
compared. In evaluating the comparable companies, Morgan Stanley made
judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Stratus or Ascend, such as the impact of
competition on Stratus or Ascend and the industry generally, industry growth
and/or technological change and the absence of any adverse material change in
the financial conditions and prospects of Stratus or Ascend or the industry or
in the financial markets in general. Mathematical analysis (such as
determining the mean or median) is not, in itself, a meaningful method of
using comparable company data.
Discounted Equity Analysis. Morgan Stanley performed an analysis of the
present value per share of Stratus' respective future trading prices based on
ranges of the following assumptions: earnings per share estimates for the
years 1999 and 2000; illustrative multiples of earnings per share, ranging
from 11.0 to 15.0; and illustrative discount rates, ranging from 14.0% to
16.0%. Based on these assumptions, Morgan Stanley calculated the present value
of future theoretical trading values, ranging from $14.41 to $32.59 per share
of Stratus Common Stock.
Historical Exchange Ratio Analysis. Morgan Stanley also reviewed the ratio
of the closing prices of Stratus Common Stock to Ascend Common Stock over the
intervals of one week, one month, three months, and six months prior to July
28, 1998, the last trading day prior to news stories of pending merger
discussions. Such implied ratios averaged 0.43 over the last week, 0.46 over
the last month, 0.69 over the last 3 months and 0.97 over the last 6 months.
Morgan Stanley noted that the ratio based on closing prices on July 28, 1998
was 0.46.
Pro Forma Analysis of the Merger. Morgan Stanley analyzed the pro forma
impact of the Merger on earnings per share and cash flow per share for Ascend
for years 1998 through 2000. The pro forma results were calculated as if the
Merger had closed at the beginning of 1998, and were based on projected
earnings derived from First Call Estimates for Stratus and Ascend. The pro
forma analysis also took into account the purchase accounting assumptions and
estimated financial and operational benefits expected to be derived from the
Merger. Morgan Stanley noted that the Merger would be slightly dilutive to
Ascend's earnings per share in 1998 and accretive to Ascend's earnings per
share in 1999 and 2000.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, would create an incomplete view of the
process underlying its opinion. In addition, Morgan Stanley may have deemed
various assumptions more or less probable than other assumptions, so that the
range of valuations resulting for any particular analysis described above
should therefore not be taken to be Morgan Stanley's view of the actual value
of Stratus or Ascend.
40
<PAGE>
In connection with the review of the Merger by the Stratus Board, Morgan
Stanley performed a variety of financial and comparative analyses for purposes
of its opinion given in connection therewith. The summary set forth above does
not purport to be a complete description of the analyses performed by Morgan
Stanley in connection with the Merger.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Stratus or Ascend. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely as part of Morgan Stanley's
preparation of its fairness opinion and were provided to the Stratus Board in
connection with the delivery of Morgan Stanley's oral and written opinion.
These analyses do not purport to be appraisals or to reflect the prices at
which Stratus or Ascend might actually be sold.
As described above, Morgan Stanley's opinion and presentation to the Stratus
Board were one of many factors taken into consideration by the Stratus Board
in making its determination to approve the Merger Agreement and the
transactions contemplated thereby. Consequently, the Morgan Stanley analyses
described above should not be viewed as determinative of the opinion of the
Stratus Board or the management of Stratus with respect to the value of
Stratus or Ascend or whether the Stratus Board would have been willing to
agree to a different Exchange Ratio.
Morgan Stanley is a full services securities firm, engaged in securities
trading and brokerage activities, as well as providing investment banking,
financial and financial advisory services. As part of its investment banking
business, Morgan Stanley is regularly engaged in the valuation of businesses
and securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuation for estate, corporate
and other purposes. In the ordinary course of its trading, brokerage and
financing activities, Morgan Stanley and its affiliates may actively trade or
effect transactions in the debt and equity securities or senior loans of
Stratus and Ascend for their own account or for the account of customers and
may, from time to time, hold a long or short position in, and buy and sell,
securities of Stratus or Ascend. In the past, Morgan Stanley and its
affiliates have provided financial advisory and financing services to Stratus,
Ascend and their affiliates and have received customary fees in connection
with these services.
Pursuant to an engagement letter between Stratus and Morgan Stanley, Stratus
retained Morgan Stanley as financial advisor in connection with a potential
transaction involving Stratus. Stratus has agreed to pay Morgan Stanley a
transaction fee of approximately $4.8 million based on the successful
completion of the Merger. Stratus has also agreed to reimburse Morgan Stanley
for its out-of-pocket expenses related to its engagement. Stratus has agreed
to indemnify Morgan Stanley and its affiliates, their respective directors,
officers, agents and employees, and each person, if any, controlling Morgan
Stanley or any of its affiliates against certain liabilities and expenses,
including liabilities under the federal securities laws arising out of or in
connection with Morgan Stanley's engagement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Stratus Board with respect to the
Merger Agreement and the Merger, stockholders of Stratus should be aware that
certain members of Stratus' management and the Stratus Board have certain
interests in the Merger that are in addition to the interests of the
stockholders of Stratus generally. The Stratus Board was aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the Merger.
Stock Options. Stratus has granted stock options pursuant to the Stratus
Stock Plans. Generally, upon the consummation of the transactions contemplated
by the Merger Agreement, unvested options for the purchase of Stratus Common
Stock granted to directors and executive officers of Stratus under the Stratus
Stock Plans will immediately vest. Certain other options held by executive
officers of Stratus and all options held by other
41
<PAGE>
employees of Stratus which would vest within two years of the consummation of
the Merger had such officer or employee been employed for such period will
become vested upon consummation of the Merger as if such officers and
employees had been employed for such period. As of September 4, 1998, unvested
options to purchase an aggregate of 1,222,524 shares were held by the
directors and executive officers of Stratus, including 550,000 unvested
options held by Mr. Sachs and 80,250 unvested shares held by William E.
Foster, Chairman of Stratus. Upon the consummation of the transactions
contemplated by the Merger Agreement, options held by the directors and
executive officers of Stratus with an aggregate value of $2,493,023 (measured
by subtracting the per share exercise price of such options from $27.81, the
closing price per share of Stratus Common Stock on The New York Stock Exchange
on September 4, 1998, the last practicable trading date for which information
was available before the printing of this Prospectus/Proxy Statement) will
become vested and exercisable, including options with an aggregate value of
$567,781 held by Mr. Foster.
As of the Effective Time, all options issued under Stratus Stock Plans will
be assumed by Ascend and deemed to constitute options to acquire Ascend Common
Stock (under the same terms and conditions as were previously applicable) (the
"Assumed Options"). The number of shares subject to the Assumed Options will
be the number of shares of Ascend Common Stock the option holders would have
been entitled to acquire in the Merger had such option holders exercised such
options in full immediately prior to the Effective Time, with an exercise
price per share equal to the exercise price of the option divided by the
Exchange Ratio.
Officer Appointment. Pursuant to the terms of the Merger Agreement, Ascend
will take all action required to cause the appointment of Mr. Sachs as
Executive Vice President of Carrier Signaling and Management of Ascend.
Indemnification and Insurance. From and after the Effective Time, Ascend
will indemnify the officers and directors of Stratus against all losses,
claims or similar expenses arising out of the fact that such person is or was
a director or officer of Stratus, and Ascend will assume the indemnification
obligations of Stratus pursuant to the bylaws of Stratus, as amended as of
August 3, 1998 (the "Stratus Bylaws") and any indemnification agreement
between Stratus and such directors and officers. The indemnification
obligations set forth in the Articles of Organization of Stratus, as amended
as of August 3, 1998 (the "Stratus Charter") and the Stratus Bylaws will not
be amended for a period of six years after the Effective Time in any manner
that would adversely affect the rights of Stratus' directors and officers.
Ascend will, until the sixth anniversary of the Effective Time, cause to be
maintained in effect the policies of directors' and officers' liability
insurance maintained by Stratus.
Employment Agreements. Messrs. Sachs and Castonguay have entered into
employment agreements with Stratus which were amended in connection with and
subject to the Merger (respectively, the "Sachs Agreement" and the "Castonguay
Agreement").
Pursuant to the Sachs Agreement, upon termination of Mr. Sachs' employment
other than for cause (as defined in the Sachs Agreement) following the
Effective Time (including, as a result of the amendment made in connection
with and subject to the Merger) or upon a termination of employment or
resignation initiated by Mr. Sachs within one year of the Effective Time, Mr.
Sachs shall receive from Ascend (i) a payment equal to two years base pay,
payable as a lump sum or on a deferred two year basis at Mr. Sachs' election,
and (ii) a payment sufficient to allow Mr. Sachs to purchase medical and life
insurance coverage equal to that provided to him as of the date of his
termination, and financial planning and tax assistance to the extent provided
by Stratus as of the date of his termination, in each case for a period of two
years following the date of his termination.
Pursuant to the Castonguay Agreement, upon any termination of Mr.
Castonguay's employment with Stratus following the Effective Time (including,
as a result of the amendment made in connection with and subject to the
Merger, a termination of employment or resignation initiated by Mr. Castonguay
within one year of the Effective Time), Mr. Castonguay will receive a lump sum
payment equal to his annual salary and target annual bonus, as each is in
effect as of the date of such termination of employment.
42
<PAGE>
Continuation of Employee Benefits. Pursuant to the Merger Agreement, Ascend
will give individuals, including any executive officers, who are employed by
Stratus as of the Effective Time and who remain employees of Stratus following
the Effective Time (each such employee, an "Affected Employee") full credit
for purposes of eligibility, vesting, benefit accrual and determination of the
level of benefits under any employee benefit plans or arrangements maintained
by Ascend or Stratus for such Affected Employees' service with Stratus to the
same extent recognized immediately prior to the Effective Time. In any event,
Ascend will provide Affected Employees, for a period of one year following the
Effective Time, with employee benefit plans or arrangements, including the
Stratus severance plan and policy, that are, in the aggregate, not less
favorable than those provided to Affected Employees immediately prior to the
Effective Time. Commencing on the first anniversary of the Effective Time
(unless Ascend consents to an earlier commencement date), the Affected
Employees will be eligible to participate in Ascend's employee benefit plans
and arrangements in which similarly situated employees of Ascend or affiliates
of Ascend participate, to the same extent as such similarly situated employees
of Ascend or affiliates of Ascend. As of the Effective Time, Ascend shall
expressly assume and agree to perform in accordance with their terms, all
employment, severance and other compensation agreements then existing between
Stratus and any director, officer or employee of Stratus.
Amendment of Severance Policy. Prior to the Effective Time, Stratus will be
permitted to amend its severance policy with respect to not more than 50 key
employees to provide that if any such key employee is terminated following the
Effective Time and would be entitled to severance under the existing policy,
he or she shall receive a lump sum, cash severance benefit on the date of
termination equal to 150% of the amount to which such key employee would
otherwise be entitled upon termination under Stratus' existing severance
policy.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
In the opinions of SASM&F, tax counsel to Stratus, and GCW&F, tax counsel to
Ascend, subject to the qualifications set forth below and contained herein,
the following is a summary of the material United States federal income tax
consequences of the Merger to holders of Stratus Common Stock who exchange
such stock for Ascend Common Stock pursuant to the Merger. The following
summary addresses only such stockholders who hold their Stratus Common Stock
as a capital asset and does not address all of the United States federal
income tax consequences that may be relevant to particular stockholders in
light of their individual circumstances or to stockholders who are subject to
special rules (including, without limitation, financial institutions, tax-
exempt organizations, insurance companies, dealers in securities or foreign
currencies, foreign holders, persons who hold such shares as a hedge against
currency risk, or a constructive sale or conversion transaction, or holders
who acquired their shares pursuant to the exercise of employee stock options
or otherwise as compensation). The following summary is not binding on the
IRS. It is based upon the Code, laws, regulations, rulings and decisions in
effect as of the date hereof, all of which are subject to change, possibly
with retroactive effect. Tax consequences under state, local, and other
foreign laws are not addressed herein.
HOLDERS OF STRATUS COMMON STOCK ARE STRONGLY URGED TO CONSULT THEIR TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
No ruling has been (or will be) sought from the IRS as to the United States
federal income tax consequences of the Merger. It is a condition to the
consummation of the Merger that Stratus receive an opinion from its tax
counsel, SASM&F, and that Ascend receive an opinion from its tax counsel,
GCW&F, to the effect that, based upon certain facts, representations and
assumptions, the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. The issuance of such opinions is conditioned on,
among other things, such tax counsels' receipt of representation letters from
each of Stratus, Ascend and Sub, in each case, in form and substance
reasonably satisfactory to each such tax counsel. The following discussion
assumes that the Merger constitutes a reorganization within the meaning of
Section 368(a) of the Code.
43
<PAGE>
Based on the above assumptions and qualifications, holders of Stratus Common
Stock who exchange their Stratus Common Stock for Ascend Common Stock pursuant
to the Merger will not recognize gain or loss for United States federal income
tax purposes, except with respect to cash, if any, they receive in lieu of
fractional shares of Ascend Common Stock. Holders of Stratus Common Stock who
receive cash in lieu of fractional shares of Ascend Common Stock in the Merger
generally will be treated as if the fractional shares of Ascend Common Stock
had been distributed to them as part of the Merger and then redeemed by Ascend
in exchange for the cash actually distributed in lieu of the fractional
shares, with such redemption qualifying as an exchange under Section 302 of
the Code. Consequently, such holders will generally recognize capital gain or
loss with respect to cash payments they receive in lieu of fractional shares.
In the case of an individual stockholder, any such capital gain will be
subject to a maximum federal income tax rate of 20% if the individual held his
or her Stratus Common Stock for more than 12 months at the Effective Time. The
deductibility of capital losses is subject to limitations for both individuals
and corporations.
Each holder's aggregate tax basis in the Ascend Common Stock received in the
Merger will be the same as his or her aggregate tax basis in the Stratus
Common Stock exchanged therefor, decreased by the amount of any tax basis
allocable to any fractional share interest for which cash is received. The
holding period of the Ascend Common Stock received in the Merger by a holder
of Stratus Common Stock will include the holding period of Stratus Common
Stock surrendered in exchange therefor.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" transaction for accounting
and financial reporting purposes, in accordance with generally accepted
accounting principles. Accordingly, a determination of the fair value of
Stratus' assets and liabilities will be made in order to allocate the purchase
price to the assets acquired and the liabilities assumed. In connection with
the Merger, it is anticipated that Ascend will take a one-time charge
consisting of a write-off of in-process research and development, estimated to
be approximately $305 million. The purchase price allocation, including the
one-time charge for write-off of in-process research and development, is
subject to revision when additional information concerning asset and liability
valuation is obtained. Upon consummation of the Merger, Ascend plans to divest
certain lines of business of Stratus. Ascend is in the early stages of
determining the impact of divesting such operations and upon consummation of
the Merger will separately account for the results of operations and assets of
these lines of business. See "Operations After the Merger."
REGULATORY REQUIREMENTS
The Merger is subject to the requirements of the HSR Act, which provide that
certain transactions may not be consummated until required information and
materials have been furnished to the Antitrust Division and the FTC and
certain waiting periods have expired or been early terminated. On August 21,
1998, Stratus and Ascend filed the required information and materials with the
Antitrust Division and the FTC and requested early termination of the
applicable 30-day waiting period under the HSR Act. In addition, similar
filings relating to compliance with antitrust regulations have been made in
Germany, Ireland and Sweden. The requirements of the HSR Act will be satisfied
if the Merger is consummated within one year from the termination of the
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 businesses of
Ascend or Stratus as a condition to consenting to such transactions. 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 substantial businesses of Ascend or Stratus. Private
parties also may seek to take legal action under the antitrust laws under
certain circumstances.
44
<PAGE>
Based on information available to them, Ascend and Stratus 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 Stratus 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 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
Stratus's conduct or operation of the business of Ascend or Stratus 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 other 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 Stratus 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 nor Stratus is required to agree to divest itself or hold
separate any subsidiary, division or business unit which is material to the
business of such party and its subsidiaries, taken as a whole, or the
divestiture or holding separate of which would be reasonably likely to have a
material adverse effect on (i) the business, properties, assets, liabilities,
financial condition or results of operations of such party and its
subsidiaries taken as a whole or (ii) the benefits intended to be derived as a
result of the Merger.
Neither Stratus nor Ascend is aware of any other material governmental or
regulatory approval required for consummation of the Merger, other than
compliance with applicable securities laws and filings under the MBCL and the
DGCL.
RESTRICTIONS ON RESALE OF ASCEND COMMON STOCK
The shares of Ascend Common Stock issuable to stockholders of Stratus upon
consummation of the Merger will have been registered under the Securities Act
at the Effective Time. Such shares will be freely transferable without
restriction by those Stratus stockholders who are not deemed to be
"affiliates" of Ascend or Stratus, as that term is defined in the rules under
the Securities Act.
Shares of Ascend Common Stock received pursuant to the Merger by those
stockholders of Stratus who are deemed to be "affiliates" of Stratus or Ascend
may be resold without registration under the Securities Act only as permitted
by Rule 145 under the Securities Act or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates include individuals
or entities that control, are controlled by, or are under common control of
Stratus or Ascend, as the case may be, and may include certain officers and
directors of Stratus or Ascend as well as principal stockholders of Stratus or
Ascend. Affiliates may not sell their shares of Ascend Common Stock acquired
in connection with the Merger except pursuant to (i) an effective registration
statement under the Securities Act covering the resale of such shares, (ii)
paragraph (d) of Rule 145 under the Securities Act or (iii) any other
applicable exemption under the Securities Act. The Registration Statement, of
which this Prospectus/Proxy Statement forms a part, does not cover the resale
of shares of Ascend Common Stock to be received by affiliates in the Merger.
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 agreed to use its best efforts to cause such
approval for quotation and has begun preparation of a notification for listing
of such shares of Ascend Common Stock on The Nasdaq National Market.
45
<PAGE>
APPRAISAL RIGHTS
Holders of shares of Stratus Common Stock are entitled to appraisal rights
under Sections 85 through 98, inclusive, of the MBCL (the full text of which
is reprinted in its entirety as Annex C to this Prospectus/Proxy Statement).
Pursuant to such sections of the MBCL, any stockholder of Stratus who files a
written objection to the Merger prior to the taking of the vote to approve and
adopt the Merger Agreement at the Stratus Special Meeting stating that he
intends to demand payment for his shares if the Merger Agreement is approved
and adopted by the stockholders of Stratus, and who does not vote in favor of
such approval and adoption, is entitled to demand in writing that Stratus pay
to such stockholder in cash the fair value of the shares of Stratus Common
Stock held by such stockholder (exclusive of any element of value arising from
the expectation or accomplishment of the Merger).
Any stockholder who wishes to make a demand for appraisal is urged to review
carefully the provisions of Sections 85 through 98 of the MBCL, inclusive,
particularly the provisions setting forth the procedural steps required to
perfect the appraisal rights provided for therein. Appraisal rights will be
lost if such procedural requirements are not fully satisfied.
Holders of Stratus Common Stock wishing to exercise appraisal rights should
bear in mind that the fair value of their shares of Stratus Common Stock
determined under the MBCL could be more than, the same as or less than the
value of the consideration they will be entitled to receive under the Merger
Agreement if they do not seek to exercise their appraisal rights. Stockholders
should also bear in mind that opinions of investment banking firms as to
fairness from a financial point of view are not necessarily opinions as to
fair value under the MBCL.
SET FORTH BELOW IS A SUMMARY OF THE PROCEDURES RELATING TO THE EXERCISE OF
APPRAISAL RIGHTS. THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE A COMPLETE
STATEMENT OF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE PROVISIONS
OF SECTIONS 85 THROUGH 98, INCLUSIVE, OF THE MBCL WHICH, TOGETHER WITH ANY
AMENDMENTS TO SUCH SECTIONS AS MAY BE ADOPTED AFTER THE DATE OF THIS
PROSPECTUS/PROXY STATEMENT, ARE INCORPORATED HEREIN BY REFERENCE. A COPY OF
SUCH SECTIONS IS ATTACHED AS ANNEX C TO THIS PROSPECTUS/PROXY STATEMENT.
Before the stockholders' vote is taken on the proposal to approve and adopt
the Merger Agreement, a stockholder who intends to exercise appraisal rights
must deliver to Stratus a written objection to the proposed Merger, stating
that such stockholder intends to demand payment for the shares of Stratus
Common Stock held by the stockholder if the Merger is consummated (such
holder, a "Dissenter" and such holder's shares of Stratus Common Stock,
"Dissenting Shares"). Such written objection should be addressed to Stratus at
55 Fairbanks Boulevard, Marlborough, Massachusetts 01752, Attention: Assistant
Clerk. The written objection to the Merger must be in addition to and separate
from any proxy or vote against the Merger. Neither voting against, nor failure
to vote for, the Merger will constitute the written objection required to be
filed by an objecting stockholder. A stockholder voting for the Merger will be
deemed to have waived his rights to an appraisal under the MBCL. A signed
proxy that is returned but which does not contain any instructions as to how
it should be voted will be voted in favor of approval and adoption of the
Merger Agreement and will be deemed a waiver of the right to an appraisal
under the MBCL. Failure to vote against the Merger, however, will not
constitute a waiver of appraisal rights.
If the Merger Agreement is approved and adopted at the Stratus Special
Meeting and the Merger becomes effective, Stratus will, within ten days after
the Effective Time, notify each holder of shares of Stratus Common Stock who
has filed a written objection meeting the requirements of Section 86 of the
MBCL, and whose shares of Stratus Common Stock were not voted in favor of the
proposal to approve and adopt the Merger Agreement, that the Merger has become
effective. The giving of such notice will not be deemed to create any rights
in the stockholder receiving such notice to demand payment for such
stockholder's shares of Stratus Common Stock.
46
<PAGE>
The notice will be sent by registered or certified mail, addressed to the
stockholder at such stockholder's last known address as it appears on the
records of Stratus immediately prior to the Effective Time.
Within 20 days after the mailing by Stratus of the notice described above,
any stockholder to whom Stratus was required to give such notice may demand in
writing from Stratus payment for the fair value of all of such holder's shares
of Stratus Common Stock. Such written demand should be addressed to Stratus at
55 Fairbanks Boulevard, Marlborough, Massachusetts 01752, Attention: Assistant
Clerk. If Stratus and such stockholder shall have agreed as to the fair market
value of such shares of Stratus Common Stock, Stratus, as the surviving
corporation, will pay to such stockholder the agreed value of such
stockholder's shares of Stratus Common Stock within 30 days after the
expiration of the 20-day period during which such written demand may be made.
The MBCL provides that any stockholder who has demanded payment for his stock
under the MBCL shall not thereafter be entitled to notice of any meeting of
stockholders, to vote such stock for any purpose or to payment of dividends or
other distributions on such stock (except dividend and distributions payable
at a date prior to the date of the vote of the proposed corporate action)
unless (i) a bill (as described below) is not filed during the 30-day period
referred to herein; (ii) a bill, if filed, is dismissed as to such
stockholder; or (iii) such stockholder, with the written approval of the
corporation (or surviving corporation in the case of a merger), delivers to
the corporation a written withdrawal of his objection to and an acceptance of
such corporate action.
If Stratus and any stockholder seeking appraisal have not agreed on the fair
value of such stockholder's shares of Stratus Common Stock within such 30-day
period, any such stockholder who has complied with Section 86 of the MBCL, or
Stratus, may, by filing a bill in equity with the Massachusetts Superior Court
in Middlesex County, Massachusetts (the "Court") within four months after the
expiration of such 30-day period, demand a determination of the fair value of
the shares of Stratus Common Stock of all such stockholders seeking such an
appraisal. If no such bill is filed within such four-month period, no holder
of shares of Stratus Common Stock will be entitled to such an appraisal. If a
bill is filed by Stratus, all stockholders seeking appraisal, other than those
who have reached agreement with Stratus as to the value of their shares of
Stratus Common Stock, must be named as parties to such proceeding. If a bill
is filed by a stockholder seeking appraisal, service of the bill must be made
upon Stratus by subpoena with a copy of the bill annexed. Stratus must file
with its answer a duly verified list of all stockholders seeking appraisal who
have not reached agreement with Stratus as to the value of their shares of
Stratus Common Stock, and such stockholders will thereupon be deemed to have
been added as parties to the bill. Stratus must give notice, in such form and
returnable on such date as the Court shall order, to each stockholder seeking
appraisal which is party to the bill by registered or certified mail,
addressed to the last
known address of such stockholder as shown in the records of Stratus, and the
Court may order such additional notice by publication or otherwise as it deems
advisable. Each stockholder seeking appraisal who makes a written demand for
payment of his shares of Stratus Common Stock as provided above will be deemed
to have consented to the giving of notice in such manner, and the giving of
notice to any such stockholder in compliance with the order of the Court will
be sufficient service on him. Failure to give notice to any stockholder
seeking appraisal will not invalidate the proceedings as to other stockholders
seeking appraisal to whom notice was properly given, and the Court may at any
time before the entry of a final decree make supplementary orders of notice.
After a hearing on such a bill, the Court will enter a decree determining
the fair value of the shares of Stratus Common Stock of those stockholders who
have become entitled to the valuation thereof and payment therefor. The full
value of such shares of Stratus Common Stock will be determined as of the day
preceding the date of the vote to approve and adopt the Merger Agreement and
shall be exclusive of any element of value arising from the accomplishment or
expectation of the Merger. When the value is so determined, the Court will
order the payment by Stratus of such value, with interest thereon, if any, as
provided below, to the stockholders entitled to receive the same upon
surrender to Stratus by such stockholders of their Stratus Stock Certificates.
The costs of such a bill, including the reasonable compensation and expenses
of any master appointed by the Court, but exclusive of fees of counsel or of
experts retained by any party, will be determined by the Court and assessed
against the parties to the bill, or any of them, in such manner as appears to
the Court to be equitable, except that all costs of giving notice to
stockholders must be paid by Stratus. Interest shall be paid upon any award
from the
47
<PAGE>
date of the Stratus Special Meeting, and the Court may, upon application of
any interested party, determine the amount of interest to be paid in the case
of any stockholder.
The MBCL provides that the enforcement by a stockholder of appraisal rights
pursuant to the procedures set forth above is such stockholder's exclusive
remedy except for the right of such stockholder to bring an appropriate
proceeding to obtain relief on the ground that such corporate action will be
or is illegal or fraudulent as to such stockholder.
ANY STRATUS STOCKHOLDER WHO DESIRES TO EXERCISE APPRAISAL RIGHTS SHOULD
CAREFULLY REVIEW THE MBCL AND IS ADVISED TO CONSULT HIS OR HER LEGAL ADVISOR
BEFORE EXERCISING OR ATTEMPTING TO EXERCISE SUCH RIGHTS.
DELISTING AND DEREGISTRATION OF STRATUS COMMON STOCK AFTER THE MERGER.
If the Merger is consummated, Stratus Common Stock will be delisted from the
Stratus Exchanges and will be deregistered under the Exchange Act.
48
<PAGE>
OPERATIONS AFTER THE MERGER
Stratus will be divided into four business units: a telecommunications
business unit; an enterprise computer business unit; and two business units
focused on financial and enterprise software (the TCAM Systems business unit
and the S2 Systems business unit, respectively). Ascend contemplates that
following the Merger the telecommunications business unit of Stratus will be
integrated into Ascend and the non-telecommunications business units will be
set up as separate subsidiaries and will then be divested. It is anticipated
that, subject to certain requirements that must be satisfied for the Merger to
qualify as a tax-free reorganization, definitive agreements relating to such
divestitures will be negotiated by the end of 1998 and closed within three
months of signing such definitive agreements, but in no event later than 12
months following the consummation of the Merger.
Achieving the anticipated benefits of the Merger will depend in large part
upon whether the integration of Stratus' telecommunications business into
Ascend is accomplished in an efficient and effective manner. The integration
of Stratus' telecommunications business into Ascend will require, among other
things, integration of the products, technologies, manufacturing operations,
research and development activities, distribution channels, management
information systems and key personnel of Stratus' telecommunications business
into Ascend. Because certain aspects of Stratus' telecommunications business
have not historically been separated from the non-telecommunications
businesses of Stratus, Ascend may encounter unforseen difficulties in
separating and integrating these aspects of the telecommunications business.
There can be no assurance that the integration of Stratus' telecommunications
business will be accomplished in an efficient and effective manner, if at all.
If significant difficulties are encountered in the integration, it could have
a material adverse effect on the business, results of operations and financial
condition of Ascend.
The integration of operations and technologies following the Merger will
require the dedication of management and other personnel which may distract
their attention from the day-to-day business of Ascend, the development or
acquisition of new technologies, and the pursuit of other business acquisition
opportunities. The difficulties of integrating Ascend and Stratus may be
increased by the necessity of coordinating organizations with distinct
cultures and widely dispersed operations. Successful integration of the two
companies' sales and marketing organizations will require the sales and
marketing personnel of each company to learn about the often technically-
complex products, services and technologies of the other company. In addition,
as commonly occurs with mergers of technology companies, during the pre-merger
and integration phases, competitors may undertake initiatives to attract
customers and recruit key employees through various incentives which could
have a material adverse effect on the business, results of operations and
financial condition of Ascend.
Ascend will be required to finance the non-telecommunications businesses
until it completes their divestitures. To the extent these businesses require
unanticipated financing, there could be a material adverse effect on the
business, results of operations and financial condition of Ascend. As of the
date of this Prospectus/Proxy Statement, Ascend is in the early stages of
determining the impact of divesting these businesses, and Ascend has
determined a preliminary purchase price allocation for these businesses. While
Ascend believes this allocation is reasonable, there can be no assurances that
the amount received for these businesses on their divesture will approximate
such allocation of the purchase price. To the extent that either the
preliminary purchase price allocation or the consideration received from the
divestiture of these businesses differs from their final purchase price
allocation, an adjustment to goodwill will be recorded in Ascend's financial
statements. While the amortization of any increased goodwill will have no
effect on Ascend's operating cash flow, such amortization could have a
material adverse effect on Ascend's reported earnings per share. As of the
date of this Prospectus/Proxy Statement, Ascend and Stratus have begun
discussions with potential acquirors for the non-telecommunications
businesses. However, no definitive agreements to divest any of these
businesses have been reached. There can be no assurance that Ascend will be
able to find acquirors for the businesses to be sold. Failure to sell the
businesses within 12 months of the consummation of the Merger or at an
adequate sales price could have a material adverse effect on the business,
results of operations and financial condition of Ascend.
The businesses to be divested share common technology, personnel and other
aspects of operations with one another and with the telecommunications
business of Stratus. Ascend may encounter unforseen difficulties in separating
these businesses, which could diminish the value of the businesses to a
potential acquiror or
49
<PAGE>
complicate or preclude the ability of Ascend to complete a divestiture. For
instance, these businesses share common intellectual property rights, some of
which are pursuant to licences and other agreements with third parties that
may preclude the businesses from utilizing such intellectual property if they
are divested without the permission of the third parties. Failure to
successfully separate these businesses could have a material adverse effect on
the business, results of operations and financial condition of Ascend.
The value of the businesses to be divested depends in large part upon the
retention of key employees in those businesses. Due to the uncertainty
surrounding the future of these businesses, there is substantial risk that
such key employees will consider alternative employment opportunities and will
be particularly susceptible to recruiting efforts by competitors. The loss of
such key employees could materially adversely affect the ability of Ascend to
sell such businesses and the price a potential acquiror is willing to pay for
such businesses.
50
<PAGE>
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/Proxy
Statement and incorporated herein by reference. This summary is qualified in
its entirety by reference to the Merger Agreement which is attached as Annex A
to this Prospectus/Proxy Statement. Stockholders of Stratus are urged to read
the Merger Agreement in its entirety for a more complete description of the
Merger. Capitalized terms not otherwise defined herein shall have the meaning
ascribed to them in the Merger Agreement.
FORM OF THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement by the stockholders of Stratus and the satisfaction or
waiver of the other conditions to the Merger, Sub will merge with and into
Stratus and Stratus will survive the Merger as a wholly owned subsidiary of
Ascend.
If all conditions to the Merger are satisfied or waived, the Merger will
become effective upon the filing of a Certificate of Merger with the Secretary
of State of the State of Delaware and the filing of the Articles of Merger
with the Secretary of State of the Commonwealth of Massachusetts.
CONVERSION OF SECURITIES
Upon the terms and subject to the conditions of the Merger Agreement, at the
Effective Time, (i) each issued and outstanding share of Stratus Common Stock
together with each associated Right (other than shares to be canceled pursuant
to clause (ii) below and Dissenting Shares (See "The Merger--Appraisal
Rights")) will be converted into the right to receive 0.75 of a share of
Ascend Common Stock and (ii) all shares of Stratus Common Stock, together with
each associated Right, owned by Ascend, Stratus, Sub or any other wholly owned
subsidiary of Ascend or Stratus will be canceled and retired and shall cease
to exist, and no stock of Ascend or other consideration shall be delivered in
exchange therefor. Each share of Sub common stock, par value $.001 per share,
issued and outstanding immediately prior to the Effective Time will be
converted into one share of common stock, par value $.01 per share, of the
Surviving Corporation. The Exchange Ratio has been fixed pursuant to the
Merger Agreement but is subject to proportionate adjustment for any stock
split or stock dividend effected between August 3, 1998 (the date of the
Merger Agreement) and the Effective Time.
Based upon the respective capitalizations of Stratus and Ascend as of
September 4, 1998, the stockholders of Stratus immediately prior to the
consummation of the Merger will own approximately 9.62% of the outstanding
shares of Ascend Common Stock immediately following consummation of the Merger
(which percentage will be less to the extent that stockholders of Stratus
exercise their appraisal rights). If any holder of shares of Stratus Common
Stock would be entitled to receive a number of shares of Ascend Common Stock
that includes a fraction, in lieu of a fractional share, such holder will be
entitled to receive cash in an amount equal to such fractional part of a share
of Ascend Common Stock multiplied by the average of the last reported sale
prices of Ascend Common Stock on The Nasdaq National Market on the ten trading
days immediately preceding the Effective Time.
Promptly after the Effective Time, the Exchange Agent will mail a letter of
transmittal, together with instructions, to each holder of record of Stratus
Common Stock for use in effecting the surrender and exchange of certificates
evidencing shares of Stratus Common Stock for certificates evidencing the
shares of Ascend Common Stock (and cash in lieu of any fractional shares) to
which such holder has become entitled. After receipt of such letter of
transmittal, each holder of certificates formerly representing Stratus Common
Stock will be able to surrender such certificates to the Exchange Agent and
will receive in exchange therefor one or more certificates evidencing the
number of whole shares of Ascend Common Stock (and cash in lieu of any
fractional shares) to which such holder is entitled. STRATUS STOCKHOLDERS
SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL AND EXCHANGE INSTRUCTIONS FROM THE EXCHANGE AGENT.
51
<PAGE>
After the Effective Time, and until surrendered and exchanged, each
certificate evidencing Stratus Common Stock will be deemed, for all purposes,
to evidence only the right to receive the number of whole shares of Ascend
Common Stock which the holder of such certificate is entitled to receive and
the right to receive the applicable cash payment (if any) in lieu of any
fractional share of Ascend Common Stock that such holder is entitled to
receive. The holder of such unexchanged certificate will not be entitled to
receive any dividends or other distributions payable by Ascend until the
certificate has been exchanged. Subject to applicable laws, such dividends and
distributions, together with any cash payment in lieu of a fractional share of
Ascend Common Stock, will be paid without interest.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties by each of
Ascend, Sub, and Stratus relating to a number of matters, including: (i) the
due organization, valid existence and good standing of Ascend, Stratus and
their respective subsidiaries; (ii) subsidiaries and joint ventures of Ascend
and Stratus; (iii) the capital structure of Ascend and Stratus; (iv) the
authorization, execution, delivery and enforceability of the Merger Agreement
and related matters; (v) the absence of conflicts under each party's charter
and by-laws, required governmental consents or approvals and violations of any
instruments or laws; (vi) the filing of documents and financial statements by
Ascend and Stratus with the Commission and the accuracy of information
contained therein; (vii) the absence of undisclosed liabilities; (viii) the
absence of certain material adverse changes or events; (ix) taxes, tax returns
and tax deficiencies; (x) material litigation; (xi) compliance with laws;
(xii) interested party transactions; (xiii) the accuracy of information
supplied for the Registration Statement and Prospectus/Proxy Statement; and
(xiv) opinions of financial advisors.
In addition to the representations and warranties by Ascend, Sub and Stratus
as set forth above, the Merger Agreement includes the following
representations and warranties by Stratus regarding: (i) intellectual property
rights; (ii) agreements, contracts and commitments; (iii) environmental
matters; (iv) employee benefit plans (including international employee benefit
plans) and other employee matters; (v) the nonapplicability of control share
acquisition provisions of Chapters 110D and 110E of the MBCL (and similar
provisions of the Stratus Charter and Stratus Bylaws) to the transactions
contemplated by the Merger Agreement; (vi) the Rights Agreement (to the extent
that the execution and delivery of the Merger Agreement, and the consummation
of the transactions contemplated by the Merger Agreement do not constitute a
"Stock Acquisition Date" or cause Ascend to become an "Acquiring Person" or an
"Adverse Person" as such terms are defined in the Rights Agreement); and (vii)
validity of title to properties.
The Merger Agreement also contains a representation and warranty by Ascend
and Sub concerning the interim operations of Sub.
CERTAIN COVENANTS AND AGREEMENTS
Conduct of Business by Ascend and Stratus. Pursuant to the Merger Agreement,
Ascend and Stratus have each agreed that, during the period from August 3,
1998 until the Effective Time (the "Interim Operations Period"), except with
the advance written consent of the other party or as contemplated by the
Merger Agreement, each of Ascend and Stratus and their respective subsidiaries
will: (i) carry on their respective businesses in the ordinary course in
substantially the same manner as previously conducted, including keeping
available the services of their present officers and key employees; (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 organizations and
relationships; (iv) 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 their 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 entered into in connection with prior acquisitions; (v)
not amend their respective bylaws (Ascend has also agreed not to amend its
Certificate of Incorporation); and (vi) not take any action that would make
any of its representations and
52
<PAGE>
warranties in the Merger Agreement untrue or incorrect in any material respect
or prevent them from performing any of their obligations under the Merger
Agreement.
Conduct of Business by Stratus. Pursuant to the Merger Agreement, Stratus
has also agreed that during the Interim Operations Period, except with the
advance written consent of Ascend or as contemplated by the Merger Agreement,
Stratus will not (i) 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 in effect as of August 3, 1998; (ii)
transfer or license or otherwise extend, amend or modify any material rights
to its intellectual property, other than in the ordinary course of business
consistent with past practices on a non-exclusive basis, except to renew or
extend exclusive licenses existing as of August 3, 1998; (iii) 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 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; (iv) acquire or agree
to acquire, by merging or consolidating with, by purchasing a substantial
interest in or substantial portion of the assets of, or by any other means,
any business entity, or otherwise acquire or agree to acquire any material
amount of assets; (v) sell, lease, license or otherwise dispose of material
properties or assets except in the ordinary course of business; (vi) increase
or agree to increase the compensation payable to its officers, employees or
consultants (except for increases consistent with past practices), grant
additional severance or termination pay or enter into employment agreements
with directors or officers, grant severance or termination pay to or enter
into any employment or severance agreements with any employee (except in
accordance with past practices or to satisfy existing contractual
obligations), enter into any collective bargaining agreement or establish,
adopt, enter into or amend in any material respect any plan for the benefit of
its directors, officers or employees, subject to certain exceptions; (vii)
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; (viii) incur capital expenditures in excess of certain individual or
aggregate amounts; (ix) enter into or amend any material OEM agreement or
other agreements pursuant to which any third party is granted exclusive
marketing, manufacturing or other rights with respect to any product, process
or technology; (x) amend or terminate any material contract, agreement or
license except in the ordinary course of business; (xi) waive or release any
material right or claim, except in the ordinary course of business; (xii)
initiate any litigation or arbitration proceeding against any person known to
Stratus to be a customer or distributor of Ascend without prior notice to
Ascend's Chief Financial Officer or settle any litigation or arbitration
proceedings involving out-of-pocket settlement payments exceeding one million
dollars; (xiii) make any loans to directors, officers or employees (except
pursuant to existing contracts entered into prior to August 3, 1998); or (xiv)
make any material changes in its tax or, except as required by law, its
accounting policies.
The Merger Agreement also provides for certain additional agreements among
the parties to the Merger, including but not limited to the following:
No Solicitation. Stratus has agreed that until the earlier of the Effective
Time or the termination of the Merger Agreement it will not, directly or
indirectly, through any officer, director, employee, representative, agent or
affiliate (i) solicit, initiate or encourage any Competing Offers, (ii) engage
in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Competing Offer, or (iii)
agree to, approve, recommend or consummate any Competing Offer.
Notwithstanding the foregoing restriction, the Merger Agreement does not
prevent Stratus and the Stratus Board from (A) furnishing non-public
information or enter into discussions or negotiations in connection with an
unsolicited bona fide written Competing Offer or to recommend such an
unsolicited bona fide written Competing Offer to stockholders, if and only to
the extent that (1) such Competing Offer would, if consummated, result in a
transaction that would, in the reasonable good faith judgment of the Stratus
Board, after consultation with its financial advisors, result in a transaction
more favorable to Stratus' stockholders from a financial point of view than
the Merger and, in the reasonable good faith judgment of the Stratus Board,
after consultation with its financial advisors, the person or entity making
such Superior Proposal appears to have the financial means, or the ability to
obtain the necessary financing, to conclude such transaction, (2) the failure
to take such action would, in the reasonable good faith
53
<PAGE>
judgment of the Stratus Board after consultation with outside corporate
counsel, be contrary to the fiduciary duties of Stratus' directors to Stratus'
stockholders under applicable law, and (3) prior to furnishing such non-public
information, or entering into such discussions or negotiations, the Stratus
Board receives an executed confidentiality agreement not materially less
favorable than those contained in the Mutual Nondisclosure and Confidentiality
Agreement dated June 15, 1998 between Ascend and Stratus, (B) accepting or
agreeing to a Superior Proposal or consummating a transaction contemplated by
a Superior Proposal, or (C) complying with Rule 14e-2 of the Exchange Act with
regard to a Competing Offer. Stratus is required to notify Ascend (orally and
in writing) within 24 hours after receipt of any Competing Offer, or any
request for non-public information or access to its properties, books or
records in connection with a Competing Offer. Such notice to Ascend is to
indicate in reasonable detail the identity of the party considering making, or
which has made, a Competing Offer, and the terms and conditions of such
proposal, inquiry or contact. Additionally, Stratus is required to notify
Ascend of the occurrence and substance of any discussions held with any such
party within 24 hours of the occurrence of such discussions and at least 48
hours prior to accepting or agreeing to a Superior Proposal, making any public
announcement of its intention to do so, recommending a Superior Proposal to
its stockholders, withdrawing its recommendation for approval of the Merger,
or engaging in a Superior Proposal.
Third-Party Consents. Each party has agreed to use its reasonable efforts to
obtain all necessary consents, waivers and approvals under its respective
material agreements, contracts, licenses or leases required for the
consummation of the transactions contemplated by 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. Each party has 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 Code.
Assumption of Stratus Options. Upon consummation of the Merger, each then-
outstanding Stratus 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 Stratus Option, the same number of shares of Ascend
Common Stock (rounded down to the nearest whole share) as the holder of such
Stratus Option would have been entitled to receive pursuant to the Merger had
such holder exercised such Stratus 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 Stratus Option as in
effect immediately prior to the Effective Time divided by the Exchange Ratio.
Following the Effective Time, Ascend will issue to each holder of a Stratus
Option a document evidencing the assumption of such Stratus Option by Ascend.
Ascend has agreed to file a registration statement on Form S-8 for the
Ascend Common Stock issuable with respect to Stratus Options assumed by Ascend
within ten business days after the Effective Time.
Indemnification and Insurance. The Merger Agreement provides that Stratus
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 August 3, 1998 or who becomes prior to the
Effective Time, an officer or director of Stratus or any of its subsidiaries
(each an "Indemnified Party") against all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in settlement
(provided, in the case of amounts paid in settlement, that such amounts shall
have been approved by the indemnifying party, which approval shall not be
unreasonably withheld), of or in connection with any claim, action, demand,
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 Stratus or any of its 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,
54
<PAGE>
liabilities or judgments or settlement amounts 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 MBCL to indemnify its own directors and
officers, as the case may be. In addition, Stratus, Ascend and the Surviving
Corporation, as the case may be, will pay expenses in advance of the final
disposition of any such claim, demand, action suit, proceeding or
investigation to each Indemnified Party to the full extent permitted by law
upon receipt of any undertaking contemplated by Section 67 of the MBCL.
Without limiting the foregoing, in the event any such claim, action, suit,
proceeding or investigation is brought or asserted against any Indemnified
Party (whether arising before or after the Effective Time), (i) the
Indemnified Parties may retain counsel reasonably satisfactory to them and
Stratus (or them and Ascend and the Surviving Corporation after the Effective
Time), (ii) Stratus (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 upon
receipt of an undertaking by such person to repay such payment if it is
determined that such person is not entitled to indemnification hereunder, and
(iii) Stratus (or after the Effective Time, Ascend and the Surviving
Corporation) shall use all reasonable efforts to assist in the vigorous
defense of any such matter, provided that none of Stratus, 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.
From and after the Effective Time, the Surviving Corporation and Ascend
shall fulfill, assume and honor in all respects the obligations of Stratus
pursuant to Stratus' Bylaws, and any indemnification agreement between Stratus
and any of Stratus' directors and officers existing and in force as of the
date of this Agreement and filed as an exhibit to filings made with the
Commission by Stratus. Ascend and Stratus further have agreed that the
indemnification obligations set forth in the Stratus Charter and Stratus
Bylaws shall survive the Merger, and may not be amended, repealed or otherwise
modified for a period of six years after the Effective Time in any manner that
would adversely affect the rights thereunder of the Indemnified Parties.
Additionally, Ascend and the Surviving Corporation have agreed to maintain,
in effect the directors' and officers' liability insurance maintained by
Stratus and its subsidiaries as of August 3, 1998, or policies with at least
the same coverage and amounts and terms no less advantageous to the insured
parties, for six years following the Effective Time (or an earlier date
mutually agreed upon by Ascend, the Surviving Corporation and the applicable
Indemnified Party), such insurance to provide coverage for claims based upon
or arising out of facts or circumstances occurring on or before the Effective
Time, including without limitation all claims based upon, arising out of,
directly or indirectly resulting from, in consequence of, or in any way
involving the Merger and any and all related transactions or related events.
In no event will Ascend or the Surviving Corporation be required to expend an
amount greater than 150% of the aggregate annual premiums paid by Stratus and
its subsidiaries for directors and officers insurance premiums in the last
fiscal year.
In lieu of the purchase of such insurance by Ascend or the Surviving
Corporation, Stratus may purchase a six year extended reporting period
endorsement ("reporting tail coverage") under its existing directors' and
officers' and liability insurance coverage, provided that such reporting tail
coverage shall extend the directors' and officers' liability coverage in force
as of August 3, 1998 for a period of at least six years from the Effective
Time for any claims based upon, arising out of, directly or indirectly
resulting from, in consequence of, or in any way involving wrongful acts or
omissions occurring on or prior to the Effective Time, including without
limitation all claims based upon, arising out of, directly or indirectly
resulting from, in consequence of, or in any way involving the Merger and any
and all related transactions or related events.
The Merger Agreement also provides that if Ascend or the Surviving
Corporation or any of their respective successors or assigns (i) consolidates
with or merges into any other person and is not the continuing or surviving
corporation or entity in such consolidation or merger or (ii) transfers all or
substantially all its properties and assets to any person, then, and in each
case, proper provision shall be made so that the successors and assigns of
Ascend or the Surviving Corporation, as the case may be, honor the
indemnification obligations described above.
55
<PAGE>
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 THE MERGER
The consummation of the Merger is subject to the satisfaction of certain
conditions, including the following: (i) the Merger Agreement shall have been
approved and adopted by the requisite vote of holders of Stratus Common Stock
pursuant to the MBCL; (ii) the waiting period required by the HSR Act, and any
other material waiting periods under applicable foreign laws shall have
expired or been terminated and no action by the Antitrust Division or the FTC
or any foreign governmental entity challenging or seeking to enjoin the
consummation of the Merger shall be pending or have been instituted; (iii) all
governmental approvals and filings required for the Merger, the absence of
which would be reasonably likely to have a material adverse effect on either
party or on the parties' ability to complete the Merger, shall have been
obtained or made; (iv) 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, and all required state securities laws
authorizations shall have been received; (v) there shall be no order,
injunction or other legal or regulatory restraint or prohibition in effect
preventing or prohibiting the consummation of the Merger or restricting the
conduct of either Ascend's or Stratus' business after the consummation of the
Merger; (vi) each of Ascend and Stratus shall have received opinions from
their respective counsel to the effect that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code for United
States federal income tax purposes; (vii) the shares of Ascend Common Stock to
be issued in the Merger shall have been authorized for quotation on The Nasdaq
National Market; (viii) Ascend, Sub and Stratus shall have performed, in all
material respects, all obligations they are required to perform at or prior to
the closing date of the Merger; (ix) the provisions of the Rights Agreement
shall not apply to Ascend or the Merger and all Rights issued thereunder shall
have been canceled or redeemed or shall be converted by virtue of the Merger;
and (x) the parties' representations and warranties shall be accurate in all
material respects when made and as of the closing date of the Merger.
Any of the conditions in the Merger Agreement may be waived by the party
benefited thereby, except those conditions imposed by law.
TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the stockholders of Ascend or
Stratus of the matters presented in connection with the Merger:
(a) by the mutual written consent of Ascend and Stratus;
(b) by either Ascend or Stratus, if the Merger shall not have been
consummated by January 31, 1999, unless the party whose failure to fulfill
any obligation under the Merger Agreement has been the cause of or resulted
in the failure of the Merger to occur on or before such date;
(c) by either Ascend or Stratus, 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, having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger,
subject to certain limitations;
(d) by either Ascend or Stratus, if, at the Stratus Special Meeting
(including any adjournment or postponement thereof), the requisite vote of
the stockholders of Stratus in favor of the Merger Agreement and the Merger
shall not have been obtained;
(e) by Ascend, if (i) the Stratus Board shall have withdrawn or modified
its recommendation of the Merger Agreement or the Merger in a manner
adverse to Ascend or shall have resolved or publicly announced or disclosed
its intention to do so; (ii) the Stratus Board shall have recommended a
Superior Proposal to the stockholders of Stratus or shall have resolved or
publicly announced its intention to recommend or accept a Superior
Proposal; or (iii) a tender offer or exchange offer which if completed
would result in the ownership by any person and such person's affiliates of
50% or more of the outstanding shares
56
<PAGE>
of Stratus Common Stock shall have been commenced and the Stratus Board
shall have filed a Statement on Form 14D-9 recommending acceptance of such
tender or exchange offer or shall have resolved or publicly announced its
intention to recommend acceptance of such tender or exchange offer;
(f) by either Ascend or Stratus, if a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth in
the Merger Agreement shall have occurred which, if uncured, would cause the
representations and warranties of such other party to be untrue and such
breach is either incapable of being cured or shall not have been cured
within 20 business days following receipt by the breaching party of written
notice of such breach from the other party; or
(g) by Stratus if it shall have accepted, approved or resolved to accept
or approve a Superior Proposal in compliance with the terms of the Merger
Agreement.
In the event of any termination of the Merger Agreement by either Ascend or
Stratus as provided above, there will be no liability or obligation on the
part of Stratus, Ascend, Sub or their respective officers, directors,
stockholders or affiliates, except to the extent that such termination results
from the willful breach by a party of any of its representations, warranties,
covenants or agreements set forth in the Merger Agreement, and provided that
the (i) provisions described below relating to the payment of fees and
expenses, (ii) the Confidentiality Agreement and (iii) the parties' agreement
to use all reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by the Merger Agreement (subject to the terms and
conditions of the Merger Agreement and subject to the appropriate vote of the
stockholders of Stratus), shall survive any such termination.
If the Merger Agreement is terminated (i) by Ascend as a consequence of the
actions described in paragraph (e) above, (ii) by Stratus as a consequence of
the actions described in paragraph (g) above or (iii) by Stratus or Ascend
pursuant to paragraph (d) above as a result of the failure to obtain the
requisite vote for adoption of the Merger Agreement and approval of the Merger
by the stockholders of Stratus and (in the case of clause (iii)) (x) at the
time of such failure an "Alternative Transaction" (as such term is defined in
the following paragraph) involving Stratus shall have been announced or
publicly proposed and (y) within one year of such failure Stratus or the
Stratus Board accepts, recommends or enters into or announces any definitive
or preliminary agreement or letter of intent with respect to an Alternative
Transaction, amends or otherwise takes action under the Rights Agreement which
has the effect of rendering the Rights Agreement inapplicable to an
Alternative Transaction, or redeems the Rights so as to facilitate an
Alternative Transaction, or an Alternative Transaction is consummated, Stratus
shall pay to Ascend the Termination Fee. The Termination Fee shall be paid in
cash and shall be payable: (A) in the case of termination by Stratus pursuant
to paragraph (g) above, prior to and as a condition precedent to the
effectiveness of such termination; (B) in the case of termination by Ascend
pursuant to Section (e), promptly after such termination; and (C) in the case
of termination by Stratus or Ascend pursuant to (d) in the circumstances set
forth in clause (iii) of the preceding sentence, not later than the earliest
such time as (A) the Stratus Board accepts, recommends or enters into or
announces any definitive or preliminary agreement or letter of intent with
respect to such Alternative Transaction, amends or otherwise takes action
under the Rights Agreement which has the effect of rendering the Rights
Agreement inapplicable to such Alternative Transaction, or redeems the Rights
so as to facilitate such Alternative Transaction, or (B) an Alternative
Transaction is consummated.
"Alternative Transaction" with respect to Stratus means (i) a transaction or
series of transactions pursuant to which any person or group (as such term is
defined under the Exchange Act), other than Ascend or Sub, or any affiliate
thereof (a "Third Party"), acquires (or would acquire upon completion of such
transaction or series of transactions) more than 50% of the equity securities
or voting power of Stratus or any of its material subsidiaries, pursuant to a
tender offer or exchange offer or otherwise, (ii) a merger, consolidation,
share exchange or other business combination involving Stratus or any of its
material subsidiaries pursuant to which any Third Party acquires ownership (or
would acquire ownership upon consummation of such merger, consolidation, share
exchange or other business combination) of more than 50% of the outstanding
equity securities or voting power of Stratus or any of its material
subsidiaries or of the entity surviving such merger or
57
<PAGE>
business combination or resulting from such consolidation, or (iii) any other
transaction or series of transactions pursuant to which any Third Party
acquires (or would acquire upon completion of such transaction or series of
transactions) control of assets of Stratus or any of its material subsidiaries
(including, for this purpose, outstanding equity securities of subsidiaries of
Stratus) having a fair market value equal to more than 50% of the fair market
value of all the consolidated assets of Stratus immediately prior to such
transaction or series of transactions.
Except as described above, whether or not the Merger is consummated, all
fees, costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby shall be paid by the party incurring
such expenses, except that all fees and expenses, other than attorneys' and
accounting fees and expenses, incurred in connection with the printing and
filing of this Prospectus/Proxy Statement and any filings under the HSR Act
and applicable foreign laws (if any) shall be shared equally by Ascend and
Stratus.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties to the Merger Agreement,
by action taken or authorized by their respective Boards of Directors, at any
time before or after the approval of the matters presented in connection with
the Merger by the stockholders of Stratus, but no amendment shall be made
after stockholder approval which by law requires further approval by such
stockholders, without such further approval.
At any time prior to the Effective Time, Ascend and Stratus, by action taken
or authorized by their respective Boards of Directors, to the extent legally
allowed, 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.
58
<PAGE>
INFORMATION CONCERNING ASCEND
The following is a brief description of the business of Ascend. Additional
information regarding Ascend is contained in Ascend's filings with the
Commission pursuant to the Exchange Act. See "Available Information."
Ascend develops, manufactures and sells wide area networking solutions for
telecommunications carriers, ISPs and corporate customers worldwide that
enable them to build: (i) Internet access systems consisting of POP equipment
for ISPs and remote site Internet access equipment for Internet subscribers;
(ii) telecommunications carrier and ISP backbone networks utilizing high speed
Frame Relay, ATM and IP switches for application; (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. Ascend's products support
existing digital and analog networks.
INFORMATION CONCERNING STRATUS
The following is a brief description of the business of Stratus on a stand-
alone basis and does not describe the business of Stratus if the Merger is
consummated. Additional information regarding Stratus is contained in Stratus'
filings with the Commission pursuant to the Exchange Act. See "Available
Information."
Stratus was founded in 1980. Stratus' objective is to be the premier
supplier of hardware, software and services solutions to targeted
telecommunications and enterprise server markets where continuous availability
is a critical need. Continuous availability, as compared to the term "high
availability," refers to Stratus systems' ability to substantially reduce the
two main sources of downtime: (i) downtime due to unexpected system failures
such as hardware or operating system crashes; and (ii) downtime associated
with shutting down a system for planned maintenance and upgrade procedures.
Stratus systems are used primarily for on-line transaction processing, message
switching, communications control, distributed computing and other interactive
applications in which system availability and data integrity are critical.
Stratus competes in two major market areas: (1) telecommunications where
service providers use Stratus systems at critical points in their networks and
operations support systems; and (2) enterprise server applications which
support enterprise-wide computing in a client/server architecture. Five key
telecommunications applications have been targeted: (i) Internet
infrastructure; (ii) intelligent network services; (iii) home location
register; (iv) local number availability; and (v) network operations support
systems. Enterprise server applications are found in electronic commerce,
financial services, retail, travel, healthcare and gaming industries.
59
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information for Ascend
set forth below gives effect to the acquisition of the Stratus Common Stock.
The historical financial information set forth below has been derived from,
and is qualified by reference to, the consolidated financial statements of
Ascend and Stratus, and should be read in conjunction with those financial
statements and the notes thereto incorporated by reference herein. The
unaudited pro forma condensed combined statement of operations data for the
year ended December 31, 1997 and the six months ended June 30, 1998 set forth
below give effect to the acquisition as if it occurred on January 1, 1997. The
unaudited pro forma condensed combined balance sheet as of June 30, 1998 set
forth below gives effect to the acquisition of Stratus as if it occurred on
June 30, 1998. The unaudited pro forma condensed combined financial
information set forth below reflects certain adjustments, including among
others, adjustments to reflect the amortization of the excess purchase price.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes to the financial statements
of Ascend and Stratus which are incorporated by reference herein from Ascend's
and Stratus' Annual Reports on Form 10-K for the years ended December 31, 1997
and December 28, 1997, respectively, and the Quarterly Reports on Form 10-Q
from the quarterly periods ended June 30, 1998 and June 28, 1998,
respectively. The unaudited pro forma condensed combined financial information
set forth below does not purport to represent what the consolidated results of
operations or financial condition of Ascend would actually have been if the
Stratus acquisition and related transaction had in fact occurred on such date
or to project the future consolidated results of operations or financial
condition of Ascend.
60
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
BUSINESS PRO FORMA
ASCEND AS OF STRATUS AS OF COMBINATION AS OF
JUNE 30, 1998 JUNE 28, 1998 COMBINED ADJUSTMENTS JUNE 30, 1998
------------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................. $ 164,772 $ 219,785 $ 384,557 $ -- $ 384,557
Short-term invest-
ments................. 198,357 57,960 256,317 -- 256,317
Accounts receivable,
net................... 268,954 99,823 368,777 -- 368,777
Inventories............ 131,902 75,135 207,037 -- 207,037
Deferred income taxes.. 107,229 19,857 127,086 -- 127,086
Other current assets... 18,352 14,243 32,595 -- 32,595
---------- --------- ---------- --------- ----------
Total current assets.... 889,566 486,803 1,376,369 -- 1,376,369
Investments............. 340,701 -- 340,701 -- 340,701
Furniture, fixtures and
equipment, net......... 139,759 141,939 281,698 -- 281,698
Other assets............ 20,203 68,638 88,841 (1)(3) 37,029 125,870
---------- --------- ---------- --------- ----------
Total assets............ $1,390,229 $ 697,380 $2,087,609 $ 37,029 $2,124,638
========== ========= ========== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....... $ 68,788 $ 22,016 $ 90,804 $ -- $ 90,804
Accrued compensation
and related
liabilities........... 21,596 21,570 43,166 -- 43,166
Accrued liabilities.... 112,254 15,283 127,537 (3) 116,000 281,293
(6) 37,756 --
Deferred revenue....... -- 17,856 17,856 (6) (17,856) --
Income taxes payable... -- 19,900 19,900 (6) (19,900) --
---------- --------- ---------- --------- ----------
Total current liabili-
ties................... 202,638 96,625 299,263 116,000 415,263
Long-term obligations... -- 1,163 1,163 -- 1,163
Commitments and
contingencies..........
Stockholders' equity:
Common stock........... 196 282 478 (3) 18 214
(3) (282) --
Additional paid-in cap-
ital.................. 985,328 269,249 1,254,577 (3) 825,603 1,810,931
(3) (269,249) --
Retained earnings...... 202,067 472,832 674,899 (1)(3) (305,000) (102,933)
(3) (472,832) --
Cumulative translation
adjustment............ -- (6,116) (6,116)(3) 6,116 --
---------- --------- ---------- --------- ----------
Subtotal................ 1,187,591 736,247 1,923,838 (215,626) 1,708,212
Less: Shares in trea-
sury, at cost.......... -- (136,655) (136,655)(3) 136,655 --
---------- --------- ---------- --------- ----------
Total stockholders' eq-
uity................... 1,187,591 599,592 1,787,183 (78,971) 1,708,212
---------- --------- ---------- --------- ----------
Total liabilities and
stockholders' equity... $1,390,229 $ 697,380 $2,087,609 $ 37,029 $2,124,638
========== ========= ========== ========= ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.
61
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASCEND STRATUS PRO FORMA
FOR THE FOR THE PRO FORMA FOR THE YEAR
YEAR ENDED YEAR ENDED BUSINESS ENDED
DECEMBER 31, DECEMBER 28, COMBINATION DECEMBER 31,
1997 1997 COMBINED ADJUSTMENTS 1997
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales..... $1,167,352 $489,214 $1,656,566 $ -- $1,656,566
Services.............. -- 199,061 199,061 -- 199,061
---------- -------- ---------- ------- ----------
Total revenues.......... 1,167,352 688,275 1,855,627 -- 1,855,627
Cost of sales:
Product cost of
sales................ 413,570 252,487 666,057 -- 666,057
Services.............. -- 125,103 125,103 -- 125,103
---------- -------- ---------- ------- ----------
Total cost of sales..... 413,570 377,590 791,160 -- 791,160
---------- -------- ---------- ------- ----------
Gross profit............ 753,782 310,685 1,064,467 -- 1,064,467
Operating expenses:
Research and
development.......... 155,996 90,647 246,643 -- 246,643
Sales and marketing... 249,129 110,460 359,589 -- 359,589
General and
administrative....... 35,267 27,438 62,705 (1) 5,286 67,991
Purchased research and
development.......... 231,100 -- 231,100 (2) -- 231,100
Costs of mergers...... 150,271 -- 150,271 -- 150,271
---------- -------- ---------- ------- ----------
Total operating
expenses............... 821,763 228,545 1,050,308 5,286 1,055,594
---------- -------- ---------- ------- ----------
Operating income
(loss)................. (67,981) 82,140 14,159 (5,286) 8,873
Interest and other
income, net............ 23,029 12,877 35,906 -- 35,906
---------- -------- ---------- ------- ----------
Income (loss) before
income taxes........... (44,952) 95,017 50,065 (5,286) 44,779
Provision for income
taxes.................. 79,422 20,903 100,325 -- 100,325
---------- -------- ---------- ------- ----------
Net income (loss)....... $ (124,374) $ 74,114 $ (50,260) $(5,286) $ (55,546)
========== ======== ========== ======= ==========
Pro forma net income
(loss) per share--Basic
(4) ................... $ (0.66) $ 3.15 $ (0.27)
========== ======== ==========
Pro forma net income
(loss) per share--
Diluted (4) ........... $ (0.66) $ 3.01 $ (0.27)
========== ======== ==========
Number of shares used in
pro forma per share
calculation--Basic
(4).................... 189,129 23,522 206,771
========== ======== ==========
Number of shares used in
pro forma per share
calculation--Diluted
(4).................... 189,129 24,635 206,771
========== ======== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.
62
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASCEND STRATUS PRO FORMA
FOR THE SIX FOR THE SIX PRO FORMA FOR THE SIX
MONTHS ENDED MONTHS ENDED BUSINESS MONTHS ENDED
JUNE 30, JUNE 28, COMBINATION JUNE 30,
1998 1998 COMBINED ADJUSTMENTS 1998
------------ ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales..... $632,469 $195,508 $827,977 $ -- $827,977
Services.............. -- 102,842 102,842 102,842
-------- -------- -------- ------- --------
Total revenues.......... 632,469 298,350 930,819 930,819
Cost of sales:
Product cost of
sales................ 226,929 117,273 344,202 -- 344,202
Services.............. -- 66,289 66,289 -- 66,289
-------- -------- -------- ------- --------
Total cost of sales..... 226,929 183,562 410,491 -- 410,491
-------- -------- -------- ------- --------
Gross profit............ 405,540 114,788 520,328 -- 520,328
Operating expenses:
Research and
development.......... 87,431 45,593 133,024 -- 133,024
Sales and marketing... 135,063 50,403 185,466 -- 185,466
General and
administrative....... 19,761 13,225 32,986(1) 2,643 35,629
-------- -------- -------- ------- --------
Total operating
expenses............... 242,255 109,221 351,476 2,643 354,119
-------- -------- -------- ------- --------
Operating income
(loss)................. 163,285 5,567 168,852 (2,643) 166,209
Interest and other
income, net............ 10,887 8,097 18,984 -- 18,984
-------- -------- -------- ------- --------
Income (loss) before
income taxes........... 174,172 13,664 187,836 (2,643) 185,193
Provision for income
taxes.................. 62,715 6,370 69,085 -- 69,085
-------- -------- -------- ------- --------
Net income (loss)....... $111,457 $ 7,294 $118,751 $(2,643) $116,108
======== ======== ======== ======= ========
Pro forma net income per
share--Basic (4)....... $ 0.58 $ 0.30 $ 0.55
======== ======== ========
Pro forma net income per
share--Diluted (4) .... $ 0.55 $ 0.29 $ 0.52
======== ======== ========
Number of shares used in
pro forma per share
calculation--Basic
(4).................... 193,802 23,928 211,748
======== ======== ========
Number of shares used in
pro forma per share
calculation--Diluted
(4).................... 203,886 24,824 222,504
======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Information.
63
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
Pro forma adjustments for the unaudited pro forma condensed combined balance
sheet as of June 30, 1998 and statements of operations for the six months
ended June 30, 1998 and for the year ended December 31, 1997 are as follows:
(1) Reflects the preliminary allocation of the purchase price and the
amortization of the cost over the fair value of net assets acquired for the
Stratus acquisition. The preliminary allocation has resulted in a charge for
purchased in-process research and development estimated to be $305 million and
estimated goodwill of $37 million which is being amortized over an average
period of seven years.
The total estimated purchase price for the Stratus acquisition has been
allocated on a preliminary basis to assets and liabilities based on
management's best estimates of their fair value with the excess costs over the
net assets acquired allocated to goodwill. This allocation is subject to
change pending a final analysis of the value of the assets acquired and,
liabilities assumed and divestiture of Stratus' non-telecommunications
businesses. The impact of such changes could be material (see note 5 below).
(2) The pro forma condensed combined statements of operations for the year
ended December 31, 1997 and the six months ended June 30, 1998 do not include
the purchased research and development related charge of $305 million since it
is considered a non-recurring charge.
(3) To reflect the purchase of all of the outstanding stock of Stratus for a
total purchase price of approximately $1.0 billion. The purchase price
consisted of approximately $826 million of stock to be issued and the fair
value assigned to assumed stock options, and the assumption of approximately
$214 million of liabilities consisting of liabilities acquired from Stratus
and acquisition and other related costs.
(4) Pro forma net income (loss) reflects the impact of the adjustments
above. Pro forma basic net income (loss) per share is computed using the
weighted-average number of shares of common stock outstanding after the
issuance of Ascend Common Stock to acquire the outstanding shares of Stratus
Common Stock. Pro forma diluted net income per share is computed as described
above and also gives effect to any dilutive options and warrants. Dilutive
options and warrants are excluded from the computation during loss periods as
their effect is antidilutive.
(5) Upon consummation of the Merger between Ascend and Stratus, Ascend plans
to divest certain lines of business of Stratus. As of the date of this filing,
Ascend was in the early stages of determining the impact of divesting such
operations and accordingly, the above pro forma information does not include
any adjustments relating to the planned sale of the lines of business. The
preliminary purchase price allocation does not assume any synergies associated
with the combination of operations of the two companies nor any benefits from
the actions expected to be taken by Ascend upon consummation of the Merger.
(6) Pro forma reclassifications are made to conform the Stratus presentation
to the Ascend presentation.
64
<PAGE>
COMPARISON OF RIGHTS OF STRATUS STOCKHOLDERS
AND ASCEND STOCKHOLDERS
After consummation of the Merger, the holders of Stratus Common Stock who
receive Ascend Common Stock under the terms of the Merger Agreement will
become stockholders of Ascend. As stockholders of Stratus, their rights are
presently governed by the MBCL and by the Stratus Charter and the Stratus
Bylaws. As stockholders of Ascend, their rights will be governed by the DGCL
and by the Restated Certificate of Incorporation of Ascend, as amended (the
"Ascend Certificate") and the Ascend Bylaws, as amended (the "Ascend Bylaws").
The following discussion summarizes the material differences between the
rights of holders of Ascend Common Stock and holders of Stratus Common Stock
and differences between the charters and bylaws of Ascend and Stratus. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Ascend Certificate and Bylaws, the Stratus Charter and Bylaws
and the relevant provisions of the DGCL and the MBCL.
Special Meetings of Stockholders. The DGCL provides that special meetings of
stockholders may be called by the board of directors or by any other person as
may be authorized by the corporation's certificate of incorporation or bylaws.
The Ascend Certificate and Ascend Bylaws provide that special meetings of the
stockholders, unless otherwise prescribed by statute, may be called by either
a resolution adopted by a majority of the authorized directors of the Ascend
Board or by the holders of not less than 10% of all shares entitled to cast
votes at the special meeting.
The MBCL provides that special meetings of stockholders of a corporation
with a class of voting stock registered under the Exchange Act (a "public
company"), may be called by a corporation's president or board of directors,
and, unless otherwise provided in the articles of organization or bylaws, must
be called by its clerk or any other officer upon written application of the
owners of at least 40% of the corporation's stock entitled to vote at such
meeting. Stratus is a public company, and the Stratus Bylaws provide that,
upon written application of one or more stockholders who hold at least 40% of
the capital stock entitled to vote at a meeting, a special meeting shall be
called by the clerk.
Inspection Rights. Inspection rights under the DGCL are more extensive than
under the MBCL. Under the DGCL, stockholders, upon the written demand under
oath stating a proper purpose, have the right to inspect a corporation's stock
ledger, stockholder list, and other books and records. The Ascend Bylaws
provide that a stockholder list prepared for a stockholder meeting shall be
open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting.
Under the MBCL, a corporation's stockholders have the right for a proper
purpose to inspect the corporation's articles of organization, bylaws, records
of all meetings of incorporators and stockholders, and stock and transfer
records, including the stockholder list. The Stratus Bylaws parallel the
statutory requirements but also provide that access to corporate records will
not be granted for the purpose of securing a list of stockholders in order to
sell such list or for using such list for a purpose other than in the interest
of the stockholder relative to the affairs of the corporation. In addition,
stockholders of a Massachusetts business corporation have common-law rights
under certain circumstances to inspect other books and records of the
corporation.
Action by Consent of Stockholders. Under the DGCL, unless the certificate of
incorporation provides otherwise, any action to be taken by stockholders may
be taken without a meeting, without prior notice, and without a vote, if the
stockholders having the number of votes that would be necessary to take such
action at a meeting at which all stockholders were present and voted consent
to the action in writing. The Ascend Certificate, however, provides that any
action required or permitted to be taken by its stockholders cannot be
effected by written consent, but must be effected at a duly called annual or
special meeting of stockholders.
65
<PAGE>
Under the MBCL, any action to be taken by stockholders may be taken without
a meeting if all stockholders entitled to vote on the matter consent to the
action in writing, and such consents must be filed with the records of
meetings of stockholders.
Cumulative Voting. Under the DGCL, a corporation may provide in its
certificate of incorporation for cumulative voting by stockholders in
elections of directors (i.e., each stockholder casts as many votes for
directors as such stockholder has shares of stock multiplied by the number of
directors to be elected). The Ascend Certificate does not provide for
cumulative voting.
The MBCL has no cumulative voting provision. Neither the Stratus Charter nor
the Stratus Bylaws provide for cumulative voting.
Dividends and Repurchases of Stock. Under the DGCL, a corporation generally
is permitted to declare and pay dividends out of surplus or out of net profits
for the current and/or preceding fiscal year, provided that such dividends
will not reduce capital below the amount of capital represented by all classes
of stock having a preference upon the distribution of assets. Under the DGCL,
a corporation may also generally redeem or repurchase shares of its stock if
such redemption or repurchase will not impair the capital of the corporation.
Under the MBCL, the payment of dividends and the repurchase of the
corporation's stock are generally permissible if such actions are not taken
when the corporation is insolvent, do not render the corporation insolvent or
bankrupt, and do not violate the corporation's articles of organization.
Classification of the Board of Directors. The DGCL permits (but does not
require) classifications of a corporation's board of directors into one, two
or three classes. The Ascend Certificate does not provide for classes of
directors.
The MBCL permits classification of a corporation's board of directors, but
in the case of a public company, the MBCL requires classification into three
classes and imposes certain requirements unless the corporation makes an
election not to be governed by the statutory provisions. Stratus has not made
such an election and, therefor, the Stratus Board is classified into three
classes.
Removal of Directors. Under the DGCL, stockholders generally may remove
directors with or without cause by a majority vote. Under the DGCL, directors
are not permitted to remove other directors.
Under the MBCL, stockholders may remove directors with or without cause by a
majority of shares entitled to vote. However, the Stratus Bylaws, in
conformity with statutory provisions, provide that directors elected by a
particular class of stockholders may be removed only by a vote of the holders
of a majority of shares of such class. Under the MBCL and the Stratus Bylaws,
directors may remove other directors for cause by a majority vote.
Vacancies on the Board of Directors. Under both the MBCL and the DGCL,
unless otherwise provided in the charter or bylaws, vacancies on the board of
directors and newly created directorships resulting from any increase in the
authorized number of directors may be filled by the remaining directors. The
Ascend Certificate and Ascend Bylaws provide that vacancies on the Ascend
Board and newly created directorships resulting from any increase in the
authorized number of directors may be filled only by a majority vote of the
directors then in office, except that vacancies on the Ascend Board resulting
from the removal of a director by the stockholders of Ascend may be filled at
a special meeting of the Ascend stockholders held for that purpose. The
Stratus Bylaws provide that any vacancy on the Stratus Board, may be filled by
the stockholders, or, in the absence of stockholder action, by the directors.
Exculpation of Directors. The DGCL and the MBCL have substantially similar
provisions relating to exculpation of directors. Each state's law permits a
corporation to provide, and the Ascend Certificate and the Stratus Charter do
so provide, that no director shall be personally liable to Ascend and Stratus,
respectively, or their respective stockholders for monetary damages for
breaches of fiduciary duty except where such exculpation
66
<PAGE>
is expressly prohibited by law. Neither Stratus nor Ascend may eliminate the
liability of directors, (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) for any transaction from which the director derived an improper personal
benefit or (iv) for unauthorized distributions and loans to insiders with
respect to corporations governed by the MBCL or for unlawful payments of
dividends, unlawful stock purchases or redemptions with respect to
corporations governed by the DGCL.
Indemnification of Directors, Officers and Others. Both the DGCL and the
MBCL generally permit indemnification of directors and officers for expenses
incurred by them by reason of their position with the corporation, if the
director or officer has acted in good faith and with the reasonable belief
that his conduct was in the best interests of the corporation. However, the
DGCL, unlike the MBCL, does not permit a corporation to indemnify persons in
respect of any claim, issue or matter as to which such person has been
adjudged to be liable to the corporation in actions brought by or in the right
of the corporation (although it does permit indemnification in such situations
if approved by the Delaware Court of Chancery). The Ascend Bylaws authorize
Ascend to provide indemnification to its directors, officers and employees or
persons serving at Ascend's request as director, officer or employee of
another corporation to the maximum extent legally permissible. The Stratus
Bylaws provide for indemnification to its directors and officers to the
maximum extent legally permissible, and Ascend and Stratus have entered into
indemnification agreements with each of its directors and officers.
Interested Director Transactions. The DGCL provides that no transaction
between a corporation and one or more of its directors or officers or any
entity in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for
that reason. In addition, no such transaction shall be void or voidable solely
because the director or officer is present at or participates in the meeting
of the board of directors or committee which authorizes the transaction, or
solely because his or their votes are counted for such purposes. In order that
such a transaction not be found void or voidable, it must, after disclosure of
material facts, be approved by a vote of a majority of the disinterested
directors, a committee of disinterested directors, or the stockholders, or the
transaction must be fair as to the corporation.
The MBCL has no comparable provisions to those of the DGCL. The Ascend
Certificate or Ascend Bylaws do not address this issue. The Stratus Bylaws
parallel the DGCL statutory provisions and contain provisions relating to
certain contracts and transactions involving officers, directors, stockholders
or employees. Such a transaction shall not be void or voidable if all material
facts were known or disclosed to the directors or stockholders voting at the
meeting on the contract or transaction.
Sales, Lease or Exchange of Assets and Mergers. The DGCL requires the
approval of the directors and the vote of the holders of a majority of the
outstanding stock entitled to vote thereon for the sale, lease, or exchange of
all or substantially all of a corporation's property and assets or a merger or
consolidation of the corporation into any other corporation, although the
certificate of incorporation may require a higher stockholder vote. The Ascend
Certificate does not require a higher vote.
The MBCL provides that a vote of two-thirds of the shares of each class of
stock outstanding and entitled to vote thereon is required to authorize the
sale, lease, or exchange of all or substantially all of a corporation's
property and assets or a merger or consolidation of the corporation into any
other corporation, except that the articles of organization may provide that
the vote of a greater or lesser proportion, but not less than a majority of
the outstanding shares of each class, is required. Under the MBCL, the
articles of organization or bylaws of a corporation may provide that all
outstanding classes of stock shall vote as a single class, but, in the case of
a merger or consolidation, the separate vote of all classes of stock, the
rights of which would be adversely affected by the transaction, also is
required. The Stratus Charter does not reduce the stockholder vote required to
approve such transactions from two-thirds.
Amendments to Charter. Under the DGCL, charter amendments require the
approval of the directors and the vote of the holders of a majority of the
outstanding stock entitled to vote thereon and a majority of each
67
<PAGE>
class of stock outstanding and entitled to vote thereon as a class, unless the
certificate of incorporation requires a greater proportion. The Ascend
Certificate requires two-thirds of the voting power of all of the outstanding
shares of capital stock entitled to vote generally in the election of
directors to amend certain provisions of the Ascend Certificate. In addition,
the DGCL requires a class vote when, among other things, an amendment will
adversely affect the powers, preferences or special rights of a class of
stock.
Under the MBCL, amendments to a corporation's articles of organization
relating to certain changes in capital or in the corporate name require the
vote of at least a majority of each class of stock outstanding and entitled to
vote thereon. Amendments relating to other matters require a vote of at least
two-thirds of each class outstanding and entitled to vote thereon or, if the
articles of organization so provide, a greater or lesser proportion but not
less than a majority of the outstanding shares of each class. Under the MBCL,
the articles of organization or bylaws may provide that all outstanding
classes of stock shall vote as a single class, but the separate vote of any
class of stock the rights of which would be adversely affected by the
amendment is also required. The Stratus Charter does not reduce the
stockholder vote required to approve such amendments.
Amendments to Bylaws. Under the DGCL, the power to adopt, amend or repeal
bylaws lies in stockholders entitled to vote; provided, however, that any
corporation may, in its certificate of incorporation, confer the power to
adopt, amend or repeal bylaws upon the directors. The Ascend Certificate gives
the board of directors the power to make, alter, amend or repeal bylaws.
Under the MBCL, the power to make, amend or repeal bylaws also lies in the
stockholders; provided that if authorized by the articles of organization, the
bylaws may provide that the directors also may make, amend or repeal the
bylaws, except with respect to any provision which by law, the articles of
organization or the bylaws requires action by the stockholders. The Stratus
Bylaws may be amended by an affirmative vote of at least a majority of
stockholders present at a meeting of the stockholders and entitled to vote,
provided that notice of the proposed amendment was given in the notice for the
meeting. The Stratus Charter provides that the directors may amend or repeal
the Stratus Bylaws in whole or in part, except with respect to any provision
thereof which by law or the Stratus Bylaws requires action by the
stockholders.
Appraisal Rights. Dissenting stockholders have the right to obtain the fair
value of their shares (so-called "appraisal rights") in more circumstances
under the MBCL than under the DGCL. Under the DGCL, appraisal rights are
available in connection with a statutory merger or consolidation in certain
specified situations. Appraisal rights are not available when a corporation is
to be the surviving corporation and no vote of its stockholders is required to
approve the merger. In addition, unless otherwise provided in the charter, no
appraisal rights are available to holders of shares of any class of stock
which is either: (a) listed on a national securities exchange or designated as
a national market system security on an inter-dealer quotation system by the
National Association of Securities Dealers, Inc. or (b) held of record by more
than 2,000 stockholders, unless such stockholders are required by the terms of
the merger to accept anything other than: (i) shares of stock of the surviving
corporation; (ii) shares of stock of another corporation which are or will be
so listed on a national securities exchange or designated as a national market
system security on an inter-dealer quotation system by The Nasdaq Stock
Market, Inc. or held of record by more than 2,000 stockholders; (iii) cash in
lieu of fractional shares of such stock or (iv) any combination thereof. The
DGCL provides that appraisal rights may be granted in the corporation's
certificate of incorporation in the event of the sale, lease, or exchange of
all or substantially all of a corporation's assets or the adoption of an
amendment to its certificate of incorporation. The Ascend Certificate does not
grant such rights.
Under the MBCL, a properly dissenting stockholder is entitled to receive the
appraised value of such stockholder's shares when the corporation votes (i) to
sell, lease, or exchange all or substantially all of its property and assets,
(ii) to adopt an amendment to its articles of organization which adversely
affects the rights of the stockholder, or (iii) to merge or consolidate with
another corporation. See "The Merger--Appraisal Rights."
68
<PAGE>
Business Combination Statute. Delaware's "business combination" statute is
substantially similar to Massachusetts' business combination statute. However,
while the DGCL provides that, if a person acquires 15% or more of the stock of
a Delaware corporation without the approval of the board of directors of that
corporation (an "interested stockholder"), the stockholder may not engage in
certain transactions with the corporation for a period of three years, the
MBCL has a 5% threshold with certain persons excluded. Both the DGCL and the
MBCL include certain exceptions to this prohibition; for example, if the board
of directors approves the acquisition of stock or the transaction prior to the
time that the person became an interested stockholder, or if the interested
stockholder acquires 85% (in the DGCL) or 90% (in the MBCL) of the voting
stock of the corporation (excluding voting stock owned by directors who are
also officers and certain employee stock plans) in one transaction, or if the
transaction is approved by the board of directors and by the affirmative vote
of two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.
Control Share Acquisition Statute. Under the Massachusetts Control Share
Acquisition statute for Massachusetts corporations, a person (hereinafter, the
"acquirer") who makes a bona fide offer to acquire, or acquires, shares of
stock of a corporation that when combined with shares already owned, would
increase the acquirer's ownership to at least 20%, 33 1/3%, or a majority of
the voting stock of the corporation, must obtain the approval of a majority of
the shares held by all stockholders except the acquirer and the officers and
inside directors of the corporation, in order to vote the shares acquired. The
statute does not require the acquirer to consummate the purchase before the
stockholder vote is taken. The Massachusetts Control Share Acquisition statute
permits a Massachusetts corporation to elect not to be governed by these
provisions by including such an election in its articles of organization or
bylaws. The Stratus Bylaws state that the Control Share Acquisition statute
shall not apply to Stratus. Delaware does not have a Control Share Acquisition
statute.
Consideration of Societal Factors. Unlike the MBCL, the DGCL does not
explicitly provide for the consideration of societal interests by a
corporation's board of directors in making decisions. The Delaware Supreme
Court has, however, held that, in discharging their responsibilities,
directors may consider constituencies other than stockholders, such as
creditors, customers, employees and perhaps even the community in general, as
long as there are rationally related benefits accruing to stockholders as
well. The Delaware Supreme Court has held, however, the concern for non-
stockholder interests is inappropriate when a sale of the company is
inevitable and an auction among active bidders is in progress. The Ascend
Certificate and Ascend Bylaws do not directly discuss consideration of
societal factors.
The MBCL expressly provides that in determining what a director reasonably
believes to be in the best interests of the corporation, the director may
consider the interests of the corporation's employees, suppliers, creditors
and customers; the economy of the state, region and nation; community and
societal considerations; and the long-term as well as short-term interests of
the corporation and its stockholders, including the possibility that these
interests may be served best by the continued independence of the corporation.
Thus, these interests could be considered even in connection with a decision
to sell a corporation. The Stratus Charter and Stratus Bylaws do not discuss
the consideration of societal factors.
69
<PAGE>
DESCRIPTION OF ASCEND CAPITAL STOCK
The authorized capital stock of Ascend consists of 400,000,000 shares of
Ascend Common Stock, $.001 par value per share, and 2,000,000 shares of Ascend
Preferred Stock, $.001 par value per share.
COMMON STOCK
As of September 4, 1998, there were approximately 198,274,964 shares of
Ascend Common Stock outstanding held of record by approximately 2,501
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 Ascend Preferred Stock, holders of Ascend Common Stock are
entitled to receive ratably such dividends as may be declared by 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 Ascend 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 BankBoston, N.A.
CERTAIN CHARTER PROVISIONS
The Ascend Certificate and Ascend 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 Stratus Stockholders and Ascend
Stockholders."
ASCEND PREFERRED STOCK
As of the date of this Prospectus/Proxy Statement, there were no shares of
Ascend Preferred Stock outstanding. The Ascend Board has the authority,
without further action by the stockholders, to issue such Ascend 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 Ascend
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. Ascend 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 Ascend 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 Ascend Preferred
Stock.
70
<PAGE>
OWNERSHIP OF STRATUS COMMON STOCK
The following table sets forth, as of September 4, 1998, certain information
with respect to the beneficial ownership of Stratus Common Stock by (i) each
holder known by Stratus to be the beneficial owner of more than 5% of Stratus
Common Stock, (ii) each director of Stratus, (iii) the Chief Executive Officer
and the four other most highly compensated executive officers as of December
28, 1997, and (iv) all directors and executive officers of Stratus as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF STRATUS COMMON STOCK
--------------------------
NUMBER OF PERCENT OF
NAME SHARES(1) OWNERSHIP
- ---- ------------- ------------
<S> <C> <C>
Morgan Stanley, Dean Witter, Discover & Co......... 2,740,384 10.55%
Joseph L. Haroush.................................. 2,248,200 9.25%
Lazard Freres & Co. LLC............................ 1,412,860 5.88%
Alexander d'Arbeloff............................... 70,909 0.29%
Paul J. Ferri...................................... 51,312 0.21%
William E. Foster(2)............................... 253,681 1.05%
Gardner C. Hendrie................................. 29,500 0.12%
Robert M. Morill(3)................................ 30,551 0.13%
Candy M. Obourn.................................... 17,000 0.07%
Bruce I. Sachs..................................... 800,742 3.33%
Paul Severino...................................... 16,000 0.07%
Stephen G. Kiely................................... 130,899 0.54%
Edward J. Mezzanotte............................... 44,778 0.19%
J. Donald Oldham................................... 118,118 0.49%
David M. Weishar................................... 110,000 0.46%
All directors and executive officers as a group (17
persons).......................................... 1,982,636 8.24%
</TABLE>
- --------
(1) Includes 1,534,926 shares which may be acquired within 60 days after
September 4, 1998 by exercise of stock options by the directors and named
executive officers as follows: Mr. D'Arbeloff, 46,000; Mr. Ferri, 36,000;
Mr. Foster, 169,000; Mr. Hendrie, 29,500; Mr. Morrill, 20,551; Mrs.
Obourn, 17,000; Mr. Sachs, 800,000; Mr. Severino, 16,000; Mr. Kiely
130,000; Mr. Mezzanotte, 44,375; Mr. Oldham, 116,500; Mr. Weishar,
110,000; all directors and executive officers as a group, 1,842,594. Of
the stock options, 1,840,999 would be fully vested as to all directors and
executive officers as a group within that 60-day period, assuming
consummation of the Merger within such 60-day period, and the holders
would have investment and voting powers; the remaining shares would be
subject to vesting, and the holders would have voting but not investment
powers until the shares vested. However, certain of these options have
exercise prices above the closing price for Stratus Common Stock on The
New York Stock Exchange on September 4, 1998.
(2) Excludes 42,000 shares held by Mr. Foster's wife, beneficial ownership of
which he disclaims.
(3) Includes 10,000 shares held by Morrill Associates Limited Partners, of
which Mr. Morrill and members of his family are partners.
71
<PAGE>
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
LLP, Palo Alto, California. As of the date hereof, attorneys at Gary Cary Ware
& Freidenrich LLP participating in this matter beneficially own approximately
8,494 shares of Ascend Common Stock.
EXPERTS
The consolidated financial statements and financial statement schedule of
Ascend at December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997 incorporated by reference in the proxy
statement to be delivered to Stratus' stockholders, which is referred to and
made a part of this Prospectus/Proxy Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference elsewhere herein which, as to years 1995 and 1996,
are based in part on the report of PricewaterhouseCoopers LLP, independent
accountants, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule of
Stratus incorporated by reference and included in Stratus' Annual Report (Form
10-K) for the year ended December 28, 1997, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon incorporated
by reference and included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report, given on the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Cascade as of December 31, 1996,
and for the years ended December 31, 1996 and 1995, incorporated by reference
in this Prospectus/Proxy Statement, have been incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
OF STRATUS STOCKHOLDERS
If the Merger is not consummated, it is currently anticipated that the 1999
Annual Meeting of stockholders of Stratus will be held on or about April 29,
1999. If such meeting is held, stockholder proposals (i) must be submitted to
the Assistant Clerk of Stratus no later than November 17, 1998, in order to be
considered for inclusion in the proxy materials for such meeting and (ii) must
be submitted to the Assistant Clerk of Stratus no later than March 15, 1999,
in order to be considered at the 1999 annual meeting. The inclusion of any
such proposal will be subject to applicable rules of the Commission.
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to the management, executive compensation,
various benefit plans (including stock plans), voting securities and the
principal holders thereof, certain relationships and related transactions and
other related matters as to Stratus and Ascend may be set forth in or
incorporated herein by reference to, in the case of Stratus, its Annual Report
on Form 10-K for the fiscal year ended December 28, 1997 and, in the case of
Ascend, its Annual Report on Form 10-K for the fiscal year ended December 31,
1997, which are incorporated by reference in this Prospectus/Proxy Statement.
All documents filed by Stratus and Ascend pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date hereof and prior to the date of
the Stratus Special Meeting shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents.
See "Incorporation By Reference." Stockholders of Stratus who wish to obtain
copies of these documents may contact Stratus or Ascend, as applicable, at its
address or telephone number set forth under "Incorporation by Reference."
72
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ASCEND COMMUNICATIONS, INC.,
A DELAWARE CORPORATION,
WILDCARD MERGER CORPORATION,
A DELAWARE CORPORATION AND A WHOLLY OWNED
SUBSIDIARY OF ASCEND,
AND
STRATUS COMPUTER, INC.,
A MASSACHUSETTS CORPORATION
DATED AS OF AUGUST 3, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE MERGER....................................................... A-1
Section 1.1 Merger....................................................... A-1
Section 1.2 Closing...................................................... A-1
Section 1.3 Effects of the Merger........................................ A-1
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-2
Section 2.3 Dissenting Shares............................................ A-4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF STRATUS...................... A-4
Section 3.1 Organization................................................. A-5
Section 3.2 Stratus Subsidiaries and Joint Ventures...................... A-5
Section 3.3 Stratus Capital Structure.................................... A-5
Section 3.4 Authority; No Conflict; Required Filings and Consents........ A-6
Section 3.5 SEC Filings; Financial Statements............................ A-7
Section 3.6 Absence of Undisclosed Liabilities........................... A-7
Section 3.7 Absence of Certain Changes or Events......................... A-8
Section 3.8 Taxes........................................................ A-8
Section 3.9 Properties................................................... A-9
Section 3.10 Intellectual Property....................................... A-10
Section 3.11 Agreements, Contracts and Commitments....................... A-10
Section 3.12 Litigation.................................................. A-11
Section 3.13 Environmental Matters....................................... A-11
Section 3.14 Employee Benefit Plans and Employee Matters................. A-12
Section 3.15 Compliance with Laws........................................ A-15
Section 3.16 Tax Matters................................................. A-15
Section 3.17 Interested Party Transactions............................... A-15
Section 3.18 Registration Statement; Proxy Statement/Prospectus.......... A-15
Section 3.19 Opinion of Financial Advisor................................ A-15
Section 3.20 Applicability of Certain Massachusetts Laws................. A-16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ASCEND AND SUB................ A-16
Section 4.1 Organization................................................. A-16
Section 4.2 Ascend Subsidiaries and Joint Ventures....................... A-16
Section 4.3 Ascend Capital Structure..................................... A-17
Section 4.4 Authority; No Conflict; Required Filings and Consents........ A-17
Section 4.5 SEC Filings; Financial Statements............................ A-18
Section 4.6 Absence of Undisclosed Liabilities........................... A-18
Section 4.7 Absence of Certain Changes or Events......................... A-18
Section 4.8 Litigation................................................... A-19
Section 4.9 Compliance with Laws......................................... A-19
Section 4.10 Tax Matters................................................. A-19
Section 4.11 Interested Party Transactions............................... A-19
Section 4.12 Registration Statement; Proxy Statement/Prospectus.......... A-19
Section 4.13 Opinion of Financial Advisor................................ A-19
Section 4.14 Taxes....................................................... A-20
Section 4.15 Interim Operations of Sub................................... A-20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE V CONDUCT OF BUSINESS.............................................. A-20
Section 5.1 Covenants of Stratus......................................... A-20
Section 5.2 Covenants of Ascend.......................................... A-22
Section 5.3 Cooperation.................................................. A-23
ARTICLE VI ADDITIONAL AGREEMENTS........................................... A-23
Section 6.1 No Solicitation.............................................. A-23
Section 6.2 Proxy Statement/Prospectus; Registration Statement........... A-24
Section 6.3 Consents..................................................... A-24
Section 6.4 Access to Information........................................ A-24
Section 6.5 Stratus Stockholders Meeting................................. A-24
Section 6.6 Legal Conditions to Merger................................... A-24
Section 6.7 Public Disclosure............................................ A-25
Section 6.8 Tax-Free Reorganization...................................... A-25
Section 6.9 Affiliate Legends............................................ A-25
Section 6.10 Nasdaq Quotation............................................ A-25
Section 6.11 Stock Plans and Options..................................... A-25
Section 6.12 Brokers or Finders.......................................... A-26
Section 6.13 Indemnification............................................. A-26
Section 6.14 Employees................................................... A-28
Section 6.15 Additional Agreements; Reasonable Efforts................... A-28
Section 6.16 Certain Director and Officer Appointments................... A-29
Section 6.17 Stratus' Rights Agreement................................... A-29
ARTICLE VII CONDITIONS TO MERGER........................................... A-29
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger... A-29
Section 7.2 Additional Conditions to Obligations of Ascend and Sub....... A-30
Section 7.3 Additional Conditions to Obligations of Stratus.............. A-30
ARTICLE VIII TERMINATION AND AMENDMENT..................................... A-31
Section 8.1 Termination.................................................. A-31
Section 8.2 Effect of Termination........................................ A-32
Section 8.3 Fees and Expenses............................................ A-32
Section 8.4 Amendment.................................................... A-33
Section 8.5 Extension; Waiver............................................ A-33
ARTICLE IX MISCELLANEOUS................................................... A-33
Section 9.1 Nonsurvival of Representations, Warranties and Agreements.... A-33
Section 9.2 Notices...................................................... A-33
Section 9.3 Interpretation............................................... A-34
Section 9.4 Counterparts................................................. A-34
Section 9.5 Entire Agreement; No Third Party Beneficiaries............... A-34
Section 9.6 Governing Law................................................ A-34
Section 9.7 Assignment................................................... A-35
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of August 3, 1998,
by and among Ascend Communications, Inc., a Delaware corporation ("Ascend"),
Wildcard Merger Corporation, a Delaware corporation and a wholly owned
subsidiary of Ascend ("Sub"), and Stratus Computer, Inc., a Massachusetts
corporation ("Stratus").
Recitals
WHEREAS, the Boards of Directors of Ascend, Sub and Stratus deem it
advisable and in the best interests of each corporation and its respective
stockholders that Ascend and Stratus combine in order to advance the long-term
business interests of Ascend and Stratus, and have approved this Agreement,
the Merger (as defined below) and the other transactions contemplated by this
Agreement;
WHEREAS, the combination of Ascend and Stratus shall be effected by the
terms of this Agreement through a transaction in which Sub will merge with and
into Stratus, Stratus will become a wholly-owned subsidiary of Ascend and the
stockholders of Stratus will become stockholders of Ascend; and
WHEREAS, for U.S. 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 (the "Code") and that this
Agreement shall be, and hereby is, adopted as a plan of reorganization for
purposes of Section 368(a) of the Code.
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 Merger. Subject to the provisions of this Agreement and in
accordance with the Massachusetts Business Corporation Law (the "MBCL"), Sub
shall be merged with and into Stratus (the "Merger"). The Merger shall become
effective (the time of such effectiveness being hereinafter referred to as the
"Effective Time") upon the filing of the Articles of Merger with the Secretary
of State of the Commonwealth of Massachusetts prepared and executed in
accordance with the relevant provisions of the MBCL and the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware. As
a result of the Merger, the outstanding shares of capital stock of Sub and
Stratus shall be converted or canceled in the manner provided in Article II of
this Agreement; the separate corporate existence of Sub shall cease; and
Stratus shall be the surviving corporation in the Merger.
Section 1.2 Closing. The closing of the Merger (the "Closing") will take
place at 9:00 a.m., local time, on a date to be specified by Ascend and
Stratus, which shall be no later than the second business day after
satisfaction or waiver of the conditions set forth in Article VII (the
"Closing Date"), at the offices of Gray Cary Ware & Freidenrich, LLP, 400
Hamilton Avenue, Palo Alto, California, unless another date or place is agreed
to in writing by Ascend and Stratus.
Section 1.3 Effects of the Merger. From and after the Effective Time, (i)
the separate existence of Sub shall cease and Sub shall be merged with and
into Stratus (Sub and Stratus are sometimes referred to below as the
"Constituent Corporations," and Stratus after the Effective Time is sometimes
referred to below as the "Surviving Corporation"), (ii) the Articles of
Organization of Stratus as in effect immediately prior to the Effective Time
shall be the Articles of Organization of the Surviving Corporation, with such
amendments thereto as Ascend may reasonably request, (iii) the Bylaws of Sub
as in effect immediately prior to the Effective Time shall be the Bylaws of
the Surviving Corporation, (iv) the Surviving Corporation shall be a
Massachusetts corporation, and (v) the Merger shall have the further effects
set forth in Section 80 of the MBCL. Without
A-1
<PAGE>
limiting the generality of the foregoing and subject thereto, at the Effective
Time all the property, rights, privileges, powers and franchises of Stratus
and Sub shall vest in the Surviving Corporation, and all debts, liabilities
and duties of Stratus and Sub shall become the debts, liabilities and duties
of the Surviving Corporation.
Section 1.4 Directors and Officers. The directors of Sub immediately prior
to the Effective Time shall be the initial directors of the Surviving
Corporation and shall hold office until their respective successors have been
appointed or elected in accordance with the Articles of Organization and
Bylaws of the Surviving Corporation. The officers of Sub immediately prior to
the Effective Time shall be the initial officers 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. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any capital
stock of Stratus 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, $.01 par value per share, of the
Surviving Corporation ("Sub Common Stock"), which shares of Sub Common Stock
shall be the only shares of Sub capital stock outstanding immediately
following such conversion.
(b) Cancellation of Ascend-Owned Stock. All shares of common stock, $.01 par
value per share, of Stratus ("Stratus Common Stock"), together with each
associated right (a "Right") issued under the Rights Agreement (as defined in
Section 3.4(b)), owned by Ascend, Stratus, Sub or any other wholly owned
Subsidiary (as defined in Section 3.2(b)) of Ascend or Stratus (if any), shall
be canceled and retired and shall cease to exist, and no stock of Ascend or
other consideration shall be delivered in exchange therefor.
(c) Exchange Ratio for Stratus Common Stock. Subject to Section 2.2, each
issued and outstanding share of Stratus Common Stock (other than shares to be
canceled in accordance with Section 2.1(b) and any Dissenting Shares (as
defined in and to the extent provided in Section 2.3 hereof)) together with
each associated Right shall be converted into the right to receive 0.75 (the
"Exchange Ratio") of a fully paid and nonassessable share of common stock,
$.001 par value per share, of Ascend ("Ascend Common Stock") (which amount
will be proportionately adjusted for any stock split or stock dividend
effected between the date of this Agreement and the Effective Time). All such
shares of Stratus Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares shall
cease to have any rights with respect thereto, except the right to receive the
shares of Ascend Common Stock and any cash in lieu of fractional shares of
Ascend Common Stock to be issued or paid in consideration therefor upon the
surrender of such certificate in accordance with Section 2.2, without
interest.
(d) Stratus Stock Options and Employee Stock Purchase Plan. At the Effective
Time, all then outstanding options to purchase Stratus Common Stock issued
under the Stratus Amended and Restated 1983 Stock Option Plan, as amended, the
Stratus Amended and Restated Employee Stock Purchase Plan, the Stratus
Restated Non-Qualified Stock Option Plan, and the Stratus 1997 Non-Qualified
Stock Option Plan (collectively, including agreements entered into under such
plans, the "Stratus Stock Plans"), not exercised as of the Effective Time will
be assumed by Ascend in accordance with Section 6.11.
Section 2.2 Exchange of Certificates. The procedures for exchanging
outstanding shares of Stratus Common Stock for Ascend Common Stock pursuant to
the Merger are as follows:
(a) Exchange Agent. As of the Effective Time, Ascend shall deposit with a
bank or trust company designated by Ascend and reasonably acceptable to
Stratus (the "Exchange Agent"), for the benefit of the
A-2
<PAGE>
holders of shares of Stratus Common Stock, for exchange in accordance with
this Section 2.2, through the Exchange Agent, certificates representing the
shares of Ascend Common Stock (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 Section 2.1 in
exchange for outstanding shares of Stratus Common Stock.
(b) Exchange Procedures. Promptly 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 Stratus Common Stock (each a "Stratus Certificate" and collectively the
"Stratus Certificates") whose shares were converted pursuant to Section 2.1
into the right to receive shares of Ascend Common Stock (i) a duly executed
letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Stratus Certificates shall pass, only upon
delivery of the Stratus Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Ascend and Stratus may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Stratus Certificates in exchange for certificates representing shares of
Ascend Common Stock. Upon surrender of a Stratus Certificate for cancellation
to the Exchange Agent or to such other agent or agents as may be appointed by
Ascend, together with such letter of transmittal, duly executed, the holder of
such Stratus 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 this
Article II, and the Stratus Certificate so surrendered shall immediately be
canceled. In the event of a transfer of ownership of Stratus Common Stock
which is not registered in the transfer records of Stratus, a certificate
representing the proper number of shares of Ascend Common Stock may be issued
to a transferee if the Stratus Certificate representing such Stratus Common
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 Stratus 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 and
cash in lieu of any fractional 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 with respect to Ascend Common Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Stratus Certificate with respect to the shares of Ascend Common
Stock represented thereby, and no cash payment in lieu of fractional shares
shall be paid to any such holder pursuant to subsection (e) below, until the
holder of record of such Stratus Certificate shall surrender such Stratus
Certificate. Subject to the effect of applicable laws, following surrender of
any such Stratus Certificate, there shall promptly 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 any cash payable in lieu of a fractional share of
Ascend Common Stock to which such holder is entitled pursuant to subsection
(e) of this Section 2.2 below and the amount of dividends or other
distributions with a record date after the Effective Time previously paid with
respect to such whole 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 whole shares of
Ascend Common Stock.
(d) No Further Ownership Rights in Stratus Common Stock. All shares of
Ascend Common Stock issued upon the surrender for exchange of shares of
Stratus Common Stock in accordance with the terms hereof (including any cash
paid pursuant to subsection (c) and (e) of this Section 2.2) shall be deemed
to have been issued in full satisfaction of all rights under the MBCL
pertaining to such shares of Stratus Common Stock. After the Effective Time,
there shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of Stratus Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Stratus Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled 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 Stratus Certificates, and such fractional share interests will
A-3
<PAGE>
not entitle the owner thereof to vote or to hold any other rights of a
stockholder of Ascend. Notwithstanding any other provision of this Agreement,
each holder of shares of Stratus Common 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 Stratus Certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to such fractional part of a share of Ascend
Common Stock multiplied by the average of the last reported sale prices of
Ascend Common Stock on The Nasdaq National Market on the ten (10) trading days
immediately preceding the Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the stockholders of Stratus for one year after the
Effective Time shall be delivered to Ascend, upon demand, and any stockholders
of Stratus 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, cash in lieu of fractional shares of Ascend Common Stock, and dividends
or distributions with respect to Ascend Common Stock.
(g) No Liability. Neither Ascend nor Stratus, nor any of their respective
directors, officers, employees or agents, shall be liable to any holder of
shares of Stratus Common Stock or Ascend Common Stock, as the case may be, for
such shares (or dividends or distributions with respect thereto) delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
Section 2.3 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Stratus Common Stock who has demanded and perfected
appraisal rights for such shares in accordance with the MBCL and who, as of
the Effective Time, has not effectively withdrawn or lost such appraisal
rights ("Dissenting Shares"), shall not be converted into or represent a right
to receive Ascend Common Stock pursuant to Section 2.1, but the holder thereof
shall only be entitled to such rights as are granted by the MBCL.
(b) Notwithstanding the foregoing, if any holder of shares of Stratus Common
Stock who demands appraisal of such shares under the MBCL shall effectively
withdraw the request for appraisal or lose the right to appraisal, then, as of
the later of the Effective Time and the occurrence of such event, such
holder's shares shall automatically be converted into and represent only the
right to receive Ascend Common Stock and cash in lieu of fractional shares,
without interest thereon, upon surrender of the certificate representing such
shares.
(c) Stratus shall give Ascend (i) prompt notice of any written demands for
appraisal of any shares of Stratus Common Stock, withdrawals of such demands,
and any other instruments served pursuant to the MBCL and received by Stratus,
which relate to any such demand for appraisal and (ii) the opportunity to
participate in all negotiations and proceedings which take place prior to the
Effective Time with respect to demands for appraisal under the MBCL. Stratus
shall not, except with the prior written consent of Ascend or as may be
required by applicable law, voluntarily make any payment with respect to any
demands for appraisal of Stratus Common Stock or offer to settle or settle any
such demands.
ARTICLE III
Representations and Warranties of Stratus
Stratus represents and warrants to Ascend and Sub that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure schedule delivered by Stratus to Ascend on or before the date of
this Agreement ("Stratus Disclosure Schedule") or except to the extent
disclosed in the Stratus SEC Reports (as defined herein) filed with the SEC
since January 1, 1998. The Stratus Disclosure Schedule shall be arranged in
sections corresponding to the numbered and lettered sections contained in this
Article III, and the disclosure in any such numbered and lettered section of
the Stratus Disclosure Schedule shall qualify only the corresponding section
in this Article III (except to the extent disclosure in any numbered and
lettered section of the Stratus Disclosure Schedule is specifically cross-
referenced in another numbered and lettered section of the Stratus Disclosure
Schedule). The term "Stratus Material Adverse Effect" shall mean a material
adverse effect on the
A-4
<PAGE>
business, operations, properties, assets (including intangible assets),
financial condition, or results of operations of Stratus and its Subsidiaries,
with materiality determined in accordance with Section 9.3.
Section 3.1 Organization. Stratus and each of its 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 (without giving effect to
the Merger), and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which it is required by law to be
so qualified, except where the failure to have such power or the failure to be
so qualified could not reasonably be expected to have a Stratus Material
Adverse Effect.
Section 3.2 Stratus Subsidiaries and Joint Ventures.
(a) Section 3.2(a) of the Stratus Disclosure Schedule sets forth a list of
all Subsidiaries and Joint Ventures (as defined in Section 3.2(b)) of Stratus,
including the name of each Subsidiary and Joint Venture, the jurisdiction in
which such Subsidiary or Joint Venture is incorporated or organized and
percentage ownership interests held by Stratus or its Subsidiaries in each
such Joint Venture. There are no outstanding subscriptions, options, call,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants with respect to any such
Subsidiary's capital stock, including any right obligating any such Subsidiary
to issue, deliver, or sell additional shares of its capital stock, and no
obligations, contingent or otherwise, of Stratus or any of its Subsidiaries to
repurchase, redeem, or otherwise acquire any shares of the capital stock of
any Subsidiary of Stratus or make any investment (in the form of a loan,
capital contribution or otherwise) in any such Subsidiary or any other entity
other than guarantees of bank obligations of such Subsidiaries entered into in
the ordinary course of business. All of the outstanding shares of capital
stock of each Subsidiary of Stratus are duly authorized, validly issued, fully
paid and nonassessable, and all such shares are owned by Stratus or another
Subsidiary of Stratus free and clear of all security interests, liens, claims,
pledges, agreements, limitations on Stratus's voting rights, charges or other
encumbrances of any nature. Neither Stratus nor any of its Subsidiaries
directly or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any such equity or similar
interest in, any corporation, limited liability company, partnership, joint
venture or other business association or entity (other than Stratus or another
Subsidiary of Stratus), excluding securities of any publicly traded company
held for investment and comprising less than five percent (5%) of the
outstanding stock or voting power of such company.
(b) As used in this Agreement, "Subsidiary" means, with respect to any
party, any corporation, limited liability company, partnership, joint venture,
or other business association or entity, at least a majority of the voting
securities or economic interests of which is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries. As used in
this Agreement, "Joint Venture" means, with respect to any party, any
corporation, limited liability company, partnership, joint venture or other
entity in which (i) such party, directly or indirectly, owns or controls five
percent (5%) or more but less than a majority of any class of the outstanding
voting securities or economic interests, or (ii) such party or a Subsidiary of
such party is a general partner.
Section 3.3 Stratus Capital Structure.
(a) The authorized capital stock of Stratus consists of 150,000,000 shares
of Stratus Common Stock and 500,000 shares of Junior Common Stock, $.01 par
value per share ("Stratus Junior Common Stock"). As of July 31, 1998: (i)
28,219,077 shares of Stratus Common Stock were issued and outstanding, all of
which are validly issued, fully paid and nonassessable; (ii) no shares of
Stratus Junior Common Stock are issued or outstanding; (iii) 4,176,900 shares
of Stratus Common Stock and no Stratus Junior Common Stock were held in the
treasury of Stratus or by Subsidiaries of Stratus; (iv) 17,980,200 shares of
Stratus Common Stock were reserved for issuance under Stratus Stock Plans
(including (A) 10,880,200 shares reserved for issuance, as a maximum combined
aggregate, under the Amended and Restated 1983 Stock Option Plan and Stratus
Restated Non-Qualified Stock Option Plan, 4,014,041 of which were subject to
outstanding options and 3,644,066 of which were reserved for future option
grants, (B) 4,100,000 shares of Stratus Common Stock reserved for future
issuance pursuant to rights outstanding under the Stratus Amended and Restated
Employee Stock Purchase Plan,
A-5
<PAGE>
and (C) 3,000,000 shares reserved for issuance under the Stratus 1997 Non-
Qualified Stock Option Plan; and (v) no shares of Stratus Common Stock were
reserved for issuance pursuant to incentive and non-qualified stock option
agreements with certain officers of Stratus. All shares of Stratus Common
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 Stratus or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of Stratus
Common Stock.
(b) Except as set forth in this Section 3.3 or as reserved for future grants
of rights or options under the Stratus Stock Plans, as amended, and except for
the Rights, there are no equity securities of any class of Stratus, or any
security exchangeable into or exercisable for such equity securities, issued,
reserved for issuance or outstanding. Except (i) pursuant to the Stratus Stock
Plans, (ii) as set forth in this Section 3.3(b), and (iii) for the Rights,
there are no options, warrants, equity securities, calls, rights, commitments
or agreements of any character to which Stratus is a party or by which it is
bound obligating Stratus to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of Stratus or obligating
Stratus to grant, extend, accelerate the vesting of or enter into any such
option, warrant, equity security, call, right, commitment or agreement, and,
to the best knowledge of Stratus, there are no voting trusts, proxies or other
agreements or understandings with respect to the shares of capital stock of
Stratus to which Stratus or any of its Subsidiaries is a party.
Section 3.4 Authority; No Conflict; Required Filings and Consents.
(a) Stratus has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate and stockholder action on the part of Stratus, subject only to the
approval of the Merger by Stratus's stockholders by the affirmative vote of
two-thirds of the shares of Stratus Common Stock outstanding at the record
date under the MBCL. This Agreement has been duly executed and delivered by
Stratus and, assuming this Agreement constitutes valid and binding obligations
of the other parties hereto, this Agreement constitutes valid and binding
obligations of Stratus, enforceable in accordance with the terms hereof,
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 Stratus does not, and
the consummation of the transactions contemplated by this Agreement will not,
(i) conflict with, or result in any violation or breach of any provision of
the Articles of Organization or Bylaws of Stratus or any of its Subsidiaries
(in each case as heretofore amended), (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) or require the consent, waiver or
agreement of any person or entity (other than consents, waivers and agreements
that have been or prior to the Closing will be obtained) under any of the
terms, conditions or provisions of any material note, bond, mortgage,
indenture, lease, contract or other material agreement, instrument or
obligation to which Stratus or any of its Subsidiaries is a party or by which
any of them or any of their properties or assets may be bound, (iii)
constitute a "Stock Acquisition Date" or cause Ascend to become an "Acquiring
Person" or an "Adverse Person" as such terms are defined in that certain
Rights Agreement dated as of December 4, 1990 between Stratus and The First
National Bank of Boston (the "Rights Agreement"), or (iv) subject to the
consents, approvals, orders, authorizations, filings and registrations
specified in Section 3.4(c), conflict with or violate any judgment, order,
decree, statute, law, ordinance, rule or regulation or any material permit,
concession, franchise or license applicable to Stratus or any of its
Subsidiaries or any of their properties or assets, except in the cases of
clause (ii) and (iv) for such consents, waivers and agreements, the absence of
which, and such violations, breaches, defaults, terminations, cancellations or
accelerations which, in the aggregate could not reasonably be expected to have
a Stratus Material Adverse Effect or a material adverse effect on the
telecommunications (including SS7) business of Stratus or the ability of
Stratus to consummate the transactions contemplated by this Agreement.
A-6
<PAGE>
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency, commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Stratus 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 pre-merger notification reports under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") and the
antitrust laws of any foreign jurisdiction which is applicable to the Merger
and the expiration or early termination of any waiting period(s) thereunder;
(ii) the filing of the Registration Statement (as defined in Section 3.18 with
the Securities and Exchange Commission (the "SEC") in accordance with the
Securities Act of 1933, as amended (the "Securities Act") and the entry of an
order by the SEC permitting such registration statement to become effective;
(iii) the filing of the Articles of Merger with the Secretary of State of the
Commonwealth of Massachusetts in accordance with the MBCL; (iv) the filing of
the Proxy Statement (as defined in Section 3.18 and related proxy materials
with the SEC in accordance with the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); (v) such consents, approvals, orders,
authorizations, filings, registrations and declarations as may be required
under applicable federal and state securities laws and the laws of any foreign
country; and (vi) such other consents, approvals, orders, authorizations,
filings, approvals and registrations which, in the aggregate, if not obtained
or made, could not reasonably be expected to have a Stratus Material Adverse
Effect or have a material adverse effect on the ability of Stratus to
consummate the transactions contemplated by this Agreement.
Section 3.5 SEC Filings; Financial Statements.
(a) Stratus has filed and made available to Ascend all forms, reports and
documents required to be filed by Stratus with the SEC since January 1, 1996
(collectively, the "Stratus SEC Reports"). The Stratus SEC Reports (i) at the
time filed, complied in all material respects with the applicable requirements
of the Securities Act and the Exchange Act, as the case may be, and (ii) did
not at the time they were filed (or if amended or superseded by a subsequent
filing, 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
Stratus SEC Reports or necessary in order to make the statements in such
Stratus SEC Reports, in the light of the circumstances under which they were
made, not misleading. None of Stratus's Subsidiaries is required to file any
forms, reports or other documents as a result of their issuance (or the
registration of such securities on a national securities exchange) with the
SEC, the National Association of Securities Dealers, Inc. (the "NASD"), the
New York Stock Exchange, Inc., or any other stock exchange or any foreign
securities commission or stock exchange regulating issuers of securities.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Stratus SEC Reports, including any Stratus
SEC Reports filed after the date of this Agreement until the Closing (the
"Stratus Financial Statements"), 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 U.S.
generally accepted accounting principles ("U.S. 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 or 8-K promulgated by the SEC), and fairly presented or
will fairly present the consolidated financial position of Stratus 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 were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.
The audited consolidated balance sheet of Stratus as of December 28, 1997 is
referred to herein as the "Stratus Balance Sheet."
Section 3.6 Absence of Undisclosed Liabilities. Stratus 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 U.S.
GAAP), and whether due or to become due, other than (i) liabilities reflected
in the Stratus Balance Sheet, (ii) normal or recurring liabilities incurred
since December 28, 1997 in the ordinary course of business consistent with
past practices, or (iii) liabilities arising out of the transactions
contemplated hereby or permitted hereunder, after the date hereof.
A-7
<PAGE>
Section 3.7 Absence of Certain Changes or Events. Since the date of the
Stratus Balance Sheet (and in the case of clauses (a) and (e) through the date
hereof), Stratus and its Subsidiaries have conducted their businesses only in
the ordinary course in a manner consistent with past practice, and since such
date there has not been:
(a) any Stratus Material Adverse Effect;
(b) any material change by Stratus or any of its Subsidiaries in its
accounting methods, principles or practices;
(c) any revaluation by Stratus or any of its Subsidiaries of any material
asset or any writedown of the value of capitalized software or inventory, or
any write-off of notes or accounts receivable other than in the ordinary
course of business consistent with past practice;
(d) any increase in the compensation payable or to become payable by Stratus
or any of its Subsidiaries to its 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 Stratus
and its Subsidiaries;
(e) entered into any commitment or transaction outside the ordinary course
of Stratus's business involving the payment or receipt by Stratus or its
Subsidiaries of more than five million dollars ($5,000,000) (including without
limitation any borrowing or capital expenditure); or
(f) any other action or event that would have required the consent of Ascend
pursuant to Section 5.1 of this Agreement had such action or event occurred
after the date of this Agreement.
Section 3.8 Taxes.
(a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes" means
any and all federal, state, local and foreign taxes, assessments and other
similar governmental charges, duties and impositions, 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.
(b) Each of Stratus and its Subsidiaries have accurately prepared and timely
filed (or will so file) all federal, state, local and foreign returns,
estimates, information statements and reports relating to any and all Taxes
concerning or attributable to Stratus or any of its Subsidiaries or to their
operations ("Returns") required to be filed at or before the Effective Time,
and such Returns are true and correct in all material respects and have been
completed in all material respects in accordance with applicable law.
(c) Each of Stratus and its Subsidiaries as of the Effective Time: (i) will
have paid all Taxes it is required to pay prior to the Effective Time and (ii)
will have withheld with respect to its employees all federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld, except for Taxes
contested in good faith by appropriate proceedings for which adequate reserves
have been taken.
(d) There is no Tax deficiency outstanding, proposed or assessed against
Stratus or any of its Subsidiaries that is not reflected as a liability on the
Stratus Balance Sheet nor has Stratus or any of its Subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(e) Neither Stratus nor any of its Subsidiaries has any liability for unpaid
federal, state, local or foreign Taxes that has not been accrued for or
reserved on the Stratus Balance Sheet, whether asserted or unasserted,
contingent or otherwise.
(f) No audit or other examination of any Return of Stratus or any of its
Subsidiaries is presently in progress, nor has Stratus or any of its
Subsidiaries been notified of any request for such an audit or other
examination.
A-8
<PAGE>
(g) Stratus has made available to Ascend or its legal counsel copies of all
foreign, federal and state income and all state sales and use Returns for
Stratus and all its Subsidiaries filed for all periods since their respective
inceptions.
(h) There are (and immediately following the Effective Time there will be)
no liens, pledges, charges, claims, restrictions on transfer, mortgages,
security interests or other encumbrances of any sort (collectively, "Liens")
on the assets of Stratus nor any of its Subsidiaries relating to or
attributable to Taxes other than Liens for Taxes not yet due and payable.
(i) Neither Stratus nor any of its Subsidiaries has knowledge of any basis
for the assertion of any claim relating or attributable to Taxes which, if
adversely determined, would result in any Lien on the assets of Stratus or any
of its Subsidiaries.
(j) None of the assets of Stratus of any of its Subsidiaries are treated as
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(k) As of the Effective Time, there will not be any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of Stratus or any of its
Subsidiaries that, individually or collectively, could give rise to the
payment of any amount that would not be deductible by Stratus or any of its
Subsidiaries as an expense under applicable law. None of Stratus nor any of
its Subsidiaries has, or will have as a result of the transactions
contemplated by this Agreement, any liabilities for Taxes (for example under
Section 280G of the Code) as a result of the amount of remuneration paid or to
be paid to its employees.
(l) Stratus nor any of its Subsidiaries has filed any consent agreement
under Section 341(f) of the Code or agreed to have Section 341(f)(4) of the
Code apply to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by Stratus or any of its Subsidiaries.
(m) Neither Stratus nor any of its Subsidiaries is a party to any Tax
sharing, indemnification or allocation agreement and neither owes any amount
under any such agreement, other than this Agreement.
(n) Each of Stratus's and its Subsidiaries' Tax basis in its assets for
purposes of determining its future amortization, depreciation and other
federal income Tax deductions is accurately reflected on its respective Tax
books and records.
(o) Neither Stratus nor any of its Subsidiaries is and has not been at any
time, a "United States real property holding corporation" within the meaning
of Section 897(c)(2) of the Code.
(p) Except as may be required as a result of the Merger, Stratus and its
Subsidiaries have not been and will not be required to include any adjustment
in taxable income for any Tax period (or portion thereof) pursuant to Section
481 or Section 263A of the Code or any comparable provision under state or
foreign Tax laws as a result of the transactions, events or accounting methods
employed prior to Closing.
(q) The operations of Stratus and its Subsidiaries in the Republic of
Ireland qualify for the ten percent (10%) effective rate (the "Effective
Rate") of Tax imposed by the Republic of Ireland on the sale of goods
manufactured in the Republic of Ireland. Stratus has made available to Ascend
or its legal counsel copies of all of its and its Subsidiaries' files, books
and records concerning Taxes imposed by the Republic of Ireland on the
operations of Stratus and its Subsidiaries for all periods since the inception
of such operations. Neither Stratus nor any of its Subsidiaries has (i)
knowledge of any basis for the assertion of any claim which, if adversely
determined, would result in any loss of qualification for the Effective Rate
or (ii) any plan or intention for the operations of Stratus or its
Subsidiaries in the Republic of Ireland which would result in any loss of
qualification for the Effective Rate.
Section 3.9 Properties. Stratus and its Subsidiaries own or have valid
leasehold interests in all real property necessary for the conduct of their
businesses as presently conducted. All material leases to which Stratus
A-9
<PAGE>
or any of its Subsidiaries is a party are in good standing, valid and
effective in accordance with their respective terms, and neither Stratus nor
its Subsidiaries is in default under any of such leases, except where the lack
of such good standing, validity and effectiveness or the existence of such
default could not reasonably be expected to have a Stratus Material Adverse
Effect.
Section 3.10 Intellectual Property.
(a) Stratus and its Subsidiaries own, or are licensed or otherwise possess,
legally enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights and mask works, 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 programs and
tangible or intangible proprietary information or material that are used in
and material to the business of Stratus and its Subsidiaries as currently
conducted by Stratus and its Subsidiaries (without giving effect to the
Merger) (the "Stratus Intellectual Property Rights").
(b) Neither Stratus nor any of its Subsidiaries is, or will be as a result
of the execution and delivery of this Agreement or the performance of any of
its obligations hereunder, in breach of any license, sublicense or other
agreement relating to the Stratus Intellectual Property Rights except for such
breaches as would not, individually or in the aggregate, be reasonably likely
to have a Stratus Material Adverse Effect.
(c) (i) Each patent, registered trademark, service mark and copyright which
is owned by Stratus or any of its Subsidiaries which is material to the
business of Stratus and its Subsidiaries is subsisting and, to the best of
Stratus's knowledge valid and enforceable; (ii) Stratus as of the date hereof
has not been sued in any suit, action or proceeding which is currently pending
which involves a claim of infringement of any patent, trademark, service mark,
copyright or violation of any trade secret or other proprietary right of any
third party, or received notice of any such claim; (iii) to the best of
Stratus's knowledge, the manufacturing, marketing, licensing or sale of
Stratus's products sold or licensed to other than the telecommunications
industry in the manner currently manufactured, marketed, sold or licensed,
does not infringe any patent, trademark, service mark, copyright, trade secret
or other proprietary right of any third party which infringement, either
individually or in the aggregate, could reasonably be expected to have a
Stratus Material Adverse Effect; and (iv) to the best of Stratus's knowledge,
the manufacturing, marketing, licensing or sale of Stratus's material products
sold or licensed to the telecommunications industry in the manner currently
manufactured, marketed, sold or licensed, does not infringe any patent,
trademark, service mark, copyright, trade secret or other proprietary right of
any third party.
(d) Section 3.10(d) of the Stratus Disclosure Schedule lists all patents and
patent applications and all trademarks, registered copyrights, trade names and
service marks included in the Stratus Intellectual Property Rights, including
the jurisdictions in which each such Stratus Intellectual Property Right has
been issued or registered or in which any such application for such issuance
and registration has been filed. Stratus has made available to Ascend (i) all
material licenses, sublicenses, distribution agreements and other agreements
as to which Stratus or any of its Subsidiaries is a party and pursuant to
which any person has exclusive rights to use any Stratus Intellectual Property
Rights or has the exclusive right to manufacture, reproduce, market or exploit
any product of Stratus or any of its Subsidiaries or any adaptation,
translation or derivative work based on a product of Stratus or any of its
Subsidiaries or any portion thereof; (ii) all material licenses, sublicenses
and other agreements as to which Stratus or any of its Subsidiaries is a party
and pursuant to which Stratus or any of its Subsidiaries is authorized to use
any third party patents, trademarks or copyrights, including software which is
used in the manufacture of, incorporated in, or forms a part of any product of
Stratus or any of its Subsidiaries, that limits such use by geography or field
of use; and (iii) all material joint development agreements to which Stratus
or any of its Subsidiaries is a party.
Section 3.11 Agreements, Contracts and Commitments. Neither Stratus nor any
of its Subsidiaries has breached, or received in writing any claim or threat
that it has breached, any of the terms or conditions of any agreement,
contract, license or commitment to which it is a party or by which any of its
assets and properties are bound ("Stratus Material Contracts") in such a
manner as would permit any other party to cancel or terminate
A-10
<PAGE>
the same (within or without notice of passage of time) or would provide a
basis for any other party to claim money damages (either individually or in
the aggregate with all other such claims) from Stratus or any of its
Subsidiaries under any Stratus Material Contract, except such breaches,
cancellations or terminations which in the aggregate could not reasonably be
expected to have a Stratus Material Adverse Effect.
Section 3.12 Litigation. There is no action, suit, proceeding, claim,
arbitration or, to the knowledge of Stratus, investigation against Stratus or
any of its Subsidiaries pending or, to the knowledge of Stratus, threatened,
or as to which Stratus or any of its Subsidiaries has received any written
notice of assertion, which, if decided adversely to Stratus or such
Subsidiary, could reasonably be expected to have a Stratus Material Adverse
Effect or have a material adverse effect on the ability of Stratus to
consummate the transactions contemplated by this Agreement.
Section 3.13 Environmental Matters.
(a) As of the date hereof, neither Stratus nor any of its Subsidiaries has
any reason to believe that any Hazardous Material- (as defined herein) related
underground storage tanks, sumps, vaults, piping or other underground
Hazardous Material-related equipment (collectively, "USTs"), are present at
any property that Stratus or any of its Subsidiaries has at any time owned,
operated, occupied, or leased, where the use, condition, or presence of such
USTs would be reasonably likely to give rise to any corrective, investigative,
or remedial obligation or any exposure to money damages under any
Environmental Law (as defined herein) that could reasonably be expected to
have a Material Adverse Effect.
(b) Neither Stratus nor any of its Subsidiaries has disposed of, emitted,
discharged, handled, stored, transported, used or released any Hazardous
Material (collectively, "Hazardous Material Handling"), arranged for any
Hazardous Material Handling, or exposed any employee or other individual to
any Hazardous Material so as to give rise to any corrective, investigative, or
remedial obligation under any Environmental Law that could reasonably be
expected to have a Material Adverse Effect.
(c) Neither Stratus nor any of its Subsidiaries is aware of the presence at
any time of any Hazardous Material-related contamination at, in, on, beneath,
or relating to any property that Stratus or its Subsidiaries has at any time
owned, operated, occupied, or leased that could reasonably be expected to have
a Material Adverse Effect.
(d) Stratus and its Subsidiaries have performed or arranged Hazardous
Material Handling in compliance with all Environmental Laws except where non-
compliance would not reasonably be expected to have a Material Adverse Effect.
Without limiting the generality of the preceding sentence, neither Stratus nor
any of its subsidiaries has disposed of, labeled, packaged, transported, sold,
recycled, discarded, or manufactured any product or component of a product
containing a Hazardous Material (the "Hazardous Material Product Activities")
in violation of any Environmental Laws where such violation would reasonably
be expected to have a Material Adverse Effect.
(e) Stratus and its Subsidiaries currently hold all governmental
environmental Hazardous Material-related approvals, permits, licenses,
clearances, consents, and orders (the "Environmental Permits") necessary for
the conduct of their respective Hazardous Material Handling and Hazardous
Material Product Activities and other businesses of Stratus and its
Subsidiaries as such activities are currently being conducted, except where
the failure to hold any such Environmental Permit would not reasonably be
expected to have a Material Adverse Effect.
(f) No action, proceeding, revocation proceeding, amendment procedure, writ,
injunction, or other governmental action is pending or, to the knowledge of
Stratus threatened, concerning any Environmental Permits, or any Hazardous
Material Handling or any Hazardous Material Product Activities of Stratus or
any of its Subsidiaries that could reasonably be expected to have a Material
Adverse Effect.
(g) Neither Stratus nor any of its Subsidiaries is aware of any fact or
circumstance which could involve Stratus or any of its Subsidiaries in any
litigation or in any administrative enforcement action, penalty or
A-11
<PAGE>
sanction, or impose upon Stratus or any of its Subsidiaries any liability,
with respect to any Hazardous Materials Handling, any Hazardous Material
Product Activities, or any Hazardous Material-related contamination relating
to any business operation of Stratus or its Subsidiaries or relating to a
property that Stratus or any of its Subsidiaries at any time has owned,
operated, occupied, or leased that could reasonably be expected to have a
Material Adverse Effect.
(h) To the knowledge of Stratus, no property that Stratus or any of its
Subsidiaries has at any time owned, operated, occupied, or leased is proposed
for listing on the National Priorities List, CERCLIS, or any similar state,
local or foreign list of sites that potentially endanger human health, ecology
or environment or that require environmental investigation or cleanup.
(i) To the knowledge of Stratus, any asbestos-containing material which is
on, in or a part of any property or structure thereon currently owned,
operated, occupied, or leased by Stratus or any of its Subsidiaries complies
with current applicable standards of Environmental Law except where non-
compliance would not have a Material Adverse Effect.
(j) To the knowledge of Stratus, no governmental notification, approval, or
consent, whether before or after the Closing, is required under Environmental
Laws in connection with the consummation of the transaction contemplated by
this Agreement.
(k) As used herein, "Hazardous Material" means any substance, waste,
material, chemical, compound or mixture which is harmful to the environment,
flora, fauna, or human health, or which is flammable, ignitable, corrosive,
reactive, radioactive, or explosive, or which is defined, listed, designated,
described or characterized under Environmental Laws as hazardous, toxic,
biohazardous, a contaminant, a pollutant, or words of similar import, and
includes without limitation asbestos, polychlorinated biphenyls, petroleum
(including crude oil or any fraction or distillate thereof), and natural gas.
(l) As used herein, "Environmental Laws" means all applicable civil,
criminal, and administrative laws (including common law), statutes, codes,
rules, regulations, ordinances, and legally enforceable orders, decrees,
judgments, permits, licenses, approvals, authorizations, and other
requirements, directives, consents, and obligations imposed by local, state,
federal, foreign, or supranational governmental authority pertaining to
protection of the environment, flora, fauna, public health and safety.
Section 3.14 Employee Benefit Plans and Employee Matters.
(a) With the exception of the definition of "Affiliate" set forth in Section
3.14(a)(i) below (which definition shall apply only to this Section 3.14), for
purposes of this Agreement, the following terms shall have the meanings set
forth below:
(i) "Affiliate" shall mean any other person or entity under common
control with Stratus within the meaning of Section 414(b), (c), (m) or (o)
of the Code and the regulations issued thereunder;
(ii) "Stratus Employee Plan" shall mean each plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether written or unwritten or otherwise, funded
or unfunded, including without limitation, each "employee benefit plan,"
within the meaning of Section 3(3) of ERISA (as defined herein) which is
maintained, contributed to, or required to be contributed to, by Stratus or
any Affiliate for the benefit of any Employee (as defined in Section
3.14(a)(iv) below);
(iii) "DOL" shall mean the Department of Labor;
(iv) "Employee" shall mean any current, former, or retired employee,
officer, or director of Stratus or any Affiliate;
(v) "Employee Agreement" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation or similar
agreement or contract between Stratus or any Affiliate and any Employee or
consultant;
A-12
<PAGE>
(vi) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(vii) "International Employee Plan" shall mean each Stratus Employee Plan
that has been adopted or maintained by Stratus, whether informally or
formally, for the benefit of Employees outside the United States;
(viii) "IRS" shall mean the Internal Revenue Service;
(ix) "Multiemployer Plan" shall mean any Pension Plan (as defined in
Section 3.14(a)(xi) below) which is a "multiemployer plan," as defined in
Section 3(37) of ERISA;
(x) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xi) "Pension Plan" shall mean each Stratus Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) The Stratus Disclosure Schedule contains an accurate and complete list
of each material Stratus Employee Plan and each material Employee Agreement
other than Employee Agreements with former employees where Stratus has
performed substantially all of Stratus's obligations thereunder) as of the
date hereof. Stratus does not have any binding plan or binding commitment to
establish any new Stratus Employee Plan, to modify any Stratus Employee Plan
or Employee Agreement (except to the extent required by law or to conform any
such Stratus Employee Plan or Employee Agreement to the requirements of any
applicable law, or as required by this Agreement), or to enter into any
Stratus Employee Plan or material Employee Agreement, nor does it have any
commitment to do any of the foregoing.
(c) Stratus has provided to Ascend: (i) correct and complete copies of all
documents embodying each material Stratus Employee Plan and each material
Employee Agreement (other than Employee Agreements with former employees where
Stratus has performed substantially all of Stratus's obligations thereunder),
including all amendments thereto and written interpretations thereof; (ii) the
three most recent annual reports (Form Series 5500 and all schedules and
financial statements attached thereto), if any, required under ERISA or the
Code in connection with each Stratus Employee Plan or related trust; (iii) if
the Stratus Employee Plan is funded, the most recent annual and periodic
accounting of Stratus Employee Plan assets; (iv) the most recent summary plan
description together with the summary of material modifications thereto, if
any, required under ERISA with respect to each Stratus Employee Plan; (v) all
IRS determination, opinion, notification and advisory letters, and rulings
relating to Stratus Employee Plans and copies of all applications and
correspondence to or from the IRS or the DOL with respect to any Stratus
Employee Plan; (vi) all material written agreements and contracts relating to
each Stratus Employee Plan, including, but not limited to, administrative
service agreements, group annuity contracts and group insurance contracts; and
(vii) all material communications to any Employee or Employees relating to any
Stratus Employee Plan and any proposed Stratus Employee Plan, in each case,
relating to any amendments, terminations, establishments, increases or
decreases in benefits, acceleration of payments or vesting schedules or other
events which would result in any material liability to Stratus.
(d) (i) Each Stratus Employee Plan has been established and maintained in
all material respects in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA and the Code; (ii) each Stratus Employee Plan intended to
qualify under Section 401(a) of the Code and each trust intended to qualify
under Section 501(a) of the Code has either received a favorable determination
letter from the IRS with respect to such plan as to its qualified status under
the Code, including all amendments to the Code effected by the Tax Reform Act
of 1986 and subsequent legislation, or has remaining a period of time under
applicable Treasury regulations or IRS pronouncements in which to apply for
such a determination letter and make any amendments necessary to obtain a
favorable determination; (iii) no material "prohibited transaction," within
the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and
not otherwise exempt under Section 408 of ERISA, has occurred with respect to
any material Stratus Employee Plan; (iv) there are no material actions, suits
or claims pending, or, to Stratus's knowledge, threatened (other than routine
claims for benefits) against any Stratus Employee Plan or against the assets
of any Stratus Employee Plan; (v) each Stratus Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance
with its terms, without material liability to Stratus
A-13
<PAGE>
or any of its Affiliates (other than ordinary administration expenses
typically incurred in a termination event); (vi) to Stratus's knowledge, there
are no material audits, inquiries or proceedings pending or threatened by the
IRS or DOL with respect to any Stratus Employee Plan; and (vii) neither
Stratus nor any Affiliate has been assessed any material penalty or material
tax with respect to any Stratus Employee Plan under Section 402(i) of ERISA or
Sections 4975 through 4980 of the Code.
(e) With respect to the Stratus Employee Plans, individually and in the
aggregate, there are no material funded benefit obligations for which
contributions have not been made or properly accrued and there are no material
unfunded benefit obligations which have not been accounted for by reserves, or
otherwise properly footnoted in accordance with U.S.GAAP, on the Stratus
Financial Statements.
(f) Stratus does not now, nor has it ever, maintained, established,
sponsored, participated in, or contributed to, any Pension Plan which is
subject to Title IV of ERISA or Section 412 of the Code.
(g) At no time has Stratus contributed to or been required to contribute to
any Multiemployer Plan.
(h) No Stratus Employee Plan or Employee Agreement provides, or has any
liability to provide, retiree life insurance, retiree health or other retiree
employee welfare benefits to any person for any reason, except (i) coverage
mandated by applicable law, (ii) death benefits under any "pension plan" or
(iii) benefits the full cost of which is borne by the current or former
employee (or his beneficiary).
(i) The execution of this Agreement and the announcement or the consummation
of the transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent acts or events or passage of time)
result in, or constitute an event under any Stratus Employee Plan, Employee
Agreement, trust or loan that will or may result in, the establishment,
accrual or payment of any benefit or compensation (whether of severance pay or
otherwise), any acceleration, forgiveness of indebtedness, vesting or
distribution of or increase in any benefit or obligation to fund any benefit
with respect to any Employee. Neither Stratus nor any of its Subsidiaries is a
party to any management, employment, deferred compensation, severance, bonus
or other contract for personal services with any Employee or any plan
agreement or understanding similar to any of the foregoing, in each case
providing for compensation in excess of two hundred thousand dollars
($200,000) per annum.
(j) Neither Stratus nor any of its Subsidiaries is a party to any oral or
written agreement with any officer of Stratus or any of its Subsidiaries
providing any term of employment or compensation guarantee extending for a
period of longer than one year from the date hereof or for the payment of
compensation in excess of two hundred thousand dollars ($200,000) per annum.
(k) No payment or benefit which will or may be made by Stratus or its
Affiliates with respect to any Employee as a result of the transactions
contemplated by this Agreement will be characterized as an "excess parachute
payment," within the meaning of Section 280G(B)(1) of the Code.
(l) To its knowledge, Stratus: (i) is in compliance in all material respects
with all applicable federal, state, local and foreign laws, rules and
regulations respecting employment, employment practices, terms and conditions
of employment and wages and hours; (ii) has withheld all amounts required by
law or by agreement to be withheld from the wages, salaries and other payments
to Employees, which amounts are material individually or in the aggregate;
(iii) is not liable for any material arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not
liable for any material payment to any trust or other fund or to any
governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice). There are no pending or, to
Stratus's knowledge, threatened material claims or actions against Stratus
under any worker's compensation policy or long-term disability policy. To
Stratus's knowledge, no employee of Stratus has violated any employment
contract, nondisclosure agreement or noncompetition agreement by which such
employee is bound due to such employee being employed by Stratus and
disclosing to Stratus or using trade secrets or proprietary information of any
other person or entity.
A-14
<PAGE>
(m) No work stoppage or labor strike against Stratus is pending or, to the
knowledge of Stratus, threatened. Stratus does not know of any activities or
proceedings of any labor union to organize any Employees. There are no
actions, suits, claims, labor disputes or grievances pending, or, to Stratus's
knowledge, threatened or relating to any labor, safety or discrimination
matters involving any Employee, including, without limitation, charges of
unfair labor practices or discrimination complaints, which, if adversely
determined, individually or in the aggregate, would be reasonably likely to be
a Stratus Material Adverse Effect. Neither Stratus nor any of its Affiliates
has been charged with or received notice of any actual or alleged unfair labor
practices within the meaning of the National Labor Relations Act. Stratus is
not presently, nor has it been in the past, a party to, or bound by, any
collective bargaining agreement or union contract with respect to Employees
and no collective bargaining agreement is currently being negotiated by
Stratus.
(n) Each International Employee Plan has been established, maintained and
administered in material compliance with its terms and conditions and with the
requirements prescribed by any and all statutory or regulatory laws that are
applicable to such International Employee Plan. No International Employee Plan
has unfunded liabilities, that as of the Effective Time, will not be offset by
insurance or fully accrued.
Section 3.15 Compliance with Laws. (a) Stratus and its Subsidiaries have
complied with, and have not received any notices of violations with respect
to, and (b) as of the date hereof, Stratus and its Subsidiaries are not in
violation of any U.S. federal, state, or local or foreign statute, law or
regulation, affecting the conduct of its business or the ownership or
operation of its business, including the U.S. Foreign Corrupt Practices Act
and all United States statutes, laws and regulations governing the license and
delivery of technology and products abroad by persons subject to the
jurisdiction of the United States, except for failures to comply or violations
which could not reasonably be expected to have a Stratus Material Adverse
Effect.
Section 3.16 Tax Matters. Neither Stratus nor any of its Subsidiaries, nor
to Stratus's knowledge, any of its other Affiliates (as defined herein) has
taken or agreed to take any action or failed to take any action which could
prevent the Merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
Section 3.17 Interested Party Transactions. Since the date of Stratus's last
proxy statement to its stockholders, no event has occurred that would be
required to be reported by Stratus as a Certain Relationship or Related
Transaction pursuant to Item 404 of Regulation S-K promulgated by the SEC.
Section 3.18 Registration Statement; Proxy Statement/Prospectus. The
information supplied to Ascend by Stratus 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, at the time the Registration Statement is first
filed in publicly available form and 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 by Stratus for inclusion in the Proxy
Statement/Prospectus (the "Proxy Statement") to be sent to the stockholders of
Stratus in connection with the special meeting of Stratus stockholders to
consider this Agreement and the Merger (the "Stratus Stockholders Meeting")
shall not, on the date the Proxy Statement is first mailed to stockholders of
Stratus, at the time of the Stratus Stockholders Meeting 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 Proxy 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 proxies for the
Stratus Stockholders Meeting which has become false or misleading. If at any
time prior to the Effective Time any event relating to Stratus or any of its
Affiliates, officers or directors should be discovered by Stratus which should
be set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement, Stratus shall promptly inform Ascend.
Section 3.19 Opinion of Financial Advisor. The financial advisor to Stratus,
Morgan Stanley & Company Incorporated, has delivered to Stratus an opinion
dated as of or immediately prior to the date of this
A-15
<PAGE>
Agreement to the effect that the Exchange Ratio is fair from a financial point
of view to the holders of Stratus Common Stock.
Section 3.20 Applicability of Certain Massachusetts Laws. Neither the
control share acquisition provisions of Chapters 110D and 110E of the MBCL nor
any similar provisions of the Articles of Organization or Bylaws of Stratus
are applicable to the transactions contemplated by this Agreement.
ARTICLE IV
Representations and Warranties of Ascend and Sub
Ascend and Sub represent and warrant to Stratus that the statements
contained in this Article IV are true and correct, except as set forth in the
disclosure schedule delivered by Ascend to Stratus on or before the date of
this Agreement ("Ascend Disclosure Schedule") or except to the extent
disclosed in the Ascend SEC Reports (as defined herein) filed with the SEC
since January 1, 1998. The Ascend Disclosure Schedule shall be arranged in
sections corresponding to the numbered and lettered sections contained in this
Article IV and the disclosure in any such numbered and lettered section of the
Ascend Disclosure Schedule shall qualify only the corresponding section in
this Article IV (except to the extent disclosure in any numbered and lettered
section of the Ascend Disclosure Schedule is specifically cross-referenced in
another numbered and lettered section of the Ascend Disclosure Schedule). The
term "Ascend Material Adverse Effect" shall mean a material adverse effect on
the business, operations, properties, assets (including intangible assets),
financial condition or results of operations of Ascend and its Subsidiaries,
with materiality determined in accordance with Section 9.3.
Section 4.1 Organization. Ascend and each of its 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 (without giving effect to
the Merger), and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which if it is required by law to
be so qualified except where the failure to have such power or the failure to
be so qualified could not reasonably be expected to have an Ascend Material
Adverse Effect.
Section 4.2 Ascend Subsidiaries and Joint Ventures. Section 4.2 of the
Ascend Disclosure Schedule sets forth a list of all Subsidiaries and Joint
Ventures of Ascend, including the name of each Subsidiary and Joint Venture
and the jurisdiction in which such Subsidiary or Joint Venture is incorporated
or organized. There are no outstanding subscriptions, options, call,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants with respect to any such
Subsidiary's capital stock, including any right obligating any such Subsidiary
to issue, deliver, or sell additional shares of its capital stock, and no
obligations, contingent or otherwise, of Ascend or any of its Subsidiaries to
repurchase, redeem, or otherwise acquire any shares of the capital stock of
any Subsidiary of Ascend or make any investment (in the form of a loan,
capital contribution or otherwise) in any such Subsidiary or any other entity
other than guarantees of bank obligations of such Subsidiaries entered into in
the ordinary course of business. All of the outstanding shares of capital
stock of each Subsidiary of Ascend are duly authorized, validly issued, fully
paid and nonassessable, and all such shares are owned by Ascend or another
Subsidiary of 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. Section 4.2 of the Ascend Disclosure Schedule sets
forth the nature and extent of the ownership and voting interests held by
Ascend in each such Joint Venture. Except as set forth in Section 4.2 of the
Ascend Disclosure Schedule, neither Ascend nor any of its Subsidiaries
directly or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any such equity or similar
interest in, any corporation, limited liability company, partnership, joint
venture or other business association or entity (other than Ascend or another
Subsidiary of Ascend), excluding securities of any publicly traded company
held for investment and comprising less than five percent (5%) of the
outstanding stock or voting power of such company.
A-16
<PAGE>
Section 4.3 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
per share ("Ascend Preferred Stock"). As of July 31, 1998: (i) 198,001,540
shares of Ascend Common Stock were issued and outstanding, all of which are
validly issued, fully paid and nonassessable; (ii) no shares of Ascend Ascend
Preferred Stock are issued or outstanding; (iii) no shares of Ascend Common
Stock or Ascend Ascend Preferred Stock were held in the treasury of Ascend or
by Subsidiaries of Ascend; and (iv) 28,934,033 shares of Ascend Common Stock
were reserved for 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"). All shares of Ascend Common 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 Ascend or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of Ascend Common Stock.
(b) Except as set forth in this Section 4.3 or as reserved for future grants
of rights or options under the Ascend Option Plans or the Ascend Purchase
Plan, 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 pursuant to the Ascend Option Plans, the
Ascend Purchase Plan or any related agreement in effect as of the date of this
Agreement, or as set forth in this Section 4.3, 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 obligating Ascend to grant,
extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement, and, 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 to
which Ascend is a party.
Section 4.4 Authority; No Conflict; Required Filings and Consents.
(a) Ascend has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all
necessary corporate and stockholder action on the part of Ascend. This
Agreement has been duly executed and delivered by Ascend and, assuming this
Agreement constitutes valid and binding obligation of the other parties
hereto, this Agreement constitutes the valid and binding obligations of
Ascend, enforceable against Ascend in accordance with the terms hereof, 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 does not, and the
consummation of the transactions contemplated by this Agreement 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 any of its Subsidiaries
(in each case as heretofore amended), (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) or require the consent, waiver or
agreement of any person or entity (other than consents, waivers and agreements
that have been or prior to the Closing will be obtained) under any of the
terms, conditions or provisions of any material note, bond, mortgage,
indenture, lease, contract or other material agreement, instrument or
obligation to which Ascend or any of its Subsidiaries is a party or by which
any of them or any of their properties or assets may be bound, or (iii)
subject to the consents, approvals, orders, authorizations, filings and
registrations specified in Section 4.4(c), conflict with or violate any
judgment, order, decree, statute, law, ordinance, rule or regulation or any
material permit, concession, franchise or license applicable to Ascend or any
of its Subsidiaries or any of their properties or assets, except in the case
of clauses (ii) and (iii) for such consents, waivers and agreements, the
absence of which, and such violations, breaches, defaults, terminations,
cancellations or accelerations which, in the aggregate could not reasonably be
expected to
A-17
<PAGE>
have an Ascend Material Adverse Effect or a material adverse effect on the
ability of Ascend to consummate the transactions contemplated by this
Agreement.
(c) 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 pre-merger notification
reports under the HSR Act and the antitrust laws of any foreign jurisdiction
which is applicable to the Merger and the expiration or early termination of
any waiting periods thereunder; (ii) the filing of the Registration Statement
with the SEC in accordance with the Securities Act and the entry of an order
by the SEC permitting such registration statement to become effective; (iii)
the filing of the Articles of Merger with the Secretary of State of the
Commonwealth of Massachusetts in accordance with the MBCL; (iv) the filing of
the Proxy Statement and related proxy materials with the SEC in accordance
with the Exchange Act; (v) such consents, approvals, orders, authorizations,
filings, registrations and declarations as may be required under applicable
federal and state securities laws and the laws of any foreign country; and
(vi) such other consents, approvals, orders, authorizations, filings,
approvals and registrations which, in the aggregate, if not obtained or made,
could not reasonably be expected to have an Ascend Material Adverse Effect or
a material adverse effect on the ability of Ascend to consummate the
transactions contemplated by this Agreement.
Section 4.5 SEC Filings; Financial Statements.
(a) Ascend has filed and made available to Stratus all forms, reports and
documents required to be filed by Ascend with the SEC since January 1, 1996
(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 Act and the Exchange Act, as the case may be, and (ii) did
not at the time they were filed (or if amended or superseded by a subsequent
filing, 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 as a result of their issuance of securities (or the
registration of such securities on a national market system) with the SEC, the
NASD, any other stock exchange or any foreign securities commission or stock
exchange regulating issuers of securities.
(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 (the
"Ascend Financial Statements"), 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 U.S. 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 or 8-K promulgated by the
SEC), and fairly presented or will fairly 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 were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount. The audited consolidated balance sheet of
Ascend as of December 31, 1997 is referred to herein as the "Ascend Balance
Sheet."
Section 4.6 Absence of Undisclosed Liabilities. 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 U.S.
GAAP), and whether due or to become due, other than (i) liabilities reflected
in the Ascend Balance Sheet, (ii) normal or recurring liabilities incurred
since December 31, 1997 in the ordinary course of business consistent with
past practices, or (iii) liabilities arising out of the transaction
contemplated hereby or permitted hereunder.
Section 4.7 Absence of Certain Changes or Events. Since the date of the
Ascend Balance Sheet, Ascend and its Subsidiaries have conducted their
businesses only in the ordinary course in a manner consistent with past
A-18
<PAGE>
practice, and since such date there has not been: (a) any Ascend Material
Adverse Effect or any fact or circumstance that would be reasonably likely to
result in an Ascend Material Adverse Effect or (b) any material change by
Ascend or any of its Subsidiaries in its accounting methods, principles or
practices; (c) any revaluation by Ascend or any of its Subsidiaries of any
material asset or any writedown of the value of capitalized software or
inventory, or any write-off of notes or accounts receivable other than in the
ordinary course of business consistent with past practice; or (d) any other
action or event that would have required the consent of Stratus pursuant to
Section 5.2 of this Agreement had such action or event occurred after the date
of this Agreement and that could reasonably be expected to result in an Ascend
Material Adverse Effect.
Section 4.8 Litigation. There is no action, suit, proceeding, claim,
arbitration or, to the knowledge of Ascend, investigation against Ascend or
any of its Subsidiaries pending, or to the knowledge of Ascend, threatened, or
as to which Ascend or any of its Subsidiaries has received any written notice
of assertion, which, if decided adversely to Ascend or such Subsidiary, could
reasonably be expected to have an Ascend Material Adverse Effect or a material
adverse effect on the ability of Ascend to consummate the transactions
contemplated by this Agreement.
Section 4.9 Compliance with Laws. (a) Ascend and its Subsidiaries have
complied with, and have not received any notices of violations with respect to
and (b) as of the date hereof, Ascend and its Subsidiaries are not in
violation of any U.S. federal, state, or local or foreign statute, law or
regulation, affecting the conduct of its business or the ownership or
operation of its business, including the U.S. Foreign Corrupt Practices Act
and all United States statutes, laws and regulations governing the license and
delivery of technology and products abroad by persons subject to the
jurisdiction of the United States, except for failures to comply or violations
which could not reasonably be expected to have an Ascend Material Adverse
Effect.
Section 4.10 Tax Matters. Neither Ascend nor any of its Subsidiaries, nor to
Ascend's knowledge, any of its other Affiliates (as defined herein) has taken
or agreed to take any action or failed to take any action which could prevent
the Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
Section 4.11 Interested Party Transactions. Since the date of Ascend's last
proxy statement to its stockholders, no event has occurred that would be
required to be reported by Ascend as a Certain Relationship or Related
Transaction pursuant to Item 404 of Regulation S-K promulgated by the SEC.
Section 4.12 Registration Statement; Proxy Statement/Prospectus. The
information supplied by Ascend for inclusion in the Registration Statement
shall not contain, at the time the Registration Statement is first filed in
publicly available form and 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 by Ascend for inclusion in the Proxy Statement to be sent
to the stockholders of Stratus in connection with the Stratus Stockholders
Meeting shall not, on the date the Proxy Statement is first mailed to
stockholders of Stratus, at the time of the Stratus Stockholders Meeting 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 Proxy 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 proxies for the
Stratus Stockholders Meeting which has become false or misleading. If at any
time prior to the Effective Time any event relating to Ascend or any of its
Affiliates, officers or directors should be discovered by Ascend which should
be set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement, Ascend shall promptly inform Stratus.
Section 4.13 Opinion of Financial Advisor. The financial advisor to Ascend,
Salomon Smith Barney, has delivered to Ascend an opinion dated as of or
immediately prior to the date of this Agreement to the effect that the
Exchange Ratio is fair to Ascend from a financial point of view.
A-19
<PAGE>
Section 4.14 Taxes. (i) Ascend and each of its Subsidiaries has filed all
Tax Returns required to have been filed on or prior to the date hereof, or
appropriate extensions therefor have been properly obtained, and such Tax
Returns are true, correct and complete, except to the extent that any failure
to file such Tax Returns or to cause such Tax Returns to be true, correct and
complete would not, individually or in the aggregate, be expected to have an
Ascend Material Adverse Effect; (ii) all Taxes shown to be due on such Tax
Returns have been timely paid or extensions for payment have been properly
obtained, or such Taxes are being timely and properly contested by Ascend,
except for failures to make payment, properly obtain extensions or timely and
properly contest which could not reasonably be expected to have an Ascend
Material Adverse Effect; (iii) there is no audit, examination, claimed
deficiency, refund litigation, proposed adjustment or matter in controversy
regarding any Taxes due and owing by Ascend or any of its Subsidiaries that
would individually or in the aggregate, have an Ascend Material Adverse
Effect; (iv) neither Ascend nor any of its Subsidiaries has waived any
statutory period of limitations in respect of any material Taxes or Tax
Returns; (v) all assessments for Taxes due and owing by Ascend or any of its
Subsidiaries with respect to completed and settled examinations or concluded
litigation have been paid (except where the nonpayment of such Taxes could not
reasonably be expected to have an Ascend Material Adverse Effect); and (vi)
neither Ascend nor any of its Subsidiaries is a party to, bound by, or has any
obligation under any Tax sharing, allocation, indemnity or similar contract or
arrangement.
Section 4.15 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.
ARTICLE V
Conduct of Business
Section 5.1 Covenants of Stratus. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, except as expressly contemplated by this
Agreement, Stratus agrees as to itself and its Subsidiaries (except to the
extent that Ascend shall otherwise consent in writing, which consent shall not
be unreasonably withheld), to carry on its business in the usual, regular and
ordinary course in substantially the same manner as previously conducted, 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, except where the failure to do so could
not reasonably be expected to have a Stratus Material Adverse Effect, 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. Stratus shall promptly after
becoming aware thereof notify Ascend of any events or occurrences not in the
ordinary course of business of Stratus that would, individually or in the
aggregate, result in a breach of any representation, warranty, covenant or
agreement of Stratus set forth in this Agreement which would cause any of the
conditions to Ascend's obligations to effect the Merger set forth in Article
VII to not be satisfied. Except as expressly contemplated by this Agreement or
as set forth in the Stratus Disclosure Schedule, Stratus shall not (and shall
not permit any of its Subsidiaries to), without the prior written consent of
Ascend, which consent shall not be unreasonably withheld:
(a) accelerate, amend or change the period of exercisability of options or
restricted stock granted under any Stratus Stock Plan 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;
(b) transfer or license to any person or entity or otherwise extend, amend
or modify any material rights to the Stratus Intellectual Property Rights (as
defined in Section 6.1(b)), other than non-exclusive licenses in the ordinary
course of business consistent with past practices, provided that Stratus and
its Subsidiaries shall be permitted to renew or extend exclusive licenses
existing as of the date hereof;
A-20
<PAGE>
(c) 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, as and to the extent required pursuant to
agreements entered into prior to the date hereof providing for the repurchase
of shares in connection with any termination of service by such party;
(d) 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, other than (i) the
issuances of Stratus Common Stock or the grant of options or rights to acquire
Stratus Common Stock pursuant to the Stratus Stock Plans in the ordinary
course of business consistent as to amount, exercise price, vesting and other
terms with past practice not to exceed two hundred fifty thousand (250,000)
shares in the aggregate, and (ii) the issuance of shares of Stratus Common
Stock upon the exercise of options granted under the Stratus Stock Plans as
and to the extent required under the Stratus Stock Plans;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other means, any business or any corporation, partnership
or other business organization or division, or otherwise acquire or agree to
acquire any material amount of assets;
(f) sell, lease, license or otherwise dispose of any of its properties or
assets which are material, individually or in the aggregate to the business of
Stratus and its Subsidiaries, taken as a whole, other than in the ordinary
course of business;
(g) take any action to: (i) increase or agree to increase the compensation
paid, payable or to become payable to its directors, officers, employees, or
consultants, except for increases in salary or wages of employees in
accordance with past practices and except as may be necessary to satisfy
contractual obligations existing as of the date hereof, (ii) grant any
additional severance or termination pay to, or enter into any employment or
severance agreements with, directors, officers or employees, except as may be
necessary to satisfy contractual obligations existing as of the date hereof,
(iii) grant any severance or termination pay to, or enter into any employment
or severance agreement with, any employee, except in accordance with past
practices and except as may be necessary to satisfy contractual obligations
existing as of the date hereof, (iv) enter into any collective bargaining
agreement, or (v) except as required by applicable law establish, adopt, enter
into or amend any bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, trust, fund, policy or arrangement for
the benefit of any directors, officers or employees, except as may be
necessary to satisfy contractual obligations existing as of the date hereof;
provided, however, that nothing contained herein shall prohibit Stratus from
conclusively determining the earned amount of any bonuses under Stratus's
bonus plans in respect of calendar year 1998, based on Stratus's annualized
performance through the Effective Time (determined without regard to the costs
incurred in connection with the transactions contemplated by this Agreement),
such bonuses to be paid in accordance with the terms of such plans and
Stratus's past practices;
(h) 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 or pursuant to arm's length transactions on commercially
reasonable terms;
(i) incur or prepay 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 and bank
agreements consistent with past practice;
(j) amend or propose to amend its Bylaws;
A-21
<PAGE>
(k) incur or commit to incur any individual capital expenditure in excess of
five million dollars ($5,000,000) or aggregate capital expenditures in excess
of forty million dollars ($40,000,000);
(l) enter into or amend any material OEM agreement or any material
agreements pursuant to which any third party is granted exclusive marketing,
manufacturing or other rights with respect to any Stratus product, process or
technology;
(m) amend or terminate any material contract, agreement or license to which
it is a party except in the ordinary course of business;
(n) waive or release any material right or claim, except in the ordinary
course of business;
(o) initiate any litigation or arbitration proceeding against any person
known to Stratus to be a customer or distributor of Ascend without prior
notice to the Chief Financial Officer of Ascend or settle any litigation or
arbitration proceeding involving out-of-pocket settlement payments of greater
than one million dollars ($1,000,000);
(p) make any loans to directors, officers or employees (other than pursuant
to contracts in existence prior to the date hereof);
(q) make any material changes in its Tax or (except as required by law)
accounting policies; or
(r) take, or agree in writing or otherwise to take, any of the actions
described in the foregoing clauses (a) through (q), or any action which is
reasonably likely to cause any of the conditions set forth in Section 7.2(a)
or Section 7.2(b) not to be satisfied.
Section 5.2 Covenants of Ascend. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, except as expressly contemplated by this
Agreement, Ascend agrees as to itself and its Subsidiaries (except to the
extent that Stratus shall otherwise consent in writing, which consent shall
not be unreasonably withheld), to carry on its business in the usual, regular
and ordinary course, in substantially the same manner as previously conducted
or as otherwise disclosed to Stratus prior to the date hereof, 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, except where the failure to do so could not
reasonably be expected to have an Ascend Material Adverse Effect, 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, in each case. Ascend shall promptly after
becoming aware thereof notify Stratus of any events or occurrences not in the
ordinary course of business of Ascend that would individually or in the
aggregate result in a breach of any representation, warranty, covenant or
agreement of Ascend set forth in this Agreement, which would cause any of the
conditions to Ascend's obligations to effect the Merger set forth in Article
VII not to be satisfied. Except as expressly contemplated by this Agreement or
as set forth in the Ascend Disclosure Schedule, Ascend shall not (and shall
not permit any of its Subsidiaries to), without the prior written consent of
Stratus which consent shall not be unreasonably withheld:
(a) 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 entered into prior to
the date hereof providing for the repurchase of shares in connection with any
termination of service by such party;
(b) amend or propose to amend its Certificate of Incorporation or Bylaws,
except as contemplated by this Agreement; or
A-22
<PAGE>
(c) take, or agree in writing or otherwise to take, any of the actions
described in the foregoing clauses (a) and (b), or any action which is
reasonably likely to cause any of the conditions set forth in Section 7.3(a)
or Section 7.3(b) not to be satisfied.
Section 5.3 Cooperation. Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Ascend and Stratus shall keep
the other apprised of the status of matters relating to the completion of the
transactions contemplated hereby, including promptly furnishing 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.
ARTICLE VI
Additional Agreements
Section 6.1 No Solicitation.
(a) Stratus agrees that, from and after the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement in
accordance with Section 8.1 it shall not, directly or indirectly, through any
officer, director, employee, representative, agent, or affiliate, (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, sale or purchase of substantial assets or stock, tender or
exchange offer, or other business combination or change in control or similar
transaction involving such party, other than the transactions contemplated or
permitted by this Agreement (any of the foregoing inquiries or proposals being
referred to in this Agreement as a "Competing Offer"), (ii) engage in
negotiations or discussions concerning, or provide any non-public information
to any person or entity relating to, any Competing Offer, or (iii) agree to,
accept, approve, recommend or consummate a Competing Offer; provided, however,
that nothing in this Section 6.1 shall prevent Stratus or its Board of
Directors from (A) furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Competing Offer by such person or entity or
recommending such an unsolicited bona fide written Competing Offer to the
stockholders of Stratus, if and only to the extent that (1) such Competing
Offer would, if consummated, result in a transaction that would, in the
reasonable good faith judgment of Stratus's Board of Directors, after
consultation with its financial advisors, be more favorable to Stratus's
stockholders from a financial point of view than the Merger and, in the
reasonable good faith judgment of Stratus's Board of Directors after
consultation with its financial advisors, the person or entity making such
Competing Offer appears to have the financial means, or the ability to obtain
the necessary financing, to conclude such transaction (any such Competing
Offer meeting such criteria being referred to in this Agreement as a "Superior
Proposal"), (2) the failure to take such action would, in the reasonable good
faith judgment of Stratus's Board of Directors after consultation with outside
corporate counsel, be contrary to the fiduciary duties of Stratus's directors
to Stratus's stockholders under applicable law, and (3) prior to furnishing
non-public information to, or entering into discussions or negotiations with,
such person or entity, Stratus's Board of Directors receives from such person
or entity an executed confidentiality agreement not materially less
restrictive to such person or entity than those contained in the Mutual
Nondisclosure and Confidentiality Agreement dated June 15, 1998 between Ascend
and Stratus (the "Confidentiality Agreement"); or (B) from accepting or
agreeing to a Superior Proposal or consummating a transaction contemplated by
a Superior Proposal (provided that Stratus has given notice as required by the
last sentence of Section 6.1(b); or (C) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to a Competing Offer.
(b) Stratus shall notify Ascend no later than twenty-four (24) hours after
receipt by Stratus (or its advisors), of any Competing Offer or any request
for nonpublic information in connection with a Competing Offer or for access
to the properties, books or records of Stratus by any person or entity that
informs such party that it is considering making, or has made, a Competing
Offer (the "Competing Offeror"). Such notice to Ascend shall be made orally
and in writing and shall indicate in reasonable detail the identity of the
Competing Offeror and the terms and conditions of such proposal, inquiry or
contact. Stratus shall notify Ascend of the occurrence and substance of any
discussions held with any such Competing Offeror within twenty-four (24) hours
of the
A-23
<PAGE>
occurrence of such discussions. Stratus shall notify Ascend at least forty-
eight (48) hours prior to accepting or agreeing to a Superior Proposal or
making any public announcement of its intention to do so or to recommend a
Superior Proposal to its stockholders or to withdraw its recommendation for
approval of the Merger or to engage in a Superior Proposal.
Section 6.2 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement, Ascend
shall prepare and file with the SEC the Registration Statement, and Stratus
shall prepare and file with the SEC the Proxy Statement. Ascend and Stratus
shall use all reasonable efforts to cause the Registration Statement to become
effective as soon after such filing as reasonably practicable. Unless the
Stratus Board of Directors determines in reasonable good faith after
consultation with outside corporate counsel that to do so would be contrary to
the fiduciary duties of the Stratus Board of Directors to Stratus's
stockholders under applicable law, the Proxy Statement shall include the
recommendation of the Board of Directors of Stratus in favor of approval and
adoption of this Agreement and the Merger.
(b) Ascend and Stratus shall each use all reasonable efforts to make all
necessary filings with respect to the Merger under the Securities Act and the
Exchange Act and applicable state securities laws and the rules and
regulations thereunder.
Section 6.3 Consents. Each of Ascend and Stratus shall use all reasonable
efforts to obtain all necessary consents, waivers and approvals under its
respective material agreements, contracts, licenses or leases required for the
consummation of the Merger and the other transactions contemplated by this
Agreement.
Section 6.4 Access to Information. Upon reasonable notice, Stratus shall
(and shall cause each of its Subsidiaries to) afford to the officers,
employees, accountants, financial advisors, counsel and other representatives
of Ascend, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and
records and all other information concerning its business, properties and
personnel as such other party may reasonably request and, during such period,
each of Stratus and Ascend shall (and shall cause each of its Subsidiaries to)
furnish promptly to the other a copy of each report, schedule, registration
statement and other document filed or received by it during such period
pursuant to the requirements of federal securities laws. Upon reasonable
notice, Ascend shall (and shall cause each of its Subsidiaries to) provide to
the officers, employees, accountants, financial advisors, counsel of Stratus
such information as may be reasonably requested by Stratus in order for the
Board of Directors of Stratus to satisfy its fiduciary duties pertaining to
this Agreement and the transactions contemplated hereby. Unless otherwise
required by law, the parties will hold all such information which is non-
public in confidence and shall treat such information as "Proprietary
Information" in accordance with the Confidentiality Agreement. No information
or knowledge obtained in any investigation pursuant to this Section 6.4 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 6.5 Stratus Stockholders Meeting. Stratus shall call and hold the
Stratus Stockholders Meeting as promptly as practicable after the date hereof
for the purpose of voting upon the adoption of this Agreement and the approval
of the Merger. Unless the Stratus Board of Directors determines in reasonable
good faith after consultation with outside corporate counsel that to do so
would be contrary to the fiduciary duties of the Stratus Board of Directors to
Stratus's stockholders under applicable law, Stratus's Board of Directors
shall recommend that Stratus stockholders vote in favor of the adoption of
this Agreement and the approval of the Merger and Stratus shall otherwise use
all reasonable efforts, including but not limited to hiring a proxy solicitor
and participating in presentations to stockholders, to obtain the requisite
approval of Stratus stockholders.
Section 6.6 Legal Conditions to Merger. Each of Ascend and Stratus shall
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on such party with respect to the Merger
(which actions shall include, without limitation, furnishing all information
required under the HSR Act and any applicable foreign antitrust laws and in
connection with approvals of or filings with any other
A-24
<PAGE>
Governmental Entity) and shall promptly cooperate with and furnish information
to each other in connection with any such requirements imposed upon either of
them or any of their Subsidiaries in connection with the Merger Each of Ascend
and Stratus shall, and shall cause its Subsidiaries to, take all reasonable
actions necessary to obtain (and shall cooperate with each other in obtaining)
any consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other third party, required to be obtained or made by
Stratus, Ascend or any of their Subsidiaries in connection with the Merger
(any of the foregoing, an "Approval") or the taking of any action required in
furtherance thereof or otherwise contemplated thereby or by this Agreement,
(i) diligently oppose or pursue any rehearing, appeal or other challenge which
may be available to it of any refusal to issue any Approval or of any order or
ruling of any Governmental Entity which may adversely affect the ability of
the parties hereto to consummate the Merger or to take any action contemplated
by any Approval or by this Agreement until such time as such refusal to issue
any Approval or any order or ruling has become final and non-appealable, and
(ii) diligently oppose any objections to, appeals from or petitions to
reconsider or reopen any Approval or the taking of any action contemplated
thereby or by this Agreement. Notwithstanding the foregoing, neither Ascend
nor Stratus shall be required to agree, as a condition to any Approval, to
divest itself or hold separate any Subsidiary, division or business unit, the
divestiture or holding separate of which would be reasonably likely (A) to
have an Ascend Material Adverse Effect, or (B) to impair in any material way
the benefits intended to be derived by Ascend after the Effective Time as a
result of the Merger.
Section 6.7 Public Disclosure. Ascend and Stratus shall consult with each
other before issuing any press release or otherwise making any public
statement with respect to the Merger or this Agreement and shall not issue any
such press release or make any such public statement prior to such
consultation, except as may be required by law or by the rules of the NASD or
the stock exchanges on which their respective securities are listed.
Section 6.8 Tax-Free Reorganization. Each of Ascend and Stratus shall and
shall cause its respective Subsidiaries to use its best efforts to cause the
Merger to be treated as a reorganization within the meaning of Section 368(a)
of the Code, and to obtain the opinion of its respective counsel contemplated
by Article VII. No party hereto, nor any Subsidiary thereof, shall take any
action that would cause the Merger not to qualify under Section 368(a) of the
Code, and the parties hereto shall, and shall cause their respective
Subsidiaries to take the position for all purposes that the Merger qualifies
as a reorganization under such Section of the Code.
Section 6.9 Affiliate Legends. Between the date of this Agreement and the
Effective Time, Ascend and Stratus shall, if requested, promptly provide each
other such information and documents as Ascend or Stratus shall reasonably
request for purposes of reviewing a list of each of its directors and
executive officers who may, in the reasonable judgment of Ascend and Stratus,
be deemed to be an "affiliate" of Ascend within the meaning of Rule 145
promulgated under the Securities Act ("Rule 145") (each such person so judged
to be an "affiliate" of Ascend or Stratus, is referred to herein as an
"Affiliate"). Ascend shall be entitled to place appropriate legends on the
certificates evidencing any Ascend Common Stock to be received by such
Affiliates of Stratus pursuant to this Agreement and to issue appropriate stop
transfer instructions to the transfer agent for the Ascend Common Stock,
consistent with the Securities Act and the rules and regulations of the SEC
thereunder.
Section 6.10 Nasdaq Quotation. Ascend shall use its best efforts to cause
the shares of Ascend Common Stock to be issued in the Merger to be approved
for quotation on The Nasdaq National Market, subject to official notice of
issuance, prior to the Effective Time.
Section 6.11 Stock Plans and Options.
(a) Stratus shall provide to each holder of an outstanding option to
purchase Stratus Common Stock (a "Stratus Option") under the Stratus Stock
Plans the notice (if any) required pursuant to such plans.
(b) From and after the Effective Time, each outstanding Stratus Option shall
be assumed by Ascend and shall be deemed to constitute an option to acquire,
on the same terms and conditions as were applicable under such Stratus Option,
the same number of shares of Ascend Common Stock as the holder of such Stratus
Option would have been entitled to receive in the Merger pursuant to this
Agreement had such holder exercised such
A-25
<PAGE>
option in full immediately prior to the Effective Time (rounded down to the
nearest whole number), at a price per share (rounded up to the nearest whole
cent) equal to the quotient of (i) the exercise price per share of Stratus
Common Stock pursuant to such Stratus Option divided by (ii) the Exchange
Ratio.
(c) As soon as practicable after the Effective Time, Ascend shall deliver to
the participants in the Stratus Stock Plan an appropriate notice setting forth
such participants' rights pursuant thereto and the grants pursuant to the
Stratus Stock Plans shall continue in effect on the same terms and conditions
(subject to the adjustments required by this Section 6.11 after giving effect
to the Merger). Ascend shall comply with the terms of the Stratus Stock Plans
and ensure, to the extent required by, and subject to the provisions of, such
plan, that Stratus Options which qualified as incentive stock options pursuant
to Section 422 of the Code prior to the Effective Time will continue to so
qualify after the Effective Time.
(d) Ascend shall take all corporate action necessary to reserve and make
available for issuance a sufficient number of shares of Ascend Common Stock
for delivery upon the exercise of the Stratus Options assumed in accordance
with this Section 6.11. As soon as practicable after the Effective Time, and
not more than ten (10) business days thereafter, Ascend shall file a
registration statement on Form S-8 (or any successor or other appropriate
form) with respect to the shares of Ascend Common Stock subject to the Stratus
Options assumed pursuant to this Section 6.11 and shall use its best efforts
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for as long as the Stratus Options remain outstanding. With
respect to those individuals, if any, who subsequent to the Merger will be
subject to the reporting requirements under Section 16(a) of the Exchange Act,
where applicable, Ascend shall administer Stratus Options assumed pursuant to
this Section 6.11 in a manner that complies with Rule 16b-3 promulgated under
the Exchange Act to the extent the Stratus Stock Plan complied with such rule
prior to the Merger.
Section 6.12 Brokers or Finders. Each of Ascend and Stratus 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 Morgan Stanley & Co., Incorporated, whose fees and expenses will be
paid by Stratus in accordance with Stratus's agreement with such firm, and
Salomon Smith Barney, whose fees and expenses will be paid by Ascend in
accordance with Ascend's agreement with such firm, and each of Ascend and
Stratus 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 any of its directors,
officers, employees or affiliates.
Section 6.13 Indemnification.
(a) Stratus 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, an officer or director of Stratus or any
of its Subsidiaries (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts that are paid in
settlement (provided, in the case of amounts paid in settlement, that such
amounts shall have been approved by the indemnifying party, which approval
shall not be unreasonably withheld), of or in connection with any claim,
action, demand, 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 Stratus or any of its 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 or settlement amounts 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 MBCL to indemnify its own
directors and officers, as the case may be. Stratus, Ascend and the Surviving
Corporation, as the case may be, shall pay expenses in advance of the final
disposition of any such claim, demand, action suit, proceeding or
A-26
<PAGE>
investigation to each Indemnified Party to the full extent permitted by law
upon receipt of any undertaking contemplated by Section 67 of the MBCL.
Without limiting the foregoing, in the event any such claim, action, suit,
proceeding or investigation is brought or asserted against any Indemnified
Party (whether arising before or after the Effective Time), (i) the
Indemnified Parties may retain counsel reasonably satisfactory to them and
Stratus (or them and Ascend and the Surviving Corporation after the Effective
Time), (ii) Stratus (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 upon
receipt of an undertaking by such person to repay such payment if it is
determined that such person is not entitled to indemnification hereunder, and
(iii) Stratus (or after the Effective Time, Ascend and the Surviving
Corporation) shall use all reasonable efforts to assist in the vigorous
defense of any such matter, provided that none of Stratus, 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 6.13, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Stratus, 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 6.13 except
to the extent such failure materially prejudices such party), and shall
deliver to Stratus (or after the Effective Time, Ascend and the Surviving
Corporation) the undertaking contemplated by Section 67 of the MBCL. 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.
(b) From and after the Effective Time, the Surviving Corporation and Ascend
shall fulfill, assume and honor in all respects the obligations of Stratus
pursuant to Stratus's Bylaws and any indemnification agreement between Stratus
and any of Stratus's directors and officers existing and in force as of the
date of this Agreement and filed as an exhibit to the Stratus SEC Reports.
Ascend and Stratus agree that the indemnification obligations set forth in
Stratus's Articles of Organization and Bylaws, in each case as of the date of
this Agreement, shall survive the Merger (and, as of or prior to the Effective
Time, Ascend shall cause the Bylaws of Sub to reflect such provisions) and
shall not be amended, repealed or otherwise modified for a period of six (6)
years after the Effective Time in any manner that would adversely affect the
rights thereunder of the Indemnified Parties.
(c) In the event Ascend or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any
other person and shall not be the continuing or surviving corporation or
entity in such consolidation or merger or (ii) transfers all or substantially
all its properties and assets to any person, then, and in each case, proper
provision shall be made so that the successors and assigns of Ascend or the
Surviving Corporation, as the case may be, honor the indemnification
obligations set forth in this Section 6.13.
(d) Ascend and the Surviving Corporation, shall, until the sixth anniversary
of the Effective Time or such earlier date as may be mutually agreed upon by
Ascend, the Surviving Corporation and the applicable Indemnified Party, cause
to be maintained in effect, to the extent available, the policies of
directors' and officers' liability insurance maintained by Stratus and its
Subsidiaries as of the date hereof (or policies of at least the same coverage
and amounts containing terms that are not less advantageous to the insured
parties) with respect to claims arising from facts or events that occurred on
or prior to the Effective Time, including without limitation all claims based
upon, arising out of, directly or indirectly resulting from, in consequence
of, or in any way involving the Merger and any and all related events. In lieu
of the purchase of such insurance by Ascend or the Surviving Corporation,
Stratus may purchase a six (6) year extended reporting period endorsement
("reporting tail coverage") under its existing directors' and liability
insurance coverage, provided that such reporting tail coverage shall extend
the director and officer liability coverage in force as of the date hereof for
a period of at least six (6) years from the Effective Time for any claims
based upon, arising out of, directly or indirectly resulting from, in
consequence of, or in any way involving wrongful acts or omissions occurring
on or prior to the Effective Time, including without limitation all claims
based upon, arising out of, directly or indirectly resulting from, in
consequence of, or in any way involving the Merger and any and all related
transactions or
A-27
<PAGE>
related events. In no event shall Ascend or the Surviving Corporation be
obligated to expend in order to maintain or procure insurance coverage
pursuant to this paragraph (d) any amount per year in excess of one hundred
fifty percent (150%) of the aggregate premiums paid by Stratus and its
Subsidiaries in the fiscal year ended for directors' and officers' liability
insurance.
(e) The obligations of Stratus, the Surviving Corporation and Ascend under
this Section 6.13 shall not be terminated or modified in such a manner as to
adversely affect any of the Indemnified Parties without the consent of such
Indemnified Party (it being expressly agreed that each such Indemnified Party
shall be a third party beneficiary of this Section 6.13).
Section 6.14 Employees.
(a) Ascend will, or will cause Stratus or the appropriate Subsidiary to give
individuals who are employed by Stratus or any of its Subsidiaries as of the
Effective Time and who remain employees of Stratus or such Subsidiary
following the Effective Time (each such employee, an "Affected Employee") full
credit for purposes of eligibility, vesting, benefit accrual and determination
of the level of benefits under any employee benefit plans or arrangements
maintained by Ascend, Stratus or any such Subsidiary for such Affected
Employees' service with Stratus or any affiliate thereof to the same extent
recognized immediately prior to the Effective Time.
(b) Ascend will, or will cause Stratus or the appropriate Subsidiary to (i)
waive all limitations as to pre-existing conditions exclusions and waiting
periods with respect to participation and coverage requirements applicable to
the Affected Employees under any welfare benefit plans that such employees may
be eligible to participate in after the Effective Time, other than limitations
or waiting periods that are already in effect with respect to such employees
and that have not been satisfied as of the Effective Time under any welfare
plan maintained for the Affected Employees immediately prior to the Effective
Time, and (ii) provide each Affected Employee with credit for any co-payments
and deductibles paid prior to the Effective Time in satisfying any applicable
deductible or out-of-pocket requirements under any welfare plans that such
employees are eligible to participate in after the Effective Time.
(c) As of the Effective Time, Ascend shall expressly assume and agree to
perform in accordance with their terms, all employment, severance and other
compensation agreements then existing between Stratus or any Subsidiary with
any director, officer or employee thereof.
(d) Notwithstanding the foregoing, Ascend agrees to provide or to cause the
Surviving Corporation to provide Affected Employees, for a period of one year
following the Effective Time, with employee benefit plans or arrangements,
including the Stratus severance plan and policy, that are, in the aggregate,
not less favorable than those provided to Affected Employees immediately prior
to the Effective Time. Ascend agrees to provide Affected Employees with a
written description of such plans and arrangements promptly following the
Effective Time.
(e) Commencing on the first anniversary of the Effective Time (unless Ascend
consents to an earlier commencement date), the Affected Employees shall be
eligible to participate in Ascend's employee benefit plans and arrangements in
which similarly situated employees of Ascend or affiliates of Ascend
participate, to the same extent as such similarly situated employees of Ascend
or affiliates of Ascend.
Section 6.15 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 actions and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, subject to the appropriate vote of the
stockholders of Stratus described in Section 3.4, including cooperating fully
with the other party, including by provision of information and making all
necessary filings under the HSR Act and any foreign antitrust laws. If 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.
A-28
<PAGE>
Section 6.16 Certain Director and Officer Appointments. Ascend and the
Ascend Board of Directors of Ascend shall take all action required to cause
the election promptly after the Effective Time by the Ascend Board of Paul
Severino to the Ascend Board and the appointment of Bruce Sachs as Executive
Vice President of Carrier Signalling and Management of Ascend.
Section 6.17 Stratus's Rights Agreement. Stratus covenants and agrees with
Ascend that Stratus shall not (i) make any modifications to the Rights
Agreement, except such modifications made in furtherance of or in connection
with the transactions contemplated hereby, nor (ii) take any action which
would in either case cause Ascend to be deemed to be an "Acquiring Person" or
an "Adverse Person" under the Rights Agreement or cause the Rights Agreement
to apply to Ascend or the transactions contemplated by this Agreement. Stratus
agrees to take such actions as are required to prevent the Rights Agreement
and the provisions thereof from applying to Ascend or the transactions
contemplated by this Agreement and to prevent Ascend from being treated as an
"Acquiring Person" or an "Adverse Person" under the Rights 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) Stockholder Approvals. This Agreement and the Merger shall have been
adopted and approved by the requisite vote of holders of Stratus Common Stock
pursuant to the MBCL and the Articles of Organization of Stratus.
(b) HSR Act. The waiting periods applicable to the consummation of the
Merger under the HSR Act and all applicable foreign laws (if any) shall have
expired or been terminated, and no action by the Department of Justice or
Federal Trade Commission or any foreign Governmental Entity challenging or
seeking to enjoin the consummation of the Merger shall have been instituted
and be pending.
(c) Approvals. All authorizations, consents, order or approvals of, or
declarations or filings with any Governmental Entity required to consummate
the transactions contemplated by this Agreement, the absence or nonoccurrence
of which would be reasonably likely to have an Ascend Material Adverse Effect
or a Stratus Material Adverse Effect, to impair the benefits intended to be
derived by Ascend after the Effective Time from the Merger, or to limit or
restrict the operation of the business of Ascend on Stratus after the
Effective Time.
(d) Registration Statement; State Securities Laws. 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, and
Ascend shall have received all permits and other authorizations required under
applicable state securities laws for the issuance of shares of Ascend Common
Stock pursuant to the Merger.
(e) 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 conduct or operation of the business of Ascend or Stratus
after the Effective Time 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 any action have been taken or any statute, rule, regulation or order
have been enacted, entered or enforced or be deemed applicable to the Merger
which makes the consummation of the Merger illegal or prevents or prohibits
the Merger.
(f) Nasdaq. The shares of Ascend Common Stock to be issued in the Merger
shall have been approved for quotation on The Nasdaq National Market.
A-29
<PAGE>
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 or waiver of each of the following conditions, any of which may
be waived in writing exclusively by Ascend and Sub:
(a) Representations and Warranties. The representations and warranties of
Stratus set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties expressly speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date, except (i) for
changes contemplated by this Agreement or (ii) where the failure to be true
and correct could not reasonably be expected to have a Stratus Material
Adverse Effect or a material adverse effect upon the parties' ability to
consummate the Merger in accordance with this Agreement, and Ascend shall have
received a certificate signed on behalf of Stratus by the chief executive
officer or chief financial officer of Stratus to such effect. For purposes of
this Section 7.2(a), no "Stratus Material Adverse Effect" shall be deemed to
have occurred with respect to breaches of the representations and warranties
of Stratus in Section 3.8 unless such breaches involve claims against or
liability of Stratus or any of its Subsidiaries for Taxes in an aggregate
amount in excess of the amount set forth in Schedule 7.2(a).
(b) Performance of Obligations. Stratus 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 Stratus by the chief executive officer or chief financial
officer of Stratus to such effect.
(c) Rights Plan. The provisions of the Rights Plan shall not apply to Ascend
or the Merger and all rights issued thereunder shall have been canceled or
redeemed or shall be converted in accordance with Article II of this
Agreement.
(d) Tax Opinion. Ascend shall have received an opinion of Gray Cary Ware &
Freidenrich LLP, tax counsel to Ascend, dated as of the Effective Time, to the
effect that the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code. The issuance of such opinion shall be conditioned
upon the receipt by such tax counsel of representation letters from each of
Stratus, Sub and Ascend, in each case, in form and substance reasonably
satisfactory to such tax counsel. The specific provisions of each such
representation letter shall be in form and substance reasonably satisfactory
to such tax counsel, and each such representation letter shall be dated on or
before the date of such opinion and shall not have been withdrawn or modified
in any material respect.
Section 7.3 Additional Conditions to Obligations of Stratus. The obligation
of Stratus to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
Stratus:
(a) Representations and Warranties. The representations and warranties of
Ascend and Sub set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the extent
such representations and warranties expressly speak as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, except (i)
for changes contemplated by this Agreement or (ii) where the failure to be
true and correct could not reasonably be expected to have an Ascend Material
Adverse Effect or a material adverse effect upon the parties' ability to
consummate the Merger in accordance with this Agreement, and Stratus shall
have received a certificate signed on behalf of Ascend by the chief executive
officer or chief financial officer of Ascend to such effect.
(b) Performance of 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 Stratus shall have received a
certificate signed on behalf of Ascend by the chief executive officer or chief
financial officer of Ascend to such effect.
(c) Tax Opinion. Stratus shall have received an opinion of Skadden, Arps,
Slate, Meagher & Flom LLP, tax counsel to Stratus, dated as of the Effective
Time, to the effect that the Merger will qualify as a reorganization
A-30
<PAGE>
within the meaning of Section 368(a) of the Code. The issuance of such opinion
shall be conditioned upon the receipt by such tax counsel of representation
letters from each of Ascend, Sub and Stratus, in each case, in form and
substance reasonably satisfactory to such tax counsel. The specific provisions
of each such representation letter shall be in form and substance reasonably
satisfactory to such tax counsel, and each such representation letter shall be
dated on or before the date of such opinion and shall not have been withdrawn
or modified in any material respect.
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(h),
by written notice by the terminating party to the other party), whether before
or after approval of the matters presented in connection with the Merger by
the stockholders of Stratus:
(a) by mutual written consent of Ascend and Stratus; or
(b) by either Ascend or Stratus if the Merger shall not have been
consummated by January 31, 1999 (provided, however, that the right to
terminate this Agreement under this Section 8.1(b) 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
(c) by either Ascend or Stratus if a court of competent jurisdiction or
other Governmental Entity shall have issued a final order, decree or ruling,
or taken any other action, having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, and all appeals with respect to
such order, decree, ruling or action have been exhausted or the time for
appeal of such order, decree, ruling or action shall have expired (provided,
however, that the right to terminate this Agreement under this Section 8.1(c)
shall not be available to any party which has not complied with its
obligations under Section 6.6); or
(d) by either Ascend or Stratus if, at the Stratus Stockholders Meeting
(including any adjournment or postponement thereof), the requisite vote of
Stratus stockholders in favor of this Agreement and approval of the Merger
shall not have been obtained; or
(e) by Ascend if (i) the Board of Directors of Stratus shall have withdrawn
or modified its recommendation of this Agreement or the Merger in a manner
adverse to Ascend or shall have resolved or publicly announced or disclosed
its intention to do so; or (ii) the Board of Directors of Stratus shall have
recommended a Superior Proposal to the stockholders of Stratus or shall have
resolved or publicly announced its intention to recommend or accept a Superior
Proposal; or (iii) a tender offer or exchange offer which if completed would
result in the ownership by any person and such person's affiliates of fifty
percent (50%) or more of the outstanding shares of Stratus Common Stock shall
have been commenced and the Board of Directors of Stratus shall have filed a
Statement on Form 14D-9 recommending acceptance of such tender or exchange
offer or shall have resolved or publicly announced its intention to recommend
acceptance of such tender or exchange offer; or
(f) by Ascend if a breach of any representation, warranty, covenant or
agreement on the part of Stratus set forth in this Agreement shall have
occurred which if uncured would cause any condition set forth in Section
7.2(a) or Section 7.2(b) not to be satisfied, and such breach is incapable of
being cured or, if capable of being cured, shall not have been cured within
twenty (20) business days following receipt by Stratus of written notice of
such breach from Ascend; or
(g) by Stratus if it shall have accepted, approved or resolved to accept or
approve a Superior Proposal in compliance with the terms of Section 6.1; or
(h) by Stratus, if a breach of any representation, warranty, covenant or
agreement on the part of Ascend set forth in this Agreement shall not have
occurred which if uncured would cause any condition set forth in Section
A-31
<PAGE>
7.3(a) or Section 7.3(b) not to be satisfied, and such breach is incapable of
being cured or, if capable of being cured, shall not have been cured within
twenty (20) business days following receipt by Ascend of written notice of
such breach from Stratus.
Section 8.2 Effect of Termination. In the event of any termination of this
Agreement pursuant to Section 8.1, there shall be no liability or obligation
on the part of Ascend, Stratus, Sub, or any of their respective officers,
directors, stockholders or Affiliates, except as set forth in Section 8.3. The
foregoing limitations shall not apply to the extent that such termination
results from the willful breach by a party of any of its representations,
warranties, covenants or agreements in this Agreement. The provisions of
Section 6.15 and Section 8.3 of this Agreement and the Confidentiality
Agreement shall remain in full force and effect and survive any termination of
this Agreement.
Section 8.3 Fees and Expenses.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such expenses, whether or not the Merger
is consummated; provided, however, that Ascend and Stratus shall share equally
all fees and expenses, other than attorneys' and accounting fees and expenses,
incurred in relation to the printing and filing of the Proxy Statement
(including any related preliminary materials) and the Registration Statement
(including financial statements and exhibits) and any amendments or
supplements thereto and the fee(s) required to be paid in connection with the
filing(s) required under the HSR Act and applicable foreign laws (if any) in
connection with the transactions contemplated by this Agreement.
(b) If this Agreement is terminated (i) by Ascend pursuant to Section
8.1(e), or (ii) by Stratus pursuant to Section 8.1(g), or (iii) by Stratus or
Ascend pursuant to Section 8.1(d) as a result of the failure to obtain the
requisite vote for adoption of this Agreement and approval of the Merger by
the stockholders of Stratus and (in the case of clause (iii)) (x) at the time
of such failure an Alternative Transaction involving Stratus shall have been
announced or publicly proposed and (y) within one year of such failure Stratus
or its Board of Directors accepts, recommends or enters into or announces any
definitive or preliminary agreement or letter of intent with respect to an
Alternative Transaction, amends or otherwise takes action under the Rights
Agreement which has the effect of rendering the Rights Agreement inapplicable
to an Alternative Transaction, or redeems the Rights so as to facilitate an
Alternative Transaction, or an Alternative Transaction is consummated, Stratus
shall pay to Ascend a termination fee of $36,759,995 (the "Termination Fee").
The Termination Fee shall be paid in cash by wire transfer of immediately
available funds to an account designated by Ascend and shall be payable: (x)
in the case of termination by Stratus pursuant to Section 8.1(g), prior to and
as a condition precedent to the effectiveness of such termination; (y) in the
case of termination by Ascend pursuant to Section 8.1(e), promptly after such
termination; and (z) in the case of termination by Stratus or Ascend pursuant
to Section 8.1(d) in the circumstances set forth in clause (iii) of the
preceding sentence, not later than the earliest such time as (A) Stratus or
its Board of Directors accepts, recommends or enters into or announces any
definitive or preliminary agreement or letter of intent with respect to such
Alternative Transaction, amends or otherwise takes action under the Rights
Agreement which has the effect of rendering the Rights Agreement inapplicable
to such Alternative Transaction, or redeems the Rights so as to facilitate
such Alternative Transaction, or (B) an Alternative Transaction is
consummated.
(c) As used in this Agreement, an "Alternative Transaction" with respect to
Stratus means (i) a transaction or series of transactions pursuant to which
any person or group (as such term is defined under the Exchange Act), other
than Ascend or Sub, or any affiliate thereof (a "Third Party"), acquires (or
would acquire upon completion of such transaction or series of transactions)
more than fifty percent (50%) of the equity securities or voting power of
Stratus or any of its material subsidiaries, pursuant to a tender offer or
exchange offer or otherwise, (ii) a merger, consolidation, share exchange or
other business combination involving Stratus or any of its material
Subsidiaries pursuant to which any Third Party acquires ownership (or would
acquire ownership upon consummation of such merger, consolidation, share
exchange or other business combination) of more than fifty percent (50%) of
the outstanding equity securities or voting power of Stratus or any of its
material Subsidiaries
A-32
<PAGE>
or of the entity surviving such merger or business combination or resulting
form such consolidation, or (iii) any other transaction or series of
transactions pursuant to which any Third Party acquires (or would acquire upon
completion of such transaction or series of transactions) control of assets of
Stratus or any of its material Subsidiaries (including, for this purpose,
outstanding equity securities of Subsidiaries of Stratus) having a fair market
value equal to more than fifty percent (50%) of the fair market value of all
the consolidated assets of Stratus immediately prior to such transaction or
series of transactions.
(d) If any fee or expense due hereunder is not timely paid, the defaulting
party shall pay the costs and expenses (including reasonable documented legal
fees and expenses) in connection with any action, including the filing of any
lawsuit or other legal action, taken to collect payment, together with
interest on the amount of any unpaid fee at the publicly announced prime rate
of Citibank, N.A. from the date such fee was required to be paid.
Section 8.4 Amendment. 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 stockholders of Stratus, but, after any such approval, no
amendment shall be made which by law requires further approval by such
stockholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 8.5 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
Miscellaneous
Section 9.1 Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Closing and
the Effective Time, except for the agreements contained in Section 1.3
(Effects of the Merger), Section 1.4 (Directors and Officers), Section 2.1
(Conversion of Capital Stock), Section 2.2 (Exchange of Certificates), Section
6.11 (Stock Plans and Options), Section 6.13 (Indemnification), Section 8.2
(Effect of Termination), Section 8.3 (Fees and Expenses), this Article IX, and
any other agreement contemplated by this Agreement which, by its terms, does
not terminate until a later date. The Confidentiality Agreement shall survive
the execution and delivery of this Agreement.
Section 9.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or mailed by registered or certified mail (return receipt
requested) 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: Frances M. Jewels, Esq.
Vice President & General Counsel
Facsimile No.: (510) 747-6621 and (978) 692-1221
A-33
<PAGE>
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301
Attention: Rod J. Howard, Esq.
Facsimile No.: (650) 327-3699
(b) if to Stratus, to
Stratus Computer, Inc.
55 Fairbanks Blvd.
Marlboro, Massachusetts 01752
Attention: Eileen Casal, Esq.
Vice President & General Counsel
Facsimile No.: (508) 229-0714
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, Massachusetts 02108
Attention: David T. Brewster, Esq.
Facsimile No.: (617) 573-4822
Section 9.3 Interpretation. When a reference is made in this Agreement to an
Article or a Section, such reference shall be to an Article or a Section of
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include," "includes" or "including" are used in this Agreement they
shall be deemed to be followed by the words "without limitation." The phrase
"made available" in this Agreement shall mean that the information referred to
has been 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 August 3, 1998. In determining whether a Stratus
Material Adverse Effect or an Ascend Material Adverse Effect exists: (a)
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 (b) none of the factors set forth on
Schedule 9.3.1 hereof shall be deemed by itself or by themselves, either alone
or in combination, to constitute a Stratus Material Adverse Effect and none of
the factors set forth on Schedule 9.3.2 hereof shall be deemed by itself or by
themselves, either alone or in combination, to constitute an Ascend Material
Adverse Effect. Reference to a party's "knowledge" means (a) in the case of
Stratus, the actual knowledge of the persons identified in Schedule 9.3.3 and
(b) in the case of Ascend, the actual knowledge of the persons identified in
Schedule 9.3.4.
Section 9.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two 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 9.5 Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein) (a)
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, and (b) except as provided in Section 6.13 is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
Section 9.6 Governing Law. This Agreement shall be governed and construed in
accordance with the internal laws of the State of Delaware without regard to
conflicts of law rules thereof except that the MBCL
A-34
<PAGE>
shall, to the extent applicable, govern the procedures to be taken hereunder
to effect the Merger. Each party hereto consents and submits to the
jurisdiction of the courts of the State of Delaware and the courts of the
United States located in such state for the adjudication of any action, suit,
proceeding, claim or dispute arising out of or otherwise relating to this
Agreement.
Section 9.7 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, and any attempted assignment thereof without
such consent shall be null and void. 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.
IN WITNESS WHEREOF, Ascend, Sub and Stratus have caused this Agreement to be
signed under seal by their respective officers thereunto duly authorized as of
the date first written above.
Stratus Computer, Inc. Ascend Communications, Inc.
/s/ Bruce I. Sachs /s/ Mory Ejabat
By: _________________________________ By: _________________________________
Bruce I. Sachs Mory Ejabat
Name: _______________________________ Name: _______________________________
Title: President Title: Chief Executive Officer
/s/ Maurice L. Castonguay Wildcard Merger Corporation
By: _________________________________
Maurice L. Castonguay /s/ Mory Ejabat
Name: _______________________________ By: _________________________________
Mory Ejabat
Name: _______________________________
Title: Assistant Treasurer Title: President
/s/ Michael F. G. Ashby
By: _________________________________
Michael F. G. Ashby
Name: _______________________________
Title: Treasurer
A-35
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
SECTION
-------------
<S> <C>
Affected Employee................................................ 6.14(a)
Affiliate........................................................ 3.14(a) & 6.9
Agreement........................................................ Preamble
Alternative Transaction.......................................... 8.3(c)
Approval......................................................... 6.6
Ascend........................................................... Preamble
Ascend Balance Sheet............................................. 4.5(a)
Ascend Common Stock.............................................. 2.1(c)
Ascend Disclosure Schedule....................................... IV
Ascend Financial Statements...................................... 4.5(a)
Ascend Material Adverse Effect................................... IV
Ascend Option Plans.............................................. 4.3(a)
Ascend Ascend Preferred Stock.................................... 4.3(a)
Ascend Purchase Plan............................................. 4.3(a)
Ascend SEC Reports............................................... 4.5(a)
Closing.......................................................... 1.2
Closing Date..................................................... 1.2
Code............................................................. Recitals
Competing Offer.................................................. 6.1(a)
Competing Offeror................................................ 6.1(b)
Confidentiality Agreement........................................ 6.1(a)
Constituent Corporations......................................... 1.3
Dissenting Shares................................................ 2.3(a)
DOL.............................................................. 3.14(a)
Effective Rate................................................... 3.9(q)
Effective Time................................................... 1.1
Employee......................................................... 3.14(a)
Employee Agreement............................................... 3.14(a)
Environmental Laws............................................... 3.13(l)
Environmental Permits............................................ 3.13(e)
ERISA............................................................ 3.14(a)
Exchange Act..................................................... 3.4(c)
Exchange Agent................................................... 2.2(a)
Exchange Fund.................................................... 2.2(a)
Exchange Ratio................................................... 2.1(c)
Governmental Entity.............................................. 3.4(c)
Hazardous Material............................................... 3.13(k)
Hazardous Material Handling...................................... 3.13(b)
Hazardous Material Product Activities............................ 3.13(d)
HSR Act.......................................................... 3.4(c)
Indemnified Parties.............................................. 6.13(a)
Indemnified Liabilities.......................................... 6.13(a)
International Employee Plan...................................... 3.14(a)
IRS.............................................................. 3.14(a)
Proxy Statement.................................................. 3.14(a)
Joint Venture.................................................... 3.2(b)
Liens............................................................ 3.8(h)
MBCL............................................................. 1.1
Merger........................................................... 1.1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECTION
--------
<S> <C>
Multiemployer Plan.................................................... 3.14(a)
NASD.................................................................. 3.5(a)
PBGC.................................................................. 3.14(a)
Pension Plan.......................................................... 3.14(a)
Proxy Statement....................................................... 3.18
Registration Statement................................................ 3.18
Returns............................................................... 3.8(b)
Right................................................................. 2.1(b)
Rights Agreement...................................................... 3.4(b)
Rule 145.............................................................. 6.9
SEC................................................................... 3.4(c)
Securities Act........................................................ 3.4(c)
Stratus............................................................... Preamble
Stratus Balance Sheet................................................. 3.5(b)
Stratus Certificate................................................... 2.2(b)
Stratus Certificates.................................................. 2.2(b)
Stratus Common Stock.................................................. 2.1(b)
Stratus Disclosure Schedule........................................... III
Stratus Employee Plan................................................. 3.14(a)
Stratus Financial Statements.......................................... 3.5(b)
Stratus Intellectual Property Rights.................................. 3.10(a)
Stratus Junior Common Stock........................................... 3.3(a)
Stratus Material Adverse Effect....................................... III
Stratus Material Contracts............................................ 3.11
Stratus Option........................................................ 6.11
Stratus SEC Reports................................................... 3.4(c)
Stratus Stockholders Meeting.......................................... 3.18
Stratus Stock Plans................................................... 2.1(d)
Sub................................................................... Preamble
Sub Common Stock...................................................... 2.1(a)
Subsidiary............................................................ 3.2(b)
Superior Proposal..................................................... 6.1(a)
Surviving Corporation................................................. 1.3
Tax................................................................... 3.8(a)
Taxes................................................................. 3.8(a)
Third Party........................................................... 8.3(c)
U.S. GAAP............................................................. 3.5(b)
USTs.................................................................. 3.13(a)
</TABLE>
<PAGE>
ANNEX B
August 2, 1998
Board of Directors
Stratus Computer, Inc.
55 Fairbanks Boulevard
Marlboro, MA 01752
Members of the Board:
We understand that Stratus Computer, Inc. ("Stratus" or the "Company"),
Ascend Communications, Inc. ("Ascend" or the "Buyer") and Wildcard Merger
Corporation, a wholly owned subsidiary of Ascend ("Acquisition Sub"), propose
to enter into an Agreement and Plan of Merger substantially in the form of the
draft dated August 2, 1998 (the "Merger Agreement"), which provides, among
other things, for the merger (the "Merger") of Acquisition Sub with and into
Stratus. Pursuant to the Merger, the Company will become a wholly owned
subsidiary of Ascend and each outstanding share of common stock, par value of
$0.01 per share, of Stratus ("Stratus Common Stock"), other than shares held
in treasury or by the Company or Buyer or any other wholly owned subsidiary of
the Company or Buyer or as to which dissenters' rights have been perfected,
shall be converted into the right to receive 0.75 shares (the "Exchange
Ratio") of common stock, par value $0.001 per share, of Ascend ("Ascend Common
Stock"). 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
shares of Stratus Common Stock (other than Ascend or any wholly owned
subsidiary of Ascend).
For purposes of the opinion set forth herein, we have:
(1) reviewed certain publicly available financial statements and other
information of Stratus and Ascend, respectively;
(2) reviewed certain internal financial statements and other financial
and operating data concerning Stratus prepared by the management of
Stratus;
(3) analyzed certain financial projections prepared by the management of
Stratus;
(4) discussed the past and current operations and financial condition and
the prospects of Stratus, including information relating to certain
strategic, financial and operational benefits from the Merger, with senior
executives of Stratus;
(5) discussed the past and current operations and financial condition and
the prospects of Ascend, including information relating to certain
strategic, financial and operational benefits from the Merger, with senior
executives of Ascend;
(6) reviewed the pro forma impact of the Merger on Ascend's earnings per
share and other financial ratios;
(7) reviewed the reported prices and trading activity for Stratus Common
Stock and Ascend Common Stock;
(8) discussed with the senior managements of Stratus and Ascend certain
research analyst projections for Stratus and Ascend, respectively;
(9) compared the financial performance of Stratus and Ascend and the
prices and trading activity of Stratus Common Stock and Ascend Common Stock
with that of certain publicly-traded companies and their securities;
(10) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
B-1
<PAGE>
Board of Directors
August 2, 1998
Page 2
(11) participated in discussions and negotiations among representatives
of Stratus and Ascend and their financial and legal advisors;
(12) reviewed the Merger Agreement; and
(13) performed such other analyses as we have deemed appropriate.
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, including the
information relating to certain strategic, financial and operational benefits
anticipated to result from the Merger provided by Stratus and Ascend, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the prospects of Stratus and
Ascend, respectively. In addition, we have assumed that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement,
including, among other things, that the Merger will be treated as a tax-free
reorganization and/or exchange, each pursuant to the Internal Revenue Code of
1986. We have not made any independent valuation or appraisal of the assets or
liabilities of the Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on financial, 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 the Company
in connection with this transaction and will receive a fee for our services.
In the past, Morgan Stanley & Co. Incorporated and its affiliates have
provided financial advisory and financing services for the Company and the
Buyer and their affiliates, and have received fees for the rendering of these
services.
It is understood that this letter is for the information of the Board of
Directors of Stratus and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by Stratus in respect of the transaction with the
Securities and Exchange Commission. In addition, this opinion does not in any
manner address the prices at which Ascend Common Stock will trade following
the consummation of the Merger and Morgan Stanley expresses no opinion or
recommendation as to how the stockholders of Stratus should vote at the
stockholders' meeting held in connection with the Merger.
Based on 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 shares of Stratus Common Stock
(other than Ascend or any wholly owned subsidiary of Ascend).
Very truly yours,
Morgan Stanley & Co. Incorporated
/s/ Cordell G. Spencer
By: _________________________________
Cordell G. Spencer
Principal
B-2
<PAGE>
ANNEX C
SECTIONS 85 THROUGH 98
INCLUSIVE
OF THE
MASSACHUSETTS BUSINESS CORPORATION LAW
Section 85. Dissenting Stockholder; Right to Demand Payment for Stock;
Exception. A stockholder in any corporation organized under the laws of
Massachusetts which shall have duly voted to consolidate or merge with another
corporation or corporations under the provisions of sections seventy-eight or
seventy-nine who objects to such consolidation or merger may demand payment
for his stock from the resulting or surviving corporation and an appraisal in
accordance with the provisions of sections eighty-six to ninety-eight,
inclusive, and such stockholder and the resulting or surviving corporation
shall have the rights and duties and follow the procedure set forth in those
sections. This section shall not apply to the holders of any shares of stock
of a constituent corporation surviving a merger if, as permitted by subsection
(c) of section seventy-eight, the merger did not require for its approval a
vote of the stockholders of the surviving corporation.
Section 86. Selections Applicable to Appraisal; Prerequisites. If a
corporation proposes to take a corporate action as to which any section of
this chapter provides that a stockholder who objects to such action shall have
the right to demand payment for his shares and an appraisal thereof, sections
eighty-seven to ninety-eight, inclusive, shall apply except as otherwise
specifically provided in any section of this chapter. Except as provided in
sections eighty-two and eighty-three, no stockholder shall have such right
unless (1) he files with the corporation before the taking of the vote of the
shareholders on such corporate action, written objection to the proposed
action stating that he intends to demand payment for his shares if the action
is taken and (2) his shares are not voted in favor of the proposed action.
Section 87. Statement of Rights of Objecting Stockholders in Notice of
Meeting; Form. The notice of the meeting of stockholders at which the approval
of such proposed action is to be considered shall contain a statement of the
rights of objecting stockholders. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock, and the directors may authorize the inclusion in any
such notice of a statement of opinion by the management as to the existence or
non-existence of the right of the stockholders to demand payment for their
stock on account of the proposed corporate action. The notice may be in such
form as the directors or officers calling the meeting deem advisable, but the
following form of notice shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting
and effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in
writing from the corporation (or, in the case of a consolidation or merger,
the name of the resulting or surviving corporation shall be inserted),
within twenty days after the date of mailing to him of notice in writing
that the corporate action has become effective, payment for his shares and
an appraisal of the value thereof. Such corporation and any such
stockholder shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of
the General Laws of Massachusetts."
Section 88. Notice of Effectiveness of Action Objected to. The corporation
taking such action, or in the case of a merger or consolidation the surviving
or resulting corporation, shall, within ten days after the date on which such
corporate action became effective, notify each stockholder who filed a written
objection meeting the requirements of section eighty-six and whose shares were
not voted in favor of the approval of such action, that the action approved at
the meeting of the corporation of which he is a stockholder has become
effective. The giving of such notice shall not be deemed to create any rights
in any stockholder receiving the same to demand payment for his stock. The
notice shall be sent by registered or certified mail, addressed to the
stockholder at his last known address as it appears in the records of the
corporation.
C-1
<PAGE>
Section 89. Demand for Payment; Time for Payment. If within twenty days
after the date of mailing of a notice under subsection (e) of section eighty-
two, subsection (f) of section eighty-three, or section eighty-eight any
stockholder to whom the corporation was required to give such notice shall
demand in writing from the corporation taking such action, or in the case of a
consolidation or merger from the resulting or surviving corporation, payment
for his stock, the corporation upon which such demand is made shall pay to him
the fair value of his stock within thirty days after the expiration of the
period during which such demand may be made.
Section 90. Demand for Determination of Value; Bill in Equity; Venue. If
during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county
where the corporation in which such objecting stockholder held stock had or
has its principal office in the commonwealth.
Section 91. Parties to Suit to Determine Value; Service. If the bill is
filed by the corporation, it shall name as parties respondent all stockholders
who have demanded payment for their shares and with whom the corporation has
not reached agreement as to the value thereof. If the bill is filed by a
stockholder, he shall bring the bill in his own behalf and in behalf of all
other stockholders who have demanded payment for their shares and with whom
the corporation has not reached agreement as to the value thereof, and service
of the bill shall be made upon the corporation by subpoena with a copy of the
bill annexed. The corporation shall file with its answer a duly verified list
of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to
each stockholder party to the bill by registered or certified mail, addressed
to the last known address of such stockholder as shown in the records of the
corporation, and the court may order such additional notice by publication or
otherwise as it deems advisable. Each stockholder who makes demand as provided
in section eighty-nine shall be deemed to have consented to the provisions of
this section relating to notice, and the giving of notice by the corporation
to any such stockholder in compliance with the order of the court shall be a
sufficient service of process on him. Failure to give notice to any
stockholder making demand shall not invalidate the proceedings as to other
stockholders to whom notice was properly given, and the court may at any time
before the entry of a final decree make supplementary orders of notice.
Section 92. Decree Determining Value and Ordering Payment; Valuation
Date. After hearing the court shall enter a decree determining the fair value
of the stock of those stockholders who have become entitled to the valuation
of and payment for their shares, and shall order the corporation to make
payment of such value, together with interest, if any, as hereinafter
provided, to the stockholders entitled thereto upon the transfer by them to
the corporation of the certificates representing such stock if certificated
or, if uncertificated, upon receipt of an instruction transferring such stock
to the corporation. For this purpose, the value of the shares shall be
determined as of the day preceding the date of the vote approving the proposed
corporate action and shall be exclusive of any element of value arising from
the expectation or accomplishment of the proposed corporate action.
Section 93. Reference to Special Master. The court in its discretion may
refer the bill or any question arising thereunder to a special master to hear
the parties, make findings and report the same to the court, all in accordance
with the usual practice in suits in equity in the superior court.
Section 94. Notation on Stock Certificates Of Pendency Of Bill. On motion
the court may order stockholder parties to the bill to submit their
certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in
its records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
C-2
<PAGE>
Section 95. Costs; Interest. The costs of the bill, including the reasonable
compensation and expenses of any master appointed by the court, but exclusive
of fees of counsel or of experts retained by any party, shall be determined by
the court and taxed upon the parties to the bill, or any of them, in such
manner as appears to be equitable, except that all costs of giving notice to
stockholders as provided in this chapter shall be paid by the corporation.
Interest shall be paid upon any award from the date of the vote approving the
proposed corporate action, and the court may on application of any interested
party determine the amount of interest to be paid in the case of any
stockholder.
Section 96. Dividends And Voting Rights After Demand For Payment. Any
stockholder who has demanded payment for his stock as provided in this chapter
shall not thereafter be entitled to notice of any meeting of stockholders or
to vote such stock for any purpose and shall not be entitled to the payment of
dividends or other distribution on the stock (except dividends or other
distributions payable to stockholders of record at a date which is prior to
the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation, or
in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to
and an acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
Section 97. Status Of Shares Paid For. The shares of the corporation paid
for by the corporation pursuant to the provisions of this chapter shall have
the status of treasury stock, or in the case of a consolidation or merger the
shares or the securities of the resulting or surviving corporation into which
the shares of such objecting stockholder would have been converted had he not
objected to such consolidation or merger shall have the status of treasury
stock or securities.
Section 98. Exclusive Remedy; Exception. The enforcement by a stockholder of
his right to receive payment for his shares in the manner provided in this
chapter shall be an exclusive remedy except that this chapter shall not
exclude the right of such stockholder to bring or maintain an appropriate
proceeding to obtain relief on the ground that such corporate action will be
or is illegal or fraudulent as to him.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
indemnification of officers, directors and other corporate agents under
certain circumstances and subject to certain limitations. Registrant's
Certificate of Incorporation and Bylaws provide that the Registrant shall
indemnify its directors, officers, employees and agents to the full extent
permitted by the DGCL, including in circumstances in which indemnification is
otherwise discretionary under such law. In addition, with the approval of the
Board of Directors and the stockholders, the Registrant has entered into
separate indemnification agreements with its directors, officers and certain
employees which require the Registrant, among other things, to indemnify them
against certain liabilities which may arise by reason of their status or
service (other than liabilities arising from willful misconduct of a culpable
nature) and to obtain directors' and officers' insurance, if available on
reasonable terms.
These indemnification provisions may be sufficiently broad to permit
indemnification of the Registrant's officers, directors and other corporate
agents for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act of 1933.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
The Registrant has obtained liability insurance for the benefit of its
directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 3, 1998 by and
among Ascend Communications, Inc., Wildcard Merger Corporation and
Stratus Computer, Inc. (included as Annex A to the Prospectus).
3.1 Registrant's Certificate of Incorporation.(1)
3.2 Registrant's Bylaws.(2)
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
8.1 Form of Opinion of Gray Cary Ware & Freidenrich LLP, as to tax
matters.
8.2 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, as to
tax matters.
21.1 List of Significant Subsidiaries.(3)
23.1 Consent of Ernst & Young LLP, Independent Auditors (Walnut Creek).
23.2 Consent of Ernst & Young LLP, Independent Auditors (Boston).
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit
5.1).
23.5 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit
8.1).
23.6 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 8.2).
23.7 Consent of Morgan Stanley & Co. Incorporated.
24.1 Power of Attorney.(4)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
99.1 Opinion of Morgan Stanley & Co. Incorporated (included as Annex B to
the Prospectus).
99.2 Form of Proxy of Stratus Computer, Inc.
</TABLE>
- --------
(1) Incorporated by reference from Ascend's Form 10-Q for the quarter ended
June 30, 1996.
(2) Incorporated by reference from Ascend's Registration Statement (No. 33-
77146), effective May 12, 1994.
(3) Incorporated by reference from Ascend's Form 10-K for the year ended
December 31, 1997.
(4) Included in previous filing of this Registration Statement on Form S-4.
ITEM 22. UNDERTAKINGS
(1) Ascend hereby undertakes as follows: that prior to any public reoffering
of the securities registered hereunder through use of a prospectus which is a
part of this Prospectus/Proxy Statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), Ascend undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
Items of the applicable form.
(2) Ascend undertakes that every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Prospectus/Proxy Statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) Ascend hereby undertakes to respond to requests for information that is
incorporated by reference into the Prospectus/Proxy Statement pursuant to
Items 4, 10(b), 11 or 13 of this Form S-4, within one business day of receipt
of such request and to send the incorporated documents by first class mail or
other equally prompt means. This includes information in documents filed
subsequent to the effective date of the Prospectus/Proxy Statement through the
date of responding to the request.
(4) Ascend hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Proxy Statement/Prospectus when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Ascend
pursuant to the foregoing provisions, or otherwise, Ascend has been advised
that in the opinion of the commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by Ascend of expenses incurred or paid by a director, officer
or controlling person of Ascend in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Ascend will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(6) Ascend hereby undertakes to remove from registration by means of a post-
effective amendment any of the Ascend Common Stock being registered which
remain unsold at the termination of the offering.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF
ALAMEDA, STATE OF CALIFORNIA, ON THE 9TH DAY OF SEPTEMBER, 1998.
Ascend Communications, Inc.
/s/ Michael F.G. Ashby
By: __________________________________
MICHAEL F.G. ASHBY
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE 9TH DAY OF SEPTEMBER,
1998.
SIGNATURE TITLE
President and Chief Executive
Mory Ejabat* Officer (Principal Executive
- ------------------------------------ Officer)
(MORY EJABAT)
/s/ Michael F.G. Ashby Executive Vice President, Chief
- ------------------------------------ Financial Officer (Principal
(MICHAEL F.G. ASHBY) Financial and Accounting Officer)
Director
Reed E. Hundt*
- ------------------------------------
(REED E. HUNDT)
Director
Betsy S. Atkins*
- ------------------------------------
(BETSY S. ATKINS)
Director
Robert K. Dahl*
- ------------------------------------
(ROBERT K. DAHL)
Director
Roger L. Evans*
- ------------------------------------
(ROGER L. EVANS)
Director
C. Richard Kramlich*
- ------------------------------------
(C. RICHARD KRAMLICH)
Director
James P. Lally*
- ------------------------------------
(JAMES P. LALLY)
Director
Martin L. Schoffstall*
- ------------------------------------
(MARTIN L. SCHOFFSTALL)
*By: /s/ Michael F.G. Ashby
---------------------------------
MICHAEL F.G. ASHBY,
ATTORNEY-IN-FACT
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 3, 1998 by and
among Ascend Communications, Inc., Wildcard Merger Corporation and
Stratus Computer, Inc. (included as Annex A to the Prospectus).
3.1 Registrant's Certificate of Incorporation.(1)
3.2 Registrant's Bylaws.(2)
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
8.1 Form of Opinion of Gray Cary Ware & Freidenrich LLP, as to tax
matters.
8.2 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, as to
tax matters.
21.1 List of Significant Subsidiaries.(3)
23.1 Consent of Ernst & Young LLP, Independent Auditors (Walnut Creek).
23.2 Consent of Ernst & Young LLP, Independent Auditors (Boston).
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit
5.1).
23.5 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit
8.1).
23.6 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 8.2).
23.7 Consent of Morgan Stanley & Co. Incorporated.
24.1 Power of Attorney.(4)
99.1 Opinion of Morgan Stanley & Co. Incorporated (included as Annex B to
the Prospectus).
99.2 Form of Proxy of Stratus Computer, Inc.
</TABLE>
- --------
(1) Incorporated by reference from Ascend's Form 10-Q for the quarter ended
June 30, 1996.
(2) Incorporated by reference from Ascend's Registration Statement (No. 33-
77146), effective May 12, 1994.
(3) Incorporated by reference from Ascend's Form 10-K for the year ended
December 31, 1997.
(4) Included in previous filing of this Registration Statement on Form S-4.
<PAGE>
[GRAY CARY WARE FREIDENRICH LLP
LETTERHEAD APPEARS HERE]
EXHIBIT 5.1
September 8, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
RE: ASCEND COMMUNICATIONS, INC.
REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-4 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of 20,000,000 shares of Common Stock, par value
$.001 per share (the "Shares"), of Ascend Communications, Inc. (the "Company").
We have acted as counsel for the Company in connection with the issuance of
the Shares pursuant to an Agreement and Plan of Merger (the "Merger Agreement"),
dated as of August 3, 1998, by and among the Company, Wildcard Merger
Corporation, and Stratus Computer, Inc. We have examined signed copies of the
Registration Statement and all exhibits thereto (including, but not limited to,
the Merger Agreement), all as filed with the Commission. In such examinations,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to original documents
of all documents submitted to us as conformed or photostatic copies. We have
also examined such corporate records, certificates and other documents and have
made such other factual and legal investigations as we have deemed relevant and
necessary as the basis for the opinions hereinafter expressed.
Based upon the foregoing, we are of the opinion that the Shares to be
issued pursuant to the Merger Agreement are duly authorized by the Company and,
when issued in accordance with the terms of the Merger Agreement, will be
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever it appears in the
Registration Statement and in the related Proxy Statement, as originally filed
or as amended or supplemented.
<PAGE>
GRAY CARY WARE & FREIDENRICH LLP
Securities and Exchange Commission
September 8, 1998
Page Two
This opinion is to be used only in connection with the issuance of the
Shares while the Registration Statement is in effect.
Very truly yours,
/s/ Gray Cary Ware & Freidenrich LLP
- ------------------------------------
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
[GRAY CARY WARE FREIDENRICH LLP
LETTERHEAD APPEARS HERE]
EXHIBIT 8.1
September 8, 1998
Ascend Communications, Inc.
One Ascend Plaza
1701 Harbor Bay Parkway
Alameda, CA 94502
Ladies and Gentlemen:
We have acted as legal counsel to Ascend Communications, Inc., a Delaware
corporation ("Ascend") in connection with (i) the preparation and execution of
the Agreement and Plan of Merger dated August 3, 1998 (the "Merger Agreement")
by and among Ascend, Wildcard Merger Corporation, a Delaware corporation and a
wholly-owned subsidiary of Ascend ("Sub") and Stratus Computer, Inc., a
Massachusetts corporation ("Stratus"); and (ii) the preparation and filing of a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), which includes the Proxy Statement
of Stratus and the Prospectus of Ascend (the "Proxy Statement/Prospectus").
Pursuant to the Merger Agreement, Sub will merge with and into Stratus (the
"Merger"). Unless otherwise defined, capitalized terms referred to herein have
the meanings set forth in the Merger Agreement.
In connection with rendering this opinion, we have examined the Merger
Agreement, the Proxy Statement/Prospectus, and such other documents and
corporate records as we have deemed necessary or appropriate in order to enable
us to render the opinion below. For purposes of this opinion, we have assumed
(i) the validity and accuracy of the documents and corporate records that we
have examined and the facts and representations concerning the Merger that have
come to our attention during our engagement and (ii) that the Merger will be
consummated in the manner described in the Merger Agreement and the Proxy
Statement/Prospectus.
Subject to the foregoing and the fact that the discussion in the Proxy
Statement/Prospectus under the heading "THE MERGER - Certain United States
Federal Income Tax Consequences of the Merger" (the "Discussion") is a summary
and does not purport to discuss all possible United States federal income tax
consequences of the Merger, we are of the opinion that, based on the assumptions
and qualifications set forth in the Discussion, the Discussion sets forth the
material United States federal income tax consequences of the Merger to
<PAGE>
Gray Cary Ware Freidenrich LLP
Ascend Communications, Inc.
September 8, 1998
Page 2
holders of Stratus Common Stock who exchange such stock for Ascend Common Stock
pursuant to the Merger Agreement. This opinion addresses only the Discussion. We
express no opinion as to the United States federal, state, local, foreign or
other tax consequences of the Merger, other than as set forth in the Discussion.
There can be no assurances that the opinion expressed herein will be accepted by
the Internal Revenue Service ("IRS") or, if challenged, by a court.
In rendering this opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing judicial
decisions, administrative regulations, published rulings and procedures, and
such other authorities as we have considered relevant. Each of those
authorities is subject to change at any time, possibly with retroactive effect.
A change in the authorities or the accuracy or completeness of any of the
information, documents, corporate records, covenants, statements,
representations or assumptions upon which our opinion is based could adversely
affect the accuracy of our conclusions set forth in the Discussion. In
addition, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof, our opinion might be
adversely affected and may not be relied upon. This opinion is expressed as of
the date hereof, and we are under no obligation and do not undertake any
responsibility to supplement or revise our opinion to reflect (i) any changes
(including changes that have retroactive effect) in applicable law, in the
material terms of the Merger Agreement, any other relevant document or corporate
record; (ii) any facts which arise after the date of this opinion; or (iii) if
any covenant, statement, representation, or assumption upon which we have relied
in delivering this opinion becomes untrue or incorrect.
This opinion has been delivered to you solely for use in connection with
the Merger, as described in the Merger Agreement and the Proxy
Statement/Prospectus, and is not to be used, circulated, quoted or otherwise
referred to for any other purpose without our express written permission. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name wherever appearing in the Registration
Statement, including the Proxy Statement/Prospectus constituting a part thereof,
and any amendments thereto. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Securities Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Gray Cary Ware & Freidenrich LLP
-------------------------------------
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP]
September 9, 1998
Stratus Computer, Inc.
55 Fairbanks Boulevard
Marlborough, Massachusetts 01752
Ladies and Gentlemen:
We have acted as counsel to Stratus Computer, Inc., a Massachusetts
corporation ("Stratus"), in connection with (i) the Merger, as defined and
described in the Agreement and Plan of Merger, dated as of August 3, 1998 (the
"Merger Agreement"), by and among Stratus, Ascend Communications Inc., a
Delaware corporation ("Ascend"), and Wildcard Merger Corporation, a Delaware
corporation and a wholly-owned subsidiary of Ascend ("Sub"), and (ii) the
preparation and filing of the Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), on September 9, 1998 (the "Registration Statement"), which includes the
Proxy Statement of Stratus and the Prospectus of Ascend (the "Proxy
Statement/Prospectus"). Unless otherwise indicated, each capitalized term used
herein has the meaning ascribed to it in the Merger Agreement.
<PAGE>
Stratus Computer, Inc.
September 9, 1998
Page 2
In connection with this opinion, we have examined the Merger
Agreement, the Proxy Statement/Prospectus, and such other documents and
corporate records as we have deemed necessary or appropriate in order to enable
us to render the opinion below. For purposes of this opinion, we have assumed
(i) the validity and accuracy of the documents and corporate records that we
have examined and the facts and representations concerning the Merger that have
come to our attention during our engagement and (ii) that the Merger will be
consummated in the manner described in the Merger Agreement and the Proxy
Statement/Prospectus.
Subject to the foregoing and the fact that the discussion in the Proxy
Statement/Prospectus under the heading "THE MERGER-Certain United States
Federal Income Tax Consequences of the Merger" (the "Discussion") is a summary
and does not purport to discuss all possible United States federal income tax
consequences of the Merger, we are of the opinion that, based on the assumptions
and qualifications set forth in the Discussion, the Discussion sets forth the
material United States federal income tax consequences of the Merger to holders
of Stratus Common Stock who exchange such stock for Ascend Common Stock pursuant
to the Merger Agreement. In addition, we express no opinion as to the United
States federal, state, local, foreign or other tax consequences of the Merger,
other than as set forth in the Discussion. Further, there can be no assurances
that the opinion expressed herein will be accepted by the Internal Revenue
Service (the "IRS") or, if challenged, by a court. This opinion is delivered in
accordance with the requirements of Item 601(b)(8) of Regulation S-K under the
Securities Act.
In rendering our opinion, we have considered the applicable provisions
of the Code, Treasury Department regulations promulgated thereunder, pertinent
judicial authorities, interpretive rulings of the IRS, and such other
authorities as we have considered relevant. It should be noted that statutes,
regulations, judicial decisions, and administrative interpretations are subject
to change at any time, possibly with retroactive effect. A change in the
authorities or the accuracy or completeness of any of the information,
documents, corporate records, covenants, statements, representations, or
assumptions on which our opinion is based could
<PAGE>
Stratus Computer, Inc.
September 9, 1998
Page 3
affect our conclusions. This opinion is expressed as of the date hereof, and we
are under no obligation to supplement or revise our opinion to reflect any
changes (including changes that have retroactive effect) (i) in applicable law
or (ii) in any information, document, corporate record, covenant, statement,
representation, or assumption stated herein that becomes untrue or incorrect.
This letter is furnished to you solely for use in connection with the
Merger, as described in the Merger Agreement and the Proxy Statement/Prospectus,
and is not to be used, circulated, quoted, or otherwise referred to for any
other purpose without our express written permission. In accordance with the
requirements of Item 601(b)(23) of Regulation S-K under the Securities Act, we
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm name under the headings "SUMMARY -
Certain United States Federal Income Tax Consequences of the Merger" and "THE
MERGER-Certain United States Federal Income Tax Consequences of the Merger" in
the Proxy Statement/Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Securities Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
EXHIBIT 23.1
ASCEND COMMUNICATIONS, INC.
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 22, 1998, incorporated by reference in the
Proxy Statement of Stratus Computer, Inc. that is made a part of the
Registration Statement (Form S-4) and related Prospectus of Ascend
Communications, Inc. for the registration of shares of its common stock in
connection with its merger with Stratus Computer, Inc.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
August 21, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus/Proxy Statement of
Ascend Communications, Inc. and Stratus Computer, Inc. for the registration of
shares of Ascend Communications, Inc. common stock and to the incorporation by
reference therein of our reports dated January 21, 1998, with respect to the
consolidated financial statements of Stratus Computer, Inc. incorporated by
reference in its Annual Report (Form 10-K) for the year ended December 28,
1997 and the related financial statement schedule included therein, filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
August 21, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
of Ascend Communications, Inc. (the "Company") on Form S-4 of our report dated
January 22, 1997, except for Note M as to which the date is March 30, 1997, on
our audits of the consolidated financial statements and our report dated
January 22, 1997 on our audits of the consolidated financial statement
schedule of Cascade Communications Corp. as of December 31, 1996, and for the
years ended December 31, 1996 and 1995, which reports are included in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1997.
We also consent to the reference to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 21, 1998
<PAGE>
EXHIBIT 23.7
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
August 18, 1998
Ascend Communications, Inc.
1701 Harbor Bay Parkway
Alameda, CA 94502
Dear Sirs:
We hereby consent to the inclusion in the Registration Statement of Ascend
Communications, Inc. ("Ascend") on Form S-4, with respect to the shares of
common stock, par value $0.001 per share of Ascend, of our opinion letter
appearing as Annex B to the Proxy Statement-Prospectus which is a part of the
Registration Statement, and to references to our firm name therein. In giving
such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations adopted by the Securities and
Exchange Commission thereunder nor do we admit that we are experts with
respect to any part of such Registration Statement within the meaning of the
term "experts" as used in the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Cordell G. Spencer
-----------------------------------
<PAGE>
EXHIBIT 99.2
DETACH HERE
PROXY
STRATUS COMPUTER, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 19, 1998
The undersigned, having received the Notice of Special Meeting and the Board
of Directors' Proxy Statement, hereby appoints Alexander V. d'Arbeloff,
William E. Foster, Robert M. Morrill, Paul J. Ferri, Gardner C. Hendrie, Candy
M. Obourn, Bruce I. Sachs and Paul J. Severino, and each of them, attorneys
and proxies for the undersigned (with full power of substitution) to attend
the above Special Meeting and all adjournments thereof (the "Stratus Special
Meeting") and to act for and to vote all shares of Stratus Computer, Inc.
("Stratus") standing in the name of the undersigned at the Meeting to be held
on October 19, 1998 at 2:00 p.m., local time, at Stratus' offices at 55
Fairbanks Boulevard, Marlborough, Massachusetts.
When properly executed, this proxy will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy
will grant authority to vote "FOR" Proposal 1 on the reverse side, and in
their discretion on any other business matters or proposals as may properly
come before the Stratus Special Meeting.
SEE REVERSE SIDE. IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF
DIRECTORS' RECOMMENDATIONS, JUST SIGN ON THE REVERSE SIDE. YOU NEED NOT MARK
ANY BOXES.
----------------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SIDE
----------------
<PAGE>
DETACH HERE
[X] PLEASE MARK VOTES AS IN
THIS EXAMPLE
1. Proposal to approve and adopt the Agreement and Plan of Merger, dated as
of August 3, 1998 (the "Merger Agreement"), by and among Ascend
Communications, Inc. ("Ascend"), Wildcard Merger Corporation, a wholly owned
subsidiary of Ascend ("Sub"), and Stratus, pursuant to which Sub will merge
with and into Stratus and Stratus will survive the Merger (the "Merger") as a
wholly owned subsidiary of Ascend. In the Merger, holders of outstanding
shares of common stock, par value $.01 per share, of Stratus ("Stratus Common
Stock") will receive 0.75 of a share of common stock, par value $.001 per
share, of Ascend for each share of Stratus Common Stock held by them.
[_] [_] [_]
FOR AGAINST ABSTAIN
2. To consider and act upon such other business matters or proposals as may
properly come before the Meeting.
[_] [_] [_]
FOR AGAINST ABSTAIN
MARK HERE FOR ADDRESS [_] CHANGE AND NOTE AT LEFT
Please sign exactly as name appears
hereon. Joint owners should each
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such.
-------------------------------------
SIGNATURE
-------------------------------------
DATE
-------------------------------------
SIGNATURE
-------------------------------------
DATE
