<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1996
REGISTRATION NO. 333-05243
===============================================================================
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INTERLINK COMPUTER SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA (PRIOR TO
REINCORPORATION)
DELAWARE (AFTER 7373 94-2990567
REINCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION NUMBER)
OR ORGANIZATION)
INTERLINK COMPUTER SCIENCES, INC.
47370 FREMONT BOULEVARD, FREMONT, CALIFORNIA 94538
(510) 657-9800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CHARLES W. JEPSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERLINK COMPUTER SCIENCES, INC.
47370 FREMONT BOULEVARD, FREMONT, CALIFORNIA 94538
(510) 657-9800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
THOMAS C. DEFILIPPS, ESQ. THOMAS A. BEVILACQUA, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION ONE MARKET
650 PAGE MILL ROAD SPEAR STREET TOWER
PALO ALTO, CALIFORNIA 94304 SAN FRANCISCO, CALIFORNIA 94105
(415) 493-9300 (415) 442-0900
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (2) OFFERING PRICE (2) FEE (3)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value.. 3,105,000 shares (1) $15.00 $46,575,000 $16,060.34
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 405,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a).
(3) A registration fee of $17,448.28 was previously paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 22, 1996
2,700,000 SHARES
[LOGO OF INTERLINK COMPUTER SCIENCES]
COMMON STOCK
------------
Of the 2,700,000 shares of Common Stock offered hereby, 2,200,000 shares are
being sold by the Company and 500,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $13.00 and $15.00 per share. See "Underwriting"
for a discussion of factors to be considered in determining the initial public
offering price. The Company's Common Stock has been approved for listing on the
Nasdaq National Market under the symbol "INLK."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............ $ $ $ $
- ------------------------------------------------------------------------------
Total (3)............ $ $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated to be
$1,000,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 405,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See "Underwriting."
------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that the certificates for the shares of Common Stock
will be available for delivery at the offices of Volpe, Welty & Company, One
Maritime Plaza, San Francisco, California, on or about , 1996.
------------
VOLPE, WELTY & COMPANY________________________________PUNK, ZIEGEL & KNOELL
, 1996
<PAGE>
ENTERPRISE CLIENT/SERVER MODEL
Many large organizations are integrating their mainframe computers into their
distributed client/server networks as "enterprise servers." The enterprise
server and the systems management applications associated with its use are
capable of providing reliable and efficient systems management, data security,
and distribution of data and applications.
Centralized
Computing
Resources
Depiction of a three tier computing environment comprised of enterprise
servers, distributed servers and clients, all linked by common networked
transport.
Distributed
Processing
Systems
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
[GATEFOLD]
INTERLINK'S ENTERPRISE SOLUTIONS
Interlink offers a suite of high-performance network transport
products and systems management applications. The network
transport products provide the communication infrastructure
between distributed networks and the enterprise server.
Interlink's systems management applications allow centralized
management of applications and data across distributed systems.
Enterprise Print Services manages
TCPaccess is a network transport the printing of enterprise server
product which connects the MVS applications to network printers
enterprise server to client/server
networks using open systems TCP/IP
protocols
HARBOR Distributed Storage Server HARBOR Backup efficiently
allows local backup and restore on backs up and restores data on
the network with control over client/server networks to an
transmission and security enterprise server
HARBOR Distribution manages the
cataloging, installation, and up-
grading of applications, data files
and software packages across the
enterprise
Depiction of a three tier enterprise server environment comprised of network
systems management, HARBOR Distributed Storage Servers and HARBOR client
software, all linked by TCPaccess and TCP/IP.
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under
the caption "Risk Factors," which would cause actual results to differ
materially from those indicated by such forward-looking statements. The
following summary is qualified in its entirety by the more detailed information
and financial statements, including notes thereto, appearing elsewhere in this
Prospectus.
THE COMPANY
Interlink Computer Sciences, Inc. ("Interlink" or the "Company") is a
supplier of high-performance solutions for enterprise networked systems
management. Interlink provides software and services which enable customers to
use their IBM and IBM-compatible MVS mainframes as "enterprise servers" in
distributed, heterogeneous client/server network environments. The Company's
products and services enable customers to transport, access and manage mission-
critical data and applications across distributed network environments. The
Company develops and markets network transport products which provide for
enterprise server TCP/IP connectivity, fault tolerance and network file
transfer. Interlink also develops and markets systems management applications
for network backup, archive and restore, distribution of applications, data and
software, network printing and other tools which expand the functionality of
the enterprise server.
Many large organizations depend on centralized mainframe computer systems to
manage mission-critical software applications and to serve as the repository
for essential business data. Recently, advances in hardware, software and
networking technologies have led to the deployment of client/server systems, in
which computing tasks are distributed throughout a network of computers.
Organizations are now seeking the technology to integrate mainframe computers
into client/server networks as "enterprise servers" which, like other servers
on the client/server network, have a specialized purpose and function.
Specifically, the enterprise server and the systems management applications
associated with its use are capable of providing reliable and efficient systems
management, data security, and distribution of data and applications.
Improvements in the cost-effectiveness of mainframe systems have significantly
increased the use of mainframe computers as enterprise servers.
With almost ten years of experience in the enterprise networked systems
management industry, Interlink provides networking solutions that build upon
its expertise in the integration of the MVS operating system with TCP/IP and
its reputation for high-performance, efficient products. Interlink's objective
is to become the leading supplier of high-performance solutions for enterprise
networked systems management. Key elements of the Company's strategy include:
supplying a suite of products that expand the functionality of the enterprise
server; capitalizing on new sales and cross-selling opportunities resulting
from its recent acquisition; employing a consultative sales approach to build
long-term customer relationships; differentiating its networking solutions
through superior customer support; and leveraging strategic marketing and
development relationships in order to provide complete solutions to its
customers' evolving network systems management needs.
As of June 30, 1996, the Company had approximately 1,200 customers worldwide.
The Company markets and sells its software and services primarily through its
direct sales organization in North America and Europe and, to a lesser extent,
through resellers and international distributors. The Company's major customers
include, among others, the Internal Revenue Service, MACIF, U.S. Sprint,
W.R. Grace & Co. and Wells Fargo Bank.
The Company recently formed a strategic relationship with Legato Systems,
Inc. ("Legato") to develop products which will enable the companies to provide
enterprise-class storage management solutions. Pursuant to the terms of the
agreement, Interlink intends to develop a new product called HARBOR Agent for
Networker (Legato's client/server storage management product) which will be
distributed by Legato. Interlink will be an authorized reseller of Legato's
storage management products, including HARBOR Agent for Networker.
On December 29, 1995, the Company acquired New Era Systems Services Ltd.
("New Era") and its HARBOR systems management product line in exchange for cash
and notes payable totaling $12.4 million and warrants to purchase 350,000
shares of its Common Stock with additional contingent earnout payments totaling
up to $5.2 million due January 31, 1997 and 1998. Prior to the acquisition, the
Company distributed the HARBOR products in certain countries in Europe for more
than one year.
Interlink was incorporated under the laws of the state of California in
December 1985. The Company will reincorporate in Delaware prior to the
completion of this offering. Unless the context otherwise requires, references
in this Prospectus to "Interlink" and the "Company" refer to Interlink Computer
Sciences, Inc., a California corporation, and its Delaware successor, together
with their subsidiaries. The Company's principal executive offices are located
at 47370 Fremont Boulevard, Fremont, California 94538, and its telephone number
is (510) 657-9800.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company............. 2,200,000 shares
Common Stock Offered by the Selling Stockhold-
ers............................................ 500,000 shares
Common Stock Outstanding after the Offering..... 5,987,019 shares (1)
Use of Proceeds................................. For repayment of
indebtedness, capital
expenditures, working capital
and other general corporate
purposes.
Nasdaq National Market symbol................... INLK
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR
YEAR ENDED JUNE 30, ACQUISITION (2)
---------------------------------------- ---------------
YEAR ENDED
1992 1993 1994 1995 1996 JUNE 30, 1996
------- ------- ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............... $23,326 $21,185 $21,875 $27,079 $34,002 $36,491
Gross profit........... 16,995 17,119 18,065 20,470 25,995 28,197
Purchased research and
development and prod-
uct amortization...... -- -- -- -- 10,479 642
Operating income
(loss)................ (4,935) 2,167 844 104 (6,995) 3,757
Net income (loss)...... (5,864) 2,902 1,667 1,647 (7,616) 2,765
======= ======= ======= ======= ======= =======
Net income (loss) per
share (3)............. $ (5.47) $ 1.17 $ 0.44 $ 0.34 $ (2.44) $ 0.56
======= ======= ======= ======= ======= =======
Shares used in per
share calculation (3). 1,073 2,474 3,808 4,814 3,127 4,954
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
AS
ACTUAL ADJUSTED (4)
------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................ $(6,371) $19,523
Total assets............................................. 25,925 51,819
Long-term debt, less current portion..................... 2,892 1,142
Total stockholders' equity (deficit)..................... (4,585) 23,059
</TABLE>
- -------
(1) Represents shares outstanding as of June 30, 1996. Reflects the issuance of
74,167 shares of Common Stock immediately subsequent to the offering upon
the net exercise of certain outstanding warrants and excludes as of June
30, 1996: (i) options outstanding to purchase up to 1,018,503 shares of
Common Stock at a weighted average exercise price of $1.82 per share under
the Company's 1992 Stock Option Plan; (ii) 399,644 shares of Common Stock
issuable upon exercise of warrants outstanding at a weighted average
exercise price of $3.08 per share; and (iii) 870,463 shares of Common Stock
reserved for issuance under the Company's 1992 Stock Option Plan, 850,000
shares of which are subject to stockholder approval. See "Management--Stock
Plans," "Description of Capital Stock" and Note 7 of Notes to Consolidated
Financial Statements. Also excludes, subject to stockholder approval,
350,000 shares reserved prior to June 30, 1996 and an additional 300,000
shares reserved subsequent to June 30, 1996 for issuance under the
1992 Stock Option Plan, the 1996 Director Option Plan and the 1996 Employee
Stock Purchase Plan.
(2) Pro forma to give effect to the Company's acquisition of New Era Systems
Services Ltd. in December 1995 as if such acquisition had taken place as of
July 1, 1995. See Notes 1 and 2 of Notes to Unaudited Pro Forma Combined
Condensed Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of the computation of net income (loss) per share.
(4) Adjusted to reflect the sale of the 2,200,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $14.00 per share, and after deducting underwriting discounts and
commissions and the estimated expenses of the offering, and the anticipated
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
--------------
Enterprise Print Services, SNS and the Interlink logo are registered
trademarks of the Company and TCPaccess, TCPaccess Fault Tolerant, Interlink
3762 Network Controller, SNS/NFS, SNS/TCPaccess, Interlink 3700 Series Network
Controller, CICS Programmers Toolkit, HARBOR and the HARBOR logo are trademarks
of the Company. This Prospectus also contains trademarks and tradenames of
other companies.
--------------
Except as otherwise indicated, all information contained in this Prospectus
(i) assumes that the Underwriters' over-allotment option is not exercised, (ii)
reflects an increase in the authorized shares of Common Stock to 25,000,000
shares which will occur prior to this offering, (iii) reflects the one-for-two
reverse stock split of the Company's capital stock which will occur prior to
this offering, (iv) gives effect to the reincorporation of the Company from
California to Delaware which will occur prior to this offering, (v) reflects
the conversion of all outstanding shares of Preferred Stock into 1,229,714
shares of Common Stock, which will occur automatically upon the closing of this
offering, (vi) reflects the filing, upon the closing of this offering, of the
Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of
undesignated Preferred Stock, and (vii) reflects the issuance of 151,166 shares
upon the net exercise of outstanding warrants, including the reduction of an
outstanding warrant to purchase 75,000 shares to 62,500 shares, which will both
occur upon the closing of this offering. See "Description of Capital Stock,"
"Underwriting" and Note 7 of Notes to Consolidated Financial Statements.
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. The following factors should be carefully considered in
evaluating the Company and its business before purchasing the Common Stock
offered hereby.
COMPETITION
General. The market in which the Company operates is intensely competitive
and is characterized by extreme price competition and rapid technological
change. The competitive factors influencing the markets for the Company's
products include product performance, price, reliability, features,
scalability, interoperability across multiple platforms, adherence to industry
standards, and the provision of support and maintenance services. The Company
competes with a number of companies, principally International Business
Machines Corp. ("IBM"), that specialize in one or more of the Company's
product lines, and such competitors may have greater financial, technical,
sales and marketing resources to devote to the development, promotion and sale
of their products, and may have longer operating histories, greater name
recognition, and greater market acceptance for their products and services
compared to those of the Company. There can be no assurance that the Company's
current competitors or any new market entrants will not develop networked
systems management products or other technologies that offer significant
performance, price or other advantages over the Company's technologies, the
occurrence of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Network Transport Products. The Company sells its TCPaccess suite of
products principally to customers who have installed IBM mainframes using the
MVS operating system. The Company's main competition for its TCPaccess
products is IBM. IBM sells TCP/IP and associated products for its MVS
mainframe systems that compete directly with the Company's TCPaccess product
line. IBM has continued to enhance the functionality and performance of its
TCP/IP product, which enhancements may require the Company to update its
TCPaccess product to remain competitive. There can be no assurance that the
Company will be able to make the improvements in its TCPaccess product
necessary to remain competitive with IBM or that any such improvements by IBM
would not have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, IBM recently released its
OS/390 operating system, which includes TCP/IP communications software in a
bundle of software provided to purchasers of OS/390. An IBM customer can
request to have the IBM TCP/IP product removed from the software bundle
provided by IBM and thereby reduce the purchase price of the system purchased.
The reduction in the purchase price related to the exclusion of IBM's TCP/IP
for MVS product from its software bundle, in certain model groups, is
substantially lower than the price the customer would have to pay to purchase
the Company's corresponding TCPaccess product. Because in some IBM model
groups IBM's TCP/IP product is less expensive to purchase than the Company's
corresponding TCPaccess products in the same model groups, there could be
substantial erosion of the Company's margins if the Company reduces the price
of its TCPaccess products in order to compete against IBM, which erosion would
have a material adverse effect on the Company's business, financial condition
and results of operations. Also, IBM could in the future decide to include its
TCP/IP product in the bundle of software provided to purchasers of its OS/390
operating system without charge. The Company believes that any reduction in
price of the IBM TCP/IP products, or the bundling of those products without
charge in its OS/390 operating system, would require the Company to either
reduce the prices of its TCPaccess products or substantially increase sales
and marketing expenses, or both, in order to continue to sell its TCPaccess
products, which actions would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, if IBM
were to develop or design its OS/390 operating system or other products so
that its TCP/IP product cannot be removed, customers who otherwise would have
been inclined to purchase the Company's TCPaccess product may not do so, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company derives a
substantial portion of its revenues from maintenance agreements with its
TCPaccess customers. If the Company sells fewer TCPaccess products, either due
to competition from IBM or otherwise, the Company's maintenance revenues would
be reduced, which would have a material adverse
5
<PAGE>
effect on the Company's business, financial condition and results of
operations. If IBM reduces the combined price of its TCP/IP products and
maintenance, IBM's combined price for its TCP/IP products and maintenance would
be more price competitive with the Company's product line, and the Company's
product and maintenance revenues would be adversely affected. The Company also
competes with IBM, Apertus Technologies Inc. ("Apertus"), Cisco Systems, Inc.,
Computerm Corporation ("Computerm"), Network Solutions, Inc. and Memorex Telex
Corp. ("Memorex") in the network controller market, where the Company resells
the network controller manufactured by Bus-Tech Inc. ("Bus-Tech"), a division
of Storage Technology Corp. ("Storage Technology"), to provide the hardware
connection which links the enterprise server to the client/server network.
System Management Applications. The primary competitors for the Company's
HARBOR Backup and HARBOR Distributed Storage Server products are IBM, Storage
Technology, Innovation Data Processing, Inc. and Boole & Babbage, Inc. The
Company's competition for the HARBOR Distribution product includes IBM,
Novadigm, Inc. ("Novadigm") and Tangram Enterprise Solutions, Inc. IBM is
aggressively marketing its ADSM backup product, which is included in the System
View package on IBM's UNIX system, AIX. There can be no assurance that IBM will
not include the ADSM backup products in a software "bundle" with the sale of
its mainframe hardware systems. The bundling of competing software products
with mainframe hardware systems could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also competes with software vendors who develop and market products for UNIX
and Windows NT operating systems, such as Microsoft Corporation ("Microsoft"),
Arcada Software, Inc., Cheyenne Software, Inc., Computer Associates
International, Inc., EMC Corporation, Hewlett-Packard Company, Legato,
Novadigm, OpenVision Technology, Inc., PLATINUM technology, inc., Sterling
Software, Inc., Sun Microsystems, Inc. and Unison Software, Inc., which are
focusing on enterprise systems management applications. Although the Company
recently signed a strategic marketing agreement with Legato, the Company is
still a competitor of Legato in the storage management market. The Company also
expects increased competition from vendors of TCP/IP-to-SNA gateway products,
including such companies as Microsoft, Novell, Inc., Apertus and CNT/Brixton
Systems, Inc. Competition from these companies could increase due to an
expansion of their product lines or a change in their approaches to enterprise
systems management or networking products. The bundling of network transport
software with a network controller by these competitors could prevent the
Company from selling TCPaccess to the customers of these competitors, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Other Factors. The Company's ability to compete successfully depends on many
factors, including the Company's success in developing new products that
implement new technologies, performance, price, product quality, reliability,
success of competitors' products, general economic conditions, and protection
of Interlink products by effective utilization of intellectual property laws.
In particular, competitive pressures from existing or new competitors who offer
lower prices or other incentives or introduce new products could result in
price reductions which would adversely affect the Company's profitability.
There can be no assurance that the Company's current or other new competitors
will not develop enhancements to, or future generations of, competitive
products that offer superior price or performance features, that the Company
will be able to compete successfully in the future, or that the Company will
not be required to incur substantial additional investment costs in connection
with its engineering, research, development, marketing and customer service
efforts in order to meet any competitive threat. The Company expects
competition to intensify, and increased competitive pressure could cause the
Company to lower prices for its products, or result in reduced profit margins
or loss of market share, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Competition."
RELIANCE ON IBM AND EMERGENCE OF MAINFRAME AS ENTERPRISE SERVER
The Company's current software products are designed for use with IBM and
IBM-compatible mainframe computers. Specifically, these software products
target users of the MVS operating system, the Customer Information Control
System ("CICS") communications subsystem and the IMS and DB2 database
management systems. As a result, future sales of the Company's existing
products and associated recurring maintenance revenues are dependent upon
continued use of mainframes and their related systems software. In addition,
because the Company's products operate in conjunction with IBM systems
software, changes to IBM systems
6
<PAGE>
software may require the Company to adapt its products to these changes, and
any inability to do so, or delays in doing so, may adversely affect the
Company's business, financial condition and results of operations. Currently,
TCP/IP is the communications protocol for the Internet and is being adopted by
some organizations as the communications protocol for their client/server
local area networks ("LANs") and wide area networks ("WANs"). This adoption
has allowed IBM MVS mainframe computers to act as enterprise servers on such
networks. The use of mainframes as enterprise servers is relatively new and
still emerging. The Company's future financial performance will depend in
large part on the acceptance and growth in the market for centralized network
management. Adoption of another communications protocol on client/server
networks could make TCP/IP communication not viable, which would undermine the
demand for the Company's TCPaccess products, and have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Sales, Marketing and Customer Support."
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
The markets for the Company's network transport products and systems
management applications are characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions and rapid
changes in customer requirements. The Company believes that its future success
will depend upon its ability to develop, manufacture and market products which
meet changing user needs, to continue to enhance its products and to develop
and introduce in a timely manner new products that take advantage of
technological advances, keep pace with emerging industry standards, and
address the increasingly sophisticated needs of its customers. There can be no
assurance whether TCP/IP will continue to be accepted as a communications
protocol on client/server networks. Furthermore, there can be no assurance
that the Company will be successful in developing and marketing, on a timely
basis, product enhancements or new products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of these products, or that any such new products or
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. The Company's failure or inability to adapt its
products to technological changes or to develop new products successfully
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The introduction or announcement of products by the Company or one or more
of its competitors, including but not limited to IBM, embodying new
technologies, or changes in customer requirements or the emergence of new
industry standards and practices could render the Company's existing products
obsolete and unmarketable. As markets for the Company's products develop and
competition increases, the Company anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average
selling prices and gross margins for each of the Company's products are
expected to decline as each product matures. There can be no assurance that
the introduction or announcement of new product offerings by the Company or
one or more of its competitors will not cause customers to defer purchasing
the existing products of the Company or that the Company will successfully
manage the transition from older products to new or enhanced products in order
to minimize disruption in customer ordering. Such deferment of purchases or
inability to manage the transition of products could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that the Company will
successfully identify new product opportunities, develop and bring to market
in a timely manner such new products, or that products or technologies
developed by others will not render the Company's products or technologies
noncompetitive or obsolete. See "Business--Product Development."
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FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF BACKLOG; SEASONALITY
The Company's operating results have historically been, and will continue to
be, subject to quarterly and annual fluctuations due to a variety of factors,
including: timely introduction, enhancement and market acceptance of new
versions of the Company's products; seasonal customer demand; timing of
significant orders; changes in the pricing policies by the Company or its
competitors; anticipated and unanticipated decreases in average unit selling
prices of the Company's products; increased competition; changes in the mix of
the products sold and in the mix of sales by distribution channel; the gain or
loss of significant customers; the introduction of new products or product
enhancements by competitors; currency fluctuations; and the failure to
anticipate changing customer product requirements. The Company typically sells
its products through a trial process to allow customers to evaluate the
effectiveness of the Company's products before determining whether to proceed
with broader deployment of such products. The Company's sales cycle, from the
date the sales agent first contacts a prospective customer to the date a
customer ultimately purchases the Company's product, is typically three to six
months for the TCPaccess products and six to nine months for the HARBOR
products. There can be no assurance however that the customers will purchase
the Company's products after such trial period or that the Company's sales
cycle will not lengthen, exposing it to the possibility of shortfalls in
quarterly revenues, which could have a material adverse effect on the
Company's business, financial condition or results of operations and cause
results to vary from period to period. The Company's operating results will
also be affected by general economic and other conditions affecting the timing
of customer orders and capital spending, and order cancellations or
rescheduling. Furthermore, it is possible that the Company's products may be
found to be defective after the Company has already shipped in volume such
products. There can be no assurance that defects in the Company's products or
failures in the Company's product quality, performance and reliability, will
not occur and such defects or failures will not have a material adverse effect
on the Company's business, financial condition and results of operations. If
such defects or failures occur, the Company could experience a decline in
revenue, increased costs (including warranty expense and costs associated with
customer support), delays in or cancellations or reschedulings of orders or
shipments, and increased product returns, any of which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company operates with very little backlog and most of its product
revenues in each quarter result from orders closed in that quarter, and a
substantial majority of those orders are completed at the end of that quarter.
The Company establishes its expenditure levels for sales, marketing, product
development and other operating expenses based in large part on its
expectations as to future revenues, and revenue levels below expectations
could cause expenses to be disproportionately high. If revenues fall below
expectations in a particular quarter, operating results and net income are
likely to be materially adversely affected. Any inability of the Company to
adjust spending to compensate for failure to meet sales forecasts or to
collect accounts receivable, or any unexpected increase in product returns or
other costs, could magnify the adverse impact of such events on the Company's
operating results.
The Company's business has experienced and is expected to continue to
experience significant seasonality. The Company has higher sales of its
software products in the quarters ending in December and June and weaker sales
in the quarters ending in September and March. The decrease in product
revenues in the quarters ending in September is due to the international
customer seasonal buying patterns. The quarters ending in March are
historically weak due to government and large organization annual budgeting
cycles. Due to the foregoing factors, quarterly revenue and operating results
are likely to vary significantly in the future and period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Further, it is
likely that in some future quarters the Company's revenue or operating results
will be below the expectations of public market analysts and investors. In
such event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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INTEGRATION OF ACQUISITION; HISTORY OF ACQUIRED TECHNOLOGIES
The Company has no significant history of operations on a combined basis
with New Era, the developer of the HARBOR products, which the Company acquired
in December 1995 in a purchase transaction. Accordingly, the historical
financial statements and pro forma financial information presented in this
Prospectus may not be indicative of the results that would have been obtained
had the acquisition occurred prior to the commencement of the periods covered
therein. There can be no assurance that the Company will be successful in
integrating the operations and personnel of New Era into its business,
incorporating the HARBOR products and any other acquired technologies into its
product lines, deriving significant future sales from the HARBOR products,
establishing and maintaining uniform standards, controls, procedures and
policies, avoiding the impairment of relationships with employees and
customers as a result of changes in management, or overcoming other problems
that may be encountered in connection with the integration of New Era. To the
extent that the Company is unable to accomplish the foregoing, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, in order to effectively sell the HARBOR
product in future periods, the Company has decided to establish a direct
HARBOR sales channel in the U.S. and is integrating the HARBOR product into
its European sales channel. Given that lead time for closing a HARBOR sale can
be as much as nine months, the ability of the Company to produce significant
HARBOR product sales in future periods is highly dependent on the Company's
success in implementing these changes. If the Company is unsuccessful in such
implementation, HARBOR product sales will likely not increase over the level
of sales during the six months ended June 30, 1996, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements and Notes thereto.
To date, the Company's core technologies for its principal network transport
products and systems management applications have been acquired and have not
been developed internally. There can be no assurance that the Company will
have the opportunity to successfully acquire or develop new technologies in
the future or that such technology, if acquired, can be successfully
integrated and commercialized by the Company. An inability to acquire, develop
or commercialize new technologies would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
may also seek to acquire or invest in businesses, products or technologies
that expand, complement or otherwise relate to the Company's current business
or product line. There can be no assurance that such acquisitions will be
successfully or cost-effectively integrated into the Company's current
operations, or that the acquired technologies will provide the necessary
complement to the Company's current products. If the Company consummates
additional acquisitions in the future that must be accounted for under the
purchase method of accounting, such acquisitions would likely increase the
Company's amortization expenses. In addition, any such acquisitions would be
subject to the risks of integration mentioned above. The Company does not
currently have any understandings, commitments or agreements with respect to
any potential acquisition or corporate partnering arrangements, nor is it
currently engaged in any discussions or negotiations with respect to any such
transaction.
RELIANCE ON AND RISKS ASSOCIATED WITH INTERNATIONAL SALES
During the fiscal years ended June 30, 1995 and 1996, 42% and 41%,
respectively, of the Company's total revenues were derived from sales to
international customers. The Company's international sales have been primarily
to European markets, and sales are generally denominated in local currencies.
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 reduce their business activities during the summer months. The
Company expects that international revenue will continue to represent a
significant portion of its total revenue. The Company intends to enter into
additional international markets and to continue to expand its operations
outside of North America by expanding its direct sales force, adding
distributors and pursuing additional strategic relationships which will
require significant management attention and expenditure of significant
financial resources. To the extent that the Company is unable to make
additional international sales in a timely manner, the Company's growth, if
any, in international revenues will be limited, and the Company's business,
financial condition and results of operations
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would be materially adversely affected. Sales to international customers are
subject to additional risks including longer receivables collection periods,
greater difficulty in accounts receivable collection, failure of distributors
to report sales of the Company's products, political and economic instability,
nationalization, trade restrictions, the impact of possible recessionary
environments in economies outside the United States, reduced protection for
intellectual property rights in some countries, currency fluctuations and
tariff regulations and requirements for export licenses. There can be no
assurance that foreign intellectual property laws will adequately protect the
Company's intellectual property rights. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries. Substantially all of the Company's distribution and other
agreements with international distributors require any dispute between the
Company and any distributor to be settled by arbitration. Under these
agreements, the party bringing the action, suit or claim is required to
conduct the arbitration in the domicile of the defendant. The result is that,
if the Company has a cause of action against a party, it may not be feasible
for the Company to pursue such action, as arbitration in a foreign country
could prove to be excessively costly and have a less certain outcome depending
on the laws and customs in the foreign country. These international factors
could have a material adverse effect on future sales of the Company's products
to international end users and, consequently, the Company's business,
financial condition and results of operations.
Most of the Company's international sales are denominated in local
currencies. The Company has not historically attempted to reduce the risk of
currency fluctuations by hedging except in certain limited circumstances where
the Company has held an account receivable expected to be outstanding for a
period of at least 12 months. The Company may be disadvantaged with respect to
its competitors operating in foreign countries by foreign currency exchange
rate fluctuations that make the Company's products more expensive relative to
those of local competitors. The Company may attempt to reduce these risks by
continuing to hedge in certain limited transactions in the future.
Accordingly, changes in the exchange rates or exchange controls may adversely
affect the Company's results of operations. There can be no assurance that the
Company's current or any future currency exchange strategy will be successful
in avoiding exchange related losses or that any of the factors listed above
will not have a material adverse effect on the Company's future international
sales and, consequently, on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales, Marketing and
Customer Support" and "--Customers."
DEPENDENCE ON DISTRIBUTORS AND STRATEGIC RELATIONSHIPS
The Company's sales are primarily made through the Company's direct sales
force and the Company's distributors in international markets. In May 1996,
the Company entered into a strategic marketing agreement with Legato. The
Company has no historical relationship with Legato, and there can be no
assurance that the Company will be able to sell its products through Legato.
The Company is currently investing, and plans to continue to invest,
significant resources to develop additional relationships, which investments
could adversely affect the Company's operating margins. The Company believes
that its success in penetrating markets for its products depends in large part
on its ability to maintain these relationships, to cultivate additional
relationships and to cultivate alternative relationships if distribution
channels change. There can be no assurance that any distributor, systems
integrator or strategic partner will not discontinue its relationship with the
Company, form competing arrangements with the Company's competitors, or
dispute the Company's other strategic relationships. A former distributor of
the Company's TCPaccess products in Italy, Selesta Integrazioni SRL
("Selesta"), has threatened legal action over the recent termination of
Selesta as a distributor of the Company's TCPaccess products. The Company has
also discontinued its existing distributor relationship with Selesta for the
distribution of the Company's HARBOR products in Italy and Spain. See "--Legal
Dispute." The loss of, or a significant reduction in revenues from, the
Company's distributors through which the Company sells its products could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, if one of the Company's distributors
declares bankruptcy, becomes insolvent, or is declared bankrupt before the
distributor remits to the Company the payments for the Company's products, the
Company may not be able to obtain the revenues to which it would be entitled
for sales made by such distributor prior to the bankruptcy or
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insolvency proceeding. In addition, the Company's distributors generally offer
other products and these distributors may give higher priority to sales of
such other products. See "--Reliance on and Risks Associated with
International Sales."
DEPENDENCE UPON SUPPLIER
Network access from the enterprise server to the network via the Company's
TCPaccess product requires a network controller, which the Company sells to
its customers. The Company's principal network controller, the 3762 Network
Controller, is supplied only by Bus-Tech and is resold by the Company. Sales
of network controllers have accounted for substantially all of the Company's
hardware revenues to date, and has accounted for 25% and 19% of product
revenues in the fiscal year ended June 30, 1995 and 1996, respectively. In
addition, the Company also relies upon Bus-Tech for network controller
replacement parts. If the Company were unable to purchase an adequate supply
of such sole-sourced product on a timely basis, the Company would be required
to develop or locate alternative sources. If such product became unavailable,
the Company could be required to design a comparable product, qualify an
alternative source, or redesign its products based upon different components.
Furthermore, IBM and Cisco Systems, Inc. could use their positions as a
supplier of network controllers to gain a competitive advantage over the
Company. To date, the Company has not experienced any difficulty or
significant delay in obtaining any such sole-sourced product. However, there
can be no assurance that the Company will not face such difficulties or delay
in the future. An inability of the Company or its customers to obtain such
sole-sourced controllers could significantly delay shipment of products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF
INFRINGEMENT
The Company's success and ability to compete is dependent in part upon its
proprietary information. The Company relies primarily on a combination of
copyright and trademark laws, trade secrets, software security measures,
license agreements and nondisclosure agreements to protect its proprietary
technology and software products. There can be no assurance, however, that
such protection will be adequate to deter misappropriation, deter unauthorized
third parties from copying aspects of, or otherwise obtaining and using, the
Company's software products and technology without authorization, or that the
rights secured thereby will provide competitive advantages to the Company. In
addition, the Company cannot be certain that others will not develop
substantially equivalent or superseding proprietary technology, or that
equivalent products will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's
proprietary rights. Furthermore, there can be no assurance that any
confidentiality agreements between the Company and its employees or any
license agreements with its customers will provide meaningful protection for
the Company's proprietary information in the event of any unauthorized use or
disclosure of such proprietary information.
There can be no assurance that others will not independently develop similar
products or duplicate the Company's products. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
or superior to the Company's products. A substantial amount of the Company's
sales are in international markets, and the laws of other countries may afford
the Company little or no effective protection of its intellectual property.
While the Company believes that its products and trademarks do not infringe
upon the proprietary rights of third parties, there can be no assurance that
the Company will not receive future communications from third parties
asserting that the Company's products infringe, or may infringe, on the
proprietary rights of third parties. The Company expects that software product
developers will be increasingly subject to infringement claims as the number
of products and competitors in the Company's industry segments grow and the
functionalities of products in different industry segments overlap. Any such
claims, with or without merit, could be time
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consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require the Company to
develop non-infringing technology or enter into royalty or licensing
agreements, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
develop non-infringing technology or license the infringed or similar
technology, the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, the Company
may initiate claims or litigation against third parties for infringement of
the Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Any such claims could be time consuming, result in costly
litigation, or lead the Company to enter into royalty or licensing agreements
rather than litigating such claims on their merits. Moreover, an adverse
outcome in litigation or similar adversarial proceedings could subject the
Company to significant liabilities to third parties, require expenditure of
significant resources to develop non-infringing technology, require disputed
rights to be licensed from others or require the Company to cease the
marketing or use of certain products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Intellectual Property and Other Proprietary
Rights."
PRODUCT ERRORS; PRODUCT LIABILITY
Software products as complex as those offered by the Company often contain
undetected errors or failures when first introduced or as new versions are
released. Testing of the Company's products is particularly challenging
because it is difficult to simulate the wide variety of computing environments
in which the Company's customers may deploy its products. Accordingly, there
can be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found after commencement of commercial
shipments, resulting in lost revenues, loss of or delay in market acceptance
and negative publicity about the Company and its products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's license agreements with customers typically contain provisions
designed to limit the Company's exposure to potential product liability
claims. The limitation of liability provisions contained in such license
agreements may not be effective under the laws of some jurisdictions,
particularly if the Company in the future relies on "shrink wrap" licenses
that are not signed by licensees. The Company's products are generally used to
manage data critical to organizations, and as a result, the sale and support
of products by the Company may entail the risk of product liability claims. A
successful liability claim brought against the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Product Development."
RELIANCE ON TCP/IP AND MAINTENANCE; CONCENTRATION OF PRODUCT SALES
During the fiscal years ended June 30, 1995 and 1996, sales of the TCPaccess
products, excluding maintenance and hardware, accounted for approximately 34%
and 36%, and, including related maintenance and hardware, accounted for
approximately 66% and 67%, respectively, of the Company's total revenues.
Accordingly, the Company's operating results, particularly in the near term,
are significantly dependent upon the continued market acceptance of the
TCPaccess products. During each of the fiscal years ended June 30, 1995 and
1996, maintenance and consulting revenue accounted for approximately 42% of
the Company's total revenues. A portion of the maintenance revenues are from
historical customers of the Company's DECnet product. The Company no longer
actively markets the DECnet product, and maintenance revenues from DECnet
customers have declined each year since the fiscal year ended June 30, 1993,
and are expected to continue to decline. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The life cycles of
the Company's products are difficult to estimate due in part to the effect of
future product enhancements and competition. A decline in the demand for the
Company's products as a result of competition, technological change or other
factors would have a material adverse effect on the Company's business,
financial condition and results of operations.
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The Company estimates that the total number of potential sites where its
TCPaccess products could be installed is limited. Many of those sites have
already been serviced by either IBM or the Company. The Company expects that
it will continue to depend upon this limited number of prospective customers
for a significant portion of its revenues in future periods. As a result of
this concentration, the Company's business, financial condition and results of
operations could be materially adversely affected by the failure of
anticipated orders to materialize and by deferrals or cancellations of orders
as a result of changes in customer requirements. In addition, the Company's
future success depends upon the capital spending patterns of such customers
and the continued demand by such customers for the Company's products. The
Company's operating results may in the future be subject to substantial
period-to-period fluctuations as a consequence of such concentration and
factors affecting capital spending in the enterprise networked systems
management market.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the continued service of, and on its
ability to attract and retain, qualified technical, sales, marketing and
managerial personnel, in particular, its key New Era employees. While the
Company intends to expand its field sales force, experienced field sales
personnel in the Company's industry are in high demand and may not be
attracted and retained on terms advantageous to the Company. Furthermore,
there can be no assurance that the Company's efforts to expand its field sales
force will be successful. The competition for qualified personnel in the
software industry is intense, and the loss of any such persons, as well as the
failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to continue to attract and retain the qualified personnel necessary for the
development of its business. The Company has employment agreements with
certain executive officers, but such agreements do not ensure their continued
service to the Company or prevent their competition with the Company following
a termination of employment. The Company does not maintain key man life
insurance on the lives of its key employees. See "Business--Employees,"
"Management--Executive Officers and Directors" and "--Employment Agreements
and Change in Control Arrangements."
LEGAL DISPUTE
The Company and the Company's subsidiary in France are involved in a
commercial dispute with Selesta, a former Italian distributor of the Company's
TCPaccess products. Selesta alleged in a letter sent to the Company that the
Company had breached and unlawfully terminated the agreement pursuant to which
Selesta was appointed a distributor of the Company's products in Italy and
asserted other related claims against the Company. The letter demanded
Selesta's reinstatement as a distributor, the execution of a written
distribution agreement setting forth the distribution arrangements between the
parties, and compensation in an unspecified amount to be paid to Selesta for
the harm that it has suffered. The Company's Canadian subsidiary, New Era, has
also previously used Selesta as a distributor of the HARBOR products in Italy
and Spain pursuant to a separate agreement. No legal claim has been filed nor
has arbitration been invoked by Selesta regarding this matter. Should Selesta
initiate legal proceedings and prevail on such claims, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Legal Dispute."
NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
of the Common Stock offered hereby will be determined through negotiations
among the Company, the representatives of the Selling Stockholders and the
Representatives of the Underwriters, and may not be indicative of future
market prices. There can be no assurance that the market price of the Common
Stock will not decline below the initial public offering price. The trading
prices of the Company's Common Stock may be subject to wide fluctuations in
response to a number of factors, including variations in operating results,
changes in earnings estimates by securities analysts, announcements of
extraordinary events such as litigation or
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acquisitions, announcements of technological innovations or new products or
new contracts by the Company or its competitors, announcements and reports
about the declining number of mainframe computers shipped, press releases or
reports of IBM or other competitors introducing competitive or substitute
products, as well as general economic, political and market conditions. In
addition, the stock market has from time-to-time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stocks of technology companies and that have often been unrelated
to the operating performance of particular companies. These broad market
fluctuations may also adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has occurred
against the issuing company. There can be no assurance that such litigation
will not occur in the future with respect to the 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 Company's
business, financial condition and results of operations. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
CONTROL BY CURRENT STOCKHOLDERS
The Company's officers, directors and principal stockholders and their
affiliates will in the aggregate beneficially own approximately 50% of the
Company's outstanding shares of Common Stock after this offering. As a result,
these stockholders, acting together, would be able to effectively control most
matters requiring approval by the stockholders of the Company, including the
election of directors and any merger, consolidation or sale of all the
Company's assets. See "Principal and Selling Stockholders" and "Description of
Capital Stock."
POTENTIAL IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market after the
offering could adversely affect the market price of the Company's Common
Stock. In addition to the 2,700,000 shares offered hereby, as of the effective
date of the Registration Statement (the "Effective Date"), 67,487 shares of
Common Stock will become eligible for sale in the public market in reliance on
Rule 144(k) under the Securities Act of 1933, as amended (the "Securities
Act"). Approximately 3,279,354 shares of Common Stock will become eligible for
sale in the public market, subject to compliance with Rules 144 and 701 under
the Securities Act, when certain 180-day lock-up agreements between the
Company and/or the Representatives and certain stockholders of the Company,
including officers, directors and Selling Stockholders, expire. In addition,
holders of warrants exercisable into an aggregate of 399,644 shares of Common
Stock have entered into 180-day lock-up agreements and no such shares may be
sold at least until 180 days after commencement of this offering upon
exercise. Upon expiration of the lock-up agreements and assuming the warrants
are then exercised for cash, the shares acquired upon exercise of the
warrants, in the absence of registration, may only be publicly resold pursuant
to Rule 144. Furthermore, all of the optionholders are subject to a 180-day
lock-up period pursuant to their option agreements and the holders of 100% of
the shares of Common Stock subject to options have entered into the same 180-
day lock-up agreements as referenced above. Volpe, Welty & Company may, in its
sole discretion, and at any time without notice, release all or any portion of
the securities subject to such lock-up agreements.
The Company intends to file a registration statement under the Securities
Act covering approximately 2,605,000 shares of Common Stock issued or reserved
for issuance under the 1992 Stock Option Plan, the 1996 Employee Stock
Purchase Plan and the 1996 Director Option Plan. That registration statement
is expected to be filed within 90 days after the date of this Prospectus and
will automatically become effective upon filing. Accordingly, all the shares
registered under that registration statement will, subject to Rule 144 volume
limitations applicable to affiliates, as that term is defined in the
Securities Act, be available for resale in the open market on such date. At
June 30, 1996, options to purchase 1,018,503 shares were issued and
outstanding under the 1992 Stock Option Plan, 598,012 of which were vested and
eligible for exercise as of that date. See "Management--Stock Plans" and
"Shares Eligible for Future Sale."
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After the closing of the offering, the holders of up to 3,391,695 issued or
issuable shares of Common Stock, of which 399,644 shares are issuable upon
exercise of warrants, will be entitled to certain demand and piggyback rights
with respect to the registration of those shares under the Securities Act.
Demand registration rights will be exercisable commencing six months after the
Effective Date. If the holders of registration rights cause a large number of
shares to be registered and sold in the public market, such sales could have
an adverse effect on the market price for the Company's Common Stock. See
"Description of Capital Stock--Registration Rights."
Holders of 3,279,354 shares of Common Stock of the Company have agreed with
the Company and/or the Representatives that until 180 days after the Effective
Date, they will not sell, offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase shares of Common Stock, or
any securities convertible or exchangeable for shares of Common Stock, owned
directly by such holders or with respect to which they have power of
disposition, without the prior written consent of the Company and/or Volpe,
Welty & Company, as the case may be. The Company has agreed with the
Representatives not to release any holders from such agreements without the
prior written consent of Volpe, Welty & Company. The Company has also agreed
not to sell, offer to sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock for a period of 180 days after the Effective Date without the
prior written consent of Volpe, Welty & Company, subject to certain limited
exceptions including sales of shares under the stock plans. The lock-up
agreements with the Representatives may be released at any time as to all or
any portion of the shares subject to such agreements at the sole discretion of
Volpe, Welty & Company.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire,
or discouraging a third party from attempting to acquire control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions provide for the elimination of the right of stockholders
to act by written consent without a meeting and specify procedures for
director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings. In addition, the Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of 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 the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay
or make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years unless certain
conditions are met. The inability of stockholders to act by written consent
without a meeting, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay
in the future for shares of the Company's Common Stock. See "Description of
Capital Stock--Preferred Stock," "--Certain Provisions of the Certificate of
Incorporation and Bylaws" and "--Certain Provisions of Delaware Law."
15
<PAGE>
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
This offering will provide substantial benefits to current equity
stockholders of the Company. Consummation of this offering is expected to
create a public market for the Common Stock held by the Company's current
stockholders, including directors and executive officers of the Company.
Current stockholders paid an aggregate of approximately $21.6 million for the
3,787,019 shares of Common Stock outstanding at June 30, 1996. Based upon an
assumed initial public offering price of $14.00 per share, this offering will
result in an unrealized gain to such stockholders in the aggregate of
approximately $31.4 million. In addition, certain stockholders will be selling
shares in this offering. However, no member of management will be selling
shares in this offering. See "--No Prior Trading Market; Possible Volatility
of Share Price" and "--Dilution."
DILUTION
As of June 30, 1996, the Company had an accumulated deficit of $24.9 million
and a working capital deficit of $6.4 million. In addition, the Company had a
pro forma tangible negative book value at June 30, 1996 of approximately $7.7
million. Based on the foregoing, purchasers of the Common Stock offered hereby
will experience immediate, substantial dilution in the net tangible book value
per share of the Common Stock from the initial public offering price. See
"Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,200,000 shares of Common
Stock offered by the Company hereby are estimated to be approximately $27.6
million ($32.9 million if the over-allotment option is exercised in full),
based on an assumed initial public offering price of $14.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses. The Company will not receive any of the proceeds from the sale of
Common Stock by the Selling Stockholders.
From these estimated net proceeds, the Company will repay the outstanding
balance of the Company's domestic bank line of credit of approximately $5.0
million at June 30, 1996, which borrowings bear interest at prime plus 1.5%
per annum and mature in November 1996. If the over-allotment option is
exercised in full, the Company intends to repay the outstanding balance of the
Company's long-term note of approximately $3.0 million at June 30, 1996, which
borrowings bear interest at prime plus 2.5% per annum and mature in December
1998. The bank line of credit and the long-term note were incurred in
connection with the acquisition of New Era. In addition, the Company currently
expects to utilize $500,000 of the net proceeds to the Company from the
offering for capital expenditures, including expanding the Company's customer
support system. The remaining net proceeds to the Company from the offering
will be used for working capital and other general corporate purposes. The
Company may use a portion of the net proceeds for the acquisition of
complementary businesses and technologies or for the implementation of various
corporate partnering arrangements. However, the Company has no present
understandings, commitments or agreements, nor is it currently engaged in any
discussions or negotiations with respect to any such transaction, except for
the development of HARBOR Agent for Networker in connection with the strategic
alliance with Legato. Pending such uses, the Company intends to invest the net
proceeds in short-term, investment grade interest bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain its earnings, if any, to fund its business and
therefore does not anticipate paying cash dividends in the foreseeable future.
The Company's bank line of credit and Western Economic Development loan
agreements contain restrictive covenants which limit the Company's ability to
pay cash dividends or make stock purchases without the prior written consent
of the lender. See Notes 4 and 5 of Notes to Consolidated Financial
Statements.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization after giving
effect to the conversion of all outstanding Preferred Stock into Common Stock
and the filing of the Company's Restated Certificate of Incorporation and
(iii) the capitalization as adjusted to reflect the sale of 2,200,000 shares
of Common Stock offered by the Company hereby at an assumed initial public
offering price of $14.00 per share and the application of the net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
PRO AS
ACTUAL FORMA (1) ADJUSTED (2)(4)
-------- --------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Bank line of credit and current portion of
long-term debt............................ $ 8,100 $ 8,100 $ 3,100
======== ======== ========
Long-term debt, less current portion (3)... 2,892 2,892 2,892
-------- -------- --------
Stockholders' equity:
Preferred Stock, no par value, 2,625,000
shares authorized, 1,229,714 issued and
outstanding, actual; $0.001 par value
5,000,000 shares authorized, no shares
issued and outstanding, pro forma and as
adjusted................................ 6,310 -- --
Common Stock, no par value, 15,000,000
shares authorized, 2,483,138 shares
issued and outstanding, actual; $0.001
par value, 25,000,000 shares authorized,
3,787,019 shares issued and outstanding,
pro forma; $0.001 par value, 25,000,000
shares authorized, 5,987,019 shares
issued and outstanding, as
adjusted (2)(4)......................... 14,602 4 6
Additional paid in capital............... -- 20,908 48,550
Cumulative translation adjustment........ (581) (581) (581)
Accumulated deficit...................... (24,916) (24,916) (24,916)
-------- -------- --------
Total stockholders' equity (deficit)... (4,585) (4,585) 23,059
-------- -------- --------
Total capitalization................. $ (1,693) $ (1,693) $ 25,951
======== ======== ========
</TABLE>
- --------
(1) Pro forma to give effect as if such conversion had taken place as of June
30, 1996. See Note 12 of Notes to Consolidated Financial Statements.
Reflects the issuance of 74,167 shares of Common Stock immediately
subsequent to the offering upon the net exercise of certain outstanding
warrants.
(2) Adjusted to reflect the sale of 2,200,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of
$14.00 per share, and after deducting underwriting discounts and
commissions and the estimated expenses of the offering and the anticipated
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(3) See Note 5 of Notes to Consolidated Financial Statements.
(4) Excludes as of June 30, 1996: (i) options outstanding to purchase up to
1,018,503 shares of Common Stock at a weighted average exercise price of
$1.82 per share under the Company's 1992 Stock Option Plan; (ii) 399,644
shares of Common Stock issuable upon exercise of warrants outstanding at a
weighted average exercise price of $3.08 per share; and (iii) 870,463
shares of Common Stock reserved for future issuance under the Company's
1992 Stock Option Plan, 850,000 shares of which are subject to stockholder
approval. See "Management--Stock Plans," "Description of Capital Stock"
and Note 7 of Notes to Consolidated Financial Statements. Also excludes,
subject to stockholder approval, 350,000 shares reserved prior to June 30,
1996 and an additional 300,000 shares reserved subsequent to June 30, 1996
for issuance under the 1992 Stock Option Plan, the 1996 Director Option
Plan and the 1996 Employee Stock Purchase Plan.
17
<PAGE>
DILUTION
The pro forma net tangible negative book value of the Company at June 30,
1996 was approximately $(7.7) million, or $(2.04) per share of Common Stock.
Pro forma net tangible negative book value per share represents the amount of
total tangible assets less total liabilities, divided by the number of shares
of Common Stock then outstanding (assuming the conversion of all then
outstanding Preferred Stock into Common Stock). After giving effect to the
sale by the Company of the 2,200,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $14.00 per
share and after deduction of estimated underwriting discounts and commissions
and offering expenses), the Company's pro forma net tangible book value at
June 30, 1996 would have been $19.9 million, or $3.33 per share of Common
Stock. This represents an immediate increase in net tangible book value of
$5.37 per share to existing stockholders and an immediate dilution of $10.67
per share to investors purchasing shares in this offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $14.00
Pro forma net tangible negative book value per share at
June 30, 1996............................................. $(2.04)
Increase in net tangible book value per share attributable
to new investors.......................................... 5.37
------
Pro forma net tangible book value per share after this
offering.................................................... 3.33
------
Dilution per share to new investors.......................... $10.67
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences in the total consideration paid and the average price per
share paid by the Company's existing stockholders and the new investors with
respect to the 2,200,000 shares of Common Stock to be sold by the Company (at
an assumed initial public offering price of $14.00 per share and before
deduction of estimated underwriting discounts and commissions and offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).... 3,787,019 63.3% $21,648,000 41.3% $ 5.72
New public investors (1)..... 2,200,000 36.7 30,800,000 58.7 14.00
--------- ----- ----------- -----
Total.................... 5,987,019 100.0% $52,448,000 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares of Common Stock held by existing stockholders to 3,287,019 or
approximately 54.9% (3,287,019 shares, or approximately 51.4%, if the
Underwriters' over-allotment option is exercised in full) and will
increase the number of shares held by new investors to 2,700,000 or
approximately 45.1% (3,105,000 shares, or approximately 48.6%, if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after this offering. See
"Principal and Selling Stockholders."
The foregoing computations assume no exercise of stock options or warrants
after June 30, 1996, except for the issuance of 74,167 shares of Common Stock
immediately subsequent to the offering upon the net exercise of certain
outstanding warrants. As of June 30, 1996, there were outstanding options to
purchase 1,018,503 shares of Common Stock, with a weighted average exercise
price of $1.82 per share and warrants to purchase 399,644 shares of Common
Stock with a weighted average exercise price of $3.08 per share. In addition,
as of June 30, 1996, 870,463 shares of Common Stock were reserved for future
issuance under the Company's 1992 Stock Option Plan, 850,000 of which are
subject to stockholder approval. Also excludes, subject to stockholder
approval, 350,000 shares reserved prior to June 30, 1996 and an additional
300,000 shares reserved subsequent to June 30, 1996 for issuance under the
1992 Stock Option Plan, the 1996 Director Option Plan and the 1996 Employee
Stock Purchase Plan. To the extent that any shares available for issuance upon
exercise of outstanding options or warrants or reserved for future issuance
under the Company's stock plans are issued, there will be further dilution to
new investors. See "Management--Stock Plans," "Description of Capital Stock"
and Note 7 of Notes to Consolidated Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company should be
read in conjunction with the Company's consolidated financial statements and
the notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein. The
consolidated statement of operations data for the fiscal years ended June 30,
1994, 1995 and 1996 and the consolidated balance sheet data as of June 30,
1995 and 1996 are derived from financial statements of the Company that have
been audited by Coopers & Lybrand L.L.P., independent accountants, and are
included elsewhere herein. The consolidated statement of operations data for
the fiscal years ended June 30, 1992 and 1993 and the consolidated balance
sheet data as of June 30, 1992, 1993 and 1994 are derived from financial
statements of the Company audited by Coopers & Lybrand L.L.P. that are not
included herein. The pro forma selected consolidated financial data are
derived from the unaudited combined condensed consolidated statement of
operations included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA FOR
YEAR ENDED JUNE 30, ACQUISITION(1)
------------------------------------------- --------------
JUNE 30,
1992 1993 1994 1995 1996 1996(2)
------- ------- ------- ------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Product................ $14,904 $11,914 $12,350 $15,818 $19,670 $21,412
Maintenance and
consulting............ 8,422 9,271 9,525 11,261 14,332 15,079
------- ------- ------- ------- ------- -------
Total revenues....... 23,326 21,185 21,875 27,079 34,002 36,491
------- ------- ------- ------- ------- -------
Cost of revenues:
Product................ 4,628 2,679 2,380 3,316 3,413 3,453
Maintenance and
consulting............ 1,703 1,387 1,430 3,293 4,594 4,841
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 6,331 4,066 3,810 6,609 8,007 8,294
------- ------- ------- ------- ------- -------
Gross profit............ 16,995 17,119 18,065 20,470 25,995 28,197
Operating expenses:
Product development.... 5,155 5,042 6,276 6,245 5,241 5,665
Sales and marketing.... 10,998 6,638 8,384 10,792 13,316 13,939
General and
administrative........ 2,727 3,272 2,561 3,329 3,954 4,194
Restructuring charge... 3,050 -- -- -- -- --
Purchased research and
development and
product amortization.. -- -- -- -- 10,479 642
------- ------- ------- ------- ------- -------
Total operating
expenses............ 21,930 14,952 17,221 20,366 32,990 24,440
------- ------- ------- ------- ------- -------
Operating income (loss). (4,935) 2,167 844 104 (6,995) 3,757
Other income............ -- 1,000 -- -- -- (92)
Interest expense, net... (743) (387) (224) (81) (507) (1,105)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary items.... (5,678) 2,780 620 23 (7,502) 2,560
Benefit from (provision
for) income taxes...... (186) (953) (273) 1,624 (114) 205
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary items.... (5,864) 1,827 347 1,647 (7,616) 2,765
Extraordinary items..... -- 1,075 1,320 -- -- --
------- ------- ------- ------- ------- -------
Net income (loss)....... $(5,864) $ 2,902 $ 1,667 $ 1,647 $(7,616) $ 2,765
======= ======= ======= ======= ======= =======
Net income (loss) per
share (3).............. $ (5.47) $ 1.17 $ 0.44 $ 0.34 $ (2.44) $ 0.56
======= ======= ======= ======= ======= =======
Shares used in per share
calculation (3)........ 1,073 2,474 3,808 4,814 3,127 4,954
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------
1992 1993 1994 1995 1996
-------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $(12,815) $(2,877) $ 212 $ (183) $(6,371)
Total assets..................... 8,674 8,754 15,853 20,000 25,925
Long-term debt, less current
portion......................... 146 5,175 672 368 2,892
Total stockholders' equity
(deficit)....................... (10,948) (6,915) 996 2,641 (4,585)
</TABLE>
- -------
(1) Pro forma to give effect to the Company's acquisition of New Era on
December 29, 1995 as if it had occurred on July 1, 1995. See Note 2 of
Notes to Consolidated Financial Statements and the Unaudited Pro Forma
Combined Condensed Consolidated Financial Statements, including the Notes
thereto.
(2) A non-recurring charge for purchased research and development was recorded
in the fiscal year ended June 30, 1996 in connection with the acquisition
of New Era. For pro forma data, this charge has been assumed to have been
incurred before the period presented, due to the non-recurring nature of
the charge. See Note 2 of Notes to the Unaudited Pro Forma Combined
Condensed Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of the computation of net income (loss) per share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
The Company offers a suite of high-performance, network transport products
and systems management applications which efficiently transport, store and
protect the integrity of mission-critical data and applications. The Company
was incorporated in December 1985 and initially focused its products and
development on providing interoperability between IBM mainframes and DECnet
network environments. In 1990, the Company acquired the core technology of its
TCPaccess suite of products. In January 1996, the Company acquired New Era
Systems Services, Ltd. ("New Era"), the developer of the HARBOR products, a
software product line providing enterprise systems management applications for
client/server networks. Prior to the acquisition, the Company distributed the
HARBOR products in certain countries in Europe for more than one year. New Era
is a wholly-owned subsidiary headquartered in Calgary, Alberta with 51
employees as of June 30, 1996.
The Company acquired New Era in exchange for cash and notes payable totaling
$12.4 million and warrants to purchase 350,000 shares of the Company's Common
Stock with additional contingent earnout payments of up to a total of
$5.2 million due January 31, 1997 and 1998. Because the New Era acquisition
was accounted for as a purchase, the Company's operating results only include
the results of New Era operations subsequent to December 29, 1995, the
acquisition date. As a result, comparisons of results for the fiscal years
ended June 30, 1995 and 1996 are not meaningful. For the quarter ended
December 31, 1995, the Company charged to operations approximately
$10.2 million of purchased research and development in connection with the New
Era acquisition. The Company's future operating costs will include the
amortization of intangible assets arising from the acquisition of New Era. At
June 30, 1996, remaining intangible assets derived from the New Era
acquisition total approximately $2.9 million and are being amortized over a
five-year period. The amortization is expected to be approximately $160,000
per quarter through December 31, 2000, but may increase after December 31,
1996 if certain contingent payments are made, based upon meeting revenue
targets for calendar years 1996 and 1997. See Note 2 of Notes to Consolidated
Financial Statements.
The Company's revenues are derived from product sales and related
maintenance and consulting contracts. Product revenues are derived from
software license fees and sales of related hardware to end users, resellers
and distributors. The Company's sales cycle, from the date the sales agent
first contacts a prospective customer to the date a customer ultimately
purchases the Company's product, is typically three to six months for the
TCPaccess products and six to nine months for the HARBOR products. Because
licenses are noncancellable and do not impose significant obligations on the
Company, the Company recognizes software license revenues upon completion of a
trial period and a signed contract. Fees for service revenues are charged
separately from the Company's product sales. The Company recognizes revenues
ratably over the term of agreement. Maintenance agreements are typically one-
year renewable contracts, pursuant to which, historically, a substantial
majority of the Company's maintenance agreements have been renewed upon
expiration. However, there can be no assurance that customers will continue to
renew expiring maintenance agreements at the historical rate. The Company
recognizes consulting revenues as services are accepted.
The Company currently derives substantially all of its product revenues from
its TCPaccess software and related hardware products and services. Although
the Company expects HARBOR products to contribute more substantially to the
Company's product revenues in future periods, broad market acceptance for
TCPaccess and HARBOR is critical to the Company's success. Failure to achieve
broad market acceptance of TCPaccess and
20
<PAGE>
HARBOR, as a result of competition, technological change or otherwise, would
have a material adverse effect on the business, financial condition and
results of operations of the Company. The Company's future performance will
depend in large part on continued growth in the number of organizations
adopting enterprise networked systems management products, and the Company's
successful development and introductions and customer acceptance of new and
enhanced versions of its software products. There can be no assurance that the
market for enterprise networked systems management products will grow or that
the Company will continue to be successful in marketing TCPaccess or HARBOR or
any new or enhanced products.
The Company's maintenance revenues are derived primarily from its TCPaccess
and DECnet product lines. The Company expects maintenance revenue from its
HARBOR line to grow in relation to growth in the HARBOR customer base. The
Company no longer actively markets its DECnet product line. As a consequence,
license revenues from this product line have declined substantially, although
the Company continues to provide maintenance to its installed DECnet
customers. Total revenues from the Company's DECnet product line were $8.5
million, $7.1 million and $7.0 million for the fiscal years ended June 30,
1994, 1995 and 1996, respectively. Maintenance revenues from the DECnet
product were $6.6 million, $6.5 million and $6.0 million for the fiscal years
ended June 30, 1994, 1995 and 1996, respectively. The Company expects that
maintenance revenues from this product line will continue to decline in the
future.
The Company licenses its software in U.S. dollars and certain foreign
currencies. The Company has experienced foreign currency exchange gains and
losses. The Company expects that fluctuations in foreign currencies may have a
significant impact on either its revenues or expenses in the future. See "Risk
Factors--Reliance on and Risks Associated with International Sales."
The Company completed a recapitalization in October 1992 in which all
previously outstanding Preferred Stock was converted to Common Stock and the
Company restructured its bank lines of credit. At that time, the Company hired
new members of its management team including a new chief executive officer and
chief financial officer. The financial statements of the Company for the
fiscal years ended June 30, 1991 and 1992 were restated due to material
misstatements contained in such financial statements resulting from misconduct
involving the preparation of accounting records, particularly in regard to the
recording of revenue. No officer of the Company at the time any such
misconduct occurred is currently an employee or officer of the Company.
Although one director at the time remains a director, the Company believes
that such director was not involved in such misconduct.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
consolidated statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Product................................................ 56.5% 58.4% 57.9%
Maintenance and consulting............................. 43.5 41.6 42.1
----- ----- -----
Total revenues....................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Product................................................ 10.9 12.2 10.0
Maintenance and consulting............................. 6.5 12.2 13.5
----- ----- -----
Total cost of revenues............................... 17.4 24.4 23.5
----- ----- -----
Gross profit............................................. 82.6 75.6 76.5
Operating expenses:
Product development.................................... 28.7 23.0 15.4
Sales and marketing.................................... 38.3 39.9 39.2
General and administrative............................. 11.7 12.3 11.6
Purchased research and development and product
amortization.......................................... -- -- 30.8
----- ----- -----
Total operating expenses............................. 78.7 75.2 97.0
----- ----- -----
Operating income (loss).................................. 3.9 0.4 (20.5)
Interest expense, net.................................... (1.1) (0.3) (1.5)
----- ----- -----
Income (loss) before income taxes and extraordinary
items................................................... 2.8 0.1 (22.0)
Benefit from (provision for) income taxes................ (1.2) 6.0 (0.4)
----- ----- -----
Income (loss) before extraordinary items................. 1.6 6.1 (22.4)
Extraordinary items...................................... 6.0 -- --
----- ----- -----
Net income (loss)........................................ 7.6% 6.1% (22.4)%
===== ===== =====
Cost of sales as a percentage of the related revenues:
Product................................................ 19.3% 21.0% 17.4%
Maintenance and consulting............................. 15.0 29.2 32.1
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1995 AND 1996
As a result of the acquisition of New Era in December 1995, the Company's
operating results for the years ended June 30, 1995 and 1996 are not directly
comparable. The results of the Company's operations for fiscal 1996 are not
representative of the combined anticipated results of operations of the
Company and New Era.
Revenues
Total revenues were $27.1 million and $34.0 million for the fiscal years
ended June 30, 1995 and 1996, respectively, representing an increase of 26%.
Product sales were $15.8 million and $19.7 million for the fiscal years ended
June 30, 1995 and 1996, respectively, representing an increase of 24%. This
increase was primarily due to a $2.5 million increase over fiscal 1995 in
TCPaccess license fees and associated hardware sales as well as the addition
of six months of revenues from HARBOR products of $1.0 million. Maintenance
and consulting revenues were $11.3 million and $14.3 million for the fiscal
years ended June 30, 1995 and 1996, respectively, representing an increase of
27%, resulting principally from an increase in the number of customers
purchasing maintenance agreements.
22
<PAGE>
Cost of Revenues
Product. Cost of revenues from product sales consists primarily of hardware,
product media, documentation and packaging costs. Cost of revenues for product
sales was $3.3 million and $3.4 million, representing 21% and 17% of total
product revenues for the fiscal years ended June 30, 1995 and 1996,
respectively. This percentage decrease was due to a reduction in third-party
product revenue and a decline in hardware revenue, which carry higher product
costs as a percentage of their respective revenue items offset somewhat by a
provision for excess and obsolete inventory of $28,000 for certain hardware
components with decreasing sales.
Maintenance and Consulting. Cost of revenues from maintenance and consulting
consists primarily of personnel related costs incurred in providing telephone
support and software updates. Cost of revenues from maintenance and consulting
was $3.3 million and $4.6 million, representing 29% and 32% of total
maintenance and consulting revenues for the fiscal years ended June 30, 1995
and 1996, respectively. This increase, as a percentage of related revenues,
was due to added headcount in the worldwide customer support department
required to keep pace with the increased product sales from period to period
and outsourcing of support and maintenance obligations from the Company's
Swiss subsidiary. Although the Company expects that the percentage may
increase in the next fiscal year as a result of the HARBOR acquisition, the
Company does not expect it to increase thereafter.
Operating Expenses
Total operating expenses were $20.4 million and $33.0 million, representing
75% and 97% of total revenues for the fiscal years ended June 30, 1995 and
1996, respectively. Excluding the charge for purchased research and
development related to the New Era acquisition, the operating expenses for the
fiscal year ended June 30, 1996 were $22.8 million representing 67% of total
revenues.
Product Development. Product development expenses consist primarily of
personnel related costs. Product development expenses were $6.2 million and
$5.2 million, representing 23% and 15% of total revenues for the fiscal years
ended June 30, 1995 and 1996, respectively. The reduction in product
development expenses resulted from the cancellation in March 1995 of a
significant product development program. The Company believes that research
and development expenses will increase in the future primarily due to the
expansion of the Company's product line as a result of the acquisition of New
Era and other anticipated product development efforts.
Product development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have not been significant in recent periods. In accordance with the Company's
policy, during fiscal year 1995 the Company wrote off $112,000 of capitalized
software because certain product enhancements were determined to be obsolete
based on the Company's assessment of net realizable value.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing personnel, the fixed costs of
worldwide field offices, and promotional costs. The Company sells through its
direct sales force, resellers and distributors. The direct channel produced
88% and 86% of product revenues for the fiscal years ended June 30, 1995 and
1996, respectively, and is also the major component of sales channel costs.
Sales and marketing expenses were $10.8 million and $13.3 million,
representing 40% and 39% of total revenues for the fiscal years ended June 30,
1995 and 1996, respectively. The increase in absolute dollars was a result of
higher commission rates, marketing program costs and the New Era acquisition.
The Company believes that sales and marketing expenses will increase in
absolute dollars as the Company continues to expand its sales force for both
HARBOR and TCPaccess and launch new corporate marketing programs.
General and Administrative. General and administrative expenses include
personnel and other costs of the finance, human resources and administrative
departments of the Company, and includes gains and losses on
23
<PAGE>
foreign currency exchange. General and administrative expenses were $3.3
million and $4.0 million, representing 12% of total revenues in each of the
fiscal years ended June 30, 1995 and 1996. The increase in dollar amounts for
general and administrative is attributable to the increased headcount required
to support the Company's expansion and a provision of $215,000 for doubtful
accounts. The increase in the allowance for doubtful accounts was the result
of an increase in accounts receivable and was based on management's judgment
relating to collectability of such accounts.
Purchased Research and Development and Product Amortization. Purchased
research and development expense incurred in connection with the New Era
acquisition was approximately $10.2 million, representing 30% of total
revenues for the fiscal year ended June 30, 1996. In addition, approximately
$321,000 of product amortization resulting from such acquisition was included
in the fiscal year ended June 30, 1996. See Note 2 of Notes to Consolidated
Financial Statements.
Interest Expense, net. Net interest expense was $81,000 and $507,000 for the
fiscal years ended June 30, 1995 and 1996, respectively. The increase was due
primarily to bank borrowings related to the New Era acquisition.
Benefit from (Provision for) Income Taxes. The income tax benefit for the
fiscal year ended June 30, 1995 was $1.6 million, with a net tax provision of
$114,000 recorded for the fiscal year ended June 30, 1996. The effective tax
rate for the fiscal year ended June 30, 1996 before income taxes and excluding
the write-off of purchased research and development and the benefit relating
to the recognition of the Company's deferred tax asset was approximately 39%.
See Note 8 of Notes to Consolidated Financial Statements.
FISCAL YEARS ENDED JUNE 30, 1994 AND 1995
Revenues
Total revenues were $21.9 million and $27.1 million for the fiscal years
ended June 30, 1994 and 1995, respectively, representing an increase of 24%
from fiscal 1994 to fiscal 1995. International revenues accounted for 36% and
42% of total revenues for the fiscal years ended June 30, 1994 and 1995,
respectively. The increase in international revenues in fiscal 1995 was
primarily attributable to an increase in the market acceptance of the
Company's products overseas and an increase in the number of international
sales offices, distributors and resellers selling the Company's products. The
Company established a sales and support office in Switzerland during fiscal
1994 and a sales and support office in Spain during fiscal 1995. The increase
in absolute dollar revenues from fiscal 1994 to fiscal 1995 accounted for the
increase in accounts receivable from period to period.
Product. Product revenues were $12.4 million and $15.8 million for the
fiscal years ended June 30, 1994 and 1995, respectively, representing an
increase of 28% from fiscal 1994 to fiscal 1995. The increase from year to
year was primarily the result of increased sales of TCPaccess which reflect
the accelerated acceptance of TCP/IP as a networking protocol. Product
revenues derived from hardware product sales were $2.8 million and $4.0
million for the fiscal years ended June 30, 1994 and 1995, respectively.
Maintenance and Consulting. Maintenance and consulting revenues were $9.5
million and $11.3 million, representing 44% and 42% of total revenues for the
fiscal years ended June 30, 1994 and 1995, respectively, and represented an
increase of 18% from fiscal 1994 to fiscal 1995. The increase was primarily
due to an increase in the number of registered customers electing to subscribe
to maintenance and support contracts after the expiration of the warranty
period, which is generally 90 days. The increase from fiscal 1994 to fiscal
1995 parallels the overall higher increase in product revenues. In fiscal
1995, the Company began to sell consulting services.
Cost of Revenues
Product. Cost of revenues from product sales was $2.4 million and $3.3
million, representing 19% and 21% of the related revenues for the fiscal years
ended June 30, 1994 and 1995, respectively. The increase in cost of
24
<PAGE>
revenues from product sales in absolute dollars and as a percentage of total
revenues from fiscal 1994 to fiscal 1995 was primarily related to an increase
in third-party product revenue, which carries a higher cost of revenues than
the Company's software products.
Maintenance and Consulting. Cost of revenues from maintenance and consulting
was $1.4 million and $3.3 million, representing 15% and 29% of the related
revenues for the fiscal years ended June 30, 1994 and 1995, respectively. The
increase in cost of revenues from maintenance and consulting in fiscal 1995 as
a percentage of related revenues compared to fiscal 1994 was attributable to
added headcount in worldwide customer support and consulting and a change in
the estimate for the recoverability of support inventory to reflect net
realizable value which caused a decrease in inventory. The Company does not
anticipate additional changes to this estimate in the future.
Operating Expenses
Product Development. Product development expenses were $6.3 million and $6.2
million, representing 29% and 23% of total revenues for the fiscal years ended
June 30, 1994 and 1995, respectively. Product development expenses were higher
in fiscal 1994 due to staffing for software engineers required to research and
develop new client/server technology. In fiscal 1995, the Company canceled
this research project and reduced the staffing levels in research and
development.
Sales and Marketing. Sales and marketing expenses were $8.4 million and
$10.8 million, representing 38% and 40% of total revenues for the fiscal years
ended June 30, 1994 and 1995, respectively. Sales and marketing expenses
increased in the period due to the opening of two international subsidiaries,
expansion of the Company's sales force and associated support staff, increased
marketing and promotional activities and increased commission expenses.
General and Administrative. General and administrative expenses were $2.6
million and $3.3 million, representing 12% of total revenues in each of the
fiscal years ended June 30, 1994 and 1995. The increase in absolute dollars in
fiscal 1995 compared to fiscal 1994 was primarily the result of adjustments
for import duties and sales tax liability.
Interest Expense, net. Net interest expense was $224,000, and $81,000, for
the fiscal years ended June 30, 1994, and 1995, respectively. Net interest
expense decreased year to year as bank borrowings declined and as interest
income increased due to higher invested cash balances.
Benefit from (Provision for) Income Taxes. The Company recorded an income
tax benefit of $1.6 million in the fiscal year ended June 30, 1995, reflecting
partial reversal of the valuation allowance against the Company's deferred tax
asset. The income tax provision for the fiscal year ended June 30, 1994 was
$273,000.
Extraordinary Items. In fiscal 1994, the Company recorded a gain of $1.3
million as the result of restructuring debt with a commercial lender. See Note
5 of Notes to Consolidated Financial Statements.
25
<PAGE>
QUARTERLY RESULTS
The following tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended June 30, 1996, as well as such
data expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Company's
audited consolidated financial statements and notes thereto. The Company
believes that results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... $3,533 $4,016 $ 2,619 $5,650 $3,034 $ 4,880 $5,282 $6,474
Maintenance and
consulting........... 2,473 2,720 3,177 2,891 3,531 3,284 3,691 3,826
------ ------ ------- ------ ------ ------- ------ ------
Total revenues...... 6,006 6,736 5,796 8,541 6,565 8,164 8,973 10,300
------ ------ ------- ------ ------ ------- ------ ------
Cost of revenues:
Product............... 856 834 665 961 640 1,002 641 1,130
Maintenance and
consulting........... 555 669 1,123 946 1,067 1,081 1,171 1,275
------ ------ ------- ------ ------ ------- ------ ------
Total cost of
revenues........... 1,411 1,503 1,788 1,907 1,707 2,083 1,812 2,405
------ ------ ------- ------ ------ ------- ------ ------
Gross profit............ 4,595 5,233 4,008 6,634 4,858 6,081 7,161 7,895
Operating expenses:
Product development... 1,604 1,737 1,751 1,153 1,124 1,170 1,487 1,460
Sales and marketing... 2,292 2,651 2,500 3,349 2,505 3,033 3,422 4,356
General and
administrative....... 648 771 1,138 772 833 955 1,202 964
Purchased research and
development and
product amortization. -- -- -- -- -- 10,158 160 161
------ ------ ------- ------ ------ ------- ------ ------
Total operating
expenses............ 4,544 5,159 5,389 5,274 4,462 15,316 6,271 6,941
------ ------ ------- ------ ------ ------- ------ ------
Operating income (loss). 51 74 (1,381) 1,360 396 (9,235) 890 954
Interest expense, net... (44) (30) (26) 19 21 20 (261) (287)
------ ------ ------- ------ ------ ------- ------ ------
Income (loss) before
provision for income
taxes.................. 7 44 (1,407) 1,379 417 (9,215) 629 667
Benefit from (provision
for) income taxes...... -- -- -- 1,624 (163) 554 (245) (260)
------ ------ ------- ------ ------ ------- ------ ------
Net income (loss)....... $ 7 $ 44 $(1,407) $3,003 $ 254 $(8,661) $ 384 $ 407
====== ====== ======= ====== ====== ======= ====== ======
Net income (loss) per
share.................. $ 0.00 $ 0.01 $ (0.45) $ 0.62 $ 0.05 $ (2.77) $ 0.08 $ 0.08
====== ====== ======= ====== ====== ======= ====== ======
Shares used in per share
calculation............ 4,770 4,823 3,114 4,849 4,829 3,125 5,016 5,161
====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
26
<PAGE>
The following table sets forth certain unaudited quarterly financial
information of the Company for each of the Company's last eight fiscal
quarters expressed as a percent of total revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... 58.8% 59.6% 45.2% 66.2% 46.2% 59.8% 58.9% 62.9%
Maintenance and
consulting........... 41.2 40.4 54.8 33.8 53.8 40.2 41.1 37.1
----- ----- ----- ----- ----- ------ ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ------ ----- -----
Cost of revenues:
Product............... 14.3 12.4 11.5 11.3 9.7 12.3 7.1 11.0
Maintenance and
consulting........... 9.2 9.9 19.3 11.0 16.3 13.2 13.1 12.3
----- ----- ----- ----- ----- ------ ----- -----
Total cost of
revenues........... 23.5 22.3 30.8 22.3 26.0 25.5 20.2 23.3
----- ----- ----- ----- ----- ------ ----- -----
Gross profit............ 76.5 77.7 69.2 77.7 74.0 74.5 79.8 76.7
Operating expenses:
Product development... 26.7 25.8 30.2 13.5 17.1 14.3 16.6 14.1
Sales and marketing... 38.2 39.4 43.1 39.2 38.2 37.2 38.1 42.3
General and
administrative....... 10.8 11.4 19.7 9.0 12.7 11.7 13.4 9.4
Purchased research and
development and
product amortization. -- -- -- -- -- 124.4 1.8 1.6
----- ----- ----- ----- ----- ------ ----- -----
Total operating
expenses........... 75.7 76.6 93.0 61.7 68.0 187.6 69.9 67.4
----- ----- ----- ----- ----- ------ ----- -----
Operating income (loss). 0.8 1.1 (23.8) 16.0 6.0 (113.1) 9.9 9.3
Interest expense, net... (0.7) (0.4) (0.5) 0.2 0.4 0.2 (2.9) (2.8)
----- ----- ----- ----- ----- ------ ----- -----
Income (loss) before
provision for income
taxes.................. 0.1 0.7 (24.3) 16.2 6.4 (112.9) 7.0 6.5
Benefit from (provision
for) income taxes...... -- -- -- 19.0 (2.5) 6.8 (2.7) (2.5)
----- ----- ----- ----- ----- ------ ----- -----
Net income (loss)....... 0.1% 0.7% (24.3)% 35.2% 3.9% (106.1)% 4.3% 4.0%
===== ===== ===== ===== ===== ====== ===== =====
</TABLE>
The Company's business has experienced and is expected to continue to
experience significant seasonality. The Company has higher sales of its
software products in the quarters ending in December and June and weaker sales
in the quarters ending in September and March. The decrease in product
revenues in the quarters ending in September is due to the international
customer seasonal buying patterns. The quarters ending in March are
historically weak due to government and large organization annual budgeting
cycles. The Company believes this pattern will continue. The increase in
product revenues in the three most recent quarters is primarily attributable
to increased software license fees for the Company's TCPaccess product as well
as the sale of the HARBOR product internationally. The decrease in product
revenues in the quarter ended in March 31, 1995 also reflected the delay in
the release of Version 3.1 of TCPaccess until the quarter ended June 30, 1995.
The increase in maintenance and consulting revenue in the quarter ended
September 30, 1995 related primarily to delays in renewals of customer
maintenance agreements and increased consulting and a maintenance revenue
adjustment for prior periods.
The Company's operating results have historically been, and will continue to
be, subject to quarterly and annual fluctuations due to a variety of factors,
including: timely introduction, enhancement and market acceptance of new
versions of the Company's products; seasonal customer demand; timing of
significant orders; changes in the pricing policies by the Company or its
competitors; anticipated and unanticipated decreases in unit average selling
prices of the Company's products; increased competition; changes in the mix of
the products sold and in the mix of sales by distribution channel; the gain or
loss of significant customers; the introduction
27
<PAGE>
of new products or product enhancements by competitors; currency fluctuations;
and the failure to anticipate changing customer product requirements. The
Company's sales cycle, from the date the sales agent first contacts a
prospective customer to the date a customer ultimately purchases the Company's
product, is typically three to six months for the TCPaccess products and six
to nine months for the HARBOR products. There can be no assurance that the
Company's sales cycle will not lengthen, exposing it to the possibility of
shortfalls in quarterly revenues, which could have a material adverse effect
on the Company's business, financial condition or results of operations, and
cause results to vary from period to period. The Company's operating results
will also be affected by general economic and other conditions affecting the
timing of customer orders and capital spending, and order cancellations or
rescheduling. The Company operates with very little backlog and most of its
product revenues in each quarter result from orders closed in that quarter,
and a substantial majority of those orders are completed at the end of that
quarter. The Company establishes its expenditure levels for sales, marketing,
product development and other operating expenses based in large part on its
expectations as to future revenues, and revenue levels below expectations
could cause expenses to be disproportionately high. If revenues fall below
expectations in a particular quarter, operating results and net income are
likely to be materially adversely affected. Any inability of the Company to
adjust spending to compensate for failure to meet sales forecasts or to
collect accounts receivable, or any unexpected increase in product returns or
other costs, could magnify the adverse impact of such events on the Company's
operating results. Due to the foregoing factors, quarterly revenue and
operating results are likely to vary significantly in the future and period-
to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of fiscal 1994, the Company has financed its operations
primarily through bank borrowings and cash generated from operations. Net cash
provided by (used in) operating activities was $(1.4) million, $2.2 million
and $4.1 million for the fiscal years ended June 30, 1994, 1995 and 1996,
respectively. Net cash used in operating activities in fiscal 1994 consisted
primarily of an increase in accounts receivable and a non-cash gain on debt
restructuring, partially offset by net income. Net cash provided by operating
activities in fiscal 1995 consisted primarily of the net income, depreciation
and amortization and an increase in deferred maintenance revenue, partially
offset by an increase in deferred income taxes. Net cash provided by operating
activities in fiscal 1996 consisted primarily of purchased research and
development partially offset by a net loss. Net cash used in investing
activities was $952,000, $2.6 million and $8.1 million for the fiscal years
ended June 30, 1994, 1995 and 1996, respectively. Net cash used in investing
activities in fiscal 1994 related to the acquisition of property and equipment
and capitalization of software development costs. Net cash used in fiscal 1995
consisted primarily of the purchase of available-for-sale securities. Net cash
used in investing activities in fiscal 1996 was primarily due to the Company's
acquisition of New Era. Net cash provided by (used in) financing activities
was $4.5 million, $(1.4) million and $6.1 million for the fiscal years ended
1994, 1995 and 1996, respectively. Net cash provided by financing activities
in fiscal 1994 consisted primarily of proceeds from issuance of Preferred
Stock and proceeds from bank line of credit and notes payable to stockholder,
partially offset by payments on notes payable. Net cash provided by financing
activities in fiscal 1995 was primarily from payments on capital lease
obligations and payments on notes payable and bank line of credit. Net cash
provided by financing activities in fiscal 1996 consisted primarily of
proceeds from the bank line of credit and term loan established for the New
Era acquisition. The Company's business is geographically dispersed resulting
in a significant portion of its cash residing outside of the United States. At
June 30, 1996, 39% of the Company's cash was in European bank accounts.
The local currency is the functional currency for each of the Company's
foreign subsidiaries. Assets and liabilities of the foreign subsidiaries are
translated to U.S. dollars at current rates of exchange, and revenues and
expenses are translated using weighted average rates, in accordance with
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation." Foreign currency transaction gains and losses are included in
the results of operations. The change in exchange gains and losses in the
Consolidated Statements of Cash Flows is due to the fluctuation of local
currency compared to the U.S. dollar during the periods presented.
Historically, the Company has not invested in derivative securities or any
other financial instruments that involve
28
<PAGE>
a high level of complexity or risk. Management expects that, in the future,
cash in excess of current requirements will be invested in investment grade,
interest-bearing securities.
At June 30, 1996, the Company had $6.1 million in cash and cash equivalents
and $(6.4) million in working capital. The negative working capital balance at
June 30, 1996 resulted from the use of working capital in connection with the
acquisition of New Era in December 1995. The Company also has available a line
of credit agreement with a bank that expires on November 29, 1996, which is
collateralized by certain assets of the Company and permits borrowings of a
percentage of eligible accounts receivable and bears interest at the lender's
prime rate plus 1.5%. Under the terms of the agreement, the Company is
required to maintain a certain minimum quick ratio and tangible net worth and
maximum debt to tangible net worth, as well as quarterly profitability. At
June 30, 1996, $5.0 million was outstanding under the line of credit with no
amounts remaining available for borrowing under this line. The Company expects
to renew this line of credit or obtain a replacement credit facility upon
expiration of this line of credit. In addition, the Company has a note payable
with a bank that is due on December 31, 1998, is collateralized by certain
assets of the Company and bears interest at the lender's prime rate plus 2.5%.
Under the terms of the note, the Company is required to maintain certain
financial covenants. At June 30, 1996, $3.0 million was outstanding under the
note. The Company had $9.4 million in accounts receivable, net of allowance
for doubtful accounts, and $8.1 million of unearned revenues, substantially
all of which will be earned over the 12-month period following June 30, 1996.
Capital expenditures, including amounts financed under capital leases, have
remained relatively constant in recent periods, aggregating approximately
$885,000, $721,000 and $384,000 for the fiscal years ended June 30, 1994, 1995
and 1996, respectively. The Company had no material capital expenditure
commitments at June 30, 1996. The Company expects that it will have
$1.0 million of capital expenditures through June 30, 1997, including
approximately $500,000 to expand its customer support system.
The Company believes that the net proceeds from the sale of the Common Stock
offered hereby, together with its current balances, cash available under its
line of credit and cash flow from operations, if any, will be sufficient to
meet its working capital and capital expenditure requirements at least through
December 31, 1997. Although operating activities may provide cash in certain
periods, to the extent the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash.
Consequently, any such future growth may require the Company to obtain
additional equity or debt financing, which may not be available or may be
dilutive.
29
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Interlink Computer Sciences, Inc. ("Interlink" or the "Company") is a
supplier of high-performance solutions for enterprise networked systems
management. Interlink provides software and services which enable customers to
use their IBM and IBM-compatible MVS mainframes as "enterprise servers" in
distributed, heterogeneous client/server network environments. The Company's
products and services enable customers to transport, access and manage
mission-critical data and applications across distributed network
environments. The Company develops and markets network transport products
which provide for enterprise server TCP/IP connectivity, fault tolerance and
network file transfer. Interlink also develops and markets systems management
applications for network backup, archive and restore, distribution of
applications, data and software, network printing and other tools which expand
the functionality of the enterprise server.
As of June 30, 1996, the Company had approximately 1,200 customers
worldwide. The Company markets and sells its software and services primarily
through its direct sales organization in North America and Europe and, to a
lesser extent, through resellers and international distributors. Significant
customers which have purchased/licensed the Company's products include the
Internal Revenue Service, MACIF, U.S. Sprint, W.R. Grace & Co. and Wells Fargo
Bank. The Company recently entered a strategic relationship with Legato to
develop products which will enable the companies to provide enterprise-class
storage management solutions.
INDUSTRY BACKGROUND
Many large organizations depend on centralized mainframe computer systems to
manage mission-critical software applications and to serve as the repository
for essential business data. These systems, along with sophisticated systems
management software, provide highly available computer processing resources,
are extremely reliable over extended periods of usage, are scalable to
accommodate a large number of users, and provide for secure processing and
storage of large amounts of data.
Recently, advances in hardware, software and networking technologies have
led to the deployment of client/server systems, in which computing tasks are
distributed throughout a network of computers. Organizations have adopted
client/server networks to obtain the advantages inherent in distributed
computing, such as independent local processing and storage of data, lower
initial cost and efficient use of common software programs.
Organizations are now seeking the technology to integrate mainframe
computers into their client/server networks as "enterprise servers" which,
like other servers on the client/server network, have a specialized purpose
and function. Specifically, the enterprise server and the systems management
applications associated with its use are capable of providing reliable and
efficient systems management, data security, and distribution of data and
applications. Improvements in the cost-effectiveness of mainframe systems have
significantly increased the use of mainframe computers as enterprise servers.
The integration of TCP/IP, an open systems transport protocol, with the IBM
MVS mainframe operating system, enables the connection of centralized
mainframes to distributed client/server networks on a peer-to-peer basis
regardless of the hardware or software used on such networks. Organizations
seeking distributed access to mainframe data, highly reliable computing
resources, and leverage from existing investments in hardware, applications
and training, have seen the integration of the enterprise server into the
client/server network as a necessary evolution. Software applications which
enhance the management of complex computing resources allow client/server
networks to take advantage of the mainframe as an enterprise server. By
recognizing this
30
<PAGE>
movement to "network-centric" computing and incorporating TCP/IP functionality
in recent releases of the MVS operating system, IBM has also acknowledged the
emergence of the mainframe as an enterprise server. Organizations now can take
advantage of investments in mainframe computers and applications by leveraging
these investments across the client/server network.
Organizations implementing client/server computing environments which
leverage the benefits of the enterprise server require rapid TCP/IP access and
a new class of software solutions to enable these previously disparate
computing environments to efficiently interoperate. At the network transport
level, the speed, efficiency and reliability of a given transport solution can
have a considerable impact on the effectiveness of the overall computing
environment, particularly as the volume of data stored and accessed across the
network increases. Organizations which implement high-performance, efficient
network transport solutions are able to lower the computing burden on their
enterprise servers and increase the potential to defer costly hardware
upgrades. At the systems level, the complexity of networks with both
centralized and distributed resources creates the need for robust applications
to perform storage management, software distribution and output management.
Customers thus require both high-performance network transport products and
systems management applications to transport, store and protect critical data
and applications. Furthermore, users require a high level of customer service
and support as they strive to leverage the advantages of both centralized and
distributed architectures in a single seamless network.
THE INTERLINK SOLUTION
Interlink's products enable MVS mainframes to function as enterprise servers
in client/server environments. The Company offers a suite of high-performance
network transport products and systems management applications which
efficiently transport, store and protect the integrity of mission-critical
data and applications. By providing both network transport products and
systems management applications as a single solution, the Company enhances the
customer's ability to manage complex computing resources. The Company believes
its high level of customer service and technical support form a key component
of its enterprise networked systems management solution by addressing the
customer's need to integrate the enterprise server with complex, heterogeneous
client/server networks. With almost ten years of experience in the enterprise
networked systems management industry, Interlink provides networking solutions
that build upon its expertise in the integration of the MVS operating system
with TCP/IP and its reputation for high-performance, efficient products.
The Company's principal network transport product, TCPaccess, integrates the
MVS enterprise server into client/server networks using open systems TCP/IP
protocols. The Company's HARBOR and other systems management applications
backup data from, distribute software to, and allow printing across the
clients and servers on the network, which expands the functionality of the
enterprise server.
31
<PAGE>
STRATEGY
Interlink's objective is to become the leading supplier of high-performance
solutions for enterprise networked systems management. Key elements of the
Company's strategy include:
Expand Functionality of the Enterprise Server. Interlink seeks to enable
customers to leverage the benefits of the enterprise server by integrating it
into client/server networks and by optimizing the utilization of powerful
existing computing resources. The Company's approach to providing integrated
enterprise server-to-network connectivity and systems management solutions is
to develop, market and support a suite of products that collectively address
the needs of the organization seeking to fully exploit the benefits of an
enterprise server. To address the needs of the enterprise networked systems
management market, the Company recently acquired New Era and its HARBOR
products, is developing enhanced versions of Enterprise Print Services, and
intends to continue to upgrade and enhance its existing product line.
Capitalize on Sales Opportunities. The Company is expanding its sales force
and is dedicating additional resources to capitalize on new sales opportunities
resulting from the acquisition of New Era. The Company intends to pursue
significant cross-sell opportunities by leveraging its existing customer base
of approximately 900 TCPaccess, 160 HARBOR and 530 DECnet licenses. The Company
also plans to market and sell its HARBOR products to organizations that utilize
SNA rather than TCP/IP networks.
Employ Consultative Sales Approach. The Company intends to develop and
maintain strong customer relationships by leveraging the broad range of
expertise of its consultative sales force to address the complexity of network
solutions. This expertise includes knowledge of mainframes, numerous server
operating systems, TCP/IP, networking technologies and a variety of third-party
software products. The Company seeks to provide comprehensive solutions to its
customers by examining their current network architectures and system problems
and by configuring solutions that best leverage the use of enterprise servers
and other existing computing resources. The Company believes that providing a
comprehensive solution, using both Interlink and complementary third-party
products, builds long-term customer relationships and facilitates future add-on
sales efforts.
Differentiate Through Superior Customer Support. To support customers that
have implemented complex networks to manage mission-critical applications and
data, the Company provides for local-language customer service and technical
support for both domestic and international customers. This support includes
24-hour, 7 day worldwide telephone support, on-site problem resolution, and
comprehensive consulting and training. The Company believes that this high
level of customer support not only differentiates its solution but also
provides insight into customer needs which influences the Company's future
product development efforts.
Leverage Strategic Relationships. The Company will leverage strategic
marketing and development relationships in order to provide a complete solution
to its customers' evolving network systems management needs. The Company
recently formed a strategic relationship with Legato to develop products which
will enable the companies to provide enterprise-class storage management
solutions. In addition, the Company is a member of the IBM S/390 Partners in
Development group, which provides the Company advance notification of
developments in the MVS operating system.
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PRODUCTS
The Company's principal software products include network transport products
and systems management applications. The Company's network transport products
provide the communication infrastructure between distributed client/server
networks and the enterprise server. Interlink's systems management
applications allow centralized management of applications and data across
distributed systems. The following table summarizes the Company's software
products and their principal functions:
<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION
<C> <S>
NETWORK TRANSPORT PRODUCTS
--------------------------
TCPaccess Provides TCP/IP networking protocols that
allow MVS mainframes to communicate with
clients and servers.
TCPaccess Fault Tolerant TCPaccess enhanced to provide redundancy to
achieve high levels of reliability in
networks with multiple paths.
SNS/NFS Allows the enterprise server to act as a
file server in Network File System ("NFS")
environments.
SYSTEMS MANAGEMENT APPLICATIONS
-------------------------------
HARBOR Backup Efficiently backs up and restores data on
client/server networks to an enterprise
server.
HARBOR Distribution Manages cataloging, installing, and up-
grading of applications, data files and
software packages across the enterprise.
HARBOR Distributed Storage Server Allows local backup and restore on the LAN
with centralized control over transmission
and security.
Enterprise Print Services Manages the printing of enterprise server
applications to network printers.
CICS Programmers Toolkit Simplifies the development of applications
for the CICS on-line transaction processing
environment across TCP/IP networks.
</TABLE>
Network Transport Products
The Company's network transport products, including its TCPaccess products,
enable peer-to-peer communication and processing between enterprise servers
and heterogeneous network systems. The TCPaccess products operate with all IBM
System/370 and System/390 and compatible enterprise servers operating on
essentially all MVS operating systems. The network transport products include
a base module and several optional modules. For the last fiscal year, a
typical sale of the Company's network transport products ranged from $50,000
to $100,000 per enterprise server, based on its size and customer location.
TCPaccess. TCPaccess provides TCP/IP protocols and common applications such
as file transfer, terminal access, electronic mail and system management.
TCPaccess is manageable from remote Simple Network Management Protocol
("SNMP") management stations through the SNMP agent contained in the product.
TCPaccess includes an Application Programmer Interface ("API") which allows
customers to easily write interfaces to applications.
TCPaccess Fault Tolerant. TCPaccess Fault Tolerant helps ensure continuous
operations for mission-critical production environments and allows user
sessions to continue across hardware failures and routing changes by quickly
re-establishing failed connections. This optional product is contained within
TCPaccess, and is enabled with a software key.
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SNS/NFS. SNS/NFS enables LAN clients that support the NFS model to
transparently access the wide variety of file types on the enterprise server.
SNS/NFS gives LAN users the ability to access remote MVS datasets as if they
were local.
Systems Management Applications
The Company's systems management applications provide centralized backup,
restore, distribution and output management. The Company's recent acquisition
of New Era and its HARBOR products enhanced the Company's systems management
applications product line. Prior to the acquisition, the Company distributed
the HARBOR products in certain countries in Europe for more than a year. The
HARBOR products are integrated client/server applications, which enable
management of distributed systems at the enterprise level. The HARBOR products
integrate with existing data storage resources and allow information
technology personnel to centrally manage a variety of client systems and
communications products. For the last fiscal year, a typical initial sale of
the Company's systems management applications ranged from $20,000 to $100,000,
based on the number of servers and clients as well as the customer's location.
HARBOR Backup. HARBOR Backup provides reliable, centralized backup and
restore for distributed environments. This product efficiently backs up data
stored on clients and servers to the enterprise server. HARBOR Backup features
a file redundancy checker to scan for identical files to avoid duplicative
data movement, a consolidation routine to ensure that a full backup of a
server or client need only be done once, and exclusion rules to eliminate
backing up temporary or system files that would not need to be restored in the
event of loss.
HARBOR Distribution. HARBOR Distribution offers management of applications,
data files and software packages across the enterprise. HARBOR Distribution
enables administrators to catalog, install, upgrade and de-install
applications, data files and software packages for all clients and servers. By
using HARBOR Distribution, customers can eliminate repetitive installation and
upgrade procedures through enterprise level automation. HARBOR Distribution
updates all clients and servers with the most recent application release,
before application processing resumes, and reports the inventory of software
for each client and server on the system. A distributed LAN server can be used
to store files for later delivery to client systems, substantially reducing
delivery times, especially over WANs.
HARBOR Distributed Storage Server. HARBOR Distributed Storage Server allows
for local network storage, backup and restore of data, while utilizing the
enterprise server to provide overall control. HARBOR Distributed Storage
Server reduces restore time and minimizes communications costs.
Enterprise Print Services. Enterprise Print Services ("EPS") manages the
printing of enterprise server applications to network printers. Each printing
resource in the enterprise can be utilized from other environments. EPS
resides on the enterprise server, providing bi-directional access from
applications in one environment to printers in the other.
CICS Programmers Toolkit. CICS Programmers Toolkit simplifies the task of
developing applications for the CICS on-line transaction processing
environment that communicate with peer applications in the TCP/IP environment.
Key features of the product include: an easy-to-use API and tools that allow
for more rapid development of applications; efficient operation allowing
higher transaction volumes; and a powerful administrator interface allowing
product configuration, operation and debugging in real-time without adversely
affecting on-line applications.
Other Products
The Company sells a network controller which is the physical hardware
connection between the enterprise server and the network. This product,
manufactured by Bus-Tech, is generally sold with the Company's TCPaccess
product. The list price of the current network controller ranges from $17,000
to $48,000. Sales of network controllers accounted for 15% and 11% of total
revenues in the fiscal years ended June 30, 1995 and 1996, respectively. The
Company's DECnet products provide networking protocols that allow MVS and VM
mainframes to communicate with devices using the DECnet protocol. Although the
Company no longer actively markets this product, the Company derives
substantial maintenance revenues from the DECnet installed customer base.
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<PAGE>
SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets and sells its software and services primarily through
its direct sales organization and, to a lesser extent, through resellers and
international distributors. The Company intends to develop and maintain strong
customer relations by leveraging the broad range of expertise of its
consultative sales force to address the complexity of network solutions. The
Company's large national and multinational customers require a highly
consultative sales approach and specialized account management due to the
technical complexities of their network environments, their geographically
dispersed installations, systems management needs and centralized decision
making processes. The sales process normally requires a customer trial, which
is managed by the Company's local technical systems engineers to aid the
customer in planning and selecting their enterprise products. The Company
believes that its consultative sales approach provides it with valuable
customer feedback which the Company uses to direct product development. The
Company facilitates leasing through various independent leasing companies for
its customers who prefer monthly payment arrangements, usually over a term of
36 months. As of June 30, 1996, the Company employed 89 persons in sales,
marketing, customer support, and consulting. For the fiscal years ending June
30, 1995 and 1996, 50% and 46%, respectively, of the Company's product
revenues were derived from international sales and 88% and 86%, respectively,
of the Company's product revenues were derived from direct sales.
Sales
Direct Sales. The Company's sales organization consists of a staff of
software sales professionals based in field sales offices. As of June 30,
1996, the Company's direct sales force included 22 account executives and 21
technical pre-sales systems engineers. Field offices are staffed by both sales
and technical pre-sales systems engineers who are located in Atlanta, Chicago,
Dallas, San Francisco and Washington, D.C. The international sales
organization has offices in Calgary, Koln, London, Madrid, Paris and Zurich.
Strategic Relationship with Legato. The Company recently formed a strategic
relationship with Legato to develop products which will enable the companies
to provide enterprise-class storage management solutions. Pursuant to the
terms of the agreement, Interlink intends to develop a new product called
HARBOR Agent for Networker (Legato's client/server storage management
product), which will be distributed by Legato. Interlink will be an authorized
reseller of Legato's storage management products, including the new HARBOR
Agent for Networker. The Company has no historical relationship with Legato,
and there can be no assurance that the Company will be able to sell its
products through Legato.
Indirect Distribution Channels. The Company currently has a reseller
relationship with Hitachi Data Systems Corp., which distributes the Company's
products in North America. The Company also sells through international
distributors that provide pre- and post-sale local-language support in
Australia, Belgium, Brazil, Denmark, Finland, Holland, Italy, Japan, Norway,
the Philippines, Singapore, South Africa, Sweden and Venezuela.
Marketing
In support of its direct and indirect sales, the Company conducts marketing
programs to position and promote its products and services. Marketing
personnel engage in a wide variety of activities to support the distribution
channels, including direct mail, advertising, seminars, public relations and
trade shows. In addition, the marketing department also conducts sales and
product training seminars for both the Company's internal sales force and
those of its channel partners. The marketing organization also has a leading
role in product marketing activities, including product management,
competitive positioning and long term product direction.
Customer Support
For each of the fiscal years ended June 30, 1995 and 1996, 42% of the
Company's total revenues were derived from maintenance and consulting. The
Company offers an annual maintenance program to its licensees through its own
support organization that includes product updates and post-sales telephone,
electronic mail,
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<PAGE>
Internet and fax hotline support. The price for annual maintenance is
typically 15% to 18% of the product list price. The Company also offers
installation and training services on a fee basis to assist customers in
deploying enterprise wide applications utilizing the Company's products.
Training is offered at the Company's in-house facilities or at the customers'
site. The Company's distributors and resellers also offer first level customer
support to their end users, while relying on the Company for any additional
support as needed. Because the Company's customers depend on the Company's
products to transport, store and protect critical data, the Company believes
its ability to provide a high level of customer service and technical support
is important to its marketing efforts and to the building of long-term
customer relationships.
CUSTOMERS
As of June 30, 1996, the Company had approximately 1,200 customers, with no
single customer accounting for more than 5% of the Company's net revenues in
any of the last three fiscal years. The following is a representative list of
the Company's customers categorized by industry. The Company believes these
customers are typical of the Company's customer base by virtue of the
industries they represent and the computer operations they manage using the
Company's products.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Communications Financial Services Health Care Manufacturing
- -------------- ------------------ ----------- -------------
BellSouth ABN-Amro Bank CHU Nancy Air Products and
NYNEX Bank for International Hospital General Chemicals
Pacific Telecom Settlements Cox Medical System Apple Computer
SITA Bank of Montreal University of California Boeing
SBC Communications Bank Vontobel at Davis Ford Werks
Telecom Eirann Barclays Bank University of Pittsburgh Inland Steel Industries
Telecomm Italia Citicorp Vision Service Plan Leggett & Platt
U.S. Sprint Commerzbank Legrand
Williams Information Credit Agricole Pyrenees Insurance MAN
Services Gascogne --------- McDonnell Douglas
Edward D. Jones Allstate Insurance Otis Elevator Company
Consumer/Retail Imperio Group Rolls Royce
- --------------- Pictet & Cie Abbey Life Assurance Ross Laboratories
Argos Distributers SIBS California State Saarstahl
Federated Systems Schweiz Kreditanstalt Auto Association SNECMA Group
Group United Overseas Bank Kemper National Sollac
Giant Food Wells Fargo Insurance Companies Sony
J. Crew Group MACIF Thyssen
Johnson & Johnson Government Pearl Insurance W.R. Grace
Publix SuperMarkets ---------- State Farm Mutual
Quaker Oats Company AOK Bundesverband Automobile Insurance Services
Sara Lee Internal Revenue Service --------
Service Merchandise NASA
Sherwin-Williams Company Securities and Exchange Axiom Corporation
Talbots Commission Comdisco
Tandy Information Services U.S. Department of State Debis Munich
The Gap Virginia Department of Dun & Bradstreet
Wilson's House of Suede Information Technology Lexis-Nexis
Mastercard International
Energy Mead Corporation
- ------ Reuters Holdings
British Gas
Florida Power & Light
Powergen
South Wales Electricity
Southern California Edison
Southern Company
</TABLE>
36
<PAGE>
The following examples are representative of how the Company's present
customers utilize TCPaccess and HARBOR in solving their network transport and
systems management needs. These examples have been prepared by the Company
based on information provided by the respective customer.
University Medical Center
A major university medical center with more than 1,000 patient beds and
10,000 employees sought to centralize the management of computerized patient
records, enable the collection of critical information from numerous sources,
such as physicians offices, surgery areas, test labs and pharmacy, and provide
data access wherever needed to assure that doctors, nurses and lab technicians
have up-to-date information. In order to achieve these objectives, the
university decided to integrate its mainframe applications with numerous LANs
and thousands of terminal devices located across the campus. When the
university standardized on TCP/IP as its interconnectivity protocol, it
selected Interlink to provide connectivity between the mainframe and the LANs.
The university installed TCPaccess, Enterprise Print Services, and the CICS
Toolkit for query processing to handle both inbound and outbound telnet
terminal sessions, file transfers and large volumes of remote printing to the
mainframe's page printers. Using Interlink's capabilities, the university has
been sending all of the major print jobs on this system to the enterprise
server. The university cited the Company's superior customer support in
addition to the functionality of the Company's products as principal reasons
for its decision to use the Company's products.
Natural Gas Supplier
A large supplier of industrial gases serving 2 million customers in Europe
is using TCPaccess to leverage the power of its mainframe resources to enhance
its client/server network. This customer's computer network in the United
Kingdom is used to ensure that its customers receive effective service
regardless of their geographic location. Historically, this customer used an
SNA network with approximately 2,000 terminals connected to an IBM mainframe.
In implementing its client/server environment this customer replaced its
terminals with PCs connected to Compaq servers running Windows NT, but wanted
to maintain the enterprise server to provide centralized data storage and
offer all users on the entire network a single point-of-contact for all key
customer information. As TCP/IP traffic increased, this customer's existing
TCP/IP product became less efficient. Switching to TCPaccess allowed this
customer to make more efficient use of its enterprise server by providing more
clients access to the central data store of the company.
Banking Institutions
Information is vital to the banking industry and protecting customer and
bank data is one of the foremost priorities at this major bank. This bank is a
full service financial organization serving customers throughout North America
and managing assets in excess of $150 billion. The bank has over 1,000
branches/offices and utilizes over 8,000 workstations and servers. The bank
chose HARBOR as its backup product because HARBOR meets its multi-site, data
integrity and high security needs.
A major European bank, with numerous worldwide subsidiaries, is using HARBOR
Backup in its decentralized backup system project. This customer sought host-
initiated, unattended over-night backup, and user-oriented and helpdesk-
supported restore in the case of emergency. The first phase of the project
covers backup and restore of approximately 700 OS/2 servers. Functionality,
security and support were the crucial factors in the bank's decision to choose
HARBOR. The bank plans to extend the project to an additional 500 OS/2
software development servers. In addition, in the first quarter 1996, the
decision was made to use HARBOR Distribution as the solution for software
distribution and management for their electronic software distribution
project.
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<PAGE>
TECHNOLOGY
The Company's core technologies are the basis for its enterprise networked
systems management products. These technologies allow for the expansion of
existing products and addition of new products to the Company's systems
management architecture.
Network Transport Products
The TCPaccess product line, the Company's principal network transport
products, was developed within an application architecture consisting of key
components which provide high-performance, efficient operation, rapid
development, reusable code and improved maintainability. These key components
are: (i) TCP/IP Base; (ii) TCP/IP APIs; (iii) TCP/IP Applications; and (iv)
IFS Architecture.
TCP/IP Base. The TCP/IP base technology incorporates a high speed, efficient
transport protocol implementation which allows client/server applications to
communicate using TCP/IP. This software product is a multi-layered
communications module with two basic functions: (i) communicating via drivers
with the LAN controller devices to provide physical network connectivity; and
(ii) implementing protocols to establish interoperability between TCP/IP
environments and the enterprise server. Included within the base technology
are fault tolerant features enabled when the customer purchases TCPaccess
Fault Tolerant. This fault tolerant technology allows TCP/IP to recover
automatically from hardware problems in the network to preserve the sessions
between the enterprise server and remote TCP/IP systems. All portions of
TCPaccess critical to high performance and efficient operation are written in
assembler language. The base technology was architected and implemented
natively in MVS for the enterprise server environment. Use of technology
porting was minimized to ensure optimum performance and efficiency. The
technology is developed in accordance with Requests for Comments governed by
the Internet Engineering Task Force, and the Company's personnel participate
in the standards development process for key TCP/IP standards.
TCP/IP Application Programming Interfaces. TCPaccess contains an API layer
to allow independent software vendors ("ISVs") and the Company's customers to
use the TCP/IP technology to develop client/server applications. A variety of
industry standard APIs are provided, including BSD sockets, X/Open Transport
Interface and Sun/ONC RPC/XDR. All of the APIs in TCPaccess were architected
and designed specifically for the enterprise server environment to deliver
high performance and efficient operation for ISV and customer applications.
TCP/IP Applications. Certain TCP/IP applications such as file transfer
protocol and tn3270 terminal access are implemented in the same address space
as the TCP/IP base technology. This architecture, in which key servers are in
the same address space, enhances the performance and efficiency of these
important services. The TCP/IP base and application services are implemented
as threads within a multi-threaded environment provided as part of the base
connectivity technology. The use of threading technology provides scalability
and permits large numbers and applications to be supported in TCPaccess.
IFS Architecture. IFS Architecture ("IFS") is proprietary enterprise server
software that provides for rapid development of systems management
applications within the enterprise server environment. TCPaccess is an IFS
application. Components of TCPaccess execute within IFS as separate processes
(e.g., TCP/IP protocol stack, API, domain name resolver, SNMP agent and
others). IFS is written in assembler language for high performance and low CPU
resource usage. Applications developed in IFS can span threads, processes and
address spaces, providing location transparency to developers to simplify and
speed the development of software. IFS also provides common system-level
services for IFS application developers. IFS significantly reduces the time
required to create new TCPaccess applications.
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<PAGE>
Systems Management Applications
The HARBOR products, the Company's principal systems management
applications, were developed within an application architecture consisting of
key components which provide high-performance, efficient operation, rapid
development, reusable code, portable code and improved maintainability. These
key components are: (i) HARBOR Transport Services; (ii) HARBOR Transport
Gateway; (iii) HARBOR Multi-System Platform; (iv) HARBOR Policy Database; and
(v) HARBOR Client User Interface.
HARBOR Transport Services. The HARBOR Transport Services is proprietary
networking middleware software that connects a large variety of clients,
servers, and networks in a customer's distributed system. HARBOR Backup,
HARBOR Distribution, HARBOR Transport Gateway and HARBOR Distributed Storage
Server all make use of HARBOR Transport Services. The technology enables
HARBOR developers to use one programming interface for network access,
regardless of the underlying transport protocol, shielding them from the
issues and difficulties that can be encountered in programming to individual
network transport protocol interfaces. HARBOR Transport Services can
automatically recover from network failures, including retrying operations
over an alternate protocol, transparently to the application. This single
networking API, and other APIs within HARBOR Transport Services, are key to
being able to develop portable networked systems management applications on a
variety of common client/server platforms.
HARBOR Transport Gateway. The HARBOR Transport Gateway is an application
built upon the HARBOR Transport Services which connects a large variety of
clients, servers and networks in a customer's distributed system. This
technology provides transparent conversion between LAN/WAN transport protocols
including TCP/IP, APPC, 3270, IPX/SPX, Asynch and others. The HARBOR Transport
Gateway permits a customer to utilize two or more dissimilar network transport
protocols in their environment, with the gateway performing the mapping of
HARBOR application data streams from one transport to another.
HARBOR Multi-System Platform. The HARBOR Multi-System Platform ("MSP") is
proprietary enterprise server software that permits rapid development of
applications within the HARBOR environment. The HARBOR Backup and HARBOR
Distribution products are MSP applications. Applications developed in MSP can
span threads, processes, address spaces and machines, providing location
transparency to developers to simplify and speed development of software. The
support within MSP for threading is a key to providing scalability,
performance and efficiency for HARBOR applications. MSP also provides common
system-level services for HARBOR software developers.
HARBOR Policy Database. The HARBOR Policy Database is a proprietary database
and an administrative facility that controls all HARBOR management functions,
and improves user and system administrator productivity. It provides a single
location for defining and managing security access, administrative policies
and distribution schedules for HARBOR Backup and HARBOR Distribution. The
database is hierarchical in nature allowing rules to be defined at a high
level as defaults and then augmented by different levels of administration.
The technology is integrated with standard security management interfaces such
as RACF, CA-Top Secret and CA-ACF2.
HARBOR Client User Interface. The HARBOR Client User Interface is the
graphical user interface presented to both HARBOR Backup and HARBOR
Distribution client users. Technology for the development of graphical user
interfaces provided by a third party enables the Company to develop HARBOR
user interfaces rapidly, with a high degree of portability and with a
consistent "look and feel" across platforms.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and development to
produce high-performance network transport products and systems management
applications. As of June 30, 1996, the Company's research and development and
quality assurance organization consisted of 60 employees. The Company intends
to enhance its existing product offerings and to introduce additional products
for the enterprise networked
39
<PAGE>
systems management market. The Company uses standard product development
methodologies in the design and development of its products to ensure
efficiency in development and high product quality. In addition, the Company
solicits input from its customers to gain insight into their specific network
requirements, enabling the research and development staff to enhance existing
products and create new products to suit the market. The Company designs its
products to be portable and adaptable to new client/server hardware and
software environments. Interlink uses software development tools such as
configuration management, code testing, and performance monitoring to aid in
this development. The Company outsources its host computing resource
requirements for cost effectiveness and efficiency. To date, most of the
Company's core technologies for its network transport products and systems
management applications have been acquired and have not been developed
internally. While the Company expects that certain of its new products will be
developed internally, the Company may also, based on timing and cost
considerations, acquire technology and products.
The Company is currently completing the development of TCPaccess Version
4.1, which is expected to be released late 1996 and is intended to support
open edition MVS-API. The Company intends to develop additional versions to
provide compatibility with IBM APIs and certain IBM user-level applications.
The Company is also developing enhancements to the HARBOR products, including
a version of HARBOR to support Windows NT on platforms other than the Intel-
based NT platform currently supported. The Company expects to also add Netware
remote administration with a graphical user interface for Windows 95. The
Company intends to develop HARBOR Agent for Networker (Legato's client/server
storage management solution) which will provide HARBOR functionality to
client/server storage management products sold by Legato. There can be no
assurance that the Company's new or enhanced products will be timely
developed, or at all, and even if developed, that such products will achieve
market acceptance.
COMPETITION
General. The market in which the Company operates is intensely competitive
and is characterized by extreme price competition and rapid technological
change. The competitive factors influencing the markets for the Company's
products include product performance, price, reliability, features,
scalability, interoperability across multiple platforms, adherence to industry
standards, and the provision of support and maintenance services. The Company
competes with a number of companies, principally IBM, that specialize in one
or more of the Company's product lines, and such competitors may have greater
financial, technical, sales and marketing resources to devote to the
development, promotion and sale of their products, and may have longer
operating histories, greater name recognition, and greater market acceptance
for their products and services compared to those of the Company. There can be
no assurance that the Company's current competitors or any new market entrants
will not develop networked systems management products or other technologies
that offer significant performance, price or other advantages over the
Company's technologies, the occurrence of which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Network Transport Products. The Company sells its TCPaccess suite of
products principally to customers who have installed IBM mainframes using the
MVS operating system. The Company's main competition for its TCPaccess
products is IBM. IBM sells TCP/IP and associated products for its MVS
mainframe systems that compete directly with the Company's TCPaccess product
line. IBM has continued to enhance the functionality and performance of its
TCP/IP product, which enhancements may require the Company to update its
TCPaccess product to remain competitive. There can be no assurance that the
Company will be able to make the improvements in its TCPaccess product
necessary to remain competitive with IBM or that any such improvements by IBM
would not have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, IBM recently released its
OS/390 operating system, which includes TCP/IP communications software in a
bundle of software provided to purchasers of OS/390. An IBM customer can
request to have the IBM TCP/IP product removed from the software bundle
provided by IBM and thereby reduce the purchase price of the system purchased.
The reduction in the purchase price related to the exclusion of IBM's TCP/IP
for MVS product from its software bundle, in certain model groups, is
substantially lower than the price the customer would have to pay to purchase
the Company's corresponding TCPaccess product. Because in some IBM model
groups IBM's TCP/IP product is less expensive to purchase than the Company's
corresponding TCPaccess products in the same model groups, there could be
substantial erosion of the Company's margins if
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<PAGE>
the Company reduces the price of its TCPaccess products in order to compete
against IBM, which erosion would have a material adverse effect on the
Company's business, financial condition and results of operations. Also, IBM
could in the future decide to include its TCP/IP product in the bundle of
software provided to purchasers of its OS/390 operating system without charge.
The Company believes that any reduction in price of the IBM TCP/IP products, or
the bundling of those products without charge in its OS/390 operating system,
would require the Company to either reduce the prices of its TCPaccess products
or substantially increase sales and marketing expenses, or both, in order to
continue to sell its TCPaccess products, which actions would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if IBM were to develop or design its OS/390 operating
system or other products so that its TCP/IP product cannot be removed,
customers who otherwise would have been inclined to purchase the Company's
TCPaccess product may not do so, which would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the Company derives a substantial portion of its revenues from
maintenance agreements with its TCPaccess customers. If the Company sells fewer
TCPaccess products, either due to competition from IBM or otherwise, the
Company's maintenance revenues would be reduced, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. If IBM reduces the combined price of its TCP/IP products and
maintenance, IBM's combined price for its TCP/IP products and maintenance would
be more price competitive with the Company's product line, and the Company's
product and maintenance revenues would be adversely affected. The Company also
competes with IBM, Apertus, Cisco Systems, Inc., Computerm, Network Solutions,
Inc. and Memorex in the network controller market, where the Company resells
the network controller manufactured by Bus-Tech to provide the hardware
connection which links the enterprise server to the client/server network.
System Management Applications. The primary competitors for the Company's
HARBOR Backup and HARBOR Distributed Storage Server products are IBM, Storage
Technology, Innovation Data Processing, Inc. and Boole & Babbage, Inc. The
Company's competition for the HARBOR Distribution product includes IBM,
Novadigm and Tangram Enterprise Solutions, Inc. IBM is aggressively marketing
its ADSM backup product, which is included in the System View package on IBM's
UNIX system, AIX. There can be no assurance that IBM will not include the ADSM
backup products in a software "bundle" with the sale of its mainframe hardware
systems. The bundling of competing software products with mainframe hardware
systems could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company also competes with
software vendors who develop and market products for UNIX and Windows NT
operating systems, such as Microsoft, Arcada Software, Inc., Cheyenne Software,
Inc., Computer Associates International, Inc., EMC Corporation, Hewlett-Packard
Company, Legato, Novadigm, OpenVision Technology, Inc., PLATINUM technology,
inc., Sterling Software, Inc., Sun Microsystems, Inc. and Unison Software,
Inc., which are focusing on enterprise systems management applications.
Although the Company recently signed a strategic marketing agreement with
Legato, the Company is still a competitor of Legato in the storage management
market. The Company also expects increased competition from vendors of TCP/IP-
to-SNA gateway products, including such companies as Microsoft, Novell, Inc.,
Apertus and CNT/Brixton Systems, Inc. Competition from these companies could
increase due to an expansion of their product lines or a change in their
approaches to enterprise systems management or networking products. The
bundling of network transport software with a network controller by these
competitors could prevent the Company from selling TCPaccess to the customers
of these competitors, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Other Factors. The Company's ability to compete successfully depends on many
factors, including the Company's success in developing new products that
implement new technologies, performance, price, product quality, reliability,
success of competitors' products, general economic conditions, and protection
of Interlink products by effective utilization of intellectual property laws.
In particular, competitive pressures from existing or new competitors who offer
lower prices or other incentives or introduce new products could result in
price reductions which would adversely affect the Company's profitability.
There can be no assurance that the Company's current or other new competitors
will not develop enhancements to, or future generations of, competitive
products that offer superior price or performance features, that the Company
will be able to compete successfully in the future, or that the Company will
not be required to incur substantial additional investment
41
<PAGE>
costs in connection with its engineering, research, development, marketing and
customer service efforts in order to meet any competitive threat. The Company
expects competition to intensify, and increased competitive pressure could
cause the Company to lower prices for its products, or result in reduced profit
margins or loss of market share, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary information. The Company relies primarily on a combination of
copyright and trademark laws, trade secrets, software security measures,
license agreements and nondisclosure agreements to protect its proprietary
technology and software products. There can be no assurance, however, that such
protection will be adequate to deter misappropriation, deter unauthorized third
parties from copying aspects of, or otherwise obtaining and using, the
Company's software products and technology without authorization, or that the
rights secured thereby will provide competitive advantages to the Company. In
addition, the Company cannot be certain that others will not develop
substantially equivalent or superseding proprietary technology, or that
equivalent products will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's proprietary
rights. Furthermore, there can be no assurance that any confidentiality
agreements between the Company and its employees or any license agreements with
its customers will provide meaningful protection for the Company's proprietary
information in the event of any unauthorized use or disclosure of such
proprietary information.
There can be no assurance that others will not independently develop similar
products or duplicate the Company's products. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
or superior to the Company's products. A substantial amount of the Company's
sales are in international markets, and the laws of other countries may afford
the Company little or no effective protection of its intellectual property.
While the Company believes that its products and trademarks do not infringe
upon the proprietary rights of third parties, there can be no assurance that
the Company will not receive future communications from third parties asserting
that the Company's products infringe, or may infringe, on the proprietary
rights of third parties. The Company expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in the Company's industry segment grows and the functionalities
of products in different industry segments overlap. Any such claims, with or
without merit, could be time consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to develop non-infringing technology or license the
infringed or similar technology, the Company's business, financial condition
and results of operations could be materially adversely affected. In addition,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity
of the Company's proprietary rights. Any such claims could be time consuming,
result in costly litigation, or lead the Company to enter into royalty or
licensing agreements rather than litigating such claims on their merits.
Moreover, an adverse outcome in litigation or similar adversarial proceedings
could subject the Company to significant liabilities to third parties, require
expenditure of significant resources to develop non-infringing technology,
require disputed rights to be licensed from others or require the Company to
cease the marketing or use of certain products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
42
<PAGE>
EMPLOYEES
As of June 30, 1996, the Company and its subsidiaries employed a total of 175
persons, of which 64 are in sales and marketing, 60 are in research and
development and quality assurance, 25 are in customer support and consulting,
and 26 are in finance and administration. Interlink employs 97 persons in the
United States, 46 persons in Canada, and 32 persons in Europe. The Company's
continued success will depend on its ability to attract and retain key
employees. No employees are represented by a labor union, and the Company
considers its employee relations to be good.
FACILITIES
The Company is headquartered in a 24,000 square foot facility in Fremont,
California. The Fremont facility houses the corporate functions, marketing,
research and development, customer support and finance and administration.
Interlink occupies this space under a lease agreement that expires on December
31, 2000. The Company has a research and development center in Columbia,
Maryland where the TCPaccess product line is developed, and in Calgary,
Alberta, Canada where the HARBOR products are developed and supported. The
Company leases office space in ten locations in the United States and Europe
for use by its regional sales and support staff. The Company believes that its
facilities are adequate to meet its requirements through the expiration of its
leases.
LEGAL DISPUTE
The Company and the Company's subsidiary in France are involved in a
commercial dispute with Selesta, a former Italian distributor of the Company's
TCPaccess products. Selesta alleged in a letter sent to the Company that the
Company had breached and unlawfully terminated the agreement pursuant to which
Selesta was appointed a distributor of the Company's products in Italy and
asserted other related claims against the Company. The letter demanded
Selesta's reinstatement as a distributor, the execution of a written
distribution agreement setting forth the distribution arrangements between the
parties, and compensation in an unspecified amount to be paid to Selesta for
the harm that it has suffered. The Company's Canadian subsidiary, New Era, has
also previously used Selesta as a distributor of the HARBOR products in Italy
pursuant to a separate agreement. No legal claim has been filed nor has
arbitration been invoked by Selesta regarding this matter. Should Selesta
initiate legal proceedings and prevail on such claims, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Risk Factors--Legal Dispute."
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 30, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles W. Jepson....... 50 President, Chief Executive Officer and Director
Augustus J. Berkeley.... 50 Vice President of Worldwide Sales
Barbara A. Booth........ 41 Vice President of Research & Development and
Customer Support
D. Benedict Dulley...... 52 Vice President of the HARBOR Division and Director
Donald R. Gammon........ 50 Vice President of Marketing
Gloria M. Purdy......... 48 Chief Financial Officer and Secretary
Thomas H. Bredt (1)..... 55 Chairman of the Board of Directors
Ronald W. Braniff (1)(2) 60 Director
Andrew I. Fillat (2).... 48 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Charles W. Jepson has served as President, Chief Executive Officer and a
member of the Board of Directors since May 1992. Prior to joining Interlink,
he served as President and Chief Executive Officer for Touch Communications, a
networking software company, from April 1991 to January 1992. He holds an
M.B.A. from the University of California at Berkeley and a B.A. in Economics
from San Jose State University.
Augustus J. Berkeley has served as Vice President of North American Sales
from January 1995 to December 1995 and has served as Vice President of
Worldwide Sales from January 1996 to the present. From March 1993 to January
1995, he served as Vice President of Sales and Marketing at CRAY Research
Superserver Inc., a computer systems company. From May 1990 to January 1993,
Mr. Berkeley served as Vice President of Marketing at Sequoia Systems, Inc. a
computer systems company. Mr. Berkeley holds a B.S. in Economics and Finance
from University of Southwestern Louisiana.
Barbara A. Booth served as Vice President of Research and Development from
December 1992 to October 1994 and has served as Vice President of Research and
Development and Customer Support from February 1996 to the present. From
September 1995 to February 1996, Ms. Booth was a business development
consultant for Inter-Island Systems Development & Integration. Ms. Booth co-
founded and served as Vice President of Technology for Viewpoint System
Software, Inc., a client/server tools company, from June 1988 until September
1992. Ms. Booth holds a B.A. in Mathematics from the University of California
at Berkeley.
D. Benedict Dulley has served as Vice President of the HARBOR Division since
the acquisition of New Era in December 1995 and as a member of the Board of
Directors since January 1996. From August 1988 to December 1995, he served as
President and Chief Executive Officer of New Era Systems Services, Ltd., now a
wholly-owned subsidiary of the Company. Mr. Dulley holds a B.S. in Mathematics
from the University of Nottingham in the United Kingdom.
Donald R. Gammon has been Vice President of Marketing since July 1994. He
also served as acting Vice President of Research and Development from April
1995 to January 1996. From December 1992 to June 1994, Mr. Gammon was the
owner of Gammon & Co., a consulting company specializing in marketing strategy
and market development. From May 1991 to December 1992, he served as Vice
President of Sales and Marketing of Structural Research and Analysis
Corporation, an analysis software company. Mr. Gammon holds a B.A. in
Marketing Management from Oklahoma State University.
44
<PAGE>
Gloria M. Purdy has served as Chief Financial Officer and Secretary from
January 1996 to the present. She had also served as Chief Financial Officer of
the Company from June 1992 to October 1992 and from February 1993 to May 1994.
She also served as Vice President of International Operations from February
1994 to September 1995 and Vice President of Business Development from October
1995 to January 1996. She served as Chief Financial Officer for Viewpoint
System Software, Inc., a client/server tools company, from 1990 to 1992. She
holds a B.S. in Accounting from Golden Gate University.
Thomas H. Bredt has served as a member of the Board of Directors since March
1990 and as Chairman of the Board of Directors since May 1992. Mr. Bredt has
been a general partner with Menlo Ventures, a venture capital firm, from April
1986 to the present. He also serves as a director and member of the
Compensation and Audit Committees of Red Brick Systems, a data warehousing
company, and as a director and member of the Compensation Committee of
Clarify, Inc., an applications software company. Mr. Bredt holds a Ph.D. in
Computer Sciences from Stanford University, an M.E.E. from New York University
and a B.S. in Engineering from the University of Michigan.
Ronald W. Braniff has served as a member of the Board of Directors since
March 1993. Mr. Braniff is a private investor and software business
consultant. He also serves as a director of Apsylog Inc., an applications
software company, Consensys Software Inc., an applications software company,
and DB Star Inc., a systems development tools software company. Mr. Braniff
served as President and Chief Executive Officer of ASK Computer Systems, a
computer systems company, from 1984 to 1989. From 1966 to 1984 he was employed
by Tymshare, a networking company, and held the position of Vice President and
General Manager of the Computer Systems Division. Mr. Braniff holds a B.S.M.E.
from Oregon State University.
Andrew I. Fillat has served as a member of the Board of Directors since
January 1994. From April 1989 to the present, Mr. Fillat has been a partner
with Advent International, Corp., a management company for several venture
capital and private equity funds ("Advent") and from June 1995 to the present,
he has served as Senior Vice President with Advent. He serves as a director
and member of the Compensation and Audit Committees of Advanced Radio Telecom,
a wireless services provider company, and Lightbridge, Inc., a services and
software provider to wireless carriers. Mr. Fillat holds a B.S. and M.S. in
Electrical Engineering and Computer Science from the Massachusetts Institute
of Technology and an M.B.A. from Harvard Graduate School of Business
Administration.
All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors. There are no family relationships
between any of the directors or executive officers of the Company.
The Company's Board of Directors has established a Compensation Committee
and an Audit Committee. The Compensation Committee establishes salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company, and administers various incentive compensation and
benefit plans. The Audit Committee oversees actions taken by the Company's
independent accountants and reviews the Company's internal financial controls.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive compensation for
their services as directors. The Company's 1996 Director Option Plan
("Director Plan") provides that options will be granted to non-employee
directors of the Company pursuant to an automatic nondiscretionary grant
mechanism. On the effective date of the Director Plan or when the director
becomes an outside director, each of the non-employee directors will
automatically be granted an option to purchase 15,000 shares of the Company's
Common Stock at an exercise price equal to the initial public offering price.
In addition, upon joining the Board of Directors, each new non-employee
director will automatically be granted an option to purchase 15,000 shares of
Common Stock and each non-employee director will subsequently be granted an
additional option to purchase 3,750 shares of Common Stock, each such option
to be granted at the fair market value of the Common Stock on the date of
grant. In addition, the Company reimburses the reasonable travel expenses of
the directors. See "--Stock Plans--Director Option Plan."
45
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of Mr. Braniff and Mr.
Fillat. Mr. Jepson, President, Chief Executive Officer and a director of the
Company, participates in all discussions and decisions regarding salaries and
incentive compensation for all employees and consultants of the Company,
except that Mr. Jepson is excluded from discussions regarding his own salary
and incentive compensation.
EXECUTIVE COMPENSATION
The following table sets forth all compensation for services rendered in all
capacities during the fiscal year ended June 30, 1996 awarded to, earned by,
or paid to (i) the Company's Chief Executive Officer and (ii) the Company's
other most highly compensated officers whose salary and bonus for such fiscal
year exceeded $100,000 and who were serving as an officer of the Company as of
the end of such fiscal year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION (1)
------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION SALARY ($) BONUS ($) COMPENSATION (2) OPTIONS (#) COMPENSATION (3)
- ------------------ ---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Charles W. Jepson....... $190,008 $ 95,300 -- -- $1,339
President and Chief
Executive Officer
Augustus J. Berkeley.... 100,008 205,648 -- -- 1,629
Vice President of
Worldwide Sales
Donald R. Gammon........ 150,000 76,000 -- -- 1,233
Vice President of
Marketing
Gloria M. Purdy......... 150,000 60,000 -- -- 3,759
Chief Financial Officer
and Secretary
</TABLE>
- --------
(1) Includes all compensation earned in the fiscal year ended June 30, 1996.
(2) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser
of $50,000 or 10% of the total annual salary and bonus for the Named
Executive Officer for such year.
(3) Includes premiums paid by the Company on life insurance policies where the
Company was not the beneficiary.
46
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth information regarding the grant of stock
options to each of the Named Executive Officers during the fiscal year ended
June 30, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
NUMBER OF PERCENTAGE OF APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION TERM
NAME UNDERLYING GRANTED TO (1)
- ---- OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------
GRANTED (2) FISCAL 1996 PER SHARE (3) DATE 5% 10%
----------- ------------- -------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Jepson....... 29,000 8.2 $1.10 9/19/02 $12,986 $30,264
Augustus J. Berkeley.... 30,000 8.4 1.10 9/19/02 13,434 31,308
Donald R. Gammon........ 37,500 10.6 1.10 9/19/02 16,793 39,135
Gloria M. Purdy......... 15,000 4.2 1.10 9/19/02 6,717 15,654
</TABLE>
- --------
(1) This column shows the hypothetical gains or "option spreads" of the
options granted based on assumed annual compound stock appreciation rates
of 5% and 10% over the full seven-year term of the options. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock
options will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period, and the
date on which the options are exercised.
(2) Options vest as to 9/48th of the option shares after nine months from the
vesting commencement date and as to 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the
vesting commencement date. The Board of Directors determined the market
value of the Common Stock based on various factors, including the illiquid
nature of an investment in the Common Stock, the Company's historical
financial performance, the preferences (including liquidation) of the
outstanding Series 1 Preferred Stock, the Company's future prospects and
the prices paid for securities of the Company in arm's length transactions
between third parties.
(3) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board of Directors on
the date of grant. Exercise price may be paid in cash, promissory note, by
delivery of already-owned shares subject to certain conditions, or
pursuant to a cashless exercise procedure under which the optionee
provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
47
<PAGE>
AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No Named Executive Officer exercised stock options during fiscal 1996. The
following table sets forth certain information regarding stock options held as
of June 30, 1996 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1996 JUNE 30, 1996 (1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles W. Jepson.......... 215,155 70,345 $2,830,599 $915,051
Augustus J. Berkeley....... 38,228 36,772 493,141 474,359
Donald R. Gammon........... 41,797 33,203 539,181 428,319
Gloria M. Purdy............ 77,687 29,813 1,013,933 387,317
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of June 30,
1996. Accordingly, these values have been calculated on the basis of an
assumed initial public offering of $14.00 per share, less the applicable
option exercise price.
STOCK PLANS
1992 Stock Option Plan. The Company's 1992 Stock Option Plan (as amended,
the "1992 Plan") was adopted by the Board of Directors in June 1992, approved
by the Company's stockholders in July 1992 and amended in June 1996. In June
1996 and July 1996, the Board of Directors approved an increase in the number
of shares of Common Stock reserved under the 1992 Plan by 1,000,000 shares to
2,105,000 shares, subject to stockholder approval. The 1992 Plan provides for
grants of incentive stock options, restricted stock and stock purchase rights
to employees (including officers and employee directors) and nonstatutory
stock options to employees (including officers and employee directors) and
consultants of the Company. The purpose of the 1992 Plan is to attract and
retain the best available personnel to the Company and to encourage stock
ownership by employees, officers and consultants of the Company to give them a
greater personal stake in the success of the Company. The 1992 Plan is
presently being administered by the Board of Directors, which determines
optionees and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The terms of options granted under the Option Plan generally may not exceed
ten years. However, the term of all incentive stock options and nonstatutory
stock options granted to an optionee who, at the time of grant, owns stock
representing more than 10% of the Company's outstanding capital stock, may not
exceed five years. The vesting of all stock option grants is determined by the
Board of Directors. Generally options granted under the 1992 Plan vest and
become exercisable starting nine months after the date of grant, with 9/48th
of the shares subject to option becoming exercisable at that time and an
additional 1/48th of such shares subject to the option becoming exercisable
each month thereafter. No option may be transferred by the optionee other than
by will or the laws of descent or distribution, and each option may be
exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with the Company or any related corporation ceases
for any reason (other than by death or permanent and total disability) may
exercise options in the 30-day period following such cessation (unless such
options terminate or expire sooner by their terms) or in such longer period as
is determined by the Board of Directors. In the event of a merger of the
Company with or into another corporation, all outstanding options may either
be assumed or an equivalent option may be substituted by the surviving entity
or, if such options are not assumed or substituted, such options shall
terminate as of the date of closing of the merger. The exercise price of
incentive stock options granted under the 1992 Plan must be at least equal to
the fair market value of the shares on the date of grant. The exercise price
of nonstatutory stock options granted under the 1992 Plan is determined by the
administrator. With respect to any participant who owns stock possessing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any incentive stock option or any nonstatutory stock option
granted must equal at least 110% of the fair market value on the grant date.
The consideration for exercising any incentive stock option or any
nonstatutory stock
48
<PAGE>
option may consist of cash, check, promissory note, delivery of already-owned
shares of the Company's Common Stock subject to certain conditions, delivery
of a properly executed exercise notice together with irrevocable instructions
to a broker to promptly deliver to the Company the amount of sale or loan
proceeds required to pay the exercise price, a reduction in the amount of any
Company liability to an optionee, or any combination of the foregoing methods
of payment or such other consideration or method of payment to the extent
permitted under applicable law. No incentive stock options may be granted to a
participant, which, when aggregated with all other incentive stock options
granted to such participant, would have an aggregate fair market value in
excess of $100,000 becoming exercisable in any calendar year.
As of June 30, 1996, 66,035 shares of Common Stock had been issued upon the
exercise of options granted under the 1992 Plan, options to purchase 1,018,503
shares of Common Stock at a weighted average exercise price of $1.82 share
were outstanding and 870,463 shares remained available for future option
grants. The 1992 Plan will terminate in June 2002, unless sooner terminated by
the Board of Directors.
Employee Stock Purchase Plan. The Company's 1996 Employee Stock Purchase
Plan (the "Purchase Plan") was adopted by the Board of Directors in June 1996,
subject to stockholder approval. A total of 350,000 shares of Common Stock has
been reserved for issuance under the Purchase Plan. The Purchase Plan, which
is intended to qualify under Section 423 of the Internal Revenue Code of 1986,
as amended, is administered by the Board of Directors or by a committee
appointed by the Board. Employees (including officers and employee directors
of the Company) are eligible to participate if they are customarily employed
for at least 20 hours per week and for more than five months in any calendar
year. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 15% of an employee's
compensation; provided that a participant may not purchase more than $12,500
worth of shares of the Company's Common Stock during each purchase period. The
Purchase Plan will be implemented in a series of overlapping purchase periods,
each to be of approximately six months duration. The initial purchase period
under the Purchase Plan will begin on the effective date of this offering and
subsequent purchase periods will begin on the first trading day on or after
November 1 and May 1 of each year. Each participant will be granted an option
on the first day of the purchase period and such option will be automatically
exercised on the last date of each semi-annual period throughout the purchase
period. If the fair market value of the Common Stock on any purchase date is
lower than such fair market value on the start date of that purchase period,
then all participants in that purchase period will be automatically withdrawn
from such purchase period and reenrolled in the immediately following purchase
period. The purchase price of the Common Stock under the Purchase Plan will be
equal to 85% of the lesser of the fair market value per share of Common Stock
on the start date of the purchase period or on the date on which the option is
exercised. Employees may end their participation in a purchase period at any
time during that period, and participation ends automatically on termination
of employment with the Company. The Purchase Plan will terminate in June 2006,
unless sooner terminated by the Board of Directors.
Director Option Plan. The Company's 1996 Director Option Plan (the "Director
Plan") was adopted by the Board of Directors in June 1996, subject to
stockholder approval. A total of 150,000 shares of Common Stock are reserved
for issuance under the Director Plan. The option grants under the Director
Plan are automatic and non-discretionary, and the exercise price of the
options is 100% of the fair market value of the Common Stock on the grant
date. The Director Plan provides for an initial grant of options to purchase
15,000 shares of Common Stock to each non-employee director of the Company (an
"Outside Director") upon the later of the effective date of the Director Plan
or when the director becomes an outside director after the effective date of
this offering. Each new non-employee director will automatically be granted an
option to purchase 15,000 shares of Common Stock upon joining the Board of
Directors. Subsequently, each Outside Director will automatically be granted
an additional option to purchase 3,750 shares of Common Stock at the next
meeting of the Board of Directors following the annual meeting of stockholders
in each year beginning with the 1997 annual meeting of stockholders, if on
such date, such Outside Director has served on the Board of Directors for at
least six months. The term of such options is ten years. The initial option
grant of 15,000 shares to an Outside Director shall vest
49
<PAGE>
at a rate of 1/48th of the shares per month following the date of grant and the
subsequent option grant of 3,750 shares shall vest at the end of four years.
The Director Plan will terminate in June 2006, unless sooner terminated by the
Board of Directors.
401(K) PLAN
Effective in September 1990, the Company adopted the 401(k) Profit Sharing
Plan (the "401(k) Plan") that covers all eligible employees of the Company. An
eligible employee may elect to defer, in the form of contributions to the
401(k) Plan, up to 15% of the total compensation that would otherwise be paid
to the employee, not to exceed approximately $9,500 per year (adjusted for
cost-of-living increases). Employee contributions are invested in selected
equity mutual funds, a guaranteed interest contract account or a money market
fund according to the directions of the employees. The contributions are fully
vested and nonforfeitable at all times. The 401(k) Plan provides for employer
contributions as determined by the Board of Directors. The Company has not made
any contributions through fiscal 1996.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Messrs. Jepson, Gammon, Berkeley, Ms. Purdy and Ms. Booth each have entered
into letter agreements with the Company which provide for severance payments if
they are terminated without cause. Messrs. Jepson, Gammon and Ms. Purdy will be
entitled to severance payments equal to six months salary, and Mr. Berkeley and
Ms. Booth will be entitled to severance payments equal to three months salary.
All of the Named Executive Officers' employment with the Company is terminable
at will.
In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by the Named Executive Officers under the 1992
Stock Option Plan will automatically accelerate in full and all unvested shares
of Common Stock held by such individuals subject to direct issuances made under
the 1992 Stock Option Plan will immediately vest in full, except to the extent
such options are to be assumed by, and the Company's repurchase rights with
respect to these shares are to be assigned to, the successor corporation.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
Prior to the closing of this offering, the Company will reincorporate in
Delaware. In conjunction with such reincorporation, the Company will adopt
provisions in its Certificate of Incorporation that eliminate to the fullest
extent permissible under Delaware law the liability of its directors to the
Company for monetary damages. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission, or
the liability of its officers and directors pursuant to federal securities
laws. The Company's Bylaws provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by Delaware law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. The Company has entered into indemnification agreements
with its officers and directors containing provisions which may require the
Company, among other things, to indemnify the officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified.
At the present time, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
50
<PAGE>
CERTAIN TRANSACTIONS
On December 29, 1995, the Company acquired New Era ("New Era Acquisition").
In connection with the New Era Acquisition, the Company, through a wholly-
owned Canadian acquisition subsidiary, acquired the outstanding New Era Common
Stock, Class B Preferred Stock and outstanding options. Immediately prior to
the closing of the New Era Acquisition, Mr. Dulley beneficially controlled
26,616 shares of New Era Common Stock and an option to acquire 8,230 shares of
New Era Common Stock. At the closing of the New Era Acquisition, Mr. Dulley
and his relatives collectively received $1,700,387 from the Company as
consideration for their New Era Common Stock. Pursuant to the New Era
Acquisition, Mr. Dulley and his relatives received warrants to purchase an
aggregate of 40,720 shares of the Company's Common Stock.
In January and March 1994, the Company sold 1,229,714 shares of Series 1
Preferred Stock to certain individuals and entities in a private placement
transaction at $5.50 per share. The holders of the Series 1 Preferred Stock
are entitled to certain registration rights. See "Descriptions of Capital
Stock--Registration Rights." The purchasers of the Series 1 Preferred Stock
included, among others, the following entities affiliated with directors and
underwriters of the Company's proposed initial public offering:
<TABLE>
<CAPTION>
NAME SHARES
---- ---------
<S> <C>
Entities affiliated with Menlo Ventures............................ 183,531
Entities affiliated with Advent International...................... 1,000,001
Punk, Ziegel & Knoell, L.P......................................... 11,835
</TABLE>
In December 1993, the Company granted Menlo Ventures IV, L.P. and Menlo
Evergreen V, L.P. (collectively the "Menlo Entities") warrants to purchase an
aggregate of 31,668 shares of the Company's Common Stock (collectively, the
"Menlo Warrants"). The Menlo Warrants resulted from bridge financing from the
Menlo Entities of $1,000,000 to the Company. The Menlo Warrants, which each
have identical terms, expire on the closing of an initial public offering of
shares of the Company's Common Stock with gross proceeds to the Company of at
least $10,000,000. Provided no initial public offering occurs, the Menlo
Warrants expire on December 15, 1998. The exercise price for the Menlo
Warrants is $0.90 per share.
The Company believes that the transactions set forth above were made on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors, and will
continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
51
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers (See "Management--Executive Compensation"), (iv)
all executive officers and directors as a group and (v) each Selling
Stockholder.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY NUMBER BENEFICIALLY
OWNED PRIOR TO OF OWNED AFTER THE
THE OFFERING (1) SHARES OFFERING (1)
----------------- BEING ---------------------
NAME OF STOCKHOLDER NUMBER PERCENT SOLD NUMBER PERCENT
- ------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Menlo
Ventures (2).................. 1,218,476 32.8% -- 1,218,476 20.4%
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Entities affiliated with Advent
International Corporation (3). 1,000,001 26.9 -- 1,000,001 16.7
101 Federal Street
Boston, MA 02110
Charles W. Jepson (4).......... 226,469 5.7 -- 226,469 3.6
Gloria M. Purdy (5)............ 81,542 2.1 -- 81,542 1.3
D. Benedict Dulley (6)......... 44,581 1.2 -- 44,581 *
Donald R. Gammon (7)........... 44,141 1.2 -- 44,141 *
Augustus J. Berkeley (8)....... 40,523 1.1 -- 40,523 *
Ronald W. Braniff (9).......... 16,334 * -- 16,334 *
Thomas H. Bredt (10)........... 1,218,476 32.8 -- 1,218,476 20.4
Andrew I. Fillat (11).......... 1,000,001 26.9 -- 1,000,001 16.7
All directors and executive
officers as a group
(9 persons) (12).............. 2,692,067 64.6 -- 2,692,067 41.8
Selling Stockholders as a
group......................... 1,422,534 38.3 500,000 896,942(13) 15.0
</TABLE>
- --------
* Less than 1% of the outstanding shares.
(1) Applicable percentage of ownership is based on 3,712,852 shares of Common
Stock prior to the offering and 5,987,019 shares of Common Stock after
the offering and a remainder of 74,167 shares following the net exercise
and sale of warrants representing 76,999 shares of Common Stock
outstanding as of June 30, 1996, together with applicable options and
warrants for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of Common
Stock subject to options that are presently exercisable or exercisable
within 60 days of June 30, 1996 are deemed to be beneficially owned by
the person holding such options for the purpose of computing the
percentage of ownership of such person but are not treated as outstanding
for the purpose of computing the percentage of any other person. Assumes
over-allotment is not exercised.
(2) Includes 501,638 shares of Common Stock, a warrant to purchase 15,834
shares of Common Stock, and 91,766 shares of Preferred Stock held by
Menlo Ventures IV, L.P. and 501,638 shares of Common Stock, a warrant to
purchase 15,834 shares of Common Stock, and 91,766 shares of Preferred
stock held by Menlo Evergreen V, L.P. (collectively, "Menlo Ventures").
(3) Includes 81,818 shares of Preferred Stock held by Adtel L.P., 45,454 held
by Adventact L.P., 1,818 held by Advent International Investors II L.P.,
36,364 held by Adwest L.P., 26,385 held by Austin Venture Capital
Limited, 26,385 held by European Venture Network L.P., 682,054 held by
Global Private Equity II, L.P., and 99,723 held by Golden Gate
Development and Investment L.P. (collectively, "Advent International
Corporation").
52
<PAGE>
(4) Includes 226,469 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(5) Includes 81,542 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(6) Includes warrant held by Mr. Dulley and family members exercisable for
44,581 shares of the Company's Common Stock.
(7) Includes 44,141 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(8) Includes 40,523 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(9) Includes 16,334 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(10) Includes 1,218,476 shares owned by entities affiliated with Menlo
Ventures, of which Mr. Bredt is a general partner. Mr. Bredt disclaims
beneficial ownership of all such shares held by those entities, except to
the extent of his pecuniary interest therein arising from his general
partnership interests therein.
(11) Includes 1,000,001 shares owned by entities affiliated with Advent
International Corporation, of which Mr. Fillat is a general partner. Mr.
Fillat disclaims beneficial ownership of all such shares held by those
entities, except to the extent of his pecuniary interest therein arising
from his general partnership interests therein.
(12) Includes 453,590 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(13) Reflects the net exercise of warrants held by certain selling
stockholders at the time of the offering.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, $0.001 par value,
and 5,000,000 shares of undesignated Preferred Stock, $0.001 par value.
COMMON STOCK
As of June 30, 1996, there were 2,483,138 shares of Common Stock outstanding
held of record by approximately 247 stockholders. As of June 30, 1996, options
to purchase an aggregate of 1,018,503 shares of Common Stock were also
outstanding. See "Management--Stock Plans."
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and have cumulative voting rights with
respect to the election of directors. The holders of Common Stock are entitled
to receive such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefor.
Upon liquidation or dissolution of the Company, the remainder of the assets of
the Company will be distributed ratably among the holders of Common Stock. The
Common Stock has no preemptive or other subscription rights and there are no
conversion rights or redemption or sinking fund provisions with respect to
such shares. All of the outstanding shares of Common Stock are, and the shares
to be sold in this offering will be, fully paid and nonassessable.
WARRANTS
As of June 30, 1996, there were outstanding warrants to purchase an
aggregate of 66,667 shares of Common Stock at an exercise price of $0.90 per
share, which expire December 1998, 75,000 shares of Common Stock at an
exercise price of $0.90 per share, which expire January 1999, an aggregate of
350,000 shares of Common Stock at an exercise price of $3.20 per share, which
expire December 2000, an aggregate of 75,000 shares of Common Stock at an
exercise price of $3.20 per share, which expire April 2003 (which will be
reduced to 62,500 upon the closing of this offering), an aggregate of 6,250
shares of Common Stock at an exercise price of $12.80 per share, which expire
April 2003 and an aggregate of 15,000 shares of Preferred Stock at an exercise
price of $5.50 per share, which expire December 1998.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price
of, and the voting and other rights of, the holders of Common Stock. The
Company has no current plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
Following the closing of this offering, the holders of approximately
3,391,695 issued or issuable shares of Common Stock (the "Registrable
Securities"), of which 399,644 are issuable upon exercise of warrants, will be
entitled to certain rights with respect to the registration of such shares of
Common Stock under the Securities Act. Under an agreement among the Company
and holders of Registrable Securities, if the Company proposed to register any
of its Common Stock under the Securities Act, certain holders of Registrable
Securities are entitled to notice of such registration and to include their
Registrable Securities therein; provided, among other conditions, that the
underwriters have the right to limit the number of shares included in any such
registration.
54
<PAGE>
Beginning 180 days after the closing of this offering, the holders of at least
twenty-five percent (25%) of the Registrable Securities have the right to
require the Company, on not more than two occasions, to file a registration
statement under the Securities Act in order to register all or any part of
their Registrable Securities. The Company may, in certain circumstances, defer
such registration and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
Further, the holders of Registrable Securities may require the Company to
register all or any portion of their Registrable Securities on Form S-3, when
such form becomes available to the Company, subject to certain conditions and
limitations.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of preventing, discouraging or delaying a change in the
control of the Company and may maintain the incumbency of the Board of
Directors and management. The authorization of undesignated Preferred Stock
makes it possible for the Board of Directors to issue Preferred Stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. In addition, the Company's Bylaws
limit the ability of stockholders of the Company to raise matters at a meeting
of stockholders without giving advance notice.
The Certificate of Incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. The Certificate of Incorporation and
the Bylaws provide that, except as otherwise required by law, special meetings
of the stockholders can only be called pursuant to a resolution adopted by a
majority of the Board of Directors, by the Chief Executive Officer of the
Company, or by stockholders holding shares in the aggregate entitled to cast
not less than 10% of the votes at that meeting.
The Bylaws establish an advance notice procedure for stockholder proposal to
be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board. Stockholders at an
annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
Board or by a stockholder who was a stockholder of record on the record date
for the meeting, who is entitled to vote at the meeting and who has given to
the Company's Secretary timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. Although
the Bylaws do not give the Board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at a special or annual meeting, the Bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper
procedures are not followed or may discourage or defer a potential acquiror
from conducting a solicitation of proxies to elect its own slate of directors
or otherwise attempting to obtain control of the Company.
The Certificate of Incorporation provides that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to participate in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a supermajority vote to approve
amendments to the Certificate of Incorporation and Bylaws could enable a
minority of the Company's stockholders to exercise veto power over any such
amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction
which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
interested stockholder obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and
55
<PAGE>
(b) employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or subsequent to such date
the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." A "business combination" is defined to include
mergers, asset sales and other transactions resulting in a financial benefit
to a stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
TRANSFER AGENT
The transfer agent for the Common Stock is The First National Bank of
Boston.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
5,987,019 shares of Common Stock (assuming net exercise of certain warrants
and no exercise of options after June 30, 1996). Of these shares, the
2,200,000 shares sold in this Offering will be freely tradeable without
restriction under the Securities Act, unless purchased by "affiliates" of the
Company.
In addition to the 2,700,000 shares offered hereby, as of the effective date
of the Registration Statement (the "Effective Date"), 67,487 shares of Common
Stock will become eligible for sale in the public market in reliance on Rule
144(k) under the Securities Act of 1933, as amended (the "Securities Act").
Approximately 3,279,355 shares of Common Stock will become eligible for sale
in the public market, subject to compliance with Rules 144 and 701 under the
Securities Act, when certain 180-day lock-up agreements between the Company
and/or the Representatives and certain stockholders of the Company, including
officers, directors and Selling Stockholders, expire. In addition, holders of
warrants exercisable into an aggregate of 399,644 shares of Common Stock have
entered into 180-day lock-up agreements and no such shares may be sold at
least until 180 days after commencement of this offering upon exercise. Upon
expiration of the lock-up agreements and assuming the warrants are then
exercised for cash, the shares acquired upon exercise of the warrants, in the
absence of registration, may only be publicly resold pursuant to Rule 144.
Furthermore, all of the optionholders are subject to a 180-day lock-up period
pursuant to their option agreements and the holders of 100% of the shares of
Common Stock subject to options have entered into the same 180-day lock-up
agreements as referenced above. Volpe, Welty & Company may, in its sole
discretion, and at any time without notice, release all or any portion of the
securities subject to such lock-up agreements.
The Company intends to file a registration statement under the Securities
Act covering approximately 2,605,000 shares of Common Stock issued or reserved
for issuance under the 1992 Stock Option Plan, the 1996 Employee Stock
Purchase Plan and the 1996 Director Option Plan. That registration statement
is expected to be filed within 90 days after the date of this Prospectus and
will automatically become effective upon filing. Accordingly, all the shares
registered under that registration statement will, subject to Rule 144 volume
limitations applicable to affiliates, as that term is defined in the
Securities Act, be available for resale in the open market on such date. At
June 30, 1996, options to purchase 1,018,503 shares were issued and
outstanding under the 1992 Stock Option Plan, 598,012 of which were vested and
eligible for exercise as of that date.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years, will be entitled
to sell in any three month period a number of shares that does not exceed the
greater of: (i) 1% of the number of shares of Common Stock then outstanding
(approximately 59,870 shares immediately after the offering assuming no
exercise of the Underwriters' over-allotment option) and (ii) the average
weekly trading volume of the Company's Common Stock in the Nasdaq National
Market during the four calendar weeks immediately preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission. Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and availability of current public information about the Company.
A person (or persons whose shares are aggregated) who is not deemed to have
been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned Restricted Shares for at
least three years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations and requirements described above.
Holders of 3,279,354 shares of Common Stock of the Company have agreed with
the Company and/or the Representatives that until 180 days after the Effective
Date, they will not sell, offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase shares of Common Stock, or
any securities convertible or exchangeable for shares of Common Stock, owned
directly by such holders or with respect to which they have power of
disposition, without the prior written consent of the Company and/or Volpe,
Welty & Company, as the case may be. The Company has agreed with the
Representatives not to release any holders from such agreements without
57
<PAGE>
the prior written consent of Volpe, Welty & Company. The Company has also
agreed not to sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or any rights
to acquire Common Stock for a period of 180 days after the Effective Date
without the prior written consent of Volpe, Welty & Company, subject to
certain limited exceptions including sales of shares under the Benefit Plans.
The lock-up agreements with the Representatives may be released at any time as
to all or any portion of the shares subject to such agreements at the sole
discretion of Volpe, Welty & Company.
Prior to this offering, there has been no prior public market for the Common
Stock and there is no assurance a significant public market for the Common
Stock will develop or be sustained after this offering. Sales of substantial
amounts of Common Stock in the public market could adversely affect the market
price of the Common Stock and could impair the Company's future ability to
raise capital through the sale of its equity securities.
58
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Volpe, Welty & Company and
Punk, Ziegel & Knoell, L.P. (the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company and the Selling Stockholders the number of shares of Common
Stock indicated below opposite their respective names below at the initial
public offering price less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent,
and that the Underwriters are committed to purchase all of such shares if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Volpe, Welty & Company...............................................
Punk, Ziegel & Knoell, L.P. .........................................
---------
Total............................................................ 2,700,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters initially
propose to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the offering, the
price and concessions and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 405,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 2,700,000 shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liability under the Securities Act.
Certain holders of the outstanding shares of Common Stock of the Company,
including all officers and directors of the Company, have agreed with the
Company and/or the Representatives that until 180 days after the Effective
Date, they will not sell, offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase shares of Common Stock, or
any securities convertible or exchangeable for shares of Common Stock owned
directly by such holders or with respect to which they have power of
disposition, without the prior written consent of the Company and/or Volpe,
Welty & Company, as the case may be. The Company has agreed with the
Representatives not to release any holder from such agreements without the
prior written consent of Volpe, Welty & Company. The Company has also agreed
not to sell, offer to sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock for a period of 180 days after the Effective Date without the
prior written consent of Volpe, Welty & Company, subject to certain limited
exceptions. The lock-up agreements may be released at any time as to all or
any portion of the shares subject to such agreements at the sole discretion of
Volpe, Welty & Company.
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<PAGE>
The Representatives have advised the Company that the Underwriters will not
confirm sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations among the Company and the Representatives.
Among the factors considered in such negotiations will be prevailing market
conditions, the net revenues and results of operations of the Company in
recent periods, market valuations of publicly traded companies that the
Company and the Representatives believe to be comparable to the Company,
estimates of business of the Company, the present state of the Company's
development and the current state of high technology industries and of the
economy as a whole. In this regard, in determining the anticipated offering
range for the Common Stock, the Underwriters considered, among other things,
the recent growth in the Company's business, the deleveraging of the Company's
balance sheet as a result of the offering, the market for network transport
products and system management applications and the current state of the
capital markets, particularly with respect to initial public offerings by
technology companies.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
Certain legal matters with respect to this Offering are being passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP, San Francisco,
California.
EXPERTS
The consolidated balance sheets of the Company as of June 30, 1995 and 1996
and the consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1996 included
in this Prospectus and the financial statement schedule included elsewhere in
the Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as stated in their reports appearing herein and
elsewhere in the Registration Statement and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The balance sheets of New Era as of February 28, 1994 and 1995 and the
consolidated statements of operations and deficit and cash flows for each of
the three years in the period ended February 28, 1995 included in this
Prospectus have been audited by Ernst & Young, independent accountants, as
stated in their report appearing herein and elsewhere in the Registration
Statement and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Securities and Exchange Commission (the "Commission")
in Washington D.C. with respect to the shares of Common Stock offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules which may be inspected without
charge at, or copies of such material may be obtained at prescribed rates
from, the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement and
such exhibits and schedules are also available on the Commission's Web site
(http://www.sec.gov). Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Company intends to furnish its stockholders annual reports containing
consolidated financial statements audited by its independent accountants, and
quarterly reports containing unaudited consolidated financial data for the
first three quarters of each fiscal year.
60
<PAGE>
GLOSSARY
APPLICATION PROGRAM INTERFACE
(API)..................... A set of libraries and program files that
allow a computer to write new programs making
calls to the functions and routines contained
in the API.
ADVANCED PEER-TO-PEER
COMMUNICATION (APPC)...... An IBM protocol that is part of the SNA ar-
chitecture that enables structured conversa-
tions between two networked applications.
Also referred to as a Logical Unit (LU) Type
6.2.
BACKUP.................... Backup is the process of saving a copy of a
file or database. The copy can be on disk,
tape, or optical devices or libraries. Files
to be backed up are those in active use--ones
that will need to be restored immediately in
case of the loss of the primary data.
CUSTOMER INFORMATION CONTROL
SYSTEM (CICS)............. An IBM mainframe control system combining el-
ements of database management and data commu-
nications, intended to handle transaction-
oriented applications.
CLIENT/SERVER............. The model of interaction in a distributed
system which a program at one site sends a
request to a program at another site and
awaits a response. The requesting program is
called a client; the program satisfying the
request is called the server.
LOCAL AREA NETWORK (LAN).. A data network located on the user's premises
in which serial transmission is used for
direct data communication among data
stations.
MULTIPLE VIRTUAL STORAGE
(MVS)..................... An IBM-licensed multipurpose operating system
for the System/370 and System/390 processors.
MVS supports such characteristics as a large
number of concurrent users, teleprocessing,
and efficient storage and retrieval from
large databases.
NETWORK CONTROLLER........ The physical hardware connection between the
enterprise server and the network.
NETWORK FILE SYSTEM (NFS)...... A distributed system developed by Sun
Microsystems which allows a set of computers
to cooperatively access each other's files in
a transparent manner.
PROTOCOL.................. A set of rules for communicating between
diverse systems which are mutually understood
and followed by the different systems or
processes.
61
<PAGE>
SYSTEMS NETWORK ARCHITECTURE
(SNA)..................... IBM's proprietary architecture for
controlling the configuration and operation
of networks.
SIMPLE NETWORK MANAGEMENT
PROTOCOL (SNMP)........... The basic protocol for delivering management
information on network devices in a TCP/IP
environment.
TRANSMISSION CONTROL
PROTOCOL/INTERNET PROTOCOL
(TCP/IP).................. A suite of protocols designed to allow
communication between networks regardless of
the technologies implemented in each network.
This connectivity includes the ability to
transfer files, send mail, and log on to a
remote host in a network of heterogeneous
systems. TCP/IP forms the base technology for
the Internet that connects most major
research institutions, including university,
corporate, and government labs.
WIDE AREA NETWORK (WAN)... A network that consists of machines connected
over a wide geographic area.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 (Audited)........ F-3
Consolidated Statements of Operations for the years ended June 30, 1994,
1995 and 1996 (Audited).................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1994, 1995 and 1996 (Audited)............................. F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1994,
1995 and 1996 (Audited).................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES AND NEW ERA SYSTEMS
SERVICES LTD. PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
Pro Forma Combined Condensed Consolidated Statements of Operations for the
year ended June 30, 1996 (Unaudited)..................................... F-25
Notes to Pro Forma Combined Condensed Consolidated Statements of
Operations............................................................... F-27
NEW ERA SYSTEMS SERVICES LTD.
Auditors' Report.......................................................... F-29
Consolidated Balance Sheets as of February 28, 1994 and 1995 (Audited) and
November 30, 1995 (Unaudited)............................................ F-30
Consolidated Statements of Operations and Deficit for the years ended
February 28, 1993, 1994 and 1995 (Audited) and for the nine months ended
November 30, 1994 and 1995 (Unaudited)................................... F-31
Consolidated Statements of Cash Flows for the years ended February 28,
1993, 1994 and 1995 (Audited) and for the nine months ended November 30,
1994 and 1995 (Unaudited)................................................ F-32
Notes to Consolidated Financial Statements................................ F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Interlink Computer Sciences, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Interlink
Computer Sciences, Inc. and Subsidiaries as of June 30, 1995 and 1996 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Interlink
Computer Sciences, Inc. and Subsidiaries as of June 30, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles.
San Jose, California
July 22, 1996
----------------
The accompanying consolidated financial statements give effect to a reverse
stock split on a one-for-two basis of the Company's Common Stock and Preferred
Stock which will occur upon reincorporation of the Company in Delaware. The
above opinion is in the form which will be signed by Coopers & Lybrand L.L.P.
upon completion of such reverse stock split described in Note 13 of notes to
consolidated financial statements and assuming that from July 22, 1996 to the
date of such completion, no other material events have occurred that would
affect the accompanying consolidated financial statements or required
disclosure therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
July 22, 1996
F-2
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30,
--------------------- 1996
1995 1996 (NOTE 12)
-------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 4,148 $ 6,121
Available-for-sale securities................ 2,525 --
Accounts receivable, net of allowance for
doubtful accounts of $279 in 1995 and $542
in 1996..................................... 7,958 9,445
Inventories.................................. 683 700
Prepaid expenses and other current assets.... 440 269
Income taxes receivable...................... -- 796
Deferred income taxes........................ 865 1,811
-------- --------
Total current assets....................... 16,619 19,142
Property and equipment, net.................... 1,451 1,281
Purchased software products.................... -- 2,893
Goodwill....................................... 248 165
Deferred income taxes.......................... 1,320 1,577
Other assets................................... 362 867
-------- --------
Total assets............................... $ 20,000 $ 25,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit.......................... $ 1,300 $ 5,000
Current portion of long-term debt............ 286 3,100
Accounts payable............................. 2,249 2,662
Accrued liabilities.......................... 6,151 6,630
Deferred maintenance and product revenue..... 6,816 8,121
-------- --------
Total current liabilities.................. 16,802 25,513
Long-term debt, less current portion........... 368 2,892
Deferred maintenance revenue................... 189 1,056
Deferred income taxes.......................... -- 771
Other liabilities.............................. -- 278
-------- --------
Total liabilities.......................... 17,359 30,510
-------- --------
Commitments and contingencies (Note 6).
Preferred stock, no par value:
Authorized: 2,625,000 shares
Issued and outstanding: 1,230,000 shares and
no pro forma shares......................... 6,310 6,310
Common stock, no par value:
Authorized: 15,000,000 shares
Issued and outstanding: 2,459,000 shares in
1995 and 2,483,000 shares in 1996 and
3,714,000 pro forma shares.................. 14,167 14,602 $ 20,912
Cumulative translation adjustment.............. (536) (581) (581)
Accumulated deficit............................ (17,300) (24,916) (24,916)
-------- -------- --------
Total stockholders' equity (deficit)....... 2,641 (4,585) $ (4,585)
-------- -------- ========
Total liabilities and stockholders' equity
(deficit)................................. $ 20,000 $ 25,925
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Product........................................... $12,350 $15,818 $19,670
Maintenance and consulting........................ 9,525 11,261 14,332
------- ------- -------
Total revenues.................................. 21,875 27,079 34,002
------- ------- -------
Cost of revenues:
Product........................................... 2,380 3,316 3,413
Maintenance and consulting........................ 1,430 3,293 4,594
------- ------- -------
Total cost of revenues.......................... 3,810 6,609 8,007
------- ------- -------
Gross profit........................................ 18,065 20,470 25,995
Operating expenses:
Product development............................... 6,276 6,245 5,241
Sales and marketing............................... 8,384 10,792 13,316
General and administrative........................ 2,561 3,329 3,954
Purchased research and development and product
amortization..................................... -- -- 10,479
------- ------- -------
Total operating expenses........................ 17,221 20,366 32,990
------- ------- -------
Operating income (loss)............................. 844 104 (6,995)
Interest income..................................... 77 172 194
Interest expense.................................... (301) (253) (701)
------- ------- -------
Income (loss) before income taxes and
extraordinary items.......................... 620 23 (7,502)
Benefit from (provision for) income taxes........... (273) 1,624 (114)
------- ------- -------
Income (loss) before extraordinary items...... 347 1,647 (7,616)
Extraordinary item--gain on debt restructuring, net
of income taxes.................................... 1,320 -- --
------- ------- -------
Net income (loss)................................... $ 1,667 $ 1,647 $(7,616)
======= ======= =======
Income (loss) per share:
Income (loss) before extraordinary items.......... $ 0.09 $ 0.34 $ (2.44)
Extraordinary item--gain on debt restructuring,
net of income taxes.............................. $ 0.35 -- --
------- ------- -------
Net income (loss) per share......................... $ 0.44 $ 0.34 $ (2.44)
======= ======= =======
Shares used in per share calculation................ 3,808 4,814 3,127
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CUMULATIVE
----------------- -------------- TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT ADJUSTMENT DEFICIT TOTAL
------- -------- ------ ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1993. -- $ -- 2,376 $14,063 $(364) $(20,614) $(6,915)
Issuance of Series 1
preferred stock, net
of issuance costs of
$470................. 1,230 6,294 -- -- -- -- 6,294
Exercise of stock
options.............. -- -- 9 6 -- -- 6
Issuance of preferred
and common stock
warrants............. -- 16 -- 26 -- -- 42
Translation
adjustment........... -- -- -- -- (98) -- (98)
Net income............ -- -- -- -- -- 1,667 1,667
------- -------- ----- ------- ----- -------- -------
Balances, June 30, 1994. 1,230 6,310 2,385 14,095 (462) (18,947) 996
Issuance of common
stock for acquisition
of Lennox and Partner
GmbH................. -- -- 42 46 -- -- 46
Issuance of common
stock................ -- -- 5 5 -- -- 5
Exercise of stock
options.............. -- -- 27 21 -- -- 21
Translation
adjustment........... -- -- -- -- (74) -- (74)
Net income............ -- -- -- -- -- 1,647 1,647
------- -------- ----- ------- ----- -------- -------
Balances, June 30, 1995. 1,230 6,310 2,459 14,167 (536) (17,300) 2,641
Issuance of common
stock for acquisition
of Lennox and Partner
GmbH................. -- -- 6 19 -- -- 19
Exercise of stock
options.............. -- -- 18 16 -- -- 16
Issuance of common
stock warrants....... -- -- -- 400 -- -- 400
Translation
adjustment........... -- -- -- -- (45) -- (45)
Net loss.............. -- -- -- -- -- (7,616) (7,616)
------- -------- ----- ------- ----- -------- -------
Balances, June 30, 1996. 1,230 $ 6,310 2,483 $14,602 $(581) $(24,916) $(4,585)
======= ======== ===== ======= ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 1,667 $ 1,647 $ (7,616)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Purchased research and development.............. -- -- 10,158
Depreciation and amortization................... 916 1,032 1,477
Gain on debt restructuring...................... (1,361) -- --
Loss on disposal of property and equipment...... -- 42 --
Provision for excess and obsolete inventory..... 64 21 28
Provision for doubtful accounts................. 100 67 215
Exchange (gain) loss............................ (141) (406) 130
Deferred income taxes........................... (174) (2,011) (1,203)
Changes in operating assets and liabilities:
Accounts receivable............................ (3,546) (787) (744)
Inventories.................................... (668) 409 (45)
Prepaid expenses and other assets.............. 55 58 (16)
Accounts payable............................... 612 128 (92)
Accrued liabilities............................ 751 411 (424)
Deferred maintenance and product revenue....... 367 1,626 1,969
Other liabilities.............................. -- -- 278
------- ------- --------
Net cash provided by (used in) operating
activities................................... (1,358) 2,237 4,115
------- ------- --------
Cash flows from investing activities:
Acquisition of New Era, net of cash acquired...... -- -- (10,168)
Proceeds from sale of available-for-sale
securities....................................... -- -- 2,525
Acquisition of property and equipment............. (618) (43) (384)
Capitalization of software development costs...... (334) (30) (90)
Purchase of available-for-sale securities......... -- (2,475) --
Acquisition of Lennox and Partner GmbH............ -- (63) --
------- ------- --------
Net cash used in investing activities......... (952) (2,611) (8,117)
------- ------- --------
Cash flows from financing activities:
Proceeds from term loan........................... -- -- 3,000
Proceeds from bank line of credit................. 1,500 -- 5,000
Payments on capital lease obligations............. (107) (339) (307)
Payments on notes payable and other............... (3,164) (887) (323)
Payments on bank line of credit................... -- (200) (1,300)
Proceeds from notes payable to stockholder........ 1,000 -- --
Proceeds from issuance of preferred and common
stock, net....................................... 5,300 21 36
------- ------- --------
Net cash provided by (used in) financing
activities................................... 4,529 (1,405) 6,106
------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................. 2,219 (1,779) 2,104
Effect of exchange rate changes on cash............. 110 189 (131)
Cash and cash equivalents, beginning of period...... 3,409 5,738 4,148
------- ------- --------
Cash and cash equivalents, end of period............ $ 5,738 $ 4,148 $ 6,121
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Interlink Computer Sciences, Inc. (the "Company") is a supplier of high
performance solutions for enterprise networked systems management. The Company
provides software and services which enable customers to use their IBM and
IBM-compatible MVS mainframes as "enterprise servers" in distributed,
heterogeneous client/server network environments. The Company markets and
sells its software and services primarily through its direct sales
organization in North America and Europe and, to a lesser extent, through
resellers and international distributors to domestic and international
customers, including original equipment manufacturers. The Company's TCPaccess
products, including related maintenance and hardware, have generated the
majority of the Company's revenues. During fiscal years 1994, 1995 and 1996,
sales of the TCPaccess products and related maintenance and hardware accounted
for approximately 61%, 66% and 67%, respectively, of the Company's total
revenues. Therefore, the Company's operating results, particularly in the near
term, are significantly dependent upon the continued market acceptance of the
TCPaccess products. The life cycles of the Company's products are difficult to
estimate due in part to the effect of future product enhancements and
competition. A decline in demand for the Company's products as a result of
competition, technological change or other factors would have a material
adverse affect on the Company's business, financial condition and result of
operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after intercompany balances and transactions
have been eliminated.
FINANCIAL INSTRUMENTS
Cash equivalents are highly liquid investments with original or remaining
maturities of three months or less at the date of purchase. Cash equivalents
present insignificant risk of changes in value because of interest rate
changes. The Company maintains its cash balances with high quality financial
institutions and has not experienced any material losses relating to any
investment instruments.
Available-for-sale securities are carried at fair value, based on quoted
market prices, with the unrealized gains or losses, net of tax, reported in
stockholders' equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity, both of which
are included in interest income. Realized gains and losses are recorded on the
specific identification method.
The amounts reported for cash equivalents, receivables and other financial
instruments are considered to approximate fair values based upon comparable
market information available at the respective balance sheet dates. Financial
instruments that potentially subject the Company to concentrations of credit
risks comprise, principally cash and cash equivalents, available-for-sale
securities, trade accounts receivable, bank lines of credit and long-term
debt. The Company invests its excess cash primarily in commercial paper and
treasury notes that mature within one year. The carrying value of the
Company's line of credit and long-term debt approximates fair value as the
interest rates are variable or the debt has been discounted at current
interest rates.
F-7
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONCENTRATIONS
At June 30, 1995 and 1996, approximately 19% and 39%, respectively, of the
Company's cash and cash equivalents and available-for-sale securities are
invested in Europe with the remaining amounts invested primarily in the United
States and Canada.
At June 30, 1995 and 1996, approximately 62% and 51%, respectively, of the
Company's trade accounts receivable are due from customers in Europe with the
remaining receivables due from customers primarily in the United States and
Canada. The Company performs ongoing evaluations of its customers' financial
condition and does not require collateral. The Company maintains allowances
for potential credit losses and such losses have been within management's
expectations.
Network access from the enterprise server to the network via the Company's
TCPaccess product requires a network controller, which the Company sells to
its customers. The Company's principal network controller, the 3762 Network
Controller, is supplied by one company. Sales of network controllers have
accounted for substantially all of the Company's hardware revenues to date,
and total hardware revenues have accounted for 23%, 25% and 19% of product
revenues in fiscal years 1994, 1995 and 1996, respectively. In addition, the
Company also relies upon this company for network controller replacement
parts. If the Company were unable to purchase an adequate supply of such sole-
sourced products on a timely basis, the Company could be required to design a
comparable product, qualify and develop an alternative source, or redesign its
products based upon different components. Furthermore, IBM could use its
position as a supplier of network controllers to gain a competitive advantage
over the Company. To date, the Company has not experienced difficulty or
significant delay in obtaining any such sole-source products. However, there
can be no assurance that the Company will not face such difficulties or delays
in the future. An inability of the Company or its customers to obtain such
sole-sourced controllers could significantly delay shipment of products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
GOODWILL
Goodwill is amortized on a straight line basis and is stated net of
accumulated amortization of $82,000 and $165,000 at June 30, 1995 and 1996,
respectively.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories are principally comprised of finished
goods at June 30, 1995 and 1996.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line basis over estimated useful lives of three to five years.
Leasehold improvements and property under capital leases are amortized using a
straight-line basis over the shorter of their estimated useful lives or the
terms of the leases. Upon disposal, assets and related accumulated
depreciation are removed from the accounts and the related gain or loss is
included in operations.
REVENUE RECOGNITION
Product Revenues
Product revenues are recognized after shipment of the product, completion of
a trial period, if any, and receipt of a signed contract, if remaining
obligations are insignificant, collection of the resulting receivable is
F-8
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
probable and product returns are reasonably estimatible. Provisions for
estimated product returns, warranty costs and insignificant vendor obligations
are recorded at the time products are shipped. Generally, the Company does not
provide the right of return or price protection to its distributors or its end
user customers.
Deferred product revenues consist generally of revenues from distributors
with which the Company does not have historical collection experience,
revenues under contracts with refundability or cancellation clauses and
revenues for which the Company believes collection is not probable. Product
revenues from distributors with which the Company either does not have
historical collection experience or believes collection is not probable are
recognized upon collection of the related accounts receivable and revenues
under contracts with refundability or cancellation clauses are recognized when
such clauses lapse.
Maintenance and Consulting Revenues
Maintenance and deferred maintenance revenues consist of maintenance and
renewal fees for providing product updates, technical support and related
services for software products, and consulting revenue consists of training
and consulting services fees. The Company unbundles a portion of its initial
product license revenues related to software maintenance revenues based upon
the amount charged for such services when they are sold separately. Unbundled
software maintenance revenues and revenues from separately sold maintenance
contracts are deferred and recognized ratably over the related service period.
Consulting services revenues from contracts are generally recognized on the
percentage of completion basis, measured by the relationship of labor hours
incurred to estimated total labor hours for the contract. The Company
considers expended hours the best available measure of progress for these
contracts. Changes in job performance and estimated profitability may result
in revisions of cost, income and losses on contracts and are recognized in the
period in which the revisions are determined. Training fees are recognized as
the related services are performed.
PRODUCT DEVELOPMENT COSTS
Costs related to the conceptual formulation and design of software products
are expensed as product development while costs incurred subsequent to
establishing technological feasibility of software products are capitalized,
if material, until general release of the product. Generally, technological
feasibility is established when the software module performs its primary
functions described in its original specifications, contains convenience
features required for it to be usable in a production environment and is
completely documented. Amortization of capitalized software costs, which
begins when products are available for general release to customers, is
provided on a product-by-product basis at the greater of the amount computed
using the ratio of current revenues to the total current and anticipated
revenues or the straight-line basis over two years. The Company evaluates the
estimated net realizable value of each software product at each balance sheet
date and records write-downs to net realizable value for any products for
which the net book value is in excess of net realizable value. During fiscal
year 1995, the Company wrote off capitalized software costs of $112,000 and in
fiscal years 1994, 1995 and 1996 capitalized software amortization was
$154,000, $259,000 and $32,000, respectively.
ADVERTISING EXPENSE
Advertising costs are expensed when incurred. In fiscal years 1994, 1995 and
1996 advertising expense was $178,000, $277,000 and $691,000, respectively.
INCOME TAXES
The Company accounts for income taxes under the liability method whereby
deferred tax asset or liability account balances are calculated at the balance
sheet date using current laws and rates in effect.
F-9
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency for the majority of the Company's foreign operations
is the applicable local currency. The translation from the applicable foreign
currency to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using the weighted average exchange rate during the period.
Adjustments resulting from such translation are reflected as a separate
component of stockholders' equity. Gains or losses resulting from foreign
currency transactions are included in the results of operations.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are included in the per share calculations where the effect
of their inclusion would be dilutive. Dilutive common equivalent shares
consist of the incremental common shares issuable upon conversion of
convertible preferred stock (using the "if converted" method) and stock
options and warrants, using the modified treasury stock method in all periods.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and common equivalent shares issued by the Company during the
twelve months preceding the initial filing of the Company's initial public
offering, using the treasury stock method and the public offering price per
share, have been included in the calculation of net income (loss) per share
for all periods presented.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to current classifications.
RECENT PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121), which requires the Company to review the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 will
become effective for the Company's 1997 fiscal year. The Company does not
expect SFAS 121 to have a material impact on the Company's financial condition
or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which
establishes a fair value based method of accounting for stock based
compensation plans. While the Company is studying the impact of the
pronouncement, it continues to account for employee stock options under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 will be
effective for fiscal years beginning after December 15, 1995.
F-10
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS:
LENNOX AND PARTNER GMBH
During fiscal year 1995, the Company purchased all of the capital stock of
Lennox and Partner GmbH ("Lennox") in exchange for 42,000 shares of the
Company's common stock and cash of $63,000. Under the terms of the purchase
agreement, the Company is obligated to make future cash payments to the
sellers of $58,000 and may be obligated to make additional cash payments of up
to $232,000 and to issue up to 6,000 additional shares of the Company's common
stock to certain Lennox sellers, who after the acquisition became employees of
the Company, contingent upon cumulative profitability of the subsidiary. The
acquisition was accounted for as a purchase transaction and the results of
operations of Lennox were included with those of the Company after July 1,
1994, the date the acquisition was consummated. During 1995, the Company paid
and expensed $60,000 related to the cumulative profitability requirements and
recorded goodwill of $330,000 related to the transaction and is amortizing
such amounts over four years. The results of operations of Lennox were not
material to those of the Company in 1994.
In December 1995, the cumulative profitability requirements specified in the
purchase agreement were met and the Company recorded an expense totaling
$216,000 related to both cash payments totaling $197,000 and the issuance of
6,000 shares of the Company's common stock with a fair value of $3.20 per
share.
NEW ERA SYSTEMS SERVICES LTD.
Effective December 29, 1995, the Company acquired all of the outstanding
stock of New Era Systems Services Ltd. ("New Era"), a Canadian company that
develops, markets and supports storage management and software distribution
products. In the transaction, the Company paid cash of approximately
$11,000,000 and issued fully exercisable warrants to purchase 350,000 shares
of its common stock at an exercise price of $3.20 per share with a fair value
of $315,000 (see Note 7). In addition, in conjunction with the acquisition,
the Company issued non-interest bearing notes payable to the shareholders of
New Era aggregating approximately $1,300,000, net of discounts for imputed
interest of $133,000 (see Note 5). These amounts resulted in a purchase price
for New Era of $13,001,000 including accruals for direct acquisition costs and
severance costs and certain duplicate facilities related to the planned
closure of New Era's European subsidiary, all totaling approximately $500,000.
The acquisition has been accounted for as a purchase transaction and the
results of operations of New Era have been included with those of the Company
since December 29, 1995, the date the acquisition was consummated.
The fair value of the assets acquired from New Era, which was determined
through established valuation techniques used in the software industry, and a
summary of the consideration exchanged for these assets is as follows (in
thousands):
<TABLE>
<S> <C>
Total purchase price............................................... $13,001
=======
Assets acquired:
Tangible assets, primarily cash, accounts receivable and property
and equipment................................................... 3,117
Purchased software products...................................... 3,199
Purchased research and development............................... 10,158
Liabilities assumed................................................ (3,473)
-------
$13,001
=======
</TABLE>
The amount allocated to purchased software products, for which technological
feasibility had been established at the acquisition date, is being amortized
on a straight line basis over five years. At June 30, 1996,
F-11
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accumulated amortization related to purchased software products was $321,000.
The amount of the purchase price allocated to purchased research and
development, which had no alternative future use and relates to products for
which technological feasibility had not been established, was expensed at the
acquisition date.
In addition, contingent consideration up to a total of $5,200,000 is payable
in cash on January 31, 1997 and 1998, upon the attainment of certain targeted
revenue levels for New Era software products and maintenance. These amounts
represent additional consideration paid for the acquisition of New Era, and up
to $2,700,000 will be recorded as purchased research and development and
expensed, if the products in research and development at the date of the
acquisition are still under research and development and up to $800,000 will
be recorded as purchased software products. Amounts paid in excess of amounts
allocated to purchased research and development and purchased software
products will be recorded as goodwill and amortized over the remaining life of
the goodwill, which is estimated at five years from the date of the
acquisition.
Summarized below are the unaudited pro forma results of operations of the
Company as though New Era had been acquired at the beginning of fiscal 1995.
Adjustments have been made for the estimated increases in amortization related
to purchased software, increases and decreases in interest expense and income
and other appropriate pro forma adjustments.
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1995 1996
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenue.......................................... $29,954 $36,491
Net income (loss)................................ (450) 2,765
Net income (loss) per share...................... (0.07) 0.56
</TABLE>
The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable and do not reflect any benefit from economies
which might be achieved from combined operations. The pro forma financial
information presented above is not necessarily indicative of either the
results of operations that would have occurred had the acquisition taken place
at the beginning of fiscal 1995 or of future results of operations of the
combined companies.
3. BALANCE SHEET DETAIL:
Property and equipment, net comprised (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
------- -------
<S> <C> <C>
Equipment.................................................. $ 6,990 $ 4,131
Furniture and fixtures..................................... 470 338
Leasehold improvements..................................... 221 97
------- -------
7,681 4,566
Less accumulated depreciation and amortization............. (6,230) (3,285)
------- -------
$ 1,451 $ 1,281
======= =======
</TABLE>
Depreciation expense was $762,000, $676,000 and $742,000 in fiscal years
1994, 1995 and 1996, respectively.
F-12
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equipment acquired under capital leases included in property and equipment
above comprised (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
1995 1996
------ ------
<S> <C> <C>
Equipment.................................................... $1,066 $1,030
Less accumulated amortization................................ (488) (766)
------ ------
$ 578 $ 264
====== ======
</TABLE>
Capitalized software, net, included in other assets, comprised (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------
1995 1996
----- -----
<S> <C> <C>
Capitalized software........................................... $ 364 $ 454
Less accumulated amortization.................................. (332) (364)
----- -----
$ 32 $ 90
===== =====
</TABLE>
4. BANK LINE CREDIT:
At June 30, 1996, the Company had available a line of credit with a bank
under a loan agreement, which also provided for certain long-term borrowings
of $3,000,000 (see Note 5). At June 30, 1996, $5,000,000 was outstanding under
the line of credit. The line of credit expires on November 29, 1996 and is
collateralized by substantially all the assets of the Company. Borrowings
under the line of credit are limited to the lesser of (i) 85% of domestic
accounts receivable plus 70% of eligible foreign accounts receivable not to
exceed $2,500,000 or (ii) $5,000,000 and bear interest at the lender's prime
rate plus 1.5% (9.75% at June 30, 1996). Under the terms of the agreement, the
Company is required to maintain a certain minimum quick ratio and tangible net
worth and maximum debt to tangible net worth, as well as specified quarterly
profitability and is restricted from paying dividends, repurchasing stock,
hypothecating assets or incurring additional indebtedness. In conjunction with
this loan agreement, the Company issued fully exercisable warrants to the bank
for 75,000 shares and 6,250 shares at $3.20 and $12.80 per share,
respectively, of the Company's common stock. In the event the Company
completes an initial public offering by October 1, 1996, the shares of common
stock exercisable under the warrant for 75,000 shares is reduced to 62,500
shares.
The weighted average interest rate on the Company's short-term borrowing was
8.4%, 10.0% and 11.0% for fiscal years 1994, 1995 and 1996, respectively.
F-13
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT:
OUTSTANDING LONG-TERM DEBT
As of June 30, 1996, the Company had long-term debt outstanding as follows
(in thousands):
<TABLE>
<S> <C>
Note payable to bank................................................ $ 3,000
Capitalized lease obligations....................................... 347
Notes payable to former New Era shareholders........................ 1,401
Western Economic Development notes payable.......................... 1,244
-------
5,992
Less current portion................................................ (3,100)
-------
$ 2,892
=======
</TABLE>
The note payable to bank bears interest at prime plus 2.5% (10.75% at June
30, 1996) and is payable in quarterly installments of principal beginning in
June 1996 with the final payment due in December 1998. The note payable, which
was issued to finance, in part, the New Era acquisition, is subject to the
same loan agreement described in Note 4 above.
The Company has leased equipment under capital lease obligations maturing
through fiscal year 2000. The lease agreements require the Company to maintain
liability and property insurance.
The notes payable to the former New Era shareholders were issued in
conjunction with the acquisition of New Era and are non-interest bearing,
unsecured and due on January 2, 1997. The notes payable are recorded net of a
discount of approximately $65,000 at June 30, 1996, which reflects the
estimated interest to maturity at a rate of 10%, the interest rate at which
other short-term borrowings were available to the Company at the time of the
acquisition.
The Western Economic Development notes payable, which were assumed in
conjunction with the Company's acquisition of New Era, are unsecured, non-
interest bearing and are due in quarterly payments through June 2005 with
accelerated principal payments required each quarter beginning in June 1996,
calculated as 14% of quarterly HARBOR revenues in excess of approximately
$600,000. As this criterion was not met at June 30, 1996, no accelerated
payments are currently due. The notes payable are recorded net of a discount
of $614,000 at June 30, 1996 based on the Company's borrowing rate of 11%, the
interest rate at which long-term borrowings were available to the Company at
the time of acquisition. Under the terms of these notes, the Company is
required to maintain minimum equity in its Canadian subsidiary, is restricted
from paying dividends and must continue to conduct certain product development
operations in Western Canada until the notes are fully repaid.
F-14
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1996, future minimum annual payments due under the long-term
debt and the capital lease obligations are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997................................................................ $3,193
1998................................................................ 1,307
1999................................................................ 994
2000................................................................ 243
2001................................................................ 235
Thereafter.......................................................... 735
------
6,707
Less amount representing interest................................... (715)
------
Total minimum payments.............................................. $5,992
======
</TABLE>
DEBT RESTRUCTURING
During fiscal year 1994, the Company exchanged borrowings of approximately
$5,000,000 for a cash payment of $3,000,000, a warrant to purchase 75,000
shares of the Company's common stock at an exercise price of $0.90 per share
(see Note 7) and a note payable of $495,000 and recorded an extraordinary gain
related to the debt restructuring of $1,320,000 net of income taxes of
$41,000. This gain represented the difference between the recorded amount of
the debt prior to the restructuring less cash paid, the estimated fair value
of the warrants and the note payable including all estimated interest payments
through January 1, 1997. During fiscal year 1995, the Company paid the
remaining $495,000 note payable to the bank.
6. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases its facilities and certain equipment under various
operating leases with terms ranging from month-to-month to five years. Under
the terms of these leases, the Company is also responsible for taxes,
insurance and utilities.
The minimum future annual rental payments as of June 30, 1996 under leases
with initial or remaining non-cancelable lease terms longer than one year are
as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997................................................................ $1,650
1998................................................................ 1,092
1999................................................................ 497
2000................................................................ 471
2001................................................................ 276
Thereafter.......................................................... 296
------
Total minimum lease payments........................................ $4,282
======
</TABLE>
Rent expense was $1,318,000, $1,668,000 and $1,767,000 in fiscal years 1994,
1995 and 1996, respectively. Sublease rental income was $9,000 in fiscal year
1994. The Company's sublease expired during fiscal year 1994.
F-15
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONTINGENCY
The Company and the Company's subsidiary in France are involved in a
commercial dispute with a former Italian distributor of the Company's
TCPaccess products. The former distributor alleged in a letter sent to the
Company that the Company had breached and unlawfully terminated the agreement
pursuant to which the former distributor was appointed a distributor of the
Company's products in Italy and asserted other related claims against the
Company. The letter demanded the former distributor's reinstatement as a
distributor, the execution of a written distribution agreement setting forth
the distribution arrangements between the parties, and compensation in an
unspecified amount to be paid to the former distributor for the harm that it
has suffered. The Company's Canadian subsidiary, New Era, has also previously
used the former distributor as a distributor of the HARBOR products in Italy
pursuant to a separate agreement. No legal claim has been filed nor has
arbitration been invoked by the former distributor regarding this matter. No
provision for any liability that may result upon resolution of this matter has
been made in the accompanying financial statements. Should the former
distributor initiate legal proceedings and prevail on such claims, the
Company's business, financial condition and results of operations could be
materially adversely affected.
FOREIGN EXCHANGE CONTRACTS
The Company had foreign exchange contracts outstanding with notional amounts
of $158,000 and $1,465,000 at June 30, 1995 and 1996, respectively. Risk equal
to the notional amounts of these contracts arises from the possible inability
of the counter parties to meet the terms of these contracts. The other parties
to these contracts are major financial institutions. The Company does not
expect any significant losses as a result of default by the other party. Gains
and losses resulting from these contracts are insignificant and are recorded
in general and administrative expense.
MANAGEMENT AND KEY EMPLOYEE COMPENSATION AGREEMENTS
The Company has agreements with certain members of management that provide
for the immediate acceleration of the exercisability of the options to
purchase the Company's common stock held by these individuals and for cash
bonuses if there is any reorganization, merger, or acquisition that results in
a change in the Company's ownership by at least 50%. Under these agreements,
the amount of additional compensation to be paid to each of these employees
would be determined based on a formula which considers the purchase price paid
for the Company and the amounts the preferred shareholders are entitled to
receive through liquidation preferences. All of these agreements terminate
immediately prior to the closing of an underwritten public offering of the
Company's common stock registered under the Securities Act of 1933, as
amended.
7. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
The Board of Directors has the authority to issue preferred stock in one or
more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation
of such series, without any further vote or action by the Company's
stockholders.
The Company's Series 1 preferred stock is initially convertible into common
stock, on a one for one basis, subject to certain antidilution adjustments.
Conversion is at the option of the holder, or is automatic upon the
F-16
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
earlier of the closing of a public offering of the Company's common stock at a
price of not less than $10.00 per share, as amended by the Company's Board of
Directors in July 1996, and an aggregate gross offering price to the public of
not less than $10,000,000 or upon the election of 50% of the holders of the
Series 1 preferred stock. The holders of preferred stock have voting rights
equal to the number of shares of common stock into which the preferred stock
is convertible. Further, holders of a certain majority of the outstanding
shares of the Series 1 preferred stock must approve a merger or sale of
substantially all the assets of the Company or amendments of the Articles of
Incorporation. The preferred stockholders are entitled to elect two members of
the Board of Directors.
In the event of liquidation or merger, or upon the election of 50% of the
holders of the Series 1 preferred stock, the holders of the Series 1 preferred
stock are entitled to receive an initial preference amount of $5.50 per share
and all declared but unpaid dividends. Thereafter, the property and/or cash
shall be distributed 50% among the holders of Series 1 preferred stock and 50%
to the holders of common stock until the holders of the Series 1 preferred
stock have received $10.00 per share. Remaining assets shall be distributed to
the common stockholders until each has received $10.00 per share and then
ratably among the common and preferred stockholders, with the preferred
stockholders sharing on an as converted basis.
The holders of Series 1 preferred stock are entitled to receive a non-
cumulative dividend of $0.38 per share, per annum, payable when, as and if
declared by the Board of Directors. The holders of the Series 1 preferred
stock also have certain registration rights.
INCENTIVE STOCK OPTION PLAN
The Company terminated its 1988 Stock Option Plan and replaced it with a
1992 Stock Option Plan ("1992 Plan") under which 975,000 shares of common
stock were reserved for issuance. During 1996, the Company increased the
number of shares of common stock reserved under the 1992 Plan by 980,000
shares to 1,955,000 shares, of which 850,000 shares are subject to stockholder
approval. All stock options outstanding or available for grant under the 1988
Stock Option Plan were canceled or terminated, respectively. Under the 1992
Plan, incentive stock options may be granted to employees, officers and
directors and non-statutory stock options to employees, officers, directors or
consultants at prices not lower than 100% and 85%, respectively of the fair
market value of the Company's common stock at the date of grant as determined
by the Board of Directors. Furthermore, the 1992 Plan provides that options
are exercisable within the times, or upon the events determined by the Board
of Directors, or by a committee of the Board appointed to administer the 1992
Plan, and are exercisable no later than seven years from the date of grant.
Generally, options become exercisable as to 9/48 after nine months from the
date of grant and ratably thereafter over three years and three months.
Options to purchase 87,750 shares of the Company's common stock with an
exercise price of $1.10 per share, however, become exercisable on the earlier
to occur of the achievement of specified performance milestones or five years
from the date of grant. In July 1996, the specified performance milestones
were determined to be satisfied and all of these options became exercisable.
F-17
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Option activity under the plan for the fiscal years 1994, 1995, and 1996
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS ----------------------------------
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE AMOUNT
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Balances, June 30, 1993.......... 69,465 420,045 $0.70 $ 295,000
Options reserved................. 400,000 -- -- --
Options granted.................. (348,350) 348,350 $0.70-$1.10 348,000
Options exercised................ -- (9,182) $0.70 (6,000)
Options canceled................. 65,874 (65,874) $0.70-$0.90 (47,000)
-------- --------- ------------ ----------
Balances, June 30, 1994.......... 186,989 693,339 $0.70-$1.10 590,000
Options reserved................. 75,000 -- -- --
Options granted.................. (313,483) 313,483 $1.10 345,000
Options exercised................ -- (27,798) $0.70-$1.10 (21,000)
Options canceled................. 182,796 (182,796) $0.70-$1.10 (170,000)
-------- --------- ------------ ----------
Balances, June 30, 1995.......... 131,302 796,228 $0.70-$1.10 744,000
Options reserved................. 980,000 -- -- --
Options granted.................. (355,150) 355,150 $1.10-$14.00 1,250,000
Options exercised................ -- (18,564) $0.70-$1.10 (16,000)
Options canceled................. 114,311 (114,311) $0.70-$1.10 (123,000)
-------- --------- ------------ ----------
Balances, June 30, 1996.......... 870,463 1,018,503 $0.70-$14.00 $1,855,000
======== ========= ==========
</TABLE>
At June 30, 1996, 598,012 outstanding options were exercisable.
WARRANTS
At June 30, 1996, the Company had issued fully exercisable warrants to
purchase the following types of stock with the terms indicated:
<TABLE>
<CAPTION>
NUMBER EXERCISE
TYPE OF STOCK OF SHARES PRICE EXERCISE PERIOD
------------- --------- -------- ---------------
<C> <C> <C> <S>
Series 1 preferred......................... 15,000 $ 5.50 through December 1998
Common..................................... 66,667 $ 0.90 through December 1998
Common..................................... 75,000 $ 0.90 through January 1999
Common..................................... 350,000 $ 3.20 through December 2000
Common..................................... 75,000 $ 3.20 through April 2003
Common..................................... 6,250 $12.80 through April 2003
</TABLE>
The warrant for 75,000 shares of common stock with an exercise price of $0.90
expires earlier than January 1999 if the Company closes an initial public
offering at a specified price per share and the gross proceeds are at least
$10,000,000 or upon a merger or reorganization. As of June 30, 1996, the Company
has reserved 15,000 shares of its Series 1 preferred stock for exercise of these
warrants and 587,917 shares of its common stock.
EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Company's Board of Directors, subject to stockholder
approval, authorized the 1996 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved a total of 250,000 shares of common stock for issuance
under the Purchase Plan. Employees (including officers and employee directors
of the Company) are eligible to participate if they are customarily employed
for at least 20 hours per week and for more than five
F-18
<PAGE>
months in any calendar year. The Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, which may not exceed 15% of
any employee's compensation. The purchase price of the common stock under the
purchase Plan will be equal to 85% of the lesser of the fair market value per
share of common stock on the start date of the purchase period or on the date
on which the option is exercised. The Purchase Plan will terminate in June
2006, unless sooner terminated by the Board of Directors. As of June 30, 1996,
no shares have been issued under the Purchase Plan.
DIRECTOR OPTION PLAN
In June 1996, the Company's Board of Directors, subject to stockholder
approval, authorized the 1996 Director Option Plan (the "Director Plan") and
reserved a total of 100,000 shares of common stock for issuance under the
Director Plan. The option grants under the Director Plan are automatic and non-
discretionary, and the exercise price of the options is 100% of the fair market
value of the common stock on the grant date. The Director Plan provides for an
initial grant of options to purchase 15,000 shares of common stock to each non-
employee director of the Company (an "Outside Director") upon the effective
date of this offering at a per share exercise price equal to the initial public
offering price. Each new non-employee director will automatically be granted an
option to purchase 15,000 shares of common stock upon joining the Board of
Directors. Subsequently, each Outside Director will automatically be granted an
additional option to purchase 3,750 shares of common stock at the next meeting
of the Board of Directors following the annual meeting of stockholders in each
year beginning with the 1997 annual meeting of stockholders, if on such date,
such Outside Director has served on the Board of Directors for at least six
months. The term of such options is ten years. As of June 30, 1996, no shares
have been issued under the Director Plan.
REINCORPORATION IN DELAWARE
In June 1996, the Company's Board of Directors, subject to stockholder
approval, authorized the reincorporation of the Company in Delaware. As a
result of the reincorporation, the Company's authorized common stock will
increase to 25,000,000 shares, with a par value of $0.001 per share, and,
subject to the conversion of all outstanding preferred stock upon the
completion of the initial public offering, the Company will be authorized to
issue 5,000,000 shares of undesignated preferred stock.
8. INCOME TAXES:
Income (loss) applicable to domestic and foreign income taxes follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1994 1995 1996
------ ---- --------
<S> <C> <C> <C>
Domestic............................................... $1,841 $73 $ 3,737
Foreign................................................ 140 (50) (11,239)
------ --- --------
$1,981 $23 $ (7,502)
====== === ========
</TABLE>
F-19
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Benefit from (provision for) income taxes comprises (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1994 1995 1996
----- ------ -------
<S> <C> <C> <C>
Current:
Federal (net of benefit of operating loss
carryforward of $737 in 1994, $600 in 1995 and
$45 in 1996)..................................... $ (45) $ (580) $(1,100)
State (net of benefit of operating loss
carryforward of $64 in 1994, $44 in 1995 and $12
in 1996)......................................... (25) -- (218)
Foreign........................................... (70) 193 --
----- ------ -------
(140) (387) (1,318)
----- ------ -------
Deferred:
Federal........................................... -- 1,091 262
State............................................. -- 100 91
Foreign........................................... (174) -- (72)
----- ------ -------
(174) 1,191 281
----- ------ -------
Decrease in valuation allowance..................... -- 820 923
----- ------ -------
$(314) $1,624 $ (114)
===== ====== =======
</TABLE>
Benefit from (provision for) income taxes relates to (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
-------------------
1994 1995 1996
----- ------ -----
<S> <C> <C> <C>
Operations............................................. $(273) $1,624 $(114)
Gain on debt restructuring............................. (41) -- --
----- ------ -----
$(314) $1,624 $(114)
===== ====== =====
</TABLE>
The components of the deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
1995 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts receivable................. $ 112 $ 180
Allowance for excess and obsolete inventories.............. 26 50
Depreciation and amortization.............................. 707 1,092
Accrual for warranty, royalties and other.................. 1,116 1,452
Net operating loss carryforwards........................... 949 1,164
Tax credit carryforwards................................... 198 --
------ ------
Total deferred tax assets................................ 3,108 3,938
Deferred tax liability:
Purchased software products................................ -- (1,321)
Valuation allowance.......................................... (923) --
------ ------
Net deferred tax assets.................................. $2,185 $2,617
====== ======
</TABLE>
The valuation allowance decreased $820,000 in fiscal year 1995, primarily due
to the fact that management believed it is more likely than not that a portion
of the deferred tax asset will be realized in the next two fiscal
F-20
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years primarily because of its expectation that both the Company and certain
of its subsidiaries will be profitable in fiscal years 1996 and 1997. At June
30, 1996, the Company reduced its valuation allowance and recorded the full
amount of its net deferred tax assets, primarily because management believes
that it is more likely than not that the Company will have continued
profitability.
The principal items accounting for the difference between income taxes
computed at the U.S. statutory rate and the (provision for) benefit from
income taxes reflected in the statements of operations are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1994 1995 1996
----- ------ -------
<S> <C> <C> <C>
United States statutory rate......................... $(674) $ (8) $ 2,551
State taxes, net of federal benefit.................. (20) (1) (127)
Foreign taxes, net................................... (257) 193 (72)
Utilization of operating loss carryforwards.......... 674 644 --
Change in valuation allowance........................ -- 820 923
Alternative minimum tax.............................. (37) -- 5
Foreign sales corporation............................ -- -- 60
Non-deductible purchased research and development.... -- -- (3,454)
Other................................................ -- (24) --
----- ------ -------
$(314) $1,624 $ (114)
===== ====== =======
</TABLE>
The Company has net operating loss and general business tax credit
carryforwards for federal income tax purposes which may be used to reduce
future taxable income, if any, and federal income tax liability, respectively.
The years in which these carryforwards expire and their amounts as of June 30,
1996 are as follows:
<TABLE>
<CAPTION>
EXPIRATION
DATE AMOUNTS
------------ ----------
<S> <C> <C>
U.S. federal net operating loss carryforwards....... Through 2007 $1,500,000
Foreign net operating loss carryforwards............ None 480,000
California state regular tax operating loss
carryforwards...................................... Through 1997 135,000
</TABLE>
The Tax Reform Act of 1986 substantially changed the rules relating to net
operating loss and tax credit carryforwards in the case of an ownership change
of a corporation. The Company had such an ownership change, as defined, which
has limited the amount of net operating loss carryforwards that can be used in
any one year to approximately $135,000.
F-21
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SEGMENT INFORMATION:
The Company is a supplier of high performance solutions for enterprise
networked systems management. The Company provides software and services which
enable IBM and IBM-compatible MVS mainframes to be used as "enterprise
services" in distributed, heterogeneous client/server network environments.
Its business falls into one industry segment. No one customer accounted for
more than 10% of consolidated annual revenues in fiscal 1994, 1995 and 1996.
The distribution of revenues between the United States, Canadian and European
operations follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States................................... $14,263 $16,105 $19,923
Canada.......................................... -- -- 1,258
Europe.......................................... 7,612 10,974 12,821
Transfer from U.S. to Europe.................... 4,243 5,221 5,620
Eliminations.................................... (4,243) (5,221) (5,620)
------- ------- -------
Consolidated...................................... $21,875 $27,079 $34,002
======= ======= =======
</TABLE>
The Company assembles its systems domestically and then sells these systems
to its European subsidiaries for distribution in the European market. Internal
selling prices are designed to allocate operating profits to the operating
entity, with sales and service profits to the sales and service entities.
Consolidated income (loss) before income taxes and extraordinary items
comprised (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1994 1995 1996
---- ---- --------
<S> <C> <C> <C>
United States........................................... $480 $ 73 $ 4,711
Canada.................................................. -- -- (10,858)
Europe.................................................. 140 (50) (1,355)
---- ---- --------
$620 $ 23 $ (7,502)
==== ==== ========
</TABLE>
Consolidated total assets comprised (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1995 1996
------- -------
<S> <C> <C>
United States................................................ $12,373 $10,858
Canada....................................................... -- 5,857
Europe....................................................... 7,627 9,210
------- -------
$20,000 $25,925
======= =======
</TABLE>
Export sales were $276,000, $440,000 and $305,000 in fiscal years 1994, 1995
and 1996, respectively.
F-22
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SUPPLEMENTAL CASH FLOW DISCLOSURES (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1994 1995 1996
------ ---- -------
<S> <C> <C> <C>
Interest paid............................................. $ 329 $309 $ 591
Income taxes paid......................................... $ 106 $ 14 $ 890
Noncash transactions from investing and financing
activities:
Property and equipment acquired from capital lease
obligations............................................ $ 267 $678 --
Exchange of 363,636 shares of Series 1 preferred stock
for a note payable due to a common shareholder......... $1,000 -- --
Issuance of preferred and common stock warrants......... $ 42 -- $ 84
Issuance of common stock for acquisition of Lennox and
Partner GmbH........................................... -- $ 46 $ 19
Issuance of common stock in lieu of recruiting expenses. -- $ 5 --
Reclassification of inventory as rental equipment under
property and equipment................................. -- $230 --
Reduction of property and equipment and accumulated
depreciation for the disposal of fully depreciated
assets................................................. -- -- $ 4,127
Acquisition of New Era (see Note 2):
Assets acquired, excluding cash......................... -- -- $ 2,330
Liabilities assumed..................................... -- -- (3,473)
Purchased software products............................. -- -- 3,199
Purchased research and development...................... -- -- 10,158
Notes payable issued to former New Era stockholders (see
Note 5)................................................ -- -- (1,328)
Accrued liabilities for acquisition costs............... -- -- (403)
Issuance of common stock warrants....................... -- -- (315)
------ ---- -------
Net cash payments..................................... -- -- $10,168
====== ==== =======
</TABLE>
11. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Profit Sharing Plan (the "Plan") qualified under
Section 401(k) of the Internal Revenue Code of 1986. All full-time U.S.
employees are eligible to participate in the Plan.
Each eligible employee may elect to contribute to the Plan up to 15% of the
employee's annual compensation. The Company, at the discretion of its board of
directors, may make matching contributions to the Plan but has not done so for
fiscal years 1994, 1995 and 1996.
12. PRO FORMA FINANCIAL STATEMENT INFORMATION:
Upon the closing of the Company's initial public offering, each outstanding
share of the Company's preferred stock will be converted automatically to
common stock. The pro forma effect of the conversion has been presented as a
separate column in the Company's balance sheet assuming the conversion had
occurred as of June 30, 1996.
F-23
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS:
In July 1996, the Company's Board of Directors, subject to stockholder
approval, authorized the outstanding shares of the predecessor California
corporation's common stock and all classes of its preferred stock to be
converted automatically into shares of the Delaware corporation's common stock
and its preferred stock on a reverse one-for-two basis (see Note 7).
In July 1996, the Company's Board of Directors, subject to stockholder
approval, authorized a further increase in the shares of common stock reserved
under the Company's 1992 Plan (see Note 7) of 150,000 shares to 2,105,000
shares.
In July 1996, the Company's Board of Directors, subject to stockholder
approval, authorized a further increase in the shares of common stock reserved
under the Company's Purchase Plan (see Note 7) of 100,000 shares to 350,000
shares.
In July 1996, the Company's Board of Directors, subject to stockholder
approval, authorized a further increase in the shares of common stock reserved
under the Company's Director Plan (see Note 7) of 50,000 shares to 150,000
shares.
F-24
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
AND
NEW ERA SYSTEMS SERVICES LTD.
PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
On December 29, 1995, Interlink Computer Sciences, Inc. and Subsidiaries
("Interlink" or the "Company") acquired New Era Systems Services Ltd ("New
Era") and its HARBOR product line in exchange for cash and notes payable
totaling $12,400,000 and warrants to purchase 350,000 shares of its Common
Stock with additional contingent earnout payments totaling up to $5,200,000
due January 31, 1997 and 1998. HARBOR is an enterprise level software product
line providing systems management functions such as backup, restore, and
distribution for centralized network management.
The following unaudited pro forma financial statement gives effect to the
acquisition of substantially all of the assets and liabilities of New Era by
Interlink as if such acquisition had taken place as of July 1, 1995.
The accompanying unaudited pro forma combined condensed consolidated
statement of operations for the year ended June 30, 1996 combines the
historical consolidated statement of operations of the Company for the year
ended June 30, 1996 and the historical statement of operations of New Era for
the six months ended November 30, 1995 as if the acquisition had occurred on
July 1, 1995. The results of operations of New Era are only included for the
six months ended November 30, 1995 as Interlink's historical results of
operations for the year ended June 30, 1996 include the results of New Era
since the date of acquisition on December 29, 1995. The unaudited pro forma
combined condensed consolidated statement of operations gives effect to the
acquisition using the purchase method of accounting based upon allocation of
the purchase price of New Era, and the adjustments described in the notes
attached hereto.
The pro forma combined information is not necessarily indicative of future
operations or the actual results that would have occurred had the acquisition
been consummated at the beginning of the periods presented. The pro forma
combined information and related adjustments are based upon available
information and upon certain assumptions which the Company believes are
reasonable. The pro forma combined condensed consolidated statement of
operations should be read in conjunction with the Company's and New Era's
historical financial statements and notes thereto incorporated by reference or
contained elsewhere herein.
Certain line items are reclassified in order to remain consistent with the
Company's financial presentation. The pro forma combined information is
presented in U.S. dollars.
F-25
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
AND
NEW ERA SYSTEMS SERVICES LTD.
PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INTERLINK, NEW ERA,
YEAR NINE MONTHS
ENDED ENDED PRO FORMA
JUNE 30, NOVEMBER 30, ADJUSTMENTS PRO FORMA
1996 1995 (SEE NOTE 2) COMBINED
---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Product.................. $19,670 $2,473 $ (731)(F) $21,412
Maintenance and
consulting.............. 14,332 1,060 (313)(F) 15,079
------- ------ -------- -------
Total revenue.......... 34,002 3,533 (1,044) 36,491
------- ------ -------- -------
Cost of revenues:
Product.................. 3,413 60 (20)(F) 3,453
Maintenance and
consulting.............. 4,594 367 (120)(F) 4,841
------- ------ -------- -------
Total cost of revenue.. 8,007 427 (140) 8,294
------- ------ -------- -------
Gross profit............... 25,995 3,106 (904) 28,197
Operating expenses
Product development...... 5,241 813 (389)(F) 5,665
Sales and marketing...... 13,316 829 (206)(F) 13,939
General and
administrative.......... 3,954 440 (200)(F) 4,194
Purchased research and
development............. 10,158 -- (10,158)(A) --
Amortization of
intangibles............. 321 -- 321 (B) 642
------- ------ -------- -------
Total operating
expenses.............. 32,990 2,082 (10,632) 24,440
------- ------ -------- -------
Operating income (loss).... (6,995) 1,024 9,728 3,757
Other income (expense),
net....................... -- (92) -- (92)
Interest income............ 194 -- (90)(D) 104
Interest expense........... (701) (4) (504)(C)(F) (1,209)
------- ------ -------- -------
Income (loss) before
benefit from
(provision for)
income taxes......... (7,502) 928 9,134 2,560
Benefit from (provision
for) income taxes......... (114) (15) 334 (E)(F) 205
------- ------ -------- -------
Net income (loss).... $(7,616) $ 913 $ 9,468 $ 2,765
======= ====== ======== =======
Net income (loss) per
share..................... $ (2.44) $ 0.56
======= =======
Shares used in per share
calculations.............. 3,127 1,827 (G) 4,954
======= ======== =======
</TABLE>
See the accompanying notes to Pro Forma Combined Condensed Consolidated
Statements of Operations (unaudited).
F-26
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
AND
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
1. PURCHASE PRICE ALLOCATION:
The following outlines the current estimates for the purchase price of the
acquisition of New Era. Management believes that there will be no material
adjustments to this allocation, which is based on an independent appraisal of
the assets purchased and liabilities assumed as follows (in thousands):
<TABLE>
<S> <C>
Purchased research and development.................................. $10,158
Purchased software products......................................... 3,199
-------
13,357
Net book value of tangible assets acquired, net of liabilities
assumed............................................................ 356
-------
$13,001
=======
</TABLE>
In addition, contingent consideration up to a total of $5,200,000 is payable
in cash on January 31, 1997 and 1998, upon the attainment of certain targeted
revenue levels for New Era software products and maintenance. These amounts
represent additional consideration paid for the acquisition of New Era and up
to $2,700,000 will be recorded as purchased research and development and
expensed, if the products in research and development at the date of the
acquisition are still under research and development, and up to $800,000 will
be recorded as purchased software products. Amounts paid in excess of amounts
allocated to purchased research and development and purchased software
products will be recorded as goodwill and amortized over the remaining life of
the goodwill, which is estimated at five years from the date of the
acquisition.
2. PRO FORMA ADJUSTMENTS:
To reflect (i) the amortization and depreciation resulting from the
allocation of the New Era purchase price to the assets acquired based on their
fair value, as determined by the management of Interlink and an independent
appraiser, (ii) the changes in interest income and expense resulting from the
reduction in cash and cash equivalents and additional borrowings,
respectively, and (iii) the income tax impact of the foregoing, certain pro
forma adjustments have been made to the accompanying pro forma combined
condensed consolidated statements of operations, assuming that the purchase
took place on July 1, 1995, as follows:
(A) Elimination of a non-recurring charge of $10,158,000 for purchased
research and development. Due to the non-recurring nature of the purchased
research and development, it has been assumed to have been charged to
operations before the beginning of the pro forma periods.
(B) Records the amortization of purchased software over five years as if the
acquisition occurred on July 1, 1995 resulting in amortization of $321,000 for
the year ended June 30, 1996. Only six months of amortization is reflected in
this adjustment for the year ended June 30, 1996 as Interlink's historical
consolidated statement of operations included amortization of $321,000 for six
months.
(C) Records the interest expense of $492,000 for the year ended June 30,
1996 on additional short-term borrowings of $3,500,000 at a rate of 10.5% and
additional long-term borrowings, including non-interest-bearing borrowings
assumed or incurred in the acquisition, all totaling approximately $5,600,000.
Only six months interest is included in the adjustment for the year ended June
30, 1996 as Interlink's historical consolidated statement of operations
includes interest expense related to the acquisition for six months.
(D) Records the decrease in interest income resulting from the reduction of
cash available for investment of approximately $4,500,000 disbursed in the
acquisition.
F-27
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
AND
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(E) Adjusts the historical tax benefit of the Company for the tax benefit
realized from the deductible portion of entries (B), (C), and (D) at 40% for
Interlink and 45% for New Era, the incremental tax rate for each company.
(F) Elimination of New Era's results of operations for the three months
ended May 31, 1995 from New Era's results of operations for the nine months
ended November 30, 1995 as Interlink's historical results of operations for
the year ended June 30, 1996 includes the results of operations of New Era for
six months from December 29, 1995, the date of acquisition, to June 30, 1996.
(G) Increases shares used in the per share calculation for the dilutive
impact of the conversion of 1,230,000 shares of Series 1 Preferred Stock to
Common Stock on a one-for-one basis and the outstanding options and warrants
using the modified treasury stock method.
F-28
<PAGE>
AUDITORS' REPORT
To the Directors of
New Era Systems Services Ltd.
We have audited the consolidated balance sheets of New Era Systems Services
Ltd. as at February 28, 1994 and 1995 and the consolidated statements of
operations and deficit and cash flows for each of the years in the three year
period ended February 28, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of New Era Systems Services Ltd.
as at February 28, 1994 and 1995 and the results of its operations and the
changes in its financial position for each of the years in the three year
period ended February 28, 1995 in accordance with accounting principles
generally accepted in the United States.
Ernst & Young
Chartered Accountants
Calgary, Canada
May 1, 1995
F-29
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
CONSOLIDATED BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------------ NOVEMBER 30,
1994 1995 1995
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS [note 4]
Current:
Cash and cash equivalents............. $ 182,409 $ 276,147 $ 762,032
Accounts receivable (net of $160,000
allowance for doubtful
accounts at November 30, 1995; nil -
February 28, 1995 and 1994).......... 1,493,654 1,522,294 1,066,975
Prepaid expenses...................... 26,945 46,418 51,934
Investment tax credit receivable...... 772,921 620,784 1,142,784
Current portion of long-term receiv-
ables [note 2]....................... -- 40,026 88,645
----------- ----------- -----------
Total current assets.............. 2,475,929 2,505,669 3,112,370
Long-term receivables [note 2].......... 220,467 385,602 441,399
Investment in New Era Software Inc. .... 26,089 134,041 124,118
Fixed assets [note 3]................... 440,096 429,630 512,409
----------- ----------- -----------
Total assets...................... $ 3,162,581 $ 3,454,942 $ 4,190,296
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
Current:
Bank indebtedness [note 4]............ $ 160,000 $ 96,000 --
Accounts payable and accrued liabili-
ties................................. 770,340 431,959 $ 345,739
Current portion of deferred revenue
[note 5]............................. 344,625 1,658,221 859,083
Current portion of long-term debt
[note 6]............................. 45,794 51,355 157,615
----------- ----------- -----------
Total current liabilities......... 1,320,759 2,237,535 1,362,437
----------- ----------- -----------
Long-term debt [note 6]................. 1,478,715 2,129,323 2,461,991
----------- ----------- -----------
Deferred revenue [note 5]............... 78,030 77,471 76,082
----------- ----------- -----------
Commitments [note 9]
Shareholders' equity (deficiency)
Share capital [note 7].................. 2,413,342 2,599,807 2,628,125
Deficit................................. (2,128,265) (3,589,194) (2,338,339)
----------- ----------- -----------
Total shareholders' equity
(deficiency)..................... 285,077 (989,387) 289,786
----------- ----------- -----------
Total liabilities and
shareholders' equity
(deficiency)..................... $ 3,162,581 $ 3,454,942 $ 4,190,296
=========== =========== ===========
</TABLE>
See accompanying notes
F-30
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED FEBRUARY 28, NOVEMBER 30,
------------------------------------ ------------------------
1993 1994 1995 1994 1995
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue [note 5]........ $2,570,680 $ 3,857,592 $ 3,937,725 $ 2,694,495 $ 4,839,137
---------- ----------- ----------- ----------- -----------
Expenses:
Sales and marketing... 1,176,358 2,635,110 2,647,208 2,156,225 1,533,039
General and adminis-
trative.............. 571,501 588,861 758,599 514,258 586,516
Research and develop-
ment................. 1,487,450 1,459,470 1,583,174 1,166,332 1,060,731
Royalties............. 49,881 70,524 103,369 39,021 102,152
Depreciation.......... 125,032 205,310 238,148 178,553 147,465
Interest on long-term
debt................. 24,202 21,950 19,787 14,911 5,654
Restructuring of U.S.
operations........... -- 86,727 116,613 52,124 5,348
Foreign exchange
(gain) loss.......... (83,638) (86,549) 3,952 14,703 117,571
Gain on sale of soft-
ware assets.......... (110,063) -- (8,570) -- --
---------- ----------- ----------- ----------- -----------
Total expenses.... 3,240,723 4,981,403 5,462,280 4,136,127 3,558,476
---------- ----------- ----------- ----------- -----------
Income (loss) from oper-
ations................. (670,043) (1,123,811) (1,524,555) (1,441,632) 1,280,661
Equity earnings (loss)
from investment
[note 1]............... (107,237) (24,607) 87,640 52,714 (9,923)
---------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... (777,280) (1,148,418) (1,436,915) (1,388,918) 1,270,738
Current income taxes
(recovery) [note 8].... (57,990) 14,405 24,014 8,173 19,883
---------- ----------- ----------- ----------- -----------
Net income (loss) for
the period............. $ (719,290) $(1,162,823) $(1,460,929) $(1,397,091) $ 1,250,855
========== =========== =========== =========== ===========
Deficit, beginning of
period................. $ (246,152) $ (965,442) $(2,128,265) $(2,128,265) $(3,589,194)
---------- ----------- ----------- ----------- -----------
Deficit, end of period.. $ (965,442) $(2,128,265) $(3,589,194) $(3,525,356) $(2,338,339)
========== =========== =========== =========== ===========
Earnings (loss) per
share.................. $ (4.01) $ (5.35) $ (6.25) $ (5.98) $ 5.35
========== =========== =========== =========== ===========
Shares used in per share
calculation............ 179,370 217,287 233,817 233,767 233,966
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-31
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED FEBRUARY 28, NOVEMBER 30,
----------------------------------- -----------------------
1993 1994 1995 1994 1995
--------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income (loss) for
the period............ $(719,290) $(1,162,823) $(1,460,929) $(1,397,091) $1,250,855
Add (deduct) items not
requiring cash:
Depreciation.......... 125,032 205,310 238,148 178,553 147,465
Gain on sale of soft-
ware assets.......... (110,063) -- (8,570) -- --
Equity (earnings) loss
from investment...... 107,237 24,607 (87,640) (52,714) 9,923
Net change in non-cash
working capital
balances related to
operations [note 10].. 525,519 (608,902) 706,054 583,439 (1,067,678)
--------- ----------- ----------- ----------- ----------
Net cash provided by
(used in) operating
activities......... (71,565) (1,541,808) (612,937) (687,813) 340,565
--------- ----------- ----------- ----------- ----------
Cash flows from invest-
ing activities:
Additions to fixed as-
sets.................. (298,240) (322,336) (239,003) (98,612) (230,244)
Proceeds on sale of
fixed assets.......... -- -- 19,891 -- --
Investment............. -- -- (20,312) -- --
--------- ----------- ----------- ----------- ----------
Net cash used in
investing
activities......... (298,240) (322,336) (239,424) (98,612) (230,244)
--------- ----------- ----------- ----------- ----------
Cash flows from financ-
ing activities:
Increase in notes re-
ceivable.............. (38,967) (16,500) (16,500) (12,375) (12,375)
Proceeds from long-term
debt.................. 954,119 606,651 698,283 705,870 489,932
Repayment of long-term
debt.................. (10,057) (26,204) (42,114) (66,913) (51,004)
Issue of share capital. 712,991 739,495 2,500 2,500 4,925
Issue of share options. -- -- -- -- 6,700
Net change in non-cash
working capital
balances related to
financing [note 10]... (834,231) 307,112 303,930 190,400 (62,614)
--------- ----------- ----------- ----------- ----------
Net cash provided by
financing
activities......... 783,855 1,610,554 946,099 819,482 375,564
--------- ----------- ----------- ----------- ----------
Net increase (decrease)
in cash and cash
equivalents during
period................. 414,050 (253,590) 93,738 33,057 485,885
Cash and cash
equivalents, beginning
of period.............. 21,949 435,999 182,409 182,409 276,147
--------- ----------- ----------- ----------- ----------
Cash and cash equiva-
lents, end of period... $ 435,999 $ 182,409 $ 276,147 $ 215,466 $ 762,032
========= =========== =========== =========== ==========
Supplemental disclosure
of cash flow
information:
Interest paid on long-
term debt............. $ 24,202 $ 21,950 $ 19,787 $ 14,911 $ 5,654
Income taxes paid (re-
covered).............. (57,990) 14,405 24,014 8,173 19,883
Proceeds on sale of
software.............. 157,933 -- -- -- --
Investment............. (157,933) -- -- -- --
</TABLE>
See accompanying notes
F-32
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The Company is
incorporated under the laws of Canada and the consolidated financial statements
are presented in Canadian dollars.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
CASH EQUIVALENTS
The Company considers all investments with a maturity of three months or less
from the date of purchase and money market funds to be cash equivalents.
REVENUE RECOGNITION
Revenue from product sales is recognized upon delivery of the software, if
collectability is probable and remaining obligations are insignificant.
Estimated returns and provisions for estimated insignificant costs are recorded
upon shipment. Maintenance and support revenues, including revenue bundled with
initial licensing fees, are recognized ratably over the contractual period of
customer support.
FIXED ASSETS
Fixed assets are stated at cost and depreciated on the straight-line basis
over estimated useful lives of the assets. These lives are generally two years
for computer equipment and software and five years for furniture and equipment.
Automobiles are amortized over the remaining term of the lease. Upon disposal,
assets and related accumulated depreciation are removed from the accounts and
the related gain or loss is included in operations.
PRODUCT DEVELOPMENT COSTS
Costs related to the conceptual formulation and design of software products
are expensed as product development while costs incurred subsequent to
establishing technological feasibility of software products are capitalized, if
material, until general release of the product. There have been no product
development costs capitalized since the Company began active business
operations.
INVESTMENT
The Company accounts for its investment in New Era Software Inc., using the
equity method. On December 1, 1994, additional shares were issued by New Era
Software Inc. diluting the Company's ownership interest from 40% to 34.2%.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". Under
SFAS 109, deferred tax assets and liabilities are
F-33
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION
The Company's functional currency is Canadian dollars. Monetary assets and
liabilities denominated in foreign currencies are translated at exchange rates
in effect at the balance sheet date. Non-monetary assets and liabilities
denominated in foreign currencies are translated at rates in effect on the
dates the assets were acquired or liabilities were assumed. Revenues and
expenses are translated at rates of exchange prevailing on the transaction
dates. Gains and losses on translation are reflected in income when incurred.
INVESTMENT TAX CREDITS
Investment tax credits relating to software development are recognized at
such time as their recovery is reasonably assured and are recorded as a
reduction of research and development expenses.
INTERIM FINANCIAL DATA (UNAUDITED)
The unaudited financial statements for the nine months ended November 30,
1994 and 1995 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial position and results of operations, in accordance with
accounting principles generally accepted in the United States.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options using the treasury stock method.
2. LONG TERM RECEIVABLES
<TABLE>
<CAPTION>
FEBRUARY 28,
----------------- NOVEMBER 30,
1994 1995 1995
-------- -------- ------------
<S> <C> <C> <C>
Leases receivable............................. -- $188,661 $280,702
NOTE RECEIVABLE FROM AFFILIATE:
HTS Hi-Tech Systems Ltd.
Note receivable............................. $165,000 165,000 165,000
Interest receivable......................... 55,467 71,967 84,342
-------- -------- --------
220,467 425,628 530,044
Less current portion........................ -- 40,026 88,645
-------- -------- --------
$220,467 $385,602 $441,399
======== ======== ========
</TABLE>
Leases receivable are sales-type leases, which relate to the sale of HARBOR
software. The above amount represents the future aggregate minimum lease
payments over the next four years.
F-34
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
The note receivable from HTS Hi-Tech Systems Ltd., a shareholder, has no
specified terms of repayment, bears interest at 10% per annum and has 20,000
Class A preferred shares of the Company pledged as collateral.
3. FIXED ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------------------------------
1994 1995 NOVEMBER 30, 1995
--------------------- ----------------------- -----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
-------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Computer equipment...... $658,288 $384,014 $ 683,424 $501,889 $ 755,093 $535,657
Computer software....... 111,546 91,499 264,935 123,519 365,801 177,065
Furniture and fixtures.. 112,313 29,493 109,509 43,791 130,899 61,219
Automobiles............. 75,546 12,591 75,546 38,719 75,546 45,123
Trademark............... -- -- 4,134 -- 4,134 --
-------- -------- ---------- -------- ---------- --------
$957,693 $517,597 $1,137,548 $707,918 $1,331,473 $819,064
======== ======== ========== ======== ========== ========
Net book value.......... $440,096 $429,630 $512,409
================= =================== ===================
</TABLE>
4. BANK INDEBTEDNESS
The Company has a $480,000 revolving credit facility. Amounts outstanding
under the facility bear interest at bank prime plus 1%. The Company has pledged
as collateral a general security agreement against all assets.
5. DEFERRED REVENUE
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------- NOVEMBER 30,
1994 1995 1995
-------- ---------- ------------
<S> <C> <C> <C>
Unearned maintenance revenue................ $422,655 $ 612,138 $935,165
Prepaid royalties........................... -- 1,123,554 --
-------- ---------- --------
422,655 1,735,692 935,165
Less current portion........................ 344,625 1,658,221 859,083
-------- ---------- --------
$ 78,030 $ 77,471 $ 76,082
======== ========== ========
</TABLE>
Prepaid royalties relate to amounts received in advance from Hitachi Data
Systems Corporation with respect to the marketing rights acquired for the sale
of HARBOR software in the United States.
F-35
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------- NOVEMBER 30,
1994 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Western Economic Diversification loan
#1...................................... $ 888,097 $ 888,097 $ 888,097
Western Economic Diversification loan
#2...................................... 530,549 1,228,832 1,714,764
Obligation under capital leases......... 105,863 63,749 16,745
---------- ---------- ----------
1,524,509 2,180,678 2,619,606
Less current portion.................... 45,794 51,355 157,615
---------- ---------- ----------
$1,478,715 $2,129,323 $2,461,991
========== ========== ==========
</TABLE>
On June 12, 1995 the Western Economic Diversification agreement regarding
loan #1 was amended, such that it is repayable in quarterly installments
commencing June 30, 1996. Interest does not accrue until 1996 and only if any
amount remains unpaid 30 days after the due date. Interest accrues at 3% above
the Bank of Canada rate. Installments may be accelerated if certain conditions
are met.
On June 12, 1995 the Western Economic Diversification agreement regarding
loan #2 was amended, such that it is repayable in quarterly installments
commencing June 30, 1996. Interest of 3% above the Bank of Canada rate does not
accrue until 1996 and only if any amount remains unpaid 30 days after the due
date. Installments may be accelerated if certain conditions are met.
The future principal repayments of the Western Diversification loans and
obligation under capital leases are as follows:
<TABLE>
<CAPTION>
WESTERN DIVERSIFICATION OBLIGATION UNDER
LOANS CAPITAL LEASE
----------------------- ----------------
<S> <C> <C>
1996 (Three months).............. $ 140,870 $16,745
1997............................. 280,000 --
1998............................. 300,000 --
1999............................. 320,000 --
2000............................. 320,000 --
Thereafter....................... 1,241,991 --
---------- -------
$2,602,861 $16,745
========== =======
</TABLE>
7. SHARE CAPITAL
AUTHORIZED
Unlimited Class A common shares, restricted as to dividend payments thereon
unless the net realizable value of assets less liabilities exceeds the combined
redemption value of Class A and Class B preferred shares
100,000 Class A, 8% cumulative preferred non-voting shares, redeemable at the
option of the company or the holder at $8.25 per share on or after September 1,
1993
100,000 Class B, 8% cumulative preferred non-voting shares, redeemable at the
option of the company or the holder at $8.25 per share on or after September 1,
1993
F-36
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
<TABLE>
<CAPTION>
NOVEMBER 30, 1995
---------------------
NUMBER
OF
SHARES CONSIDERATION
------- -------------
<S> <C> <C>
COMMON SHARES
Class A.............................................. 233,867 $1,989,431
Issued for cash...................................... 197 4,925
Proceeds on sale of options.......................... -- 6,700
------- ----------
234,064 $2,001,056
======= ==========
PREFERRED SHARES
Class A.............................................. 70,000 $ 577,500
Class B.............................................. 30,000 247,500
------- ----------
100,000 825,000
------- ----------
Notes receivable from employees...................... -- (197,931)
------- ----------
334,064 $2,628,125
======= ==========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------------------------------------------------------
1993 1994 1995
--------------------- --------------------- ---------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES CONSIDERATION SHARES CONSIDERATION SHARES CONSIDERATION
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
COMMON SHARES
Class A................. 149,934 $ 534,445 200,806 $1,247,436 233,767 $1,986,931
Issued for cash......... 50,872 712,991 32,961 739,495 100 2,500
------- ---------- ------- ---------- ------- ----------
200,806 $1,247,436 233,767 $1,986,931 233,867 $1,989,431
======= ========== ======= ========== ======= ==========
PREFERRED SHARES
Class A................. 70,000 $ 577,500 70,000 $ 577,500 70,000 $ 577,500
Class B................. 30,000 247,500 30,000 247,500 30,000 247,500
------- ---------- ------- ---------- ------- ----------
100,000 $ 825,000 100,000 $ 825,000 100,000 $ 825,000
======= ========== ======= ========== ======= ==========
Notes receivable
from employees......... -- $ (472,145) -- $ (398,589) -- $ (214,624)
------- ---------- ------- ---------- ------- ----------
308,806 $1,600,291 333,767 $2,413,342 333,867 $2,599,807
======= ========== ======= ========== ======= ==========
</TABLE>
Included in the Class A and Class B preferred shares is a contributed surplus
of $507,500 and $205,500 respectively.
The dividends on the Class A and Class B, 8% cumulative preferred non-voting
shares have not been declared or paid. As at November 30, 1995, the cumulative
amount in arrears are $219,450 (February 28, 1995--$184,800; February 28,
1994--$138,600) and $94,050 (February 28, 1995--$79,200; February 28, 1994--
$59,400) respectively.
At November 30, 1995 directors, officers and employees held options to
purchase 50,000 Class A common shares of the Company at a price of $15 per
share. The options expire on February 28, 1998.
F-37
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
Upon the issue of common shares from treasury, or under option, the proceeds
are credited to the common stock account. No charges are made against income
with respect to these transactions, as the options are issued at fair market
value.
The notes receivable from employees represent advances to employees of the
Company and one of its wholly owned subsidiaries to purchase Class A common
shares. The notes bear interest at rates between 6% and 11% per annum and are
repayable over three to ten years. The common shares purchased have been
pledged as collateral for the notes receivable.
8. INCOME TAXES
The provision for income taxes differs from the amount that would have been
expected by applying corporate income tax rates to income before income taxes.
The principal reasons for this difference are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED FEBRUARY 28, NOVEMBER 30,
---------------------------------- ----------------------
1993 1994 1995 1994 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Domestic income (loss)
before income taxes.... $ (515,283) $ (348,817) $ (647,530) $ (536,783) $ (227,545)
Foreign income (loss)
before income taxes.... (261,997) (800,101) (789,385) (852,135) 1,498,283
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (777,280) (1,148,918) (1,436,915) (1,388,918) 1,270,738
---------- ---------- ---------- ---------- ----------
Expected tax expense
(recovery)............. (344,646) (509,209) (637,128) (619,180) 566,495
Add (deduct) impact of:
Non-taxable portion of
royalty income....... (19,860) (12,705) (34,791) 21,862 19,860
Investment tax credit
earned............... (34,698) (31,703) (62,672) (63,436) (55,342)
Non-taxable portion of
capital gain......... (12,200) -- -- -- --
Non-deductible equity
loss (earnings)...... 47,549 10,911 (38,859) 23,373 4,399
Foreign rate
differences.......... 27,733 79,158 74,307 123,256 (52,312)
Other................. 26,836 (70,797) 97,563 61,930 69,704
---------- ---------- ---------- ---------- ----------
(309,286) (534,345) (601,580) (452,195) 552,804
Less change in valuation
allowance.............. 251,296 548,750 625,594 460,368 (532,921)
---------- ---------- ---------- ---------- ----------
$ (57,990) $ 14,405 $ 24,014 $ 8,173 $ 19,883
========== ========== ========== ========== ==========
</TABLE>
As at November 30, 1995, the Company had net operating losses carried forward
for income taxes purposes of approximately $195,348 which are available to be
carried forward to future periods. These losses expire as follows:
<TABLE>
<CAPTION>
CANADA IRELAND TOTAL
------ -------- --------
<S> <C> <C> <C>
1999................................................ $1,021 -- $ 1,021
Indefinitely........................................ -- $194,327 194,327
------ -------- --------
$1,021 $194,327 $195,348
====== ======== ========
</TABLE>
F-38
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
The Company has investment tax credits of $370,000 available as a reduction
of future years' taxes payable. These credits expire in 2002 ($53,000), 2003
($32,000), 2004 ($41,000), 2005 ($79,000) and 2006 ($165,000).
The deferred tax asset primarily represents research and development
expenditures charged against income in the financial statements but not yet
deducted for income tax purposes. As there is substantial uncertainty as to
whether these deductions will be utilized, the Company has established a
valuation allowance to recognize this uncertainty.
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
--------------------------------- ----------------------
1993 1994 1995 1994 1995
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Deferred tax asset...... $ 251,296 $ 800,046 $ 1,425,640 $ 1,260,414 $ 892,719
Valuation allowance..... (251,296) (800,046) (1,425,640) (1,260,414) (892,719)
--------- --------- ----------- ----------- ---------
Net deferred tax asset.. -- -- -- -- --
========= ========= =========== =========== =========
</TABLE>
9. COMMITMENTS
Future minimum lease payments over the next five years under the Company's
office leases are as follows:
<TABLE>
<S> <C>
1996 (three months).............................................. $ 42,413
1997............................................................. 169,650
1998............................................................. 163,962
1999............................................................. 156,000
2000............................................................. 156,000
Thereafter....................................................... 13,000
--------
$701,025
========
</TABLE>
F-39
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
10. NET CHANGE IN NON-CASH WORKING CAPITAL
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED FEBRUARY 28, NOVEMBER 30,
---------------------------------- ----------------------
1993 1994 1995 1994 1995
--------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
(INCREASE) DECREASE IN
CURRENT ASSETS
Accounts receivable.... $ (39,577) $(1,020,678) $ (28,640) $ 206,491 $ 455,319
Prepaid expenses....... 5,826 (19,043) (19,473) (30,043) (5,516)
Investment tax credit
receivable............ (161,885) (93,858) 152,137 250,921 (522,000)
Lease receivable....... -- -- (188,661) (4,125) (92,041)
Notes receivable from
employees............. (292,437) 73,556 183,965 175,204 16,693
--------- ----------- ---------- --------- -----------
$(488,073) $(1,060,023) $ 99,328 $ 598,448 $ (147,545)
========= =========== ========== ========= ===========
INCREASE (DECREASE) IN
CURRENT LIABILITIES
Bank indebtedness...... -- $ 160,000 $ (64,000) $(160,000) $ (96,000)
Accounts payable and
accrued liabilities... $ (7,189) 419,628 (338,381) 335,755 (86,220)
Deferred maintenance
revenue............... 186,550 178,605 1,313,037 (364) (800,527)
--------- ----------- ---------- --------- -----------
179,361 758,233 910,656 175,391 (982,747)
--------- ----------- ---------- --------- -----------
$(308,712) $ (301,790) $1,009,984 $ 773,839 $(1,130,292)
========= =========== ========== ========= ===========
NET CHANGE IN NON-CASH
WORKING CAPITAL BALANCES
RELATED TO:
Operating.............. $ 525,519 $ (608,902) $ 706,054 $ 583,439 $(1,067,678)
Financing.............. (834,231) 307,112 303,930 190,400 (62,614)
--------- ----------- ---------- --------- -----------
$(308,712) $ (301,790) $1,009,984 $ 773,839 $(1,130,292)
========= =========== ========== ========= ===========
</TABLE>
11. SUBSEQUENT EVENTS
On December 28, 1995 the Company sold its 34.2% interest in New Era Software
Inc. and the royalty rights to certain software owned by New Era Software Inc.
for net cash consideration of U.S. $540,000.
On December 29, 1995, 100% of the issued and outstanding common shares of the
Company were acquired by Interlink Computer Sciences, Inc. Immediately prior to
this acquisition all of the Class A preferred shares of the Company were
redeemed for aggregate consideration of $808,500, including unpaid dividends.
F-40
<PAGE>
NEW ERA SYSTEMS SERVICES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN CANADIAN DOLLARS)
Information for the nine months ended November 30, 1994 and
information for periods subsequent to February 28, 1995 is unaudited
12. SEGMENTED INFORMATION
The Company is involved in three distinct geographic segments.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED FEBRUARY 28, NOVEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1994 1995
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Canada................ $1,719,017 $ 2,613,710 $ 1,984,688 $ 1,519,033 $2,581,708
United States......... 851,663 856,100 1,134,611 766,090 1,370,104
Ireland............... -- 387,782 818,426 409,372 887,325
---------- ----------- ----------- ----------- ----------
Total revenues...... $2,570,680 $ 3,857,592 $ 3,937,725 $ 2,694,495 $4,839,137
========== =========== =========== =========== ==========
OPERATING INCOME:
Canada................ $ (408,046) $ (323,710) $ (735,170) $ (589,497) $ (217,622)
United States......... (261,997) (735,244) (583,604) (534,430) 1,305,417
Ireland............... -- (64,857) (205,781) (317,705) 192,866
---------- ----------- ----------- ----------- ----------
Total operating
income............. $ (670,043) $(1,123,811) $(1,524,555) $(1,441,632) $1,280,661
========== =========== =========== =========== ==========
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1994 1995
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Canada................ $1,389,923 $ 1,804,852 $ 1,921,001 $ 1,564,247 $2,121,554
United States......... 783,750 966,699 897,420 662,388 1,283,489
Ireland............... -- 391,030 636,521 355,681 785,253
---------- ----------- ----------- ----------- ----------
Total assets........ $2,173,673 $ 3,162,581 $ 3,454,942 $ 2,582,316 $4,190,296
========== =========== =========== =========== ==========
</TABLE>
F-41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 30
Management................................................................ 44
Certain Transactions...................................................... 51
Principal and Selling Stockholders........................................ 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 57
Underwriting.............................................................. 59
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 60
Glossary.................................................................. 61
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVERING A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,700,000 SHARES
[LOGO OF INTERLINK COMPUTER SCIENCES]
COMMON STOCK
--------
PROSPECTUS
--------
VOLPE, WELTY & COMPANY
PUNK, ZIEGEL & KNOELL
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the Common Stock being registered hereunder. All
of the amounts shown are estimates except for the SEC registration fee and the
NASD filing fee.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
SEC registration fee............................................. $ 17,448
NASD filing fee.................................................. 5,560
Nasdaq National Market listing fees.............................. 41,393
Accounting fees and expenses..................................... 400,000
Blue Sky fees and expenses....................................... 15,000
Legal fees and expenses.......................................... 375,000
Printing and engraving fees and expenses......................... 125,000
Transfer Agent and Registrar fees................................ 15,000
Miscellaneous.................................................... 5,599
----------
Total.......................................................... $1,000,000
==========
</TABLE>
The Selling Stockholders will bear their pro rata portion of underwriting
discounts and commissions, based on the number of shares offered by such
holders. All of the other costs and expenses of the Selling Stockholders will
be borne by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and other corporate agents in the terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1993, as amended (the "Act"). The Registrant's Certificate
of Incorporation to be filed upon the closing of the offering to which this
Registration Statement relates (Exhibit 3.3 hereto) and the Registrant's
Bylaws (Exhibit 3.4 hereto) provides for indemnification of the Registrant's
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the Delaware General Corporation Law. The
Registrant also intends to enter into agreements with its directors and
executive officers that will require the Registrant among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the fullest extent not prohibited by
Delaware law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On various dates since March 31, 1993, Registrant sold and issued: (i) an
aggregate of 66,667 shares (net of repurchases) of its Common Stock, which
were not registered under the Securities Act, to 25 employees and consultants
pursuant to the exercise of stock options under the 1992 Plan at an aggregate
purchase price of $51,070; (ii) shares of Series 1 Preferred Stock convertible
into a total of 1,229,714 shares to a group of sophisticated investors at a
price per share of $5.50; (iii) warrants to purchase a total of 350,000 shares
of the Company's Common Stock to the shareholders of New Era with an exercise
price of $3.20 in connection with the acquisition of New Era; (iv) granted
warrants to purchase a total of 66,667 shares of the Company's Common Stock at
an exercise price of $0.90 pursuant to bridge financings from investors; (v) a
warrant to
II-1
<PAGE>
purchase a total of 75,000 shares of the Company's Common Stock at an exercise
price of $.90 pursuant to a negotiation of a line of credit from an
institutional lender; (vi) a warrant for 62,500 shares of the Company's Common
Stock at an exercise price of $3.20 and a warrant for 6,250 shares of Common
Stock at an exercise price of $12.80 pursuant to a negotiation of a line of
credit from an institutional lender; and (vii) a warrant for 15,000 shares of
Preferred Stock at an exercise price of $5.50.
The issuance of the securities described above was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) under the
Securities Act or Rule 701 promulgated under Section 3(b) of the Securities
Act as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1+ Amended and Restated Articles of Incorporation of the Registrant.
3.2 Form of Certificate of Incorporation to be filed prior to the
effective date of the Registration Statement under which the offering
is being made.
3.3 Form of Restated Certificate of Incorporation to be filed upon the
closing of the offering under the Registration Statement.
3.4+ Bylaws of the Registrant, as amended to date.
4.1+ Form of Lock-Up Agreement.
4.2 Form of Common Stock Certificate.
4.3+ Registration Rights Agreement between the Registrant and certain
shareholders dated January 27, 1994, as amended.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1 1992 Stock Option Plan, as amended, and form of agreement thereto.
10.2 1996 Employee Stock Purchase Plan, as amended, and form of agreement
thereto.
10.3 1996 Director Stock Option Plan, as amended, and form of agreement
thereto.
10.4+ Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.5**+ OEM/Remarketing Agreement between the Registrant and Bus-Tech, Inc.
dated February 13, 1989, as amended.
10.6+ Lease Agreement between the Registrant and King & Lyons dated December
8, 1986.
10.7 Lease Agreement between New Era Systems Services, Ltd. and Trizec
Properties Limited.
10.8**+ Software License and Distribution Agreement between the Registrant and
Legato Systems, Inc. dated May 10, 1996.
10.9**+ Revenue Sharing Agreement between the Registrant and Legato Systems,
Inc. dated May 10, 1996.
10.10+ Agreement and Plan of Business Acquisition by the Registrant, New Era
Systems Services Ltd., and the Principal Shareholders of New Era
Systems Services Ltd. dated December 13, 1995, as amended.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.11+ Letter Agreement between the Company and Donald R. Gammon dated June
2, 1994, as amended.
10.12+ Letter Agreement between the Company and Gloria Purdy dated January
18, 1996.
10.13+ Letter Agreement between the Company and Augustus J. Berkeley dated
December 9, 1994.
10.14+ Letter Agreement between the Company and Barbara Booth dated January
16, 1996.
10.15+ Letter Agreement between the Company and Charles W. Jepson dated
October 28, 1992.
10.16 Warrant issued from the Company to Menlo Ventures IV, L.P. dated
December 15, 1993.
10.17+ Warrant issued from the Company to Menlo Evergreen V, L.P. dated
December 15, 1993.
10.18+ Note and Security and Loan Agreement between the Registrant and
Imperial Bank dated April 25, 1996.
11.1 Calculation of net income (loss) per share.
21.1+ List of the Company's subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P. (see page II-8).
23.2 Consent of Ernst & Young Chartered Accountants (see page II-7)
23.3 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in
Exhibit 5.1).
24.1+ Power of Attorney (see page II-5).
27.1+ Financial Data Schedule for Fiscal 1995.
27.2+ Financial Data Schedule for nine months ended March 1996.
27.3 Financial Data Schedule for Fiscal 1996.
</TABLE>
- --------
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts.
All other Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus 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) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
II-3
<PAGE>
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant 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, the Registrant 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 of 1933 and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fremont, State of California, on the 22th day of
July, 1996.
Interlink Computer Sciences, Inc.
By: /s/ Charles W. Jepson
----------------------------------
(Charles W. Jepson)
President, Chief Executive Officer
and Director (Principal Executive
Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles W. Jepson President, Chief Executive July 22, 1996
____________________________________ Officer and Director
(Charles W. Jepson) (Principal Executive Officer)
/s/ Gloria M. Purdy Vice President of Finance, July 22, 1996
____________________________________ Chief Financial Officer,
(Gloria M. Purdy) Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ Thomas H. Bredt * Chairman of the July 22, 1996
____________________________________ Board of Directors
(Thomas H. Bredt)
/s/ Ronald W. Braniff * Director July 22, 1996
____________________________________
(Ronald W. Braniff)
/s/ D. Benedict Dulley * Director July 22, 1996
____________________________________
(D. Benedict Dulley)
/s/ Andrew I. Fillat * Director July 22, 1996
____________________________________
(Andrew I. Fillat)
</TABLE>
/s/ Gloria M. Purdy
By:
----------------------------
(Gloria M. Purdy)
(Attorney-in-fact)
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our reports dated July 22, 1996, on our audits of the financial statements and
the financial statement schedule of Interlink Computer Sciences, Inc. and
Subsidiaries. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
San Jose, California
July 22, 1996
II-6
<PAGE>
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 1, 1995, with respect to the consolidated
financial statements of New Era Systems Services Ltd. in the Registration
Statement (Form S-1) and related prospectus of Interlink Computer Sciences,
Inc. dated July 23, 1996.
ERNST & YOUNG CHARTERED ACCOUNTANTS
Calgary, Canada
July 23, 1996
II-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the financial statements of Interlink
Computer Sciences, Inc. and Subsidiaries as of June 30, 1995 and 1996, and for
each of three years in the period ended June 30, 1996 which financial
statements are included in the Registration Statement, we have also audited
the financial statement schedule listed in Item 16(b) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
July 17, 1996
II-8
<PAGE>
SCHEDULE II
INTERLINK COMPUTER SCIENCES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND WRITE-OFF END OF
DESCRIPTION OF PERIOD EXPENSES OF ACCOUNTS PERIOD
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended June 30, 1994
Allowance for doubtful accounts. 352 100 118 334
Allowance for excess and
obsolete inventories........... 100 64 135 29
Year ended June 30, 1995
Allowance for doubtful accounts. 334 67 122 279
Allowance for excess and
obsolete inventories........... 29 21 -- 50
Year ended June 30, 1996
Allowance for doubtful accounts. 279 304(1) 41 542
Allowance for excess and
obsolete inventories........... 50 28 -- 78
</TABLE>
- --------
(1) Includes $89 of allowance for doubtful accounts related to the acquisition
of New Era Systems Services Ltd. and Subsidiaries.
<PAGE>
INTERLINK COMPUTER SCIENCES, INC.
EXHIBIT INDEX
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1+ Amended and Restated Articles of Incorporation of the Registrant.
3.2 Form of Certificate of Incorporation to be filed prior to the
effective date of the Registration Statement under which the offering
is being made.
3.3 Form of Restated Certificate of Incorporation to be filed upon the
closing of the offering under the Registration Statement.
3.4+ Bylaws of the Registrant, as amended to date.
4.1+ Form of Lock-Up Agreement.
4.2 Form of Common Stock Certificate.
4.3+ Registration Rights Agreement between the Registrant and certain
shareholders dated January 27, 1994, as amended.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1 1992 Stock Option Plan, as amended, and form of agreement thereto.
10.2 1996 Employee Stock Purchase Plan, and form of agreement thereto.
10.3 1996 Director Stock Option Plan, and form of agreement thereto.
10.4+ Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.5**+ OEM/Remarketing Agreement between the Registrant and Bus-Tech, Inc.
dated February 13, 1989, as amended.
10.6+ Lease Agreement between the Registrant and King & Lyons dated December
8, 1986.
10.7 Lease Agreement between New Era Systems Services, Ltd. and Trizec
Properties Limited.
10.8**+ Software License and Distribution Agreement between the Registrant and
Legato Systems, Inc. dated May 10, 1996.
10.9**+ Revenue Sharing Agreement between the Registrant and Legato Systems,
Inc. dated May 10, 1996.
10.10+ Agreement and Plan of Business Acquisition by the Registrant, New Era
Systems Services Ltd., and the Principal Shareholders of New Era
Systems Services Ltd. dated December 13, 1995, as amended.
10.11+ Letter Agreement between the Company and Donald R. Gammon dated June
2, 1994, as amended.
10.12+ Letter Agreement between the Company and Gloria Purdy dated January
18, 1996.
10.13+ Letter Agreement between the Company and Augustus J. Berkeley dated
December 9, 1994.
10.14+ Letter Agreement between the Company and Barbara Booth dated January
16, 1996.
10.15+ Letter Agreement between the Company and Charles W. Jepson dated
October 28, 1992.
10.16 Warrant issued from the Company to Menlo Ventures IV, L.P. dated
December 15, 1993.
10.17+ Warrant issued from the Company to Menlo Evergreen V, L.P. dated
December 15, 1993.
10.18+ Note and Security and Loan Agreement between the Registrant and
Imperial Bank dated April 25, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.1 Calculation of net income (loss) per share.
21.1+ List of the Company's subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P. (see page II-8).
23.2 Consent of Ernst & Young Chartered Accountants (see page II-7)
23.3 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.1).
24.1+ Power of Attorney (see page II-5).
27.1+ Financial Data Schedule for Fiscal 1995.
27.2+ Financial Data Schedule for nine months ended March 1996.
27.3 Financial Data Schedule for Fiscal 1996.
</TABLE>
- --------
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
+ Previously filed.
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
INTERLINK COMPUTER SCIENCES, INC.
FIRST: The name of this corporation is Interlink Computer Sciences, Inc.
SECOND: The address of the corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of this corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is 17,625,000
shares. 15,000,000 shares shall be Common Stock, par value $.001 per share, and
2,625,000 shares shall be Preferred Stock, par value $.001 per share, of which
all is designated Series 1 Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is authorized to fix the number of shares of any series
of Preferred Stock and to determine the designation of any such series. Subject
to Section 5 herein, the Board of Directors is also authorized, except as to
matters fixed as to Preferred Stock in this Article Fourth, to determine and
alter the rights, preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock and to increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any series subsequent to the issue of shares of that series.
Subject to Section 5 herein, in case the number of shares of any series shall be
so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series. The rights, preferences, privileges and
restrictions granted to or imposed upon the Common Stock and Preferred Stock are
as follows:
1. General Definitions. For purposes of these Restated Articles of
-------------------
Incorporation, the following definitions shall apply:
(a) "Preferred" or "Series 1 Preferred" shall refer to the Series 1
-----------------------------------
Preferred Stock.
(b) "Common" shall mean the Company's Common Stock.
--------
<PAGE>
(c) "Subsidiary" shall mean any corporation at least 50% of whose
------------
outstanding voting shares shall at the time be owned by the Company or by one or
more of such subsidiaries.
(d) "Board" shall mean the Board of Directors of the Company.
-------
2. Dividend Provisions. The holders of shares of the Series 1 Preferred
-------------------
shall be entitled to receive dividends, out of any assets legally available
therefor, prior and in preference to any declaration or payment of any dividend
(payable other than in Common Stock or other securities and rights convertible
into or entitling the holder thereof to receive, directly or indirectly,
additional shares of Common Stock of the Company) on the Common Stock at the
rate of $0.38 per share of Series 1 Preferred, per annum, payable when, as and
if declared by the Board of Directors. After payment of such dividends, any
additional dividends declared shall be distributed among the holders of Common
Stock and Series 1 Preferred ratably on a share-for-share basis (with all
Preferred participating in such distribution based upon the number of shares of
Common into which each share of Preferred is then convertible). The right to
dividends shall not be cumulative, and no right shall accrue to holders of any
shares by reason of the fact that dividends on such shares are not declared or
paid in any prior year.
3. Liquidation, Merger, Consolidation.
----------------------------------
(a) At any time, in the event of any of the following occurrences (a
"Transaction"):
(i) any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
which will result in the Company's shareholders immediately prior to such
transaction not holding (by virtue of such shares or securities issued solely
with respect thereto) at least 50% of the voting power of the surviving or
continuing entity;
(ii) a sale of all or substantially all of the assets of the
Company, unless the Company's shareholders immediately prior to such sale will,
as a result of such sale, hold (by virtue of securities issued as consideration
for the Company's sale) at least 50% of the voting power of the purchasing
entity; or
(iii) any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary;
then the Company shall take appropriate steps in connection with such
Transaction to ensure that the assets of the Company available for distribution
or such other property issued in connection with such Transaction shall be
distributed at the closing of the Transaction in the order and priority that
follows:
(A) the holders of the Series 1 Preferred shall receive,
for each share of such stock then held, property or cash in an amount equal to
the sum of (A) $5.50 per share of
-2-
<PAGE>
Series 1 Preferred (appropriately adjusted for stock splits, reverse stock
splits and the like) plus (B) all declared but unpaid dividends on each such
share; then
(B) property and/or cash shall next be distributed (1) 50%
among the holders of Series 1 Preferred and (2) 50% among the holders of the
Common until the holders of the Series 1 Preferred have received, for each share
of Series 1 Preferred held, property or cash in an amount which, when combined
with the property and/or cash received pursuant to paragraph (A) above, equals
$13.75 (appropriately adjusted for any stock splits, reverse stock splits and
the like); then
(C) property and/or cash shall next be distributed among
the holders of the Common until the holders of the Common have received, for
each share of Common held, property or cash in an amount which, when combined
with the property and/or cash received pursuant to paragraph (B) above, equals
$13.75 (appropriately adjusted for stock splits, reverse stock splits and the
like); then
(D) all remaining assets available for distribution shall
be distributed among the holders of the Common and the Series 1 Preferred on a
share-for-share basis, with the holders of the Series 1 Preferred sharing on an
as converted basis.
(b) Any securities to be delivered to the shareholders pursuant to
subsection 3(a) above shall be valued as follows:
(i) If traded on a securities exchange or the National Market
System of the National Association of Securities Dealers, Inc., the value shall
be deemed to be the average of the closing prices of the securities on such
exchange over the 30 day period ending three (3) days prior to the closing;
(ii) If actively traded over the counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever are
applicable) over the 30 day period ending three (3) days prior to the closing;
and
(iii) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by the Board and the holders
of a majority of the then outstanding shares of Series 1 Preferred or, if they
are unable to agree, by an independent appraiser mutually acceptable to the
Board and to such holders.
4. Conversion. The holders of the Preferred shall have conversion rights
----------
as follows:
(a) Right to Convert. Each share of Series 1 Preferred shall be
----------------
convertible, at the option of the holder thereof, at any time, into such number
of fully paid and nonassessable shares of Common as is determined by dividing
$5.50 by the then applicable Series 1 Conversion Price, determined as
hereinafter provided, in effect at the time of conversion. The price at which
shares
-3-
<PAGE>
of Common shall be deliverable upon conversion (the "Series 1 Conversion Price")
shall initially be $5.50 per share of Common. Such initial Series 1 Conversion
Price shall be subject to adjustment as hereinafter provided.
(b) Automatic Conversion. Each share of Preferred shall
--------------------
automatically be converted into Common at the then applicable conversion rate
upon the earlier of (i) immediately prior to the closing of a firm commitment
underwritten Qualified Public Offering (as defined below) pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of Common for the account of the Company to the
public at a price per share (determined without regard to underwriter
commissions and expenses) of not less than $10.00 (appropriately adjusted for
stock splits, reverse stock splits and the like) and an aggregate gross offering
price of not less than $10,000,000 or (ii) the election by holders of at least
50% of the outstanding Preferred to so convert. In the event of such an offering
as described in subsection (i) above, the person(s) entitled to receive the
Common issuable upon such conversion of the Preferred shall not be deemed to
have converted such Preferred until immediately prior to the closing of such
underwritten Qualified Public Offering (as defined below).
(c) Mechanics of Conversion. No fractional shares of Common shall be
-----------------------
issued upon conversion of the Preferred. In lieu of any fractional share to
which a holder would otherwise be entitled, the Company shall pay cash equal to
such fraction multiplied by the then fair market value of a share of Common.
Before any holder of the Preferred shall be entitled to convert the same into
full shares of Common, he or she shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or of any transfer agent
for the Preferred; provided, however, that in the event of an automatic
conversion pursuant to Section 4(b), the outstanding shares of Preferred shall
be converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent, and provided further that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such automatic conversion unless the certificates
evidencing such shares of Preferred are either delivered to the Company or its
transfer agent as provided above, or the holder notifies the Company or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such certificates. The Company
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of the Preferred, a certificate or certificates for the number of
shares of Common to which he shall be entitled as aforesaid and a check payable
to the holder in the amount of any cash amounts payable as the result of a
conversion into a fractional share of Common, and any declared but unpaid
dividends on the converted Preferred. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred to be converted, and the person or persons
entitled to receive the shares of Common issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common on such date.
(d) Adjustment of Conversion Rate.
-----------------------------
-4-
<PAGE>
(i) Adjustments for Dilutive Issuances.
----------------------------------
(A) Special Definitions. For purposes of this Section
-------------------
4(d), the following definitions shall apply:
(1) 'Options' shall mean rights, options or warrants
-------
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) 'Original Issue Date' shall mean January 26, 1994.
-------------------
(3) 'Convertible Securities' shall mean any evidences
----------------------
of indebtedness, shares or other securities convertible into or exchangeable for
Common Stock.
(4) 'Additional Shares of Common Stock' shall mean
---------------------------------
all shares of Common Stock issued (or, pursuant to Section 4(d)(i)(C), deemed to
be issued) by the Company after the Original Issue Date, other than shares of
Common Stock issued or issuable:
(aa) upon conversion of the Preferred;
(bb) to officers, directors and employees of, and
consultants to, the Company and/or its Subsidiaries pursuant to any stock,
option or bonus plan, agreement or arrangement approved by the Board; or
(cc) shares of the Company's Common or Preferred
or options or warrants exercisable for such Common or Preferred issued to banks,
savings and loan associations, equipment lessors or other similar institutions
in connection with debt financing provided to the Company and/or any Subsidiary;
or
(dd) as a dividend or distribution on the
Preferred or pursuant to any event for which adjustment is made pursuant to
subparagraph (d)(ii), (iii) or (iv) hereof.
(5) 'Issue Price' with respect to any issuance of
-----------
Additional Shares of Common Stock shall mean the price per share obtained by
dividing the total consideration received by the Company in respect of such
Additional Shares of Common Stock, computed in accordance with Section
4(d)(i)(E) hereof, by the aggregate number of shares of such Additional Shares
of Common Stock issued, computed in accordance with Section 4(d)(i)(C) hereof.
(B) No Adjustment of Conversion Price. No adjustment in
---------------------------------
the Conversion Price of a particular share of Preferred shall be made hereunder
in respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Company is less than the Conversion Price in effect on the
date of, and immediately prior to such issue, for such share of Preferred.
-5-
<PAGE>
(C) Deemed Issue of Additional Shares of Common Stock.
-------------------------------------------------
(1) Options and Convertible Securities. Except as
----------------------------------
otherwise provided in Section 4(d)(i)(B), in the event the Company at any time
or from time to time after the Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue of Options or Convertible Securities or, in case such a record date shall
have been fixed, as of the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have been issued unless
the consideration per share (determined pursuant to Section 4(d)(i)(E) hereof)
of such Additional Shares of Common Stock would be less than the Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any such case in
which Additional Shares of Common Stock are deemed to be issued:
(aa) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(bb) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
(I) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus the
consideration actually received by the Company upon such exercise, or for the
issue of all such Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any, actually received by the
Company upon such conversion or exchange, and
(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Company for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus the
consideration
-6-
<PAGE>
deemed to have been received by the Company upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;
(cc) no readjustment pursuant to clause (bb) above
shall have the effect of increasing the Conversion Price to an amount which
exceeds the lower of (i) the Conversion Price on the original adjustment date,
or (ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date; and
(dd) in the case of any Options which expire by
their terms not more than 30 days after the date of issue thereof, no adjustment
of the Conversion Price shall be made until the expiration or exercise of all
such Options.
(D) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common Stock. In the event the Company shall after the
- ---------------------------------
Original Issue Date issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
4(d)(i)(C)) without consideration or for a consideration per share less than the
Conversion Price in effect on the date of and immediately prior to such issue,
then and in such event such Conversion Price shall be reduced, concurrently with
such issue, to a price (calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such issue
plus the number of shares of Common Stock which the aggregate consideration
received by the Company for the total number of Additional Shares of Common
Stock so issued would purchase at such Conversion Price, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of such Additional Shares of Common Stock so
issued; and provided further that, for the purposes of this Section 4(d)(i)(D),
all shares of Common Stock issuable upon conversion of outstanding Options and
Convertible Securities shall be deemed to be outstanding, and immediately after
any Additional Shares of Common Stock are deemed issued pursuant to Section
4(d)(i)(C), such Additional Shares of Common Stock shall be deemed to be
outstanding.
(E) Determination of Consideration. For purposes of this
------------------------------
Section 4(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall:
-----------------
(aa) insofar as it consists of cash, be computed
at the aggregate amount of cash received by the Company excluding amounts paid
or payable for accrued interest or accrued dividends;
-7-
<PAGE>
(bb) insofar as it consists of services or
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board; and
(cc) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (aa) and (bb) above,
as determined in good faith by the Board.
(2) Options and Convertible Securities. The
----------------------------------
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 4(d)(i)(C), relating to
Options and Convertible Securities, shall be determined by dividing
(aa) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise in full of such Options
or the conversion or exchange in full of such Convertible Securities, or in the
case of Options for Convertible Securities, the exercise in full of such Options
for Convertible Securities and the conversion or exchange in full of such
Convertible Securities, by
(bb) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise in full of such Options or the conversion or exchange in full
of such Convertible Securities.
(ii) Adjustments for Subdivisions, Combinations or Consolidations
------------------------------------------------------------
of Common Stock. In the event the outstanding shares of Common Stock shall be
- ---------------
subdivided (by stock split, stock dividend or otherwise), into a greater number
of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased (to the nearest whole cent). In the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
then in effect shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased (to the nearest whole cent).
(iii) Adjustments for Other Distributions. In the event the
-----------------------------------
Company at any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, any distribution
payable in securities of the Company other than shares of Common Stock and other
than as otherwise adjusted in this Section 4, then and in each such event
provision shall be made so that the holders of Preferred shall receive upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities
-8-
<PAGE>
of the Company which they would have received had their shares of Preferred been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section 4 with respect to the rights of the holders of the Preferred.
(iv) Adjustments for Reclassification, Exchange and Substitution.
-----------------------------------------------------------
If the Common Stock issuable upon conversion of the Preferred shall be changed
into the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision, combination or consolidation of shares provided for above),
the Conversion Price then in effect shall, concurrently with the effectiveness
of such reorganization or reclassification, be proportionately adjusted such
that the Preferred shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by the
holders upon conversion of such shares of Preferred immediately before that
change.
(e) No Impairment. The Company will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the applicable conversion rights of the holders
of the Preferred, as set forth in this Section 4, against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price or pursuant to this Section
4, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
such series of Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of any holder of Preferred, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
applicable Conversion Price for such series of Preferred at the time in effect,
and (iii) the number of shares of Common and the amount, if any, of other
property which at the time would be received upon the conversion of such series
of Preferred.
(g) Notices of Record Date. In the event of any taking by the
----------------------
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any security or right convertible
into or entitling the holder thereof to receive additional shares of Common, or
any right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other
-9-
<PAGE>
securities or property, or to receive any other right, the Company shall mail to
each holder of Preferred, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution, security or right, and the amount and
character of such dividend, distribution, security or right.
(h) Issue Taxes. The Company shall pay any and all issue taxes and
-----------
other taxes that may be payable in respect of any issue or delivery of shares of
Common on conversion of shares of Preferred pursuant hereto; provided, however,
that the Company shall not be obligated to pay any transfer taxes resulting from
any transfer requested by any holder in connection with any such conversion.
(i) Notices. Any notice required by the provisions of this
-------
Paragraph 4 to be given to the holders of shares of Preferred shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of the Company.
(j) The Company shall at all times keep a sufficient number of shares
of Common authorized to allow the conversion of Preferred as set forth in this
Section 4.
5. Voting Rights.
-------------
(a) Except as otherwise required by law, by Section 5(b) or by
Section 6, the holder of each share of Common Stock issued and outstanding shall
have one vote and the holder of each share of the Series 1 Preferred shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Series 1 Preferred could be converted at the record
date for determination of the shareholders entitled to vote on such matters, or,
if no such record date is established, at the date such vote is taken or any
written consent of shareholders is solicited, such votes to be counted together
with all other shares of stock of the Company having general voting power and
not separately as a class. Holders of Common Stock and Series 1 Preferred shall
be entitled to notice of any shareholders' meeting in accordance with the Bylaws
of the Company. Fractional votes by the holders of Series 1 Preferred shall not,
however, be permitted and any fractional voting rights shall (after aggregating
all shares into which shares of Series 1 Preferred held by each holder could be
converted) be rounded to the nearest whole number.
(b) Election/Removal of Directors.
-----------------------------
(i) Series 1 Preferred Stock. So long as at least 1,181,818
------------------------
shares of Series 1 Preferred are outstanding (adjusted for any stock split,
consolidation or the like), the holders of the Series 1 Preferred shall be
entitled, voting as a separate class, to elect two (2) directors to the Board at
each annual meeting of shareholders, and (to the exclusion of the vote of
holders of the Common) to remove from office any or all of them and to fill any
vacancy or vacancies caused by the resignation, death or removal of any or all
of them.
-10-
<PAGE>
(ii) Common Stock. So long as at least 909,409 shares of
------------
Series 1 Preferred are outstanding (adjusted for any stock split, consolidation
or the like), the holders of Common Stock shall be entitled, voting as a
separate class, to elect two (2) directors to the Board at each annual meeting
of shareholders, and (to the exclusion of the vote of holders of Series 1
Preferred) to remove such directors from office and to fill any vacancy or
vacancies caused by the resignation, death or removal of such director or
directors.
(iii) Voting As A Single Class.
------------------------
(A) So long as at least 909,409 shares of Series 1
Preferred are outstanding (adjusted for any stock split, consolidation or the
like, the holders of the Series 1 Preferred and Common Stock, voting together as
a single class (with the Series 1 Preferred voting as described in Section 5(a)
hereof) shall be entitled to elect the remaining directors to the Board at each
annual meeting of shareholders and to remove such directors from office and to
fill any vacancy or vacancies caused by the resignation, death or removal of
such director or directors.
(B) At such time as the number of shares of Series 1
Preferred outstanding shall fall below 909,409 (adjusted for any stock splits,
consolidations or the like), the holders of Common Stock and Series 1 Preferred
shall vote together as one class in the election and removal of directors, with
the Series 1 Preferred voting as described in Section 5(a) hereof.
6. Covenants. In addition to any other rights provided by law, so long
---------
as at least 909,409 shares of the Series 1 Preferred (appropriately adjusted
for any stock split, consolidation or the like) shall be outstanding, the
Company shall not, without first obtaining the affirmative vote or written
consent of the holders of a majority of the outstanding shares of Series 1
Preferred:
(a) amend or repeal any provision of, or add any provision to, the
Company's Articles of Incorporation or by-laws if such action would alter or
change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series 1 Preferred;
(b) authorize any additional shares of Series 1 Preferred Stock;
(c) authorize or issue shares of any class of stock having any
preference or priority superior to or on a parity with the preferences or
priorities of the Series 1 Preferred, or reclassify any Common into shares
having any preference or priority superior to or on a parity with the
preferences or priorities of the Series 1 Preferred; or
(d) declare or pay, or set aside for payment, any dividends on the
Common (other than dividends payable solely in shares of Common Stock);
-11-
<PAGE>
(e) effect any sale, transfer or other conveyance of all or
substantially all of the assets of the Company or any consolidation, merger or
other transaction pursuant to which the holders of the Company's capital stock
immediately prior to such transaction own less than a majority of the voting
capital stock of the surviving or continuing entity by virtue of their ownership
of Company capital stock;
(f) amend the Company's by-laws to increase the number of authorized
directors above five (5); or
(g) increase above 1,000,000 the number of shares of Common Stock
reserved for issuance pursuant to any stock, option or bonus plan intended for
the benefit officers, directors and employees of or consultants to the Company
and/or its subsidiaries.
7. Residual Rights. All rights accruing to the outstanding shares of
---------------
the Company not expressly provided for to the contrary herein shall be vested in
the Common.
8. Status of Converted Stock. In the event any shares of Preferred shall
-------------------------
be converted pursuant to Section 4 hereof, the shares so converted shall be
canceled and eliminated from the shares which the Company is authorized to
issue.
9. Consent for Certain Repurchases of Common Stock Deemed to be
------------------------------------------------------------
Distributions. Each holder of Preferred shall be deemed to have consented, for
- -------------
purposes of Section 502, 503 and 506 of the California Corporations Code, to
distributions made by the Company in connection with the repurchase of shares of
Common issued to or held by employees or consultants upon termination of their
employment or services or pursuant to agreements providing for the right of said
repurchase between the Company and such persons.
FIFTH:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be as set forth in the
corporation's Bylaws.
2. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend,
or repeal the Bylaws of the corporation.
3. The directors of the corporation need not be elected by written ballot
unless a stockholder demands election by written ballot at the meeting and
before voting begins, or unless the Bylaws so provide.
4. Advance notice of stockholder nomination for the election of directors
and of business to be brought by stockholders before any meeting of the
stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
-12-
<PAGE>
5. Vacancies created by the resignation of one or more members of the
Board of Directors and newly created directorships, created in accordance with
the Bylaws of this corporation, may be filled by the vote of a majority,
although less than a quorum, of the directors then in office, or by a sole
remaining director.
SIXTH: Following the effectiveness of the registration of any class of
securities of the corporation pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, no action shall be taken by the stockholders
of the corporation except at an annual or special meeting of the stockholders
called in accordance with the Bylaws and no action shall be taken by the
stockholders by written consent.
SEVENTH:
1. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach fiduciary duty as a director.
2. The corporation may indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the corporation or any predecessor of the corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
corporation or any predecessor to the corporation.
3. Neither any amendment nor repeal of this Article SEVENTH, nor the
adoption of any provision of the corporation's Certificate of Incorporation
inconsistent with this Article SEVENTH, shall eliminate or reduce the effect of
this Article SEVENTH, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article SEVENTH, would
accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
EIGHTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside of the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the corporation.
NINTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this right.
-13-
<PAGE>
TENTH: The name and mailing address of the incorporator are:
Thomas C. DeFilipps
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is the act and deed of such incorporator and that
the facts stated therein are true.
__________________________________
Thomas C. DeFilipps, Incorporator
-14-
<PAGE>
EXHIBIT 3.3
RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERLINK COMPUTER SCIENCES, INC.
Interlink Computer Sciences, Inc., a corporation organized and existing
under laws of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is Interlink Computer Sciences, Inc.
Interlink Computer Sciences, Inc. was originally incorporated under the same
name, and the original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the state of Delaware on June 5, 1996.
2. Pursuant to Sections 228, 242 and 245 of the General Corporation Laws
of the State of Delaware, this Restated Certificate of Incorporation restates
and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby amended and restated to read in its entirety as follows:
FIRST: The name of this corporation is Interlink Computer Sciences, Inc.
SECOND: The address of the corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of this corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is 25,000,000
shares. 20,000,000 shares shall be Common Stock, par value $.001 per share, and
5,000,000 shares shall be Preferred Stock, par value $.001 per share.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is authorized to fix the number of shares of any series
of Preferred Stock and to determine the designation of any such series. The
Board of Directors is also authorized to determine and alter the powers, rights,
preferences and privileges and the qualifications, limitations and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock and
within the limitations or restrictions stated in any resolution or resolutions
of the Board of Directors originally fixing the
<PAGE>
number of shares constituting any series, to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series, to determine the
designation of any series, and to fix the number of shares of any series. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
FIFTH:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be as set forth in the
corporation's Bylaws.
2. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend,
or repeal the Bylaws of the corporation.
3. The directors of the corporation need not be elected by written ballot
unless a stockholder demands election by written ballot at the meeting and
before voting begins, or unless the Bylaws so provide.
4. Advance notice of stockholder nomination for the election of directors
and of business to be brought by stockholders before any meeting of the
stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
5. Vacancies created by the resignation of one or more members of the
Board of Directors and newly created directorships, created in accordance with
the Bylaws of this corporation, may be filled by the vote of a majority,
although less than a quorum, of the directors then in office, or by a sole
remaining director.
SIXTH: Following the effectiveness of the registration of any class of
securities of the corporation pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, no action shall be taken by the stockholders
of the corporation except at an annual or special meeting of the stockholders
called in accordance with the Bylaws and no action shall be taken by the
stockholders by written consent.
SEVENTH:
1. To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, a director of the corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach fiduciary duty as a director.
2. The corporation may indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative
-2-
<PAGE>
or investigative, by reason of the fact that he, his testator or intestate is or
was a director, officer or employee of the corporation or any predecessor of the
corporation or serves or served at any other enterprise as a director, officer
or employee at the request of the corporation or any predecessor to the
corporation.
3. Neither any amendment nor repeal of this Article SEVENTH, nor the
adoption of any provision of the corporation's Certificate of Incorporation
inconsistent with this Article SEVENTH, shall eliminate or reduce the effect of
this Article SEVENTH, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article SEVENTH, would
accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
EIGHTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside of the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the corporation.
NINTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this right.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed this ____ day of August, 1996.
INTERLINK COMPUTER SCIENCES, INC.
By: _______________________________
Charles W. Jepson
President and Chief Executive Officer
ATTEST:
- -----------------------------------
Gloria Purdy, Secretary
-3-
<PAGE>
EXHIBIT 4.2
NUMBER SHARES
TMX INTERLINK COMPUTER SCIENCES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR STATEMENTS RELATING
THE CITY OF BOSTON, MA OR NEW YORK, NY TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
This Certifies that CUSIP 458747 10 2
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
INTERLINK COMPUTER SCIENCES, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
(Signature) (Signature)
- ------------------------ ------------------------------------
CHIEF FINANCIAL OFFICER PRESIDENT
[CORPORATE SEAL OF
INTERLINK COMPUTER SCIENCES, INC.
JUNE 5, 1996
* DELAWARE *]
COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR
BY [Signature]
- ----------------------------
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807
(310) 989-2333
(FAX) (310) 426-7450 308-19X
<PAGE>
A statement of the powers, designations,preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- __________Custodian_____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act____________________________
in common (State)
UNIF TRF MIN ACT-- ______Custodian (until age ____)
(Cust)
________ under Uniform Transfers
(Minor)
to Minors Act___________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- -----------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------
X _____________________________________________
X _____________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By
-----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17ad-15.
- -------------------------------------------
AMERICAN BANK NOTE COMPANY
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807
(310) 989-2333
(FAX) (310) 426-7450
- -------------------------------------------
<PAGE>
[LETTERHEAD OF WILSON, SONSINI, GOODRICH & ROSATI]
July 22, 1996
Interlink Computer Sciences, Inc.
47370 Fremont Boulevard
Fremont, CA 94538
RE: REGISTRATION STATEMENT ON FORM S-1
FILE NO. 333-05243
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on June 5, 1996 (Registration No. 333-
05243) (the "Registration Statement"), as amended, in connection with the
registration under the Securities Act of 1933, as amended, of the shares of
Common Stock registered pursuant to the Registration Statement (the "Shares").
The Shares are to be sold as described in the Registration Statement. As your
counsel in connection with this transaction, we have examined the proceedings
taken and proposed to be taken in connection with said sale and issuance of the
Shares.
It is our opinion that the Shares, when issued and sold in the manner
referred to in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectuses constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
By: /s/ Thomas C. DeFilipps
----------------------------------------
Thomas C. DeFilipps
<PAGE>
EXHIBIT 10.1
INTERLINK COMPUTER SCIENCES, INC.
1992 STOCK PLAN
(as amended ____________________, 1996)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under this Plan may be incentive stock options (as
defined under Section 422 of the Code or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code. Stock purchase rights and
long-term performance awards may also be granted under this Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Company" means Interlink Computer Sciences, Inc., a California
-------
corporation.
(f) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services. The term Consultant shall not include directors
who are not compensated for their services or are paid only a director's fee by
the Company.
(g) "Continuous Status as an Employee or Consultant" means the
----------------------------------------------
absence of any interruption or termination of the employment or consulting
relationship by the Company or any Subsidiary. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of: (i) any leave
of absence approved by the Board, including sick leave, military leave, or any
other personal leave; provided, however, that for purposes of Incentive Stock
Options, such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (ii) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or its successor.
<PAGE>
(h) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(j) "Fair Market Value" means, as of any date, the value of Stock
-----------------
determined as follows:
(i) If the Stock is listed on any established stock exchange or
a national market system including without limitation the Nasdaq National Market
or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange or the exchange with the
greatest volume of trading in Stock for the last market trading day prior to the
day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high and low asked prices for the Stock on the last market
trading day prior to the day of determination; or
(iii) In the absence of an established market for the Stock, the
Fair Market Value thereof shall be determined in good faith by the
Administrator.
(k) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(l) "Long-Term Performance Award" means an award under Section 12
---------------------------
below. A Long-Term Performance Award shall permit the recipient to receive a
cash or stock bonus (as determined by the Administrator) upon satisfaction of
such performance factors as are set out in the recipient's individual grant.
Long-Term Performance Awards shall be based upon the achievement of Company,
Subsidiary and/or individual performance factors or upon such other criteria as
the Administrator may deem appropriate.
(m) "Long-Term Performance Award Agreement" means a written agreement
-------------------------------------
between the Company and an Optionee evidencing the terms and conditions of an
individual Long-Term Performance Award grant. The Long-Term Performance Award
Agreement is subject tot he terms and conditions of the Plan.
(n) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(o) "Option" means a stock option granted pursuant to the Plan.
------
(p) "Optioned Stock" means the Stock subject to an Option.
--------------
-2-
<PAGE>
(q) "Optionee" means an Employee or Consultant who receives an Option
--------
or Right.
(r) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(s) "Plan" means this 1992 Stock Plan.
----
(t) "Restricted Stock" means shares of Stock acquired pursuant to a
----------------
grant of Stock Purchase Rights under Section 11 below.
(u) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right.
(v) "Right" means a Long-Term Performance Award or a Stock Purchase
-----
Right granted pursuant to the Plan.
(w) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(x) "Section 16(b)" means Section 16(b) of the Exchange Act of 1934,
-------------
as amended.
(y) "Share" means a share of the Stock, as adjusted in accordance
-----
with Section 15 of the Plan.
(z) "Stock" means the Common Stock of the Company;
-----
(aa) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan.
(bb) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 15 of
-------------------------
the Plan, the maximum aggregate number of shares of Stock which may be optioned
and sold under the Plan is 2,105,000. The shares may be authorized, but
unissued, or reacquired Stock.
If an Option or Right should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares which were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan. Shares of Restricted Stock that are
repurchased by the Company at their original purchase price shall also become
available for future grants under the Plan.
-3-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Administration With Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Options and Rights to Employees who are also officers or
directors of the Company, the Plan shall be administered by (A) the Board if the
Board may administer the Plan in compliance with Rule 16b-3 promulgated under
the Exchange Act or any successor thereto ("Rule 16b-3") with respect to a plan
intended to qualify thereunder as a discretionary plan, or (B) a Committee
designated by the Board to administer the Plan, which Committee shall be
constituted in such a manner as to permit the Plan to comply with Rule 16b-3
with respect to a plan intended to qualify thereunder as a discretionary plan.
Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in sub stitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-3,
------------------------------
the Plan may be administered by different bodies with respect to directors, non-
director officers and Employees who are neither directors nor officers.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options and Rights to Employees or
- ---------
Consultants who are neither directors nor officers of the Company, the Plan
shall be administered by (A) the Board or (B) a Committee designated by the
Board, which Committee shall be constituted in such a manner as to satisfy the
legal requirements relating to the administration of employee stock plans, if
any, of California corporate and securities laws and of the Code (the
"Applicable Laws"). Once appointed, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Stock, in
accordance with Section 2(j) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options and Rights may from time to time be granted hereunder;
-4-
<PAGE>
(iii) to determine whether and to what extent Options and Rights
are granted hereunder;
(iv) to determine the number of shares of Stock to be covered by
each award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or waiver of
forfeiture restrictions regarding any Option or Right and/or the shares of Stock
relating thereto, based in each case on such factors as the Administrator shall
determine, in its sole discretion);
(vii) to reduce the exercise price of any Option or Right;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws.
(ix) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Committee's Decision. All decisions, determinations and
------------------------------
interpretations of the Administrator shall be final and binding on all Optionees
and any other holders of Options or Rights.
5. Eligibility. Nonstatutory Stock Options, Stock Purchase Rights, and
-----------
Long-Term Performance Awards may be granted to Employees and Consultants.
Incentive Stock Options may be granted only to Employees. An Employee or
Consultant who has been granted an Option or Right may, if he or she is
otherwise eligible, be granted an additional Options or Rights.
6. Limitations.
-----------
(a) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(b) For purposes of Section 6(a), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
-5-
<PAGE>
(c) Neither the Plan nor any Option or Right shall confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
(d) The following limitations shall apply to grants of Options to
Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 250,000 Shares.
(ii) In connection with his or her initial employment, an
Employee may be granted Options to purchase up to an additional 250,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 15.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 15), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 21 of the Plan. It shall
continue in effect until June 1, 2002 unless sooner terminated under Section 17
of the Plan.
8. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement. In the case of an Incentive Stock Option, the term shall
be no more than ten (10) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement. In the case of an Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power
-6-
<PAGE>
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other shares of the Company's capital stock
which (x) in the case of shares of the Company's capital stock acquired upon
exercise of an Option either have been owned by the Optionee for more than six
months on the date of surrender or were not acquired, directly or indirectly,
from the Company, and (y) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised, (5) delivery of a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the Company the
amount of sale or loan proceeds required to pay the exercise price, (6) a
reduction in the amount of any Company liability to the Optionee, including any
liability attributable to the Optionee's participation in any Company-sponsored
deferred compensation program or arrangement; or (7) any combination of the
foregoing methods of payment.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including perfor mance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised, and the Optionee
deemed to be a shareholder of the shares being purchased upon exercise, when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Board, consist
of any consideration and method of payment allowable under Section 9(b) of the
Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option within such period of time as is specified in the Option
Agreement to the extent that he or she is entitled to exercise it on the date of
-7-
<PAGE>
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for three (3)
months following the Optionee's termination. In the case of an Incentive Stock
Option, such period of time for exercise shall not exceed three (3) months from
the date of termination. If, on the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, the Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. In such event, an Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option
three months and one day following such change of status.
(c) Disability of Optionee. Upon termination of an Optionee's
----------------------
Continuous Status as an Employee or Consultant as a result of the Optionee's
total and permanent disability (as defined in Section 22(c)(3) of the Code, the
Optionee may exercise his or her Option at any time within twelve (12) months
from the date of termination, but only to the extent that the Optionee is
entitled to exercise it on the date of termination (and in no event later than
the expiration of the term of the Option as set forth in the Option Agreement).
If, on the date of termination, the Optionee is not entitled to exercise his or
her entire Option, the Shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. Upon the death of an Optionee, the Option
-----------------
may be exercised at any time within twelve (12) months following the date of
death (but in no event later than the expiration of the term of such Option as
set forth in the Option Agreement), by the Optionee's estate or by a person who
acquires the right to exercise the Option by bequest or inheritance, but only to
the extent that the Optionee would have been entitled to exercise the Option on
the date of death. If, at the time of death, the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If the Optionee's
estate or the person who acquires the right to exercise the Option by bequest or
inheritance does not exercise the Option within the time specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
11. Stock Purchase Rights.
---------------------
-8-
<PAGE>
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing, by means of a Notice of Grant, of the terms, conditions and
restrictions related to the offer, including the number of Shares that the
offeree shall be entitled to purchase, the price to be paid, and the time within
which the offeree must accept such offer, which shall in no event exceed six (6)
months from the date upon which the Administrator made the determination to
grant the Stock Purchase Right. The offer shall be accepted by execution of a
Restricted Stock Purchase Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Rule 16b-3. Stock Purchase Rights granted to Insiders, and
----------
Shares purchased by Insiders in connection with Stock Purchase Rights, shall be
subject to any restrictions applicable thereto in compliance with Rule 16b-3. An
Insider may only purchase Shares pursuant to the grant of a Stock Purchase
Right, and may only sell Shares purchased pursuant to the grant of a Stock
Purchase Right, during such time or times as are permitted by Rule 16b-3.
(d) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Admin istrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(e) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 15
of the Plan.
12. Long-Term Performance Awards.
----------------------------
(a) Administration. Long-Term Performance Awards are cash or stock
--------------
bonus awards that may be granted either alone or in addition to other awards
granted under the Plan. Such awards may be granted for no cash consideration.
The Administrator shall determine the nature, length and starting date of any
performance period (the "Performance Period") for each Long-Term Performance
Award, and shall determine the performance or employment factors, if any, to be
used in the determination of Long-Term Performance Awards and the extent to
which such Long-Term Performance Awards are valued or have been earned. Long-
Term Performance Awards may vary from participant to participant and between
groups of participants and shall be based upon the achievement of Company,
Subsidiary, Parent and/or individual performance factors or upon such
-9-
<PAGE>
other criteria as the Administrator may deem appropriate. Performance Periods
may overlap and participants may participate simultaneously with respect to
Long-Term Performance Awards that are subject to different Performance Periods
and different performance factors and criteria. Long-Term Performance Awards
shall be confirmed by, and be subject to the terms of, Long-Term Performance
Award agreements. The terms of such awards need not be the same with respect to
each participant.
At the beginning of each Performance Period, the Administrator may
determine for each Long-Term Performance Award subject to such Performance
Period the range of dollar values or number of shares of Common Stock to be
awarded to the participant at the end of the Performance Period if and to the
extent that the relevant measures of performance for such Long-Term Performance
Award are met. Such dollar values or number of shares of Common Stock may be
fixed or may vary in accordance with such performance or other criteria as may
be determined by the Administrator.
(b) Adjustment of Awards. The Administrator may adjust the
--------------------
performance factors applicable to the Long-Term Performance Awards take into
account changes in legal, accounting and tax rules and to make such adjustments
as the Administrator deems necessary or appropriate to reflect the inclusion or
exclusion of the impact of extraordinary or unusual items, events or
circumstances in order to avoid windfalls or hardships.
13. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Right as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is subject to Rule 16b-3, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
-10-
<PAGE>
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
14. Non-Transferability of Options and Rights. Options and Rights may not
-----------------------------------------
be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
15. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Right, and the number of shares of Common Stock
which have been authorized for issuance under the Plan but as to which no
Options or Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Right, as well as the price per
share of Common Stock covered by each such outstanding Option or Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option or Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Right shall be assumed or an
equivalent option or right substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Right, the
Optionee shall have the right
-11-
<PAGE>
to exercise the Option or Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be exercisable. If an Option or Right
is exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee that the Option or
Right shall be fully exercisable for a period of fifteen (15) days from the date
of such notice, and the Option or Right shall terminate upon the expiration of
such period. For the purposes of this paragraph, the Option or Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Right, for each Share of Optioned
Stock subject to the Option or Right, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
16. Date of Grant. The date of grant of an Option or Right shall, for all
-------------
purposes, be the date on which the Administrator makes the determination
granting such Option or Right, or such other date as is determined by the Board.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Right is so granted within a reasonable time after the date of
such grant.
17. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 422 of the Code (or any successor rule or
statute or other applicable law, rule or regulation, including the requirements
of any exchange or quotation system on which the Common Stock is listed or
quoted). Such shareholder approval, if required, shall be obtained in such a
manner and to such a degree as is required by the applicable law, rule or
regulation.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
18. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations
-12-
<PAGE>
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
19. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
20. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Board shall approve from time to time.
21. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.
-13-
<PAGE>
EXHIBIT 10.2
INTERLINK COMPUTER SCIENCES, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of Interlink Computer Sciences, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Interlink Computer Sciences, Inc. and any
-------
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
------------
but exclusive of commissions, payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation, provided,
however, that in no event will any employee have eligible compensation in excess
of $50,000 in any one Purchase Period.
(f) "Designated Subsidiaries" shall mean the Subsidiaries which have
-----------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
<PAGE>
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) For the purposes of the Enrollment Date under the first
Offering Period under the Plan, the Fair Market Value of the Common Stock shall
be the price to public as set forth in the final prospectus included within the
Registration Statement on form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Common Stock
(4) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the Board.
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after November 1 and May
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later. The first Offering Period shall be the period
commencing with the first Trading Day on or after the date on which the
Company's registration statement on Form S-1 is declared effective by the
Securities and Exchange Commission and terminating on the last Trading Day on or
before November 1, 1998. The duration and timing of Offering Periods may be
changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the
-2-
<PAGE>
first Purchase Period of any Offering Period shall commence on the Enrollment
Date and end with the next Exercise Date.
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee (as defined in Section 2(g)), who shall be employed
by the Company on a given Enrollment Date shall be eligible to participate in
the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 19 hereof. The first Offering Period shall begin on the
effective date of the initial public offering of the Company's Common Stock that
is filed with the Securities and Exchange Commission and shall end on the last
Trading Day on or before November 1, 1998. The Board shall have the power to
change the duration of Offering Periods (including the commencement dates
thereof) with respect to future offerings without shareholder approval if such
change is announced at least five (5) days prior to the scheduled beginning of
the first Offering Period to be affected thereafter.
-3-
<PAGE>
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at such time during any
Purchase Period which is scheduled to end during the current calendar year (the
"Current Purchase Period") that the aggregate of all payroll deductions which
were previously used to purchase stock under the Plan in a prior Purchase Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Purchase Period equal $21,250. Payroll deductions
shall recommence at the rate provided in such participant's subscription
agreement at the beginning of the first Purchase Period which is scheduled to
end in the following calendar year, unless terminated by the participant as
provided in Section 10 hereof.
-4-
<PAGE>
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than a
number of shares determined by dividing $12,500 by the Fair Market Value of a
share of the Company's Common Stock on the Enrollment Date, and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier with drawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal; Termination of Employment.
-------------------------------------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at
-5-
<PAGE>
any time by giving written notice to the Company in the form of Exhibit B to
this Plan. All of the participant's payroll deductions credited to his or her
account shall be paid to such participant promptly after receipt of notice of
withdrawal and such participant's option for the Offering Period shall be
automatically terminated, and no further payroll deductions for the purchase of
shares shall be made for such Offering Period. If a participant withdraws from
an Offering Period, payroll deductions shall not resume at the beginning of the
succeeding Offering Period unless the participant delivers to the Company a new
subscription agreement.
(b) Upon a participant's ceasing to be an Employee (as defined in
Section 2(g) hereof), for any reason, he or she shall be deemed to have elected
to withdraw from the Plan and the payroll deductions credited to such
participant's account during the Offering Period but not yet used to exercise
the option shall be returned to such participant or, in the case of his or her
death, to the person or persons entitled thereto under Section 14 hereof, and
such participant's option shall be automatically terminated. The preceding
sentence notwithstanding, a participant who receives payment in lieu of notice
of termination of employment shall be treated as continuing to be an Employee
for the participant's customary number of hours per week of employment during
the period in which the participant is subject to such payment in lieu of
notice.
(c) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
12. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be three hundred and fifty
thousand (350,000) shares, subject to adjustment upon changes in capitalization
of the Company as provided in Section 18 hereof. If, on a given Exercise Date,
the number of shares with respect to which options are to be exercised exceeds
the number of shares then available under the Plan, the Company shall make a pro
rata allocation of the shares remaining available for purchase in as uniform a
manner as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
-6-
<PAGE>
13. Administration.
--------------
(a) Administrative Body. The Plan shall be administered by the
-------------------
Board or a committee of members of the Board appointed by the Board. The Board
or its committee shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
decision and determination made by the Board or its committee shall, to the full
extent permitted by law, be final and binding upon all parties.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
----------------------
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be administered only by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee or
person that is not "disinterested" as that term is used in Rule 16b-3.
14. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such partici pant's death subsequent to an Exercise
Date on which the option is exercised but prior to delivery to such participant
of such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to
exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
-7-
<PAGE>
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, as well as the price per share and
the number of shares of Common Stock covered by each option under the Plan which
has not yet been exercised, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Periods shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, any Purchase Periods then in progress shall be
shortened by setting a new Exercise Date (the "New Exercise Date") and any
Offering Periods then in progress shall end on the New Exercise Date. The New
Exercise Date shall be before the date of the Company's proposed sale or merger.
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised
-8-
<PAGE>
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
19. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 18 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 18
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
-9-
<PAGE>
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
23. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by Rule 16b-3 of the Exchange Act, if the Fair Market Value of the
Common Stock on any Exercise Date in an Offering Period is lower than the Fair
Market Value of the Common Stock on the Enrollment Date of such Offering Period,
then all participants in such Offering Period shall be automatically withdrawn
from such Offering Period immediately after the exercise of their option on such
Exercise Date and automatically re-enrolled in the immediately following
Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
INTERLINK COMPUTER SCIENCES, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________________________ hereby elects to
participate in the Interlink Computer Sciences, Inc. 1996 Employee Stock
Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 15%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my ability
to exercise the option under this Subscription Agreement is subject to
shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only): _________
__________________________________________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in
<PAGE>
an amount equal to the excess of the fair market value of the shares at the
time such shares were purchased by me over the price which I paid for the
shares. I hereby agree to notify the Company in writing within 30 days
--------------------------------------------------------------
after the date of any disposition of my shares and I will make adequate
-----------------------------------------------------------------------
provision for Federal, state or other tax withholding obligations, if any,
--------------------------------------------------------------------------
which arise upon the disposition of the Common Stock. The Company may, but
----------------------------------------------------
will not be obligated to, withhold from my compensation the amount
necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax deductions
or benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of the 2-
year and 1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received income only at the time of
such disposition, and that such income will be taxed as ordinary income
only to the extent of an amount equal to the lesser of (1) the excess of
the fair market value of the shares at the time of such disposition over
the purchase price which I paid for the shares, or (2) 15% of the fair
market value of the shares on the first day of the Offering Period. The
remainder of the gain, if any, recognized on such disposition will be taxed
as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
______________________________________________________________
(First) (Middle) (Last)
__________________________________ ___________________________________
Relationship
___________________________________
(Address)
-2-
<PAGE>
Employee's Social
Security Number: __________________________________________
Employee's Address:
__________________________________________
__________________________________________
__________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_______________________ __________________________________________
Signature of Employee
__________________________________________
Spouse's Signature (If beneficiary other than
spouse)
-3-
<PAGE>
EXHIBIT B
---------
INTERLINK COMPUTER SCIENCES, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Interlink
Computer Sciences 1996 Employee Stock Purchase Plan which began on ____________,
19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically termi nated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:___________________________
<PAGE>
EXHIBIT 10.3
INTERLINK COMPUTER SCIENCES, INC.
1996 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1996 Director Option Plan
--------------------
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means Interlink Computer Sciences, Inc., a California
-------
corporation.
(e) "Director" means a member of the Board.
--------
(f) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
- -----------------------
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the date of
<PAGE>
determination, as reported in The Wall Street Journal or such other source as
-----------------------
the Board deems reliable, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(i) "Inside Director" means a Director who is an Employee.
---------------
(j) "Option" means a stock option granted pursuant to the Plan.
------
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means a Director who holds an Option.
--------
(m) "Outside Director" means a Director who is not an Employee.
----------------
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1996 Director Option Plan.
----
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 150,000 Shares of Common Stock (the "Pool"). The Shares may
be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. The provisions set forth in this Section
--------------------
4(a) shall not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder. All grants of Options to Outside Directors
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
-2-
<PAGE>
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 15,000 Shares (the "First Option") on the date on which the
later of the following events occurs: (A) the effective date of this Plan, as
determined in accordance with Section 6 hereof, or (B) the date on which such
person first becomes an Outside Director, whether through election by the
shareholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive a First Option.
(iii) Each Outside Director shall be automatically granted an
Option to purchase 3,750 Shares (a "Subsequent Option") on the date of his or
her re-election to the Board each year, if as of such date, he or she shall have
served on the Board for at least the preceding six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any exercise of an Option granted before the Company has obtained
shareholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such shareholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be
as follows:
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the
Fair Market Value per Share on the date of grant of the First Option. In the
event that the date of grant of the First Option is not a trading day, the
exercise price per Share shall be the Fair Market Value on the next trading day
immediately following the date of grant of the First Option.
(D) subject to Section 10 hereof, the First Option shall
become exercisable as to 1/48th of the Shares subject to the First Option each
month after its date of grant, provided that the Optionee continues to serve as
a Director on such dates.
(vi) The terms of a Subsequent Option granted hereunder shall
be as follows:
-3-
<PAGE>
(A) the term of the Subsequent Option shall be ten (10)
years.
(B) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the
Fair Market Value per Share on the date of grant of the Subsequent Option. In
the event that the date of grant of the Subsequent Option is not a trading day,
the exercise price per Share shall be the Fair Market Value on the next trading
day immediately following the date of grant of the Subsequent Option.
(D) subject to Section 10 hereof, the Subsequent Option
shall become exercisable as to 100% of the Shares subject to the Subsequent
Option on the fourth anniversary of its date of grant, provided that the
Optionee continues to serve as a Director on such dates.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the shareholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair
-4-
<PAGE>
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (iv) delivery of a
properly executed exercise notice together with such other documentation as the
Company and the broker, if applicable, shall require to effect an exercise of
the Option and delivery to the Company of the sale or loan proceeds required to
pay the exercise price, or (v) any combination of the foregoing methods of
payment.
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Rule 16b-3. Options granted to Outside Directors must comply
----------
with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
or any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify Plan transactions, and
other transactions by Outside Directors that otherwise could be matched with
Plan transactions, for the maximum exemption from Section 16 of the Exchange
Act.
(c) Termination of Continuous Status as a Director. Subject to
----------------------------------------------
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or total and permanent disability (as
defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her
Option, but only within three (3) months following the date of such
-5-
<PAGE>
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not entitled to
exercise an Option on the date of such termination, and to the extent that the
Optionee does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.
(d) Disability of Optionee. In the event Optionee's status as a
----------------------
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months following the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of termination, or if he or she does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the Option shall
terminate.
(e) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of
-6-
<PAGE>
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the Option
or equivalent option shall continue to be exercisable as provided in Section 4
hereof for so long as the Optionee serves as a Director or a director of the
Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor Corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to
Shares for which it would not otherwise be exercisable. Thereafter, the Option
or option shall remain exercisable in accordance with Sections 8(c) through (e)
above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
-------------------------------------
-7-
<PAGE>
(a) Amendment and Termination. Except as set forth in Section 4, the
-------------------------
Board may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made which would
impair the rights of any Optionee under any grant theretofore made, without his
or her consent. In addition, to the extent necessary and desirable to comply
with Rule 16b-3 under the Exchange Act (or any other applicable law or
regulation), the Company shall obtain shareholder approval of any Plan amendment
in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
-8-
<PAGE>
16. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
Such shareholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
-9-
<PAGE>
EXHIBIT 10.7
Between
TRIZEC PROPERTIES LIMITED,
as Landlord
AND
NEW ERA SYSTEMS SERVICES LTD.,
as Tenant
Fifth & Fifth, Calgary, Alberta Date: May 21, 1996
<PAGE>
FIFTH & FIFTH
OFFICE LEASE
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Clause No. Page
---------- ----
LEASE PROVISIONS AND SCHEDULES
<S> <C> <C>
Certain Lease Provisions 1.1 1
Schedules 1.2 1
CONSTRUCTION OF PREMISES
Early Occupation By Tenant 2.1 2
Condition of Premises and Landlord's Work 2.2 2
Landlord's Approval of Tenant's Work 2.3 2
Conduct and Completion of Tenant's Work 2.4 3
Liens 2.5 3
Installation of Tenant's Improvements and Fixtures 2.6 3
DEMISE, TERM AND OCCUPATION
Demise of Premises and Term 3.1 3
Continuance in Possession 3.2 3
Surrender of Premises 3.3 4
RENT
Basic Rent 4.1 4
Additional Rent 4.2 4
Additional Amounts Due to the Landlord 4.3 4
Interest on Arrears 4.4 5
Set-Off and Abatement 4.5 5
Place and Manner of Payment 4.6 5
Net Lease 4.7 5
GENERAL COVENANTS
Quiet Enjoyment 5.1 5
Covenants of the Tenant 5.2 5
USE OF PREMISES
Use of Premises 6.1 6
Nuisance 6.2 6
Food Service Facilities 6.3 6
Insurance Policies 6.4 6
Window Coverings 6.5 6
Compliance with Laws, Regulations and Directives 6.6 6
Signs 6.7 6
Rules and Regulations 6.8 6
Banking Facilities 6.9 7
Hazardous Substances 6.10 7
TAXES
Property Taxes Payable by the Landlord 7.1 8
Property Taxes and Contributions Payable by the Tenant 7.2 8
Payment and Allocation of Property Taxes of Light Fixtures 7.3 8
Other Tax 7.4 9
COMMON FACILITIES
Access to Premises 8.1 9
Access to Common Facilities 8.2 9
Restrictions on Use of Common Facilities 8.3 9
OPERATING EXPENSES
Tenant's Contributions to Operating Expense 9.1 10
Tenant's Payment of Operating Expense 9.2 10
BUILDING SERVICES AND UTILITIES
Operation, Maintenance and Cleaning of the Building 10.1 11
Heating 10.2 11
Air Conditioning 10.3 11
Elevator Service 10.4 11
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
Security Guards 10.5 11
Utilities 10.6 11
RELOCATION
Relocation of Premises 11.1 12
MAINTENANCE, REPAIRS AND ALTERATIONS
Repair and Maintenance of Premises 12.1 13
Entry, Inspection and Emergency Repairs by the Landlord 12.2 12
Repair on Notice 12.3 13
Alterations by the Tenant 12.4 13
Repairs by Landlord 12.5 13
Replacement of Fluorescent Tubes and Light Bulbs 12.6 13
Damage, Destruction of Premises 12.7 14
Expropriation 12.8 14
INSURANCE AND INDEMNITY
Landlord's Insurance 13.1 15
Tenant's Contributions to Landlord's Insurance 13.2 16
Tenant's Insurance 13.3 16
Limitation of Landlord's Liability 13.4 17
Limitations of Tenant's Liability 13.5 18
Indemnity 13.6 18
REMEDIES UPON DEFAULT
Re-Entry and Termination on Default 14.1 19
Rights and Obligations on Re-Entry and Termination 14.2 19
Cross-Default by Tenant 14.3 20
Bankruptcy of the Tenant and Additional Rights of Termination 14.4 20
Landlord's Rights to Cure Defaults 14.5 20
Remedies Generally 14.6 21
Waiver 14.7 21
Security Interest 14.8 21
Default by the Landlord 14.9 21
Limited Recourse against the Landlord 14.10 22
ASSIGNMENTS, TRANSFERS AND OTHER ENCUMBRANCES
Transfers and Encumbrances by Landlord 15.1 22
Subordination and Attornment by Tenant 15.2 22
Certificates of Status 15.3 23
Transfers Affecting the Premises 15.4 23
Successors and Assigns 15.5 27
INTERPRETATION AND MISCELLANEOUS
Notices 16.1 27
Collateral Representations and Agreements 16.2 27
Certificates 16.3 28
Legal Relationship 16.4 28
Changes in Area and the Landlord's Plan Attached as Schedule "A" 16.5 28
Severability 16.6 28
Unavoidable Delay 16.7 28
Broker's Commission 16.8 28
Partnership Entity 16.9 29
Registration 16.10 29
Display of Premises 16.11 29
Interpretation 16.12 29
Reasonableness 16.13 30
Confidentiality 16.14 30
SECURITY DEPOSIT 16.15 31
OPTION TO RENEW 16.16 31
ARBITRATION 16.17 31
EXPANSION 16.18 32
PARKING 16.19 33
ACCEPTANCE 17.0 33
</TABLE>
SCHEDULES
- ---------
SCHEDULE "A" OUTLINE OF PREMISES
SCHEDULE "B" LEASE DEFINITIONS
iii
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SCHEDULE "C" LANDLORD'S AND TENANT'S WORK
iv
<PAGE>
FIFTH & FIFTH
OFFICE LEASE
------------
THIS LEASE is made between the Landlord and Tenant, hereinafter identified, and
constitutes a Lease between the parties hereto of the Premises in the Building,
as hereinafter described, on the terms and with and subject to the covenants and
agreements of the parties hereinafter set out.
1. LEASE PROVISIONS AND SCHEDULES
1.1 Certain Lease Provisions
------------------------
In addition to the definitions set out in Schedule "B", the following are
certain basic lease provisions which are referred to in subsequent provisions of
this Lease:
<TABLE>
<S> <C> <C>
(a) Date of this Lease: MAY 21, 1996.
(b) Landlord: TRIZEC PROPERTIES LIMITED.
(c) Address of Landlord: 2200, 335 - 8TH AVENUE S.W.,
CALGARY, ALBERTA
T2P 1C9
ATTENTION: WESTERN CANADA REGION
TELECOPIER NO.: (403) 269 - 0733.
(d) Tenant: NEW ERA SYSTEMS SERVICES LTD.
(e) Address of Tenant: SUITE 500, 605 - 5TH AVENUE S. W.,
CALGARY, ALBERTA
T2P 3H5.
(f) Commencement Date: JULY 1, 1996.
(g) Termination Date: SEPTEMBER 30, 2002.
(h) Term: SIX (6) years AND THREE (3) MONTHS, less any broken portion of a calendar
month excluded from the Term pursuant to the definition of "Term" set out in Schedule "B.".
(i) Rentable Area of the Premises: FIFTEEN THOUSAND, THREE HUNDRED AND
NINETY-FOUR (15,394) square feet, subject to adjustment as provided
for in the definition of "Rentable Area" set out in Schedule "B".
(j) Location of the Premises: the floor of the Building numbered FIVE (5).
(k) Basic Rent: Determined pursuant to Section 4.1 based upon an annual
amount per square foot of Rentable Area of the Premises which is as follows:
NIL ($0.000) DURING THE PERIOD FROM THE COMMENCEMENT DATE TO AND
INCLUDING OCTOBER 31, 1996, AND
FOUR DOLLARS AND FIFTY CENTS ($4.50) DURING THE PERIOD FROM
NOVEMBER 1, 1996 TO AND INCLUDING JUNE 30, 1999, AND
SIX DOLLARS ($6.00) DURING THE PERIOD FORM JULY 1, 1999 TO AND
INCLUDING SEPTEMBER 30, 2000, AND
SEVEN DOLLARS ($7.00) DURING THE PERIOD FROM OCTOBER 1, 2000 TO
AND INCLUDING SEPTEMBER 30, 2002.
</TABLE>
1.2 Schedules
---------
The following Schedules are attached to and form part of this Lease:
Schedule "A" -- Plan delineating the Premises
Schedule "B" -- Lease Definitions
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Schedule "C" -- Landlord's Work and Tenant's Work
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2. CONSTRUCTION OF PREMISES
------------------------
2.1 Early Occupation by Tenant
--------------------------
(a) The Tenant shall not be entitled to exclusive occupation of the
Premises until:
(i) this Lease has been executed and delivered by the Tenant in a
form acceptable to the Landlord, and
(ii) any Landlord's Work is substantially completed.
(b) At all times while the Tenant is permitted to have occupation of the
Premises prior to the Commencement Date pursuant to the provisions
of this Lease, to the extent applicable, the Tenant shall be subject
to and shall comply with all the provisions of this Lease except
that no Basic Rent, Operating Expense or Property Taxes shall be
payable by the Tenant prior to the commencement of the Term, but the
Tenant shall pay for all electricity, water, temporary heat,
security, refuse removal and other utilities and services furnished
to the Tenant or its contractors by the Landlord or others, plus an
administrative fee equal to fifteen percent (15%) of all such costs,
expenses or charges, promptly upon being invoiced therefor.
2.2 Condition of Premises and Landlord's Work
-----------------------------------------
(a) If no items of Landlord's Work are specifically required to be
performed in accordance with Schedule "C", the Tenant hereby
acknowledges that it accepts the Premises in an "as-is" condition.
(b) If Schedule "C" specifically requires that certain items of work be
performed by the Landlord:
(i) Landlord's Work shall consist only of the items of work
described under the heading "Landlord's Work" in Schedule
"C".
(ii) The Landlord shall complete the Landlord's Work in a good and
workmanlike manner.
(iii) When the Tenant is entitled to occupation of the Premises
pursuant to the provisions of this Lease, it shall inspect
the Landlord's Work and, within fifteen (15) days after the
Commencement Date, give written notice to the Landlord fully
describing any defects or deficiencies in the construction of
the Premises or performance of the Landlord's Work of which
it becomes or should become aware. Otherwise and in all other
respects the Tenant shall be deemed to be satisfied with the
Landlord's Work and the condition of the Building and the
Premises.
2.3 Landlord's Approval of Tenant's Work
------------------------------------
(a) If Schedule "C" specifically requires that certain items of
Landlord's Work be performed, in order that any Landlord's Work and
the Tenant's Work may proceed expeditiously, the Tenant agrees to
provide the Landlord within a reasonable time prior to the
Commencement Date (and in any event not later than thirty (30) days
after being requested so to do) copies of each of its preliminary
plans, drawings and specifications of all the Tenant's Work prepared
by qualified designers and conforming to good engineering practice
together with such other information as may be necessary for the
Landlord's Work to proceed and for the Tenant's Work to be approved.
If the Landlord requires revisions to the Tenant's plans, drawings
and specifications prior to giving final approval thereof, such
revisions are to be made expeditiously by the Tenant. The Tenant
acknowledges that the Landlord's Work with regard to any sprinklers,
the HVAC System or any other heating, ventilating, air conditioning
and cooling system servicing the Building or the Premises, and main
electrical service to the Premises cannot be completed without the
Tenant's plans, drawings and specifications.
(b) If the Tenant fails to submit the required plans, drawings and
specifications within any of the time limitations set out in
Subsection 2.3(a), or if, in the reasonable opinion of the Landlord,
any revisions required thereto are not made expeditiously, the
Landlord may at its option either:
(i) by written notice terminate this Lease without
prejudice to any of its rights to damages, or
(ii) proceed with the Landlord's Work which is independent of the
Tenant's plans, drawings and specifications.
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(c) The Tenant agrees to pay to the Landlord, upon being invoiced
therefor, the costs, fees and expenses incurred by the Landlord in
reviewing or approving the plans and specifications submitted by the
Tenant in accordance with this Section 2.3 plus an administrative
fee equal to fifteen percent (15%) of all such costs, fees and
expenses.
2.4 Conduct and Completion of Tenant's Work
---------------------------------------
The Tenant shall complete all Tenant's Work in a good and workmanlike manner to
the Landlord's satisfaction and, to the extent covered by the plans, drawings
and specifications approved by the Landlord, in conformity therewith. No
Tenant's Work for which plans, drawings and specifications are required shall be
commenced until such plans and specifications have been approved in writing by
the Landlord. Any defects or deficiencies in Tenant's Work shall immediately be
rectified whenever they occur and in any event when the Tenant is required to do
so by the Landlord.
2.5 Liens
-----
In the conduct of Tenant's Work or any work under Section 12.4 or to which
Section 12.4 applies, the Tenant shall comply with all the provisions of any
applicable statutes respecting construction and other liens, including, without
limitation, the Builders' Lien Act (Alberta), and shall take all steps necessary
to ensure that no lien shall attach to the Premises, the Building Lands, the
Building or any part thereof. If any such lien shall arise the Tenant shall
immediately cause it to be discharged and any registration thereof vacated,
failing which the Landlord may, upon not less than five (5) days notice, make
such payment or take such action as may be necessary or expedient to discharge
such lien (whether or not the validity of such lien is admitted or denied by the
Tenant) including, without limitation, making payments into court or directly to
any lien claimant or obtaining bonds or other security. The Landlord shall be
entitled forthwith to be indemnified and reimbursed by the Tenant for any
payment, cost or expense incurred in taking any action permitted under this
Section 2.5 (including, without limitation, legal fees and disbursements on a
solicitor and his own client basis) plus an administrative fee equal to fifteen
percent (15%) of all such payments, costs or expenses.
2.6 Installation of Tenant's Improvements and Fixtures
--------------------------------------------------
All Leasehold Improvements, equipment, improvements and fixtures installed in or
affixed to the Premises pursuant to this Lease, and whether by the Landlord, the
Tenant or any previous tenant or other occupant of the Premises or any portion
thereof, and whether or not they are trade fixtures according to law, shall upon
being attached, installed or affixed become the property of the Landlord, but
subject, in the case of trade fixtures only, to removal by the Tenant pursuant
to Section 3.3. Notwithstanding the foregoing or any law to the contrary, if the
Tenant or any of the Tenant's agents, contractors, invitees, or any person for
whom the Tenant is legally responsible for creates or is permitted to bring to
the Building or the Premises any Hazardous Substances or if the conduct of the
Tenant's business shall cause there to be any Hazardous Substances in or at the
Building or the Premises, such Hazardous Substances shall be and shall remain
the sole and exclusive property of the Tenant and shall not become the property
of the Landlord regardless of the degree of affixation to the Premises or the
Building of the Hazardous Substances or the goods containing the Hazardous
Substances.
3. DEMISE, TERM AND OCCUPATION
3.1 Demise of Premises and Term
---------------------------
In consideration of the rents, covenants and agreements hereinafter reserved and
contained on the part of the Tenant to be respectively paid, observed and
performed, the Landlord doth demise and lease the Premises unto the Tenant, and
the Tenant doth hereby accept such demise and lease, to have and to hold for the
Term and upon the conditions herein mentioned.
3.2 Continuance in Possession
-------------------------
In the event that the Tenant remains in possession of the Premises after the
expiration of the Term without objection by the Landlord and without any written
agreement otherwise providing, it shall be deemed to be a tenant from month-to-
month, at a monthly Basic Rent equal to ONE HUNDRED AND TWENTY-FIVE PERCENT
(125%) OF the monthly Basic Rent required to be paid in the last Lease Year of
the Term pursuant to Section 4.1, and subject otherwise to the provisions of
this Lease which shall be read with such changes as are appropriate to a monthly
tenancy but this Section 3.2 shall not authorize the Tenant to so overhold where
the Landlord has objected.
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3.3 Surrender of Premises
---------------------
Upon the expiration of the Term or sooner termination of this Lease, the Tenant
shall vacate and surrender to the Landlord the Premises in accordance with the
provisions of this Lease. Except to the extent as otherwise expressly agreed by
the Landlord in writing, no Leasehold Improvements, trade fixtures, furniture or
equipment shall be removed by the Tenant from the Premises either during or at
the expiration of the Term or sooner termination of this Lease except that the
Tenant:
(a) may, if no Event of Default has occurred or is then in existence,
remove its trade fixtures, furnishings, equipment and inventory at
the end of the Term,
(b) INTENTIONALLY LEFT BLANK, and
(c) may, if no Event of Default has occurred or is then in existence,
remove its trade fixtures, furnishings and equipment during the
Term in the usual and normal course of its business where such
trade fixtures, furnishings or equipment have become excess for the
Tenant's purposes or the Tenant is substituting therefor new trade
fixtures, furnishings and equipment.
The Tenant shall, in the case of every removal, either during or at the end of
the Term, make good any damage caused to the Premises and the Building by the
installation and removal. This Section 3.3 shall survive the expiration of the
Term or sooner termination of this Lease. At the expiration of the Term or
sooner termination of the Term, the Tenant will deliver all keys for the
Premises to the Landlord at the place then fixed for the payment of Basic Rent
and give to the Landlord the combination of any locks, safes and vaults in the
Premises.
4. RENT
4.1 Basic Rent
----------
Commencing on the Commencement Date and thereafter during the Term, the Tenant
shall pay to the Landlord yearly and every Lease Year Basic Rent equal to the
amount specified in Subsection 1.1(k) for such Lease Year, multiplied by the
number of square feet of Rentable Area of the Premises. Basic Rent shall be
payable by equal monthly instalments, in advance, on the first day of each
calendar month during the Term, provided that if the Term commences on a day
which is not the first day of a calendar month, then the instalment of Basic
Rent payable on the Commencement Date for the broken portion of a calendar
month at the beginning of the Term shall be calculated at a rate per day of one
three hundred and sixty-fifth (1/365th) of the annual Basic Rent payable during
the first Lease Year.
4.2 Additional Rent
---------------
In addition to the Basic Rent hereby reserved, commencing on NOVEMBER 1, 1996,
the Tenant agrees to pay to the Landlord as rent:
(a) the Tenant's Proportionate Share of Property Taxes for each Taxation
Year, or portion thereof, occurring within the Term; and
(b) the Tenant's Proportionate Share of Operating Expense for each
Operating Year, or portion thereof, occurring within the Term.
Such amount shall be payable by the Tenant on the first day of each calendar
month occurring during the Term based upon the estimates of Property Taxes and
Operating Expense prepared by the Landlord for each Taxation Year and Operating
Year, or portion of either, occurring during the Term pursuant to Sections 9.2
and 7.3 respectively and, subject to reconciliation, in accordance with
Subsections 9.2(b) and 7.3(b) respectively.
4.3 Additional Amounts Due to the Landlord
--------------------------------------
In addition to the Basic Rent, the Tenant shall pay to the Landlord, all other
amounts which shall become due and payable hereunder by the Tenant to the
Landlord and any or all of such other amounts so payable shall, when in default,
be deemed to be rent, receivable as such, and all remedies of the Landlord on
non-payment of rent shall be applicable thereto. The obligation of the Tenant
to pay any of the rents or other amounts expressed to be payable by the Tenant
pursuant to this Lease (including, without limitation, Basic Rent and Additional
Rent) owing, accrued or unpaid at the end of the Term shall survive the
expiration or sooner termination of this Lease. If the Term commences on other
than the first day of a calendar month and this Lease provides that Basic Rent,
Additional Rent or any other amount payable hereunder escalates or commences at
a time following the Commencement Date rather than on the Commencement Date,
then such escalation or commencement, as the case may be, shall be deemed to
occur at such time following in each case on the date which may be specified or,
if no date is specified or ascertainable, at the start of a Lease Year.
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4.4 Interest on Arrears
-------------------
In every case where the Tenant shall fail to pay any instalment of rent when due
or shall pay any amount which is thereafter determined, estimated or found to be
less than the amount properly due, the Tenant shall pay interest at an annual
rate of TWO PERCENT (2%) in excess of the Prime Rate on the unpaid amount or
deficiency from the date it was properly due until paid. Whenever such interest
is to be calculated over a period in excess of one (1) day, it shall be adjusted
daily and compounded monthly, not in advance.
4.5 Set-off and Abatement
---------------------
All rent payable hereunder by the Tenant to the Landlord shall be paid without
any deduction, set-off or abatement whatsoever, except as herein expressly
provided. The Tenant covenants and agrees that whenever an Event of Default has
occurred or in existence, the Landlord may, at its option, apply all sums
received from or due to the Tenant against amounts due and payable hereunder in
such manner as the Landlord sees fit regardless of any designations or
instructions by the Tenant to the contrary.
4.6 Place and Manner of Payment of Rent
-----------------------------------
(a) All rent payable hereunder shall be paid by the Tenant to the
Landlord at the office of the Landlord in the Building, or at such
other place as the Landlord may designate in writing from time to
time, without any prior demand therefor, and shall be payable in
lawful money of Canada, at par.
(b) On or prior to the Commencement Date and thereafter on or prior to
the commencement of each Lease Year, the Landlord may, at its option
and upon notice to the Tenant, require the Tenant to present to the
Landlord a series of monthly post-dated cheques for the following
Lease Year, in amounts conforming with the aggregate amount of
monthly payments of Basic Rent and Additional Rent payable pursuant
to Sections 4.1 and Subsections 7.3(a) and 9.2(a). If the Tenant
changes its bank or other financial institution upon which such
post-dated cheques are drawn, the Tenant shall immediately notify
the Landlord in writing and provide the Landlord with new post-dated
cheques drawn on the Tenant's new bank or other financial
institution.
(c) Notwithstanding Subsection 4.6(b), the Landlord may, at its option
and upon notice to the Tenant, require the Tenant to immediately
execute and deliver to and in the form submitted by the Landlord,
any documents, instruments, authorizations or certificates required
to give effect to an automatic debiting system whereby the aggregate
amount of monthly payments of Basic Rent and Additional Rent payable
pursuant to Sections 4.1 and Subsections 7.3(a) and 9.2(a) shall be
debited monthly or from time to time, as determined by the Landlord,
from the Tenant's bank account and credited to the Landlord's bank
account. The Tenant shall pay all service fees and other charges in
connection with the automatic debiting system contemplated by this
Subsection 4.6(c). If the Tenant changes its bank or other financial
institutions from which such payments are automatically debited, the
Tenant shall immediately notify the Landlord in writing and ensure
that such automatic debiting s ystem applies to the Tenant's new
bank or other financial institution.
4.7 Net Lease
---------
It is the intent of the parties hereto that the Basic Rent payable under this
Lease is absolutely net to the Landlord except as expressly provided for in this
Lease to the contrary. Any cost or expense pertaining to the Premises, the
Building or the Building Lands which is not expressly declared herein to be that
of the Landlord and any obligation pertaining to the Premises, the Building or
the Building Lands which is not expressly declared herein to be that of the
Landlord shall be deemed to be the obligation of the Tenant to be paid by the
Tenant or performed by or at the expense of the Tenant, as the case may be.
5. GENERAL COVENANTS
5.1 Quiet Enjoyment
---------------
Upon the payment of the rent hereby reserved at the times and in the manner
herein provided and upon the strict observance and performance of each and every
one of the covenants, conditions, restrictions and stipulations by the Tenant to
be observed or performed, the Tenant shall and may peaceably and quietly possess
and enjoy the Premises during the Term of this Lease without any interruption
from or by the Landlord or any persons lawfully claiming by, through or under it
save and except as expressly provided in this Lease.
5.2 Covenants of the Tenant
-----------------------
The Tenant covenants to pay rent and to observe and perform all the covenants
and provisos of this Lease on its part to be observed and performed.
6. USE OF PREMISES
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6.1 Use of Premises
---------------
The Tenant shall use and occupy the Premises only for lawful purposes in
connection with its corporate and business offices, provided it shall comply
with this Lease and the requirements of federal, provincial and municipal laws,
by-laws and regulations.
6.2 Nuisance
--------
The Tenant shall not use or permit any part of the Premises to be used in such
manner as to cause a nuisance or otherwise cause or permit annoying noises or
vibrations or offensive odours to emanate therefrom and the Tenant agrees that
the Landlord shall determine in its own discretion if any such state or
condition exists. The Tenant shall not permit any overloading of the floor or
floors of the Premises and the Tenant shall not place therein any safe, heavy
business machine or other heavy object without first obtaining the written
consent of the Landlord and the Tenant agrees that the Landlord shall determine
in its own discretion if any state or condition of overloading exists or may
exist. Any background music provided by the Tenant in the Premises shall be
from the same source as that provided by the Landlord in the Building or if no
background music is provided by the Landlord, from such source as shall have
been previously approved in writing by the Landlord.
6.3 Food Service Facilities
-----------------------
The Tenant shall not conduct a restaurant, cafeteria, snack bar or other food
dispensing operation in or from the Premises; provided, however, that the Tenant
shall have the right to designate a lunch area in the Premises for the exclusive
use of employees of the Tenant, which lunch area may include any kitchen
equipment or appliance which does not require ventilation SUCH AS A MICROWAVE
OVEN but in any event shall not include a stove.
6.4 Insurance Policies
------------------
The Tenant shall not do or permit to be done or omit to do anything or permit
any omission which shall cause or shall have the effect of potentially causing
the rate of insurance upon the Building or any part thereof to be increased at
any time during the Term; provided, however, that if such rate of insurance
shall be increased as a result of the use and occupancy of the Premises by the
Tenant or any act or omission of the Tenant then, notwithstanding any other
remedy the Landlord may have, the Tenant shall, on demand, pay to the Landlord
the amount by which the insurance premium shall be so increased plus an
administration fee equal to fifteen percent (15%) of the amount of the increase
of such premium.
6.5 Window Coverings
----------------
The Tenant shall use only those window coverings designated for the Premises by
the Landlord. The Tenant shall be responsible for ensuring the window coverings
are cleaned, repaired and maintained. The Tenant shall have the right to
install overcurtains, provided that any such overcurtains shall be placed on the
room side of the window coverings designated by the Landlord and provided that
such overcurtains shall not disrupt or adversely affect the heating, cooling, or
air-conditioning of the Building or impose an above-average load on the HVAC
System.
6.6 Compliance with Laws, Regulations and Directives
------------------------------------------------
The Tenant shall at its expense comply with all provisions of law including,
without limitation, federal and provincial legislative enactments, building and
other civic by-laws and any other governmental and municipal codes and
regulations which relate to the Tenant's partitioning, equipment, operation and
use of the Premises or the making by the Tenant of any repairs, replacements,
alterations, additions, changes, substitutions or improvements of or to the
Premises or the conduct of any business conducted in, at or from the Premises.
The Tenant shall comply with all police, fire and sanitary regulations imposed
by any federal, provincial or municipal authorities or made by insurance
underwriters.
6.7 Signs
-----
The Tenant shall not paint, display, inscribe, place or affix any sign, picture,
advertisement, notice, lettering or direction on any part of the outside of the
Building or visible from the outside of the Building, nor shall the Tenant
paint, display, inscribe, place or affix any sign, picture, advertisement,
notice, lettering or direction on the outside of the Premises or inside the
Premises so as to be visible from the outside of the Premises without the
written consent of the Landlord. The Landlord shall prescribe, and the Tenant
shall adopt, a uniform pattern of tenant identification signs to be placed on
the outside of the doors leading to the Premises. The Tenant shall comply with
the Landlord's sign policy adopted from time to time.
6.8 Rules and Regulations
---------------------
The Tenant covenants and agrees that the Rules and Regulations are part of this
Lease and shall in all respects be observed and obeyed, conformed to and
performed by the Tenant and its employees, contractors, agents and invitees.
The Landlord shall have the right to amend the Rules and Regulations as in its
judgement may from time
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to time be necessary for the proper operation of the Building. All such Rules
and Regulations now and hereafter in force shall be read as forming part of the
provisions of this Lease as if the same were embodied herein.
6.9 Banking Facilities
------------------
The Tenant shall not permit the Premises or any part thereof to be used for any
purpose which is not compatible with a first class commercial and office
building in the City of Calgary, Alberta and shall not, in any event, permit or
suffer:
(a) the Premises or any part thereof to be occupied (whether by way of
any Transfer or otherwise) by any bank, trust company, credit union
or loan company for any purpose, or by any other person, firm,
corporation or institution (including a governmental institution)
for use for the purposes of accepting in any way money on deposit
from the public or lending money to the public; or
(b) the installation, placement or use on any part of the Premises of
any sign, teller machine, automatic banking vault, multi-institution
automatic banking vault or kiosk or device of whatsoever nature, the
purpose of which is to advertise or provide any banking service
whatsoever.
6.10 Hazardous Substances
--------------------
(a) The Tenant shall not cause or permit Hazardous Substances to be
brought upon, kept or used in or about the Premises without the
prior written consent of the Landlord, which consent may be
unreasonably or arbitrarily withheld unless the Tenant demonstrates
to the Landlord's reasonable satisfaction that such Hazardous
Substances are reasonably necessary for the Tenant's use of the
Premises and that it will be used, kept, stored and disposed of in a
manner that complies with all federal, provincial and municipal laws
regulating any such Hazardous Substances.
(b) The Tenant authorizes the Landlord to make enquiries from time to
time of any government or governmental agency in order to determine
the Tenant's compliance with any and all laws and regulations
pertaining to Hazardous Substances and the protection of the
environment. The Tenant covenants and agrees that it will from time
to time provide to the Landlord such written authorization as the
Landlord may reasonably require in order to facilitate the obtaining
of such information.
(c) The Landlord may at any time and from time to time inspect the
Premises and the Tenant's records for the purpose of identifying the
existence, nature and extent of Hazardous Substances on the Premises
and the Tenant's use, storage and disposal of such Hazardous
Substances, and the Tenant agrees to cooperate with the Landlord in
its performance of each such inspection. If the Landlord, acting
reasonably, determines following any such inspection that further
testing or investigation is required in order to monitor the
Tenant's compliance with all applicable laws relating to the use,
storage and disposal of Hazardous Substances, the Landlord may, at
its option, require the Tenant, at its expense, to arrange for such
testing or investigation, or may arrange for such testing or
investigation itself, in which case the Landlord's costs of any such
testing or investigation shall be paid by the Tenant to the Landlord
forthwith upon demand therefor.
(d) If any governmental authority having jurisdiction shall require the
clean-up of any Hazardous Substances held, released, spilled,
abandoned or placed upon the Premises or the Building or released
into the environment by the Tenant or by anyone for whom the Tenant
is responsible in the course of the Tenant's business or as a result
of the Tenant's use or occupancy of the Premises, then the Tenant
shall, at its own expense, prepare all necessary studies, plans and
proposals and submit the same for approval, shall provide all bonds
and other security required by governmental authorities having
jurisdiction and shall carry out the work required and keep the
Landlord fully informed and shall provide to the Landlord full
information with respect to proposed plans and comply with the
Landlord's reasonable requirements with respect to such plans. The
Tenant further agrees that if the Landlord determines, in its own
discretion that the Building, the Landlord or the Landlord's
reputation is placed in any jeopardy by the requirement for any such
work, the Landlord may itself undertake such work or any part
thereof at the cost and expense of the Tenant.
(e) Upon the request of the Landlord, the Tenant shall disclose in
writing, the names and approximate amounts of all Hazardous
Substances that the Tenant uses, keeps, stores or disposes of in or
on the Premises or the Building and the names and amounts of all
Hazardous Substances that were actually used, kept, stored or
disposed of in or on the Premises or the Building during the
previous Lease Years.
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7. TAXES
-----
7.1 Property Taxes Payable by the Landlord
--------------------------------------
The Landlord shall pay or cause to be paid to all applicable Taxing Authorities
all Property Taxes, with the exception of business taxes, business assessments,
water taxes, assessments, rates and levies imposed on the Tenant or other
tenants and occupants of the Building (and not upon the Landlord) in respect of
any business carried on, in, or use and occupancy of, any rentable premises in
the Building, including the Premises, but subject to its right of reimbursement
as provided in this Article 7.
7.2 Property Taxes and Contributions Payable by the Tenant
------------------------------------------------------
(a) The Tenant shall promptly pay when due to all applicable Taxing
Authorities all Property Taxes which consist of business taxes
imposed in respect of any and every business carried on in the
Premises, or in respect of the use or occupancy thereof, including
any business assessments or taxes imposed in respect of the Common
Facilities or any portion thereof.
(b) THE TENANT SHALL PAY TO THE LANDLORD IN THE MANNER HEREINAFTER
PROVIDED FOR IN EACH TAXATION YEAR OR PORTION THEREOF OCCURRING
DURING THE TERM, PORTION OF PROPERTY TAXES, CALCULATED BY
MULTIPLYING THE PROPERTY TAXES DURING SUCH TAXATION YEAR BY THE
TENANT'S PROPORTIONATE SHARE. IF THE COMMENCEMENT DATE OR THE
TERMINATION DATE OCCURS DURING ANY TAXATION YEAR, SUCH THAT THE
WHOLE OF ANY TAXATION YEAR IS NOT INCLUDED WITHIN THE TERM, THE
TENANT'S PROPORTIONATE SHARE OF PROPERTY TAXES FOR SUCH TAXATION
YEAR SHALL BE ADJUSTED ON A PER DIEM BASIS.
--------
7.3 Payment and Allocation of Property Taxes
----------------------------------------
The following provisions apply to the payment and allocation of Property Taxes:
(a) Prior to the Commencement Date and the commencement of each Taxation
Year, or portion thereof, which occurs during the Term, the Landlord
may estimate the amount of Property Taxes and the Tenant's
contributions thereto to become payable under Subsection 7.2(b) in
the next ensuing or current Taxation Year and shall notify the
Tenant in writing of such estimate. The amount of the Tenant's
contribution so estimated shall be payable by the Tenant to the
Landlord in accordance with Section 4.2. When such Property Taxes
for such Taxation Year become finally determined the Landlord shall
recalculate such aforementioned contributions, and the Landlord
shall fix monthly instalments for the then remaining balance of such
Taxation Year such that, after giving credit for instalments paid by
the Tenant hereunder on the basis of the previous estimate, the
Tenant's entire required contribution will have been paid during
such Taxation Year. If for any reason such Property Taxes are not
finally determined within such Taxation Year, the parties shall make
the appropriate adjustment in respect of such contribution when such
Property Taxes become finally determined as contemplated by
Subsection 7.3(b). If the Term includes only a portion of a Taxation
Year, appropriate adjustments will be made so that the Tenant's
required contributions will be for that portion of the Taxation Year
which is during the Term. Notwithstanding the Term may commence
following that portion of any Taxation Year in which the entire
amount of such Property Taxes for each Taxation Year have become due
and payable to the applicable Taxing Authority, the Tenant shall
nonetheless pay its required contribution for such Taxation Year as
contemplated by Subsection 7.2(b) upon demand.
(b) Within one hundred and twenty (120) days after the end of each
Taxation Year, the Landlord shall furnish to the Tenant an audited
statement of the actual Property Taxes during such Taxation Year and
the amount thereof payable by the Tenant pursuant to Section 7.2,
showing in reasonable detail the information relevant and necessary
to the exact calculation and determination thereof. If the audited
statement shows that the Tenant has underpaid its required
contribution to Property Taxes, the Tenant shall pay to the Landlord
the amount of such deficiency within fourteen (14) days of the date
the Tenant receives the audited statement. If the audited s tatement
shows that the Tenant has overpaid its required contribution of
Property Taxes, the Landlord may, in its sole discretion, credit the
amount of such overpayment towards the Tenant's rental account, or
take the amount of the overpayment into consideration when
determining the monthly instalments of Property Taxes for the then
current Taxation Year, or refund the overpayment to the Tenant. The
Tenant agrees that any audited statement provided pursuant to this
Subsection 7.3(b) shall be binding on it unless, prior to the
expiration of one (1) year after the last day of the Taxation Year
to which such Property Taxes relate, the Tenant shows such statement
to be patently unreasonable or erroneous in some substantial
respect.
(c) The Landlord may postpone payment of any Property Taxes on the
Building payable by it pursuant to Section 7.1, and the Tenant may
postpone payment of any Property Taxes payable by it under
Subsection 7.2(a) in each case to the extent permitted by law and if
prosecuting in good faith any appeal against the imposition thereof,
but provided that, in the case of a postponement
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by the Tenant which involves any risk of the Building Lands or the
Building or any part of them or the registration of any writ, lien,
charge or other encumbrance against the Building Lands, the Building
or the Landlord, or the Landlord becoming liable to assessment,
prosecution, fine or other liability, the Tenant shall provide
security in a form and of an amount satisfactory to the Landlord in
respect of such liability and give such undertakings as the Landlord
may reasonably require to ensure payment thereof. The Tenant will
pay to the Landlord all loss, costs, charges and expenses in respect
of any increases in Property Taxes arising directly or indirectly
out of an appeal or contestation by the Tenant plus an
administrative fee equal to fifteen percent (15%) of all such
losses, costs, charges and expenses.
(d) To the extent that determination of any Property Taxes or the
Tenant's contribution thereto depends upon an apportionment of an
assessment which has not been made by any Taxing Authorities, the
Landlord may allocate that portion of Property Taxes from time to
time in such manner and on such basis as the Landlord shall in its
sole opinion consider equitable, having regard, among other things,
to general principles of assessment utilized in Calgary, Alberta.
The allocation made by the Landlord shall be binding upon the Tenant
unless, prior to the expiration of one (1) year after the Taxation
Year to which such Property Taxes relate, the Tenant shows the
Landlord's allocation to be patently unreasonable or erroneous in
some substantial respect.
(e) Whenever requested by the Landlord, the Tenant will deliver to the
Landlord receipts for payment of all Property Taxes payable by the
Tenant pursuant to Subsection 7.2(a) and furnish such other
information in connection therewith as the Landlord may reasonably
require.
7.4 Other Tax
---------
In addition to the other amounts payable hereunder, the Tenant shall pay, any
multi-stage sales, sales, use, consumption, value-added or other similar taxes
(including, without limitation, the GST) imposed by any Taxing Authority upon
the Landlord, the Taxpayer or the Tenant on or in respect of this Lease, the
payments made by the Tenant for the goods and services provided by the Landlord
or the Taxpayer hereunder, including, without limitation, the rental of the
Premises or administrative services provided to the Tenant or to tenants or
other occupants of the Building generally. In addition, the Tenant shall also
reimburse and indemnify the Landlord and the Taxpayer for the Tenant's
Proportionate Share of amounts paid by the Landlord or the Taxpayer as or on
account of such taxes in respect of any goods or services acquired by the
Landlord for the purpose of this Lease. Amounts payable by the Tenant under
this Section 7.4 from time to time shall be paid as and when the Basic Rent is
payable.
If required the Landlord agrees, at the request and cost of the Tenant, to
prepare and execute any requisite forms necessary to establish that the Tenant
has paid to the Landlord the amount payable under this Section 7.4 and that the
Landlord has remitted such amount to the appropriate Taxing Authority.
8. COMMON FACILITIES
8.1 Access to Premises
------------------
The Landlord shall permit the Tenant, its employees and all persons lawfully
requiring access to the Premises, to have access to the Premises through the
Building during Normal Business Hours. At times other than Normal Business
Hours access to the Building and the Premises shall be in accordance with the
Rules and Regulations.
8.2 Access to Common Facilities
---------------------------
Subject to the provisions of this Lease and the Rules and Regulations, the
Tenant shall have for itself and its employees, agents, officers, directors,
permitted subtenants and licensees and any persons having business with the
Tenant, the non-exclusive and non-transferable right to use, during Normal
Business Hours, in common with all other persons entitled thereto, those
portions of the Common Facilities appropriate and intended for common use, for
their proper and intended purposes.
8.3 Restrictions on Use of Common Facilities
----------------------------------------
The Common Facilities and the right to the use thereof extended to the Tenant
under Section 8.2 shall be subject to the following:
(a) Such right of use shall not extend to parts of the Common Facilities
from time to time alloca ted by the Landlord for other use, whether
temporary or permanent, including kiosks, outdoor selling areas,
displays, entertainment and special features, or to parts
inappropriate for actual use such as roofs, service rooms and the
Structural Elements.
(b) The Common Facilities shall at all times be under the exclusive
control and management of the Landlord, the Manager of the Building
or such parties appointed by the Landlord by contract, and
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the Landlord shall have the right to close and lock the enclosed
Common Facilities at all times other than during the Normal Business
Hours.
(c) The Landlord shall have the right to alter, vary, rearrange or
relocate the Common Facilities or any parts thereof, including all
entrances and exits thereto, and to interfere with the use of any
portion thereof as may be necessary and reasonable during the making
of alterations, reconstructions or repairs to any portion of the
Building.
(d) Without in any way limiting the generality of the foregoing, the
Landlord may erect temporary scaffolds and other aids to
construction on the exterior of the Premises in connection with any
of its activities under this Section 8.3. There shall be no
abatement or set off of rent because of any erections or any entry,
installation, maintenance, use, repair, changes in, additions to,
subtraction from or rearrangement of the Common Facilities, provided
that such works shall be carried out by the Landlord as
expeditiously as is reasonably practicable so as to interfere as
little as is reasonably practicable with the conduct of the business
of the Tenant in the Premises, and provided further that public
access to the Premises shall not be permanently denied.
(e) The Tenant shall not obstruct the Common Facilities, and shall not
advertise or conduct business anywhere in the Building other than
within the Premises.
9. BUILDING OPERATING EXPENSE
9.1 Tenant's Contributions to Operating Expense
-------------------------------------------
The Tenant shall pay to the Landlord in the manner hereinafter provided for in
each Operating Year or portion thereof occurring during the Term, a portion of
Operating Expense, calculated by multiplying the amount of the Operating Expense
during such Operating Year by the Tenant's Proportionate Share. Where the whole
of any Operating Year is not included within the Term, the appropriate
apportionment of Operating Expense for such Operating Year shall be made on a
per diem basis.
- --------
9.2 Tenant's Payment of Operating Expense
-------------------------------------
(a) Prior to the commencement of each Operating Year, or as soon
thereafter as possible, the Landlord will furnish to the Tenant an
estimate of Operating Expense for such Operating Year and the amount
thereof payable by the Tenant pursuant to Section 9.1. The amount of
the Tenant's contribution so estimated shall be payable by the
Tenant to the Landlord in accordance with Section 4.2.
(b) Within one hundred and twenty (120) days after the end of each
Operating Year, the Landlord shall furnish to the Tenant an audited
statement of the actual Operating Expense during such Operating Year
and the amount thereof payable by the Tenant pursuant to Section
9.1, showing in reasonable detail the information relevant and
necessary to the exact calculation and determination thereof. If the
audited statement shows that the Tenant has underpaid its required
contribution to Operating Expense, the Tenant shall pay to the
Landlord the amount of such deficiency within fourteen (14) days of
the date the Tenant receives the audited statement. If the audited
statement shows that the Tenant has overpaid its required
contribution of Operating Expense, the Landlord may, in its sole
discretion, credit the amount of such overpayment towards the
Tenant's rental account, or take the amount of the overpayment into
consideration when determining the monthly instalments of Operating
Expense for the then current Operating Year, or refund the
overpayment to the Tenant. The Tenant agrees that any audited
statement provided pursuant to this Subsection 9.2(b) shall be
binding on it unless, prior to the expiration of one (1) year after
the last day of the Operating Year to which such Operating Expense
relate, the Tenant shows such statement to be patently unreasonable
or erroneous in some substantial respect.
(c) Notwithstanding anything contained in this Lease, in order to
calculate the Tenant's equitable share of the Operating Expense, at
such times during any Operating Year when less than one hundred
percent (100%) of the Building is occupied by tenants, those items
of Operating Expense which vary directly with the use and occupancy
of the Building which shall include, without limitation, items such
as janitorial costs, garbage removal and utility costs not
separately metered to tenants, including the Tenant, shall be
grossed up and expressed as what, in the Landlord's reasonable
estimation, they would have been if the Building had been one
hundred percent (100%) occupied during the entire Operating Year.
The Tenant agrees that any estimation made by the Landlord pursuant
to this Subsection 9.2(c) shall be binding on it unless, prior to
the expiration of one (1) year after the last day of the Operating
Year to which such estimation relates, the Tenant shows such
estimation to be patently unreasonable or erroneous in some
substantial respect.
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(d) The Landlord and Tenant agree that Operating Expense may include a
reasonable portion, as determined by the Landlord, of Operating
Expense incurred in respect of the Common Facilities which are
situate outside the Building and other services, facilities and
utilities, but which relate and are attributable to the Building.
The Landlord shall, in such manner and on such basis as the Landlord
in its sole opinion considers equitable, ascertain and make such
allocations as may be necessary to establish Operating Expense. In
ascertaining and making the allocations to Operating Expense, the
Landlord shall include a portion of the Operating Expense incurred
in respect of the Common Facilities which are situate outside the
Building which either exclusively serve the Building or jointly
serve the Building and the remainder of the Building. The
allocations and attributions made pursuant to this Subsection 9.2(d)
shall be binding upon the Tenant unless, within one (1) year from
the last day of the Operating Year to which such Operating Expense
relate, the Tenant shows the Landlord's allocations and attributions
to be patently unreasonable or erroneous in some substantial
respect.
10. BUILDING SERVICES AND UTILITIES
10.1 Operation, Maintenance and Cleaning of the Building
---------------------------------------------------
The Landlord shall operate and maintain the Building and clean the Building
(including the Premises but excluding those premises in the Building designated
by the Landlord as being for retail use) all in accordance with building
management standards as are established by custom and practice for comparable
buildings in Calgary, Alberta.
10.2 Heating
-------
The Landlord shall furnish sufficient heating to the Premises to maintain the
Premises at the same standard of comfort as is established by custom and
practice for comparable buildings in Calgary, Alberta.
10.3 Air Conditioning
----------------
The Landlord shall furnish air-conditioning to the Premises during Normal
Business Hours at the same standard of comfort as is established by custom and
practice for comparable buildings in Calgary, Alberta. The Landlord shall,
however, when requested by the Tenant, furnish air-conditioning to the Premises
other than during Normal Business Hours, but only at the expense of the Tenant
and upon receipt of notice from the Tenant not less than twenty-four (24) hours
in advance. The expense to the Tenant for such additional air-conditioning shall
be the Landlord's cost for labour and utilities used in the operating of the
air-conditioning system during the period of such additional air-conditioning,
as determined by the Landlord, acting reasonably, plus an administrative fee
equal to fifteen percent (15%) of all such costs. NOTWITHSTANDING THE ABOVE, THE
TENANT WILL NOT BE CHARGED FOR THE FIRST TWO HUNDRED (200) HOURS OF ADDITIONAL
AIR-CONDITIONING FURNISHED TO THE PREMISES IN ANY GIVEN LEASE YEAR. IN THE EVENT
THE TENANT IS FURNISHED LESS THAN TWO HUNDRED (200) HOURS OF ADDITIONAL AIR
CONDITIONING IN ANY GIVEN LEASE YEAR, ANY UNEXPENDED HOURS SHALL NOT CARRY
FORWARD TO THE SUCCEEDING LEASE YEAR.
10.4 Elevator Service
----------------
The Landlord shall provide elevator service in the Building to the Premises
during Normal Business Hours and at least one (1) passenger elevator for service
to the Premises at all other times; provided, however, that in the event any
elevator in the Building is incapable of operating, the Landlord shall repair
such elevator or elevators with all due dispatch having regard to all of the
circumstances.
10.5 Security Guards
---------------
The Landlord shall provide security service reasonably adequate for the safety
and care of the Building including the Premises but not the contents thereof or
the property of the Tenant or any other person, and for the preservation of good
order in the Building. The security service shall be comprised of proficient
security personnel who shall be on duty in the Building during such hours as the
Landlord shall from time to time determine. The security personnel may require
all persons, including, without limitation, employees or invitees of the Tenant,
to register when entering or leaving the Building during such hours as are
established by the Rules and Regulations and shall further have the right to
refuse admission to the Building to any person not producing an identification
pass authorized by the Landlord. The Tenant shall be responsible for the
payment of all costs pertaining to the preparation or replacement of any such
identification passes plus an administrative fee equal to fifteen percent (15%)
of such costs.
10.6 Utilities
---------
Should there be supplied or furnished to or used or consumed in the Premises
cool air, chilled water, water, natural gas, electricity or any other utility,
the Tenant shall reimburse the Landlord for the costs of all such utilities plus
an administrative fee equal to fifteen percent (15%) of the cost of all
utilities. The determination of any utilities consumed by the Tenant pursuant to
this Section 10.6 shall, at the option of the Landlord, either (i) be by a
separate meter installed by the Tenant at its sole expense, or (ii) be allocated
by the Landlord to the Tenant on a basis which
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the Landlord considers reasonable. Any allocation and attribution made by the
Landlord pursuant to this Section 10.6 shall be binding upon the Tenant unless,
within one (1) year from the last day of the Operating Year to which such
utilities consumed by the Tenant pursuant to this Section 10.6 relate, the
Tenant shows the Landlord's allocations and attributions to be patently
unreasonable or erroneous in some substantial respect.
11. RELOCATION
11.1 Relocation of Premises
----------------------
The Landlord shall have the right upon providing the Tenant with a Notice
of Relocation, to relocate the Tenant to other premises in the Building and the
Tenant hereby agrees to co-operate and participate in regard to such relocation
pursuant to the following provisions:
(a) the Notice of Relocation shall not require the Tenant to relocate to
the Relocated Premises in less than sixty (60) days;
(b) the Relocated Premises shall BE A CONTIGUOUS AREA WHICH contains
approximately the same or greater Rentable Area as the Rentable Area
of the Premises;
(c) the Landlord shall provide at its expense, Leasehold Improvements in
the Relocated Premises equal to the standards of the Leasehold
Improvements existing in the Premises at the time of the Notice of
Relocation;
(d) the Landlord shall pay for the reasonable moving costs, if any, for
the Tenant's trade fixtures and furnishings from the Premises to the
Relocated Premises;
(e) as full compensation for all other costs, expenses and damages which
the Tenant may suffer or incur in connection with the relocation
contemplated by this Section 11.1, including, without limitation,
disruption and loss of business, Basic Rent and Additional Rent for
the Relocated Premises shall abate for the period of the FIRST FOUR
(4) MONTHS of occupancy;
(f) if the Rentable Area of the Relocated Premises is less than the
Rentable Area of the Premises, Basic Rent and Additional Rent for
the Relocated Premises shall be decreased proportionately as the
Rentable Area of the Relocated Premises compares to the Rentable
Area of the Premises;
(g) the Basic Rent and Additional Rent for the Relocated Premises shall
be no greater than the Basic Rent and the Additional Rent for the
Premises, notwithstanding the Rentable Area of the Relocated
Premises may be greater than the Rentable Area of the Premises;
(h) all provisions of this Lease shall apply to the Relocated Premises
except as set out in this Section 11.1; and
(i) if the location of the Relocated Premises does not meet the Tenant's
reasonable approval, the Tenant shall have the right to terminate
this Lease by providing the Landlord with not less than forty-five
(45) days' Notice given within ten (10) days of receipt of the
Notice of Relocation and the Tenant shall surrender the Premises no
later than the expiration of the notice period specified in the
Tenant's Notice. FURTHER, THE LANDLORD WILL REIMBURSE THE TENANT FOR
THE REASONABLE EXPENSE ACTUALLY INCURRED BY THE TENANT TO VACATE THE
PREMISES TO AN AMOUNT NOT TO EXCEED ONE DOLLAR AND TWENTY FIVE CENTS
($1.25) PER SQUARE FOOT OF THE RENTABLE AREA OF THE PREMISES, OR THE
NEW PREMISES OF THE TENANT, WHICHEVER SHALL BE LESS.
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NOTWITHSTANDING THE ABOVE, THE LANDLORD SHALL NOT PROVIDE THE TENANT WITH A
NOTICE OF RELOCATION ON OR BEFORE APRIL 30, 1997.
12. MAINTENANCE, REPAIRS AND ALTERATIONS
12.1 Repair and Maintenance of Premises
----------------------------------
The Tenant shall, at its sole expense and throughout the Term, keep the Premises
and the Tenant's equipment, trade fixtures and the Leasehold Improvements
therein in good condition and in a good and tenantable state of maintenance,
repair and decoration, excepting only for Structural Repairs.
12.2 Entry, Inspection and Emergency Repairs by the Landlord
-------------------------------------------------------
The Tenant shall permit the Landlord from time to time within Normal Business
Hours, or at any time in the case of emergency, to enter and examine the state
of maintenance, repair and order of the Premises, all equipment and fixtures
within the Premises and any Leasehold Improvements now or hereafter made to the
Premises and the
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Landlord may give notice to the Tenant requiring that the Tenant perform such
maintenance or effect such repairs, decoration or replacement as may be found
necessary from such examination; provided, however, that the failure of the
Landlord to give such notice shall not relieve the Tenant from its obligations
to maintain, repair, decorate and keep the Premises and the Tenant's equipment
and trade fixtures and the Leasehold Improvements therein in good condition and
in a good and tenantable state of maintenance, repair and decoration. The Tenant
agrees that the Landlord shall have the right to enter the Premises at all
reasonable times during the Term to make repairs or alterations as the Landlord
shall deem necessary for the safety or preservation or proper administration of
the Premises or any other portion of the Building, and the Landlord may for such
purposes attach scaffolds or other temporary structures to the Premises.
12.3 Repair on Notice
----------------
The Tenant shall, when necessary during the Term and, whether upon receipt of
Notice from the Landlord or not, perform, effect and pay for such maintenance,
repairs, decorations or replacements as may be the responsibility of the Tenant
under this Lease by the use of contractors or other qualified workmen approved
in advance by the Landlord in writing. In the event that the Tenant fails to
comply with the Landlord's Notice to effect maintenance, repairs, decoration or
replacements within the time provided for in the Landlord's Notice, then the
Landlord may cause such maintenance, repairs, decoration or replacements to be
undertaken, which shall be deemed to be at the sole request of the Tenant
although the Tenant's permission is not required, and the Landlord shall be
entitled to recover from the Tenant the cost thereof plus an administrative fee
equal to fifteen percent (15%) of the costs incurred by the Landlord with
respect thereto.
12.4 Alterations by the Tenant
-------------------------
The Tenant may, with the prior written consent of the Landlord, such consent not
to be unreasonably withheld, from time to time during the Term, make such
alterations, additions, substitutions and improvements to the Premises or any
part thereof as the Tenant may reasonably deem necessary or desirable to adapt
the Premises for the Tenant's purposes: (I) provided that the Structural
Elements, the outside appearance and strength of the Building and the
mechanical, electrical and plumbing services thereof or the HVAC System are not
affected; OR (II) IF THE STRUCTURAL ELEMENTS, THE OUTSIDE APPEARANCE AND
STRENGTH OF THE BUILDING AND THE MECHANICAL, ELECTRICAL AND PLUMBING SERVICES
THEREOF OR THE HVAC SYSTEM ARE AFFECTED, PROVIDED THE ALTERATIONS, ADDITIONS,
SUBSTITUTIONS AND IMPROVEMENTS ARE PERFORMED BY CONTRACTORS OR WORKMEN APPROVED
BY THE LANDLORD, ACTING REASONABLY. Prior to commencement of any such work the
Tenant shall provide to the Landlord for its approval all drawings and
specifications detailing such work and the Tenant shall thereafter obtain the
Landlord's prior written approval to any change or changes in such drawings and
specifications. The Tenant shall submit to the Landlord's review and approval of
such plans, drawings and specifications and the Landlord's inspection and, where
warranted in the opinion of the Landlord, supervision of all work contemplated
by this Section 12.4. Such work shall be performed by competent contractors or
workmen (whose labour union affiliations are compatible with those of any
workmen who may be employed in the Building by the Landlord or its contractors
or subcontractors), engaged by the Tenant but in each case only as approved in
writing by the Landlord. When the Landlord elects to supervise the work carried
out by or no behalf of the Tenant, the Landlord shall not be the contractor of
the Tenant unless the Landlord and the Tenant otherwise agree in writing. THE
TENANT SHALL PROMPTLY PAY ALL CHARGES AND EXPENSES PERTAINING TO THE LANDLORD'S
REVIEW, INSPECTION OR SUPERVISION INCLUDING, WITHOUT LIMITATION, THE FEES, COSTS
AND EXPENSES OF THE LANDLORD'S EXTERNAL ARCHITECTS, ENGINEERS OR OTHER QUALIFIED
CONSULTANTS PLUS AN ADMINISTRATIVE FEE EQUAL TO FIFTEEN PERCENT (15%) OF ALL
SUCH FEES, CHARGES AND EXPENSES. All work carried out pursuant to this Section
12.4 shall be performed in a good and workmanlike manner subject to all
conditions which the Landlord may reasonably impose (including the arranging by
the Tenant of builders' risk and contractor's public liability insurance in
whatever amounts and subject to whatever conditions, exclusions and endorsements
the Landlord deems to be reasonable) and the Tenant shall in the performance of
any such work ensure, so far as may be possible, the progress and completion
thereof without undue delay.
12.5 Repairs by Landlord
-------------------
The Landlord shall keep the Common Facilities in a proper state of repair,
reasonable wear and tear excepted, and the Landlord will make all repairs and
replacements to the Building elevators and to the HVAC System other than such
heating, cooling or air-conditioning apparatus as may be installed by or for the
exclusive use of any tenant, licensee or other occupant of the Building
including the Tenant. The Landlord will be responsible for the making of
Structural Repairs. All repairs referred to in this Section 12.5 shall be made
by the Landlord as expeditiously as is reasonably possible in the circumstances.
12.6 Replacement of Fluorescent Tubes and Light Bulbs
------------------------------------------------
The Tenant shall pay the cost, including installation, of all electric light
bulbs, fluorescent tubes and ballasts, all of which shall be of a standard and
colour determined by the Landlord for the Building, used to replace those in the
Premises as at the Commencement Date together with the cost of maintenance and
repair of fluorescent fixtures plus an administrative fee equal to fifteen
percent (15%) of all such costs. The Landlord shall have the exclusive right to
supply and effect such installation, maintenance and repair at reasonable,
competitive rates.
12.7 Damage, Destruction of Premises
-------------------------------
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It is understood and agreed that if, during the Term of this Lease, the Building
shall be damaged or destroyed by fire, lightning, tempest, impact of aircraft,
acts of God or the Queen's enemies, riots, insurrections, explosions or other
casualties, then and in each such event the following provisions shall have
effect:
(a) If, in the reasonable opinion of the Landlord's architect, the
Premises are rendered partially unfit for occupancy by the Tenant,
all rents hereby reserved shall abate in part only in the proportion
that the part of the Premises rendered unfit for occupancy bears to
the whole of the Premises or if the Premises are rendered wholly
unfit for occupancy by the Tenant the rent hereby reserved shall be
suspended, in each case until the obligation to pay such rents
commences again under Subsection 12.7(d). Notwithstanding the
foregoing, the Tenant shall not be entitled to any abatement of any
rents if the damage to the Premises can be repaired, replaced or
restored within ten (10) days after the date of such damage except
to the extent that the Landlord can recover such rents from its
insurers.
(b) Neither the Landlord nor the Tenant shall have the right to
terminate this Lease and the Landlord shall promptly commence and
proceed to rebuild or repair and restore the damaged Premises to the
extent provided for in Subsection 12.7(c).
(c) If the Landlord is obligated, pursuant to the provisions of this
Section 12.7, to rebuild or repair and restore or cause the
rebuilding, repair or restoration of the Building, such work shall
be commenced promptly and shall be prosecuted with reasonable
diligence so as to rebuild or repair and restore the Building, with
such changes as the Landlord may determine. It is expressly
understood and agreed that the obligation of the Landlord to rebuild
or repair or restore or cause the rebuilding, repair or restoration
of the Building includes all Structural Elements but does not extend
to and shall not be deemed to include the rebuilding, repair or
restoration of any alterations, additions, extensions, Leasehold
Improvements, equipment or installations existing prior to the
damage or destruction, made upon or to the Premises, and shall not
extend to the Pedestrian Bridges or other above or below ground
walkways forming part of the Building prior to such damage or
destruction.
(d) Except to the extent the Landlord is required to rebuild, repair or
restore or cause the rebuilding, repair and restoration of the
Building as aforesaid, the Tenant shall rebuild or repair and
restore the Premises and rent payable hereunder abated shall
commence when the Landlord's architect, in his sole opinion,
determines that such rebuilding, repair or restoration of the
Premises should have been completed by the Tenant and the Premises
should have been ready for the Tenant's business.
12.8 Expropriation
-------------
(a) If during the Term, the whole of the Premises or any part of the
Premises, to the extent that the remainder is not sufficient in size
to allow the Tenant, in its reasonable opinion, to efficiently carry
on its normal business operations, shall be taken or expropriated by
any public authority under the power of expropriation, then the
obligation of the Tenant for the payment of rent beyond the
Condemnation Date shall cease and determine and following the due
settlement by the expropriating party of such award or awards as may
be payable as a result of such expropriation, this Lease and
interest created by this Lease shall terminate, effective as of the
Condemnation Date. However, if during the Term, a part of the
Premises shall be taken or expropriated by any public authority
under the power of expropriation and the remainder of the Premises
is sufficient to allow the Tenant, in its reasonable opinion, to
efficiently carry on its normal business operations, then this Lease
shall continue in full force and effect, save and except the Tenant
shall be liable for rents in respect of the part of the Premises so
taken only up to the Condemnation Date and thereafter the rents and
other charges payable hereunder shall be reduced proportionately.
(b) All compensation and damages with respect to the taking of the
Premises or a portion thereof awarded by the expropriating public
authority or by any board having jurisdiction to settle such matters
shall belong to the Landlord and the Tenant in such amounts or
proportions as determined by the provisions of the Expropriation Act
(Alberta), as in force at the Condemnation Date.
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13. INSURANCE AND INDEMNITY
13.1 Landlord's Insurance
--------------------
(a) The Landlord shall, throughout the Term, provide and keep in force
or cause to be provided or kept in force:
(i) commercial general liability insurance with respect to the
Landlord's operation of the Building for personal injury,
death and damage to property of others;
(ii) property damage insurance against fire (including an extended
coverage endorsement) and leakage and discharge from fire
protective devices in respect of the Building and fixed
improvements therein and all rentable Premises therein
including the Premises, but excluding all trade fixtures and
Leasehold Improvements installed or constructed by or on
behalf of tenants, including the Tenant, in the Building;
(iii) loss of rental income, loss of gross earnings or loss of
profits insurance, including loss of all rentals receivable
from tenants in the Building in accordance with the provisions
of their leases, in such amount or amounts as the Landlord
elects to obtain or any Mortgagee requires or approves;
(iv) boiler and machinery insurance covering boilers, pressure
vessels and machinery installed, operated and maintained by or
for the Landlord.
(b) The Landlord may, in its sole discretion, provide and keep in force
or cause to be provided or kept in force such other insurance (which
may include insurance of the trade fixtures and Leasehold
Improvements installed in the Premises) as the Landlord, in its sole
discretion, elects to obtain and any Mortgagee requires or approves.
(c) Insurance effected by the Landlord under this Section 13.1 shall be
in amounts which the Landlord shall from time to time determine as
being reasonable and sufficient and shall be subject to such
reasonable deductibles and exclusions as the Landlord may determine.
(d) Insurance affected by the Landlord pursuant to Paragraphs 13.1(a)(i)
shall permit the release of the Tenant from certain liability as set
out in Section 13.5.
(e) Insurance affected by the Landlord pursuant to Paragraphs
13.1(a)(ii), 13.1(a)(iii) and 13.1(a)(iv) and, if applicable,
Subsection 13.1(b), shall:
(i) permit the release of the Tenant from certain liability as set
out in Section 13.5; and
(ii) contain waiver of subrogation provisions for the benefit of
the Tenant and those for whom the Tenant is legally
responsible for, whether or not any claim which may arise
against any such person arises as a result of the negligence
or other acts or omissions of the Tenant or those for whom the
Tenant is legally responsible for.
(f) The Tenant acknowledges that the Landlord's loss of rental income
insurance policy provides that:
(i) payments thereunder by the insurer may be limited to a
period of one (1) year following the date of any destruction
or damage, and
(ii) no insurance proceeds will be payable thereunder in the case
of destruction or damage caused by any occurrence not covered
by the policy described in Paragraph 13.1(a)(ii).
(g) If the Landlord's cost of any insurance obtained by the Landlord
under this Section 13.1 shall be increased by reason of any use of
or activity in or the Tenant's occupancy of the Premises (whether or
not permitted by this Lease or any consent is given by the Landlord)
or any act of neglect, commission or omission of the Tenant or
anyone for whom the Tenant is legally responsible, or anything done
or omitted to be done in and about the Premises then,
notwithstanding any other remedy the Landlord may be afforded, the
Tenant shall pay to the Landlord the amount of the increase from
time to time in any premiums of insurance payable by the Landlord
resulting therefrom plus an administrative fee equal to fifteen
percent (15%) of the amount of each premium.
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(h) If any policy of insurance upon the Building or any part thereof is
cancelled or may be cancelled by the insurer thereunder, by the use
or occupancy of the Premises by the Tenant or by any act or omission
of the Tenant, or such of same as may be permitted by the Tenant,
the Landlord may forthwith terminate this Lease by notice in
writing, and the Tenant shall immediately deliver up possession of
the Premises to the Landlord and the Landlord may forthwith re-enter
and take possession of the same.
13.2 Tenant's Contributions to Landlord's Insurance
----------------------------------------------
In the event that the Landlord elects to insure certain Leasehold Improvements
or trade fixtures in the Premises pursuant to Subsection 13.1(b), the Landlord
shall promptly give written notice thereof to the Tenant and the Landlord may
from time to time charge the premium cost relating to the insuring of Leasehold
Improvements or trade fixtures in the Premises to the Tenant and the Tenant
shall make prompt payment therefor upon receipt of periodic invoices from the
Landlord. Premium costs charged directly to the Tenant and other tenants of the
Building shall be credited as a deduction from Operating Expense when paid.
13.3 Tenant's Insurance
------------------
(a) The Tenant shall, throughout the Term, provide and keep in force, at
its sole cost and expense:
(i) comprehensive general liability insurance with respect to the
business carried on in, or from the Premises and the use and
occupancy thereof providing coverage for personal injury,
bodily injury, death and damage to property of others;
(ii) property damage insurance on an all risks form with coverage
equivalen t to or better than the Insurance Bureau of Canada's
standard all risks wording, in respect of the Tenant's
furniture, equipment and the trade fixtures and Leasehold
Improvements installed in the Premises (to the extent that the
Landlord has not elected to insure the same pursuant to
Subsection 13.1(b) and Section 13.2) and such other property
in or forming part of the Premises (not being property which
the Landlord is bound or elects to insure pursuant to Section
13.1) as the Landlord, acting reasonably, and any Mortgagee
may from time to time require; and,
(iii) if any boiler, pressure vessel or machinery is installed,
operated and maintained by or for the Tenant in the Premises,
boiler and machinery insurance with respect thereof.
(b) Insurance effected by the Tenant pursuant to this Section 13.3
shall:
(i) be in amounts which the Landlord, acting reasonably, and any
Mortgagee, shall from time to time determine as being
sufficient; and
(ii) be upon such terms and conditions as the Landlord, acting
reasonably, and any Mortgagee may from time to time require or
approve in writing, provided however that until the Landlord
or any Mortgagee give written notice to the Tenant as to the
required or approved terms and conditions the Tenant's
insurance shall provide, the insurance effected by the Tenant
shall be upon the terms and conditions set out in Subsection
13.3(a).
(c) Insurance effected by the Tenant pursuant to Paragraph 13.3(a)(i)
shall:
(i) be written on an occurrence form;
(ii) have limits of not less than TWO MILLION DOLLARS
($2,000,000.00) in respect of any one (1) accident or
occurrence;
(iii) name the Landlord and the Manager of the Building as
additional insureds;
(iv) contain cross liability and severability of interest
provisions;
(v) contain a blanket contractual liability endorsement; and
(vi) permit the release of the Landlord from the liability set
out in Section 13.4.
(d) Insurance effected by the Tenant pursuant to Paragraphs 13.3(a)(ii)
and 13.3(a)(iii) shall:
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(i) be on a full replacement cost basis and for amounts
sufficient to prevent the Tenant from being a co-insurer;
(ii) contain waiver of subrogation provisions for the benefit of
the Landlord and those for whom the Landlord is legally
responsible whether or not any claims which may arise against
such persons arises as a result of the negligence or other
acts or omissions of the Landlord or those for whom the
Landlord is legally responsible;
(iii) be subject only to those deductibles and exclusions as the
Landlord, acting reasonably, or any Mortgagee may approve or
require; and
(iv) name the Landlord as an additional loss payee as its
interest may appear.
(e) On or before the earlier of the date the Tenant occupies the
Premises or the Commencement Date and, thereafter, at least once
every Lease Year, the Tenant shall file with the Landlord whatever
certificates of insurance may be necessary, in the Landlord's sole
opinion, to establish the Tenant's insurance coverage in effect from
time to time. Each such certificate of insurance shall state that
the Landlord shall be notified in writing at least thirty (30) days
prior to the date any material change in the policy or policies of
maintenance evidenced by the certificate or the coverage afforded by
such policy or policies of insurance is to take effect or the date
the policy or policies of insurance evidenced by the certificate is
to be cancelled.
(f) If the Tenant fails to:
(i) effect any of the insurance coverage required by this Section
13.3; or
(ii) pay any premium for any insurance policy referred to in this
Section 13.3; or
(iii) file with the Landlord a certificate of insurance with
respect to the insurance policies referred to in Subsection
13.1(a) or such other proof of insurance coverage as the
Landlord may, in its sole discretion, deem to be an
acceptable substitute for the certificates of insurance
referred to in Subsection 13.1(e),
the Landlord may, upon not less than twenty-four (24) hours prior
written notice to the Tenant, effect such insurance coverage, pay
such premiums or obtain such certificates of insurance as may be
necessary to ensure the Tenant has complied with the provisions of
this Section 13.3 and, if the Landlord takes such actions, the
Landlord shall recover from the Tenant, upon demand, all cash fees,
expenses and premiums the Landlord may pay plus an administrative
fee equal to fifteen percent (15%) of such costs, fees, expenses and
premiums.
13.4 Limitation of Landlord's Liability
----------------------------------
(a) Except for and only to the extent of, any loss, injury, or damage
suffered by the Tenant or others directly caused by the negligence
of the Landlord or by those for whom the Landlord is legally
responsible for, the Landlord shall not be liable or in any way
responsible to the Tenant in respect of any loss, injury or damage
suffered by the Tenant or others caused by or in respect of:
(i) loss, theft, damage or destruction, however caused, of any
property of the Tenant or others whether or not such property
is entrusted to the care or control of the Landlord;
(ii) injury or damage to persons or property resulting from fire,
smoke, explosion, falling plaster or ceiling tiles, broken
glass, escaping steam, gas, fumes, vapour or odours,
electricity, vermin, computer or electronic equipment or
systems malfunction or stoppage, freezing or excessive heat
or cold, flooding, water, rain, or snow, or leaks or
discharges from any part of the Building or from any pipes,
any component of the sprinkler system, appliance or plumbing
work therein, or from dampness;
(iii) damage caused by other tenants, occupants or persons in the
Premises or other premises in the Building or the public, or
caused by operations in the construction of any private or
public work including, without limitation, work conducted
pursuant to Section 8.3, 12.2 or 12.5;
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(iv) anything whatsoever in relation to the HVAC System or any
other heating, ventilating or air-conditioning services or
equipment, any utility services or elevator or escalator
services to be provided, furnished or supplied under this
Lease by the Landlord;
(v) any act or omission (including theft, malfeasance or
negligence) on the part of any agent, contractor, sub-
contractor or person engaged to perform janitorial or
security services by the Landlord;
(vi) any loss or damage, however caused, to money, securities,
negotiable instruments, papers or other valuables of the
Tenant;
(vii) any failure of the Landlord to conduct the repairs,
replacements or maintenance contemplated by Section 12.5;
(viii) any damage, injury or loss suffered to the Premises or the
contents thereof by reason of the Landlord entering upon the
Premises to undertake an examination of the Premises or the
contents thereof or to carry on any work in the Premises
including, without limitation, the examination of the
Premises and the work contemplated by Section 12.2; and
(ix) any loss, damage or inconvenience suffered or incurred by the
Tenant or caused to the Tenant's business or property as a
direct or indirect result of any act the Landlord may take in
remedying or attempting to remedy any Event of Default
contemplated by Section 14.5.
(b) Notwithstanding Subsection 13.4(a), with respect to any loss, damage
or injury to property suffered by Tenant or others, in no event
shall the Landlord be liable for any loss, injury or damage suffered
by the Tenant or others, whether due to the negligence of the
Landlord or otherwise, if the Tenant has insured itself against or
is required by Paragraphs 13.3(a)(ii) or 13.3(a)(iii) to insure
itself against such losses, injury or damage.
13.5 Limitations of Tenant's Liability
---------------------------------
The Tenant shall not be liable to the Landlord in respect of any direct loss,
injury, or damage insured or required to be insured by the Landlord under the
provisions of Paragraphs 13.1(a)(ii), 13.1(a)(iii) and 13.1(a)(iv), to the
extent of any recovery by the Landlord under such insurance.
13.6 Indemnity
---------
Except as provided in Section 13.5, the Tenant shall indemnify and hold harmless
the Landlord against any and all:
(a) liability, loss, claims, demands, damages or expenses (including,
legal fees and disbursements on a solicitor and his own client
basis), due to or arising out of injury of any kind to any person
(including injury resulting in death, personal discomfort, mental
anguish, shock, sickness, disease, invasion of privacy, wrongful
entry, eviction or discrimination) occurring at, in or about the
Premises;
(b) costs, liabilities, claims or damages or expenses due to or arising
out of any work done by, or act of neglect or omission of the Tenant
or its servants, employees, agents, contractors, invitees, or
licensees in and about the Building;
(c) fines, penalties, actions, suits, legal proceedings and all costs or
expenses associated therewith (including, legal fees and
disbursements on a solicitor and his own client basis) arising out
of or in any way connected with any deposit, spill, discharge or
other release of any Hazardous Substances that occurs during the
Term, or any extensions or renewals thereof, at or from the
Premises, or any use, production, processing, storage or disposal of
any Hazardous Substances at, in or about the Premises, or the
transportation of Hazardous Substances to or from the Premises, or
from the Tenant's failure to provide all information, make all
submissions and take all actions required by any competent
governmental and regulatory authority;
(d) costs or expenses incurred by the Landlord to modify, clean or
operate the Building's electrical, mechanical, plumbing or heating,
ventilating and air-conditioning systems (including, the HVAC
System) occasioned by any spill, deposit, discharge or other release
of Hazardous Substances by the Tenant or any person for whom the
Tenant is legally responsible in, upon or around the Premises or the
Building and for all costs or expenses incurred by the Landlord to
restore the Building, the Common Facilities or the Premises to their
original state following any deposit, spill,
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discharge or other release of Hazardous Substances by the Tenant or
any person for whom the Tenant is legally responsible;
(e) costs, charges or expenses (including, legal fees and
disbursements on a solicitor or his own client basis) incurred by
the Landlord as a direct or indirect result of any breach or non-
performance by the Tenant of any provisions of this Lease which
costs or expenses shall include, any and all costs associated with:
(i) any proceeding to collect or enforce the payment of rent
due or payable by the Tenant;
(ii) effecting distraint against the Tenant's goods, chattels and
equipment in the manner prescribed by law;
(iii) obtaining legal possession of the Premises after an
occurrence of an Event of Default; and
(iv) the exercise of any of the Landlord's rights or remedies
prescribed by law or pursuant to the Security Agreement.
The Tenant's obligations and liabilities contained in this Section 13.6 shall
survive the expiration or termination of this Lease.
14. REMEDIES UPON DEFAULT
14.1 Re-Entry and Termination on Default
-----------------------------------
If and whenever an Event of Default shall occur, the Landlord may, at its
option:
(a) terminate this Lease by written notice to the Tenant and all rights
and interest hereby created or then existing in favour of the Tenant
or derived under this Lease shall thereupon terminate and the
Landlord may enter into and take possession of the Premises and
remove the Tenant's effects therefrom, any statute or law to the
contrary notwithstanding, or
(b) without effecting a re-entry and termination, and as the agent and
in the name of the Tenant, take possession of the Premises, together
with all the Leasehold Improvements, trade fixtures and furnishings
thereon and, as the agent and in the name of the Tenant, sublet the
Premises together with all or any of such Leasehold Improvements,
trade fixtures and furnishings on whatever terms the Landlord may
deem appropriate, in which case the Tenant shall continue to be
liable for the performance of all of its obligations under this
Lease including the payment of rent and other amounts payable
hereunder, the Landlord shall be entitled to enforce all the
covenants of the subtenant and to collect and receive all rent and
other amounts payable by the subtenant and apply them against all
indebtedness of the Tenant to the Landlord from time to time
existing, and the Tenant shall pay any deficiency to the Landlord
when and as from time to time demanded.
Any right of action of the Landlord against the Tenant in respect of any
antecedent breach of any of the said covenants, agreements, conditions,
restrictions, or stipulations in and of this Lease shall not be prejudiced by
the termination of this Lease by the Landlord.
14.2 Rights and Obligations on Re-Entry and Termination
--------------------------------------------------
If and whenever the Landlord exercises its option to re-enter the Premises or
terminate this Lease:
(a) the Tenant shall immediately vacate the Premises and surrender the
Premises in accordance with Section 3.3 and all rights of the Tenant
under this Lease to the Landlord, and the Landlord may remove or
cause to be removed from the Premises the Tenant or any other
occupant or occupants thereof; and
(b) notwithstanding any law or statutory enactment to the contrary, the
Tenant shall pay to the Landlord:
(i) rent and all other amounts payable hereunder up to the time
of such re-entry or termination, whichever is later, together
with all expenses as the Landlord may incur in connection
with such termination, (including, legal fees and
disbursements on a solicitor and his own client basis) but
such termination and the recovery of such expenses shall in
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every case be without prejudice to, and shall not limit any
claim of, the Landlord for damages in respect of loss of rent
and other income of the Landlord expected to be derived from
this Lease during the period which would have constituted the
unexpired portion of the Term if this Lease had not been
terminated, or prejudice or impair the right of recovery by
the Landlord for damages arising from or in any way related
to the occurrence of an Event of Default; and
(ii) after written notice to the Tenant on or prior to the date of
termination, damages for the loss of rent or other income the
Landlord expected to be derived from the Premises under this
Lease as stated by the Landlord in said notice being either:
(A) the amount, if any, by which the rent which would have
been payable hereunder exceeds the payments, if any,
received by the Landlord from other occupants of the
Premises payable on the first day of each month during
the period which would have constituted the unexpired
portion of the Term, or any renewals or extensions
thereof, had this Lease not been terminated; or
(B) a lump sum amount equal to the Basic Rent and Additional
Rent which would have been payable under this Lease from
the date of termination during the period which would
have constituted the unexpired portion of the Term or
any renewals or extensions thereof had this Lease not
been terminated, reduced by the rental value of the
Premises for the same period established by the terms
and conditions upon which the Landlord re-lets the
Premises if such re-letting is accomplished within sixty
(60) days of the date of termination, and otherwise
established by reference to all market and other
relevant circumstances as the Landlord deems to be
reasonable, it being understood that rent and rental
value shall be reduced to present worth at an assumed
rate of six percent (6%) and that Property Taxes and
Operating Expense shall increase annually at rates equal
to ten percent (10%) and six percent (6%) respectively
in each Taxation Year and Operating Year following the
Taxation Year and Operating Year during which this Lease
is terminated and otherwise on the basis of the
Landlord's estimates and assumptions of fact which shall
govern unless and until either proven to be incorrect
when the actual increase in Property Taxes and Operating
Expense for such future Taxation Years and Operating
Years are fully known as contemplated by Subsections
7.3(a) and 9.2(b), or such assumed rate of increase of
Property Taxes and Operating Expense and other estimates
and assumptions of fact are shown by the Tenant to be
patently unreasonable or substantially erroneous.
14.3 Cross-Default by Tenant
-----------------------
The occurrence of an Event of Default under this Lease shall be deemed to
constitute a default under all leases, licences or other occupancy agreements
the Tenant may then have with the Landlord or any Affiliate of the Landlord with
respect to any premises situate in the Provinces of British Columbia, Alberta,
Saskatchewan or Manitoba, and to constitute a default under the Security
Agreement.
14.4 Bankruptcy of the Tenant and Additional Rights of Termination
-------------------------------------------------------------
(a) In addition to all other rights of the Landlord to terminate
hereunder, whether or not the Term has commenced and whether or not
any rent has been paid or prepaid, this Lease may be terminated at
the option of the Landlord if an Act of Insolvency has occurred.
(b) In the event that an Act of Insolvency occurs, or this Lease is
terminated pursuant to Subsection 14.4(a), or Subsection 15.4(c) by
reason of an Involuntary Transfer, the Tenant shall, in addition to
meeting all requirements of Section 14.2, forthwith pay to the
Landlord rent for the next ensuing three (3) months as accelerated
rent, and any other sums allowed by any governing statute or rule of
law.
14.5 Landlord's Rights to Cure Defaults
----------------------------------
If and whenever an Event of Default occurs whereby the Tenant fails to perform
any of its covenants under this Lease, the Landlord may perform such covenant
for the account of the Tenant and may enter upon the Premises for the purpose,
and no notice thereof need be given to the Tenant except if and to the extent
any provision of this Lease expressly requires that notice be given in the
circumstances. The Tenant shall promptly pay to the Landlord, on demand, the
amount of all costs, charges and expenses incurred by the Landlord in connection
with such default or in curing or attempting to cure such Event of Default
(including, without limitation, legal fees and disbursements on
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a solicitor and his own client basis) plus an administrative fee equal to
fifteen percent (15%) of the amount of all such costs, charges and expenses.
14.6 Remedies Generally
------------------
Mention in this Lease of any particular remedy or remedies of the Landlord in
respect of any Event of Default by the Tenant shall not preclude the Landlord
from any other remedy in respect thereof, whether available at law or in equity,
or by statute, or expressly provided for herein. No remedy shall be exclusive
or dependent upon any other remedy, but the Landlord may from time to time
exercise any one or more of such remedies generally or in combination, such
remedies being cumulative and not alternative. In addition to any other
remedies the Landlord may have hereunder, if any Event of Default occurs which
is not remedied promptly after notice from the Landlord as specified in this
Lease, the Landlord shall have the right to suspend the supply to the Premises
of any benefit, service or utility furnished by the Landlord until the
occurrence or situation causing the Event of Default is cured.
14.7 Waiver
------
No waiver by the Landlord of any Event of Default, breach or non-compliance
hereunder shall operate as a waiver of the Landlord's rights hereunder in
respect of any continuing or subsequent Event of Default, breach or non-
observance, and no waiver shall be inferred from or implied by any overlooking
by the Landlord of such Event of Default, breach or non-observance or by
anything done or omitted to be done by the Landlord with respect thereto save
only an express waiver in writing.
14.8 Security Interest
-----------------
(a) The Tenant hereby grants to the Landlord the Security Interest in
the Collateral to secure the payment of all rent expressed to be
payable hereunder and the fulfilment of all other obligations of the
Tenant under this Lease or any other new lease, agreement to lease,
license or other occupancy agreement made between the Landlord and
the Tenant with respect to the Premises or any part thereof or any
other Premises located in the Building. THE SECURITY INTEREST SO
CREATED WILL BE SUBORDINATE ONLY TO THOSE SECURITY AGREEMENTS
REGISTERED AT THE ALBERTA REGISTRIES PERSONAL PROPERTIES REGISTRY AS
REGISTRATION NUMBERS 92042228673, 93030414598 AND 95122907314.
Notwithstanding the creation of the Security Interest, the Tenant
may sell its inventory and stock-in-trade in the normal course of
its business. The Tenant agrees that the Security Interest shall
attach to the Collateral forthwith upon the execution of this Lease
or any agreement to lease or offer to lease made between the
Landlord and the Tenant with respect to the Premises or any part
thereof or any other Premises located in the Building. The Tenant
waives its right to receive a copy of any financing statement,
financing change statement or any statement used by the Alberta
Personal Property Registry to confirm registration.
(b) Upon the occurrence of an Event of Default, the Landlord may itself
or by its agents or employees, or by a receiver (which term shall
include a receiver-manager) or any replacement appointed in writing
by the Landlord, take possession of the Collateral, carry on the
business permitted by this Lease to be carried on in, from or upon
the Premises in such manner as the Landlord or such receiver
determines, and realize upon the Collateral and enforce its rights
under the Security Interest by any remedy or proceedings authorized
or permitted hereby or at law including, all rights and remedies
available to a secured party under any present or future statute of
the Province of Alberta. Included in such rights of the Landlord is
the right to recover all costs, charges or expenses directly or
indirectly associated with the seizing, retaking, holding,
repairing, processing, preparing for disposition and disposing of
the Collateral (including, legal fees and disbursements on a
solicitor and his own client basis), which may be incurred by the
Landlord. The Landlord may exercise any rights as provided by the
Security Agreement on the Premises and, for such purpose, the
Landlord may lock the Premises, change any locks on the Premises and
by any means exclude the Tenant from all or any parts of the
Premises and the Landlord shall not thereby be terminating this
Lease in the absence of express written notice terminating this
Lease.
(c) The Security Interest shall not be deemed to have been satisfied,
discharged or redeemed by reason of the Tenant not being indebted to
Landlord at any time or from time to time and no payment shall
reduce the amount secured by the Security Interest except to the
extent expressly approved by the Landlord in writing.
(d) The Security Interest is given in addition to, and not as an
alternative to, and may be exercised by the Landlord without
prejudice to any other rights of the Landlord under this Lease or at
law, including the Landlord's right of distress.
14.9 Default by the Landlord
-----------------------
The Landlord shall only be deemed to be in default under the provisions of this
Lease if the Landlord fails to keep, observe or perform any covenant, obligation
or agreement which is expressly stated in this Lease as being an obligation of
the Landlord to keep, observe or perform within thirty (30) days after the
receipt by the Landlord of a
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written notice by the Tenant specifying such breach or non-performance. The
Landlord shall not be considered to be in default under this Lease if the
Landlord commences to cure the breach in a diligent and prudent manner within
such thirty (30) day period and, to cure any such breach, the Landlord shall be
allowed such additional time as may be necessary or reasonable given the nature
and the extent of the breach set out in the Tenant's notice.
14.10 Limited Recourse against the Landlord
-------------------------------------
(a) Subject to the provisions of Section 15.1 hereof, the obligations of
and rights against the Landlord with respect to the performance or
observance of any covenant, agreement or condition to be kept,
observed or performed by the Landlord under or pursuant to this
Lease shall be performed and satisfied and enforced only against,
and recourse hereunder shall be had only against, the Building and
the interest of the Landlord therein and no obligations of the
Landlord with respect to the performance or observance of any
covenant, agreement or condition to be kept, observed or performed
by the Landlord under or pursuant to this Lease shall be personally
binding on and no recourse shall be had, judgement issued or
execution or other process levied against the Landlord except to the
extent that such process is necessary for the enforcement of any
covenant, condition or agreement to be kept, observed or performed
by the Landlord under or pursuant to this Lease.
(b) Without limiting the Landlord's rights and remedies under this
Lease, the Tenant hereby consents to the Landlord obtaining an
injunction to restrain the Tenant from breaching the provisions of
this Section 14.10 and all costs, fees, disbursements and expenses
(including, legal fees and disbursements on a solicitor and his own
client basis) which may be incurred by the Landlord in respect
thereto shall be paid by the Tenant to the Landlord.
The Tenant's obligations set out in this Section 14.10 shall survive the
expiration or earlier termination of this Lease.
15. ASSIGNMENTS, TRANSFERS AND OTHER ENCUMBRANCES
15.1 Transfers and Encumbrances by Landlord
--------------------------------------
The person or persons comprising the Landlord may sell, transfer, lease,
mortgage, encumber or otherwise deal with the Building and the Building
Lands or any portion of either or the interest of such person or persons
therein, in every case without the consent of the Tenant and without
restriction, and to the extent that any purchaser, transferee or lessee
from such person or persons has become bound by and covenanted to perform
the covenants and obligations of the Landlord under this Lease, the
transferring or selling person or persons shall, without further written
agreement, be freed and relieved of liability upon such covenants and
obligations.
15.2 Subordination and Attornment by Tenant
--------------------------------------
(a) This Lease is subject and subordinate to (but at the option of the
Landlord, or at the option of any Mortgagee, this Lease shall be
attorned and the Tenant bound to) any Mortgage. On request at any
time and from time to time of the Landlord or of any such Mortgagee,
the Tenant covenants and agrees to either:
(i) attorn to such Mortgagee and become bound to it as its tenant
of the Premises for the then unexpired residue of the Term and
upon the provisions herein contained (subject always to the
respective priorities (as between themselves) of Mortgagees
who from time to time request such attornment), or
(ii) postpone and subordinate this Lease to any Mortgage or other
encumbrance with the intent and effect that this Lease and all
the rights of the Tenant shall be subject to the rights of
such Mortgagee or encumbrancer as fully as if such Mortgage or
other encumbrance had been made and registered before the
making of this Lease.
Whichever of the foregoing may be requested (and notwithstanding
that any previous attornment and subordination to such Mortgagee
shall have been given), the Tenant shall, within TEN (10) days of a
written request therefor, execute and deliver to the requesting
party any instruments of attornment, postponement or subordination
which may be so requested to give effect to the foregoing.
(b) PROVIDED NO EVENT OF DEFAULT HAS OCCURRED OR IS THEN IN EXISTENCE
AND THE TENANT IS IN ACTUAL POSSESSION OF THE WHOLE OF THE PREMISES,
THE LANDLORD SHALL USE REASONABLE EFFORTS TO HAVE ANY MORTGAGEE OR,
AT THE OPTION AND EXPENSE OF THE TENANT, ALL MORTGAGEES ENTER INTO
AN AGREEMENT OR AGREEMENTS WITH THE TENANT WHICH SHALL PROVIDE THAT,
SO LONG AS THE TENANT STRICTLY PERFORMS ITS OBLIGATIONS AS SET OUT
IN THIS LEASE AND ATTORNS TO THE MORTGAGEE OR
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MORTGAGEES AS ITS TENANT AS CONTEMPLATED BY SUBSECTION 15.2(A), THE
TENANT SHALL BE ENTITLED TO REMAIN IN POSSESSION OF THE PREMISES ON
THE SAME TERMS AND CONDITIONS AS ARE SET OUT IN THIS LEASE. IF ANY
MORTGAGEE CHARGES OR LEVIES ANY OTHER COSTS OR EXPENSE TO OR AGAINST
THE LANDLORD FOR THE EXECUTION AND DELIVERY OF ANY AGREEMENT
CONTEMPLATED BY THIS SUBSECTION 15.2(B), THE TENANT SHALL REIMBURSE
THE LANDLORD THE AMOUNT OF ANY SUCH FEE, COST OR OTHER EXPENSE, PLUS
AN ADMINISTRATIVE FEE EQUAL TO FIFTEEN PERCENT (15%) OF SUCH FEE,
COST OR EX PENSE UPON BEING INVOICED THEREFOR.
15.3 Certificates of Status
----------------------
Within TEN (10) days after any request therefor, from time to time, by the
Landlord, the Tenant shall, in each instance, execute and deliver, in the form
supplied by the Landlord, a certificate or other status statement addressed as
the Landlord may designate which states:
(a) that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that this Lease is in full force and
effect as modified and identifying such modifying agreements) or, if
this Lease is not in full force and effect, the statement shall so
state;
(b) the Commencement Date and the Termination Date;
(c) the date to which Rent has been paid under this Lease and the amount
of any deposit which may be held by the Landlord;
(d) whether or not there is any Event of Default in existence or any
existing or alleged default of this Lease by the Landlord, whether
or not any Notice has been served with respect to any Event of
Default or default of this Lease by the Landlord and, if there is
any Event of Default or default of this Lease by the Landlord, the
nature and extent of such Event of Default or default of this Lease
by the Landlord;
(e) whether there are any set-offs, defences or counterclaims against
enforcement of the obligations to be performed by the Tenant under
this Lease;
(f) with reasonable particularity, details respecting the Tenant's
financial status and corporate organization;
(g) that any Landlord's Work that may be specified in Schedule "C" or as
may be set out in any other agreement between the parties hereto
relating to the Premises, has been completed to the satisfaction of
the Tenant and that the Tenant has accepted possession of the
Premises;
(h) any tenant allowance or inducement which may be specified in this
Lease has been paid in full to the Tenant; and
(i) such other matters relating to this Lease, the Premises, the
Building and the Tenant as may be determined by the Landlord.
15.4 Transfers Affecting the Premises
--------------------------------
(a) The Tenant shall not enter into, consent to or otherwise permit or
allow to occur, any Voluntary Transfer unless, in each and every
case:
(i) such Voluntary Transfer shall be one which, if consented to by
the Landlord, would not be inconsistent with or breach any
provisions of this Lease, UNLESS SUCH INCONSISTENCY OR BREACH
IS EXPRESSLY AGREED TO BY THE LANDLORD;
(ii) the Tenant shall have submitted to the Landlord a request for
its consent to such Voluntary Transfer, which request shall be
accompanied by:
(A) APPROPRIATE particulars of the proposed Voluntary
Transfer, including its terms and copies of any offers,
draft agreements or other documents which record and
embody particulars of its terms;
(B) APPROPRIATE particulars as to the identity of the persons
who will acquire a right of use and occupancy of the
whole or any part of the Premises under the proposed
Voluntary Transfer including, full information regarding:
(i) the responsibility, reputation, financial standing
and business carried on by such person or persons,
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(ii) the name under which business will be carried on by
such person or persons in the whole or part of the
Premises to be used or occupied by it or them, and
(iii) if any change in the type of use of the Premises
or the kind of business carried out in the
Premises is contemplated for the space to be so
used or occupied, the contemplated use or
business;
(C) all further information relating to the proposed
Voluntary Transfer which is relevant or which the
Landlord may have reasonably requ ested within FIVE (5)
days after its receipt of the Tenant's request for
consent thereto, and of all the information required to
accompany such request;
(D) a statement that the Tenant intends to enter into or
consent to or otherwise permit the proposed Voluntary
Transfer if the consent of the Landlord is given thereto;
(E) the Transfer Fee; and
(iii) the Tenant shall have obtained the written consent of the
Landlord to such Voluntary Transfer.
The provisions of this Subsection 15.4(a) apply to each and every
successive Voluntary Transfer which may be proposed to be entered
into, consented to or otherwise permitted by the Tenant.
(b) The Tenant shall notify the Landlord in writing of any Involuntary
Transfer which may occur or which may be likely to occur, and of
which knowledge shall have come to the Tenant, promptly after
receipt of such knowledge by the Tenant, and the Tenant shall,
whenever requested by the Landlord, make available to it for
inspection all share registers, firm accounts and other books and
records within its custody or control which are relevant to any
determination of whether or not any Voluntary Transfer or
Involuntary Transfer may have occurred.
(c) The Landlord shall have the right, upon receipt of any request by
the Tenant for consent of the Landlord to any Voluntary Transfer
pursuant to Subsection 15.4(a), or upon the occurrence of any
Involuntary Transfer, to terminate this Lease as to the whole or
part, as the case may be, of the Premises affected by such Voluntary
Transfer or Involuntary Transfer. Such right of termination shall be
exercised in each case by written notice to the Tenant given within
TEN (10) days after the receipt by the Landlord of the request of
the Tenant for the consent of the Landlord to a Voluntary Transfer,
or within TEN (10) days after the Landlord receives notice from the
Tenant of the occurrence or likely occurrence of an Involuntary
Transfer, or after the actual occurrence of such Involuntary
Transfer, whichever is later, as the case may be (such right of
termination, in the case of certain Involuntary Transfers such as
bankruptcy, being subject to any superior rights afforded by law to
trustees-in-bankruptcy and others). If the Landlord shall exercise
such right of termination, this Lease shall terminate as to the
whole or affected part, as the case may be, of the Premises, upon a
termination date to be stipulated by the Landlord in its notice of
termination, and which date shall be not less than sixty (60) days
nor more than ninety (90) days following the giving of such notice
of termination (but subject nevertheless, in the case of a notice of
termination given as a result of a request by the Tenant for the
consent of the Landlord to a Voluntary Transfer, to the right of the
Tenant to elect to withdraw such request, provided that it shall do
so by written notice of withdrawal given to the Landlord within five
(5) days after the giving of such notice of termination by the
Landlord, and if and upon such withdrawal of such request the notice
of termination given by the Landlord shall be of no effect). If any
notice of termination with respect to the whole or part of the
Premises shall be given (and not become ineffective by virtue of the
foregoing provision):
(i) the Tenant shall surrender the whole or part, as the case may
be, of the Premises affected by such notice of termination
upon the stipulated termination date in accordance with such
notice;
(ii) if the whole of the Premises is required to be surrendered,
all rent and other sums payable under this Lease shall be
apportioned and paid to the date of surrender; if a part only
of the Premises is required to be surrendered, all rent and
other sums payable under this Lease which are fairly
attributable according to an attribution to be made by the
Landlord (to be primarily based upon relative floor area but
which may take into account other relevant factors) to such
part shall be apportioned and paid to the date of surrender of
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such part and Basic Rent for the remaining portion of the
Premises not so surrendered shall thereafter abate and become
adjusted, consistent with the attribution made by the Landlord
as above referred to;
(iii) if part only of the Premises is required to be surrendered, IF
REQUESTED IN WRITING BY THE LANDLORD, the Tenant shall
compensate the Landlord for the cost of partitioning off the
part of the Premises required to be surrendered and providing
necessary and appropriate new entrances thereto, separate
services thereto, and doing all other work required to enable
the part so surrendered to become functionally separate and
suitable for separate use and occupancy (all such work to be
in accordance with the standards generally adopted by the
Landlord for the Building), and the Tenant shall be
responsible for any appropriate modifications which are
necessary in the remaining portion of the Premises being
retained by the Tenant; and
(iv) the Tenant may remove its trade fixtures, and other personal
property from the surrendered part of the Premises in
accordance with the provisions of this Lease but shall not be
entitled to any compensation for any fixtures, improvements,
alterations, equipment or Leasehold Improvements which it
shall be required to leave therein, and the provisions of
Sections 2.6 and 3.3 shall apply thereto.
(d) If the Tenant shall have requested the Landlord's consent to any
Voluntary Transfer pursuant to Subsection 15.4(a), and if the
Landlord shall not have exercised its right of termination pursuant
to Subsection 15.4(c), the Landlord may, in its sole option and at
its own sole discretion, either:
(i) refuse its consent to the proposed Voluntary Transfer on any
reasonable grounds (the onus being upon the Tenant to
demonstrate the unreasonability of the Landlord's opinion). In
considering such consent, in addition to statutory or common
law tests in respect of the withholding of consent, the
Landlord may pay due regard to the following criteria, it
being understood and agreed by the Landlord and the Tenant
that such criteria comprise reasonable grounds for determining
whether or not the Landlord should consent to any Voluntary
Transfer:
(A) whether or not such Voluntary Transfer shall be made to a
person or persons:
(I) of good commercial reputation, responsibility and
character which is, in the sole opinion of the
Landlord, compatible with other occupants of the
Building and generally beneficial to image, status
or quality of the Building; and
(II) who is or are of substantial financial resources and
means to satisfactorily finance its business and to
discharge all the Tenant's obligations and covenants
hereunder;
(B) whether or not such Voluntary Transfer would have the
effect of or is likely to detrimentally affect the
Building or the interest of the Landlord therein;
(C) whether or not the Landlord, if such Voluntary Transfer
occurs, shall then be in default of any restrictive
covenant granted in favour of any person or an occupant
of the Building;
(D) whether or not such Voluntary Transfer results in change
in the business carried out in the Premises; and,
(E) whether or not such transfer is to an existing occupant
of the Building or to a person or persons controlling or
affiliated to an existing occupant of the Building; or
(ii) grant its consent thereto, or
(iii) grant its consent thereto with such conditions as the Landlord
may, in its sole discretion, elect to impose; and without in
any way limiting the right of the Landlord to impose
conditions, such conditions may include:
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(A) further limitations upon the purposes for which the
Premises or any part thereof to be affected by the
proposed Voluntary Transfer is to be used; or
(B) a condition that any options which the Tenant has to
renew or extend, or further renew or extend the Term, or
any rights of first refusal or options on additional
space in the Building be surrendered.
(e) If the consent of the Landlord to any Voluntary Transfer shall be
given pursuant to Subsection 15.4(d):
(i) the Tenant shall enter into such transaction or permit it to
be entered into, as the case may be, only upon terms and
conditions which are consistent with the terms and conditions
of the request for consent made to the Landlord and with
information submitted by the Tenant to the Landlord pursuant
to Subsection 15.4(a), and any conditions of the Landlord's
consent thereto which may be imposed by the Landlord pursuant
to Paragraph 15.4(d)(iii), and the Landlord may require that
this Lease be amended as may be appropriate to implement any
change in the type of use or the business that will be carried
out in the whole or any part of the Premises affected by such
Voluntary Transfer, or any changes in Basic Rent, or the
availability of options, or otherwise as may be appropriate to
give effect to the terms upon which such Voluntary Transfer is
to be entered into and any conditions of the consent thereto
by the Landlord;
(ii) in entering into or permitting such Voluntary Transfer, the
Tenant shall cause such Voluntary Transfer to be made upon
terms and conditions appropriate to implement the basis
thereof including any conditions upon which the Landlord's
consent thereto was given, and to include provisions which are
effective to specify use and the business which may be carried
on, to prevent any change in such use or business, and to
prevent any further Voluntary Transfer to be made without the
prior written consent of the Landlord (which consent may be
withheld or granted in accordance with the provisions of
Subsection 15.4(d)), and in any event such Voluntary Transfer
shall otherwise be on terms and conditions which are
inconsistent with this Lease or incompatible with the
fulfilment of a ll the obligations of the Tenant hereunder;
(iii) without the prior written consent of the Landlord, the Tenant
shall not amend or permit the amendment of the terms of such
Voluntary Transfer or waive any obligations of any person
where any such amendment or waiver would or might result in
any contravention of the terms of this Lease, or any
conditions of the Landlord's consent to the making of such
Voluntary Transfer, and shall enforce or cause to be enforced
all the provisions of any such Voluntary Transfer where the
enforcement thereof is necessary for the fulfilment of all the
obligations of the Tenant to the Landlord under this Lease, or
in respect of any conditions of the Landlord's consent
referred to;
(iv) if such Voluntary Transfer shall not be concluded within sixty
(60) days after the giving of such consent, such consent shall
expire and become null and void and the Tenant shall not then
enter into or permit such Voluntary Transfer without again
conforming to all of the requirements of this Section 15.4;
and
(v) if such Voluntary Transfer is a Sublease, the subtenant
thereunder and the Tenant shall both execute and deliver the
Landlord's then standard consent to sublease agreement.
(f) In addition to the payment of the Transfer Fee, the Tenant shall, on
demand, reimburse to the Landlord all other costs and expenses
(including legal fees and disbursements on a solicitor and his own
client basis) incurred by the Landlord in connection with each
request by the Tenant for consent to a Voluntary Transfer plus an
administrative fee equal to fifteen percent (15%) of such costs and
expenses.
(g) No consent of the Landlord to any Voluntary Transfer shall be
construed as releasing any obligation of the Tenant under this
Lease, except if and to the extent such consent shall expressly
release or modify any such obligation.
(h) The Tenant shall not print, publish, post, mail, display,
broadcast or otherwise advertise or offer for any of the foregoing
purposes, the whole or any part of the Premises for the purposes of
a Transfer, and shall not permit any broker or other party to do any
of the foregoing, unless the complete text and format of any such
notice, advertisement or offer shall have first been approved in
writing by the Landlord. Without in any way restricting or limiting
the Landlord's right to refuse any text and format on other grounds,
any text and format proposed by the Tenant shall not
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contain any reference to the Basic Rent, Additional Rent or any
other amount payable under this Lease.
15.5 Successors and Assigns
----------------------
All the obligations imposed upon the Tenant by this Lease shall extend to and be
binding upon all heirs, executors, administrators, successors, assigns,
subtenants and encumbrancers of the Tenant but nevertheless, no one claiming to
exercise or enjoy any of the benefits or rights of the Tenant hereunder by
assignment or otherwise shall enjoy or exercise such benefits or rights unless
Section 15.4 has strictly been complied with.
16. INTERPRETATION AND MISCELLANEOUS
16.1 Notices
-------
(a) All Notices shall be in writing and shall be delivered to the
addressee by registered or certified mail, hand delivery, or
transmitted by telegram, telecopier or other similar form of
telecommunication capable of confirming transmissions to the
addressee. Notices to the Landlord shall be directed to the address
specified in Subsection 1.1(c), or at such other address as the
Landlord may from time to time designate by notice, or by facsimile
transmission to the telecopier number specified in Subsection 1.1(c)
or to such other number as the Landlord may from time to time
designate by Notice. Notices to the Tenant at the address specified
in Subsection 1.1(e), or such other address as the Tenant may from
time to time designate in writing, or by facsimile transmission to
any telecopier number which may be specified in Subsection 1.1(e) or
to such other telecopier number as the Tenant may from time to time
designate by notice.
(b) If the Landlord or the Tenant sends any Notice by facsimile
transmission, the sender shall promptly send by regular mail or
personally deliver to the addressee a true or original copy of the
Notice bearing a notation that the Notice was transmitted by
telecopier together with a copy of a transmission report from the
telecopier or other electronic device transmitting the Notice
confirming the successful transmission and receipt of the facsimile
by the addressee.
(c) Every Notice shall be deemed to have been given to the addressee
thereof as of the earliest of:
(i) THREE (3) DAYS following the day it was mailed; or
(ii) the day the Notice personally delivered; or
(iii) if the Notice was transmitted by facsimile transmission then:
(A) on the day the transmission was sent if the facsimile was
received by the addressee prior to 4:30 p.m. (local time
for the addressee) on any weekday (excluding statutory or
civic holidays observed in the city or other municipality
where the transmission was directed); or
(B) the immediately following weekday that is not a
statutory or civic holiday observed in the city or other
municipality where the facsimile was directed if the
facsimile is received by the addressee after 4:30 p.m.
(local time for the addressee) on any weekday, or at
anytime during Saturday, Sunday or a statutory or civic
holiday observed in the city or other municipality where
the transmission was directed.
16.2 Collateral Representations and Agreements
-----------------------------------------
This Lease constitutes the entire agreement between the Landlord and Tenant
relating to the subject matter hereof and may be amended only by an agreement in
writing signed by the parties hereto, and neither party is bound by any
representations, warranties, promises, assurances, conditions, statements,
understandings, agreements or inducements not embodied herein, and in
particular, no warranties or representations of the Landlord, the Manager of the
Building or their respective representatives, agents, employees, contractors,
officers and directors which are not expressed herein are to be implied. This
Lease supersedes and revokes all previous negotiations, arrangements, letters of
intent, offers to lease, lease proposals, brochures and information conveyed,
whether orally or in writing, between or among the Landlord, the Manager of The
Building, the Tenant or their respective representatives, agents, employees,
contractors, officers and directors.
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16.3 Certificates
------------
The following certificates shall be conclusive and binding upon the Landlord and
the Tenant in respect of any question of fact or opinion in dispute hereunder
arising under this Lease with respect to the matters stipulated:
(a) a certificate procured by the Landlord from an architect,
professional engineer, land or quantity surveyor (and who may be one
generally employed by the Landlord), as to the Rentable Area of the
Premises or the Building, any question of fact concerning the
completion of any construction, Landlord's Work or Tenant's Work,
the extent to which the completion of any Landlord's Work or
Tenant's Work has been delayed by Unavoidable Delay, whether the
Building or the Premises or any part thereof is being kept in good
repair, order and condition as required by the provisions of this
Lease, the cost of supplying utilities to the Premises pursuant to
Section 9.2, the cause of any destruction or damage, the estimated
cost of any repairing any damage or destruction, the extent to which
the Premises are rendered unfit for use and occupancy by reason of
any destruction or damage or the time necessary to complete any
repairs; and
(b) a certificate procured by the Landlord from a licensed chartered
accountant (and who may be the Landlord's auditor) as to any
question of fact or opinion concerning the computation of Additional
Rent or rent generally including the proper amount of any payment to
the Landlord by the Tenant pursuant to Sections 4.1 or 4.2, charges
for any utilities pursuant to Section 10.6, the amount of Property
Taxes and the contribution of the Tenant thereto pursuant to Article
7 and the amount of Operating Expense and the contribution of the
Tenant thereto pursuant to Article 9.
Any certificate procured by the Landlord shall contain a professional opinion
and shall be prepared using generally accepted practices and procedures
appropriate to such certificate.
16.4 Legal Relationship
------------------
No provision of this Lease is intended to create a joint venture or partnership
or any other similar relationship between the Landlord and the Tenant, it being
agreed that such relationship is that of landlord and tenant only.
16.5 Changes in Area and the Landlord's Plan attached as Schedule "A"
----------------------------------------------------------------
The Tenant acknowledges and agrees that the areas and boundaries of the Building
are subject to alteration as a result of the addition of lands proximate thereto
which the Landlord designates as part of the Building or of the deduction of
land at any time comprised within the Building which may be conveyed, deducted,
expropriated or designated by the Landlord for any municipal or other purpose.
The Landlord and the Tenant covenant and agree with each other that this Lease
shall affect only the lands from time to time comprising the Building Lands as
designated by the Landlord as such lands may from time to time be altered,
varied, diminished, enlarged or supplemented. The Tenant covenants and agrees,
at the request of the Landlord, to enter into such further assurances, releases
or other documents as may reasonably be required by the Landlord to give effect
to such alteration, variation, diminution, enlargement or supplementation.
Schedule "A" attached hereto is for identification purposes only and is not to
be interpreted as being a representation or warranty on the part of the Landlord
with respect to existing or future tenancies, or to the exact size and shape of
the Premises, the Building, the Building or the size, shape and precise location
of the Common Facilities.
16.6 Severability
------------
Should any provision of this Lease be unenforceable, it shall be considered
separate and severable from the remaining provisions of this Lease, which shall
remain in force and be binding as though the said provision had not been
included.
16.7 Unavoidable Delays
------------------
In the event that either the Landlord or the Tenant shall be delayed, hindered
or prevented from the performance of any act required hereunder, by reason of
any Unavoidable Delay not the fault of the party delayed, then performances of
such act shall be excused for the period during which such performance is
rendered impossible, and the time for the performance thereof shall be extended
accordingly, provided however that, notwithstanding the foregoing, the Landlord
may elect to terminate this Lease and all the obligations of the Landlord and
the Tenant respectively upon written notice to the Tenant if the completion of
the initial improvements made to the Premises to accommodate the Tenant shall be
prevented by Unavoidable Delay, and if the delay has continued for one hundred
and twenty (120) days. But this shall not operate to excuse the Tenant or the
Landlord from the prompt payment of rent or any other payments required under
this Lease.
16.8 Broker's Commissions
--------------------
The Tenant acknowledges that, SAVE FOR COMMERCIAL EQUITIES LIMITED, THE TENANT
has not dealt with any agent or broker representing or purporting to represent
the Landlord in connection with its leasing of the Premises or any other
rentable premises in the Building or the Building. Any brokerage fees or
commissions of the Tenant (OTHER
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THAN THOSE PAYABLE TO COMMERCIAL EQUITIES LIMITED) shall be paid by the Tenant.
ANY BROKERAGE FEES OR COMMISSIONS PAYABLE TO COMMERCIAL EQUITIES LIMITED SHALL
BE PAID BY THE LANDLORD.
16.9 Partnership Entity
------------------
(a) If the Tenant is or shall become a partnership, each person who is a
member, or shall become a member of, such partnership or successor
thereof shall be and continue to be jointly and severally liable for
the performance and observance of all covenants, provisos,
conditions and agreements on the part of the Tenant to be observed
and performed, whether or not such person ceases to be a member of
such partnership or successor thereof.
(b) If the Landlord at any time becomes a partnership and the
partnership agreement in connection with such partnership provides
that only the assets of the partnership and not the assets of the
separate partners be available for the satisfaction of Landlord's
obligations hereunder, the Tenant acknowledges and agrees that the
liability of the partners shall be limited accordingly, and that
recourse shall not be had to the partners separately or to their
separate assets in respect of Landlord's obligations under this
Lease. Without limiting the Landlord's rights and remedies under
this Lease, the Tenant hereby consents to the Landlord obtaining an
injunction to restrain the Tenant from breaching the provisions of
this Subsection 16.9(b) and all costs, fees, disbursements and
expenses (including, legal fees and disbursements on a solicitors
and his own client basis) which may be incurred by the Landlord in
respect thereto shall be paid by the Tenant to the Landlord.
16.10 Registration
------------
(a) Notwithstanding any law or legislative enactment to the contrary,
the Tenant shall not register this Lease against the fee simple
title to the Building Lands or any part thereof, and the Landlord
shall not be obligated to provide to the Tenant a copy of this Lease
in registerable form. If permitted by law, however, the Tenant may,
at its sole expense and upon payment of the Caveat Review Fee to the
Landlord, register a caveat in respect of this Lease against the
Landlord's fee simple title to the Building Lands, but not against
title to any adjacent lands, which caveat shall disclose only the
existence and Term of this Lease and such other provisions as the
Landlord, in its sole discretion, may approve. Prior to registering
any such caveat, the Tenant shall submit the caveat to the Landlord
for its approval together with the Caveat Review Fee.
In addition to the payment of the Caveat Review Fee, the Tenant
shall, on demand of the Landlord, reimburse to the Landlord all
other costs and expenses (including legal fees and disbursements on
a solicitor and his own client basis) incurred by the Landlord in
connection with each request by the Tenant to review a caveat plus
an administrative fee equal to fifteen percent (15%) of such costs
and expenses.
(b) The Tenant hereby covenants to discharge and withdraw the caveat
from any certificate of title pertaining to the Building Lands
within thirty (30) days of the expiration or sooner termination of
this Lease and renewal, if any. If the caveat is not discharged and
withdrawn within such thirty (30) day period, the Landlord shall
have the right to take such action or to make such payment as may be
necessary or expedient to discharge and withdraw the caveat. The
Landlord shall be entitled forthwith to be indemnified and
reimbursed by the Tenant for any payment, cost or expense incurred
in taking any action permitted under this Subsection 16.10(b)
(including, without limitation, legal fees and disbursements on a
solicitor and his own client basis) plus an administrative fee equal
to fifteen percent (15%) of all such payments, costs or expenses.
This covenant shall survive the expiration or earlier termination of
this Lease.
16.11 Display of Premises
-------------------
The Landlord may enter the Premises at reasonable times to show them to
prospective purchasers, tenants or mortgagees. During th e twelve (12) months
prior to the expiration of the Term or at any time the Premises are vacant, the
Landlord may display on the Premises notices of reasonable size and number, and
in reasonable locations, that the Premises are available for renting.
16.12 Interpretation
--------------
(a) This Lease shall be construed and governed by the laws of the
Province of Alberta and the laws of Canada applicable therein
provided that, to the extent permitted by law, the Tenant hereby
waives and renounces all the rights, benefits or protections now or
hereafter provided to it under any landlord and tenant legislation
enacted from time to time by the Province of Alberta. The parties
hereto irrevocably attorn to the Courts of the Province of Alberta.
INITIAL HERE:
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(b) All references to the Tenant shall be read with such changes in
number and gender as may be appropriate, according to whether the
Tenant is a male or female person or a corporation or partnership,
and if more than one (1) person deemed to be joint and several.
(c) Unless expressly stated otherwise, reference in this Lease to:
(i) "days" or "months" shall be to calendar days and calendar
months respectively;
(ii) "set-off" means "set-off, notice, demand, counterclaim,
defence, deduction, alteration, diminution, compensation or
abatement";
(iii) "any" means "any and all";
(iv) "the Tenant shall not permit" means "the Tenant shall not
cause, suffer or permit"; and
(v) "the Tenant agrees" means "the Tenant expressly acknowledges
and agrees".
(d) The words "hereof", "herein", and "hereunder" and similar
expressions used in any provision of this Lease relate to the whole
of this Lease and not to such provision only, unless the context
indicates otherwise.
(e) Grammatical variations of any terms defined herein have similar
meanings. Words importing the singular will include the plural and
vice versa. Words importing the masculine gender will include the
----------
feminine and neuter genders and vice versa.
----------
(f) The division of this Lease into articles, sections, subsections,
paragraphs, subparagraphs, clauses and subclauses, the provision of
a table of contents and index thereto, and the insertion of headings
are for convenience of reference only and will not affect the
construction or interpretation of this Lease. Wherever in this Lease
a particular Article, Section, Subsection, Paragraph, Schedule or
other portion thereof is referred to then, unless otherwise
indicated, such reference pertains to an article, section,
subsection, paragraph, schedule or portion thereof contained in this
Lease.
(g) Any reference to money in this Lease is to lawful currency of
Canada. All amounts referred to in this Lease exclude any GST which
may be payable or levied in respect of such amount.
(h) Any reference herein to the word "including", when following any
general statement, term or matter is not to be construed to limit
such general statement, term or matter to the specific items or
matters set forth immediately following such word or to similar
items or matters whether or not non-limiting language (such as
"without limitation", or words of similar import) is used with
reference thereto, but rather such general statement, term, or
matter is to be construed to refer to all other items or matters
that could reasonably fall within the broadest possible scope of
such general statement, term or matter.
(i) Any reference to a statute includes and is a reference to such
statute and to the regulations made pursuant thereto, and, unless
otherwise expressly provided herein, also refers to all amendments
made thereto and in force from time to time, and to any statute or
regulation that may be passed which supplements or supersedes such
statute or regulation.
(j) Time shall be of the essence of this Lease and of every part hereof.
16.13 Reasonableness
--------------
Except as may be otherwise specifically provided in this Lease, wheresoever and
whenever the Landlord's or the Tenant's discretion, consent or approval is
required under this Lease, the Landlord and the Tenant agree that such
discretion will be reasonably exercised and that such approval or consent will
not be unreasonably withheld or delayed.
16.14 Confidentiality
---------------
The Tenant hereby agrees that:
(a) each and every provision of this Lease is sensitive and confidential
in nature and that the disclosure of the same to any third party may
be expected to cause substantial loss and damage to the Landlord;
and
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<PAGE>
(b) except for disclosure on the same confidential basis as is provided
herein only to officers or employees of the Tenant who have a bona
fide and actual need to know the provisions of this Lease on behalf
of the Tenant, it and its officers and employees to whom disclosure
is made as aforesaid will hold in strict confidence and will not
disclose the same to any third party.
16.15 SECURITY DEPOSIT
----------------
ON OR BEFORE THE EXECUTION AND DELIVERY OF THIS LEASE BY THE TENANT, THE TENANT
SHALL DEPOSIT WITH THE LANDLORD OR THE LANDLORD'S AGENT THE SUM OF THIRTY-FIVE
THOUSAND, TWO HUNDRED AND SIXTY-EIGHT DOLLARS ($35,268.00) (THE "DEPOSIT") AS
PARTIAL CONSIDERATION FOR THIS LEASE. THE DEPOSIT SHALL BE HELD AND APPLIED BY
THE LANDLORD, WITHOUT LIABILITY FOR INTEREST, EQUALLY AGAINST THE FIRST AND LAST
MONTHLY INSTALMENTS OF BASIC RENT, OPERATING EXPENSES AND PROPERTY TAXES PAYABLE
BY THE TENANT HEREUNDER AND THE GST PAYABLE IN RESPECT OF SUCH INSTALMENTS. IF
AT ANY TIME DURING THE TERM, ANY AMOUNT EXPRESSED TO BE PAYABLE BY THE TENANT TO
THE LANDLORD IS OVERDUE OR UNPAID, THE LANDLORD MAY, AT ITS OPTION, APPLY THE
DEPOSIT, OR ANY PORTION THEREOF, TOWARDS ANY SUCH OVERDUE AND UNPAID AMOUNTS,
WITHOUT THEREBY LIMITING OR PRECLUDING THE LANDLORD FROM PURSUING ANY OTHER
RIGHT OR REMEDY IT MAY BE AFFORDED AT LAW OR IN EQUITY OR UNDER THIS LEASE. IN
THE EVENT THE ENTIRE DEPOSIT OR ANY PORTION THEREOF IS APPLIED BY THE LANDLORD
TO ANY SUCH OVERDUE OR UNPAID AMOUNTS PRIOR TO THE APPLICATION OF ONE HALF OF
THE DEPOSIT TOWARDS THE LAST MONTHLY INSTALMENTS OF BASIC RENT, OPERATING
EXPENSES AND PROPERTY TAXES PAYABLE BY THE TENANT HEREUNDER AND THE GST PAYABLE
IN RESPECT OF SUCH INSTALMENTS THEN THE TENANT SHALL, UPON WRITTEN DEMAND FROM
THE LANDLORD, IMMEDIATELY REMIT TO THE LANDLORD SUCH SUM AS IS SUFFICIENT TO
RESTORE THE DEPOSIT TO AN AMOUNT EQUAL TO ONE HALF OF THIRTY-FIVE THOUSAND, TWO
HUNDRED AND SIXTY-EIGHT DOLLARS ($35,268.00).
16.16 OPTION TO RENEW
---------------
PROVIDED THE TENANT HEREUNDER IS NEW ERA SYSTEMS SERVICES LTD., THE TENANT IS IN
ACTUAL POSSESSION OF THE ENTIRE PREMISES AND NO EVENT OF DEFAULT HAS OCCURRED OR
IS IN EXISTENCE BOTH WHEN THE TENANT PURPORTS TO EXERCISE THIS OPTION TO RENEW
AND ON THE LAST DAY OF THE TERM, THE TENANT SHALL HAVE THE OPTION TO RENEW THE
TERM FOR A FURTHER PERIOD OF FIVE (5) YEARS (THE "RENEWAL TERM") UPON GIVING THE
LANDLORD WRITTEN NOTICE OF ITS ELECTION TO RENEW THE TERM AT LEAST SIX (6)
MONTHS AND NOT MORE THAN NINE (9) MONTHS PRIOR TO THE EXPIRATION OF THE TERM.
THE RENEWAL TERM SHALL BE UPON THE TERMS AND CONDITIONS AS ARE CONTAINED IN THIS
LEASE BUT SHALL NOT CONTAIN ANY FURTHER OPTION TO RENEW, ANY FURTHER LANDLORDS
WORK, OR THE AMOUNT OF BASIC RENT PAYABLE DURING THE RENEWAL TERM. THE BASIC
RENT DURING THE RENEWAL TERM SHALL BE MUTUALLY AGREED UPON BY THE LANDLORD AND
THE TENANT PRIOR TO THE EXPIRATION OF THE TERM BASED UPON THE THEN PREVAILING
RENTAL RATE FOR SIMILARLY IMPROVED OFFICE SPACE IN BUILDINGS OF SIMILAR AGE AND
QUALITY LOCATED IN THE CENTRAL BUSINESS CORE OF CALGARY, ALBERTA. IF THE
PARTIES HERETO ARE UNABLE TO AGREE UPON THE BASIC RENT FOR THE RENEWAL TERM
WITHIN NINETY (90) DAYS PRIOR TO THE EXPIRATION DATE OF THE TERM, THEN SUCH
QUESTION MAY BE SUBMITTED TO AND DETERMINED BY ARBITRATION IN ACCORDANCE WITH
SECTION 16.17. NOTWITHSTANDING THE FOREGOING, THE BASIC RENT DURING THE RENEWAL
TERM SHALL NOT BE LESS THAN THE BASIC RENT DURING THE LAST LEASE YEAR OF THE
TERM. IF THE TENANT FAILS TO EXERCISE THIS OPTION TO RENEW WITHIN THE TIME AND
IN THE MANNER SET OUT IN THIS SECTION 16.16, THIS OPTION SHALL BE NULL AND VOID.
16.17 ARBITRATION
-----------
(a) IN THE EVENT OF A DISPUTE BETWEEN THE PARTIES HERETO AS TO ANY
MATTER WHICH UNDER THE PROVISIONS OF THIS LEASE IS TO BE DETERMINED
BY ARBITRATION OR IN OTHER CIRCUMSTANCES WHERE THE PARTIES AGREE IN
WRITING, ARBITRATION PROCEEDINGS SHALL BE COMMENCED BY THE PARTY
DESIRING ARBITRATION (THE "INITIATING PARTY") AND THE PRINCIPLES SET
OUT IN THIS SECTION 16.17 SHALL APPLY.
(b) UPON NOTICE FROM THE INITIATING PARTY TO THE OTHER PARTY (THE
"RESPONDING PARTY"), THE PARTIES SHALL MEET WITHIN SEVEN (7) DAYS
AND ATTEMPT TO APPOINT A SOLE ARBITRATOR. IF THE PARTIES DO NOT SO
MEET OR ARE UNABLE TO AGREE ON A SOLE ARBITRATOR THEN, UPON NOT LESS
THAN FIVE (5) DAYS NOTICE GIVEN BY EITHER PARTY, EITHER PARTY MAY
APPLY TO A COURT OF COMPETENT JURISDICTION PURSUANT TO THE
ARBITRATION ACT (ALBERTA) TO APPOINT THE SOLE ARBITRATOR. THE
PROVISIONS OF SUCH ACT SHALL APPLY TO ANY SUCH COURT APPLICATION.
(c) THE SOLE ARBITRATOR SELECTED TO ACT HEREUNDER SHALL BE QUALIFIED BY
EDUCATION, TRAINING AND EXPERIENCE TO PASS UPON THE PARTICULAR
QUESTION OR DISPUTE.
(d) THE SOLE ARBITRATOR APPOINTED PURSUANT TO SUBSECTION 16.17(b) SHALL
PROCEED IMMEDIATELY TO HEAR AND DETERMINE THE QUESTION OR QUESTIONS
IN DISPUTE. THE DECISION AND REASONS THEREFOR SHALL BE MADE WITHIN
THIRTY (30) DAYS AFTER THE APPOINTMENT OF THE SOLE ARBITRATOR AND,
IN THE EVENT THAT THE DECISION IS NOT MADE WITHIN SUCH TIME PERIOD,
EITHER PARTY MAY ELECT TO TERMINATE THE ARBITRATION (EXCEPT WHERE
THE SUBJECT MATTER OF THE ARBITRATION RELATES TO THE DETERMINATION
OF THE BASIC RENT DURING THE RENEWAL TERM). THE DECISION AND REASONS
THEREFOR OF THE SOLE ARBITRATOR SHALL BE DRAWN UP IN WRITING AND
SIGNED BY THE SOLE ARBITRATOR AND SHALL BE FINAL AND BINDING UPON
THE PARTIES HERETO AS TO ANY QUESTION OR QUESTIONS SO SUBMITTED TO
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<PAGE>
ARBITRATION AND THE PARTIES SHALL BE BOUND BY SUCH DECISION AND
COMPLY WITH THE TERMS AND PROVISIONS THEREOF.
(e) THE COMPENSATION AND EXPENSES OF THE SOLE ARBITRATOR SHALL BE PAID
IN EQUAL PORTIONS BY THE PARTIES HERETO.
(f) NOTHING IN THIS SECTION 16.17 SHALL PRECLUDE EITHER PARTY FROM
SEEKING AN INTERPRETATION OF ANY PROVISION OR PROVISIONS OF THIS
LEASE FROM A COURT OF COMPETENT JURISDICTION PROVIDED THAT SUCH
INTERPRETATION IS SOUGHT PRIOR TO THE DATE AN INITIATING PARTY
COMMENCES ARBITRATION ON THE SAME QUESTION OF INTERPRETATION AND
SUCH QUESTION OF INTERPRETATION HAS NOT PREVIOUSLY BEEN SUBMITTED TO
ARBITRATION IN ACCORDANCE WITH THIS SECTION 16.17.
16.18 EXPANSION
---------
PROVIDED THE TENANT HEREUNDER IS NEW ERA SYSTEMS SERVICES LTD., THE TENANT IS IN
ACTUAL POSSESSION OF THE ENTIRE PREMISES AND NO EVENT OF DEFAULT HAS OCCURRED OR
IS IN EXISTENCE, THE TENANT SHALL HAVE THE OPTION TO EXPAND THE PREMISES BY AN
AREA OF BETWEEN TWO THOUSAND (2,000) AND FIVE THOUSAND (5,000) SQUARE FEET, ON
ONE OF THE FLOORS OF THE BUILDING NUMBERED FROM AND INCLUDING THREE (3) TO AND
INCLUDING SEVENTEEN (17), SUBJECT TO THE FOLLOWING:
(a) THE TENANT SHALL PROVIDE WRITTEN NOTICE TO THE LANDLORD ON A DATE
FROM AND INCLUDING JULY 1, 1999 TO AND INCLUDING JULY 6, 1999,
SETTING FORTH ITS INTENTION TO EXPAND AND AN APPROXIMATION OF THE
SQUARE FOOTAGE OF ADDITIONAL OFFICE SPACE THE TENANT REQUIRES (THE
"EXPANSION REQUIREMENTS");
(b) UPON RECEIPT OF THE TENANT'S EXPANSION REQUIREMENTS, THE LANDLORD
SHALL NOTIFY THE TENANT IN WRITING (THE "LANDLORD'S NOTICE"), ON OR
BEFORE SEPTEMBER 1, 1999:
(i) WHETHER OFFICE SPACE IS AVAILABLE IN THE BUILDING WHICH WILL
SATISFY THE EXPANSION REQUIREMENTS BY JANUARY 1, 2000; OR
INITIAL HERE:
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(ii) WHETHER NO OFFICE SPACE IS AVAILABLE AS PER PARAGRAPH
16.18(b)(i).
WHETHER OFFICE SPACE IS AVAILABLE THAT WILL SATISFY THE EXPANSION
REQUIREMENTS IS DETERMINED SOLELY BY THE LANDLORD, ACTING
REASONABLY. IN THE EVENT THAT OFFICE SPACE IS AVAILABLE PURSUANT TO
PARAGRAPH 16.18(b)(i), THE LANDLORD SHALL PROVIDE TO THE TENANT,
ALONG WITH OR INCLUDED IN THE LANDLORD'S NOTICE, A FLOOR PLAN OF
SUCH OFFICE SPACE AND THE RENTAL RATE FOR SUCH OFFICE SPACE THAT THE
LANDLORD, ACTING REASONABLY, IS WILLING TO ACCEPT AS REFLECTING THE
THEN PREVAILING RENTAL RATE FOR SIMILARLY IMPROVED OFFICE SPACE IN
THE BUILDING FOR A SIMILAR TERM;
(c) IN THE EVENT THAT OFFICE SPACE IS AVAILABLE PURSUANT TO PARAGRAPH
16.18(b)(i) AND THE LANDLORD AND TENANT ENTER INTO AN AGREEMENT
WHEREBY THE TENANT EXPANDS ITS PREMISES TO INCLUDE SUCH SPACE, ANY
AN ALL COST ASSOCIATED WITH SUCH EXPANSION WILL BE THE SOLE
RESPONSIBILITY OF THE TENANT;
(d) IN THE EVENT THAT OFFICE SPACE IS AVAILABLE PURSUANT TO PARAGRAPH
16.18(b)(i), BUT THE LANDLORD AND TENANT ARE UNABLE TO ENTER INTO AN
AGREEMENT PURSUANT TO SECTION 16.18(c) WITHIN THIRTY (30) DAYS OF
RECEIPT BY THE TENANT OF THE LANDLORD'S NOTICE, THEN SUCH QUESTION
MAY BE SUBMITTED TO AND DETERMINED BY ARBITRATION IN ACCORDANCE WITH
SECTION 16.17;
(e) IN THE EVENT THAT NO OFFICE SPACE IS AVAILABLE PURSUANT TO PARAGRAPH
16.18(b)(i), THE TENANT WILL HAVE THE RIGHT TO TERMINATE THIS LEASE,
EFFECTIVE JANUARY 1, 2000, BY PROVIDING THE LANDLORD WITH NOTICE OF
SUCH TERMINATION ON OR BEFORE SEPTEMBER 1, 1999, AND PAYING TO THE
LANDLORD THE AMOUNT OF ONE (1) MONTHS BASIC RENT AT THE THEN
PREVAILING RATE FOR BASIC RENT, AND ADDITIONAL RENT, PLUS THE GST
APPLICABLE THERETO;
(f) IF THE TENANT FAILS TO EXERCISE THIS OPTION TO EXPAND WITHIN THE
TIME AND IN THE MANNER SET OUT IN THIS SECTION 16.18, THIS OPTION
SHALL BE NULL AND VOID.
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16.19 PARKING
-------
PROVIDED THE TENANT IS NEW ERA SYSTEMS SERVICES LTD., THE TENANT IS IN ACTUAL
POSSESSION OF THE ENTIRE PREMISES AND NO EVENT OF DEFAULT HAS OCCURRED OR IS IN
EXISTENCE, THE LANDLORD OR ITS AGENT SHALL MAKE AVAILABLE TO THE TENANT DURING
NORMAL BUSINESS HOURS THROUGHOUT THE TERM SIX (6) UNRESERVED PARKING SPACES IN
THE PARKING FACILITY OF THE BUILDING FOR USE BY THE TENANT'S EMPLOYEES AT THE
PREVAILING RATE CHARGED FROM TIME TO TIME BY THE LANDLORD OR ITS AGENT FOR SUCH
PARKING SPACES. THE DOCUMENT GOVERNING THE TENANT'S OCCUPATION OF SUCH PARKING
SPACES SHALL BE THE STANDARD PARKING LICENCE AGREEMENT THEN UTILIZED BY THE
LANDLORD OR ITS AGENT FOR THE BUILDING. THE TENANT AGREES AND ACKNOWLEDGES THAT
THE LANDLORD MAY CLOSE THE PARKING FACILITY OR LIMIT ACCESS THERETO IN EVENTS OF
HAZARD, EMERGENCY AND/OR NECESSARY MAINTENANCE.
17. ACCEPTANCE
----------
The Tenant hereby accepts this Lease of the above described Premises to be held
by it as tenant subject to the covenants, conditions and restrictions above and
in the Schedules attached hereto set forth.
IN WITNESS WHEREOF the parties hereto have duly executed this Lease of the day,
month and year set out in Section 1.1(a) hereof.
LANDLORD: TRIZEC PROPERTIES LIMITED
- --------
Per:
__________________________________ c/s
Per: ______________________________
TENANT: NEW ERA SYSTEMS SERVICES LTD.
- ------
Per:
__________________________________
Authorized Signature c/s
Title:
Per:
__________________________________
Authorized Signature
Title:
INITIAL HERE:
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<PAGE>
SCHEDULE "A"
FLOOR PLAN
[Diagram of floor plan for 5th Floor of the Premises]
PLAN FLOOR 5
FIFTH & FIFTH BUILDING
INITIAL HERE:
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Schedule A, Page 5
<PAGE>
SCHEDULE "B"
LEASE DEFINITIONS
In this Lease, including this Schedule "B", the following defined terms have the
meanings indicated:
"ACCESSORY AREA" means, in respect of any floor of the Building, all corridors
which are not exclusive to any single tenant, elevator lobbies, heating or
ventilating ducts, air-conditioning shafts and ducts (if the Building's HVAC
System eliminates fan rooms on the applicable floor of the Building), toilets
which are not exclusive to any single tenant, janitor closets the access to
which is not exclusive to any single tenant, rooms containing telephone or other
communication equipment or panels which are not exclusive to any single tenant,
all rooms, closets or vaults which contain electrical equipment which is not for
the exclusive use of any single tenant, and any rooms, closets or ventilating or
heating flues, shafts, fans and ducts, together with, in each case, the walls
enclosing such objects, provided that, if any of the enclosing walls referred to
in this definition of "Accessory Area" are common to an adjacent Core Area or
adjacent to another Accessory Area, then the measurement of the Accessory Area
shall be from the centre of such common wall. For clarification, Accessory
Areas shall exclude Core Areas.
"ACT OF INSOLVENCY" means any event or occurrence defined as an "act of
bankruptcy" in the Bankruptcy and Insolvency Act (Canada) or any of the
following events or occurrences:
(a) if the Tenant is a body corporate, upon an order being made or an
effective resolution passed for the winding-up or the liquidation of
the Tenant or the surrender or forfeiture of its charter or similar
incorporating document; or
(b) the Tenant makes a general assignment for the benefit of its creditor,
is declared to be bankrupt, files a petition in bankruptcy or
insolvency or for any real readjustment of debts or creditors'
arrangement, or makes a proposal under the Bankruptcy and Insolvency
Act (Canada) or takes advantage of any legislation for the relief of
insolvent or bankrupt debtors in respect of its own debts including
the Companies' Creditors Arrangement Act (Canada) and The Winding Up
Act (Canada) if the Tenant is a body corporate.
(c) upon a receiver, receiver and manager, custodian or any other official
having a similar power being appointed with respect to the business or
affairs of the Tenant or any substantial portion thereof or with
respect to the Tenant; or
(d) any execution, attachment or similar process shall be issued against
the Tenant, or any encumbrancer shall take any action or proceeding
whereby any of the trade fixtures, Leasehold Improvements, furnishings
or personal property on the Premises or any portion thereof shall be
taken or attempted to be taken by someone other than the Tenant or an
assignee or subtenant permitted under this Lease, unless such
execution, attachme nt or similar process, action or proceeding be set
aside, vacated, discharged or abandoned within fifteen (15) days after
its commencement.
"ADDITIONAL RENT" means all amounts expressed to be payable by the Tenant to the
Landlord pursuant to Section 4.2 and any other amounts which are expressed by
this Lease as constituting Additional Rent.
"AFFILIATE" shall adopt the same meaning as ascribed to the word "affiliate" by
the Canada Business Corporations Act.
--------------------------------
"ASSIGNMENT" means any transaction whereby the rights of the Tenant under this
Lease and to the Premises are transferred to another, whether immediately,
conditionally or contingently, and includes the granting of a "security
interest", as defined in the Personal Property Security Act (Alberta), an
------------------------------
assignment or specific or floating charge whereby the interest of the Tenant in
the Premises or this Lease is granted, mortgaged or pledged as security for any
indebtedness or other obligation.
"BASIC RENT" means the annual rent payable pursuant to Section 4.1 based upon
the annual amount per square foot of Rentable Area of the Premises specified in
Subsection 1.1(k).
"BUILDING" means the commercial complex commonly known as "Fifth & Fifth"
constructed on and under the Building Lands, municipally addressed as 605 - 5th
Avenue S.W., Calgary, Alberta and all related facilities and appurtenances
thereto composed of:
(a) two (2) underground levels containing parking facilities, Building
service facilities, loading ramps and storage facilities;
(b) a two (2) level structure at the ground and plus fifteen levels
containing common areas and facilities, public amenity space,
mechanical services areas and retail, banking and office premises;
INITIAL HERE:
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Schedule B, Page 5
<PAGE>
(c) the office building constructed on the Building Lands comprising
thirty-one (31) floors (including mechanical, cooling and storage
floors and areas but excluding a floor numbered thirteen (13))
commencing with the floor of the Building numbered three (3),
together with certain Common Facilities and any other improvements
required or permitted to be built in connection with the Building
and its associated development (including the Pedestrian Bridges
and any other pedestrian bridges over adjacent streets).
"BUILDING LANDS" means the lands located in Calgary, Alberta legally described
as:
PLAN "A1"
BLOCK 29
LOTS 9 TO 20 INCLUSIVE
EXCEPTING THEREOUT AS TO SURFACE ONLY OUT OF PORTION ON STREET WIDENING
ON PLAN 8211630.
"CAPITAL EXPENDITURE" shall mean and include only those costs or expenditures
incurred by the Landlord with respect to any alteration, improvement or
additions by the Landlord made to the Building the purpose of which is intended
primarily to substantially upgrade, update, expand or enlarge the Building or
its facilities or systems, or primarily for the purpose of creating an improved
building, or a new and distinct capital asset. Any expenditure made for the
primary purpose of preserving, protecting, maintaining or restoring the Building
or its facilities and systems or any constituent part thereof, in or to their
ordinary first-class operating condition after deterioration thereof from
whatever cause, including, prolonged use, latent defects, wear and tear,
accident or ageing and which do not materially add to the value of the Building
or appreciably prolong the Building's originally anticipated life shall not be
considered to be a Capital Expenditure. For greater certainty, it is understood
and agreed that the replacement of worn or damaged parts, components or systems,
even though substantial and even though such replacement may incidentally result
in an improved or superior part, component or system, shall only be considered
to be a Capital Expenditure if such replacement results in a distinct capital
asset which is fundamentally different in kind and improved from what it was
before. A repair or replacement expenditure or cost shall be deemed to be a
Capital Expenditure only if the effect of either the repair or replacement made
to the Building's facilities, systems or constituent parts thereof results in a
distinct capital asset which is something fundamentally different in kind and
improved from what it was before.
"CAPITAL TAX" means any tax, taxes, levy or levies paid or payable by the
Taxpayer to any Taxing Authority based upon or computed by reference to the
capital employed by the Taxpayer, or the paid-up capital or place of business of
the Taxpayer. For clarification, Capital Tax is not an Income Tax.
"CAPITAL TAX FOR THE BUILDING" means, for any Operating Year, the aggregate of
the amounts calculated by multiplying the aggregate book value to the Taxpayer
of the Building and the Building Lands (and all equipment used in connection
therewith) by the rate of each applicable Capital Tax imposed, from time to
time, by any Taxing Authority. The aggregate book value shall be costs incurred
less depreciation and amortization, determined as at the end of such Operating
Year for financial statement purposes. Capital Tax for the Building is an
approximation based upon the concept of Capital Tax, and is not necessarily the
actual Capital Tax paid or payable by the Landlord in respect of the Building
and the Building Lands. If the calculation of Capital Tax changes, the Landlord
may adjust its calculations of such amount to reasonably reflect such change.
"CAVEAT REVIEW FEE" means one hundred and seventy-five dollars ($175.00) or such
other amount as the Landlord may, from time to time, advise the Tenant as
constituting the Landlord's administrative fee associated with each request to
review a caveat contemplate d by Subsection 16.10(a).
"CHANGE IN CONTROL" means, in the case of any corporation or partnership, the
transfer by sale, assignment, transmission on death, mortgage, trust or
otherwise, of any shares, voting rights or interest which will result in a
change of the identity of the person or persons exercising, or who might
exercise, effective control of such corporation or partnership unless such
change occurs as the result of trading in shares listed upon a recognized stock
exchange, and such trading is not for the purpose of acquiring effective
control.
"COLLATERAL" means this Lease, all interests created by this Lease, all the
Tenant's personal property of any kind LOCATED AT, IN OR ABOUT THE PREMISES,
including, without limitation, all goods, chattels, trade fixtures, furniture,
equipment, inventory, stock-in-trade, chattel paper, instruments, documents of
title, supplies, securities, the Tenant's interest in and to this Lease and the
Premises, accounts receivable, book debts, sublease rents, licence fees,
intangibles and all proceeds derived from dealing with any of the foregoing.
"COMMENCEMENT DATE" means the date specified in Subsection 1.1(f).
"COMMON FACILITIES" means the facilities integrated with, attached to, serving
or benefiting the Building or the Building, whether or not located on the
Building Lands and whether or not owned or leased by the Landlord, which are
provided or designated by the Landlord as being for the common use or benefit of
the Building or the Building's respective tenants or their employees, customers,
licensee and invitees or the general public and expressly includes, and as the
same may be changed from time to time, entrances, lobbies, corridors,
passageways, interior and exterior pedestrian walkways whether below, at or
above ground level, parking lots, parkades or other parking facilities or
structures, whether below, at or above ground level, the Pedestrian Bridges,
stairways which are not exclusive to any tenant, public elevators, public
washrooms, loading and unloading areas, public plazas and interior and exterior
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covered pedestrian malls, landscaped areas and service elevators, together with
the building systems, facilities or equipment within, attached to, serving or
benefiting the Building, whether or not located on the Building Lands and
whether or not owned or leased by the Landlord, including, without limitation or
duplication, the HVAC System, heating, ventilating, air-conditioning and
security systems, mechanical and electrical rooms and facilities and the
machinery and equipment therein, fire protection and detection equipment, ducts,
shafts, the Building's storage areas, service areas and facilities, and any
facilities which are not exclusive to any Building tenant.
"CONDEMNATION DATE" means, with respect to the expropriation of the Premises in
accordance with Section 12.8, the earlier of:
(a) the date of vesting of title to the Premises in any public authority
under the power of expropriation; or
(b) the date upon which any public authority under the power of
expropriation shall have the right to possession of the Premises.
"CORE AREAS" means, with respect to any floor of the Building, any stairs or
staircases not for the exclusive use of any single tenant, elevator shafts,
elevator service pits and rooms containing apparatus necessary to operate
elevators not for the use of any single tenant and any flues, vents, stacks,
pipe shafts and vertical ducts (provided such vertical ducts are not located in
an Accessory Area) together with, in each case, any walls enclosing such
objects, provided that, if any of the enclosing walls referred to in this
definition of "Core Areas" are common to an adjacent Accessory Area or adjacent
to another Core Area, then the measurement of the Core Area shall be from the
centre of such common wall. For clarification, Core Areas shall exclude
Accessory Areas.
"EVENT OF DEFAULT" means any of the following events or occurrences:
(a) any Basic Rent, Additional Rent or other amount payable by the Tenant
under this Lease, including any instalment thereof, shall be in
arrears and shall not then be paid within TEN (10) days after demand
in writing by the Landlord notwithstanding any law or legislative
enactment may provide for a longer period of time before that rent
must go unpaid before a landlord may re-enter and resume possession of
any leased premises; or
(b) the Tenant shall have breached or failed to comply with any of its
covenants and agreements contained in this Lease, and shall have
failed to remedy such breach or non-compliance within TEN (10) days
after written notice thereof given by the Landlord to the Tenant (or
such longer period, if any, as the Landlord may allow for the
remedying of such breach or non-compliance); provided, however, that
no time for the remedying of such breach or non-compliance shall or
need be given or allowed where the breach or non-compliance is one not
reasonably capable of being remedied within a reasonable time; or
(c) upon the occurrence of any event or circumstances which, pursuant to
Section 14.4 or any other provision of this Lease so providing,
entitles the Landlord to cancel or terminate this Lease; or
(d) the Tenant fails to commence business in or from the Premises within
thirty (30) days after the Commencement Date; or
(e) the Tenant abandons the Premises prior to the expiration of the Term;
or
(f) any Act of Insolvency; or
(g) any assignment, disclaimer, rejection or disaffirmation of the Lease,
or any subletting or abandonment of all or any part of the Premises
prior to the expiration of the Term WITHOUT THE PRIOR CONSENT OF THE
LA NDLORD IN WRITING AND PURSUANT TO THE TERMS OF THIS LEASE, WHERE
APPLICABLE, or any termination of this Lease in any proceeding,
whether effected by the Landlord in concert with the Tenant or by any
trustee, trustee-in bankruptcy, receiver, receiver and manager or
liquidator of the Tenant, or by operation of law; or
(h) the Tenant attempts to make any bulk sale or remove any substantial
part of the trade fixtures or furnishings from the Premises other than
in the course of business, or pursuant to a permitted Transfer, or
when the same are no longer required for the conduct of the Tenant's
business and other trade fixtures or furnishings of equal or greater
value and utility in the conduct of the Tenant's business are being
substituted therefor; or
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(i) at any time any person other than the Tenant or any other has or
exercises the right to possess, occupy, manage or control the Premises
any part thereof or any of the business carried on therein, other than
an occupant permitted or approved by the Landlord pursuant to Section
15.4; or
(j) the Tenant becoming in default under other lease, license or occupancy
agreement the Tenant may have with the Landlord or any Affiliate of
the Landlord with respect to any premises situate in the Provinces of
British Columbia, Alberta, Saskatchewan or Manitoba.
"GST" means the tax levied by the Government of Canada on goods and services
pursuant to the Excise Tax Act (Canada) and commonly known as the Goods and
Services Tax.
"HAZARDOUS SUBSTANCES" means any substance, class of substance or mixture of
substances, or such quantity of an otherwise non-hazardous substance or
substances, which are or may be detrimental to the environment or human health
including, without limitation:
(a) radioactive materials;
(b) explosives;
(c) any solid, liquid, gas or odour or combination of any of them that, if
released, creates or contributes to a condition that:
(i) endangers the health, safety or welfare of persons;
(ii) interferes with the normal enjoyment of life or property; or
(iii) causes damage to plant life or to property;
(d) toxic substances, which shall include, without limitation, asbestos,
polychlorinated biphenyls, all chemicals and substances known or
suspected to cause cancer or reproductive toxicity;
(e) any substance, chemical or material, declared to be hazardous or toxic
under any law, by-law, regulation or ordinance enacted or promulgated
by any legislative, governmental or regulatory body having
jurisdiction over the Landlord, the Tenant, the Premises, the Building
or the Building Lands; and
(d) any medical waste or hazardous biological material.
"HVAC SYSTEM" means the entirety of any system in or for the Building for the
supply of heating, ventilating or cooling to Common Facilities or the Building
wherever such system, or portions thereof, is or are located, including any
central plant therefor and the improvements and fixtures necessary for any such
central plant and all the appurtenances and equipment and systems associated
with or for such system and includes the apparatus for the further processing
and distribution or exhaust of air such as ducts, diffusers, re-heat coils,
controls and other apparatus and equipment therefor, and includes such apparatus
located within rentable premises, except to the extent exclusively serving such
rentable premises.
"INCOME TAX" means any tax or taxes paid or payable by the Taxpayer or the
Landlord to any Taxing Authority based on or computed by reference to the net or
gross income or profit of the Landlord or the Taxpayer and, for clarification,
such tax or taxes are distinct from Capital Tax.
"INVOLUNTARY TRANSFER" means any Transfer to which the Tenant is not a voluntary
party and has no right to consent or withhold its consent, and includes an
expropriation, bankruptcy, receivership or seizure by execution or other legal
process.
"LANDLORD" means the Landlord specified in Subsection 1.1(b) and its successors
and assigns. In any provision of this Lease that contains a release, waiver or
other exculpatory language in favour of the Landlord (such as, by way of example
only, Sections 13.4 and 13.6), reference to the "Landlord" shall mean the
Landlord, the Taxpayer, the Manager of the Building and their respective
directors, officers, employees, contractors and agents.
"LANDLORD'S WORK" means any items of work to be performed by the Landlord at, in
or upon the Premises which are described under the heading "Landlord's Work" in
Schedule "C". If no items of work are described as "Landlord's Work" in
Schedule "C", the Premises shall be delivered to the Tenant by the Landlord in
an "as-is" condition.
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"LEASE YEAR" means each successive period of twelve (12) calendar months during
the Term ending:
(a) if the Term commences on the first day of a calendar month, on an
anniversary of the last day of the calendar month preceding the
calendar month in which the Term commences; and
(b) if the Term commences other than on the first day of the calendar
month, on an anniversary of the last day of the calendar month
preceding the calendar month in which the Term commences (so as to
exclude in such case in the first Lease Year and the first month of
such Lease Year, the broken portion of the calendar month between the
last day of the calendar month preceding the month in which the Term
commences and the commencement of the Term),
provided that if and whenever the Landlord deems it necessary for the Landlord's
accounting purposes, the Landlord may at any time and from time to time by
written notice to the Tenant specify an annual date upon which each subsequent
Lease Year is to commence, and in such event the Lease Year which would
otherwise be current when such annual date first occurs after the giving of such
notice shall terminate on the day preceding the date upon which the specified
annual date next falls, and any appropriate adjustments shall be made in respect
of any Lease Year which is, as a result, less than twelve (12) calendar months.
"LEASEHOLD IMPROVEMENTS" means all fixtures, improvements, installations,
equipment, alterations and additions from time to time made, erected ,
constructed or installed in the Premises, or any portion thereof, by, for or on
behalf of the Tenant, the Landlord or any previous tenant or other occupant of
the Premises, or portion thereof, or other adjacent premises, with the exception
of Hazardous Substances, trade fixtures and furniture, but including, without
limitation, doors, safes, vaults and their related hardware; all partitions
however affixed (including moveable partitions); light fixtures, bulbs and
tubes, track lighting tracks, heads, bulbs and tubes; heating, cooling and
ventilating equipment and systems; mechanical, plumbing, electrical, sprinkler,
fire detection, safety, and other utility systems; facilities, installations,
fitting, controls and equipment; drapes or other window coverings and their
related hardware; counters, cabinets, shelves, book shelves, and built-in
furniture; internal stairways, escalators, elevators and any other
transportation equipment and systems; ceilings and ceiling tile and panels; and,
all flooring and floor coverings with the exception of any carpeting which is
laid over vinyl tile or finished floor and affixed so as to be readily removable
without damage.
"MANAGER OF THE BUILDING" means any person (who may be an Affiliate of the
Landlord or the Taxpayer) who may be retained to lease, manage or operate the
Building on behalf of the Landlord or the Taxpayer and such person's successors
and assigns.
"METHOD OF MEASUREMENT" means the method of measurement used by the Landlord to
determine the Rentable Area of any rentable premises in the Building as follows:
(a) If the premises to be measured is located on a floor of the Building
which is designated by the Landlord to be occupied by a single tenant,
the Rentable Area of the Premises shall be the area within the outside
walls of the Building computed by measuring from the inside surface of
the outer Building wall (ignoring the finishing treatment thereof) to
the inside surface of the opposite outer Building wall (ignoring the
finishing treatment thereof), or where the outer Building wall
consists of fifty percent (50%) or more of glass, from the inside
surface of the outside glass wall to the inside surface of the
opposite outer Building wall (ignoring the finishing treatment
thereof) or the inside surface of the opposite glass wall, whichever
is applicable, and shall include the areas of columns and projections
necessary to the Building and all Accessory Areas but excluding the
area of all Core Areas on the floor.
(b) If the premises to be measured is located on a floor of the Building
which is designated by the Landlord to be occupied by multiple
tenants, the Rentable Area shall be determined by adding:
(i) the area within the outside walls of the premises computed by
measuring from the inside surface of the outer Building wall
(ignoring the finishing treatment thereof) to the inside surface
of the opposite outer Building wall (ignoring the finishing
treatment thereof), or where the outer Building wall consists of
fifty percent (50%) or more of glass, from the inside surface of
the outside glass wall to the inside surface of the opposite
outer Building wall (ignoring the finishing treatment thereof) or
the inside surface of the opposite glass wall, whichever is
applicable, and shall include the areas of columns and
projections necessary to the Building
plus,
(ii) that area determined by multiplying the total area of all
Accessory Areas on the floor by a fraction, the numerator of
which is the area of the premises to be measured determined in
accordance with Paragraph (b)(i) of this definition of "Method
of Measurement" and the denominator of which is the aggregate
area of all the rentable premises on the floor in
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question determined in accordance with Paragraph (b)(i) of this
definition of "Method of Measurement".
(c) If the premises to be measured is located in an area of the Building
designated by the Landlord as being for retail use, the Rentable Area
of the premises shall be the area in square feet of all floor space
therein (including floor space of mezzanines, if any) measured at
floor level from, as may be applicable:
(i) the interior face of all exterior Building walls (ignoring the
finishing treatment there of), comprising the boundaries of
such premises or, where an exterior Building wall comprising
the boundaries of such premises consists of fifty percent (50%)
or more of glass, from the inside surface of such glass or,
(ii) the centre line of any walls (ignoring the finishing treatment
thereof) separating the rentable premises from adjoining
rentable premises or,
(iii) the inner surfaces of any walls (ignoring the finishing
treatment thereof) separating the rentable premises from an
Accessory Area or Core Area, or,
(iv) the demising line dividing the rentable premises from any
adjoining Common Area, as such line is established by the
Landlord.
No deductions shall be made for columns or projections necessary for
the Building. Where a portion of any premises is recessed from the
demising line of the such premises, the area of such recess shall be
included as part of the Rentable Area of the premises in question.
"MORTGAGE" means any mortgage or charge of or on the estate or interest of the
Landlord in the Building or the Building Lands, or any portion thereof and
includes, any debenture, deed of trust and mortgage securing bonds or debentures
and any similar instruments resulting from any financing, refinancing or
collateral financing, any renewals or extensions thereof, from time to time
placed or registered by the Landlord or any Mortgagee against or in respect of
the Building, the Building Lands, or any portion thereof or the Premises.
"MORTGAGE AGREEMENT FEE" means two hundred and fifty dollars ($250.00) or such
other amount as the Landlord may, from time to time, advise the Tenant as
constituting the Landlord's administrative fee associated with each request for
the obtaining of an agreement contemplated by Section 15.2(b).
"MORTGAGEE" means a mortgagee, encumbrancer or chargee under a Mortgage and
includes, without limitation, a secured party, a debenture holder, a trustee
under a trust bond and any trustee for bond holders, debenture holders or
secured creditors.
"NORMAL BUSINESS HOURS" means the hours from 7:30 a.m. to 6:00 p.m. Monday to
Friday inclusive of each week, exclusive of all statutory or legal holidays, or
such other reasonable hours as the Landlord may from time to time specify in the
Rules and Regulations.
"NOTICE" means any notice, demand, request, statement or report, including any
Notice of Relocation, which may be or is contemplated by or is required to be
given or sent pursuant to this Lease.
"NOTICE OF RELOCATION" means the notice required to be provided by the Landlord
to the Tenant in accordance with Section 11.1.
"OPERATING EXPENSE" means the Landlord's or the Taxpayer's expenses, costs and
charges, without duplication, which are incurred or accrued by or attributable
to the Taxpayer or the Landlord in the course of discharging its obligations
under this Lease and to own, lease, operate, maintain, repair, supervise and
administer the Building, including the Common Facilities, and which shall
include, without limitation:
(a) Management fees at local rates prevailing from time to time for
comparable buildings and any administrative or management fees paid to
the Manager of the Building.
(b) On-site and off-site management and support staff costs, including:
(i) wages, salaries, unemployment insurance expenses, pension plan
payments, benefits or other compensations for the employees,
agents or contractors of the Landlord or the Manager of the
Building, including the Landlord's or the Manager of the
Building's superintending, clerical, technical services, and
accounting staff who perform services in connection with the
operation of the Building, but excluding leasing commissions
paid to agents of the Landlord or the Manager of the Building
or to other brokers or to any other person whatsoever;
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(ii) costs of telephone, stationery supplies and other materials
required for the routine operation of the Building, and the
Landlord's allocation of all occupancy costs associated with
the Building's management office; and,
(iii) uniforms, if any, of the employees of the Landlord or the
Manager of the Building and the cleaning and pressing thereof.
(c) All repairs (excluding Structural Repairs) to and physical maintenance
and cleaning of, the Building, including redecoration of the Common
Facilities, and the cost of supplies and equipment used in connection
therewith.
(d) Straight line amortization based on manufacturers' recommended life of
capitalized cleaning equipment used in the Building.
(e) All insurance premiums, deductibles and other charges with respect to
insurance incurred by or allocated to the Building by the Landlord.
(f) Costs incurred in connection with inspection and servicing of
elevator, electrical distribution and mechanical equipment, and the
costs of supplies and equipment used in connection therewith.
(g) Costs incurred for fuel or other energy for heating, ventilating and
air-conditioning the Building and for operating the HVAC System or any
other heating, ventilating and air-conditioning system in the
Building and for electricity, steam or other power required in
connection with the lighting, use and operation of the Building.
(h) Water, sewer and service charges, garbage and waste removal costs.
(i) Fees and expenses of the Landlord's firm of chartered accountants
pertaining only to services performed in the preparation of any
statements or certificates contemplated by the provisions of the
Lease.
(j) Fees, costs and disbursements incurred in connection with proceedings
for the contestation of Property Taxes, Taxes or Capital Taxes for the
Building.
(k) The annual amount of depreciation or amortization of the cost of any
improvement, modification or addition to the Building or the
machinery, equipment or facilities related thereto where, in the
reasonable opinion of the Landlord, such expenditure:
(i) may reduce Operating Expense;
(ii) maintain the quality, integrity or character of the Building or
the machinery, equipment or facilities related thereto;
(iii) is for the benefit or safety of Building users generally; or,
(iv) is required by law or any directive of any governmental, quasi-
governmental or regulatory body or authorities having
jurisdiction,
plus interest on the undepreciated portion of the original cost of
such improvement, modification or addition, payable monthly, from the
date on which the relevant cost was incurred at an annual rate of
interest equal to ten percent (10%) above the Prime Rate (the rate of
interest to be applied to the undepreciated, unamortized portion of
the original cost, in each case, shall be adjusted, as long as a rate
is required, every year, on the anniversary date of the acquisition of
the relevant improvement, modification or addition to the annual rate
of interest that is ten percent (10%) above the Prime Rate).
In no event shall depreciation, amortization or interest in respect of
any Capital Expenditure or any machinery, equipment or facilities
installed or constructed in conjunction with the original construction
of the Building be included in the determination of Operating Expense.
(l) Business or similar taxes assessed with respect to Common Facilities,
if any.
(m) Taxes and Capital Tax for the Building.
(n) Such other operating costs, charges and expenditures of a like nature
as may be incurred in respect of or attributable to the ownership,
preservation, protection, leasing, maintenance, supervision,
administration or operation of the Building.
(o) but in any event, Operating Expense shall exclude:
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(i) the Income Tax of the Landlord, the Taxpayer or the Manager of
the Building;
(ii) any Capital Expenditures;
(iii) the cost of providing electricity, water, natural gas and other
utilities to rentable premises in the Building (the cost of
which, in respect of the Premises, is reimbursed to the
Landlord under Section 9.2);
(iv) the cost of providing heating, ventilating and cooling to any
rentable premises in the Building (the cost of which, in
respect of the Premises, is paid by the Tenant or reimbursed to
the Landlord under Section 9.2) ; and
(v) Property Taxes (the Tenant's contributions to such Property
Taxes being made pursuant to Section 7.2);
(p) there shall be deducted from Operating Expense:
(i) the amounts of proceeds of insurance relating to damage actually
recovered by the Landlord, the cost of the repair of which was
included in Operating Expense; and
(ii) all other recoveries from the Tenant and other tenants applicable
to expenses included in Operating Expense, other than
contributions thereto pursuant to Section 9.1, or contributions
by any other tenant pursuant to comparable provisions of any
other lease of rentable premises in the Building.
Operating Expense shall be allocated to each Operating Year in accordance with
generally accepted accounting practice, as determined by the Landlord's
auditors, and any prepaid expense (for example, insurance) may be allocated to
the Operating Year in which the expense is incurred.
"OPERATING YEAR" means a consecutive twelve-month period ending December 31 or
such other consecutive twelve (12) month period as the Landlord from time to
time may adopt.
"PEDESTRIAN BRIDGES" means the elevated pedestrian bridge crossing over 5th
Avenue S.W. between 5th and 6th Streets S.W., the elevated pedestrian bridge
crossing over 5th Street S.W. between 5th and 6th Avenues S.W., the elevated
pedestrian bridge crossing over the alleyway adjacent to the Building Lands to
the south of the Building as modified or relocated in connection with the
construction of the Building and the uncovered, elevated pedestrian bridge or
walkway over the Building Lands to the west of the Building and any other above
or below ground level pedestrian bridge or walkway crossing over any street,
avenue or alleyway adjacent to the Building Lands or adjoining the Building to
any other building or other commercial complex or structure.
"PREMISES" means the rentable premises in the Building located on the floor(s)
of the Building indicated in Subsection 1.1(j) as shown outlined in red on
Schedule "A" and the approximate measurements of which are indicated in
Subsection 1.1(i) the exact measurements of which shall depend on the actual
location of perimeter walls and other construction defining the boundaries
thereof, when and as actually constructed (it being agreed that any variations
in the configuration and measurements of such premises necessitated by or during
any construction by the Landlord shall be permitted) and the measurement of the
premises in accordance with the Method of Measurement. In any event, the
Premises shall exclude any Accessory Area or Core Area within the Premises and
the use of such excepted areas as well as access thereto through the Premises
for the purpose of use, operation, maintenance and repair of such areas and the
equipment or apparatus located or situate therein or thereon is expressly
reserved to the Landlord. Notwithstanding the reservation of such areas to the
Landlord, the Tenant acknowledges that the cost of operation, maintenance and
repair thereof and the equipment or apparatus contained therein or thereon may
be included in Operating Expense and that the entire area of such Accessory
Areas or a portion thereof shall be included in the determination of the
Rentable Area of the Premises.
"PRIME RATE" means the annual percentum rate of interest announced by the Royal
Bank of Canada at its main branch in Calgary, Alberta as its reference rate for
demand loans made in Canada in Canadian dollars to commercial customers and
designated as its "prime rate" provided that, in no event, shall any annual rate
of any interest expressed in this Lease exceed the maximum annual rate of
interest permitted by law and the Prime Rate shall be adjusted as may be
necessary to ensure that any annual rate of any interest expressed in this Lease
exceed the maximum annual rate of interest permitted by law. Unless a provision
of this Lease states otherwise, in the event of a change in the Prime Rate,
interest shall be calculated at the new rate commencing on the date which the
said rate changes. A certificate signed by the manager of the main branch of the
Royal Bank of Canada in Calgary, Alberta setting forth the Prime Rate from time
to time shall be conclusive and shall bind the parties hereto.
"PROPERTY TAXES" means all real property, municipal, school and local
improvement taxes, assessments and rates and all taxes, assessments and rates of
a like nature imposed in respect of the Building Lands and the Building from
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time to time by any Taxing Authority, including machinery tax, if any, and all
taxes, rates, duties, levies, fees, charges and assessments whatsoever imposed
by any Taxing Authority upon the Taxpayer which are based upon the size or area
of the Building or Building Lands, but excluding Income Tax to the extent such
taxes are not levied in lieu of taxes, rates, duties, levies and assessments
against the Building or the Building Lands or upon the Landlord in respect
thereof; if the system of property taxation shall be altered or varied and any
new tax shall be levied or imposed on all or any portion of the Building or the
Building Lands or the revenues therefrom or the Landlord in substitution for or
in addition to Property Taxes presently levied or imposed, then any such new tax
or levy shall be deemed to be Property Taxes.
"RELOCATED PREMISES" means the rentable premises in the Building to which the
Tenant is relocated by the Landlord pursuant to Section 11.1 and, after
relocation, means the Premises.
"RENT", "RENTS" or "RENT" means all amounts expressed by this Lease to be
payable by the Tenant to the Landlord including Basic Rent and Additional Rent.
"RENTABLE AREA" means, in respect of any rentable premises, the area in square
feet of all floor space therein (including floor space of mezzanines, if any)
measured in accordance with the Method of Measurement. The Rentable Area of the
Premises shall be calculated and determined by the Landlord or its architect,
land surveyor or quantity surveyor as soon as practicable following the
execution and delivery of this Lease and, thereafter, whenever and as often as
the Premises or any Accessory Area on the floor or floors of the Building the
Premises are located shall be enlarged or diminished by any future alteration
thereof. Each time the Rentable Area of the Premises is calculated and
determined, the Landlord shall advise the Tenant accordingly and, (i) such
calculated and determined area shall be the Rentable Area of the Premises as of
the applicable date be it, the Commencement Date in the case of the initial
calculation and determination of the area of the Premises at the commencement of
the Term or that date which is the earlier of the date any alteratio n enlarging
or diminishing the Premises or any Accessory Area on the floor or floors of the
Building the Premises are located is completed or is in actual use, or otherwise
determined by an agreement between the Landlord and the Tenant, and (ii) all
Rent determined on the basis of the Rentable Area of the Premises shall be
adjusted accordingly, retroactively if necessary. Until such adjustment (if
any) is required to be made, the Rentable Area of the Premises is agreed to be
as set forth in Subsection 1.1(i) or, if the Tenant has received notification
from the Landlord that the Rentable Area of the Premises is different from that
set out in Subsection 1.1(i), as set forth in the most recent notice the
Landlord may have sent advising the Tenant of its determination and calculation
of the Rentable Area of the Premises.
"RULES AND REGULATIONS" means the rules and regulations made by the Landlord as
of the date of this Lease, the receipt of which is hereby acknowledged by the
Tenant, pertaining to the operation, representation, safety, care or cleanliness
of the Building and the Premises, the operation and maintenance of the Building
and all equipment associated therewith, the use of the Common Facilities and all
appurtenances associated therewith, Normal Business Hours, the lighting of
rentable premises and other premises in the Building, the display of signs
visible outside of any premises forming part of the Building (which rules and
regulations may differentiate between different types of businesses and the use
or uses put to a premises in the Building), and all other such rules and
regulations or amendments to the existing rules and regulations as the Landlord
may make from time to time; provided that, at all times, such rules and
regulations are reasonable in the circumstances and are consistent with the
provisions of this Lease.
"SECURITY AGREEMENT" means the terms, conditions, covenants and agreements set
out in Section 14.8 which are intended to and shall form an agreement separate
and divisible from this Lease, which shall survive the termination, surrender or
disclaimer of this Lease and which are intended to and shall form a "security
agreement" as defined in the Personal Property Security Act (Alberta). The
------------------------------
consideration for the Security Agreement includes the granting of this Lease to
the Tenant and the sum of ten dollars ($10.00) paid by the Landlord to the
Tenant, the receipt and sufficiency of which is hereby acknowledged by the
Tenant. If requested by the Landlord, the Tenant shall, within five (5) days of
a written request therefor, re-execute and deliver the Security Agreement as a
separate document using the Landlord's then standard form of general security
agreement. Nonetheless, the Tenant acknowledges this Security Agreement and the
Security Interest are complete and valid without the necessity of any further
documentation in respect thereof.
"SECURITY INTEREST" means a "security interest", as defined in the Personal
Property Security Act (Alberta), charge and lien in, over and in respect of the
Collateral.
"STRUCTURAL ELEMENTS" means:
(a) the cast-in-place concrete superstructure of the Building which is
comprised of all interior core walls, foundations, sub-floor and floor
slabs, beams, columns and the roof slab;
(b) the weather envelope of the Building which is comprised of the air and
water seal installed within the curtainwall system of the Building and
which excludes, for clarification, all sheets of exterior glass, the
roof membrane and the gaskets, shim tape and caulking elements or
components of the Building's curtainwall system; and
INITIAL HERE:
Tenant: // Initials
-----------
Landlord: // Initials
-----------
Schedule B, Page 13
<PAGE>
(c) any load-bearing pre-cast concrete components or structural steel
members of the Building.
"STRUCTURAL REPAIRS" means all repairs made to and replacements of any
constituent part or component of the Structural Elements of the Building.
"SUBLEASE" means any transaction other than an Assignment by which any right of
use or occupancy (whether exclusive or non-exclusive, whether permanent or
temporary and whether immediately, conditionally or contingently) relating to
the whole or any part of the Premises is conferred upon anyone, and includes, in
addition to a sublease, a sub-sublease, concession, license, sub-licence,
agreement, sublease as security for any indebtedness or other obligation or any
other arrangement conferring any such right of use or occupancy and whether or
not the Tenant is a party thereto.
"TAXATION YEAR" means a consecutive twelve (12) month period ending December 31
or such other consecutive twelve (12) month period which is from time to time
used by any Taxing Authority for the purposes of levying, charging or assessing
Property Taxes.
"TAXES" means all taxes, rates, duties, levies, fees, charges and assessments
whatsoever imposed, assessed, levied or charged from time to time by any Taxing
Authority in respect of or computed by reference to the Building, the Building
Lands or the Taxpayer or any aspect or attribute of any of the foregoing but
excluding:
(a) Income Tax of the Landlord, the Taxpayer and the Manager of the
Building, and
(b) Capital Tax, Capital Tax for the Building, Property Taxes, and any
taxes referred to in Section 7.4.
"TAXING AUTHORITY" means any school, utility, municipal, regional, provincial,
federal or other governmental or corporate authority, agency or commission.
"TAXPAYER" means the Landlord, each of the entities constituting the Landlord
and each of the legal or beneficial owners of the Building or the Building
Lands, if any and as may be applicable.
"TENANT" means the Tenant specified in Subsection 1.1(d) and its permitted
successors and assigns. Any reference to the "Tenant" includes, where the
context allows (such as, by way of example only, Sections 13.3, 13.4 and 13.6)
the directors, officers, employees, contractors, agents, invitees, permitted
subtenants and licensees of the Tenant and all other persons for whom the Tenant
may reasonably be expected to exercise control over or for whom the Tenant is
legally responsible.
"TENANT'S PROPORTIONATE SHARE" means the proportion that the Rentable Area of
the Premises is to the Rentable Area of all office and retail premises in the
Building, as determined by the Landlord.
"TENANT'S WORK" means all items of work other than Landlord's Work which are
necessary to properly complete the Premises ready for use and occupancy by the
Tenant for the purpose of its business, including, without limitation, all items
of work which may be described under the heading "Tenant's Work" in Schedule
"C".
"TERM" means the term of this Lease, which shall commence upon the earlier of
the Commencement Date or the fifth anniversary of the date of this Lease, as
specified in Subsection 1.1(a), and shall expire on the Termination Date.
"TERMINATION DATE" means the date as specified in Subsection 1.1(g) or, if no
date is specified in Subsection 1.1(g), the date determined as follows:
(a) if the Term commences on the first day of a calendar month, on an
anniversary of the last day of the calendar month immediately
preceding the calendar month in which the Term commences, which
anniversary shall be the earliest such anniversary which includes in
the Term the number of years specified in Subsection 1.1(h); or
(b) if the Term commences other than on the first day of a calendar month,
on an anniversary of the last day of the calendar month immediately
preceding the calendar month in which the Term commences, which
anniversary shall be the earliest such anniversary which includes in
the Term the number of years specified in Subsection 1.1(h), save and
except for the broken portion of the calendar month from the first day
of the month in which the Term commences to the commencement of the
Term.
"TRANSFER" means any Assignment, Sublease, Change in Control or other
transaction or occurrence whatsoever, including an expropriation, receivership
or seizure by execution or other legal process, which has or might have the
result of changing the identity of the person or persons having lawful use or
occupancy of the whole or any part of the Premises, whether such change is or
might be immediate, deferred, conditional, exclusive or non-exclusive or
permanent or temporary.
INITIAL HERE:
Tenant: // Initials
-----------
Landlord: // Initials
-----------
Schedule B, Page 14
<PAGE>
"TRANSFER FEE" means two hundred and fifty dollars ($250.00) or such other
amount as the Landlord may, from time to time, advise the Tenant as constituting
the Landlord's administrative fee associated with each request for the
Landlord's consent to a Voluntary Transfer.
"UNAVOIDABLE DELAY" means a delay caused by fire, strike or other casualty or
contingency beyond the reasonable control of a party who is, by reason thereof,
delayed in the performance of such party's covenants and obligations under this
Lease in circumstances where it is not within the reasonable control of such
party to avoid such delay (but does not include any insolvency, lack of funds or
other financial cause of delay).
"VOLUNTARY TRANSFER" means any Transfer to which the Tenant is a voluntary party
or to which the consent of the Tenant is necessary and may be withheld (or could
have been withheld had the Tenant complied with the requirements of Section 15.4
requiring it to reserve a right of consent, and a right to arbitrarily withhold
such consent in respect of any transfer entered into by anyone other than the
Tenant, including a tenant or subtenant under a Sublease).
INITIAL HERE:
Tenant: // Initials
-----------
Landlord: // Initials
-----------
Schedule B, Page 15
<PAGE>
SCHEDULE "C"
LANDLORD'S WORK AND TENANT'S WORK
1. LANDLORD'S WORK
---------------
1.1 There are no items of Landlord's Work to be performed. The Tenant accepts
the Premises in an "as-is" condition as of the date set out in Subsection
1.1(a).
2. TENANT'S WORK
-------------
2.1 The Tenant's Work shall consist of the installation and construction of any
and all alterations, improvements, Leasehold Improvements, fixtures,
equipment, trade fixtures, furnishings and additions to or in the Premises
which, in the sole opinion of the Tenant, are necessary or desirable for
the Tenant to properly conduct its business or trade at, from or upon the
Premises.
<PAGE>
EXHIBIT 10.16
NEITHER THIS WARRANT NOR THE UNDERLYING COMMON STOCK HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). SUCH SECURITIES MAY NOT BE
SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT WITHOUT THE HOLDER HEREOF DELIVERING TO THE ISSUER AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT SUCH REGISTRATION IS
NOT REQUIRED.
INTERLINK COMPUTER SCIENCES, INC.
COMMON STOCK PURCHASE WARRANT
Issuance Date: December 15, 1993
Void After: December 15, 1998
1. Number and Price of Shares Subject to Warrant. Subject to the terms
---------------------------------------------
and conditions of this Warrant, Menlo Ventures IV, L.P. (the "Holder"), whose
address is 3000 Sand Hill Road, Bldg. 4, Ste. 100, Menlo Park, California 94025
(fax no. (415) 854-7059), shall be entitled to purchase from Interlink Computer
Sciences Inc., a California corporation (the "Company"), up to Thirty-one
Thousand Six Hundred Sixty-Seven (31,667) fully paid and non-assessable shares
of the Company's Common Stock (the "Shares"), at an exercise price of
$0.45 per share (which number of Shares and purchase price are subject to
adjustment as described below). The purchase price of one share of Common Stock
payable from time to time upon the exercise of this Warrant (whether such price
be the price specified above or an adjusted price determined as hereinafter
provided) is referred to herein as the "Exercise Price."
2. Expiration Date. This Warrant shall expire on the earlier to occur
---------------
of (i) December 15, 1998; (ii) the closing of an initial public offering of
shares of the Company's Common Stock provided that (a) the per share initial
public offering price is equal to or greater than the minimum per share price
necessary to include the Company's Common Stock on the NASDAQ National Market
System as in effect at the time of the public offering and (b) that the gross
proceeds to the Company from the offering (before deduction of underwriting
discounts and commissions and expenses of the offering) are at least $10
million; or (iii) the closing of a merger or reorganization of the Company
unless the pre-merger/reorganization holders of the Company's voting securities
own, immediately following such merger or reorganization, at least a majority of
the outstanding voting securities of the Company or its successor, it being
understood that the Holder shall have the opportunity, by giving conditional
notice of exercise, to exercise this Warrant concurrent with the closing of a
transaction described in this clause (iii). The earlier to occur of such dates
is referred to herein as the "Expiration Date."
<PAGE>
3. Exercise of warrant.
-------------------
(a) This Warrant may be exercised by Holder in whole or in part at
any time prior to the Expiration Date by the surrender of this Warrant together
with a completed and signed Notice of Exercise and payment in full of the
Exercise Price as to the shares being purchased at the principal office of the
Company. Payment of the Exercise Price shall be made by cash, by bank or
certified check or, in lieu of exercising this Warrant for cash or check, Holder
may elect to receive shares equal to the value of this Warrant (or the portion
thereof being exercised) in which event the Company shall issue to Holder a
number of Shares computed using the following formula:
X = Y(A-B)
------
A
Where: X = The number or Shares to be issued to Holder:
Y = The gross number of Shares purchasable under this Warrant or,
in the event of a partial exercise, the gross number of shares as
to which this Warrant is being exercised;
A = The fair market value of one Share; and
B = Exercise Price (as adjusted to the date of such calculations).
For purposes of this Section, fair market value of the Company's
Common Stock shall mean the average of the closing bid and asked prices of the
Company's Common Stock quoted in the Over-The-Counter Market Summary, or the
closing price quoted on any exchange on which the Common Stock is listed,
whichever is applicable, as published in the Western Edition of The Wall Street
---------------
Journal for the ten trading days prior to the date of determination of fair
- -------
market value. If the Common Stock is not traded Over-The-Counter or on an
exchange, the fair market value shall be the price per share which the Company
could obtain from a willing buyer for shares sold by the Company from authorized
but unissued shares, as such price shall be agreed by the Company and the
Holder.
(b) The Company shall, within ten (10) days after exercise of this
Warrant, prepare a certificate for the shares of Common Stock purchased in
the name of the Holder of this Warrant, or as such Holder may direct (subject to
the restrictions upon transfer contained herein and upon payment by such holder
hereof of any applicable transfer taxes). Shares issuable upon exercise hereof
shall be deemed issued on the date on which the Notice of Exercise, together
with payment of the Exercise Price of the Shares purchased (if applicable) are
-2-
<PAGE>
delivered to the Company notwithstanding any delay in issuing certificates
therefor.
(c) Upon partial exercise hereof, a new warrant or warrants
containing the same date and provisions as this Warrant shall be issued by the
Company to the registered holder for the number of Shares with respect to which
this Warrant shall not have been exercised.
4. Adjustments.
-----------
(a) Adjustments for Combinations or Subdivisions of Common Stock.
------------------------------------------------------------
In the event the Company at any time or from time to time after the date hereof
shall declare or pay any dividend on the Common Stock payable in Common Stock or
in any right to acquire Common Stock, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise), or in the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common
Stock, then the Exercise Price in effect and the number of Shares subject to
this Warrant immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate.
(b) Adjustments for Reorganizations, Mergers. Etc. In case of any
---------------------------------------------
reorganization or any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another entity or entities,
or the conveyance of all or substantially all of the assets of the Company to
another corporation, this Warrant shall thereafter be exercisable for the number
of shares of stock or other securities or property (including cash) to which a
holder of the number of Shares deliverable upon exercise of this Warrant would
have been entitled upon the record date of (or date of, if no record date is
fixed) such reorganization, reclassification, consolidation, merger or
conveyance; and, in any case, appropriate adjustment (as determined by the Board
of Directors) shall be made in the application of the provisions herein set
forth with respect to the rights and interests thereafter of the holder(s) of
this Warrant, to the end that the provisions set forth herein shall thereafter
be applicable, as nearly as equivalent as is practicable, in relation to any
shares of stock or the securities or property (including cash) thereafter
deliverable upon the exercise of this Warrant.
(c) Certificates as to Adjustment. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Exercise Price or the number of Shares subject
to this Warrant pursuant to this Section 4, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
-3-
<PAGE>
adjustment or readjustment is based. The Company shall, upon the written
request at any time of any Holder, furnish or cause to be furnished to such
Holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Exercise Price at the time in effect, and (iii) the number of Shares
subject to this Warrant and the amount, if any, or other property which at the
time would be received upon exercise of this Warrant.
5. No Fractional Shares. No fractional shares of Common Stock will be
--------------------
issued in connection with any exercise of this Warrant. In lieu of any
fractional shares which would otherwise be issuable, the Company shall pay cash
equal to the product of such fraction multiplied by the fair market value of
one share of Common Stock on the date of exercise, as determined in good faith
by the Company's Board or Directors.
6. Transfer of Warrant. Subject to the limitations provided for in
-------------------
Section 7 herein, this Warrant and all rights hereunder may be transferred in
whole or in part by the Holder.
7. Compliance with Securities Laws.
-------------------------------
(a) Holder acknowledges that it understands that this Warrant and the
Shares have not been registered under the Act and accordingly must be held
indefinitely unless they are subsequently registered under the Act or an
exemption from such registration is available. Holder represents and warrants
that this Warrant is being acquired for investment, for Holder's own account,
and without any present intention to sell or distribute this Warrant or the
Shares.
(b) It shall be a condition to any transfer or exercise of this
Warrant that the Company shall have received, at the time of such transfer or
exercise, a representation in writing that this Warrant (or portion hereof
transferred) or the shares of Common Stock being issued upon such exercise, as
the case may be, are being acquired for investment and not with a view to any
sale or distribution thereof, or a statement of the pertinent facts covering any
proposed distribution thereof.
(c) It shall be a further condition to any transfer of this Warrant
or of any or all of the shares of Common Stock issued upon exercise of this
Warrant, other than a transfer registered under the Act (as defined below), that
the Company shall have received a legal opinion, in form and substance
satisfactory to the Company and its counsel, reciting the pertinent
circumstances surrounding the proposed transfer and stating that such transfer
is exempt from the prospectus and the registration requirements of the Act.
(d) Each certificate evidencing the shares of Common Stock issued
upon exercise of this Warrant, or upon any transfer of such
-4-
<PAGE>
the Company and its counsel, restricting the transfer of such shares to sales or
other dispositions exempt from the requirements of the Act.
(e) It shall be a further condition to any transfer of this Warrant
that the transferee shall receive and accept a Warrant, of like tenor and date,
executed by the Company.
8. No Stockholder Rights. This Warrant shall not entitle holder to any
---------------------
of the rights of a shareholder of the Company.
9. Registration Rights. Holder shall be entitled, with respect to the
-------------------
Shares, to registration rights substantially as set forth in that certain
Shareholders' Agreement dated as of October 20, 1992, between the Company,
Holder and certain other parties as the same may be amended from time to time.
10. Miscellaneous.
-------------
(a) This Warrant shall be governed by and construed in accordance
with the laws of the State of California.
(b) The headings in this Warrant are for purposes of convenience and
reference only, and shall not be deemed to constitute a part hereof.
(c) Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the Company and the registered holder hereof.
(d) All notices under this warrant shall be in writing and shall be
deemed to have been duly "given" on the date of delivery, if delivered
personally or by telegram or facsimile to the party to whom notice is to be
given, or on the third business day after mailing if mailed by first class mail,
registered or certified, postage prepaid and properly addressed to the address
(i) if to the Company, to Interlink Computer Sciences, Inc., 47370 Fremont
Blvd., Fremont, California 94538, Attn: Chief Financial Officer (fax no. (510)
659-6381) and (ii) if to the Holder, at the address shown on the first page
hereof. Either party may change its address for purposes of this section by
giving the other party written notice of the new address in the manner set forth
above.
INTERLINK COMPUTER SCIENCES, INC.
By: /s/ Charles W. Jepson
--------------------------------
Charles W. Jepson
President and Chief
Executive Officer
-5-
<PAGE>
EXHIBIT 11.1
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Primary and fully diluted:
Weighted average shares:
Common 2,375 2,428 2,447
Preferred 555 1,230
Common equivalent shares from stock options
and warrants 198 476
Common and common equivalent shares pursuant
to Staff Accounting Bulletin No. 83 680 680 680
------ ------ ------
Shares used in per share calculation 3,808 4,814 3,127
====== ====== ======
Income (loss) before extraordinary item $ 347 $1,647 ($7,616)
Extraordinary item - gain on debt restructuring,
net of income taxes 1,320
------ ------ ------
Net income (loss) $1,667 $1,647 ($7,616)
====== ====== ======
Income (loss) per share:
Income (loss) before extraordinary item $ 0.09 $ 0.34 ($2.44)
Extraordinary item - gain on debt restructuring,
net of income taxes 0.35
------ ------ ------
Net income (loss) per share $ 0.44 $ 0.34 ($2.44)
====== ====== ======
</TABLE>
(1) There is no difference between primary and fully diluted net income (loss)
per share for all periods presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FISCAL YEAR ENDED JUNE 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 6,121
<SECURITIES> 0
<RECEIVABLES> 9,987
<ALLOWANCES> 542
<INVENTORY> 700
<CURRENT-ASSETS> 19,142
<PP&E> 4,566
<DEPRECIATION> 3,285
<TOTAL-ASSETS> 25,925
<CURRENT-LIABILITIES> 25,513
<BONDS> 0
0
6,310
<COMMON> 14,602
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,925
<SALES> 34,002
<TOTAL-REVENUES> 34,002
<CGS> 8,007
<TOTAL-COSTS> 8,007
<OTHER-EXPENSES> 32,990
<LOSS-PROVISION> 215
<INTEREST-EXPENSE> 701
<INCOME-PRETAX> (7,502)
<INCOME-TAX> (114)
<INCOME-CONTINUING> (7,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,616)
<EPS-PRIMARY> (2.44)
<EPS-DILUTED> (2.44)
</TABLE>
