<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1996
REGISTRATION NO. 333-05243
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
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>
3,105,000
Common Stock, $.001 par value.. 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 AUGUST 5, 1996
2,700,000 SHARES
LOGO
[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 quotation 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.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
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<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.
TCPaccess is a network transport Enterprise Print Services manages
- --------- -------------------------
product which connects the MVS the printing of enterprise server
enterprise server to client/server applications to network printers
networks using open systems TCP/IP
protocols
HARBOR Backup efficiently
-------------
backs up and restores data on
client/server networks to an
enterprise server
HARBOR Distributed Storage Server
- ---------------------------------
allows local backup and restore on
the network with control over
transmission and security
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. Certain terms used in this Prospectus are defined in the Glossary
beginning on page 65.
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..... 6,056,851 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) $21,273
Total assets............................................. 25,925 48,569
Long-term debt, less current portion..................... 2,892 2,892
Total stockholders' equity (deficit)..................... (4,585) 23,059
</TABLE>
- -------
(1) Represents shares outstanding as of June 30, 1996. Reflects the issuance of
143,999 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) 411,470 shares of Common Stock
issuable upon exercise of warrants outstanding at a weighted average
exercise price of $3.18 per share; and (iii) 870,463 shares of Common Stock
reserved for issuance under the Company's 1992 Stock Option Plan. See
"Management--Stock Plans," "Description of Capital Stock" and Note 7 of
Notes to Consolidated Financial Statements. Also excludes 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 143,999 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."
6
<PAGE>
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 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 was denied a trademark
registration of the name "Interlink" based on the use of similar names by
other companies in the computer industry. 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
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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. 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"), 67,394 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 3,278,805 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 411,470 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 3,456,838 issued or
issuable shares of Common Stock, of which 411,470 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 3,294,337 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
3,856,851 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 $32.3 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 net 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."
16
<PAGE>
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.
17
<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,
3,856,851 shares issued and outstanding,
pro forma; $0.001 par value, 25,000,000
shares authorized, 6,056,851 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 143,999 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) 411,470
shares of Common Stock issuable upon exercise of warrants outstanding at a
weighted average exercise price of $3.18 per share; and (iii) 870,463
shares of Common Stock reserved for future issuance under the Company's
1992 Stock Option Plan. See "Management--Stock Plans," "Description of
Capital Stock" and Note 7 of Notes to Consolidated Financial Statements.
Also excludes 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.
18
<PAGE>
DILUTION
The pro forma net tangible negative book value of the Company at June 30,
1996 was approximately $(7.7) million, or $(2.01) 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 $3.29 per share of Common
Stock. This represents an immediate increase in net tangible book value of
$5.30 per share to existing stockholders and an immediate dilution of $10.71
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............................................. $(2.01)
Increase in net tangible book value per share attributable
to new investors.......................................... 5.30
------
Pro forma net tangible book value per share after this
offering.................................................... 3.29
------
Dilution per share to new investors.......................... $10.71
======
</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).... 3,856,851 63.7% $21,648,000 41.3% $ 5.61
New public investors (1)..... 2,200,000 36.3 30,800,000 58.7 14.00
--------- ----- ----------- -----
Total.................... 6,056,851 100.0% $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 3,356,851 or
approximately 55.4% (3,356,851) shares, or approximately 51.9%, 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 44.6% (3,105,000 shares, or approximately 48.1%, 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 143,999 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 411,470 shares of Common
Stock with a weighted average exercise price of $3.18 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. Also excludes 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.
19
<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.
20
<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
21
<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.
22
<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.
23
<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
24
<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
25
<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 made
during the quarter ended March 31, 1995 in the estimate for the recoverability
of support inventory to reflect net realizable value which caused a decrease
in inventory. This change of approximately $348,000 reflected the Company's
determination that the resale value of this support inventory was below cost.
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 of approximately $350,000 made
during the quarter ended March 31, 1995.
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.
26
<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>
27
<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
28
<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
29
<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.
30
<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
31
<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.
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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 $30,000
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 $15,000 to $75,000,
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.
Communications
Financial Services
Health Care
Manufacturing
BellSouth ABN-Amro Bank CHU Nancy Hospital General
Air Products
NYNEX Bank for International Settlements and Chemicals
Cox Medical System
Pacific Telecom Bank of Montreal Apple Computer
University of California at Davis
SITA Bank Vontobel Boeing
University of Pittsburgh
SBC Communications Barclays Bank Vision Service PlanFord Werks
Telecom Eirann Citicorp Insurance Inland Steel
Industries
Telecomm Italia Commerzbank Allstate Insurance Group
U.S. Sprint Credit Agricole Pyrenees Gascogne Leggett & Platt
Abbey Life Assurance
Williams Information Services Legrand
Edward D. Jones California State Auto Association
Consumer/Retail MAN
Imperio Kemper National Insurance
Companies
Argos Distributers Pictet & Cie McDonnell
Federated Systems GroupSIBS MACIF Douglas
Giant Food Schweiz KreditanstaltPearl Insurance Otis Elevator
J. Crew Group United Overseas Bank Company
State Farm Mutual Automobile
Insurance
Johnson & Johnson Wells Fargo Rolls Royce
Publix SuperMarkets Government Ross
Quaker Oats Company Laboratories
AOK Bundesverband
Sara Lee Internal Revenue Service Saarstahl
Service Merchandise NASA SNECMA Group
Sherwin-Williams Company Sollac
Securities and Exchange Commission
Talbots U.S. Department of State Sony
Tandy Information Services Thyssen
Virginia Department of Information Technology
W.R. Grace
The Gap
Services
Wilson's House of Suede
Energy Axiom
Corporation
British Gas
Florida Power & Light Comdisco
Powergen Debis Munich
South Wales Electricity Dun &
Southern California Edison Bradstreet
Southern Company Lexis-Nexis
Mastercard
International
Mead
Corporation
Reuters
Holdings
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<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
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<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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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
42
<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 was denied a trademark
registration of the name "Interlink" based on the use of similar names by
other companies in the computer industry. However the Company has used the
name "Interlink" since its incorporation in December 1985 and intends to
continue to use such name. 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.
43
<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."
44
<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 60 Director
(1)(2).................
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.
45
<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."
46
<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.
47
<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.
48
<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 and the stockholders 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. 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
49
<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
and approved by the stockholders in July 1996. 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 will be implemented by a series
of overlapping offering periods, each to be of approximately twenty-four
months duration. Each offering period shall contain four six month purchase
periods, the initial offering period under the Purchase Plan will begin on the
effective date of this offering and subsequent offering periods will begin on
the first trading day on or after November 1 and May 1 of each 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. Each participant
will be granted an option on the first day of the offering period and such
option will be automatically exercised on the last date of each purchase
period. If the fair market value of the Common Stock on any purchase date is
lower than the fair market value on the start date of the offering period,
then all participants in that offering period will be automatically withdrawn
from such offering period and reenrolled in the immediately following offering
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 offering period or on the date on which the option is
exercised. Employees may end their participation in the Purchase Plan at any
time, and participation ends automatically on termination of employment with
the Company. In any event, 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 and approved by the
stockholders in July 1996. 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
50
<PAGE>
shall vest 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.
51
<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.
52
<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).................. 1,216,440 30.9% -- 1,216,440 20.1%
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Entities affiliated with Advent
International Corporation (3). 1,000,001 25.4 -- 1,000,001 16.5
101 Federal Street
Boston, MA 02110
Charles W. Jepson (4).......... 226,469 5.4 -- 226,469 3.6
Gloria M. Purdy (5)............ 81,542 2.0 -- 81,542 1.3
D. Benedict Dulley (6)......... 44,581 1.1 -- 44,581 *
Donald R. Gammon (7)........... 44,141 1.1 -- 44,141 *
Augustus J. Berkeley (8)....... 40,523 1.0 -- 40,523 *
Barbara A. Booth............... 20,000 * -- 20,000 *
Ronald W. Braniff (9).......... 16,334 * -- 16,334 *
Thomas H. Bredt (10)........... 1,216,440 30.9 -- 1,216,440 20.1
Andrew I. Fillat (11).......... 1,000,001 25.4 -- 1,000,001 16.5
All directors and executive
officers as a group
(9 persons) (12).............. 2,690,031 61.2 -- 2,690,031 41.3
Selling Stockholders:
Selling Stockholders as a
group....................... 1,399,008 35.5 500,000 885,916(13) 13.6
Susan G. Ainslie, MD as
trustee of the
Redding Anesthesia
Associates Medical Group
Self-Employed Money Purchase
Pension Plan, FBO Susan
Ainslie..................... 2,277 * 500 1,777 *
Susan G. Ainslie, M.D. ...... 13,885 * 1,981 11,904 *
Allan Family Trust........... 17,641 * 6,620 11,021 *
Merle H. Amundson as Trustee
of the
Merle H. Amundson and Mary
C. Amundson Family Trust.... 81,192 2.1 30,469 50,723 *
Najam & Tayyiba Awan......... 35,814 * 7,443 28,371 *
Barbas Family Trust.......... 609 * 500 109 *
Edmund G. & Anna L. Bartlett. 3,853 * 1,446 2,407 *
Richard & Karinne Bauer...... 34,160 * 12,819 21,341 *
Trevor J. Bauer.............. 1,015 * 500 515 *
Berkeley Technology
Investments Limited......... 662 * 500 162 *
David Blumberg Trust, Irwin
Feinberg, Trustee........... 8,430 * 3,163 5,267 *
Elliott Blumberg Trust, Irwin
Feinberg, Trustee........... 8,430 * 3,163 5,267 *
Andre P. Bourdet............. 122 * 122 0 *
Deirdre I.M. Bourdet......... 122 * 122 0 *
Sandra E. Bourdet............ 2,055 * 771 1,284 *
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO NUMBER OWNED AFTER
THE OF THE
OFFERING (1) SHARES OFFERING (1)
--------------- BEING --------------
NAME OF STOCKHOLDER NUMBER PERCENT SOLD NUMBER PERCENT
- ------------------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Sterling Trust Company, as Trustee FBO
James G. Bourkeis IRA................... 2,611 * 979 1,632 *
Lawrence J. Brisson...................... 250 * 250 0 *
Donna Campbell........................... 245 * 245 0 *
Richard R. & Mary J. Caraher............. 90 * 90 0 *
Carlson Family Partnership............... 7,707 * 2,892 4,815 *
George E. Carr........................... 845 * 500 345 *
Protective Management Establishment as
Trustee of the Mont Cervin Trust........ 50,905 1.3 19,102 31,803 *
Clear Lake Keys Corporation.............. 2,542 * 954 1,588 *
R. Joseph Collins........................ 4,152 * 1,558 2,594 *
Raymond C. Combs......................... 100 * 100 0 *
Coppola Creative Concepts DBP............ 203 * 203 0 *
Creath Ferrante, Ltd. ................... 4,410 * 1,655 2,755 *
James K. Creath.......................... 1,042 * 500 542 *
James K. Creath as Trustee FBO Creath
Living Trust............................ 12,091 * 4,537 7,554 *
Kate Demarest............................ 1,055 * 500 555 *
Dunedin Berkeley Development Capital
Limited................................. 101,974 2.6 38,267 63,707 1.1
East Oakland Youth Development
Foundation.............................. 5,940 * 2,229 3,711 *
John A. Eddy (14)........................ 1,183 * 500 535 *
Mark & Suzi Etchell...................... 167 * 167 0 *
Robert M. Fell........................... 2,000 * 750 1,250 *
Anthony & Anita Gabriele................. 8,955 * 500 8,455 *
Richard G. Garcia........................ 30 * 30 0 *
Richard Godfrey.......................... 1,015 * 500 515 *
Surinder Kaur Gogia, Custodian FBO
Ravinder Singh Gogia UGMA............... 1,456 * 546 910 *
Marshall C. Gravatt...................... 7 * 7 0 *
Lila B. Greenawalt....................... 1,100 * 500 600 *
Darcey & Peggy Hardin.................... 300 * 300 0 *
Ray T. Higgins........................... 4,357 * 500 3,857 *
Douglas Alan Hiles (14).................. 119 * 92 0 *
Hillard Company.......................... 1,917 * 719 1,198 *
Christopher O. Hopper.................... 9,371 * 2,487 6,884 *
JHI Development Capital Limited.......... 112,787 2.9 42,325 70,462 1.2
Imperial Bank (14)....................... 118,750 3.0 43,096 62,885 1.0
Karl S. Johnson.......................... 50,144 1.3 4,931 45,213 *
Chris Kang............................... 4,061 * 1,524 2,537 *
Lawrence R. Kelly, Jr. .................. 3,951 * 1,483 2,468 *
Kimball Family Trust..................... 17,906 * 3,975 13,931 *
Prabhakar L. Kollipara................... 1,103 * 500 603 *
E. James Langham, M.D. .................. 1,218 * 500 718 *
Sterling Trust Company, as Trustee FBO
E. James Langham IRA.................... 3,352 * 1,258 2,094 *
Sterling Trust Company, as Trustee FBO
Lansing Financial Group, Inc. Pension
Plan.................................... 36,304 * 13,624 22,680 *
Lucile Lansing........................... 5,373 * 2,017 3,356 *
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO NUMBER OWNED AFTER
THE OF THE
OFFERING (1) SHARES OFFERING (1)
--------------- BEING --------------
NAME OF STOCKHOLDER NUMBER PERCENT SOLD NUMBER PERCENT
- ------------------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
David LaRochelle.......................... 8,821 * 3,310 5,511 *
Dr. Thomas & Ione Latoff.................. 406 * 406 0 *
Zenia I. Latoff and Chris J. Kang......... 5,619 * 2,108 3,511 *
Layendecker Trust......................... 1,218 * 500 718 *
The Levin Revocable Trust,
Marvin T. Levin Trustee.................. 509 * 500 9 *
S.H. Liew, M.D. .......................... 3,431 * 1,287 2,144 *
Maltby Electric Supply Co. ............... 7,217 * 4,420 2,797 *
Charles S. Marine......................... 1,026 * 500 526 *
Richard & Mary Steele Mastain............. 8,630 * 3,238 5,392 *
MNOPF Trustees Limited.................... 112,787 2.9 42,328 70,459 1.2
Washington Trust Bank as
Trustee FBO Modern Electric
Water Company
Defined Benefit Trust.................... 1,769 * 664 1,105 *
James and Janice M. Morton................ 3,963 * 1,488 2,475 *
National Semiconductor Corporation........ 47,170 1.2 17,701 29,469 *
Gopal R. Nemana & Vijaya Nemana........... 600 * 500 100 *
John F. Nicholson......................... 2,000 * 750 1,250 *
Lambert P. Onuma.......................... 70,252 1.8 26,364 43,888 *
Malcolm & Gail Onuma...................... 1,014 * 500 514 *
Patricia L. Onuma......................... 13,250 * 4,973 8,277 *
Wallace T. Onuma.......................... 4,467 * 1,676 2,791 *
OTRA L.P. ................................ 5,466 * 2,051 3,415 *
Ralph E. & Louise B. Peck as Trustees
FBO the Peck Family Trust................ 3,815 * 1,432 2,383 *
Margaret S. Petersen...................... 1,470 * 552 918 *
Martine W. Petersen....................... 2,940 * 1,103 1,837 *
Patricia Robboy Phillips.................. 2,010 * 754 1,256 *
Mark & Helen Poppenberg................... 375 * 375 0 *
Douglas N. Reid........................... 50 * 50 0 *
Gilbert R. and Armida T. Sainz............ 1,231 * 500 731 *
Kelly Susan Sainz......................... 615 * 500 115 *
Gilbert Mark Sainz........................ 615 * 500 115 *
John L. Samuels Trustee for the
Lawrence W. Samuels Revocable
Living Trust............................. 847 * 500 347 *
Robert R. Sata............................ 501 * 501 0 *
George W. Saupe, Jr....................... 2,290 * 500 1,790 *
Makoto & Irene C. Sawada.................. 1,218 * 500 718 *
Robert H. Schinlever...................... 7,408 * 2,780 4,628 *
Jed & Glendalee Scully.................... 2,206 * 828 1,378 *
Margo Shrack.............................. 470 * 470 0 *
Robert S. Silva, M.D. .................... 13,381 * 5,022 8,359 *
Jeannette B. Simons....................... 1,074 * 500 574 *
Mary Small................................ 90 * 90 0 *
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO NUMBER OWNED AFTER
THE OF THE
OFFERING (1) SHARES OFFERING (1)
--------------- BEING --------------
NAME OF STOCKHOLDER NUMBER PERCENT SOLD NUMBER PERCENT
- ------------------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Stephen Small............................. 145 * 145 0 *
Lois C. Parker Smith...................... 10,739 * 4,030 6,709 *
Sommarstrom Family Trust.................. 1,343 * 505 838 *
Henry R. & Dorothy M. Spana............... 150 * 150 0 *
Special Opportunities, L.P.,
a California Limited Partnership......... 39,085 * 14,667 24,418 *
SPI Berkeley Development
Capital Limited.......................... 101,974 2.6 38,268 63,706 1.1
Sun Vally Ford 401K Plan.................. 163 * 163 0 *
Janko & Jana Susac........................ 5,001 * 1,493 3,508 *
Donald R. Swatman, DDS
Profit Sharing Plan...................... 3,005 * 1,128 1,877 *
Frank J. & Jean F. Taylor................. 600 * 500 100 *
Greg Thompson............................. 11,795 * 4,427 7,368 *
Katherine C. Tom.......................... 100 * 100 0 *
Virginia Tomlinson........................ 1,121 * 500 621 *
Sterling Trust Company, Trustee
FBO T. John Tsalaky
IRA Account.............................. 3,776 * 1,417 2,359 *
Union Bank (15)........................... 75,000 1.9 28,146 46,854 *
Washington Trust Bank..................... 600 * 500 100 *
Marya Welch, Trustee for the
Marya Welch Trust........................ 959 * 500 459 *
Brian John Wesley (14).................... 1,183 * 500 535 *
Andrew G. Wilson.......................... 6,505 * 2,441 4,064 *
Mary E. Wright............................ 188 * 188 0 *
</TABLE>
- --------
* Less than 1% of the outstanding shares.
(1) Applicable percentage of ownership is based on 3,940,755 shares of Common
Stock prior to the offering and 6,056,851 shares of Common Stock after
the offering, including 143,999 shares of Common Stock following the net
exercise and sale of warrants, 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 14,816
shares of Common Stock upon net exercise, 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 14,816 shares of Common Stock upon net exercise,
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").
56
<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 1,217,458 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.
(14) Reflects warrants held prior to and after the offering, and the net
exercise of warrants into shares sold in the offering.
(15) Reflects a warrant held prior to the offering and the net exercise of
said warrant, with certain shares sold in the offering.
57
<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 66,668 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
3,456,838 issued or issuable shares of Common Stock (the "Registrable
Securities"), of which 411,470 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
58
<PAGE>
conditions, that the underwriters have the right to limit the number of shares
included in any such registration. 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
59
<PAGE>
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (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.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
5,984,517 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"), 67,394 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 3,278,805 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 411,470 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 59,850 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 3,294,337 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
61
<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.
62
<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.
63
<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.
64
<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.
SYSTEMS NETWORK ARCHITECTURE
(SNA).......................... IBM's proprietary architecture for
controlling the configuration and operation
of networks.
65
<PAGE>
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.
66
<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.
Coopers & Lybrand L.L.P.
San Jose, California
July 22, 1996,
except for Note 13 for which
the date is July 26, 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 and
net realizable value........................... 64 369 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) 61 (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. Net realizable
value for each software product is the estimated future gross revenues from
that product reduced by the estimated future costs of completing and disposing
of that product. 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 each balance sheet date, the
Company estimates the net future cash flows from its purchased software
products. If such net future cash flows are less than the net book value of
the purchased software products, the Company will reduce
F-11
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
such net book value to the fair value of the software products, which is
generally the present value of estimated expected future cash flows using an
appropriate discount rate. At June 30, 1996, the estimated net future cash
flows of the purchased software products exceeded their net book value and
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 $13.75 per share. Remaining assets shall be distributed to
the common stockholders until each has received $13.75 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..................................... 66,668 $ 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 will be implemented by a series
of overlapping offering periods, each to be of approximately twenty-four
months duration. 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 offering 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 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). All share and per share amounts in the
consolidated financial statements have been restated to reflect the reverse
stock split which will be effected upon the reincorporation of the Company in
Delaware. This reincorporation and reverse stock split were approved by the
Company's stockholders in July 1996.
Effective July 26, 1996, the Company's stockholders approved the Company's
Purchase Plan and Director Plan (see Note 7). In addition, the Company's
stockholders approved the number of shares of common stock reserved for
issuance under the Company's 1992 Plan, Purchase Plan, and Director Plan which
totaled 1,955,000 shares, 250,000 shares and 100,000 shares, respectively (see
Note 7). In conjunction with this approval, the Company's stockholders also
approved a further increase in the shares of common stock reserved under the
Company's 1992 Plan, Purchase Plan, and Director Plan by an additional 150,000
shares, 100,000 shares and 50,000 shares, respectively. Following this
approval, the total number of shares of common stock reserved for issuance
under the Company's 1992 Plan, Purchase Plan, and Director Plan was 2,105,000
shares, 350,000 shares and 150,000 shares, respectively.
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........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Consolidated Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 31
Management................................................................ 45
Certain Transactions...................................................... 52
Principal and Selling Stockholders........................................ 53
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 64
Glossary.................................................................. 65
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 APPEARS HERE]
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 June 30, 1993, Registrant sold and issued: (i) an
aggregate of 55,544 shares (net of repurchases) of its Common Stock, which
were not registered under the Securities Act, to 23 employees and consultants
pursuant to the exercise of stock options under the 1992 Plan at an aggregate
purchase price of $43,703; (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 66,668 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 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.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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.
10.19.1 Agreement between New Era Systems Services, Ltd. and The Minister of
Western Economic Diversification dated September 10, 1993.
10.19.2 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated February 7, 1994.
10.19.3 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated April 21, 1994.
10.19.4 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated February 28,
1995.
10.19.5 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated June 12, 1995.
10.19.6 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated June 12, 1995.
10.19.7 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated June 23, 1995.
10.19.8 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated January 11, 1996.
10.19.9 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated January 11, 1996.
10.19.10 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated May 29, 1996.
10.19.11 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated May 29, 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-6).
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.
II-3
<PAGE>
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.
(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. 2 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 5th day of
August, 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. 2 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 August 5, 1996
____________________________________ Officer and Director
(Charles W. Jepson) (Principal Executive Officer)
/s/ Gloria M. Purdy Vice President of Finance, August 5, 1996
____________________________________ Chief Financial Officer,
(Gloria M. Purdy) Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ Thomas H. Bredt * Chairman of the August 5, 1996
____________________________________ Board of Directors
(Thomas H. Bredt)
/s/ Ronald W. Braniff * Director August 5, 1996
____________________________________
(Ronald W. Braniff)
/s/ D. Benedict Dulley * Director August 5, 1996
____________________________________
(D. Benedict Dulley)
/s/ Andrew I. Fillat * Director August 5, 1996
____________________________________
(Andrew I. Fillat)
</TABLE>
By: /s/ Gloria M. Purdy
----------------------------
(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
August 5, 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 August 5, 1996.
ERNST & YOUNG CHARTERED ACCOUNTANTS
Calgary, Canada
August 5, 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 22, 1996,
except for Note 13 for which
the date is July 26, 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........... 29 369(1) 348 50
Year ended June 30, 1996
Allowance for doubtful accounts. 279 304(2) 41 542
Allowance for excess and
obsolete inventories........... 50 28 -- 78
</TABLE>
- --------
(1) Includes a $348 provision for the writedown of support inventory to net
realizable value.
(2) 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, as amended, and form of agreement
thereto.
10.3+ 1996 Director 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.
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>
10.19.1 Agreement between New Era Systems Services, Ltd. and The Minister of
Western Economic Diversification dated September 10, 1993.
10.19.2 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated February 7, 1994.
10.19.3 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated April 21, 1994.
10.19.4 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated February 28,
1995.
10.19.5 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated June 12, 1995.
10.19.6 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated June 12, 1995.
10.19.7 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated June 23, 1995.
10.19.8 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated January 11, 1996.
10.19.9 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated January 11, 1996.
10.19.10 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated May 29, 1996.
10.19.11 Amendment to Agreement between New Era Systems Services, Ltd. and The
Minister of Western Economic Diversification dated May 29, 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-6).
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 1.1
3,105,000 Shares
Interlink Computer Sciences, Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
August __, 1996
VOLPE, WELTY & COMPANY
PUNK, ZIEGEL & KNOELL, L.P.
c/o VOLPE, WELTY & COMPANY
As Representatives of the several Underwriters
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Dear Representatives:
SECTION 1. Introductory. Interlink Computer Sciences, Inc., a
------------
Delaware corporation (together with all subsidiaries and divisions of Interlink
Computer Sciences, Inc., the "Company"), proposes to issue and sell 2,200,000
shares of its authorized but unissued Common Stock, par value $0.001 per share
(the "Common Stock"), and certain stockholders of the Company named in Schedule
B annexed hereto (the "Selling Stockholders") propose to sell an aggregate of
500,000 shares of the Company's issued and outstanding Common Stock to the
several underwriters named in Schedule A annexed hereto (the "Underwriters"),
for whom you are acting as Representatives. Said aggregate of 2,700,000 shares
are herein called the "Firm Common Shares." In addition, the Company proposes
to grant to the Underwriters an option to purchase up to 405,000 additional
shares of Common Stock (the "Optional Common Shares"), as provided in Section 5
hereof. The Firm Common Shares and, to the extent such option is exercised, the
Optional Common Shares are hereinafter collectively referred to as the "Common
Shares."
On or before the Effective Date (as hereinafter defined), Interlink
Computer Sciences Inc., a California corporation (the "California Corporation")
effected a reincorporation into the State of Delaware by entering into the
Agreement and Plan of Merger dated as of July __, 1996 (the "Merger Agreement")
with the Company. Accordingly, the Company and the California Corporation
hereby make all representations, warranties and covenants jointly and severally,
and unless specifically separated, all representations in this Agreement refer
jointly to the Company and the California Corporation.
1.
<PAGE>
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
---------------------------------------------
Company represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-05243)
with respect to the Common Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder, and
has been filed with the Commission. The Company has prepared and has filed
or proposes to file prior to the effective date of such registration
statement an amendment or amendments to such registration statement, which
amendment or amendments have been or will be similarly prepared. There
have been delivered to you two signed copies of such registration statement
and amendments, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus have been delivered to
you in such reasonable quantities as you have requested for each of the
Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a
further amendment thereto, including the form of final prospectus, (ii) a
final prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations, or (iii) a term sheet (the "Term Sheet") as described in and
in accordance with Rules 434 and 424(b) of the Rules and Regulations. As
filed, the final prospectus, if one is used, or the Term Sheet and
Preliminary Prospectus (as hereinafter defined), if a final prospectus is
not used, shall include all Rule 430A Information (as hereinafter defined)
and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to
you prior to the date and time that this Agreement was executed and
delivered by the parties hereto, or, to the extent not completed at such
date and time, shall contain only such specific additional information and
other changes (beyond that contained in the latest Preliminary Prospectus
(as hereinafter defined)) as the Company shall have previously advised you
in writing would be included or made therein.
2.
<PAGE>
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall
also mean such registration statement as so amended; provided, however,
that such term shall also include (i) all Rule 430A Information (as
hereinafter defined) deemed to be included in such registration statement
at the time such registration statement becomes effective as provided by
Rule 430A of the Rules and Regulations and (ii) a registration statement,
if any, filed pursuant to Rule 462(b) of the Rules and Regulations relating
to the Common Shares. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time
it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean either (i) the prospectus
relating to the Common Shares in the form in which it is first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations, or
(ii) if a Term Sheet is not used and no filing pursuant to Rule 424(b) of
the Rules and Regulations is required, the form of final prospectus
included in the Registration Statement at the time such registration
statement becomes effective, or (iii) if a Term Sheet is used, the Term
Sheet in the form in which it is first filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations, together with the Preliminary
Prospectus included in the Registration Statement at the time it becomes
effective. The term "Rule 430A Information" means information with respect
to the Common Shares and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of
the Act and the Rules and Regulations and, as of its date, has not included
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the
Registration Statement becomes effective, and at all times subsequent
thereto up to and including each Closing Date hereinafter mentioned, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, will contain all material statements and information
required to be included therein by the Act and the Rules and Regulations
and will in all material respects conform to the requirements of the Act
and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or
3.
<PAGE>
supplement thereto, will include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, no
representation or warranty contained in this subsection 2(b) shall be
applicable to information contained in or omitted from any Preliminary
Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter,
directly or through the Representatives, specifically for use in the
preparation thereof.
(c) The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than Interlink France
S.A.R.I., Interlink Deutschland GmbH, Interlink Iberica S.A. (Spain),
Interlink (Switzerland) S.A., Interlink Computer Sciences, Ltd. (United
Kingdom), New Era Systems Services, Ltd. (Canada), Era Nua Teoranta, Ltd.
(Ireland), and Interlink Computer Sciences (Barbados) Inc. The Company and
each of its subsidiaries have been duly incorporated and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation, with full power and authority
(corporate and other) to own and lease their properties and conduct their
respective businesses and all proposed future businesses as described in
the Prospectus; the Company owns all of the outstanding capital stock of
its subsidiaries free and clear of all claims, liens, charges and
encumbrances; the Company and each of its subsidiaries are in possession of
and operating in compliance with all authorizations, licenses, permits,
consents, certificates and orders material to the conduct of their
respective businesses, all of which are valid and in full force and effect,
except where the failure of any such authorization, license, permit,
consent, certificate or order to be valid or in full force, would not in
any single case or when aggregated with all such failures by the Company
and all of its subsidiaries have a material adverse effect upon the
Company; the Company and each of its subsidiaries are duly qualified to do
business and in good standing as foreign corporations in each jurisdiction
in which the ownership or leasing of properties or the conduct of their
respective businesses requires such qualification, except for jurisdictions
in which the failure to so qualify would not have a material adverse effect
upon the Company and its subsidiaries taken as a whole; and no proceeding
has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification.
(d) The Company has an authorized and outstanding capital stock
as set forth under the heading "Capitalization" in the Prospectus; the
issued and
4.
<PAGE>
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, were not issued in violation of
or subject to any preemptive rights or other rights to subscribe for or
purchase securities, and conform to the description thereof contained in
the Prospectus. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. Except as disclosed in or contemplated
by the Prospectus or the financial statements of the Company, and the
related notes thereto, included in the Prospectus, neither the Company nor
any subsidiary has outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights, convertible
securities or obligations, except for options granted subsequent to the
date as of which information is given in the Prospectus pursuant to the
Company's 1992 Stock Option Plan. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common Shares
by the Company pursuant to this Agreement. No stockholder of the Company
has any right which has not been waived to require the Company to register
the sale of any shares owned by such stockholder under the Act in the
public offering contemplated by this Agreement. No further approval or
authority of the stockholders or the Board of Directors of the Company will
be required for the transfer and sale of the Common Shares to be sold by
the Selling Stockholders or the issuance and sale of the Common Shares to
be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding obligation of the Company. The
making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated
5.
<PAGE>
will not violate any provisions of the certificate of incorporation or
bylaws, or other organizational documents, of the Company or any of its
subsidiaries, and will not conflict with, result in the breach or violation
of, or constitute, either by itself or upon notice or the passage of time
or both, a default under any material agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which
the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries or any of its respective properties may be bound
or affected, any statute or any authorization, judgment, decree, order,
rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company or any of its
subsidiaries or any of their respective properties. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and
delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Act, the
Blue Sky laws applicable to the public offering of the Common Shares by the
several Underwriters and the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD").
(g) All corporate action on the part of the California
Corporation and the Company, and their respective Boards of Directors,
shareholders and stockholders, as the case may be, necessary for the
authorization, execution, delivery and performance of the Merger Agreement,
effecting the reincorporation of the California Corporation under the laws
of State of Delaware, has been taken. The Merger Agreement has been duly
executed by each of the California Corporation and the Company. The Merger
Agreement has been filed with the Secretary of the State of Delaware and
shall be effective on or before the First Closing Date (as hereinafter
defined). Each of the California Corporation and the Company had all
corporate power and authority to execute and deliver the Merger Agreement,
to file the Merger Agreement with the Secretary of the State of California
and the Secretary of the State of Delaware and to consummate the
reincorporation contemplated by the Merger Agreement, and the Merger
Agreement at the time of execution and filing constituted a valid and
binding obligation of each of the California Corporation and the Company,
enforceable in accordance with its terms. The merger between the
California Corporation and the Company was effected pursuant to a valid
qualification under California state securities laws.
(h) Coopers & Lybrand L.L.P., who have expressed their opinion
with respect to the financial statements and schedules filed with the
Commission as a part of the Registration Statement and included in the
Prospectus and in
6.
<PAGE>
the Registration Statement, and Ernst & Young Chartered Accountants L.L.P.,
who have expressed their opinion with respect to the financial statements
of New Era Systems Services, Ltd., are independent accountants as required
by the Act and the Rules and Regulations.
(i) The financial statements and schedules of the Company, New
Era Systems Services, Ltd., and, subject to the qualifications expressly
set forth in the Prospectus under the caption "Pro Forma Combined Condensed
Consolidated Statements of Operations," the Company on a pro forma
consolidated basis, and, in each case, the related notes thereto, included
in the Registration Statement and the Prospectus present fairly the
financial position of the Company and New Era Systems Services, Ltd., as
the case may be, as of the respective dates of such financial statements
and schedules, and the results of operations and changes in financial
position of the Company and New Era Systems Services, Ltd., as the case may
be, for the respective periods covered thereby. Such statements, schedules
and related notes have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis as
certified by the independent accountants named in subsection 2(h). No
other financial statements or schedules are required to be included in the
Registration Statement. The selected financial data set forth in the
Prospectus under the captions "Capitalization" and "Selected Consolidated
Financial Data" fairly present the information set forth therein on the
basis stated in the Registration Statement.
(j) Except as disclosed in the Prospectus, and except as to
defaults which individually or in the aggregate would not be material to
the Company and its subsidiaries taken as a whole, neither the Company nor
any of its subsidiaries is in violation or default of any provision of its
certificate of incorporation or bylaws, or other organizational documents,
or is in breach of or default with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a
party or by which it or any of its properties are bound; and, except as to
defaults which individually or in the aggregate would not be material to
the Company and its subsidiaries taken as a whole, there does not exist any
state of facts which constitutes an event of default on the part of the
Company or any such subsidiary as defined in such documents or which, with
notice or lapse of time or both, would constitute such an event of default.
(k) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been
7.
<PAGE>
described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof. Neither the
Company nor any of its subsidiaries, nor to the Company's knowledge, any
other party is in breach of or default under any of such contracts, except
as to breaches or defaults which, in any single case or in the aggregate
would not have a material adverse effect on the Company or the subsidiary.
(l) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is or may be a party or of which property owned or leased by
the Company or any of its subsidiaries is or may be the subject, or related
to environmental or discrimination matters, which actions, suits or
proceedings might, individually or in the aggregate, prevent or adversely
affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or otherwise),
properties, business or results of operations of the Company and its
subsidiaries taken as a whole; and no labor disturbance by the employees of
the Company or any of its subsidiaries exists or is imminent which might be
expected to have a material adverse effect on such condition, properties,
business or results of operations. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body. Except as disclosed in
the Prospectus, there are no material legal or governmental actions, suits
or proceedings pending or, to the Company's knowledge, threatened against
any executive officers or directors of the Company.
(m) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned by it
in the financial statements hereinabove described (or elsewhere in the
Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of
any kind except (i) those, if any, reflected in such financial statements
(or elsewhere in the Prospectus), or (ii) those which do not adversely
affect the use made and proposed to be made of such property by the Company
and its subsidiaries. The Company or the applicable subsidiary holds its
leased properties under valid and binding leases, with such exceptions as
are not materially significant in relation to the business of the Company.
Except as disclosed in the Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(n) Since the respective dates as of which information is given
in the Registration Statement and
8.
<PAGE>
Prospectus, and except as described in or specifically contemplated by the
Prospectus: (i) the Company and its subsidiaries have not incurred any
material liabilities or obligations, indirect, direct or contingent, or
entered into any material verbal or written agreement or other transaction
which is not in the ordinary course of business; (ii) the Company and its
subsidiaries have not sustained any material loss or interference with
their respective businesses or properties from fire, flood, windstorm,
accident or other calamity, whether or not covered by insurance; (iii) the
Company has not paid or declared any dividends or other distributions with
respect to its capital stock and the Company and its subsidiaries are not
in default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock (other
than upon the sale of the Common Shares hereunder, upon the exercise of
options and warrants described in the Registration Statement and the
automatic conversion of the outstanding shares of Preferred Stock into
Common Stock prior to the First Closing as described in the Registration
Statement) or indebtedness material to the Company and its subsidiaries
(other than in the ordinary course of business); and (v) there has not been
any material adverse change or any development involving or which may
reasonably be expected to involve a prospective material adverse change, in
the condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and its subsidiaries taken as a
whole.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted;
the expiration of any trademarks, trade names, patent rights, mask works,
copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company or its
subsidiaries; and the Company has no knowledge of any material infringement
by it or its subsidiaries of trademark, trade name rights, patent rights,
mask works, copyrights, licenses, trade secret or other similar rights of
others which could reasonably be expected to have a material adverse effect
on the condition (financial or otherwise), business, results of operations
or prospects of the Company and its subsidiaries taken as a whole, and
there is no claim being made against the Company or its subsidiaries
regarding trademark, trade name, patent, mask work, copyright, license,
trade secret or other infringement which could have a material adverse
effect on the condition (financial or otherwise), business, results of
9.
<PAGE>
operations or prospects of the Company and its subsidiaries taken as a
whole.
(p) The Company has not been advised, and has no reason to
believe, that either it or any of its subsidiaries is not conducting
business in compliance with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations; except where failure to be so in compliance would not
materially adversely affect the condition (financial or otherwise),
business, results of operations or prospects of the Company and its
subsidiaries taken as a whole.
(q) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid
all taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or could reasonably be asserted or threatened
against the Company or its subsidiaries which could materially adversely
affect the business, operations or properties of the Company and its
subsidiaries taken as a whole.
(r) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(s) The Company has not distributed, and will not distribute
prior to the later to occur of (i) completion of the distribution of the
Shares, or (ii) the expiration of any time period within which a dealer is
required under the Act to deliver a prospectus relating to the Shares, any
offering material in connection with the offering and sale of the Shares
other than the Preliminary Prospectus, the Prospectus, the Registration
Statement and any other materials permitted by the Act and consented to by
the Underwriters.
(t) Each of the Company and its subsidiaries maintains insurance
of the types and in the amounts generally deemed adequate for its business,
including, but not limited to, directors' and officers' insurance,
insurance covering real and personal property owned or leased by the
Company and its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. The Company has not been refused
any insurance sought and applied for, and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost
that
10.
<PAGE>
would not materially adversely affect the business, business prospects,
properties, condition (financial or otherwise) or results of operations of
the Company or its subsidiaries.
(u) Neither the Company nor any of its subsidiaries has at any
time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
the laws of the United States or any jurisdiction thereof.
(v) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Common Shares.
(w) The Common Stock has been approved for quotation as a
National Market System security on The Nasdaq Stock Market upon notice of
issuance.
(x) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
in violation of Section 517.075 of the Florida Statutes.
(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences. The representations and
warranties given by the Company and its officers to its independent public
accountants for the purpose of supporting the letters referred to in
Sections 8(c)(vi) and (vii) are true and correct.
(z) Except as disclosed in the Prospectus, (i) the Company and
its subsidiaries are in compliance in all material respects with all rules,
laws and regulations, both foreign and domestic, relating to the use,
treatment, storage and disposal of toxic substances and protection of
health or the environment ("Environmental Laws") which are applicable to
their business, (ii) neither the Company nor
11.
<PAGE>
any of its subsidiaries has received any notice from any governmental
authority or third party of an asserted claim under Environmental Laws,
(iii) no facts currently exist that will require the Company or any of its
subsidiaries to make future material capital expenditures to comply with
Environmental Laws, and (iv) to the knowledge of the Company, no property
which is or has been owned, leased or occupied by the Company or any of its
subsidiaries has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as
a contaminated site under applicable state or local law.
SECTION 3. Representations, Warranties and Covenants of the Selling
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Stockholders.
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(a) Each of the Selling Stockholders represents and warrants to,
and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has, and on the First Closing
Date (as hereinafter defined) mentioned will have, good and marketable
title to the Common Shares proposed to be sold by such Selling
Stockholder hereunder on such Closing Date and full right, power and
authority to enter into this Agreement and to sell, assign, transfer
and deliver such Common Shares hereunder, free and clear of all voting
trust arrangements, liens, encumbrances, equities, security interests,
restrictions and claims whatsoever; and upon delivery of and payment
for such Common Shares hereunder, the Underwriters will acquire good
and marketable title thereto, free and clear of all liens,
encumbrances, equities, claims, restrictions, security interests,
voting trusts or other defects of title whatsoever.
(ii) Such Selling Stockholder has executed and delivered an
Irrevocable Power of Attorney and caused to be executed and delivered
on his behalf a Custody Agreement (hereinafter collectively referred
to as the "Stockholders Agreement") and in connection herewith such
Selling Stockholder further represents, warrants and agrees that such
Selling Stockholder has deposited in custody, under the Stockholders
Agreement, with the agent named therein (the "Agent") as custodian,
certificates in negotiable form for the Common Shares to be sold
hereunder by such Selling Stockholder, for the purpose of further
delivery pursuant to this Agreement. Such Selling Stockholder agrees
that the Common Shares to be sold by such Selling Stockholder on
deposit with the Agent are subject to the interests of the Company and
the
12.
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Underwriters, that the arrangements made for such custody are to that
extent irrevocable, and that the obligations of such Selling
Stockholder hereunder shall not be terminated, except as provided in
this Agreement or in the Stockholders Agreement, by any act of such
Selling Stockholder, by operation of law, by the death or incapacity
of such Selling Stockholder or by the occurrence of any other event.
If the Selling Stockholder should die or become incapacitated, or if
any other event should occur, before the delivery of the Common Shares
hereunder, the documents evidencing Common Shares then on deposit with
the Agent shall be delivered by the Agent in accordance with the terms
and conditions of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether or not the Agent shall
have received notice thereof. This Agreement and the Stockholders
Agreement have been duly executed and delivered by or on behalf of
such Selling Stockholder and the form of such Stockholders Agreement
has been delivered to you.
(iii) The performance of this Agreement and the Stockholders
Agreement and the consummation of the transactions contemplated hereby
and by the Stockholders Agreement will not result in a breach or
violation by such Selling Stockholder of any of the terms or
provisions of, or constitute a default by such Selling Stockholder
under, any indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other agreement
or instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder or any of its properties is bound, any
statute, or any judgment, decree, order, rule or regulation of any
court or governmental agency or body applicable to such Selling
Stockholder or any of its properties.
(iv) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common Shares.
(v) Each Preliminary Prospectus and the Prospectus, to the
extent and only to the extent it has related to such Selling
Stockholder, has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and has not
included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading
in light of the circumstances under which they were made; and neither
the
13.
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Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, to the extent and only to the extent it relates to
such Selling Stockholder, will include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(vi) Such Selling Stockholder is not aware that any of the
representations and warranties set forth in Section 2 above is untrue
or inaccurate in any material respect.
(b) Each of the Selling Stockholders agrees with the Company and
the Underwriters not to offer to sell, sell or contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible
into or exchangeable for any shares of Common Stock, for a period of 180
days after the first date that any of the Common Shares are released by you
for sale to the public, without the prior written consent of Volpe, Welty &
Company, which consent may be withheld at the sole discretion of Volpe,
Welty & Company.
SECTION 4. Representations and Warranties of the Underwriters. The
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Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and to the Selling Stockholders that the information set forth (i)
on the cover page of the Prospectus with respect to price, underwriting
discounts and commissions and terms of offering and (ii) under "Underwriting" in
the Prospectus was furnished to the Company by and on behalf of the Underwriters
for use in connection with the preparation of the Registration Statement and the
Prospectus and is correct in all material respects. The Representatives
represent and warrant that they have been authorized by each of the other
Underwriters as the Representatives to enter into this Agreement on its behalf
and to act for it in the manner herein provided.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the
--------------------------------------------
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, (i) the Company agrees to
issue and sell to the Underwriters 2,220,000 of the Firm Common Shares, and (ii)
the Selling Stockholders agree, severally and not jointly, to sell to the
Underwriters in the respective amounts set forth in Schedule B hereto, an
aggregate of 500,000 of the Firm Common Shares. The Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Stockholders, respectively, the number of Firm Common Shares described below.
The purchase price per share to be paid by the several Underwriters to the
Company and to the Selling Stockholders, respectively, shall be $_________ per
share.
14.
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The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of full shares which (as nearly as practicable, as
determined by you) bears to 2,220,000 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Stockholders shall be to purchase from the Selling
Stockholders that number of full shares which (as nearly as practicable, as
determined by you) bears to 500,000 the same proportion as the number of shares
set forth opposite the name of such Underwriter in Schedule A hereto bears to
the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of Volpe,
Welty & Company, One Maritime Plaza, 11th Floor, San Francisco, California (or
such other place as may be agreed upon by the Company and the Representatives)
at such time and date, not later than the third (or, if the Firm Common Shares
are priced, as contemplated by Rule 15c6-1(c) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after 4:30 P.M. Washington D.C. Time, the
fourth) full business day following the first date that any of the Common Shares
are released by you for sale to the public, as you shall designate by at least
48 hours' prior notice to the Company (or at such other time and date, not later
than one week after such third or fourth, as the case may be, full business day
as may be agreed upon by the Company and the Representatives) (the "First
Closing Date"); provided, however, that if the Prospectus is at any time prior
to the First Closing Date recirculated to the public, the First Closing Date
shall occur upon the later of the third or fourth, as the case may be, full
business day following the first date that any of the Common Shares are released
by you for sale to the public (as set forth above) or the date that is 48 hours
after the date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company and the Selling Stockholders to you, for the
respective accounts of the Underwriters with respect to the Firm Common Shares
to be sold by the Company and by the Selling Stockholders against payment by
you, for the accounts of the several Underwriters, of the purchase price
therefor by certified or official bank checks payable in next day funds to the
order of the Company and of the Agent in proportion to the number of Firm Common
Shares to be sold by the Company and the Selling Stockholders, respectively.
The certificates for the Firm Common Shares shall be registered in such names
and denominations as you shall have requested at least two full business days
prior to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at a location in
New York, New York, as may be designated by you. Time shall be of the essence,
and delivery at the time and place specified in
15.
<PAGE>
this Agreement is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 405,000 Optional
Common Shares at the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you for the
account of the Underwriters in the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the first date that any of the Common Shares are
released by you for sale to the public, upon notice by you to the Company
setting forth the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, the names and denominations in which the
certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may not
be earlier than the First Closing Date), being herein referred to as the "Second
Closing Date," shall be determined by you, but if at any time other than the
First Closing Date shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Company
pursuant to such notice of exercise by a fraction, the numerator of which is the
number of Firm Common Shares to be purchased by such Underwriter as set forth
opposite its name in Schedule A and the denominator of which is 2,700,000
(subject to such adjustments to eliminate any fractional share purchases as you
in your discretion may make). Certificates for the Optional Common Shares will
be made available for checking and packaging on the business day preceding the
Second Closing Date at a location in New York, New York, as may be designated by
you. The manner of payment for and delivery of the Optional Common Shares shall
be the same as for the Firm Common Shares purchased from the Company as
specified in the two preceding paragraphs. At any time before lapse of the
option, you may cancel such option by giving written notice of such cancellation
to the Company. If the option is cancelled or expires unexercised in whole or
in part, the Company will deregister under the Act the number of Option Shares
as to which the option has not been exercised. Notwithstanding the foregoing,
in the event that the Registration Statement is amended or the Prospectus is
supplemented between the date hereof and any Closing Date, the Underwriters
shall have the right to delay the Closing Date to a date which will allow the
Underwriters the time necessary to distribute the Prospectus as amended or
supplemented.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept
16.
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delivery of its Common Shares, to make payment and to receipt therefor. You,
individually and not as the Representatives of the Underwriters, may (but shall
not be obligated to) make payment for any Common Shares to be purchased by any
Underwriter whose funds shall not have been received by you by the First Closing
Date or the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Representatives is advisable and at the public offering price set forth
on the cover page of and on the terms set forth in the Prospectus.
SECTION 6. Covenants of the Company. The Company covenants and
------------------------
agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the parties
hereto, to become effective. If the Registration Statement has become or
becomes effective pursuant to Rule 430A of the Rules and Regulations, or
the filing of the Prospectus is otherwise required under Rule 424(b) of the
Rules and Regulations, the Company will file the Prospectus, properly
completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules
and Regulations within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly
advise you in writing (i) of the receipt of any comments of the Commission,
(ii) of any request of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus or for additional information,
(iii) when the Registration Statement shall have become effective and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will
not file any amendment or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or the
Prospectus of which you have not been furnished with a copy a reasonable
time prior to such filing or to which you reasonably object or which is not
in compliance with the Act and the Rules and Regulations.
17.
<PAGE>
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or the Prospectus which in your judgment may be
necessary or advisable to enable the several Underwriters to continue the
distribution of the Common Shares and will use its best efforts to cause
the same to become effective as promptly as possible. The Company will
fully and completely comply with the provisions of Rule 430A of the Rules
and Regulations with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or
supplements, would include an untrue statement of a material fact, or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or if it is necessary at any
time to amend the Prospectus, including any amendments or supplements, to
comply with the Act or the Rules and Regulations, the Company will promptly
advise you thereof and will promptly prepare and file with the Commission,
at its own expense, an amendment or supplement which will correct such
statement or omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to become
effective as soon as possible; and, in case any Underwriter is required to
deliver a prospectus after such nine-month period, the Company upon
request, but at the expense of such Underwriter, will promptly prepare such
amendment or amendments to the Registration Statement and such Prospectus
or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the
end of the first quarter ending after one year following the effective date
of the Registration Statement (as defined in Rule 158(c) of the Rules and
Regulations, the "Effective Date"), the Company will make generally
available to its security holders an earnings statement (which need not be
audited) covering a period of 12 consecutive months beginning after the
effective date of the Registration Statement which will satisfy the
provisions of the last paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to in
Section 10(a)(3) of the Act, will furnish to you and the Selling
Stockholders or mail to your order copies of the
18.
<PAGE>
Registration Statement, the Prospectus, the Preliminary Prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you and the Selling Stockholders may
request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the Blue Sky laws of such jurisdictions
as you designate, will comply with such laws and will continue such
qualifications, registrations and exemptions in effect so long as
reasonably required for the distribution of the Common Shares. The Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction where it is
not presently qualified or where it would be subject to taxation as a
foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such
purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request of any Representative or
Underwriter, to each of the other Underwriters: (i) as soon as practicable
after the end of each fiscal year, copies of the Annual Report of the
Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows
for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the
filing thereof, copies of each proxy statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report
filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its Common
Stock.
(h) During the period of 180 days after the first date that any
of the Common Shares are released by you for sale to the public, without
the prior written consent of Volpe, Welty & Company (which consent may be
withheld at the sole discretion of Volpe, Welty & Company), the Company
will not, other than pursuant to outstanding stock options and warrants
disclosed in the Prospectus or pursuant to the grant of additional options
or rights granted under the Company's stock option plans or employee stock
purchase
19.
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plans which plans are disclosed in the Prospectus, issue, offer, pledge,
sell, grant options to purchase or otherwise dispose of, directly or
indirectly, any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity
security. During the period of 180 days after the first date that any of
the Common Shares are released by you for sale to the public, without the
prior written consent of Volpe, Welty & Company (which consent may be
withheld at the sole discretion of Volpe, Welty & Company), the Company
will not release any security holder from any contractual commitment to the
Company not to, directly or indirectly, offer to sell, pledge, sell or
contract to sell or otherwise dispose of any shares of its Common Stock or
any right to acquire such shares or securities convertible into or
exchangeable for any shares of Common Stock. Additionally, the Company
acknowledges that, pursuant to a letter dated July 18, 1996, Montgomery
Securities transferred and assigned to Volpe, Welty & Company all rights
held by Montgomery Securities under all lock-up agreements solicited and
obtained from security holders of the Company (the "Assignment"),
including, without limitation, the right to provide written consent to the
release of any such lock-up agreement. The Company hereby agrees to honor
the Assignment and to take no action which could reasonably be expected to
violate or undermine the enforceability of the Assignment or the underlying
lock-up agreements. The Company further agrees to instruct its transfer
agent that the Assignment is binding and enforceable with respect to
transfers of shares. The Company agrees to further instruct its transfer
agent to stop transfer if any person attempts to transfer shares in
violation of the Assignment or any assigned lock-up agreement.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements
under the caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register
its Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Blue Sky laws of the State of
California (and thereby permit market making transactions and secondary
trading in the Company's Common Stock in California), will comply with such
Blue Sky laws and will continue such qualifications, registrations and
exemptions in effect for a period of five years after the date hereof.
(k) The Company will use its best efforts to maintain the Common
Stock as a National Market System security on The Nasdaq Stock Market.
20.
<PAGE>
(l) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in
your opinion the market price for the shares has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you concerning the substance
of, and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and, unless otherwise paid by the Company, the Selling
Stockholders agree to pay, in such proportions as they may agree upon among
themselves, all costs, fees and expenses incurred in connection with the
performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel and the Company's independent accountants, (v) all costs
and expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee
of the National Association of Securities Dealers, Inc., (viii) the furnishing
to you and the Underwriters of the reports and information referred to in
Section 6(g) and (ix) all other fees, costs and expenses referred to in Item 13
of the Registration Statement. The Underwriters may deem the Company to be the
primary obligor with respect to all costs, fees and expenses to be paid by the
Company and by the
21.
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Selling Stockholders. Except as provided in this Section 7, Section 9 and
Section 11 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky laws and the Blue
Sky memorandum referred to above). This Section 7 shall not affect any
agreements relating to the payment of expenses between the Company and the
Selling Stockholders.
The Selling Stockholders will pay (directly or by reimbursement) all
fees and expenses incident to the performance of their obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to (i) any fees and expenses of counsel for such Selling
Stockholders other than fees and expenses of Wilson, Sonsini, Goodrich & Rosati,
P.C. which shall be paid by the Company, (ii) any fees and expenses of the
Agent, and (iii) all expenses and taxes incident to the sale and delivery of the
Common Shares to be sold by such Selling Stockholders to the Underwriters
hereunder.
SECTION 8. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Stockholders made pursuant to the provisions hereof, to
the performance by the Company and the Selling Stockholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations relating to the Common
Shares, not later than 10:00 P.M.), Washington, D.C. Time, on the date of
this Agreement, or at such later time as shall have been consented to by
you; if the filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b) of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) of the Rules and Regulations; and prior to such
Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge
of the Company, the Selling Stockholders or you, shall be contemplated by
the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement, or
22.
<PAGE>
otherwise, shall have been complied with to your satisfaction.
(b) You shall be satisfied that, since the respective dates as of
which information is given in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
(i) there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, and, since such dates,
except in the ordinary course of business, neither the Company nor any of
its subsidiaries has entered into any material transaction not referred to
in the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein, (ii) there shall not have
been any change in the capital stock, other than pursuant to the exercise
of outstanding options and warrants disclosed in the Prospectus, of the
Company or any of its subsidiaries or any material change in the
indebtedness (other than in the ordinary course of business) of the Company
or any of its subsidiaries, (iii) except as set forth or contemplated by
the Registration Statement or the Prospectus, no material verbal or written
agreement or other transaction shall have been entered into by the Company
or any of its subsidiaries, which is not in the ordinary course of business
and no such agreements which are required to be filed as exhibits to the
Registration Statement have not been filed as required, (iv) no loss or
damage (whether or not insured) to the property of the Company or any of
its subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, results of
operations or prospects of the Company and its subsidiaries, (v) no legal
or governmental action, suit or proceeding affecting the Company or any of
its subsidiaries which is material to the Company or any of its
subsidiaries or which affects or may affect the transactions contemplated
by this Agreement shall have been instituted or threatened, and (vi) there
shall not have been any material change in the condition (financial or
otherwise), business, management, results of operations or prospects of the
Company or any of its subsidiaries which makes it impractical or
inadvisable in the judgment of the Representatives to proceed with the
public offering or purchase the Common Shares as contemplated hereby. You
shall also be satisfied that neither the Company nor any of its
subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus, and the
representations and warranties of the Company herein are true and correct
in all material respects as of the First
23.
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Closing Date or any later date on which Optional Common Shares are to be
purchased, as the case may be.
(c) There shall have been furnished to you, as Representatives of
the Underwriters, on each Closing Date, in form and substance satisfactory
to you, except as otherwise expressly provided below:
(i) An opinion of Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, counsel for the Company and the Selling
Stockholders, addressed to the Underwriters and dated the First
Closing Date, or the Second Closing Date (in the latter case with
respect to the Company only), as the case may be, to the effect that:
(1) Each of the Company and its Canadian subsidiaries
has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction
of incorporation, to such counsel's knowledge, is duly qualified
to do business as a foreign corporation and is in good standing
in all other jurisdictions where the ownership or leasing of
properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to
so qualify would not have a material adverse effect on the
Company and its subsidiaries, and has full corporate power and
authority to own its properties and conduct its business as
described in the Registration Statement;
(2) The authorized, issued and outstanding capital
stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus of the date specified therein
and conforms as to legal matters in all material respects to the
description thereof contained in the Registration Statement and
the Prospectus under the caption "Description of Capital Stock"
as of the date specified therein; all necessary and proper
corporate proceedings have been taken in order to authorize
validly such authorized Common Stock; all outstanding shares of
Common Stock (including the Firm Common Shares and any Optional
Common Shares) have been duly and validly issued, are fully paid
and nonassessable, have been issued in compliance with federal
and state securities laws, to such counsel's knowledge, were not
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase any securities; without
limiting the foregoing, to such counsel's knowledge there are
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no preemptive or other rights to subscribe for or purchase any of
the Common Shares to be sold by the Company hereunder;
(3) All of the issued and outstanding shares of capital
stock of the Company's Canadian subsidiaries have been duly and
validly authorized and issued, are fully paid and nonassessable
and are owned beneficially by the Company free and clear of all
liens, encumbrances, equities, claims, security interests, voting
trusts or other defects of title whatsoever;
(4) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Delaware
law, and when duly countersigned by the Company's transfer agent
and registrar, and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with
the provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid
and nonassessable, to such counsel's knowledge, will not have
been issued in violation of or subject to any preemptive rights
or other rights to subscribe for or purchase securities and will
conform in all respects to the description thereof contained in
the Prospectus;
(5) The execution and delivery of the Merger Agreement,
effecting the reincorporation of the California Corporation under
the laws of the State of Delaware, were duly authorized by all
necessary corporate action on the part of each of the California
Corporation and the Company and were duly authorized by all
necessary action on the part of the stockholders of each of the
California Corporation and the Company;
(6) Each of the California Corporation and the Company
had all corporate power and authority to execute and deliver the
Merger Agreement, to file the Merger Agreement with the Secretary
of State of California and the Secretary of State of Delaware and
to consummate the reincorporation contemplated by the Merger
Agreement; the Merger Agreement at the time of execution and
filing constituted a valid and binding obligation of each of the
California Corporation and the Company, enforceable in accordance
with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting creditors' rights
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generally or by general equitable principles; the merger between
the California Corporation and the Company (the "Merger") was
effected under the laws of the State of California and the State
of Delaware;
(7) Except as disclosed in or specifically contemplated
by the Prospectus, (including options or rights granted pursuant
to the Company's stock option plans or employee stock purchase
plans subsequent to the date as of which information is given
with respect to the outstanding options or rights in the
Prospectus) to such counsel's knowledge, there are no outstanding
options, warrants or other rights calling for the issuance of,
and no commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any security convertible into or
exchangeable for capital stock of the Company;
(8) (a) The Registration Statement has become
effective under the Act, and, to such counsel's knowledge, no
stop order proceeding suspending the effectiveness of the
Registration Statement or preventing the use of the Prospectus
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission; any
required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) of the Rules and Regulations has been
made in the manner and within the time period required by such
Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the financial
statements and notes thereto and financial schedules included
therein as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the
Act and the Rules and Regulations;
(c) To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a
character required to be disclosed in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration
Statement which are not disclosed or filed, as required by the
Rules and Regulations;
(d) To such counsel's knowledge, there are no
legal or governmental actions, suits or proceedings pending or
threatened against the
26.
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Company which are required to be described in the Prospectus
which are not described as required by the Rules and Regulations;
(9) The Company has full corporate right, power and
authority to enter into this Agreement and to sell and deliver
the Common Shares to be sold by it to the several Underwriters;
this Agreement has been duly and validly authorized by all
necessary corporate action by the Company, has been duly and
validly executed and delivered by and on behalf of the Company,
and is a valid and binding agreement of the Company, except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities
arising under the Act as to which no opinion need be expressed;
and no approval, authorization, order, consent, registration,
filing, qualification, license or permit of or with any court,
regulatory, administrative or other governmental body or agency
is required for the execution and delivery of this Agreement by
the Company or the consummation of the transactions contemplated
by this Agreement, except such as have been obtained and are in
full force and effect under the Act and such as may be required
under applicable Blue Sky laws in connection with the purchase
and distribution of the Common Shares by the Underwriters and the
clearance of such offering with the NASD;
(10) The execution and performance of this Agreement
and the consummation of the transactions herein contemplated,
other than the performance of the Company's indemnification and
contribution obligations under this Agreement concerning which no
opinion need be expressed, will not conflict with, result in the
breach of, or constitute, either by itself or upon notice or the
passage of time or both, a material default under, any agreement,
mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of its or their
property may be bound or affected which is material to the
Company and its subsidiaries taken as a whole, or violate any of
the provisions of the certificate of incorporation or bylaws, or
other organizational documents, of
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the Company or any of its subsidiaries or violate any statute,
judgment, decree, order, rule or regulation of any court or
governmental body having jurisdiction over the Company or any of
its subsidiaries or any of its or their property, the violation
of which would in any single case or when aggregated with all
such violations by the Company and all of its subsidiaries have a
material adverse effect upon the Company;
(11) Neither the Company nor any subsidiary is in
violation of its certificate of incorporation or bylaws, or other
organizational documents, or to such counsel's knowledge, in
breach of or default with respect to any provision of any
material agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company or any such subsidiary is a party or
by which it or any of its properties may be bound or affected,
except where such default would not materially adversely affect
the Company and its subsidiaries taken as a whole; and, to such
counsel's knowledge, the Company and its subsidiaries are in
compliance with all laws, rules, regulations, judgments, decrees,
orders and statutes of any court or jurisdiction to which they
are subject, except where noncompliance would not materially
adversely affect the Company and its subsidiaries;
(12) To such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived
to the registration of shares of Common Stock or other
securities, because of the filing of the Registration Statement
by the Company or the offering contemplated hereby;
(13) To such counsel's knowledge, this Agreement and
the Stockholders Agreement have been duly authorized, executed
and delivered by or on behalf of each of the Selling
Stockholders; the Agent has been duly and validly authorized to
act as the custodian of the Common Shares to be sold by each such
Selling Stockholder; and to such counsel's knowledge, no
approval, authorization, order or consent of any court,
regulatory body, administrative agency or other governmental body
is required for the execution and delivery of this Agreement or
the Stockholders Agreement or the consummation by the Selling
Stockholders of the transactions contemplated by this Agreement,
except such as have been obtained and are in full
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force and effect under the Act and such as may be required under
the rules of the NASD and applicable Blue Sky laws;
(14) To such counsel's knowledge, the Selling
Stockholders have full right, power and authority to enter into
this Agreement and the Stockholders Agreement and to sell,
transfer and deliver the Common Shares to be sold on such Closing
Date by such Selling Stockholders hereunder and good and
marketable title to such Common Shares so sold, free and clear of
all liens, encumbrances, equities, claims, restrictions, security
interests, voting trusts, or other defects of title whatsoever,
has been transferred to the Underwriters (whom counsel may assume
to be bona fide purchasers) who have purchased such Common Shares
hereunder; and
(15) To such counsel's knowledge, this Agreement and
the Stockholders Agreement are valid and binding agreements of
each of the Selling Stockholders in accordance with their terms
except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally and except with
respect to those provisions relating to indemnities or
contributions for liabilities under the Act, as to which no
opinion need be expressed.
(16) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares to the
Underwriters hereunder.
(17) The Assignment is valid, binding and enforceable,
and as a result, the Company is duly entitled to honor the
Assignment in instructing its transfer agent and its
securityholders.
In rendering such opinion, such counsel may rely as to the
matters set forth in paragraphs (13), (14), (15) and (16), on opinions of
other counsel retained by the Selling Stockholders, as to matters of local
law, on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Stockholders and of officers of the Company and
of governmental officials, in which case their opinion is to state that
they are so doing and that the Underwriters are justified in relying on
such opinions or certificates and copies of said opinions or certificates
are to be attached to the opinion. Such counsel shall also include a
statement to the effect that although they have
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not independently verified the accuracy and completeness of the statements
contained in the Registration Statement or Prospectus, based upon meetings
with officers and other representatives of the Company, their participation
in the preparation of the Registration Statement and Prospectus and their
review and discussion of the contents thereof nothing has come to such
counsel's attention that would lead such counsel to believe that either at
the effective date of the Registration Statement or at the applicable
Closing Date the Registration Statement or the Prospectus, or any such
amendment or supplement (except for the financial statements and schedules
as to which such counsel need not express any statement), contains any
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading.
(ii) Such opinion or opinions of Brobeck, Phleger & Harrison
LLP, counsel for the Underwriters dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require,
and the Company and the Selling Stockholders shall have furnished to
such counsel such documents and shall have exhibited to them such
papers and records as they may reasonably request for the purpose of
enabling them to pass upon such matters. In connection with such
opinions, such counsel may rely on representations or certificates of
officers of the Company and governmental officials.
(iii) An opinion of counsel (acceptable to counsel for the
Underwriters) for subsidiaries of the Company located in Germany,
England, Spain, France, Ireland, Barbados and Switzerland and
identified in Exhibit 21.1 of the Registration Statement addressed to
the Underwriters and dated the First Closing Date, or the Second
closing Date (in the latter case with respect to the Company only), as
the case may be, to the effect that each subsidiary of the Company has
been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation, is
duly qualified to do business as a foreign corporation and is in good
standing in all other jurisdictions where the ownership or leasing of
properties or the conduct of its business requires such qualification,
except for jurisdictions in which the failure to so qualify would not
have a material adverse effect on such subsidiary, and has full
corporate power and authority to own its
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properties and conduct its business and all future proposed business
as described in the Registration Statement; and all issued and
outstanding shares of capital stock of each subsidiary have been duly
and validly authorized and issued, are fully paid and nonassessable
and are owned beneficially by the Company free and clear of all liens,
encumbrances, equities, claims, security interests, voting trusts and
other defects of title.
(iv) A certificate of the Company executed by the Chairman of
the Board or President and the Chief Financial Officer of the Company,
dated the First Closing Date or the Second Closing Date, as the case
may be, to the effect that:
(1) The representations and warranties of the Company
set forth in Section 2 of this Agreement are true and correct as
of the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order preventing
or suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the best of
the knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated under
the Act;
(3) Each of the respective signers of the certificate
has carefully examined the Registration Statement and the
Prospectus; in his or her opinion and to the best of his or her
knowledge, the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all statements required
to be stated therein regarding the Company and its subsidiaries;
and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto includes any untrue statement of
a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement,
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written or oral, transaction or event has occurred which should
have been set forth in an amendment to the Registration Statement
or in a supplement to or amendment of any prospectus which has
not been disclosed in such a supplement or amendment;
(5) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, there
has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or otherwise), business, properties, results of operations,
management or prospects of the Company and its subsidiaries; and
no legal or governmental action, suit or proceeding is pending or
threatened against the Company or any of its subsidiaries which
is material to the Company and its subsidiaries, whether or not
arising from transactions in the ordinary course of business, or
which may adversely affect the transactions contemplated by this
Agreement; since such dates and except as so disclosed, neither
the Company nor any of its subsidiaries has entered into any
verbal or written agreement or other transaction which is not in
the ordinary course of business or incurred any material
liability or obligation, direct, contingent or indirect, made any
change in its capital stock, except pursuant to the Company's
stock option or stock purchase plans disclosed in the Prospectus,
made any material change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid any dividend, or
made any other distribution, upon its outstanding capital stock
payable to stockholders of record on a date prior to the First
Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus and
except as disclosed in or contemplated by the Prospectus, the
Company and its subsidiaries have not sustained a material loss
or damage by strike, fire, flood, windstorm, accident or other
calamity (whether or not insured).
(v) On the First Closing Date a certificate, dated such
Closing Date and addressed to you, signed by or on behalf of each of
the Selling Stockholders to the effect that the representations and
warranties of such
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Selling Stockholder in this Agreement are true and correct, as if made
at and as of the First Closing Date and such Selling Stockholder has
complied with all the agreements and satisfied all the conditions on
his part to be performed or satisfied prior to the First Closing Date.
(vi) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed
to you, as Representatives of the Underwriters, from Coopers & Lybrand
L.L.P., independent accountants, the first one to be dated the day
before the date of this Agreement, the second one to be dated the
First Closing Date and the third one (in the event of a Second
Closing) to be dated the Second Closing Date, in form and substance
satisfactory to you.
(vii) On the date before this Agreement is executed and also
on the First Closing Date and the Second Closing Date a letter
addressed to you, as Representatives of the Underwriters, from Ernst &
Young Chartered Accountants L.L.P., independent accountants, the first
one to be dated the day before the date of this Agreement, the second
one to be dated the First Closing Date and the third one (in the event
of a Second Closing) to be dated the Second Closing Date, in form and
substance satisfactory to you.
(viii) On or before the First Closing Date, letters from each
of the Selling Stockholders, each holder of one percent or more of the
Company's Common Stock and each director and officer of the Company,
in form and substance satisfactory to you, confirming that for a
period of 180 days after the first date that any of the Common Shares
are released by you for sale to the public, such person will not
directly or indirectly offer to sell, pledge, sell or contract to sell
or otherwise dispose of any shares of Common Stock or any right to
acquire such shares or securities convertible into or exchangeable for
any shares of Common Stock without the prior written consent of Volpe,
Welty & Company, which consent may be withheld at the sole discretion
of Volpe, Welty & Company.
(ix) On or before the First Closing Date, letters or other
agreements from the holders of 98% of the Company's outstanding
capital stock, from the holders of 100% of the outstanding options to
purchase Common Stock of the Company, and from the holders of 100% of
the outstanding warrants to purchase Common Stock of the Company, in
form and substance satisfactory to you, confirming that for a period
of 180 days after the first date that any of the Common
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Shares are released by you for sale to the public, such person will
not directly or indirectly offer to sell, pledge, sell or contract to
sell or otherwise dispose of any shares of Common Stock or any right
to acquire such shares or securities convertible into or exchangeable
for any shares of Common Stock without the prior written consent of
Volpe, Welty & Company and/or the Company, which consent, in the case
of Volpe, Welty & Company, may be withheld at the sole discretion of
Volpe, Welty & Company.
(x) On or before the First Closing Date, (i) certificates
evidencing the effectiveness of the Merger from each of the Secretary
of the State of California and the Secretary of the State of Delaware,
(ii) satisfaction that no dissenters rights exist as a result of the
Merger, and (iii) satisfaction that the Company has succeeded the
California Corporation in all material respects to the title of all
the assets and privity to all the rights previously owned or held by
the California Corporation, through operation of law.
(xi) Evidence that the Common Stock has been approved for
quotation as a National Market System security on The Nasdaq Stock
Market upon notice of issuance.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to the Representatives or to
counsel for the Underwriters shall be deemed to be a representation and warranty
by the Company to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Stockholders without liability on
the part of any Underwriter, the Company or the Selling Stockholders except for
the expenses to be paid or reimbursed by the Company and by the Selling
Stockholders pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding
---------------------------------------
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 8, or if the sale to the Underwriters of the Common Shares
at the First Closing is not consummated because of any refusal, inability or
failure on
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the part of the Company or the Selling Stockholders to perform any agreement
herein, to fulfill any of the conditions herein, or to comply with any provision
hereof, the Company agrees to reimburse you and the other Underwriters upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by you and them in connection with the proposed purchase and the sale of the
Common Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating directly to the offering contemplated by the Prospectus. Any
such termination shall be without liability of any party to any other party
except that the provisions of this Section, Section 7 and Section 11 shall at
all times be effective and shall apply.
SECTION 10. Effectiveness of Registration Statement. You, the
---------------------------------------
Company and the Selling Stockholders will use your, its and their best efforts
to cause the Registration Statement to become effective, to prevent the issuance
of any stop order suspending the effectiveness of the Registration Statement
and, if such stop order be issued, to obtain as soon as possible the lifting
thereof.
SECTION 11. Indemnification.
---------------
(a) The Company and each of the Selling Stockholders, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or
several, to which such Underwriter or such controlling person may become
subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of the Company), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated
below) (i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (ii) arise out of or are based upon the omission or
alleged omission to state in any of them a material fact required to be
stated therein or necessary to make the statements in any of them not
misleading, or (iii) arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company or the
Selling Stockholders contained herein or any failure of the Company or the
Selling Stockholders to perform their respective obligations hereunder or
under law; and will reimburse each Underwriter and each such controlling
person for any legal and other expenses as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying
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any such loss, claim, damage, liability, expense or action; provided,
however, that neither the Company nor the Selling Stockholders will be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof and
provided, further, however, that with respect to any untrue statement or
-------- -------
omission made in any Preliminary Prospectus, the indemnity agreement
contained in this paragraph shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such underwriter)
from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Common Shares which are the subject
thereof to the extent that any such loss, claim damage, liability or
expense of such Underwriter or controlling person results from the fact
that a copy of the Prospectus or an amendment or supplement thereto was not
sent or given to such person at or prior to the written confirmation of
sale of such Common Shares to such person in any case where such delivery
is required by the Act, and if the untrue statement or omission has been
corrected in the Prospectus, amendment or supplement (as the case may be)
unless such failure to deliver the Prospectus was a result of noncompliance
by the Company with its obligations under Section 6(e) hereof; provided,
--------
however, that the liability of the Selling Stockholder under the indemnity
-------
agreements contained in this paragraph (a) shall be limited to an amount
equal to the proceeds received by such Selling Stockholder in this offering
from the Underwriters. The Company and the Selling Stockholders may agree,
as among themselves and without limiting the rights of the Underwriters
under this Agreement, as to their respective amounts of such liability for
which they each shall be responsible. In addition to its other obligations
under this Section 11(a), the Company and the Selling Stockholders agree
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, or any
inaccuracy in the representations and warranties of the Company or the
Selling Stockholders herein or failure to perform its obligations
hereunder, all as described in this Section 11(a), they will reimburse each
Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability
of the Company's or the Selling Stockholders' obligation to reimburse each
Underwriter for such expenses and the
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possibility that such payments might later be held to have been improper by
a court of competent jurisdiction; provided however that the Selling
Stockholders shall not be required to advance sums in excess of the amounts
of proceeds received by such Selling Stockholder in this offering. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company and the
Selling Stockholders to the extent applicable together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing)
announced from time to time by Bank of America NT&SA, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments
which are not made to an Underwriter within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability
which the Company or the Selling Stockholders may otherwise have. Each
Selling Stockholder shall not be required to provide indemnification or
advancement of expenses hereunder to the Underwriters in an amount in
excess of such Selling Stockholder's pro rata share of the amount of such
indemnification or advanced expenses (based on the number of shares sold by
such Selling Stockholder and the Company) until the Underwriters shall have
first made a demand on the Company with respect to such indemnification or
advancement of expenses and the Company shall have either rejected such
demand or failed to make such requested payment within 30 days after
receipt of such demand.
(b) Each Underwriter will severally indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Stockholders and each person, if any,
who controls the Company or any Selling Stockholder within the meaning of
the Act, against any losses, claims, damages, liabilities or expenses to
which the Company, or any such director, officer, Selling Stockholder or
controlling person may become subject, under the Act, the Exchange Act, or
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) (i) arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, (ii) arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading or (iii) arise out of or are based upon any inaccuracy in the
representations of such Underwriters in Section 4 hereof; in each case
discussed
37.
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above in (i), (ii) and (iii), to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, in
reliance upon and in conformity with the information furnished to the
Company pursuant to Section 4 hereof; and will reimburse the Company, or
any such director, officer, Selling Stockholder or controlling person for
any legal and other expense reasonably incurred by the Company, or any such
director, officer, Selling Stockholder or controlling person in connection
with investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action. In addition to its other
obligations under this Section 11(b), each Underwriter severally agrees
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
this Section 11(b) which relates to information furnished to the Company
pursuant to Section 4 hereof or any inaccuracy in the representations of
the Underwriters in Section 4 hereof, it will reimburse the Company (and,
to the extent applicable, each officer, director, controlling person or
Selling Stockholder) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company
(and, to the extent applicable, each officer, director, controlling person
or Selling Stockholder) for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is
so held to have been improper, the Company (and, to the extent applicable,
each officer, director, controlling person or Selling Stockholder) shall
promptly return it to the Underwriters together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within 30 days of
a request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying
party under this Section, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any
38.
<PAGE>
liability which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section or
to the extent it is not prejudiced as a proximate result of such failure.
In case any such action is brought against any indemnified party and such
indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to
the extent that it may wish, jointly with all other indemnifying parties
similarly notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be a conflict between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying
party shall not be liable for the expenses of more than one separate
counsel, approved by the Representatives in the case of paragraph (a), or
approved by the Company in the case of paragraph (b), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action, in each of
which cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of any losses,
39.
<PAGE>
claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative benefits received by
the Company, the Selling Stockholders and the Underwriters from the
offering of the Common Shares or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company, the Selling
Stockholders and the Underwriters in connection with the statements or
omissions or inaccuracies in the representations and warranties herein
which resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The respective
relative benefits received by the Company, the Selling Stockholders and the
Underwriters shall be deemed to be in the same proportion, in the case of
the Company and the Selling Stockholders as the total price paid to the
Company and to the Selling Stockholders, respectively, for the Common
Shares sold by them to the Underwriters (net of underwriting commissions
but before deducting expenses), and in the case of the Underwriters as the
underwriting commissions received by them bears to the total of such
amounts paid to the Company and to the Selling Stockholders and received by
the Underwriters as underwriting commissions. The relative fault of the
Company, the Selling Stockholders and the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact or the inaccurate or the alleged inaccurate representation
and/or warranty relates to information supplied by the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result
of the losses, claims, damages, liabilities and expenses referred to above
shall be deemed to include, subject to the limitations set forth in
subparagraph (c) of this Section 11, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in subparagraph
(c) of this Section 11 with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be
required with respect to any action for which notice has been given under
subparagraph (c) for purposes of indemnification. The Company, the Selling
Stockholders and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 11 were determined
solely by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does
not take account of the equitable
40.
<PAGE>
considerations referred to in this subparagraph (d). Notwithstanding the
provisions of this Section 11, (i) no Underwriter shall be required to
contribute any amount in excess of the amount of the total underwriting
commissions received by such Underwriter in connection with the Common
Shares underwritten by it and distributed to the public and (ii) each
Selling Stockholder shall not be required to contribute any amount in
excess of the amount by which the total gross proceeds received by that
Selling Stockholder from the Underwriters from the sale of shares exceeds
the amount of any damages which that Selling Stockholder has otherwise been
required to pay pursuant to this Section 11. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 11 are several in proportion to their
respective underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
11(a) and 11(b) hereof, including the amounts of any requested
reimbursement payments and the method of determining such amounts, shall be
settled by arbitration conducted under the provisions of the Constitution
and Rules of the Board of Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for
arbitration or written notice of intention to arbitrate, therein electing
the arbitration tribunal. In the event the party demanding arbitration
does not make such designation of an arbitration tribunal in such demand or
notice, then the party responding to said demand or notice is authorized to
do so. Such an arbitration would be limited to the operation of the
interim reimbursement provisions contained in Sections 11(a) and 11(b)
hereof and would not resolve the ultimate propriety or enforceability of
the obligation to reimburse expenses which is created by the provisions of
such Sections 11(a) and 11(b) hereof.
(f) No indemnifying party will, without the prior written consent
of the indemnified party, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not
such indemnified party or any person who controls such indemnified party
within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of such
indemnified party and each such controlling
41.
<PAGE>
person from all liability arising out of such claim, action, suit or
proceeding.
SECTION 12. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company and the Selling Stockholders to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Representatives of all such shares in accordance with the terms
hereof. If any Underwriter or Underwriters default in their obligations to
purchase Common Shares hereunder on either the First or Second Closing Date and
the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase on such Closing Date does not exceed
10% of the total number of Common Shares which the Underwriters are obligated to
purchase on such Closing Date, the non-defaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the Common Shares which such defaulting Underwriters agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to the
Representatives and the Company for the purchase of such Common Shares by other
persons are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Stockholders except for the expenses to be paid by the
Company and the Selling Stockholders pursuant to Section 7 hereof and except to
the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California Time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00
42.
<PAGE>
P.M., California Time, on the first full business day following the date of
execution of this Agreement; but this Agreement shall nevertheless become
effective at such earlier time after the Registration Statement becomes
effective as you may determine on and by notice to the Company or by release of
any of the Common Shares for sale to the public. For the purposes of this
Section 13, the Common Shares shall be deemed to have been so released upon the
release for publication of any newspaper advertisement relating to the Common
Shares or upon the release by you of telegrams (i) advising Underwriters that
the Common Shares are released for public offering, or (ii) offering the Common
Shares for sale to securities dealers, whichever may occur first.
SECTION 14. Termination. Without limiting the right to terminate
-----------
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you and the Selling Stockholders or by you by notice to the Company and the
Selling Stockholders at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company or the Selling Stockholders
to any Underwriter (except for the expenses to be paid or reimbursed by the
Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof
and except to the extent provided in Section 11 hereof) or of any
Underwriter to the Company or the Selling Stockholders (except to the
extent provided in Section 11 hereof).
(b) This Agreement may be terminated by you at any time prior to
the First Closing Date by giving written notice to the Company and the
Selling Stockholders in accordance with Section 8, or if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in hostilities or an
escalation of major hostilities by the United States or the declaration of
war or a national emergency by the United States on or after the date
hereof, (ii) any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions if the
effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States or the
Company's industry sector would, in the Underwriters' reasonable judgment,
make the offering or delivery of the shares impracticable, (iii) suspension
of trading in securities generally or a material adverse decline in value
of securities generally on the New York Stock Exchange, the American Stock
Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on
either such exchange or system, (iv) the
43.
<PAGE>
enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, any court, legislative body, agency or
other governmental authority which in the Underwriters' reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) if any adverse event shall have
occurred or shall exist which makes untrue or incorrect in any material
respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration
Statement or Prospectus but should be reflected therein in order to make
the statements or information contained therein not misleading in any
material respect, (vi) if there shall be any action, suit or proceeding
pending or threatened, or there shall have been any development or
prospective development involving particularly the business or properties
or securities of the Company or any of its subsidiaries or the transactions
contemplated by this Agreement, which, in the reasonable judgment of the
Representatives, may materially and adversely affect the Company's business
or earnings and makes it impracticable or inadvisable to offer or sell the
Common Shares, (vii) declaration of a banking moratorium by either federal
or New York State authorities or (viii) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to Section 14(b), there shall be no
liability of the Company or the Selling Stockholders to the Underwriters
and no liability of the Underwriters to the Company or the Selling
Stockholders; provided, however, that in the event of any such termination
-------- -------
the Company and the Selling Stockholders agree to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Stockholders
under this Agreement, including all costs and expenses referred to in
Sections 7 and 9 hereof.
SECTION 15. Failure of the Selling Stockholders to Sell and Deliver.
-------------------------------------------------------
If one or more of the Selling Stockholders shall fail to sell and deliver to the
Underwriters the Common Shares to be sold and delivered by such Selling
Stockholders at the First Closing Date under the terms of this Agreement, then
the Underwriters may at their option, by written notice from you to the Company
and the Selling Stockholders, either (i) terminate this Agreement without any
liability on the part of any Underwriter or, except as provided in Sections 7, 9
and 11 hereof, the Company or the Selling Stockholders, or (ii) purchase the
shares which the Company and other Selling Stockholders have agreed to sell and
deliver in accordance with the terms hereof. In the event of a failure by one
or more of the Selling
44.
<PAGE>
Stockholders to sell and deliver as referred to in this Section, either you or
the Company shall have the right to postpone the Closing Date for a period not
exceeding seven business days in order that the necessary changes in the
Registration Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected.
SECTION 16. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, represen tations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 17. Notices. All communications hereunder shall be in
-------
writing and, if sent to the Representatives shall be mailed, delivered or
telegraphed and confirmed to you at One Maritime Plaza, 11th Floor, San
Francisco, California 94111, Attention: Ted Mitchell, with a copy to Thomas A.
Bevilacqua, Esq. at Brobeck, Phleger & Harrison LLP, One Market, Spear Tower,
San Francisco, California 94105; and if sent to the Company or the Selling
Stockholders shall be mailed, delivered or telegraphed and confirmed to the
Company at 47370 Fremont Boulevard, Fremont, California 94538, Attention:
Gloria M. Purdy, with a copy to Thomas C. DeFilipps, Esq. at Wilson, Sonsini,
Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304. The
Company, the Selling Stockholders or you may change the address for receipt of
communications hereunder by giving notice to the others.
SECTION 18. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 19. Representation of Underwriters. You will act as
------------------------------
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken jointly or
by Volpe, Welty & Company, as Representatives, will be binding upon all the
Underwriters.
45.
<PAGE>
SECTION 20. Partial Unenforceability. The invalidity or
------------------------
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 21. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 22. General. This Agreement constitutes the entire agreement
-------
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Stockholders and you.
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Stockholders represents by so doing that such Attorney-in-fact
has been duly appointed as Attorney-in-fact by such Selling Stockholder pursuant
to a validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action. Any action taken under this Agreement by
any of the Attorneys-in-fact will be binding on all the Selling Stockholders.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
46.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters including you, all in accordance
with its terms.
Very truly yours,
INTERLINK COMPUTER SCIENCES, INC.
By:____________________________________
Charles W. Jepson
President
SELLING STOCKHOLDERS
By:____________________________________
Charles W. Jepson
(Attorney-in-fact)
By:____________________________________
Gloria M. Purdy
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
VOLPE, WELTY & COMPANY
PUNK, ZIEGEL & KNOELL, L.P.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By VOLPE, WELTY & COMPANY
By:___________________________
Principal
47.
<PAGE>
SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
Volpe, Welty & Company..............................
Punk, Ziegel & Knoell, L.P..........................
_________
TOTAL 2,700,000
=========
A-1
<PAGE>
SCHEDULE B
Number of Firm
Common Shares to
be Sold by Selling
Name of Selling Stockholder Stockholders
- --------------------------- ------------------
-------
TOTAL 500,000
=======
B-1
<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 Participation 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 Participation
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 Participation 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 Participation Agreement unless the
Company elects to process a given change in participation more quickly. A
participant's Participation 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 Participation
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, notice of exercise of his or her option shall be
deemed to have been given by the participant and 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, in its discretion, either
(i) arrange the delivery to each participant, as appropriate, of a certificate
representing the shares purchased upon exercise of his or her option, or, (ii)
credit the shares purchased to an account in the participant's name with a
brokerage firm selected by the Board to hold shares in street name.
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
Participation 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
PARTICIPATION 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
Participation 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 in order to
exercise the option(s) granted to me pursuant to the Employee Stock
Purchase Plan and to purchase 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 Participation 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 under United States federal tax law, 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 United States 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 United States 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 United States 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. I understand
that the foregoing tax summary does not discuss the provisions of the
income tax laws of any municipality, state or foreign jurisdiction in which
I may reside.
7. I understand and acknowledge that notwithstanding any other provision of
this Participation Agreement or the Employee Stock Purchase Plan.
(a) neither the Employee Stock Purchase Plan nor this Participation
Agreement shall form any part of any contract of employment between
the Company or any Designated Subsidiary and any Employees of any such
company, and it shall not confer on any participant any legal or
equitable rights (other than those constituting the options granted
under the Employee Stock Purchase Plan themselves, against the Company
or any Designated Subsidiary, directly or indirectly, or give rise to
any cause of action in law or in equity against the Company or any
subsidiary.
(b) the benefits to participants under the Employee Stock Purchase Plan
shall not form any part of their wages, pay or remuneration or count
as wages pay or remuneration for pension fund or other purposes.
(c) in no circumstances shall any Employee on ceasing to hold his or her
office or employment by virtue of which he or she is or may be
eligible to participate in the Employee Stock Purchase Plan be
entitled to any compensation for any loss of any right or benefit or
prospective right or benefit under the Plan, which he might otherwise
have enjoyed whether such compensation is claimed by way of damages
for wrongful dismissal or other breach of contract or by way of
compensation for loss of office or otherwise.
(d) that the Company expressly retains the right to terminate the Employee
Stock Purchase Plan at any time and that I will have no right to
continued option grants under the Employee Stock Purchase Plan in such
event.
8. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Participation Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
9. For U.S. Participants only: 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 PARTICIPATION 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
Participation Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:___________________________
<PAGE>
EXHIBIT 10.19.1
COPY
Project #A-93-WD-0461
- -------------------------------------------------------------------------------
This Agreement made in duplicate this 10th day of September 1993.
BETWEEN:
Her Majesty The Queen in right of Canada represented by the Minister of
Western Economic Diversification herein called the "Minister";
- and -
New Era Systems Services Ltd. incorporated under the laws of Alberta and
having its Head Office and principal place of business in the City of Calgary,
in the Province of Alberta, herein called the "Client".
WHEREAS the Minister is responsible for the administration of the Western
Economic Diversification Program; and
WHEREAS the Client has submitted a proposal under that Program to the Minister;
and
WHEREAS the Minister is satisfied that if implemented, the proposal will assist
in the development or diversification of the economy of Western Canada;
THEREFORE the parties agree as follow:
1. In this Agreement;
"Assisted Capital Costs" means those Project Costs which are described
as Assisted Capital Costs in Attachment "A".
"Assisted Research and Development Costs" means those Project Costs
which are described as Assisted Research and Development Cost in
Attachment "A".
"Assisted Marketing and Product Support Costs" means those Project Costs
which are described as Assisted Marketing & Product Support Costs in
Attachment "A".
"Assisted Project Costs" means those Project Costs which are described
as Assisted Project Cots in Attachment "A".
"Equity" means the aggregate of the value of the following accounts:
(a) issued common and/or preferred share capital,
(b) proprietor's and/or partner's capital accounts,
- -------------------------------------------------------------------------------
Page 1
<PAGE>
Project #A-93-WD-0461
- --------------------------------------------------------------------------------
(c) contributed surplus,
(d) retained earnings and/or deficits, and
(e) subordinated loans
provided that these accounts do not include items such as goodwill which,
in the sole judgement of the Minister, unreasonably inflate that value.
"Fiscal Year" means the period for which the accounts of the business of
the Client are made up and accepted for the purposes of assessment under
the Income Tax Act.
"Project" means the project particularly described in Attachment "A", which
the Client agrees to carry out under this Agreement.
"Project Costs" are reasonable and proper direct costs of implementing the
Project as specified in Attachment "A".
"WD" when used in an Attachment to this Agreement, means Her Majesty, the
Minister, or the Department of Western Economic Diversification as the
circumstances require.
"Western Canada" means the provinces of Alberta, British Columbia, Manitoba
and Saskatchewan.
The Project
-----------
2.1 The Client undertakes the carry out the Project in a diligent and
professional manner.
2.2 The Client shall carry out the Project at Calgary in the Province of
Alberta unless the Client has the prior written authorization of the
Minister to relocate the Project within Western Canada.
2.3 (a) The Client shall commence carrying out the Project on or before the
1st day of September 1993, herein called the "Project Start Date".
(b) The Client shall fully complete the Project no later than the 28th day
of February 1995, herein called the "Project Completion Date."
(c) The Project Date and the Project Completion Date may be altered by
notice in writing by the Minister.
- --------------------------------------------------------------------------------
Page 2
<PAGE>
Project #A-93-WD-0461
- -------------------------------------------------------------------------------
2.4 (a) The Client shall, on or before the Project Start Date, demonstrate
that the client has commenced the Project. Such demonstration shall
consist of such evidence as may be required by the Minister and may
include evidence that:
i) a national Research Council (NRC) IRAP application of at least
$195,000 has been approved; and,
ii) Assisted Project Costs have been incurred and paid.
(b) If in the sole judgement of the Minister, the Client has failed, on
or before the Project Start Date, to demonstrate that the Client has
commenced the Project, the Agreement may be terminated at the option
of the Minister effective immediately.
The Contribution
----------------
3.1 Provided the Client is in compliance with the Client's obligations under
this Agreement, the Minister will make a financial contribution (herein
called the "Contribution") to the Client which in the aggregate shall not
exceed the sum of $1,878,973 made up as follows:
(a) the lesser of 10% of Assisted Capital Costs and $20,300:
(b) the lesser 30% of Assisted Research and Development Costs and
$823,290; and,
(c) the lesser 45% of Assisted Marketing and Product Support Costs and
$1,035,383.
3.2 The amount to be paid by the Minister on account of the Contribution shall
not exceed:
(a) $884,650 in Canada's fiscal year ending March 31, 1994; and,
(b) $994,323 in canada's fiscal year ending March 31,1995
3.3 If the Client's forecast of Project Costs provided under subsection 4.3
would indicate a payment to the Client in any fiscal year that is
different from the amount specified in subsection 3.2, the Minister may
notify the Client in writing:
(a) that the amounts in subsection 3.2 have been adjusted to be
consistent with the Client's forecast of Project Costs; or
- -------------------------------------------------------------------------------
Page 3
<PAGE>
Project #A-93-WD-0461
- --------------------------------------------------------------------------------
(b) that no adjustment will be made to the amounts specified in
subsection 3.2.
3.4 The Minister shall not make any payment for Assisted Project Costs
incurred on or before the 1st day of April 1993.
3.5 Payments by the Minister under this Agreement shall be made to the
Client not more frequently than four (4) times per year and the Minister
may, at the Minister's sole discretion, reallocate payments to a future
government fiscal year, but in no case shall a payment be made until
after the Client has actually commenced the Project.
3.6 Payments to the Client shall not be made unless the Client has submitted
a claim for reimbursement of Assisted Project Costs which the client has
incurred and paid, it being understood that the claim must be
accompanied by such vouchers, receipts and other documentation,
including progress reports, as may be requested by the Minister.
3.7 Claims submitted by the Client shall not be paid unless they are
submitted no later than six months following the Project Completion
Date.
3.8 The Minister does not have any obligation to make the Contribution
unless the client complies with the following special conditions:
a) the Client must agree, prior to the disbursement of WD
contributions for Phase 1, to an amendment to revise the
repayment schedule for WD project A91WD0183 to twelve (12) equal
quarterly repayments commencing on the 1st day of April 1995;
b) the Minister must be satisfied that Phase 1 has been completed,
prior to the disbursement of WD contribution for Phase 2. The
Minister may request, at the Minister's expense, an evaluation
by external specialists, to confirm that performance targets
have been achieved; and,
c) the client must provide evidence of approval by Revenue Canada
of a Scientific Research & Experimental Development Tax Credit
(SR & ED/ITC) of at least $679,000 prior to the disbursement of
WD contributions for Phase 2. Any shortfalls in the Tax Credit
will be supplemented by shareholder equity and/or available line
of credit.
3.9 The Client represents and warrants that no costs under this Agreement
are for goods or services provided by South African companies or by a
majority-owned South African company located outside of South Africa.
- -------------------------------------------------------------------------------
Page 4
<PAGE>
Project #A-93-WD-0461
- -------------------------------------------------------------------------------
3.10 The Minister and the Client hereby acknowledge that for purposes of this
Agreement the following federal, provincial, and municipal government
financial assistance for the Project has been taken into consideration:
Western Economic Diversification $1,878,973
NRC/IRAP 200,000
SR & ED/ITC - Current Project 744,329
----------
TOTAL GOVERNMENT ASSISTANCE TAKEN INTO ACCOUNT $2,823,302
==========
3.11 (a) The Client undertakes to inform the Minister promptly in writing
of any reduction in Project Costs or of any additional federal,
provincial or municipal assistance to be received for the
Project, and the Minister shall have the right to adjust the
amount of the Contribution to take into account the amount of
any such additional assistance that is to be received.
(b) For purposes of this Agreement, total government assistance,
including any tax credit to which the Client is or will be
entitled in respect of any property related to the Project,
shall not exceed 50% of Assistable Capital Costs and 75% of
Assistable Non-Capital Costs as estimated in Attachment "A".
Repayment of Contribution
-------------------------
4.1 The Client shall repay the contribution to Her Majesty in eight (8)
equal quarterly instalments, due the first day of each quarter,
starting no later than thirteen (13) months after the Project Completion
Date.
4.2 The Client agrees to pay to Her Majesty interest compounded monthly on
any amount that remains unpaid 30 days after the date on which the
payment first falls due, herein called the "Due Date". In such event,
interest shall be set at the rate provided for in subsection 6.2 (b)
and shall be calculated from the Due Date until all principal and
interest is paid in full.
Client's Additional Responsibilities
------------------------------------
4.3 (a) When submitting a claim for payment of a portion of the
Contribution, the Client shall provide the Minister with a
written forecast of Project Costs, Assisted Project Costs, and
other forecast information specified in Attachment "B", expected
to be paid by the Client during the period specified in
Attachment "B".
- --------------------------------------------------------------------------------
Page 5
<PAGE>
Project #A-93-WD.0461
- --------------------------------------------------------------------------------
(b) The Client shall in addition to the forecasts required by subsection
4.3(a), provide such additional forecasts as may be requested by the
Minister.
4.4 (a) The Client agrees to contribute new cash Equity in support of Phase 1
of the Project of not less than $524,177 before any payment is made by
Her Majesty to the Client under this Agreement. Further, the Client
agrees to contribute new cash Equity in support of Phase 2 of the
Project of not less than $260,000 before any payment is made by Her
Majesty to the Client toward Phase 2 under this Agreement.
(b) The Client agrees to maintain level of Equity as defined in this
Agreement but not including retained earnings or losses, of $2,072,436
as reported in the Client's audited Consolidated Balance Sheet at
February 28, 1993, plus an additional $342,000 after September 1, 1993
plus an additional $310,000 after December 31, 1993, until the
Contribution has been fully repaid.
(a) The Client agrees not to repay shareholders' loans or issue dividends
or redeem share capital without the written approval of the Minister
until the Contribution hereunder has been fully repaid.
(b) The written approval of the Minister required by subsection 4.5(a) must
be obtained at least 60 days before taking the action contemplated by
subsection 4.5(a).
4.6 The Client shall not alter the scope of the Project without the prior
written consent of the Minister.
4.7 The Client shall obtain the prior written consent of the Minister to any
change which, in the sole judgement of the Minister, may materially affect
the ownership, management, or financing of the Client during the term of
this Agreement.
4.8 The Client agrees not to dispose of, or relinquish control over, any
substantial asset utilized in the Project, including intellectual property
developed or acquired as a result of carrying out the Project, unless the
Minister consents in writing.
4.9 The Client agrees that until all of its indebtedness hereunder has been
repaid in full, it will not guarantee or otherwise incur any liability for
the obligations of any other person, firm, or corporation without the
written approval of the Minister.
4.10 The Client Agrees not to pledge any of its property as security for a loan
made to the Client by a shareholder of the Client.
- -------------------------------------------------------------------------------
Page 6
<PAGE>
Project #A-93-WD-0461
- --------------------------------------------------------------------------------
4.11 The Client shall provide evidence of satisfactory insurance coverage for
the Project and maintain such insurance coverage in full force and effect
until the Contribution has been fully repaid.
4.12 The Client hereby covenants that the Client is the owner of any
intellectual property including patents, trademarks and industrial designs
which it may use in carrying out the Project or that it has acquired the
right to use such intellectual property from the person who is lawfully
authorized to give it.
4.13 After the Project Completion Date, the Client will implement or operate
the Project in Western Canada until the Contribution has been fully
repaid.
4.14 The Client covenants that manufacturing, processing, or commercialization
of any products to be marketed by the Client or a licensee of the Client
as a consequence of carrying out the Project under this Agreement shall
take place in Western Canada until such time as the Contribution made
under this Agreement has been repaid in full unless the Client obtains the
Minister's prior written consent to such manufacturing, processing, or
commercialization outside of Western Canada.
4.15 The Client shall obtain all necessary licenses, permits, and approvals
required for the Project by applicable legislation, regulations and by-
laws.
4.16 The Client shall permit any authorized representative of the Minister
reasonable access to the Client's premises to inspect and assess the
progress of the Project as well as to examine the Client's books and
records relating to the Project, and to make copies thereof.
Reporting
---------
5.1 The Client shall submit an annual consolidated financial statement audited
by a professionally certified external accountant within six (6) months
following the Client's Fiscal Year end until all the Client's obligations
have been complied with. Moreover, the Client agrees to provide such
additional financial statements as may be requested by the Minister.
5.2 The Client shall, if requested by the Minister, provide a project audit
report as required and described in Attachment "B".
5.3 The Client shall provide progress reports as indicated in Attachment "B"
or as requested by the Minister.
- -------------------------------------------------------------------------------
Page 7
<PAGE>
Project #A-93-WD-0461
- --------------------------------------------------------------------------------
5.4 Upon request by the Minister, the Client shall provide promptly such
information as the Client is reasonably able to provide in elaboration of
any report or other information or documentation required to be provided
under this Agreement.
5.5 As part of the final payment claim the Client shall submit a Project
Completion Report containing;
(a) a summary of the technical and operational results of the Project;
(b) a description of the benefits that have accrued or are likely to
accrue to the economy of Western Canada as a result of the Project.
Default
-------
6.1 (a) The following constitute events of Default:
(i) the Client becomes bankrupt or insolvent, goes into
receivership, or takes the benefit of any statute from time to
time in force relating to bankrupt or insolvent debtors;
(ii) an order is made or resolution passed for the winding up of the
Client, or the Client is dissolved;
(iii) the Client ceases to carry on business;
(iv) the Client fails to implement or operate the Project in Western
Canada until the Contribution has been fully repaid;
(v) the Client has submitted false or misleading information to the
Minister or has failed to disclose relevant information which
may have a negative impact on the Client's financial position;
(vi) the Client fails to maintain the required level of Equity;
(vii) the Client makes a false or misleading statement concerning
assistance by the Minister in a prospectus or other document
related to raising funds for the Project;
(viii) the Client has not met or satisfied a term or condition of this
Agreement.
- -------------------------------------------------------------------------------
Page 8
<PAGE>
Project #A-93-WD-0461
- -------------------------------------------------------------------------------
(b) If an event of default occurs, the Minister may inform the Client by
notice in writing sent by registered mail to the client's address as
specified in subsection 8.2 (b) hereof:
(i) that the Minister's obligation to pay the contribution, or the
balance of the contribution, to the Client is hereby
terminated; and/or
(ii) that the Client is required to repay to the Minister, all or
part of the Contribution forthwith and that such amount is a
debt due to Her Majesty in Right of Canada and may be
recovered as such, and
unless the Client satisfies the Minister, within a period of 2 weeks
-------
from the receipt of the said notice, that the event of default has
not occurred or that it has been fully remedied, the Client hereby
agrees to be bound by and to comply with the terms of such notice.
6.2 (a) The Client shall pay, in addition to any amount payable as a result
of an Event of Default, interest on such amount calculated from the
date of the notice given under subsection 6.1(b) (herein also called
the "Due Date") by the Minister of the Event of Default, until the
date that the full amount payable has been received by Her Majesty.
(b) The rate of interest under subsection 4.2 and subsection 6.2 (a)
shall be 3 percent above the minimum rate at which the Bank of
Canada is prepared to make loans on the Due Date compounded monthly,
herein called the Bank of Canada Rate. This interest rate shall be
in effect until such time as the entire amount repayable has been
received by Her Majesty.
Environment
-----------
7.1 (a) The Client hereby represents that any environmental issues or
concerns relating to the Project which are known or ought to be
known to the Client have been disclosed to the Minister.
(b) The Client covenants to inform the Minister of any environmental
issues or concerns regarding the Project which arise during the Term
of this Agreement.
(c) the Client covenants that it has obtained or will obtain all
certificates, consents, permits and approvals required for
compliance with applicable legislation; that it will otherwise
comply with the requirements of such legislation; and that it will
use its best efforts to resolve environmental issues.
- -------------------------------------------------------------------------------
Page 9
<PAGE>
Project #A-93-WD-0461
- -------------------------------------------------------------------------------
Administration
--------------
8.1 (a) Subject to subsection 6.1(b) of this Agreement, any notice or
communication authorized or permitted with respect to this
Agreement shall be effectively given if:
- delivered by hand; or
- sent by letter; or
- sent by telecopier facsimile (FAX) prepaid to the
address or FAX number, as given in this Agreement.
(b) Any notice that is delivered by hand shall be deemed to have
been received on delivery;
(c) Any notice which has been mailed shall be deemed to have been
received eight calendar days after being mailed;
(d) Any notice sent by telecopier facsimile (FAX) shall be deemed
to have been received twenty four hours after the time which is
printed on the dispatcher's telecopier confirmation slip.
8.2 (a) Any notice or communication required or permitted by this
Agreement to be made by the Client to the Minister shall be
addressed to:
The Director General - Operations
Department of Western Economic Diversification
Suite 1500 Canada Place
9700 Jasper Avenue
Edmonton, Alberta
T5J 4H7
FAX # (403) 495-4557
(b) Any notice of communication which is required or authorized by
the Minister to be made to the Client may be addressed to:
Mr. Ben Dulley
President
New Era Systems Services Ltd.
710 Esso Plaza East Tower
425 - 1st Street SW
Calgary, Alberta
T2P 3L8
FAX # (403) 266-6767
- ------------------------------------------------------------------------------
Page 10
<PAGE>
Project #A-93-WD-0461
- --------------------------------------------------------------------------------
(c) Either the Minister or the Client may change the address and
other information stipulated above, provided that a written
change of address notice is issued to the other party.
8.3 (a) The Minister and the Client shall treat as confidential and
shall not disclose, during the term of this Agreement, any
information regarding the Project provided by one party to the
other party in confidence or any additional information which
either party receives in confidence as a result of the
performance of the Agreement, provided that such information may
be disclosed in the event that the parties agree to the
disclosure; the disclosure may be required to be made by law; or
the party claiming the information to be confidential makes the
information public.
(b) It is understood that all information provided by the Client
under this Agreement is done so on the basis that the
information is commercially confidential and is treated as such
by the Client.
8.4 The Client hereby authorizes the Minister to make the usual credit
inquiries from time to time, regarding the financial status of the
client and consents to the disclosure of the Client's financial status
by any bank, financial institution or creditor of the Client.
Public Announcements and Communications
---------------------------------------
9.1 The Client hereby agrees to comply with the requirements contained in
Attachment "C" concerning public announcements, placement of signs,
official ceremonies, and publications including news releases and
annual reports.
General
-------
10.1 No member of the House of Commons of Canada or the Senate of Canada
shall be admitted to any share or part of the Agreement or to any
benefit to arise therefrom.
10.2 It is a term of this Agreement:
(a) that no former public office holder who is not in compliance
with the post-employment provisions of the conflict of Interest
and Post-employment code for Public Office Holders shall derive
a direct benefit from this Agreement; and
- -------------------------------------------------------------------------------
Page 11
<PAGE>
Project #A-93-WD-0461
- --------------------------------------------------------------------------------
(b) that during the term of this Agreement any former federal public
office holder engaged in the course of carrying out this Agreement
shall comply with the principles of the Conflict of Interest and
Post-Employment code for Public Office Holders. Should an interest
be acquired during the life of this Agreement that would cause a
conflict of interest or seem to cause a departure from the
principles, the Client shall declare it immediately to the
Minister.
10.3 Notwithstanding anything in this agreement concerning the Project
Completion Date, this agreement shall remain in full force and effect
until all the obligations of the Client including the obligation to repay
the contribution, have been fully carried out.
10.4 This Agreement shall not be assigned in whole or in part by the Client
without the prior written consent of the Minister.
10.5 Any payment by the Minister under this Agreement is subject to there being
an appropriation for the fiscal year in which the payment is to be made.
10.6 This Agreement is binding on the Client, and its heirs, executors,
administrators/successors and assigns.
IN WITNESS WHEREOF this Agreement has been executed by the parties by their duly
authorized officers on the day and year first written above.
/s/G. W. Webster
- -------------------- --------------------------
Witness For the Minister of
Western Economic Diversification
Corporate Seal New Era Systems Services Ltd.
/s/[signature appears here]
--------------------------
President
/s/[signature appears here]
--------------------------
Vice President, Finance
- -------------------------------------------------------------------------------
Page 12
<PAGE>
EXHIBIT 10.19.2
[LETTERHEAD OF GOVERNMENT OF CANADA APPEARS HERE]
WD PROJECT NO.: A-93-WD-0461
CLAIM NO.: Two
AMENDMENT
February 7, 1994
New Era System Services Ltd.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Attention: Mr. Ben Dulley
Dear Mr. Dulley:
We are pleased to advise you that a payment of $220,949 has been approved by the
Western Diversification Program on the above project. A cheque for this amount
has been requisitioned, and you may expect to receive it in the immediate
future.
The payment is based on approved costs of $628,031. The method of calculating
the amount of the payment is shown in the attached annex. This payment is based
on the claim information submitted and is subject to possible future audit or
review.
We also wish to inform you that approval has been granted to amend the Agreement
for this project dated September 10, 1993.
This amendment replaces the last paragraph on page 15 of Attachment "A", as
follows:
From: "Advertising & Promotion: Included are costs associated with trade show
registration, promotional material, advertising, editorial coverage, and
the presentation of a Users Conference. The Users Conference will occur
only in Phase 2."
To: "Advertising & Promotion: Included are costs associated with trade show
registration, promotional material, advertising, editorial coverage, and
the presentation of Users Conferences."
.../2
<PAGE>
WD PROJECT NO.: A-93-WD-0461
CLAIM NO.: Two
AMENDMENT
- 2 -
Our Agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
Enclosed are guidelines for your reference in preparing future Project Progress
Reports. In addition we have also enclosed a Certificate of Compliance which we
request you complete and submit with each future claim.
Should you have any questions about the payment or its calculation, please feel
free to contact Les Gibson as (403) 495-6872 or in his absence Jim Ireland at
(403) 495-4438.
Yours Sincerely,
/s/ Y.N. Stepnisky
Y.N. Stepnisky
Director General Operations
Alberta Region
Att.
<PAGE>
Exhibit 10.19.3
[LETTERHEAD APPEARS HERE]
WD Project No.: A-93-WD-0461
Amendment
April 21, 1994
Mr. Ben Dulley
New Era System Services Ltd.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
I wish to inform you that approval has been granted to further amend the
Agreement for this project dated September 10, 1993 as amended February 7, 1994.
This amendment replaces subsections 3.1 and 3.2 and Attachment "A" of our
original Agreement, as follows:
1. Subsection 3.1:
From: "Provided the Client is in compliance with the Client's obligations under
this Agreement, the Minister will make a financial contribution (herein
called the "Contribution") to the Client which in the aggregate shall not
exceed the sum of $1,878,973 made up as follows:
(a) the lesser of 10% of Assisted Capital Costs and $20,300;
(b) the lesser of 30% of Assisted Research and Development Cost and
$823,290; and
(c) the lesser of 45% of Assisted Marketing and Product Support Costs
and $1,035,383.
.../2
CANADA
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
- 2 -
To: "Provided the Client is in compliance with the Client's obligations
under this Agreement, the Minister will make a financial contribution
(herein called the "Contribution") to the Client which in the
aggregate shall not exceed the sum of $1,878,973 made up as follows:
(a) the lesser of 10% of Assisted Capital Costs and $24,033;
(b) the lesser of 30% of Assisted Research and Development Costs and
$795,719, and
(c) the lesser of 45% of Assisted Marketing and Product Support Costs
and $1,059,221."
2. Subsection 3.2:
From: The amount to be paid by the Minister on account of the Contribution
shall not exceed:
(a) $884,650 in Canada's fiscal year ending March 31, 1994; and
(b) $994,323 in Canada's fiscal year ending March 31, 1995.
To: The amount to be paid by the Minister on account of the Contribution
shall not exceed:
(a) $786,828 in Canada's fiscal year ending March 31, 1994; and
(b) $1,092,145 in Canada's fiscal year ending March 31, 1995.
3. The costs for Attachment "A" are changed as shown in the attached Revised
Attachment "A".
All other terms and conditions of the original Agreement remain in effect for
the project duration.
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
.../3
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
-3-
If you are in agreement with this Letter of Amendment, please have an authorized
officer of your company sign the second copy of the amendment where indicated
and return it to this office.
Sincerely yours,
/s/ Gary Webster
Gary Webster
NEW ERA SYSTEMS SERVICES LTD.
/s/ (SIGNATURE TO COME)
- ---------------------------
Signature
(Seal)
April 25, 1994
- ---------------------------
Date
<PAGE>
[LETTERHEAD OF GOVERNMENT OF CANADA APPEARS HERE]
Exhibit 10.19.4
WD PROJECT NO.: A-93-WD-0461
CLAIM NO.: Seven
AMENDMENT
February 28, 1995
Mr. Ben Dulley
New Era Systems Services Ltd.
710 Esso Plaza, East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
We are pleased to advise you that a payment of $256,183 has been approved by the
Western Diversification Program on the above project. A cheque for this amount
has been requisitioned, and you may expect to receive it in the immediate
future.
The payment is based on approved costs of $725,805. The method of calculating
the amount of the payment is shown in the attached annex. This payment is based
on the claim information submitted and is subject to possible future audit or
review.
We also wish to acknowledge change in shareholders:
FROM:
<TABLE>
<CAPTION>
Common Preferred
------ ---------
<S> <C> <C>
David Benedict Dulley 15,836 10,000
Ann Triplett Fish 12,100 - 0 -
HTS Holdings Ltd. 42,250 70,000
GBR Linden, Lennox, & Gailer 16,000 - 0 -
Less than 5% shareholdings 147,078 20,000
------- -------
Total 233,264 100,000
------- -------
</TABLE>
.../2
<PAGE>
WD PROJECT NO.: A-93-WD-0461
CLAIM NO.: Seven
AMENDMENT
- 2 -
TO:
<TABLE>
<CAPTION>
Common Preferred
------ ---------
<S> <C> <C>
David Benedict Dulley 22,445 10,000
Ann Triplett Fish - 0 - - 0 -
HTS Holdings Ltd. 42,250 70,000
GBR Linden, Lennox, & Gailer - 0 - - 0 -
Peter Gailer 14,823 - 0 -
Less than 5% shareholdings 154,345 20,000
------- -------
Total 233,863 100,000
------- -------
</TABLE>
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
Enclosed are guidelines for your reference in preparing future Project Progress
Reports. In addition we have also enclosed a Certificate of Compliance which we
request you complete and submit with each future claim.
Should you have any questions about the payment or its calculation, please feel
free to contact Mike Bowen at (403)495-2017 or in his absence Gary Wagner at
(403)495-5787.
Yours sincerely,
/s/ Brant Popp
Brant Popp
A/Director General
Program Implementation
Alberta Region
Att.
<PAGE>
Exhibit 10.19.5
[LETTERHEAD OF GOVERNMENT OF CANADA APPEARS HERE]
WD Project No.: A-93-WD-0461
Amendment
June 12, 1995
Mr. Ben Dulley
New Era System Services Ltd.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
I wish to inform you that approval has been granted to further amend the
Agreement for this project dated September 10, 1993 as amended February 7, 1994,
April 21, 1994 and February 28, 1995.
This amendment replaces subsections 2.3(b), 3.2, and 4.1 of our amended
Agreement, as follows:
1. Subsection 2.3(b) is amended:
From: "The Client shall fully complete the Project no later than the 28th day
of February 1995, herein called the "Project Completion Date"."
To: "The Client shall fully complete the Project no later than the 30th day
of June 1995, herein called the "Project Completion Date"."
2. Subsection 3.2 is amended:
From: "The amount to be paid by the Minister on account of the Contribution
shall not exceed:
(a) $786,828 in Canada's fiscal year ending March 31, 1994; and
(b) $1,092,145 in Canada's fiscal year ending March 31, 1995."
.../2
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
-2-
To: "The amount to be paid by the Minister on account of the Contribution
shall not exceed:
(a) $786,828 in Canada's fiscal year ending March 31, 1994;
(b) $905,187 in Canada's fiscal year ending March 31, 1995; and
(c) $186,958 in Canada's fiscal year ending March 31, 1996."
3. Subsection 4.1 is amended:
From: "The Client shall repay the contribution to Her Majesty in eight (8)
equal quarterly instalments, due the first day of each quarter, starting
no later than thirteen (13) months after the Project Completion Date."
To: "The Client shall repay the contribution to Her Majesty as follows:
(a) $48,173 on June 30, 1996;
(b) Seven (7) equal quarterly instalments of $47,600 each, due the last
day of each quarter, commencing September 30, 1996;
(c) Quarterly instalments of $54,400 each, due the last day of each
quarter, commencing June 30, 1998 until the indebtedness is repaid
in full;
(d) Accelerated quarterly instalments equal to 9.5% of HARBOR product
revenues that exceed $820,000 in the quarter ending one month prior
to the payment date stated in (a) to (c) above. Each of these
accelerated instalments will be due and payable with the regular
quarterly instalments.
(e) The accelerated instalments in each year will not exceed:
(i) $17,100 in Canada's fiscal year ending March 31, 1997;
(ii) $114,000 in Canada's fiscal year ending March 31, 1998;
.../3
<PAGE>
WP Project No: A-93-WD-0461
Amendment
-3-
(iii) $230,250 in Canada's fiscal year ending March 31,
1999;
(iv) $369,750 in Canada's fiscal year ending March 31,
2000;
(v) $536,100 in Canada's fiscal year ending March 31,
2001;
(f) Any portion of the Contribution that shall remain unpaid
at June 30, 2005 shall become due and payable on that date.
All other terms and conditions of the amended Agreement remain in effect
for the project duration.
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
If you are in agreement with this Letter of Amendment, please have an
authorized officer of your company sign the second copy of the amendment
where indicated and return it to this office.
Sincerely yours,
/s/ Gary Webster
Gary Webster
NEW ERA SYSTEMS SERVICES LTD.
[SIGNATURE APPEARS HERE]
- ----------------------------
Signature
(Seal)
15 June 95
- ----------------------------
Date
<PAGE>
Exhibit 10.19.6
[LETTERHEAD OF GOVERNMENT OF CANADA
APPEARS HERE IN ENGLISH & IN FRENCH]
WD Project No.: A-91-WD-0183
Amendment
June 12, 1995
Mr. Ben Dulley
New Era System Services Ltd.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
I wish to inform you that approval has been granted to further amend the
Agreement for this project dated April 2, 1992 as amended June 22, 1992,
December 14, 1992 and September 13, 1993.
This amendment replaces subsection 4.01(a) of our amended Agreement, as follows:
From: "The Recipient shall repay the Contribution to the Minister in twelve
(12) quarterly instalments. The first repayment installment of $74,097
shall be due and payable on or before April 1, 1995. The subsequent
eleven (11) repayment installments of $74,000 each are due and payable
commencing July 1, 1995 with the final installment due January 1, 1988."
To: "The Recipient shall repay the contribution to the Minister as follows:
(a) $22,697 on June 30, 1996;
(b) Seven (7) equal quarterly instalments of $22,400 each, due the last
day of each quarter, commencing September 30, 1996;
[LOGO OF CANADA]
.../2
<PAGE>
WD Project No.: A-91-WD-0183
Amendment
- 2 -
(c) Quarterly instalments of $25,600 each, due the last day of each
quarter, commencing June 30, 1998 until the indebtedness is repaid in
full;
(d) Accelerated quarterly instalments equal to 4.5% of HARBOR product
revenues that exceed $820,000 in the quarter ending one month prior to
the payment date stated in (a) to (c) above. Each of these accelerated
instalments will be due and payable with the regular quarterly
instalments.
(e) The accelerated instalments in each year will not exceed:
(i) $ 8,100 in Canada's fiscal year ending March 31, 1997;
(ii) $ 54,000 in Canada's fiscal year ending March 31, 1998;
(iii) $109,050 in Canada's fiscal year ending March 31, 2000; and
(iv) $175,200 in Canada's fiscal year ending March 31, 2000; and
(v) $255,750 in Canada's fiscal year ending March 31, 2001;
(f) Any portion of the Contribution that shall remain unpaid at February
28, 2003 shall become due and payable on that date.
All other terms and conditions of the amended Agreement remain in effect for the
project duration.
<PAGE>
WD Project No.: A-91-WD-0183
Amendment
- 3 -
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
If you are in agreement with this Letter of Amendment, please have an authorized
officer of your company sign the second copy of the amendment where indicated
and return it to this office.
Sincerely yours
/s/ Gary Webster
----------------
Gary Webster
NEW ERA SYSTEMS SERVICES LTD.
/s/ [SIGNATURE APPEARS HERE]
- ----------------------------
Signature
(Seal)
June 12, 1995
- ----------------------------
Date
<PAGE>
Exhibit 10.19.7
[LETTERHEAD OF GOVERNMENT OF
CANADA APPEARS HERE]
WD PROJECT NO.: A-93-WD-0461
CLAIM NO.: Eight
AMENDMENT
June 23, 1995
Mr. Ben Dulley
New Era Systems Services Ltd.
710 Esso Plaza, East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
We are pleased to advise you that a payment of $229,749 has been approved by the
Western Diversification Program on the above project. A cheque for this amount
has been requisitioned, and you may expect to receive it in the immediate
future.
The payment is based on approved costs of $702,110. The method of calculating
the amount of the payment is shown in the attached annex. This payment is based
on the claim information submitted and is subject to possible future audit or
review.
We also wish to acknowledge change in common shareholders:
From:
David Benedict Dulley 22,445
Peter Gailer 14,823
HTS Holdings Ltd. 42,250
Less than 5% shareholdings 154,345
-------
Total 233,863
-------
.../2
<PAGE>
WD PROJECT NO.: A-93-WD-0461
CLAIM NO.: Eight
AMENDMENT
-2-
TO:
David Benedict Dulley 21,345
Peter Gailer 14,823
HTS Holdings Ltd. 39,450
Less than 5% shareholdings 158,245
-------
Total 233,863
-------
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
Enclosed are guidelines for your reference in preparing future Project Progress
Reports. In addition we have also enclosed a Certificate of Compliance which we
request you complete and submit with each future claim.
Should you have any questions about the payment or its calculation, please feel
free to contact Mike Bowen at (403) 495-2017 or in his absence Barbara Hedstrom
at (403) 495-6428.
Yours sincerely,
/s/ Fraser Spears
Fraser Spears
A/Director General
Program Implementation
Alberta Region
Att.
<PAGE>
[LETTERHEAD OF GOVERNMENT OF CANADA APPEARS HERE]
Exhibit 10.19.8
WD Project No.: A-91-WD-0183
Amendment
January 11, 1996
Mr. Ben Dulley
New Era Systems Services Ltd.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
I wish to inform you that approval has been granted to further amend the
Agreement for this project dated April 2, 1992 as amended June 22, 1992,
December 14, 1992, September 13, 1993 and June 12, 1995.
This amendment replaces subsection 4.01(a) of our amended Agreement,
acknowledges the change in ownership of New Era Systems Services Ltd., and adds
Interlink Computer Sciences, Inc. as a joint Recipient to the Agreement as
follows:
1. Subsection 4.01(a) is amended:
From: "The Recipient shall repay the contribution to the Minister as follows:
(a) $22,697 on June 30, 1996;
(b) Seven (7) equal quarterly instalments of $22,400 each, due the last
day of each quarter, commencing September 30, 1996;
(c) Quarterly instalments of $25,600 each, due the last day of each
quarter, commencing June 30, 1998 until the indebtedness is repaid
in full;
.../2
<PAGE>
WD Project No.: A-91-WD-0183
Amendment
-2-
(d) Accelerated quarterly instalments equal to 4.5% of HARBOR product
revenues that exceed $820,000 in the quarter ending one month prior
to the payment date stated in (a) to (c) above. Each of these
accelerated installment will be due and payable with the regular
quarterly installments.
(e) The accelerated installments in each year will not exceed;
(i) $ 8,100 in Canada's fiscal year ending March 31, 1997;
(ii) $ 54,000 in Canada's fiscal year ending March 31, 1998;
(iii) $109,050 in Canada's fiscal year ending March 31, 1999;
(iv) $175,200 in Canada's fiscal year ending March 31, 2000; and
(v) $255,750 in Canada's fiscal year ending March 31, 2001;
(f) Any portion of the Contribution that shall remain unpaid at February
28, 2003 shall become due and payable on that date."
To: "The Recipient shall repay the Contribution to the Minister as follows:
(a) $22,697 on June 30, 1996;
(b) Seven (7) equal quarterly instalments of $22,400 each, due the last
day of each quarter, commencing September 30, 1996;
(c) Quarterly instalments of $25,600 each, due the last day of each
quarter, commencing June 30, 1998 until the indebtedness is repaid
in full;
.../3
<PAGE>
WD Project No.: A-91-WD-0183
Amendment
-3-
(d) Accelerated quarterly instalments equal to 4.5% of HARBOR product
revenues that exceed $820,000 in the quarter ending one month prior
to the payment date stated in (a) to (c) above. Each of these
accelerated instalments will be due and payable with the regular
quarterly instalments.
(e) Any portion of the Contribution that shall remain unpaid at February
28, 2003 shall become due and payable on that date."
2. To acknowledge the change in ownership of New Era Systems Services Ltd.:
From: HTS Holdings Ltd. 31,975 13.66%
Peter Gailer 17,323 7.40%
David Benedict Dulley 16,145 6.90%
Others with (Less than) 5% (88 shareholders) 168,621 72.04%
------- ------
234,064 100.00%
======= ======
To: Interlink Computer Sciences, Inc. 234,064 100.00%
======= ======
3. Interlink Computer Sciences, Inc. is added as a joint Recipient to the
Agreement by amended the first paragraph:
From: "In response to your proposal dated July 17, 1991, Her Majesty the Queen
in right of Canada, as represented by the Minister of Western Economic
Diversification ("the Minister") hereby offers to make a repayable
contribution ("the Contribution") to New Era Systems Services Ltd. ("the
Recipient"), upon the following terms and conditions:"
To: "In response to your proposal dated July 17, 1991, Her Majesty the Queen
in right of Canada, as represented by the Minster of Western Economic
Diversification ("the Minister") hereby offers to make a repayable
contribution ("the Contribution") to New Era Systems Services Ltd. and
Interlink Computer Sciences Inc. ("the Recipient" or "the Recipients"),
upon the following terms and conditions:
.../4
<PAGE>
WD Project No.: A-91-WD-0183
Amendment
- 4 -
Interlink Computer Sciences Inc. hereby covenants with the Minister and
New Era Systems Services Ltd. that it will, at all times, so long as the
Agreement is in force, observe and perform all terms, conditions,
covenants, obligations and undertakings as if it was an original party
to the Agreement. This creates a joint and several liability upon
Interlink Computer Sciences Inc. and New Era Systems Services Ltd.
In this Agreement, the law of the Province of Alberta is to prevail."
All other terms and conditions of the amended Agreement remain in effect for the
project duration.
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
If you are in agreement with this Letter of Amendment, please have an authorized
officer of New Era Systems Services Ltd. and Interlink Computer Sciences Inc.
each sign the second copy of the amendment where indicated and return it to this
office.
Sincerely yours,
[SIGNATURE APPEARS HERE]
for Gary Webster
NEW ERA SYSTEMS SERVICES LTD. INTERLINK COMPUTER SCIENCES, INC.
- --------------------------- -----------------------------
Signature Signature
(Seal) (Seal)
- --------------------------- -----------------------------
Date Date
<PAGE>
[LOGO OF GOVERNMENT OF
CANADA APPEARS HERE]
Exhibit 10.19.9
WD Project No.: A-93-WD-0461
Amendment
January 11, 1996
Mr. Ben Dulley
New Era Systems Services Ltd.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
TZP 3L8
Dear Mr. Dulley:
I wish to inform you that approval has been granted to further amend the
Agreement for this project dated September 10, 1993 as amended February 7, 1994,
April 21, 1994, February 28, 1995, June 12, 1995 and June 23, 1995.
This amendment replaces subsections 3.2, 4.1 of our amended Agreement,
acknowledges the change in ownership of New Era Systems Services Ltd., and adds
Interlink Computer Sciences, Inc. to the Agreement as follows:
1. Subsection 3.2 is amended:
From: "The amount to be paid by the Minister on account of the Contribution
shall not exceed:
(a) $786,828 in Canada's fiscal year ending March 31, 1994;
(b) $905,187 in Canada's fiscal year ending March 31, 1995; and
(c) $186,958 in Canada's fiscal year ending March 31, 1996."
.../2
CANADA
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
- 2 -
To: "The amount to be paid by the Minister on account of the Contribution
shall not exceed:
(a) $786,828 in Canada's fiscal year ending March 31, 1994;
(b) $905,187 in Canada's fiscal year ending March 31, 1995; and
(c) $ 22,749 in Canada's fiscal year ending March 31, 1996."
2. Subsection 4.1 is amended:
From: "The Client shall repay the contribution to Her Majesty as follows:
(a) $48,173 on June 30, 1996;
(b) Seven (7) equal quarterly instalments of $47,600 each, due the last
day of each quarter, commencing September 30, 1996;
(c) Quarterly instalments of $54,400 each, due the last day of each
quarter, commencing June 30, 1998 until the indebtedness is repaid
in full;
(d) Accelerated quarterly instalments equal to 9.5% of HARBOR product
revenues that exceed $820,000 in the quarter ending one month prior
to the payment date stated in (a) to (c) above. Each of these
accelerated instalments will be due and payable with the regular
quarterly instalments.
(e) The accelerated instalments in each year will not exceed:
(i) $ 17,100 in Canada's fiscal year ending March 31, 1997;
.../3
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
- 3 -
(ii) $114,000 in Canada's fiscal year ending March 31, 1998;
(iii) $230,250 in Canada's fiscal year ending March 31, 1999;
(iv) $369,750 in Canada's fiscal year ending March 31, 2000; and
(v) $536,100 in Canada's fiscal year ending March 31, 2001;
(f) Any portion of the Contribution that shall remain unpaid at June
30, 2005 shall become due and payable on that date."
To: "The Client shall repay the contribution to Her Majesty as follows:
(a) $48,173 on June 30, 1996;
(b) Seven (7) equal quarterly instalments of $47,600 each, due the last
day of each quarter, commencing September 30, 1996;
(c) Quarterly instalments of $54,400 each, due the last day of each
quarter, commencing June 30, 1998 until the indebtedness is repaid
in full;
(d) Accelerated quarterly instalments equal to 9.5% of HARBOR product
revenues that exceed $820,000 in the quarter ending one month prior
to the payment date stated in (a) to (c) above. Each of these
accelerated instalments will be due and payable with the regular
quarterly instalments.
(e) Any portion of the Contribution that shall remain unpaid at June
30, 2005 shall become due and payable on that date."
.../4
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
- 4 -
3. To acknowledge the change in ownership of New Era Systems Services Ltd.:
From: HTS Holdings Ltd. 31,975 13.66%
Peter Gailer 17,323 7.40%
David Benedict Dulley 16,145 6.90%
Others with (less than)5% 168,621 72.04%
(88 shareholders) ------- -------
234,064 100.00%
======= =======
To: Interlink Computer Sciences, Inc. 234,064 100.00%
======= =======
3. Interlink Computer Sciences, Inc. is added as a Client to the Agreement by
amended the definition of "Client" in the Agreement:
From: "New Era Systems Services Ltd. incorporated under the laws of Alberta
and having its Head Office and principal place of business in the City
of Calgary, in the Province of Alberta, herein called the "Client".
To: "New Era Systems Services Ltd. incorporated under the laws of Alberta
and having its Head Office and principal place of business in the City
of Calgary, in the Province of Alberta, and Interlink Computer Sciences
Inc. incorporated under the laws of California and having its Head
Office and principal place of business in the City of Fremont, in the
State of California, herein called the "Client" or the "Clients".
Interlink Computer Sciences Inc. hereby covenants with the Minister and
New Era Systems Services Ltd. that it will, at all times, so long as
the Agreement is in force, observe and perform all terms, conditions,
covenants, obligations and undertakings as if it was an original party
to the Agreement. This creates a joint and several liability upon
Interlink Computer Sciences Inc. and New Era Systems Services Ltd."
4. The following paragraph will be added to Subsection 1 of the Agreement:
.../5
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
- 5 -
"In this Agreement, the law of the Province of Alberta is to prevail."
All other terms and conditions of the amended Agreement remain in effect for the
project duration.
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
If you are in agreement with this Letter of Amendment, please have an authorized
officer of New Era Systems Services Ltd. and Interlink Computer Sciences Inc.
each sign the second copy of the amendment where indicated and return it to this
office.
Sincerely yours,
[SIGNATURE APPEARS HERE]
for Gary Webster
NEW ERA SYSTEMS SERVICES LTD. INTERLINK COMPUTER SCIENCES, INC.
- --------------------------- ---------------------------
Signature Signature
(Seal) (Seal)
- --------------------------- ----------------------------
Date Date
<PAGE>
EXHIBIT 10.19.10
Government Gouvernement
of Canada du Canada
Department of Ministere da la
Western Economic Diversication de
Diversification l'economie de l'quest
15th Floor, Canada Place 15 etage, Place du Canada
9700 Jasper Avenue 9700 av. Jasper
Edmonton, Alberta Edmonton (Alberta)
TSJ4H7 TSJ4H7
(403) 495-4184 (403) 495-4164
Fax 495-4557 495-4557 belino
WD Project No.: A-93-WD-0461
Amendment
May 29, 1996
Mr. Ben Dulley
New Era Systems Services Ltd. and
Interlink Computer Sciences, Inc.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
I wish to inform you that approval has been granted to further amend the
Agreement for this project dated September 10, 1993 as amended February 7, 1994,
April 21, 1994, February 28, 1995, June 12, 1995, June 23, 1995, and January
11, 1996.
This Amendment replaces subsections 4.4(b), 4.5(a) of our amended Agreement as
follows:
1. Subsection 4.4(b) is amended:
From: "The Client agrees to maintain a minimum level of Equity as defined in
this Agreement but not including retained earnings or losses, of
$2,072,436 as reported in the Client's audited Consolidated Balance
Sheet at February 28, 1993, plus an additional $342,000 after September
1, 1993 plus an additional $310,000 after December 31, 1993, until the
Contribution has been fully repaid."
To: "The Clients agree that the New Era Systems Service Ltd. will maintain a
minimum level of Equity as defined in this Agreement, but not including
retained earnings or losses, of $2,248,613."
.../2
Canada
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
- 2 -
2. Subsection 4.5(a) is amended:
From: "The Client agrees not to repay shareholders' loans or issue dividends
or redeem share capital without written approval of the Minister until
the Contribution hereunder has been fully repaid."
To: "Except for dividends in the amount of $231,000 paid on the redemption
of the Class "A" preferred shares of New Era System Services Ltd., the
Clients agree not to repay shareholders' loans or issue dividends or
redeem share capital without the written approval of the Minister until
the Contribution hereunder has been fully repaid."
All other terms and conditions of the amended Agreement remain in effect for the
project duration.
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
This letter will also acknowledge the following:
1. The total number of New Era Systems Services Ltd. Class "A" Common
shares owned by Interlink Computer Sciences Inc. is 234,065 rather than 234,064
as indicated in our letter dated January 11, 1996.
2. Annual consolidated financial statements of Interlink Computer Sciences
Inc. and annual reviewed financial statements of New Era Systems Services Ltd.
will satisfy the annual financial statement reporting requirements of
subsection 5.1 providing they are submitted within six (6) months of each of the
company's fiscal year ends. The Clients however, will still be required to
provide interim financial statements upon request and may be required to provide
audited financial statements if requested by the Minister.
---/3
<PAGE>
WD Project No.: A-93-WD-0461
Amendment
- 3 -
If you are in agreement with this Letter of Amendment, please have an authorized
officer of New Era Systems Services Ltd. and Interlink Computer Sciences, Inc.
each sign the second copy of the amendment where indicated and return it to this
officer.
Yours sincerely,
/s/ David Alton
David Alton
Director General
Program Implementation
Alberta Region
NEW ERA SYSTEMS SERVICE LTD. INTERLINK COMPUTER SCIENCES, INC.
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE]
- --------------------------------- ---------------------------------
Signature Signature
31 May 96 June 10, 1996
- --------------------------------- ---------------------------------
Date Date
<PAGE>
Exhibit 10.19.1
[LOGO OF GOVERNMENT OF CANADA APPEARS HERE]
WD Project No.: A-91-WD-0183
Amendment
May 29, 1996
Mr. Ben Dulley
New Era Systems Services Ltd. and
Interlink Computer Sciences, Inc.
710 Esso Plaza East Tower
425 - 1st Street S.W.
Calgary, Alberta
T2P 3L8
Dear Mr. Dulley:
I wish to inform you that approval has been granted to further amend the
Agreement for this project dated April 2, 1992 as amended June 22, 1992,
December 14, 1992, September 13, 1993 and June 12, 1995 and January 11, 1996.
This amendment replaces subsection 5.01(a)(ii) of our amended Agreement as
follows:
From: "The Recipient agrees not to repay shareholders loans or issue dividends
until all repayment instalments have been made."
To: "Except for dividends in the amount of $231,000 paid on the redemption
of the Class "A" preferred shares of New Era Systems Services Ltd., the
Recipient agrees not to repay shareholders loans or issue dividends
until all repayment instalments have been made."
All other terms and conditions of the amended Agreement remain in effect for the
project duration.
Our agreement to this amendment does not signify that future requests for
amendments of this type will be approved.
This letter will also acknowledge the following:
.../2
[LOGO OF CANADA APPEARS HERE]
<PAGE>
WD Project No.: A-91-WD-0183
Amendment
- 2 -
1. The total number of New Era Systems Services Ltd. Class "A" Common
shares owned by Interlink Computer Sciences Inc. is 234,065 rather than
234,064 as indicated in our letter dated January 11, 1996.
2. Annual consolidated financial statements of Interlink Computer Sciences
Inc. and annual reviewed financial statements of New Era Systems
Services Ltd. will satisfy the annual financial statement reporting
requirements of subsection 6.02 providing they are submitted within four
(4) months of each of the company's fiscal year ends. The Recipients
however, will still be required to provide interim financial statements
upon request and may be required to provide audited financial statements
if requested by the Minister.
If you are in agreement with this Letter of Amendment, please have an authorized
officer of New Era Systems Services Ltd. and Interlink Computer Sciences Inc.
each sign the second copy of the amendment where indicated and return it to this
office.
Yours sincerely,
/s/ David Alton
David Alton
Director General
Program Implementation
Alberta Region
NEW ERA SYSTEMS SERVICES LTD. INTERLINK COMPUTER SCIENCES, INC.
/s/ [SIGNATURE APPEARS HERE] /s/ [SIGNATURE APPEARS HERE]
- ----------------------------- ------------------------------
Signature Signature
(Seal) (Seal)
31 May 96 June 10, 1996
- ----------------------------- ------------------------------
Date Date
<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.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Interlink France S.A.R.I. France
New Era Systems Services, Ltd. Alberta, Canada
