<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
INTERLINK COMPUTER SCIENCES, INC
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
INTERLINK COMPUTER SCIENCES, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
----------------
TO BE HELD MARCH 6, 1997
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders of
INTERLINK COMPUTER SCIENCES, INC., a Delaware corporation (the "Company"),
will be held on Thursday, March 6, 1997 at 2:00 p.m., local time, at the
Marriott Courtyard, 4700 Lakeview Boulevard, Fremont California 94538 for the
following purposes:
1. To elect five directors to serve until the next Annual Meeting of
Stockholders or until their successors are elected.
2. To transact such other business as may properly come before the meeting
or any adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close
of business on January 24, 1997 are entitled to notice of and to vote at the
Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the Annual Meeting, you are
urged to mark, sign, date and return the enclosed Proxy as promptly as
possible in the postage-prepaid envelope enclosed for that purpose. Any
stockholder attending the Annual Meeting may vote in person even if he or she
has returned a Proxy.
Sincerely,
Charles W. Jepson
President and Chief Executive
Officer
Fremont, California
January 29, 1997
YOUR VOTE IS IMPORTANT.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU ARE
REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE AND RETURN IT IN THE ENVELOPE PROVIDED.
<PAGE>
INTERLINK COMPUTER SCIENCES, INC.
----------------
PROXY STATEMENT FOR THE
1997 ANNUAL MEETING OF STOCKHOLDERS
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of
INTERLINK COMPUTER SCIENCES, INC. (the "Company") for use at the Annual
Meeting of Stockholders to be held on Thursday, March 6, 1997 at 2:00 p.m.,
local time, or at any adjournment thereof, for the purposes set forth herein
and in the accompanying Notice of Annual Meeting of Stockholders. The
Company's principal executive offices are located at 47370 Fremont Boulevard,
Fremont, California 94538. The Company's telephone number is (510) 657-9800.
The Annual Meeting will be held at the Marriott Courtyard (the "Marriott"),
4700 Lakeview Boulevard, Fremont, CA 94538. The Marriott's phone number is
(510) 656-1800.
These proxy solicitation materials and the accompanying financial
information for the fiscal year ended June 30, 1996, including financial
statements, were first mailed on or about January 29, 1997 to all stockholders
entitled to vote at the Annual Meeting.
RECORD DATE
Stockholders of record at the close of business on January 24, 1997 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. At
the Record Date, 7,115,710 shares of the Company's Common Stock, $.001 par
value, were issued and outstanding and held of record by approximately 287
stockholders. No shares of the Company's Preferred Stock were outstanding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 by (i) each
person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer named in the Summary Compensation Table below, and (iv)
all directors and executive officers as a group. Except as otherwise noted
below, the Company knows of no agreements among its stockholders which relate
to voting or investment power of its Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK APPROXIMATE
FIVE PERCENT STOCKHOLDERS, BENEFICIALLY PERCENTAGE
DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OWNED OWNED(1)
---------------------------------------- ------------ -----------
<S> <C> <C>
Entities affiliated with Menlo Ventures (2)............ 1,215,626 17.3%
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Entities affiliated with Advent International Corp.
(3)................................................... 947,231 13.5
101 Federal Street
Boston, MA 02110......................................
Charles W. Jepson (4).................................. 253,594 3.5
Gloria M. Purdy (5).................................... 94,145 1.3
Donald R. Gammon (6)................................... 51,562 *
D. Benedict Dulley (7)................................. 48,227 *
Augustus J. Berkeley (8)............................... 47,603 *
Barbara A. Booth (9)................................... 30,625 *
Christopher A. Markle (10)............................. 16,458 *
Michael J. Satterwhite................................. -- *
Ronald W. Braniff (11)................................. 20,979 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK APPROXIMATE
FIVE PERCENT STOCKHOLDERS, BENEFICIALLY PERCENTAGE
DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OWNED OWNED(1)
---------------------------------------- ------------ -----------
<S> <C> <C>
Thomas H. Bredt (12).................................. 1,215,626 17.3%
Andrew I. Fillat (13)................................. 947,231 13.5
All directors and executive officers as a group (10
persons) (14) 2,674,488 35.9
</TABLE>
- --------
* Less than 1%
(1) Applicable percentage of ownership is based on 7,011,481 shares of Common
Stock outstanding as of December 31, 1996 together with applicable
options for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to shares. Shares of
Common Stock subject to options currently exercisable or exercisable
within 60 days after December 31, 1996 are deemed outstanding for
computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage ownership of
any other person.
(2) Includes 607,813 shares held by Menlo Ventures IV, L.P. and 607,813
shares of Common Stock held by Menlo Evergreen V, L.P. (collectively
"Menlo Ventures").
(3) Includes 81,818 shares held by Adtel L.P., 45,454 shares held by
Adventact L.P., 1,818 shares held by Advent International Investors II
L.P., 36,364 shares held by Advent L.P., 682,054 shares held by Global
Private Equity II, L.P. and 99,773 shares held by Golden Gate Development
and Investment L.P. (collectively "Advent International").
(4) Includes 253,594 shares subject to stock options that are exercisable
within 60 days of December 31, 1996.
(5) Includes 94,145 shares subject to stock options that are exercisable
within 60 days of December 31, 1996.
(6) Includes 2,344 shares subject to stock options that are exercisable
within 60 days of December 31, 1996. Mr. Gammon resigned his executive
officer position on October 16, 1996 and has entered into a consulting
relationship with the Company, whereby his options will continue to vest
through April 1997.
(7) Includes 3,646 shares subject to stock options that are exercisable
within 60 days of December 31, 1996 and warrants to purchase 44,581
shares held by Mr. Dulley's family.
(8) Includes 47,603 shares subject to stock options that are exercisable
within 60 days of December 31, 1996.
(9) Includes 10,625 shares subject to stock options that are exercisable
within 60 days of December 31, 1996.
(10) Includes 16,458 shares subject to stock options that are exercisable
within 60 days of December 31, 1996.
(11) Includes 20,979 shares subject to stock options that are exercisable
within 60 days of December 31, 1996.
(12) Includes 1,215,626 shares owned by affiliates of 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.
(13) Includes 947,231 shares owned by entities affiliated with Advent
International, of which Mr. Fillat is a Senior Vice President. Mr. Fillat
disclaims beneficial ownership of all such shares held by those entities.
(14) Includes 447,050 shares subject to stock options that are exercisable
within 60 days of December 31, 1996.
REVOCABILITY OF PROXIES
Any proxy given pursuant to the solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy or by
attending the Annual Meeting and voting in person.
2
<PAGE>
VOTING AND SOLICITATION
Each stockholder is entitled to one vote for each share of Common Stock held
by such stockholder on the Record Date on all matters presented at the Annual
Meeting. Stockholders do not have the right to cumulate votes in the election
of directors. A quorum comprising the holders of a majority of the outstanding
shares of Common Stock on the Record Date must be present or represented for
the transaction of business at the Annual Meeting. Abstentions and broker non-
votes will be counted as present for the purpose of determining the presence
of a quorum for the transaction of business.
The cost of soliciting proxies will be borne by the Company. The Company has
retained Boston Equiserve to provide proxy solicitation services in connection
with the Annual Meeting at an estimated cost of $1,000. In addition, the
Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
material to such beneficial owners. Proxies may also be solicited by certain
of the Company's directors, officers and regular employees, without additional
compensation, personally or by telephone or telegram.
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING
Proposals of stockholders which are intended to be presented by such
stockholders at the Company's 1998 Annual Meeting of Stockholders must be
received by the Secretary of the Company at the Company's offices at 47370
Fremont Boulevard, Fremont, California 94538, no later than September 27, 1997
in order that they may be included in the proxy statement and form of proxy
relating to that meeting.
3
<PAGE>
PROPOSAL ONE
ELECTION OF DIRECTORS
NOMINEES
A board of five directors is to be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the five nominees named below, all of whom are presently directors of the
Company. In the event that any such nominee is unable or declines to serve as
a director at the time of the Annual Meeting, the proxies will be voted for a
nominee who shall be designated by the present Board of Directors to fill the
vacancy. In the event that additional persons are nominated for election as
directors, the proxy holders intend to vote all proxies received by them in
such a manner as will assure the election of as many of the nominees listed
below as possible, and, in such event, the specific nominees to be voted for
will be determined by the proxy holders. The Company is not aware of any
nominee who will be unable or will decline to serve as a director. Each
director elected at this Annual Meeting will serve as a director until the
next Annual Meeting of Stockholders or until a successor has been duly elected
and qualified.
VOTE REQUIRED
If a quorum is present and voting, the five nominees receiving the highest
number of affirmative votes shall be elected to the Board of Directors.
Abstentions and broker non-votes are not counted in the election of directors.
The names of the nominees and certain information about them are set forth
below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION(S) WITH THE COMPANY SINCE
--------------- --- ---------------------------- --------
<S> <C> <C> <C>
Charles W. Jepson....... 50 President, Chief Executive Officer and Director 1992
Thomas H. Bredt (1)..... 56 Chairman of the Board of Directors 1990
Ronald W. Braniff
(1)(2).................. 60 Director 1993
D. Benedict Dulley...... 52 Vice President of the HARBOR Division and Director 1996
Andrew J. Fillat (2).... 48 Director 1994
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
There are no family relationships between any of the directors or executive
officers of the Company.
Charles W. Jepson has served as President, Chief Executive Officer and a
member of the Board of Directors since May 1992. Prior to joining the Company,
he served as President and Chief Executive Officer for Touch Communications, a
networking software company, from April 1991 to January 1992. Shortly after
his departure, Touch Communications filed for protection from its creditors
under the federal bankruptcy laws. Mr. Jepson holds an M.B.A. from the
University of California at Berkeley and a B.A. in Economics from San Jose
State 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 application
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
4
<PAGE>
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.
D. Benedict Dully has served as Vice President of the HARBOR Division since
the acquisition of New Era Systems Services, Ltd. ("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, now a wholly-owned subsidiary of the Company. Mr. Dully holds a B.S. in
Mathematics from the University of Nottingham in the United Kingdom.
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, a management company for several venture capital
and private equity funds, and from June 1995 to the present, he has served as
Senior Vice President with Advent International. He serves as a director and
member of the Compensation and Audit Committees of Advanced Radio Telecom, a
wireless services provider company, Voxware, Inc., a voice-compression and
communications 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.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of 13 meetings during
fiscal 1996. No director attended fewer than 75% of the meetings of the Board
of Directors or committees thereof, if any, upon which such director served.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Board does not have a nominating committee or any committee performing
similar functions.
The Audit Committee, which currently consists of Messrs. Bredt and Braniff,
held one meeting in fiscal 1996. The Audit Committee oversees actions taken by
the Company's independent accountants and reviews the Company's internal
financial controls.
The Compensation Committee, which consists of Messrs. Braniff and Fillat,
did not meet in fiscal 1996. The Compensation Committee is responsible for
determining salaries, incentives and other forms of compensation for
directors, officers and other employees of the Company and administering
various incentive compensation and benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Braniff and Fillat. Mr.
Jepson, who is 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 to the Company,
except that Mr. Jepson is excluded from discussions regarding his own salary
and incentive compensation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES TO BE ELECTED TO
THE BOARD OF DIRECTORS.
5
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Company's executive officers as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OFFICE
HELD
NAME AGE CURRENT POSITION WITH COMPANY SINCE
---- --- ----------------------------- ------
<S> <C> <C> <C>
Charles W. Jepson....... 50 President, Chief Executive Officer and Director 1992
Augustus J. Berkeley.... 50 Vice President of Worldwide Sales 1995
Barbara A. Booth........ 41 Vice President of Research and Development 1992
and Customer Support
D. Benedict Dulley...... 52 Vice President of the HARBOR Division and Director 1995
Gloria M. Purdy......... 49 Chief Financial Officer and Secretary 1996
Michael J. Satterwhite.. 40 Vice President of Human Resources 1996
Christopher A. Markle... 39 Vice President of Strategic Marketing 1996
</TABLE>
Charles W. Jepson has served as President, Chief Executive Officer and a
member of the Board of Directors since May 1992. Prior to joining the Company,
he served as President and Chief Executive Officer for Touch Communications, a
networking software company, from April 1991 to January 1992. Shortly after
his departure, Touch Communications filed for protection from its creditors
under the federal bankruptcy laws. Mr. Jepson 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 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 the
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 Dully 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, now a wholly-owned
subsidiary of the Company. Mr. Dully holds a B.S. in Mathematics from the
University of Nottingham in the United Kingdom.
Gloria M. Purdy has served as Chief Financial Officer and Secretary from
January 1996 to the present. She also served as Chief Financial Officer of the
Company from June 1992 to October 1992 and from February 1993 to May 1994. Ms.
Purdy 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. Ms.
Purdy holds a B.S. in Accounting from Golden Gate University.
Michael J. Satterwhite has served as Vice President of Human Resources from
September 1996 to the present. From October 1995 to September 1996 he was
Worldwide Director of Human Resources for Software Publishing Corporation
("SPC"), a visual communications software company. From June 1993 to October
1995, Mr. Satterwhite was the Manager of Human Resources at SPC. From June
1992 to June 1993, he was Manager of Human Resources at Oracle Corporation, an
information management software company. From 1990 to June 1992, he was
Manager of recruiting and employment at International Business Machines, Inc.
Mr. Satterwhite holds a B.S. in Organization Behavior from the University of
San Francisco.
6
<PAGE>
Christopher A. Markle has served as Vice President of Strategic Marketing
from December 1996 to the present. He also served as the Company's Director of
Marketing from June 1993 to December 1996 and as Director of Engineering from
April 1990 to June 1993. Mr. Markle holds a B.S. in Computer Science from the
Virginia Polytechnic Institute.
EXECUTIVE COMPENSATION AND OTHER MATTERS
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
ANNUAL COMPENSATION
COMPENSATION(1) AWARDS
---------------- ------------
SECURITIES
NAME AND PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(2)
------------------ ------ -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Charles W. Jepson......... 1996 $190,008 $95,300 29,000 $1,339
President and Chief
Executive Officer
Augustus J. Berkeley...... 1996 100,008 205,648 30,000 1,629
Vice President of
Worldwide Sales
Donald R. Gammon(3)....... 1996 150,000 76,000 37,500 1,233
Vice President of
Marketing
Gloria M. Purdy........... 1996 150,000 60,000 15,000 3,759
Chief Financial Officer
and Secretary
</TABLE>
- --------
(1) 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 to 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.
(2) Includes premiums paid by the Company on life insurance policies where the
Company was not the beneficiary.
(3) Mr. Gammon resigned his executive officer position on October 16, 1996 and
has entered into a consulting relationship with the Company, whereby his
options will continue to vest through April 1997.
7
<PAGE>
OPTION GRANTS IN FISCAL 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>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF STOCK
------------------------------------------------ PRICE
NUMBER OF PERCENTAGE OF APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------
NAME 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 exercise 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 of 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 then
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.
8
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END 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)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles W. Jepson........... 215,155 70,345 $1,969,980 $633,671
Augustus J. Berkeley........ 38,228 36,772 340,229 327,271
Donald R. Gammon............ 41,797 33,203 371,993 295,507
Gloria M. Purdy............. 77,687 29,813 703,185 268,065
</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 the
initial public offering price of $10.00 per share, less the applicable
option exercise price.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Mr. Jepson, Mr. 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. Mr. Jepson 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.
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 provides
that options will be granted to non-employee directors of the Company pursuant
to an automatic nondiscretionary grant mechanism. 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 annually, each such option to be granted at the fair
market value of the Common Stock on the date of grant. The initial option
grant of 15,000 shares vests 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
vests at the end of four years. Upon the effectiveness of the Company's
initial public offering, each non-employee director received options to
purchase 15,000 shares of Common Stock at the then fair market value. In
addition, the Company reimburses the reasonable travel expenses of the
directors.
REPORT OF THE COMPENSATION COMMITTEE
The following is the Report of the Compensation Committee of the Company
describing the compensation policies and rationale applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the fiscal year ended June 30, 1996. The information contained in
the report shall not be deemed to be "soliciting material" or to be "filed"
with the Securities and Exchange Commission nor shall such information be
incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except
to the extent that the Company specifically incorporates it by reference into
such filing.
General. The responsibilities of the Compensation Committee are to
administer the Company's various incentive plans, including the Company's 1992
Stock Option Plan and the 1996 Employee Stock Purchase Plan, and to set
compensation policies applicable to the Company's executive officers. The
Committee's fundamental policy is to offer the Company's executive officers
competitive compensation opportunities based upon overall
9
<PAGE>
Company performance, their individual contribution to the financial success of
the Company and their personal performance. It is the Committee's objective to
have a substantial portion of each officer's compensation contingent upon the
Company's performance, as well as upon such officer's own level of
performance. Accordingly, each executive officer's compensation package
comprises three elements: (i) base salary, which is established primarily on
the basis of individual performance and market considerations; (ii) annual
variable performance awards payable in cash and tied to the Company's
achievement of financial performance goals and the executive's contribution;
and (iii) long-term stock-based incentive awards, which strengthen the
mutuality of interests between the executive officers and the stockholders.
Base Salary. Base salary is primarily used by the Company as a device to
attract, motivate, reward and retain highly skilled executives. The Committee
reviewed and approved fiscal 1996 base salaries for the Chief Executive
Officer and other executive officers at the beginning of the fiscal year. Base
salaries were established by the Committee based on an executive officer's job
responsibilities, level of experience, individual performance, contribution to
the business, the Company's financial performance for the past year and
recommendations from management. The Committee also took into account the
salaries for similar positions at comparable companies, based on each
individual Committee member's industry experience. In reviewing base salaries,
the Committee focused significantly on each executive officer's prior
performance with the Company and expected contribution to the Company's future
success. In making base salary decisions, the Committee exercised its
discretion and judgment using these factors. No specific formula was applied
to determine the weight of each factor.
Annual Incentive Bonuses. Each executive officer's bonus is based on
qualitative and quantitative factors. Bonuses are intended to motivate and
reward executive officers by directly linking the amount of the bonus to
specific Company-based performance targets. Annual incentive bonuses for
executive officers are intended to reflect the Committee's belief that a
portion of the compensation of each executive officer should be contingent
upon the performance of the Company. To carry out this philosophy, the Board
reviews and approves the financial budget for the fiscal year. The Committee
then establishes target bonuses for each executive officer as a percentage of
the officer's base salary. The executive officers, including Mr. Jepson, must
successfully achieve these performance targets, which are submitted by
management to the Committee for its evaluation and approval at the beginning
of the fiscal year. Company-based performance goals are tied to different
indicators of Company performance, such as the operating results of the
Company. The Committee evaluates the completion of the Company-based
performance targets and approves a performance rating relative to the goals
completed. This scoring is influenced by the Committee's perception of the
importance of the various corporate goals. The Committee believes that the
bonus arrangement provides an excellent link between the Company's earnings
performance and the incentives paid to executives.
Stock Options. The Committee provides the Company's executive officers with
long-term incentive compensation through grants of stock options under the
Company's 1992 Stock Option Plan. The Committee believes that stock options
provide the Company's executive officers with the opportunity to purchase and
maintain an equity interest in the Company and to share in the appreciation of
the value of the Company's Common Stock. The Committee believes that stock
options directly motivate an executive to maximize long-term stockholder
value. The options also use vesting periods that encourage key executives to
continue in their employment with the Company. All options granted to
executive officers to date have been granted at the fair market value of the
Company's Common Stock on the date of grant. The Committee considers the grant
of each option subjectively, considering factors such as the executive
officer's relative position and responsibilities with the Company, the
individual performance of the executive officer over the previous fiscal year,
and the anticipated contribution of the executive officer to the attainment of
the Company's long-term strategic performance goals. Stock options granted in
prior years are also taken into consideration. The Committee views stock
option grants as an important component of its long-term, performance-based
compensation philosophy.
CEO Salary. The compensation of Mr. Jepson, President and Chief Executive
Officer of the Company, consists of base salary, an annual bonus and incentive
stock options. The Board of Directors periodically reviews Mr. Jepson's base
salary and bonus and revises his compensation based on the Board's overall
evaluation of his
10
<PAGE>
performance toward the achievement of the Company's financial, strategic and
other goals, with consideration given to his length of service and to
comparative chief executive officer compensation information. The Compensation
Committee believes that the Company's success is dependent in part upon the
efforts of its Chief Executive Officer. In fiscal 1996, Mr. Jepson earned a
base salary of $190,008 as set by the Compensation Committee and earned a
bonus of $95,300 which was based on the Company achieving certain levels of
operating profit and performance objectives. Mr. Jepson also received an
option to purchase 29,000 shares of Common Stock of the Company (with an
exercise price of 100% of market value of the Common Stock on the date of
grant). This stock option grant was primarily based on the performance of the
Company and Mr. Jepson's significant contribution to that performance in terms
of both leadership and strategic vision.
SECTION 162(M)
The Board has considered the potential future effects of Section 162(m) of
the Internal Revenue Code on the compensation paid to the Company's executive
officers. Section 162(m) disallows a tax deduction for any publicly-held
corporation for individual compensation exceeding $1 million in any taxable
year for any of the executive officers named in the proxy statement, unless
such compensation is performance-based. The Company has adopted a policy that,
where reasonably practicable, the Company will seek to qualify the variable
compensation paid to its executive officers for an exemption from the
deductibility limitations of Section 162(m).
Respectfully submitted by members of
the Compensation Committee:
Ronald W. Braniff
Andrew I. Fillat
11
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders of
the Company's Common Stock from August 15, 1996 (the date the Company first
became subject to the reporting requirements of the Securities Exchange Act of
1934, as amended) through December 31, 1996 to the cumulative total return
over such period of (i) the Nasdaq Stock Market-U.S. Index and (ii) the H&Q
Technology Index./1/
LOGO
COMPARISON OF 4 MONTH CUMULATIVE TOTAL RETURN*
AMONG INTERLINK COMPUTER SCIENCES, INC., THE NASDAQ STOCK MARKET-US INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
INTERLINK NASDAQ HAMBRECHT
Measurement Period COMPUTER STOCK & QUIST
(Fiscal Year Covered) SCIENCES, INC. MARKET-US TECHNOLOGY
- --------------------- --------------- --------- ----------
<S> <C> <C> <C>
8/15/96 $100.00 $100.00 $100.00
12/31/96 $168.00 $114.00 $129.00
</TABLE>
* $100 INVESTED ON 8/15/96 IN STOCK OR INDEX-
INCLUDING REINVESMENT OF DIVIDENDS.
YEAR ENDING DECEMBER 31.
(1) The graph assumes that $100 was invested on August 15, 1996 (the date the
Company first became subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended) in the Company's Common Stock
and in the Nasdaq Stock Market-U.S. Index and in the H & Q Technology
Index and that all dividends were reinvested. No dividends have been
declared or paid on the Company's Common Stock. Stockholder returns over
the indicated period should not be considered indicative of future
stockholder returns.
The information contained in the Performance Graph shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference into such
filing.
12
<PAGE>
CERTAIN TRANSACTIONS WITH MANAGEMENT
On December 29, 1996, the Company acquired New Era (the "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.
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 and 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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act of 1934 requires the Company's executive
officers and directors, and persons who own more than 10% of a registered
class of the Company's equity securities, to file reports of initial ownership
and changes in ownership with the Securities and Exchange Commission ("SEC")
and the National Association of Securities Dealers, Inc. Executive officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons, the Company
believes that during fiscal 1996 all executive officers and directors of the
Company complied with all applicable filing requirements.
OTHER MATTERS
The Company knows of no other matters to be addressed at the Annual Meeting.
If any other matters are properly addressed at the Annual Meeting, it is the
intention of the persons named in the accompanying proxy to vote the shares
represented in the manner as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: January 29, 1997
13
<PAGE>
SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Proxy.
<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> <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.
14
<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" in the
Company's Quarterly Report on Form 10-Q for the period ended September 30,
1996.
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
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 HARBOR, as a result of competition,
technological change or otherwise, would have a material adverse effect
15
<PAGE>
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.
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.
16
<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.
17
<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. See "Fiscal Year Ended June 30, 1994
and 1995 Operating Expenses-Product Development." 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
18
<PAGE>
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 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.
19
<PAGE>
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 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 for a research
project to develop new client/server technology. During the quarter ended
March 31, 1995, the Company reassessed this project and determined that it was
no longer commercially viable. The Company, therefore, canceled the project,
reduced the staffing levels in research and development, and accrued
approximately $250,000 for employee severance and other costs. These accrued
costs were substantially paid as of June 30, 1995.
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.
20
<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
income 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>
21
<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 of new products or product
enhancements by competitors; currency fluctuations; and the failure to
anticipate changing customer product
22
<PAGE>
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.
23
<PAGE>
Historically, the Company has not invested in derivative securities or any
other financial instruments that involve 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
in its initial public offering, together with its cash balances at June 30,
1996, 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.
24
<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 77,750 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>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
INTERLINK COMPUTER SCIENCES, INC.
1997 ANNUAL MEETING OF STOCKHOLDERS
MARCH 6, 1997
The undersigned stockholder of INTERLINK COMPUTER SCIENCES, INC., a
Delaware corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement, each dated January 29, 1997, and
hereby appoints Charles W. Jepson and Gloria M. Purdy, and each of them,
proxies and attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the undersigned at the
1997 Annual Meeting of Stockholders of INTERLINK COMPUTER SCIENCES, INC., to
be held on March 6, 1997 at 2:00 p.m. local time, at the Marriott Courtyard,
4700 Lakeview Boulevard, Fremont, California 94538 and at any adjournments
thereof, and to vote all shares of Common Stock which the undersigned would be
entitled to vote if then and there personally present, on the matter set forth
below:
1. ELECTION OF DIRECTORS:
[_] FOR all nominees listed below [_] WITHHOLD
(except as indicated)
IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW:
Charles W. Jepson, D. Benedict Dulley, Thomas H. Bredt, Ronald W.
Braniff, Andrew I. Fillat
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, AND AS SAID PROXIES
DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
DATED: ____________________, 1997
--------------------------------------------
Signature
--------------------------------------------
Signature
(This Proxy should be marked, dated and signed by the shareholder(s) exactly
as his or her name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. If shares
are held by joint tenants or as community property, both should sign.)
