UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD OF
FROM__________________TO________________
Commission file number 0-21077
INTERLINK COMPUTER SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2990567
(State of incorporation) (IRS Employer Identification Number)
47370 Fremont Boulevard
Fremont, California 94538
(510) 657-9800
(Address and telephone number of principal executive offices)
-----------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
7,011,481 shares of the registrant's Common stock, $0.001 par value, were
outstanding as of January 1, 1997.
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<TABLE>
INTERLINK COMPUTER SCIENCES, INC.
AND SUBSIDIARIES
CONTENTS
<CAPTION>
Page
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
December 31, 1996 and June 30, 1996.................................................................4
Condensed Consolidated Statements of Operations:
Three and six months ended December 31, 1996 and 1995...............................................5
Condensed Consolidated Statements of Cash Flows:
Six months ended December 31, 1996 and 1995.........................................................6
Notes to Condensed Consolidated Financial Statements....................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................................9
PART II: OTHER INFORMATION
Item 2 Changes in Securities......................................................................................26
Item 6 Exhibits and Reports on Form 8-K...........................................................................26
Signatures ...........................................................................................................27
</TABLE>
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PART I: FINANCIAL INFORMATION
3
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<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
December 31, June 30,
1996 1996
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 27,061 $ 6,121
Accounts receivable, net .......................................................... 9,640 9,445
Inventories ....................................................................... 1,327 700
Other current assets .............................................................. 2,615 2,876
-------- --------
Total current assets .......................................................... 40,643 19,142
Property and equipment, net ............................................................ 1,562 1,281
Purchased software products ............................................................ 2,467 2,893
Other non-current assets ............................................................... 1,942 2,609
-------- --------
Total assets .................................................................. $ 46,614 $ 25,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit ............................................................... $ 5,000
Current portion of long-term debt ................................................. $ 1,867 3,100
Accounts payable .................................................................. 2,517 2,662
Accrued liabilities ............................................................... 6,024 6,630
Deferred maintenance and product revenue .......................................... 7,611 8,121
-------- --------
Total current liabilities ..................................................... 18,019 25,513
Long-term debt, less current portion ................................................... 984 2,892
Deferred maintenance revenue ........................................................... 914 1,056
Other liabilities ...................................................................... 887 1,049
-------- --------
Total liabilities ................................................................. 20,804 30,510
-------- --------
Commitments and contingencies (Note 5)
Preferred stock ........................................................................ 6,310
Common stock ........................................................................... 49,924 14,602
Cumulative translation adjustment ...................................................... (542) (581)
Accumulated deficit .................................................................... (23,572) (24,916)
-------- --------
Total stockholders' equity (deficit) .............................................. 25,810 (4,585)
-------- --------
Total liabilities and stockholders' equity (deficit) .......................... $ 46,614 $ 25,925
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
( in thousands, except per share data)
<CAPTION>
Three months ended Six months ended
December 31, December 31,
(unaudited) (unaudited)
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product .................................................... $ 5,960 $ 4,880 $ 10,792 $ 7,914
Maintenance and consulting ................................. 3,673 3,284 7,566 6,815
-------- -------- -------- --------
Total revenues ....................................... 9,633 8,164 18,358 14,729
-------- -------- -------- --------
Cost of revenues:
Product .................................................... 678 1,002 1,363 1,642
Maintenance and consulting ................................. 1,209 1,081 2,446 2,148
-------- -------- -------- --------
Total cost of revenues ............................... 1,887 2,083 3,809 3,790
-------- -------- -------- --------
Gross profit ..................................................... 7,746 6,081 14,549 10,939
Operating expenses:
Product development ........................................ 1,969 1,170 3,870 2,294
Sales and marketing ........................................ 3,194 3,033 6,258
5,538
General and administrative ................................. 1,107 955 2,019 1,788
Purchased research and development and
product amortization .................................... 139 10,158 301 10,158
-------- -------- -------- --------
Total operating expenses ............................. 6,409 15,316 12,448 19,778
-------- -------- -------- --------
Operating income (loss) .......................................... 1,337 (9,235) 2,101 (8,839)
Interest income, net ............................................. 144 20 88 41
-------- -------- -------- --------
Income (loss) before provision for income taxes .................. 1,481 (9,215) 2,189 (8,798)
Provision for (benefit from) income taxes ........................ 578 (554) 847 (391)
-------- -------- -------- --------
Net income (loss) ................................................ $ 903 ($ 8,661) $ 1,342 ($ 8,407)
======== ======== ======== ========
Net income (loss) per share ...................................... $ 0.12 $ (2.77) $ 0.19 $ (2.69)
======== ======== ======== ========
Shares used in per share calculation ............................. 7,671 3,125 6,886 3,125
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Six months ended December 31,
1996 1995
-------- --------
(unaudited)
<S> <C>
Cash flows from operating activities:
Net income (loss) ......................................................................... 1,342 (8,407)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Purchased research and development ............................................... -- 10,158
Depreciation and amortization .................................................... 848 474
Provision for doubtful accounts .................................................. 100 93
Exchange gain .................................................................... (32) (76)
Changes in operating assets and liabilities:
Accounts receivable .......................................................... (195) (2,209)
Inventories .................................................................. (623) 195
Other assets ................................................................. 1,027 (337)
Accounts payable ............................................................. (133) (670)
Accrued liabilities .......................................................... (618) (1,031)
Deferred maintenance and product revenue ..................................... (713) 1,796
Other liabilities ............................................................ (156) (2)
-------- --------
Net cash provided by (used in) operating activities ...................... 847 (16)
-------- --------
Cash flows from investing activities:
Acquisition of New Era, net of cash acquired .............................................. -- (10,168)
Proceeds from sale of available-for-sale securities ....................................... -- 5,685
Acquisition of property and equipment ..................................................... (714) (199)
Capitalization of software development costs .............................................. (56) --
Purchase of available-for-sale securities ................................................. -- (3,160)
-------- --------
Net cash used in investing activities ........................................ (770) (7,842)
-------- --------
Cash flows from financing activities:
Proceeds from term loan ................................................................... -- 3,000
Proceeds from bank line of credit ......................................................... -- 5,000
Payments on notes payable and other ....................................................... (3,045) (251)
Payments on bank line of credit ........................................................... (5,000) (1,300)
Proceeds from issuance of common stock, net ............................................... 29,012 27
-------- --------
Net cash provided by financing activities ................................ 20,967 6,476
-------- --------
Net increase (decrease) in cash and cash equivalents ................ 21,044 (1,382)
Effect of exchange rate changes on cash ........................................................ (104) 58
Cash and cash equivalents, beginning of period ................................................. 6,121 4,148
-------- --------
Cash and cash equivalents, end of period ....................................................... $ 27,061 $ 2,824
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ............................................................................. $ 177 $ 148
Income taxes paid ......................................................................... $ 1,412 $ 132
Non cash transactions from financing activities:
Conversion of preferred stock to common
stock in connection with initial public offering ................................. $ 6,310 --
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
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INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation:
The unaudited condensed consolidated financial statements included herein
have been prepared by Interlink Computer Sciences, Inc. and its
subsidiaries (collectively, the "Company") in accordance with generally
accepted accounting principles and reflect all adjustments, consisting only
of normal recurring adjustments, which in the opinion of management are
necessary to fairly present the Company's consolidated financial position,
results of operations, and cash flows for the periods presented. The
financial statements include the accounts of the Company and its wholly
owned subsidiaries after intercompany balances and transactions have been
eliminated. These financial statements should be read in conjunction with
the Company's June 30, 1996 audited consolidated financial statement as
included in the Company's Registration Statement on Form S-1 as declared
effective by the Securities and Exchange Commission on August 15, 1996
(Reg. No. 333-05243). The consolidated results of operations for the three
and six months ended December 31, 1996 are not necessarily indicative of
the results to be expected for any subsequent period or for the entire
fiscal year ending June 30, 1997. The June 30, 1996 balance sheet was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. 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 December 31, 1996 and June 30, 1996.
3. Initial Public Offering:
On August 15, 1996, the Company sold 2,200,000 shares of its Common Stock
in an initial public offering and on September 16, 1996, an additional
330,000 shares of Common Stock were sold when the Company's underwriters
exercised their over-allotment option, which sales of Common Stock together
were made at $10.00 per share and which generated approximately $22.1
million of cash, net of underwriting discounts, commissions, and other
offering costs. On August 16, 1996, the Common Stock began trading on the
NASDAQ National Market under the symbol INLK. Upon the completion of the
offering, all of the Company's 1,230,000 shares of Series 1 Preferred Stock
were converted into shares of Common Stock on a one-for-one basis.
4. 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 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 filing of the Company's
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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.
5. Contingencies
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.
During the quarter the Company settled a commercial dispute with MSB, a
former Belgian distributor of the Company's TCPaccess products. The
settlement included a payment to MSB in the amount of $100,000. All claims
and counterclaims relating to this dispute have been dismissed as a result
of the settlement.
6. Subsequent Event
On January 27, 1997, the Company signed a definitive agreement with Cisco
Systems, Inc. ("Cisco") regarding a strategic alliance to jointly develop
and market IOS/390, a software suite that extends Cisco's Internetwork
Operating System (IOS) networking technologies to IBM and compatible MVS
mainframes and mainframe applications. As part of the alliance, on December
12, 1996, Cisco purchased 622,000 newly-issued shares of the Company's
Common Stock (approximately nine percent (9%) of the Company's outstanding
shares) for approximately $6.8 million.
8
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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
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section below entitled
"Risk Factors That May Affect Future Results," as well as those risks discussed
in this section and elsewhere in this Report.
The following discussion should be read in conjunction with the management's
discussion included in the Company's Registration Statement on Form S-1 as
declared effective by the Securities and Exchange Commission on August 15, 1996
(Reg. No. 333-05243).
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 December 1995 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. This transaction was accounted for as a purchase. 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.
<TABLE>
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
condensed consolidated statement of operations data for the periods indicated:
<CAPTION>
Three months Six months
ended December 31, ended December 31,
-------------------- ---------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Product ......................................................... 61.9% 59.8% 58.8% 53.7%
Maintenance and consulting ...................................... 38.1 40.2 41.2 46.3
----- ----- ----- -----
Total revenues .............................................. 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Product ......................................................... 7.0 12.3 7.4 11.1
Maintenance and consulting ...................................... 12.6 13.2 13.3 14.6
----- ----- ----- -----
Total cost of revenues ...................................... 19.6 25.5 20.7 25.7
----- ----- ----- -----
Gross profit ......................................................... 80.4 74.5 79.3 74.3
Operating expenses:
Product development ............................................. 20.4 14.3 21.1 15.6
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Sales and marketing ............................................. 33.2 (37.2) 34.1 37.6
General and administrative ...................................... 11.5 (11.7) 11.0 12.1
Purchased research and development
and product amortization .................................... 1.4 (124.4) 1.7 69.0
----- ----- ----- -----
Total operating expenses .................................... 66.5 (187.6) 67.9 134.3
----- ----- ----- -----
Operating income (loss) .............................................. 13.9 (113.1) 11.4 (60.0)
Interest income, net ................................................. 1.5 (0.2) 0.5 0.3
----- ----- ----- -----
Income (loss) before income taxes ............................... 15.4 (112.9) 11.9 (59.7)
Provision for (benefit from) income taxes ............................ 6.0 (6.8) 4.6 (2.6)
----- ----- ----- -----
Net income (loss) .................................................... 9.4% (106.1)% 7.3% (57.1)%
===== ====== ===== =====
Cost of sales as a percentage of the related revenues:
Product ......................................................... 11.4% 20.5% 12.6% 20.7%
Maintenance and consulting ...................................... 32.9% 32.9% 32.3% 31.5%
</TABLE>
As a result of the acquisition of New Era in December 1995, the Company's
operating results for the three and six months ended December 31, 1996 and 1995
are not directly comparable.
Revenues:
The Company's revenues are derived from product sales and related maintenance
and consulting contracts. Product revenues are derived from software license
fees and sales of related hardware to end users, resellers and distributors. The
Company's sales cycle, from the date the sales agent first contacts a
prospective customer to the date a customer ultimately purchases the Company's
product, is typically three to six months for the TCPaccess products and six to
nine months for the HARBOR products. Because licenses are noncancellable and do
not impose significant obligations on the Company, the Company recognizes
software license revenues upon completion of a trial period and receipt of a
signed contract. Fees for service revenues are charged separately from the
Company's product sales. The Company recognizes maintenance 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. 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 no longer actively markets its DECnet product
line. As a consequence, maintenance revenues from this product line may continue
to decline in the future.
Total revenues were $9.6 million and $8.2 million for the three months ended
December 31, 1996 and 1995, respectively, representing an increase of 17%. Total
revenues were $18.4 million and $14.7 million for the six months ended December
31, 1996 and 1995, respectively, representing an increase of 25%. Product sales
were $6.0 million and $4.9 million for the three months ended December 31, 1996
and 1995, respectively, representing an increase of 22%. Product sales were
$10.8 million and $7.9 million for the six months ended December 31, 1996 and
1995, respectively, representing an increase of 37%. These increases were
primarily due to an increase in TCPaccess license fees and associated hardware
sales as well as the addition of revenues from Harbor products. Maintenance and
consulting revenues were $3.7 million and $3.3 million for the three months
ended December 31, 1996 and 1995, respectively,
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representing an increase of 12%. Maintenance and consulting revenues were $7.6
million and $6.8 million for the six months ended December 31, 1996 and 1995,
respectively, representing an increase of 12%. These increases resulted
principally from an increase in the number of customers purchasing maintenance
agreements.
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 $678,000 and $1,002,000, representing 11% and 21% of total
product revenues for the three months ended December 31, 1996 and 1995,
respectively. Cost of revenues for product sales was $1,363,000 and $1,642,000,
representing 13% and 21% of total product revenues for the six months ended
December 31, 1996 and 1995, respectively. These percentage decreases were due to
a reduction in third-party revenue and a decline in hardware revenue, which
carry higher product costs as a percentage of their respective revenues. The
decrease in the percentage of cost of revenues from product sales is due to
product mix and is not necessarily indicative of cost of revenues from product
sales in future quarters.
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 $1.2 million and $1.1 million, representing 33% of total
maintenance and consulting revenues for the three months ended December 31, 1996
and 1995, respectively. Cost of revenues for maintenance and consulting was $2.4
million and $2.1 million, representing 32% of total maintenance and consulting
revenues for the six months ended December 31, 1996 and 1995, respectively . The
absolute dollar increases were due to staff additions as a result of the
acquisition of New Era.
Operating Expenses:
Total operating expenses were $6.4 million and $15.3 million, representing 67%
and 188% of total revenues for the three months ended December 31, 1996 and
1995, respectively. Total operating expenses were $12.4 million and $19.8
million, representing 68% and 134% of total revenues for the six months ended
December 31, 1996 and 1995, respectively .
Product Development. Product development expenses consist primarily of
personnel related costs. Product development expenses were $2.0 million and $1.2
million, representing 20% and 14% of total revenues for the three months ended
December 31, 1996 and 1995, respectively. Product development expenses were $3.9
million and $2.3 million, representing 21% and 16% of total revenues for the six
months ended December 31, 1996 and 1995, respectively. These increases in
product development expenses resulted from the expansion of the Company's
product line as a result of the acquisition of New Era and ongoing product
development efforts.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales and marketing personnel, the fixed costs of
worldwide sales offices, and promotional costs. The Company sells through its
direct sales force, resellers and distributors. The direct channel produced 89%
and 85% of product revenues for the three months ended December 31, 1996 and
1995, respectively, and 85% and 90% of product revenues for the six months ended
December 31, 1996 and 1995, respectively. Sales and marketing expenses were $3.2
million and $3.0 million, representing 33% and 37% of total revenues for the
three months ending December 31, 1996 and 1995, respectively. Sales and
marketing expenses were $6.3 million and $5.5 million, representing 34% and 38%
of total revenues for the six months ending December 31, 1996 and 1995,
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respectively. The increase in absolute dollars was a result of higher
commissions, marketing program costs and the New Era acquisition
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 $1.1 million and $1.0
million, representing 12% of total revenues for the three months ended December
31, 1996 and 1995, respectively General and administrative expenses were $2.0
million and $1.8 million, representing 11% and 12% of total revenues for the six
months ended December 31, 1996 and 1995, respectively. These increases in dollar
amounts for general and administrative are attributable to the increased
headcount required to support the Company's expansion.
Purchased Research and Development and Product Amortization. Purchased
research and development and product amortization was $139,000 and $10.2
million, representing 1% and 124% of total revenues for the three months ended
December 31, 1996 and 1995, respectively. Purchased research and development and
product amortization was $301,000 and $10.2 million, representing 2% and 69% of
total revenues for the six months ended December 31, 1996 and 1995,
respectively. These decreases were due to a one-time write-off of $10.2 million
of purchased research and development related to the New Era acquisition in
December 1995.
Interest Income (Expense) Net. Net interest income was $144,000 and
$20,000 for the three months ended December 31, 1996 and 1995, respectively. Net
interest income was $88,000 and $41,000 for the six months ended December 31,
1996 and 1995, respectively. The increases were due primarily to reduction of
bank borrowings related to the New Era Acquisition and interest earned on funds
received from the initial public offering.
Provision for(Benefit from) Income Taxes. The income tax provision
(benefit) was $578,000 and $(554,000) for the three months ended December 31,
1996 and 1995, respectively. The income tax provision (benefit) was $847,000 and
($391,000) for the six months ended December 31, 1996 and 1995, respectively.
The effective tax rate for both the three months and six months ended December
31, 1996 was approximately 39%. Benefit from income taxes for the three and six
months ended December 31, 1995, was the result of the Company reducing its
valuation allowance during the quarter ended December 31, 1995.
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.
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.
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Liquidity and Capital Resources
Working capital increased at December 31, 1996 over that at December 31, 1995
primarily due to the proceeds from the initial public offering and proceeds from
the equity investment from Cisco.
For the six months ended December 31, 1996, net cash provided by operating
activities resulted primarily from net income, depreciation and amortization and
a decrease in other assets, partially offset by a decrease in accrued
liabilities and deferred maintenance and product revenue and an increase in
inventories. For the six months ended December 31, 1995, net cash used in
operations was primarily from net loss and an increase in accounts receivable,
partially offset by purchased research and development and an increase in
deferred maintenance and product revenue.
For the six months ended December 31, 1996, the Company's investing activities
have consisted primarily of purchases of property and equipment. For the six
months ended December 31, 1995, the Company's investing activities consisted
primarily of the acquisition of New Era and the redemption and purchase of
available-for-sale securities.
Net cash provided by financing activities for the six months ended December 31,
1996 consisted primarily of proceeds from the initial public offering and the
equity investment by Cisco, partially offset by payments on bank line of credit
and notes payable. For the six months ended December 31, 1995, the Company's
financing activities consisted of proceeds and payments on the bank line of
credit, term loan and notes payable.
The Company's business is geographically dispersed resulting in a significant
portion of its cash residing outside the United States. At December 31, 1996,
approximately 20% of the Company's cash was in European and Canadian accounts.
At December 31, 1996, the Company had $27.1 million in cash and cash equivalents
and $22.6 million in working capital. The Company had $9.6 million in accounts
receivable, net of allowance for doubtful accounts, and $8.5 million of unearned
revenues, substantially all of which are expected to be earned over the 12 month
period following December 31, 1996.
The Company believes that its current cash balance and its cash flow from
operations, if any, will be sufficient to meet its anticipated working capital
and capital expenditure requirements for at least the next 12 months.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some which are beyond the Company's control, and include the following:
Competition
General. The market in which the Company operates is intensely competitive
and is characterized by extreme price competition and rapid technological
change. The competitive factors influencing the markets for the Company's
products include product performance, price, reliability, features, scalability,
interoperability across multiple platforms, adherence to industry standards, and
the provision of support and maintenance services. The
13
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Company competes with a number of companies, principally International Business
Machines Corp. ("IBM"), that specialize in one or more of the Company's product
lines, and such competitors may have greater financial, technical, sales and
marketing resources to devote to the development, promotion and sale of their
products, and may have longer operating histories, greater name recognition, and
greater market acceptance for their products and services compared to those of
the Company. There can be no assurance that the Company's current competitors or
any new market entrants will not develop networked systems management products
or other technologies that offer significant performance, price or other
advantages over the Company's technologies, the occurrence of which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Network Transport Products. The Company sells its TCPaccess suite of
products principally to customers who have installed IBM mainframes using the
MVS operating system. The Company's main competition for its TCPaccess products
is IBM. IBM sells TCP/IP and associated products for its MVS mainframe systems
that compete directly with the Company's TCPaccess product line. IBM has
continued to enhance the functionality and performance of its TCP/IP product,
which enhancements may require the Company to update its TCPaccess product to
remain competitive. There can be no assurance that the Company will be able to
make the improvements in its TCPaccess product necessary to remain competitive
with IBM or that any such improvements by IBM would not have a material adverse
effect on the Company's business, financial condition or results of operations.
In addition, IBM's OS/390 operating system, which includes TCP/IP communications
software in a bundle of software provided to purchasers of OS/390, has been and
is aggressively marketed by IBM, and the Company believes it has lost sales of
the Company's TCP/IP products as a result. An IBM customer can request to have
the IBM TCP/IP product removed from the software bundle provided by IBM and
thereby reduce the purchase price of the system purchased. The reduction in the
purchase price related to the exclusion of IBM's TCP/IP for MVS product from its
software bundle, in certain model groups, is substantially lower than the price
the customer would have to pay to purchase the Company's corresponding TCPaccess
product. Because in some IBM model groups IBM's TCP/IP product is less expensive
to purchase than the Company's corresponding TCPaccess products in the same
model groups, there could be substantial erosion of the Company's margins if the
Company reduces the price of its TCPaccess products in order to compete against
IBM, which erosion would have a material adverse effect on the Company's
business, financial condition and results of operations. Also, IBM has in some
cases included and may continue to include its TCP/IP product in the bundle of
software provided to purchasers of its OS/390 operating system without charge.
The Company believes that any general reduction in price of the IBM TCP/IP
products, or the widespread bundling of those products without charge in its
OS/390 operating system, would require the Company to either reduce the prices
of its TCPaccess products or substantially increase sales and marketing
expenses, or both, in order to continue to sell its TCPaccess products, which
actions would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, if IBM were to
develop or design its OS/390 operating system or other products so that its
TCP/IP product could not be removed, customers who otherwise would have been
inclined to purchase the Company's TCPaccess product may not do so, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company derives a substantial
portion of its revenues from maintenance agreements with its TCPaccess
customers. If the Company sells fewer TCPaccess products, either due to
competition from IBM or otherwise, the Company's maintenance revenues would be
reduced, which would have a material adverse effect on the Company's business,
financial condition and results of operations. If IBM reduces the combined price
of its TCP/IP products and maintenance, IBM's combined price for its TCP/IP
products and maintenance would be more price competitive with the Company's
product line, and the Company's product and maintenance revenues would be
adversely
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affected. The Company also competes with IBM, Apertus Technologies Inc.
("Apertus"), Computerm Corporation ("Computerm"), Network Solutions, Inc. and
Memorex Telex Corp. ("Memorex") in the network controller market, where the
Company resells the network controller manufactured by Bus-Tech Inc.
("Bus-Tech"), a division of Storage Technology Corp. ("Storage Technology"), to
provide the hardware connection which links the enterprise server to the
client/server network.
System Management Applications. The primary competitors for the Company's
HARBOR Backup and HARBOR Distributed Storage Server products are IBM and Storage
Technology. The Company's competition for the HARBOR Distribution product
includes IBM, Novadigm, Inc. ("Novadigm") and Tangram Enterprise Solutions, Inc.
IBM is aggressively marketing its ADSM backup product, which is included in the
System View package on IBM's UNIX system, AIX. There can be no assurance that
IBM will not include the ADSM backup products in a software "bundle" with the
sale of its mainframe hardware systems. The bundling of competing software
products with mainframe hardware systems could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company also competes with software vendors who develop and market products for
UNIX and Windows NT operating systems, such as Microsoft Corporation
("Microsoft"), Arcada Software, Inc., Computer Associates International, Inc.,
EMC Corporation, Hewlett-Packard Company, Legato Systems Inc. ("Legato") (with
whom the Company has a strategic alliance), Novadigm, OpenVision Technology,
Inc., PLATINUM Technology, Inc., Sterling Software, Inc., Sun Microsystems, Inc.
and Unison Software, Inc., which are focusing on enterprise systems management
applications. Although the Company recently signed a strategic marketing
agreement with Legato, the Company is still a competitor of Legato in the
storage management market. The Company also expects increased competition from
vendors of TCP/IP-to-Systems Network Architecture gateway products, including
such companies as Microsoft, Novell, Inc., Apertus and CNT/Brixton Systems, Inc.
Competition from these companies could increase due to an expansion of their
product lines or a change in their approaches to enterprise systems management
or networking products. The bundling of network transport software with a
network controller by these competitors could prevent the Company from selling
TCPaccess to the customers of these competitors, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Other Factors. The Company's ability to compete successfully depends on
many factors, including the Company's success in developing new products that
implement new technologies, performance, price, product quality, reliability,
success of competitors' products, general economic conditions, and protection of
Interlink products by effective utilization of intellectual property laws. In
particular, competitive pressures from existing or new competitors who offer
lower prices or other incentives or introduce new products could result in price
reductions which would adversely affect the Company's profitability. There can
be no assurance that the Company's current or other new competitors will not
develop enhancements to, or future generations of, competitive products that
offer superior price or performance features, that the Company will be able to
compete successfully in the future, or that the Company will not be required to
incur substantial additional investment costs in connection with its
engineering, research, development, marketing and customer service efforts in
order to meet any competitive threat. The Company expects competition to
intensify, and increased competitive pressure could cause the Company to lower
prices for its products, or result in reduced profit margins or loss of market
share, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
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Reliance on IBM and Emergence of Mainframe as Enterprise Server
The Company's current software products are designed for use with IBM and
IBM-compatible mainframe computers. Specifically, these software products target
users of the MVS operating system, the Customer Information Control System
communications subsystem and the IMS and DB2 database management systems. As a
result, future sales of the Company's existing products and associated recurring
maintenance revenues are dependent upon continued use of mainframes and their
related systems software. In addition, because the Company's products operate in
conjunction with IBM systems software, changes to IBM systems software may
require the Company to adapt its products to these changes, and any inability to
do so, or delays in doing so, may adversely affect the Company's business,
financial condition and results of operations. Currently, TCP/IP is the
communications protocol for the Internet and is being adopted by some
organizations as the communications protocol for their client/server local area
networks and wide area networks. This adoption has allowed IBM MVS mainframe
computers to act as enterprise servers on such networks. The use of mainframes
as enterprise servers is relatively new and still emerging. The Company's future
financial performance will depend in large part on the acceptance and growth in
the market for centralized network management. Adoption of another
communications protocol on client/server networks could make TCP/IP
communication not viable, which would undermine the demand for the Company's
TCPaccess products, and have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Distributors and Strategic Relationships
The Company's sales are primarily made through the Company's direct sales
force and the Company's distributors in international markets. A former
distributor of the Company's TCPaccess products in Italy, Selesta Integrazioni
SRL ("Selesta"), has threatened legal action over the recent termination of
Selesta as a distributor of the Company's TCPaccess products. The Company has
also discontinued its existing distributor relationship with Selesta for the
distribution of the Company's HARBOR products in Italy and Spain. The loss of,
or a significant reduction in revenues from, the Company's distributors through
which the Company sells its products could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
if one of the Company's distributors declares bankruptcy, becomes insolvent, or
is declared bankrupt before the distributor remits to the Company the payments
for the Company's products, the Company may not be able to obtain the revenues
to which it would be entitled for sales made by such distributor prior to the
bankruptcy or insolvency proceeding. In addition, the Company's distributors
generally offer other products and these distributors may give higher priority
to sales of such other products.
Alliance with Legato. In May 1996 the Company entered into a strategic
marketing agreement with Legato. The Company has no historical relationship with
Legato, and there can be no assurance that the Company will be able to sell its
products through Legato.
Alliance with Cisco. In January, 1997, the Company entered into a
strategic alliance with Cisco pursuant to which Cisco and the Company agreed to
cooperate to develop certain TCP/IP software that operates with Cisco products
and to have Cisco sell such products. This alliance requires that the Company
devote a substantial portion of the Company's software development resources and
personnel to the development of such products, that the Company bundle a number
of its existing products into the new Cisco products, that Cisco and Interlink
jointly market the products, and that Cisco and Interlink share support
obligations for customers of the products.
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To date, all of the Company's core technologies have been acquired and
have not been developed internally. There can be no assurance that the software
development can be completed successfully, in a timely manner, or at all. The
alliance may divert the Company from developing other stand-alone products or
enhancing existing stand-alone products to compete against IBM or others,
allowing IBM or others to sell more advanced products to the Company's customer
base prior to the availability of the new products beings developed with Cisco,
which could result in loss of sales and maintenance revenue, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. Furthermore, the timing of software development cannot be
predicted with accuracy, and the Company's software development efforts for the
Cisco products will be subject to technological risks including the possibility
that the software will not operate with Cisco's products in a manner acceptable
to customers, that the software may not be compatible with customers' networks,
that the bundling of the Company's software will result in unforeseen technical
obstacles, that Cisco and the Company may disagree about the development
objectives, or that competitors, including IBM, will develop competing products
that make the jointly developed products obsolete. In addition, Cisco may not be
successful in marketing the jointly developed software once the products are
completed, and the Company is not guaranteed any minimum sales revenues from the
alliance. Because the Company is not permitted to sell the jointly developed
products independently of Cisco, the Company, after incurring the substantial
costs of development and diversion of resources away from developing other
products, may not receive sufficient revenues from Cisco sales, which would have
a material adverse effect on the Company's business, financial condition, and
results of operations. There can be no assurance that Cisco will be successful
in selling the jointly developed products or that the Company will receive any
revenues from such products.
The Company has no significant experience working with Cisco, and the
alliance with Cisco is subject to all the risks inherent in such strategic
relationships including the failure of the parties to meet their respective
obligations under the terms of the alliance, the risk of loss of rights to
important intellectual property either jointly developed in connection with the
alliance or otherwise, and the risk of a dispute over key provisions of the
alliance. There can be no assurance that the parties will meet their objectives
under the terms of the alliance or that the Company will not lose control over
its intellectual property. The failure of either the Company or Cisco to meet
their obligations under the terms of the alliance would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company is currently investing, and plans to continue to invest,
significant resources to develop additional relationships, which investments
could adversely affect the Company's operating margins. The Company believes
that its success in penetrating markets for its products depends in large part
on its ability to maintain these relationships, to cultivate additional
relationships and to cultivate alternative relationships if distribution
channels change. There can be no assurance that any distributor, system
integrator or strategic partner will not discontinue its relationship with the
Company, form competing arrangements with the Company's competitors, or dispute
the Company's other strategic relationships.
New Products and Rapid Technological Change
The markets for the Company's network transport products and systems
management applications are characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions and rapid
changes in customer requirements. The Company believes that its future success
will depend upon its ability to develop, manufacture and market products which
meet changing user needs, to continue to enhance its products and to develop and
introduce in a timely manner new products that take advantage of technological
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advances, keep pace with emerging industry standards, and address the
increasingly sophisticated needs of its customers. There can be no assurance
whether TCP/IP will continue to be accepted as a communications protocol on
client/server networks. Furthermore, there can be no assurance that the Company
will be successful in developing and marketing, on a timely basis, product
enhancements or new products, either independently or with strategic partners,
that respond to technological change or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of these products, or that any
such new products or product enhancements will adequately meet the requirements
of the marketplace and achieve market acceptance. The Company's failure or
inability to adapt its products to technological changes or to develop new
products successfully would have a material adverse effect on the Company's
business, financial condition and results of operations.
The introduction or announcement of products by the Company or one or more
of its competitors, including but not limited to IBM, embodying new
technologies, or changes in customer requirements or the emergence of new
industry standards and practices could render the Company's existing products
obsolete and unmarketable. As markets for the Company's products develop and
competition increases, the Company anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average selling
prices and gross margins for each of the Company's products are expected to
decline as each product matures. There can be no assurance that the introduction
or announcement of new product offerings by the Company or one or more of its
competitors will not cause customers to defer purchasing the existing products
of the Company or that the Company will successfully manage the transition from
older products to new or enhanced products in order to minimize disruption in
customer ordering. Such deferment of purchases or inability to manage the
transition of products could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that the Company will successfully identify new product
opportunities, develop and bring to market in a timely manner such new products,
or that products or technologies developed by others will not render the
Company's products or technologies noncompetitive or obsolete.
Fluctuations in Operating Results; Absence of Backlog; Seasonality
The Company's operating results have historically been, and will continue
to be, subject to quarterly fluctuations due to a variety of factors, including:
expenditures on research and development, timely introduction, enhancement and
market acceptance of new versions of the Company's products; seasonal customer
demand; timing of significant orders; changes in the pricing policies by the
Company or its competitors; anticipated and unanticipated decreases in average
unit selling prices of the Company's products; increased competition; changes in
the mix of the products sold and in the mix of sales by distribution channel;
the gain or loss of significant customers; the introduction of new products or
product enhancements by competitors; currency fluctuations; and the failure to
anticipate changing customer product requirements. In addition, the impact of
revenues, if any, from the Cisco alliance cannot be estimated at this time. The
Company typically sells its products through a trial process to allow customers
to evaluate the effectiveness of the Company's products before determining
whether to proceed with broader deployment of such products. The Company's sales
cycle, from the date the sales agent first contacts a prospective customer to
the date a customer ultimately purchases the Company's product, is typically
three to six months for the TCPaccess products and six to nine months for the
HARBOR products. There can be no assurance however that the customers will
purchase the Company's products after such trial period or that the Company's
sales cycle will not lengthen, exposing it to the possibility of shortfalls in
quarterly revenues, which could have a material adverse effect on the Company's
business, financial condition or results of operations and cause results to vary
from period to period. The Company's operating results will also be affected by
general economic and other conditions affecting the timing of customer orders
and capital spending, and order cancellations or rescheduling. Furthermore, it
is possible that the Company's products may be found to be defective after the
Company has already shipped in volume such products. There can be no assurance
that defects in the Company's products or failures in the Company's product
quality, performance and reliability, will not occur and such defects or
failures will not have a material adverse effect on the Company's business,
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financial condition and results of operations. If such defects or failures
occur, the Company could experience a decline in revenue, increased costs
(including warranty expense and costs associated with customer support), delays
in or cancellations or rescheduling of orders or shipments, and increased
product returns, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company operates with very little backlog and most of its product
revenues in each quarter result from orders closed in that quarter, and a
substantial majority of those orders are completed at the end of that quarter.
The Company establishes its expenditure levels for sales, marketing, product
development and other operating expenses based in large part on its expectations
as to future revenues, and revenue levels below expectations could cause
expenses to be disproportionately high. If revenues fall below expectations in a
particular quarter, operating results and net income are likely to be materially
adversely affected. Any inability of the Company to adjust spending to
compensate for failure to meet sales forecasts or to collect accounts
receivable, or any unexpected increase in product returns or other costs, could
magnify the adverse impact of such events on the Company's operating results.
The Company's business has experienced and is expected to continue to
experience significant seasonality. The Company has higher sales of its software
products in the quarters ending in December and June and weaker sales in the
quarters ending in September and March. The decrease in product revenues in the
quarters ending in September is due to the international customer seasonal
buying patterns. The quarters ending in March are historically weak due to
government and large organization annual budgeting cycles. Due to the foregoing
factors, quarterly revenue and operating results are likely to vary
significantly in the future and period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarters the Company's revenue or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
Integration of Acquisition; History of Acquired Technologies
The Company has only one year of operations on a combined basis with New
Era, the developer of the HARBOR products, which the Company acquired in
December 1995 in a purchase transaction. There can be no assurance that the
Company will be successful in integrating the operations and personnel of New
Era into its business, incorporating the HARBOR products and any other acquired
technologies into its product lines, deriving significant future sales from the
HARBOR products, establishing and maintaining uniform standards, controls,
procedures and policies, avoiding the impairment of relationships with employees
and customers as a result of changes in management, or overcoming other problems
that may be encountered in connection with the integration of New Era. To the
extent that the Company is unable to accomplish the foregoing, the Company's
business, financial condition and results of operations would be materially
adversely affected. The expansion of installed IOS/390 sites will provide
increased sales opportunities for HARBOR and other Interlink applications.
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As the Company transitions to this model, there could be some impact on
near-term business and a more gradual growth in overall Systems Management
Applications. In addition, in order to sell the HARBOR product, the Company
established a direct HARBOR sales channel in the U.S. and integrated the HARBOR
product into its European sales channel. Given that lead time for closing a
HARBOR sale can be as much as nine months, the ability of the Company to produce
significant HARBOR product sales in future periods is highly dependent on the
Company's success with these changes. If the Company is unsuccessful in such
implementation, HARBOR product sales will likely not increase over the level of
sales during the calendar year ended December 31, 1996, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
To date, the Company's core technologies for its principal network
transport products and systems management applications have been acquired and
have not been developed internally. There can be no assurance that the Company
will have the opportunity to successfully acquire or develop new technologies in
the future or that such technology, if acquired, can be successfully integrated
and commercialized by the Company. An inability to acquire, develop or
commercialize new technologies would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
may also seek to acquire or invest in businesses, products or technologies that
expand, complement or otherwise relate to the Company's current business or
product line. There can be no assurance that such acquisitions will be
successfully or cost-effectively integrated into the Company's current
operations, or that the acquired technologies will provide the necessary
complement to the Company's current products. If the Company consummates
additional acquisitions in the future that must be accounted for under the
purchase method of accounting, such acquisitions would likely increase the
Company's amortization expenses. In addition, any such acquisitions would be
subject to the risks of integration mentioned above. The Company does not
currently have any understandings, commitments or agreements with respect to any
potential acquisition or corporate partnering arrangements, nor is it currently
engaged in any discussions or negotiations with respect to any such transaction.
Reliance on and Risks Associated with International Sales
During the three months ended December 31, 1996 and 1995, 41% and 46%,
respectively, of the Company's total revenues were derived from sales to
international customers. The Company's international sales have been primarily
to European markets, and sales are generally denominated in local currencies.
The Company expects that international revenue will continue to represent a
significant portion of its total revenue. The Company intends to enter into
additional international markets and to continue to expand its operations
outside of North America by expanding its direct sales force, adding
distributors and pursuing additional strategic relationships which will require
significant management attention and expenditure of significant financial
resources. To the extent that the Company is unable to make additional
international sales in a timely manner, the Company's growth, if any, in
international revenues will be limited, and the Company's business, financial
condition and results of operations would be materially adversely affected.
Sales to international customers are subject to additional risks including
longer receivables collection periods, greater difficulty in accounts receivable
collection, failure of distributors to report sales of the Company's products,
political and economic instability, nationalization, trade restrictions, the
impact of possible recessionary environments in economies outside the United
States, reduced protection for intellectual property rights in some countries,
currency fluctuations and tariff regulations and requirements for export
licenses. There can be no assurance that foreign intellectual property laws will
adequately protect the Company's intellectual property rights. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. Substantially all of the
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Company's distribution and other agreements with international distributors
require any dispute between the Company and any distributor to be settled by
arbitration. Under these agreements, the party bringing the action, suit or
claim is required to conduct the arbitration in the domicile of the defendant.
The result is that, if the Company has a cause of action against a party, it may
not be feasible for the Company to pursue such action, as arbitration in a
foreign country could prove to be excessively costly and have a less certain
outcome depending on the laws and customs in the foreign country. These
international factors could have a material adverse effect on future sales of
the Company's products to international end users and, consequently, the
Company's business, financial condition and results of operations.
Most of the Company's international sales are denominated in local
currencies. The Company has not historically attempted to reduce the risk of
currency fluctuations by hedging except in certain limited circumstances where
the Company has held an account receivable expected to be outstanding for a
period of at least 12 months. The Company may be disadvantaged with respect to
its competitors operating in foreign countries by foreign currency exchange rate
fluctuations that make the Company's products more expensive relative to those
of local competitors. The Company may attempt to reduce these risks by
continuing to hedge in certain limited transactions in the future. Accordingly,
changes in the exchange rates or exchange controls may adversely affect the
Company's results of operations. There can be no assurance that the Company's
current or any future currency exchange strategy will be successful in avoiding
exchange related losses or that any of the factors listed above will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
Dependence Upon Proprietary Technology; Risk of Third-Party Claims of
Infringement
The Company's success and ability to compete is dependent in part upon its
proprietary information. The Company relies primarily on a combination of
copyright and trademark laws, trade secrets, software security measures, license
agreements and nondisclosure agreements to protect its proprietary technology
and software products. There can be no assurance, however, that such protection
will be adequate to deter misappropriation, deter unauthorized third parties
from copying aspects of, or otherwise obtaining and using, the Company's
software products and technology without authorization, or that the rights
secured thereby will provide competitive advantages to the Company. In addition,
the Company cannot be certain that others will not develop substantially
equivalent or superseding proprietary technology, or that equivalent products
will not be marketed in competition with the Company's products, thereby
substantially reducing the value of the Company's proprietary rights.
Furthermore, there can be no assurance that any confidentiality agreements
between the Company and its employees or any license agreements with its
customers will provide meaningful protection for the Company's proprietary
information in the event of any unauthorized use or disclosure of such
proprietary information.
There can be no assurance that others will not independently develop
similar products or duplicate the Company's products. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
or superior to the Company's products. A substantial amount of the Company's
sales are in international markets, and the laws of other countries may afford
the Company little or no effective protection of its intellectual property.
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While the Company believes that its products and trademarks do not infringe
upon the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communications from third parties asserting that
the Company's products infringe, or may infringe, on the proprietary rights of
third parties. The Company was denied a trademark registration of the name
"Interlink" based on the use of similar names by other companies in the computer
industry. The Company expects that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in the Company's industry segments grow and the functionalities of
products in different industry segments overlap. Any such claims, with or
without merit, could be time consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. In the event of a successful claim of
product infringement against the Company and failure or inability of the Company
to develop non-infringing technology or license the infringed or similar
technology, the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Any such claims could be time consuming, result in costly
litigation, or lead the Company to enter into royalty or licensing agreements
rather than litigating such claims on their merits. Moreover, an adverse outcome
in litigation or similar adversarial proceedings could subject the Company to
significant liabilities to third parties, require expenditure of significant
resources to develop non-infringing technology, require disputed rights to be
licensed from others or require the Company to cease the marketing or use of
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Product Errors; Product Liability
Software products as complex as those offered by the Company often contain
undetected errors or failures when first introduced or as new versions are
released. Testing of the Company's products is particularly challenging because
it is difficult to simulate the wide variety of computing environments in which
the Company's customers may deploy its products. Accordingly, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found after commencement of commercial shipments,
resulting in lost revenues, loss of or delay in market acceptance and negative
publicity about the Company and its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's license agreements with customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. The limitation of liability provisions contained in such
license agreements may not be effective under the laws of some jurisdictions,
particularly if the Company in the future relies on "shrink wrap" licenses that
are not signed by licensees. The Company's products are generally used to manage
data critical to organizations, and as a result, the sale and support of
products by the Company may entail the risk of product liability claims. A
successful liability claim brought against the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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Reliance on TCP/IP and Maintenance; Concentration of Product Sales
During the three months ended December 31, 1996 and 1995, sales of the
TCPaccess products, excluding maintenance and hardware, accounted for
approximately 39% and 46%, and, including related maintenance and hardware,
accounted for approximately 64% and 76%, respectively, of the Company's total
revenues. Accordingly, the Company's operating results, particularly in the near
term, are significantly dependent upon the continued market acceptance of the
TCPaccess products. A portion of the maintenance revenues are from historical
customers of the Company's DECnet product. The Company no longer actively
markets the DECnet product, and maintenance revenues from DECnet customers have
declined each year since the fiscal year ended June 30, 1993, and are expected
to continue to decline. The life cycles of the Company's products are difficult
to estimate due in part to the effect of future product enhancements and
competition. A decline in the demand for the Company's products as a result of
competition, technological change or other factors would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company estimates that the total number of potential sites where its
TCPaccess products could be installed is limited. Many of those sites have
already been serviced by either IBM or the Company. The Company expects that it
will continue to depend upon this limited number of prospective customers for a
significant portion of its revenues in future periods. As a result of this
concentration, the Company's business, financial condition and results of
operations could be materially adversely affected by the failure of anticipated
orders to materialize and by deferrals or cancellations of orders as a result of
changes in customer requirements. In addition, the Company's future success
depends upon the capital spending patterns of such customers and the continued
demand by such customers for the Company's products. The Company's operating
results may in the future be subject to substantial period-to-period
fluctuations as a consequence of such concentration and factors affecting
capital spending in the enterprise networked systems management market.
Dependence on Key Personnel
The Company is highly dependent on the continued service of, and on its
ability to attract and retain, qualified technical, sales, marketing and
managerial personnel. While the Company intends to expand its field sales force,
experienced field sales personnel in the Company's industry are in high demand
and may not be attracted and retained on terms advantageous to the Company.
Furthermore, there can be no assurance that the Company's efforts to expand its
field sales force will be successful. The competition for qualified personnel in
the software industry is intense, and the loss of any such persons, as well as
the failure to recruit additional key personnel in a timely manner, could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to continue to attract and retain the qualified personnel necessary for the
development of its business. The Company has employment agreements with certain
executive officers, but such agreements do not ensure their continued service to
the Company or prevent their competition with the Company following a
termination of employment. The Company does not maintain key man life insurance
on the lives of its key employees.
Possible Volatility of Share Price
There can be no assurance that the market price of the Company's Common
Stock will not decline below the initial public offering price. The trading
prices of the Company's Common Stock may be subject to wide fluctuations in
response to a number of factors, including variations in operating results,
alliances, changes in
23
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earnings estimates by securities analysts, announcements of extraordinary events
such as litigation, alliances, or acquisitions, announcements of technological
innovations or new products or new contracts by the Company or its competitors,
announcements and reports about the declining number of mainframe computers
shipped, press releases or reports of IBM or other competitors introducing
competitive or substitute products, as well as general economic, political and
market conditions. In addition, the stock market has from time-to-time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the common stocks of technology companies and
that have often been unrelated to the operating performance of particular
companies. These broad market fluctuations may also adversely affect the market
price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has occurred against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
adverse determination in such litigation could also subject the Company to
significant liabilities.
24
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PART II: OTHER INFORMATION
25
<PAGE>
ITEM 2. Changes in Securities
On December 12, 1996, the Company sold 622,000 shares of its Common
Stock to Cisco for an aggregate purchase price of approximately $6.8
million. The sale of the shares of Common Stock to Cisco was deemed
to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act as a transaction by an issuer
not involving a public offering. Cisco represented its intention to
acquire the securities for investment only and not with a view to or
for sale in connection with any distribution thereof and an
appropriate legend was affixed to the share certificate issued in the
transaction. Cisco had adequate public information about the Company.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.3 1996 Director Stock Option Plan,
as amended, and form of agreement
thereto
(b) Exhibit 10.20 Stock purchase agreement between the
Company and Cisco dated December 12,
1996
(c) Exhibit 11.1 Statement Regarding Computation of
Net Income (Loss) Per Share
(d) Exhibit 27 Financia Data Schedule (EDGAR version
only)
(e) Reports on Form 8-K The Company filed a current report
on Form 8-K on December 16, 1996.
26
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1997 INTERLINK COMPUTER SCIENCES INC.
AND SUBSIDIARIES
(Registrant)
By: /s/Gloria M. Purdy
---------------------------------------
Gloria M. Purdy
Chief Financial Officer and Secretary
27
EXHIBIT 10.3
INTERLINK COMPUTER SCIENCES, INC.
1996 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1996 Director Option Plan
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Interlink Computer Sciences, Inc., a California
corporation.
(e) "Director" means a member of the Board.
(f) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the date of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable, or;
<PAGE>
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(i) "Inside Director" means a Director who is an Employee.
(j) "Option" means a stock option granted pursuant to the Plan.
(k) "Optioned Stock" means the Common Stock subject to an Option.
(l) "Optionee" means a Director who holds an Option.
(m) "Outside Director" means a Director who is not an Employee.
(n) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1996 Director Option Plan.
(p) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 150,000 Shares of Common Stock (the "Pool"). The Shares
may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
(a) Procedure for Grants. The provisions set forth in this Section
4(a) shall not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder. All grants of Options to Outside Directors
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
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(i) No person shall have any discretion to select
which Outside Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically
granted an Option to purchase 15,000 Shares (the "First Option") on the date on
which the later of the following events occurs: (A) the effective date of this
Plan, as determined in accordance with Section 6 hereof, or (B) the date on
which such person first becomes an Outside Director, whether through election by
the shareholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive a First Option.
(iii) Each Outside Director shall be automatically
granted an Option to purchase 3,750 Shares (a "Subsequent Option") on the date
of his or her re-election to the Board each year, if as of such date, he or she
shall have served on the Board for at least the preceding six (6) months.
(iv) Notwithstanding the provisions of subsections
(ii) and (iii) hereof, any exercise of an Option granted before the Company has
obtained shareholder approval of the Plan in accordance with Section 16 hereof
shall be conditioned upon obtaining such shareholder approval of the Plan in
accordance with Section 16 hereof.
(v) The terms of a First Option granted hereunder
shall be as follows:
(A) the term of the First Option shall be
ten (10) years.
(B) the First Option shall be exercisable
only while the Outside Director remains a Director of the Company, except as set
forth in Sections 8 and 10 hereof.
(C) the exercise price per Share shall be
100% of the Fair Market Value per Share on the date of grant of the First
Option. In the event that the date of grant of the First Option is not a trading
day, the exercise price per Share shall be the Fair Market Value on the next
trading day immediately following the date of grant of the First Option.
(D) subject to Section 10 hereof, the First
Option shall become exercisable as to 1/48th of the Shares subject to the First
Option each month after its date of grant, provided that the Optionee continues
to serve as a Director on such dates.
(vi) The terms of a Subsequent Option granted
hereunder shall be as follows:
(A) the term of the Subsequent Option shall
be ten (10) years.
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(B) the Subsequent Option shall be
exercisable only while the Outside Director remains a Director of the Company,
except as set forth in Sections 8 and 10 hereof.
(C) the exercise price per Share shall be
100% of the Fair Market Value per Share on the date of grant of the Subsequent
Option. In the event that the date of grant of the Subsequent Option is not a
trading day, the exercise price per Share shall be the Fair Market Value on the
next trading day immediately following the date of grant of the Subsequent
Option.
(D) subject to Section 10 hereof, the
Subsequent Option shall become exercisable as to 100% of the Shares subject to
the Subsequent Option on the fourth anniversary of its date of grant, provided
that the Optionee continues to serve as a Director on such dates.
(vii) In the event that any Option granted under the
Plan would cause the number of Shares subject to outstanding Options plus the
number of Shares previously purchased under Options to exceed the Pool, then the
remaining Shares available for Option grant shall be granted under Options to
the Outside Directors on a pro rata basis. No further grants shall be made until
such time, if any, as additional Shares become available for grant under the
Plan through action of the Board or the shareholders to increase the number of
Shares which may be issued under the Plan or through cancellation or expiration
of Options previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect
to continuation of service as a Director or nomination to serve as a Director,
nor shall it interfere in any way with any rights which the Director or the
Company may have to terminate the Director's relationship with the Company at
any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares
to be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
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<PAGE>
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Rule 16b-3. Options granted to Outside Directors must comply
with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
or any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify Plan transactions, and
other transactions by Outside Directors that otherwise could be matched with
Plan transactions, for the maximum exemption from Section 16 of the Exchange
Act.
(c) Termination of Continuous Status as a Director. Subject to
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or total and permanent disability (as
defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her
Option, but only within three (3) months following the date of such termination,
and only to the extent that the Optionee was entitled to exercise it on the date
of such termination (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of such termination, and to the extent that the Optionee does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(d) Disability of Optionee. In the event Optionee's status as a
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee
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<PAGE>
may exercise his or her Option, but only within twelve (12) months following the
date of such ter mination, and only to the extent that the Optionee was entitled
to exercise it on the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of termination, or if he or she does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(e) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or
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<PAGE>
Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or
substituted for, the Option or equivalent option shall continue to be
exercisable as provided in Section 4 hereof for so long as the Optionee serves
as a Director or a director of the Successor Corporation. Following such
assumption or substitution, if the Optionee's status as a Director or director
of the Successor Corporation, as applicable, is terminated other than upon a
voluntary resignation by the Optionee, the Option or option shall become fully
exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Sections 8(c) through (e) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. Except as set forth in Section 4, the
Board may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made which would
impair the rights of any Optionee under any grant theretofore made, without his
or her consent. In addition, to the extent necessary and desirable to comply
with Rule 16b-3 under the Exchange Act (or any other applicable law or
regulation), the Company shall obtain shareholder approval of any Plan amendment
in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof.
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<PAGE>
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated there
under, state securities laws, and the requirements of any stock exchange upon
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
Such shareholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
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INTERLINK COMPUTER SCIENCES, INC.
DIRECTOR OPTION AGREEMENT
Interlink Computer Sciences, Inc., a California corporation (the
"Company"), has granted to ______________________________________ (the
"Optionee"), a (X one) a [ ] First Option or a [ ] Subsequent Option option to
purchase a total of __________________ (_________) shares of the Company's
Common Stock (the "Optioned Stock"), at the price determined as provided herein,
and in all respects subject to the terms, definitions and provisions of the
Company's 1996 Director Option Plan (the "Plan") adopted by the Company which is
incorporated herein by reference. The terms defined in the Plan shall have the
same defined meanings herein.
1. Nature of the Option. This Option is a nonstatutory option and is not
intended to qualify for any special tax benefits to the Optionee.
2. Exercise Price. The exercise price is $_______ for each share of Common
Stock.
3. Exercise of Option. This Option shall be exercisable during its term in
accordance with the provisions of Section 8 of the Plan as follows:
(i) Right to Exercise.
(a) First Option. If this Option is a First Option, it shall
become exercisable in installments cumulatively as to 1/48 of the Optioned Stock
each month after the date of grant, so that the Option shall be exercisable as
to one hundred percent (100%) of the Optioned Stock four years after the date of
grant.
(b) Subsequent Option. If this Option is a Subsequent Option,
it shall become exercisable in full four years after its date of grant.
(c) Notwithstanding the provisions of Section 3(i)(a) or
3(i)(b), in no event shall this Option be exercisable prior to the date the
shareholders of the Company approve the Plan.
(d) This Option may not be exercised for a fraction of a
share.
(e) In the event of Optionee's death, disability or other
termination of service as a Director, the exercisability of the Option is
governed by Section 8 of the Plan.
(ii) Method of Exercise. This Option shall be exercisable by written
notice which shall state the election to exercise the Option and the number of
Shares in respect of which the Option is being exercised. Such written notice,
in the form attached hereto as Exhibit A, shall be signed by the
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Optionee and shall be delivered in person or by certified mail to the Secretary
of the Company. The written notice shall be accompanied by payment of the
exercise price.
4. Method of Payment. Payment of the exercise price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
(i) cash;
(ii) check;
(iii) surrender of other shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which said Option shall be exercised; or
(iv) delivery of a properly executed exercise notice together with
such other documentation as the Company and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price.
5. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
Shares may then be listed. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
7. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, and may be exercised during such
period only in accordance with the Plan and the terms of this Option.
8. Taxation Upon Exercise of Option. Optionee understands that, upon
exercise of this Option, he or she will recognize income for tax purposes in an
amount equal to the excess of the then Fair Market Value of the Shares purchased
over the exercise price paid for such Shares. Since the Optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain
limited circumstances the measurement and timing of such income (and the
commencement of any capital gain holding period) may be deferred, and the
Optionee is advised to contact a tax advisor concerning the application of
Section 83 in general and the availability a Section 83(b) election in
particular in connection with the exercise of the Option. Upon a resale of such
Shares by the
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Optionee, any difference between the sale price and the Fair Market Value of the
Shares on the date of exercise of the Option, to the extent not included in
income as described above, will be treated as capital gain or loss.
DATE OF GRANT: ______________ INTERLINK COMPUTER SCIENCES, INC.
a California corporation
By: ________________________________________
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
attached hereto, and represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under the Plan.
Dated: _________________ ____________________________________________
Optionee
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EXHIBIT A
DIRECTOR OPTION EXERCISE NOTICE
Interlink Computer Sciences, Inc.
47370 Fremont Blvd.
Fremont, CA 94538
Attention: Corporate Secretary
1. Exercise of Option. The undersigned ("Optionee") hereby elects to
exercise Optionee's option to purchase ______ shares of the Common Stock (the
"Shares") of Interlink Computer Sciences, Inc. (the "Company") under and
pursuant to the Company's 1996 Director Option Plan and the Director Option
Agreement dated _______________ (the "Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Agreement.
3. Federal Restrictions on Transfer. Optionee understands that the Shares
must be held indefinitely unless they are registered under the Securities Act of
1933, as amended (the "1933 Act"), or unless an exemption from such registration
is available, and that the certificate(s) representing the Shares may bear a
legend to that effect. Optionee understands that the Company is under no
obligation to register the Shares and that an exemption may not be available or
may not permit Optionee to transfer Shares in the amounts or at the times
proposed by Optionee.
4. Tax Consequences. Optionee understands that Optionee may suffer adverse
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultant(s) Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. Delivery of Payment. Optionee herewith delivers to the Company the
aggregate purchase price for the Shares that Optionee has elected to purchase
and has made provision for the payment of any federal or state withholding taxes
required to be paid or withheld by the Company.
6. Entire Agreement. The Agreement is incorporated herein by reference.
This Exercise Notice and the Agreement constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and agreements of
the Company and Optionee with respect to the
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subject matter hereof. This Exercise Notice and the Agreement are governed by
California law except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: INTERLINK COMPUTER SCIENCES, INC.
_________________________________ By: ___________________________________
Its: __________________________________
Address:
Dated: __________________________ Dated: ________________________________
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EXHIBIT 10.20
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STOCK PURCHASE AGREEMENT
December 12, 1996
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TABLE OF CONTENTS
Page
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1. Purchase and Sale of Stock........................................ 1
1.1 Closing.................................................. 1
1.2 Delivery................................................. 1
2. Representations and Warranties of the Company..................... 1
2.1 Authority................................................ 1
2.2 Organization, Good Standing and Qualification............ 2
2.3 Capitalization and Voting Rights......................... 3
2.4 Subsidiaries............................................. 3
2.5 Valid Issuance of Common Stock........................... 3
2.6 Governmental Consents.................................... 4
2.7 Offering................................................. 4
2.8 Litigation............................................... 4
2.9 Intellectual Property.................................... 4
2.10 Conflicts................................................ 5
2.11 Compliance with Other Instruments........................ 5
2.12 Disclosure............................................... 6
2.13 Registration Rights...................................... 6
2.14 Title to Property and Assets............................. 6
2.15 Financial Statements..................................... 6
2.16 Changes.................................................. 6
2.17 SEC Documents; Material Contracts........................ 7
2.18 Compliance with All Laws................................. 7
2.19 Investment Company....................................... 8
3. Representations and Warranties of Investor........................ 8
3.1 Authorization............................................ 8
3.2 Purchase Entirely for Own Account........................ 8
3.3 Governmental Consents.................................... 8
3.4 No Consent............................................... 8
3.5 Disclosure of Information................................ 9
3.6 Investment Experience.................................... 9
3.7 Accredited Investor...................................... 9
3.8 Restricted Securities.................................... 9
3.9 Further Limitations on Disposition....................... 9
3.10 Legends.................................................. 10
4. Right to Notification............................................. 10
4.1 Notification of Acquisition of Securities................ 10
i.
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4.2 Notification of Receipt of Acquisition Proposal
or Initiation of Sale................................. 10
4.3 Actual Voting Power...................................... 11
5. Registration Rights............................................... 11
5.1 Request for Registration................................. 11
5.2 Obligations of the Company............................... 12
5.3 Expenses of Registration................................. 14
5.4 Indemnification.......................................... 14
5.5 Limitations on Subsequent Registration Rights............ 16
6. Right of First Offer.............................................. 17
6.1 New Issuances............................................ 17
6.2 "New Securities"......................................... 17
6.3 Notice of New Securities................................. 17
6.4 Exercise of Right of First Offer......................... 18
6.5 Transferability.......................................... 18
6.6 Closing.................................................. 18
6.7 Reservation of Shares.................................... 18
6.8 Term..................................................... 18
7. Conditions of Investor's Obligations at Closing................... 18
7.1 Representations and Warranties........................... 19
7.2 Performance.............................................. 19
7.3 Compliance Certificate................................... 19
7.4 Qualifications........................................... 19
7.5 Proceedings and Documents................................ 19
7.6 Opinion of Company Counsel............................... 19
8. Conditions of the Company's Obligations at Closing................ 19
8.1 Representations and Warranties........................... 19
8.2 Payment of Purchase Price................................ 19
8.3 Qualifications........................................... 20
9. Investor Notice................................................... 20
10. Miscellaneous..................................................... 21
10.1 Survival of Warranties................................... 21
10.2 Assignment; Successors and Assigns....................... 21
10.3 Governing Law............................................ 21
10.4 Counterparts............................................. 21
10.5 Titles and Subtitles..................................... 22
10.6 Notices, etc............................................. 22
10.7 Finder's Fee............................................. 23
10.8 Expenses................................................. 23
ii.
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10.9 Amendments and Waivers............................................ 23
10.10 Severability...................................................... 23
10.11 Entire Agreement.................................................. 23
iii.
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
the 12th day of December, 1996, by and among Interlink Computer Sciences, Inc.,
a Delaware corporation (the "Company"), and Cisco Systems, Inc., a California
corporation ("Investor").
WHEREAS, the Company and Investor have agreed to execute a
Binding Letter of Intent contemporaneously with this Agreement;
WHEREAS, pursuant to the Binding Letter of Intent, the parties
have agreed that they will execute a Development, Marketing and Support
Agreement no later than January 16, 1997, which will supersede the Binding
Letter of Intent; and
WHEREAS, this Agreement supersedes Section 15 and Section 17
of the Binding Letter of Intent.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock. Subject to the terms and
conditions of this Agreement, Investor agrees to purchase at the Closing (as
hereinafter defined) and the Company agrees to sell and issue to Investor at the
Closing, 622,000 shares of the Company's Common Stock (the "Shares"), at a
purchase price of eleven dollars ($11.00) per share (the "Purchase Price").
1.1 Closing. The purchase and sale of the Shares shall be held
at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California, on December 12, 1996 at 4:00 p.m., or at such other time and
place upon which the Company and Investor shall agree (which time and place
shall be referred to as the "Closing").
1.2 Delivery. At the Closing, the Company will issue to
Investor a certificate registered in the Investor's name, representing the
number of Shares purchased by Investor against payment of the Purchase Price.
The Purchase Price shall be paid to the Company by certified check payable to
the Company or by wire transfer.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to Investor that:
2.1 Authority. The Company has full power and authority to
execute and deliver this Agreement, and to consummate the transactions
contemplated by this Agreement. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the execution and
delivery of, and the consummation of the
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transactions contemplated by this Agreement and the performance of all
obligations of the Company under this Agreement has been taken. This Agreement,
upon execution and delivery by the Company and assuming the due and proper
execution and delivery by Investor, constitutes legal, valid and binding
obligations of the Company, enforceable in accordance with its respective terms,
except as may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting the
enforcement of creditors rights generally, and (ii) the effect of rules of law
governing the availability of equitable remedies. The making and performance of
this Agreement by the Company and the consummation of the transactions herein
contemplated will not violate any provisions of the certificate of incorporation
or bylaws, or other organizational documents, of the Company or any of its
subsidiaries, and will not conflict with, result in the breach or violation of,
or constitute, either by itself or upon notice or the passage of time or both, a
default under any material agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of its respective properties may be bound or affected, any statute or any
authorization, judgment, decree, order, rule or regulation of any court or any
regulatory body, administrative agency or other governmental body applicable to
the Company or any of its subsidiaries or any of their respective properties.
2.2 Organization, Good Standing and Qualification. The Company
and each of its subsidiaries have been duly incorporated and are validly
existing as corporations in good standing under the laws of their respective
jurisdictions of incorporation, with full power and authority (corporate and
other) to own and lease their properties and conduct their respective businesses
and all proposed future businesses. With the exception of Interlink Iberica
S.A., of which the Company owns 99.8% of the outstanding capital stock; each
subsidiary of the Company only has one class of capital stock and the Company
owns all of the outstanding capital stock of its subsidiaries free and clear of
all claims, liens, charges and encumbrances; the Company and each of its
subsidiaries are in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of their respective businesses, all of which are valid and in full
force and effect, except where the failure of any such authorization, license,
permit, consent, certificate or order to be valid or in full force, would not in
any single case or when aggregated with all such failures by the Company and all
of its subsidiaries have a material adverse effect upon the Company; the Company
and each of its subsidiaries are duly qualified to do business and in good
standing as foreign corporations in each jurisdiction in which the ownership or
leasing of properties or the conduct of their respective businesses requires
such qualification, except for jurisdictions in which the failure to so qualify
would not have a material adverse effect upon the Company and its subsidiaries
taken as a whole; and no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification.
2.
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2.3 Capitalization and Voting Rights. The authorized capital
of the Company as of December 3, 1996 consisted of:
(i) Preferred Stock. 5,000,000 shares of Preferred
Stock, $0.001 par value (the "Preferred Stock"), none of which are issued and
outstanding.
(ii) Common Stock. 25,000,000 shares of common stock,
$0.001 par value ("Common Stock"), of which 6,388,789 shares are issued and
outstanding.
(iii) Other than 2,105,000 shares of Common Stock
reserved for issuance to employees pursuant to the Company's 1992 Stock Option
Plan (the "Option Plan"), of which options to purchase 1,335,310 shares have
been granted, 350,000 shares of Common Stock reserved for issuance under the
1996 Employee Stock Purchase Plan (the "Purchase Plan"), of which no shares have
been issued, 150,000 shares of Common Stock reserved for issuance under the
Company's 1996 Director Option Plan (the "Director Plan"), of which options to
purchase 15,000 shares have been granted, and warrants to purchase 468,750
shares of Common Stock, neither the Company nor any subsidiary has outstanding
any options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or any
such options, rights, convertible securities or obligations. The Company is not
a party or subject to any agreement or understanding, and, to the best of the
Company's knowledge, there is no agreement or understanding between any persons
and/or entities, which affects or relates to the voting or giving of written
consents with respect to any security or by a director of the Company.
(iv) The issued and outstanding shares of Common Stock
have been duly authorized and validly issued, are fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws and
were not issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities. All issued and outstanding
shares of capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable.
2.4 Subsidiaries. Other than Interlink France S.A.R.I.,
Interlink Deutschland GmbH, Interlink Iberica S.A. (Spain), Interlink
(Switzerland) S.A., Interlink Computer Sciences, Ltd. (United Kingdom), New Era
Systems Services, Ltd. (Canada), Era Nua Teoranta, Ltd. (Ireland), and Interlink
Computer Sciences (Barbados) Inc., the Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. Other than as disclosed in each
statement, annual, quarterly and other report, registration statement (the
"Company SEC Documents") filed (other than preliminary material) by the Company
with the U.S. Securities and Exchange Commission (the "SEC"), the Company is not
a participant in any joint venture, partnership or similar arrangement.
3.
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2.5 Valid Issuance of Common Stock. The Common Stock to be
sold by the Company has been duly authorized and, when issued, delivered and
paid for in the manner set forth in this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws. No preemptive rights or other
rights to subscribe for or purchase exist with respect to the issuance and sale
of the Common Stock by the Company pursuant to this Agreement.
2.6 Governmental Consents. Other than compliance with the
Securities Act of 1933, as amended (the "Act") and such filings as may be
required to be made with the National Association of Securities Dealers (the
"NASD"), no consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal, state or
local governmental authority on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement.
2.7 Offering. Subject in part to the truth and accuracy of
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Common Stock as contemplated by this Agreement are
exempt from the registration requirements of the Act, and neither the Company
nor any authorized agent acting on its behalf will take any action hereafter
that would cause the loss of such exemption.
2.8 Litigation. Other than as disclosed in the Company SEC
Documents, there are no legal or governmental actions, suits or proceedings
pending or, to the Company's knowledge, threatened to which the Company or any
of its subsidiaries is or may be a party or of which property owned or leased by
the Company or any of its subsidiaries is or may be the subject, or related to
environmental or discrimination matters, which actions, suits or proceedings
might, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business or
results of operations of the Company and its subsidiaries taken as a whole; and
no labor disturbance by the employees of the Company or any of its subsidiaries
exists or, to the Company's knowledge, is imminent which might be expected to
have a material adverse effect on such condition, properties, business or
results of operations. Neither the Company nor any of its subsidiaries is a
party or subject to the provisions of any material injunction, judgment, decree
or order of any court, regulatory body, administrative agency or other
governmental body. There are no material legal or governmental actions, suits or
proceedings pending or, to the Company's knowledge, threatened against any
executive officers or directors of the Company.
2.9 Intellectual Property. Other than as disclosed in the
Company SEC Documents, the Company has sufficient title and ownership of all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for its business as now
conducted without any conflict with or
4.
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infringement of the rights of others. Other than as disclosed in the Company SEC
Documents, there are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other person or entity. The
Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will, to the best of the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company.
2.10 Conflicts. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Company's business will, to the best of
the Company's knowledge, conflict with or result in a material breach of the
terms, conditions or provisions of, or constitute a material default under, any
contract, covenant or instrument under which the Company or any of its employees
is now obligated.
2.11 Compliance with Other Instruments. Except as to defaults
which individually or in the aggregate would not be material to the Company and
its subsidiaries taken as a whole, neither the Company nor any of its
subsidiaries is in violation or default of any provision of its certificate of
incorporation or bylaws, or other organizational documents, or is in breach of
or default with respect to any provision of any agreement, judgment, decree,
order, mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument to which it is a party or by which it or any of its properties
are bound; and, except as to defaults which individually or in the aggregate
would not be material to the Company and its subsidiaries taken as a whole, to
the Company's knowledge, there does not exist any state of facts which
constitutes an event of default on the part of the Company or any such
subsidiary as defined in such documents or which, with notice or lapse of time
or both, would constitute such an event of default. The execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby and thereby, will not result in any such violation or be in
conflict with or constitute, with or without the passage of time
5.
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and giving of notice, either a default under any such provision, instrument,
judgment, order, writ, decree or contract or an event that results in the
creation of any lien, charge or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture, or nonrenewal of any
material permit, license, authorization, or approval applicable to the Company,
its business or operations or any of its assets or properties.
2.12 Disclosure. The Company has fully provided Investor with
all the information that such Investor has requested for deciding whether to
purchase the Common Stock. Neither this Agreement, nor any other statements or
certificates made or delivered in connection herewith or therewith contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements herein or therein not misleading.
2.13 Registration Rights. Except for the registration rights
granted under this Agreement, and as disclosed in the Company SEC Documents,
there are no other stockholders of the Company that have been granted
registration rights, including piggyback rights, and the Company has not agreed
to grant any registration rights, to any person or entity.
2.14 Title to Property and Assets. The Company or the
applicable subsidiary has good and marketable title to all the properties and
assets subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those which do not adversely affect the use made and proposed to be made
of such property by the Company and its subsidiaries. The Company or the
applicable subsidiary holds its leased properties under valid and binding
leases, with such exceptions as are not materially significant in relation to
the business of the Company. The Company owns or leases all such properties as
are necessary to its operations as now conducted.
2.15 Financial Statements. The Company has delivered to
Investor its audited financial statements (balance sheet and profit and loss
statement, statement of stockholders' equity and statement of cash flows,
including notes thereto) at June 30, 1996 and for the fiscal year then ended,
and its unaudited financial statements (balance sheet and profit and loss
statement) as at and for the 3-month period ended September 30, 1996 (the
audited and unaudited financial statements are collectively, the "Financial
Statements"). The Financial Statements of the Company and its subsidiaries,
present fairly the financial position of the Company and its subsidiaries, as
the case may be, as of the respective dates of such financial statements and
schedules, and the results of operations and changes in financial position of
the Company and its subsidiaries, as the case may be, for the respective periods
covered thereby. Such Financial Statements, schedules and related notes have
been prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis.
2.16 Changes. Since September 30, 1996:
6.
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(a) the Company and its subsidiaries have not incurred any
material liabilities or obligations, indirect, direct or contingent, or entered
into any material verbal or written agreement or other transaction which is not
in the ordinary course of business;
(b) the Company and its subsidiaries have not sustained any
material loss or interference with their respective businesses or properties
from fire, flood, windstorm, accident or other calamity, whether or not covered
by insurance;
(c) the Company has not paid or declared any dividends or
other distributions with respect to its capital stock and the Company and its
subsidiaries are not in default in the payment of principal or interest on any
outstanding debt obligations;
(d) There has not been any change in the capital stock or,
other than in the ordinary course of business, indebtedness material to the
Company and its subsidiaries; and
(e) there has not been any material adverse change or any
development involving or which may reasonably be expected to involve a
prospective material adverse change, in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company and its
subsidiaries taken as a whole.
2.17 SEC Documents; Material Contracts. The Company has filed
each statement, annual, quarterly and other report, registration statement and
definitive proxy statement required to be filed (other than preliminary
material) by the Company with the SEC subsequent to August 15, 1996. As of their
respective filing dates, the Company SEC Documents complied in all material
respects with the requirements of the Act or the Securities Exchange Act of 1934
(the "1934 Act"), as the case may be, and none of the Company SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading,
except to the extent corrected by any subsequently filed Company SEC Documents.
The Company's Registration Statement on Form S-1, which became effective on
August 14, 1996 (the "Registration Statement"), and the Company SEC Documents,
include certain contracts as required by the SEC's rules and regulations. The
contracts so described in the Registration Statement and in the Company SEC
Documents, that are currently material to the Company and its business, are in
full force and effect on the date hereof. Neither the Company nor any of its
subsidiaries, nor to the Company's knowledge, any other party is in breach of or
default under any of such contracts, except as to breaches or defaults which, in
any single case or in the aggregate would not have a material adverse effect on
the Company or the subsidiary.
7.
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2.18 Compliance with All Laws. The Company has not been
advised, and has no reason to believe, that either it or any of its subsidiaries
is not conducting business in compliance with all applicable laws, rules and
regulations of the jurisdictions in which it is conducting business, including,
without limitation, all applicable local, state and federal environmental laws
and regulations, except where failure to be so in compliance would not
materially adversely affect the condition (financial or otherwise), business,
results of operations or prospects of the Company and its subsidiaries taken as
a whole.
2.19 Investment Company. The Company is not an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
3. Representations and Warranties of Investor. Investor hereby
represents and warrants that:
3.1 Authorization. Investor has full power and authority to
execute and deliver, and to consummate the transactions contemplated by the
Closing and this Agreement. All corporate action on the part of Investor, its
officers, directors and shareholders necessary for (i) the execution and
delivery of, and the consummation of the transactions contemplated by, this
Agreement, and (ii) as of the Closing, the performance of all obligations of
Investor under this Agreement, has been taken. This Agreement, upon execution
and delivery by Investor and assuming the due and proper execution and delivery
by the Company, constitutes a legal, valid and binding obligation of Investor,
enforceable in accordance with its terms, except as may be limited by (i)
applicable bankruptcy, insolvency, reorganization or other laws of general
application relating to or affecting the enforcement of creditors rights
generally, and (ii) the effect of rules of law governing the availability of
equitable remedies.
3.2 Purchase Entirely for Own Account. This Agreement is made
with Investor in reliance upon Investor's representation to the Company, which
by Investor's execution of this Agreement Investor hereby confirms, that the
Common Stock to be received by Investor (collectively, the "Securities") will be
acquired for investment for Investor's own account, not as a nominee or agent,
and not with a view to the resale or distribution of any part thereof, and that
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, Investor further
represents that Investor does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
3.3 Governmental Consents. Other than compliance with the Act
and such filings as may be required to be made with the NASD, no consent,
approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state or local
governmental authority on the part of Investor is required in connection with
the consummation of the transactions contemplated by this Agreement.
8.
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3.4 No Consent. No consent, approval, waiver or other action
by any entity under any material contract, agreement, indenture, lease,
instrument or other document to which Investor is a party or by which it is
bound is required or necessary for the execution, delivery and performance of,
or the consummation of the transactions contemplated by, this Agreement by
Investor.
3.5 Disclosure of Information. Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Common Stock. Investor further represents that it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Common Stock and the
business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of Investor to rely
thereon.
3.6 Investment Experience. Investor is an investor in
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Common
Stock. Investor has not been organized for the purpose of acquiring the Common
Stock.
3.7 Accredited Investor. Investor is an "accredited investor"
within the meaning of SEC Rule 501 of Regulation D, as presently in effect.
3.8 Restricted Securities. Investor understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
3.9 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, Investor further agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 3 provided and to the extent this Section is applicable, and:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
9.
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(b) If reasonably requested by the Company, Investor shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company that such disposition will not require registration of such
shares under the Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
3.10 Legends. Each certificate or instrument representing
Shares shall bear legends in substantially the following forms:
(i) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
'SECURITIES ACT') AND ARE 'RESTRICTED SECURITIES' AS DEFINED IN RULE
144 PROMULGATED UNDER THE SECURITIES ACT. THE SECURITIES MAY NOT BE
SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN
CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT, OR (II) IN COMPLIANCE WITH RULE 144, OR (III)
PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THESE
SECURITIES THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO
SUCH SALE, OFFER OR DISTRIBUTION."
(ii) Any other legends required by California law or
other applicable blue sky or state securities laws.
The Company need not register a transfer of any Shares, and may also instruct
its transfer agent not to register a transfer of any Shares, unless the
conditions specified in the foregoing legends are satisfied to the extent
applicable.
4. Right to Notification.
4.1 Notification of Acquisition of Securities. The Company
will notify Investor in the event any person or entity acquires securities which
results in such person or entity owning five (5%) percent or more of the
securities of the Company or a Spinoff (defined as a subsidiary of the Company,
to which the Company transfers substantially all of its assets used in
development and/or production of TCP/IP products) promptly when the Company
becomes aware of the acquisition. In the event any person or entity varies its
ownership above five (5%) percent by one (1%) percent or more, then the Company
shall notify Investor immediately after the Company receives a copy of the
applicable Form 13 or any other applicable form or earlier if the Company
becomes aware of such acquisition prior to receiving the applicable form filed
with the SEC.
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4.2 Notification of Receipt of Acquisition Proposal or
Initiation of Sale. In the event that the Board of Directors of the Company or
the Spinoff (i) receives an offer to be acquired by means of (x) a merger,
consolidation or other business combination pursuant to which the stockholders
of the Company or a Spinoff immediately prior to the effective date of such
transaction have beneficial ownership of less than fifty percent (50%) of the
total combined voting power for election of directors of the surviving
corporation immediately following such transaction; or (y) the sale of all or
substantially all of the assets of the Company or a Spinoff, or (ii) votes to
initiate a sale to any other person or entity of (xx) twenty-five (25%) percent
or more of the Actual Voting Power of the Company (as defined in Section 4.3
below) or a Spinoff, or (yy) all or substantially all of the Company's or a
Spinoff's assets, prior to accepting such acquisition proposal or initiating
such sale, the Company or the Spinoff shall provide to Investor written notice
(the "Notice") of the proposed terms of such acquisition proposal or sale within
two (2) business days of receipt of such acquisition proposal or the initiation
of a sale of the Company or the Spinoff. The Notice shall include the following
information: (a) the identity of the party making the acquisition proposal and
(b) the specific terms of the acquisition proposal or the initiation of a sale
of the Company or the Spinoff. Further, the Company shall provide a true and
complete copy of the acquisition proposal if in writing, or a complete written
summary thereof if the proposal is not in writing, and any and all documents
containing or referring to non-public information of the Company that are or
have been supplied to the party making the acquisition proposal. The Company
agrees not to accept an acquisition proposal or vote to initiate a sale of the
Company or the Spinoff as provided for in this Section 4.2 earlier than twenty
(20) days from the date of Investor's receipt of the Notice.
4.3 Actual Voting Power. "Actual Voting Power of the Company
or a Spinoff" shall mean the total number of votes that may be cast in the
election of Directors of the Company or a Spinoff at any meeting of stockholders
of the Company or a Spinoff if all shares of Common Stock and other securities
of the Company or a Spinoff entitled to vote generally in the election of
Directors of the Company or a Spinoff were present and voted at such meeting,
other than votes that may be cast only by one class or series of stock (other
than shares of Common Stock) or upon the happening of a contingency.
4.4 Term. The Notice requirements set forth in Section 4.1
shall commence on December 10, 1996 and shall terminate on December 31, 1999.
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5. Registration Rights.
5.1 Request for Registration.
(a) If the Company shall receive at any time after August 15,
1997, a written request from Investor that the Company file a registration
statement under the Act covering the registration of the Common Stock purchased
hereunder, then the Company shall effect as soon as practicable, and in any
event within 60 days of the receipt of such request, the registration under the
Act of all securities which Investor requests to be registered.
(b) If Investor intends to distribute the securities covered
by its request by means of an underwriting, Investor shall so advise the Company
as a part of its request made pursuant to subsection (a) above. The underwriter
will be selected by the Company and shall be reasonably acceptable to Investor.
Investor shall (together with the Company) enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting.
(c) Notwithstanding the foregoing, if the Company shall
furnish to Investor a certificate signed by the Chief Executive Officer of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such registration statement to be filed and it is therefore essential to
defer the filing of such registration statement, the Company shall have the
right to defer taking action with respect to such filing for a period of not
more than 120 days after receipt of the request of Investor; provided, however,
that the Company may not utilize this right more than once in any twelve-month
period.
(d) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 5.1:
(i) After the Company has effected one
registration, other than a registration which is made on Form S-3 pursuant to
this Section 5.1, and such registration has been declared or ordered effective;
(ii) If all securities which Investor requests
to be registered may immediately be sold under Rule 144 during any 90-day
period.
(iii) More than once in any 12-month period.
5.2 Obligations of the Company. Whenever required under this
Section 5 to effect the registration of any securities, the Company shall, as
expeditiously as reasonably possible:
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(a) Prepare and file with the SEC a registration statement
with respect to such securities and use commercially reasonable efforts to cause
such registration statement to become effective, and, upon the request of
Investor, keep such registration statement effective for a period of up to one
hundred twenty (120) days or until the distribution contemplated in the
Registration Statement has been completed; provided, however, that such 120-day
period shall be extended for a period of time equal to the period Investor
refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to Investor such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of securities.
(d) Use commercially reasonable efforts to register and
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by Investor; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions, unless the Company is already subject to service in such
jurisdiction and except as may be required by the Act.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering, said form to be
agreeable to the Company and its counsel. Investor shall also enter into and
perform its obligations under such an agreement.
(f) Notify Investor at any time when a prospectus relating to
such registration statement is required to be delivered under the Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
(g) Cause all such securities registered pursuant hereunder to
be listed on each securities exchange on which similar securities issued by the
Company are then listed.
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(h) Use commercially reasonable efforts to furnish, at the
request of Investor, on the date that securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
5, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to Investor and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
Investor.
5.3 Expenses of Registration. All expenses other than
underwriting discounts and commissions incurred in connection with the request
for registration pursuant to Section 5.1, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company (including fees and disbursements
of counsel for the Company in its capacity as counsel to Investor hereunder; if
Company counsel does not make itself available for this purpose, the Company
will pay the reasonable fees and disbursements of one counsel for Investor)
shall be borne by the Company and all such expenses for subsequent registrations
shall be borne by Investor; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 5.1 if the registration request is subsequently withdrawn at the
request of Investor (in which case Investor shall bear such expense); provided
further, however, that if at the time of such withdrawal, Investor has learned
of a material adverse change in the condition, business, or prospects of the
Company from that known to Investor at the time of its request and has withdrawn
the request with reasonable promptness following disclosure by the Company of
such material adverse change, then Investor shall not be required to pay any of
such expenses and shall retain its rights pursuant to Section 5.1.
5.4 Indemnification. In the event any securities are included
in a registration statement under this Section 5:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless Investor, any underwriter (as defined in the Act) for Investor
and each person, if any, who controls Investor or underwriter within the meaning
of the Act or the 1934 Act, against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Act or the 1934
Act or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
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prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the Act, or the 1934 Act or any state securities
law; and the Company will pay to each Investor, underwriter or controlling
person, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 5.4(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any Investor, underwriter or controlling person.
(b) To the extent permitted by law, Investor will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, any underwriter, and any controlling
person of any such underwriter or Investor, against any losses, claims, damages,
or liabilities (joint or several) to which any of the foregoing persons may
become subject, under the Act, or the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by Investor expressly for use
in connection with such registration; and Investor will pay, as incurred, any
legal or other expenses reasonably incurred by any person intended to be
indemnified pursuant to this subsection 5.4(b), in connection with investigating
or defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this subsection 5.4(b) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of
Investor, which consent shall not be unreasonably withheld; provided, that, in
no event shall any indemnity under this subsection 5.4(b) exceed the gross
proceeds from the offering received by Investor.
(c) Promptly after receipt by an indemnified party under this
Section 5.4 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 5.4, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
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satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
5.4, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 5.4.
(d) If the indemnification provided for in this Section 5.4 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Investor under this
Section 5.4 shall survive the completion of any offering of securities in a
registration statement under this Section 5, and otherwise.
5.5 Limitations on Subsequent Registration Rights. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of Investor, enter into any agreement with any holder or
prospective holder of any securities of the Company which would allow such
holder or prospective holder (a) to include such securities in any registration
filed under Section 5.1 hereof, unless under the terms of such agreement, such
holder or prospective holder may include such securities
16.
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in any such registration only to the extent that the inclusion of its securities
will not reduce the amount of the securities of Investor which are included or
(b) to make a demand registration which could result in such registration
statement being declared effective prior to the earlier of August 15, 1997 or
within one hundred twenty (120) days of the effective date of any registration
effected pursuant to Section 5.1.
6. Right of First Offer.
6.1 New Issuances. The Company hereby grants to Investor the
right of first offer (the "Right of First Offer") to purchase a pro rata share
(rounded to the next lowest number) of all (or any part) of any "New Securities"
(as defined in Section 6.2) that the Company may, from time to time propose to
sell and issue in a private equity financing. Such pro rata share, for purposes
of this right of first offer, is the ratio of the number of Shares then owned by
Investor to the total number of shares of Common Stock outstanding immediately
prior to such issuance. This Right of First Offer shall be subject to the
following provisions:
6.2 "New Securities" shall mean any Common Stock of the
Company whether or not authorized on the date hereof, and rights, options, or
warrants to purchase Common Stock and equity securities of any type whatsoever
that are, or may become, convertible into Common Stock; provided, however, that
"New Securities" does not include the following:
(a) issuances of any other securities issued upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar event;
(b) securities of the Company issued pursuant to the
acquisition of a business by the Company by merger, purchase of assets, or other
acquisition or reorganization approved by the Board of Directors;
(c) securities of the Company issued in connection with
equipment lease transactions, loan guarantees, commercial loans, bank financing
transactions or technology licenses approved by the Board of Directors; and
(d) shares of Common Stock, warrants to purchase shares of
Common Stock or options to purchase shares of Common Stock, issued or granted to
officers, directors, employees or consultants of the Company pursuant to stock
plans and option plans or other compensatory arrangements approved by the Board
of Directors.
6.3 Notice of New Securities. In the event that the Company
proposes to undertake an issuance of New Securities, it shall give Investor
written notice of its intention, describing the type of New Securities, the
price, and the general terms upon which the Company proposes to issue the same.
Investor shall have ten (10) business days after receipt of such notice to agree
to purchase its pro rata share of such New
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Securities at the price and upon the terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased.
6.4 Exercise of Right of First Offer. In the event that
Investor fails to exercise in full the right of first refusal within the ten
(10) business day period specified above, the Company shall have ninety (90)
days thereafter to sell (or enter into an agreement to sell) the New Securities
respecting which the right of Investor was not exercised at a price and upon
terms no more favorable to the purchasers thereof than specified in the
Company's notice. In the event the Company has not sold (or entered into an
agreement to sell) the New Securities within ninety (90) day period the Company
shall not thereafter issue or sell any New Securities, without first offering
such New Securities to the Investor in the manner provided above.
6.5 Transferability. This Right of First Offer may not be
transferred or assigned by Investor.
6.6 Closing. The purchase and sale of any securities pursuant
to the exercise of the Right of First Offer shall take place at 10:00 a.m. on
the fifth business day following expiration or early termination of all waiting
periods imposed on such purchase and sale by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"), or, if no waiting period is imposed on
such purchase and sale by the HSR Act, not later than five (5) business days
following Investor's exercise of the Right of First Offer. Any such purchase and
sale shall occur at the offices of the Company located at the address set forth
on the signature page hereof, or at such other time and place as the Company and
Investor may agree. The Company and Investor will use their commercially
reasonable efforts to comply with all Federal and state laws and regulations and
stock exchange listing requirements applicable to any purchase and sale of
securities pursuant to the exercise of the Right of First Offer. The issuance of
such shares shall be subject to compliance with applicable laws and regulations
of any applicable stock exchange and there shall not then be in effect any order
enjoining or restraining such exercise or issuance.
6.7 Reservation of Shares. The Company agrees that it shall
not take any of the actions or series of actions referred to in Paragraph 6
above which would have the effect of triggering the right of Investor to
exercise the Right of First Offer unless the Company shall have an adequate
number of shares available or reserved to satisfy any obligation it may have to
issue shares under Paragraph 6 above.
6.8 Term. The right to purchase additional shares in this
Section 6 shall terminate on December 31, 1999.
7. Conditions of Investor's Obligations at Closing. The
obligations of Investor under subsection 1.2 of this Agreement are subject to
the fulfillment on or
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before the Closing of each of the following conditions, the waiver of which
shall not be effective without Investor's consent thereto:
7.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
7.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
7.3 Qualifications. All authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
7.4 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investor, and it shall have received all such counterpart original
and certified or other copies of such documents as it may reasonably request.
7.5 Opinion of Company Counsel. Investor shall have received
from Wilson, Sonsini, Goodrich & Rosati, counsel for the Company, an opinion,
dated as of the Closing, in a form reasonably acceptable to counsel for
Investor.
7.6 Waiver of Registration Rights. The Company shall obtain a
waiver and/or consent from the requisite number of holders of Registrable
Securities, as defined in that certain Registration Rights Agreement, dated
January 27, 1994, by and among the Company and each of the parties listed on
Exhibit A thereto (the "Rights Agreement"), of any and all rights granted by
that certain Rights Agreement, as required by the Rights Agreement.
8. Conditions of the Company's Obligations at Closing. The
obligations of the Company to Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by
Investor:
8.1 Representations and Warranties. The representations and
warranties of Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
8.2 Payment of Purchase Price. The Investor shall have
delivered the purchase price specified in Section 1.
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8.3 Qualifications. All authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
9. Investor Notice. In the event that Investor (which, for
purposes of this Section 9 includes Investor, its affiliates and all of its
subsidiaries) intends to, directly or indirectly, acquire, or enter into
discussions, negotiations, arrangements or understandings with any third party
to acquire prior to the expiration of this Section 9 (including, without
limitation, the lapse of the negative covenants of this Section 9.1 upon the
occurrence of any of the events described in Section 9.1(a) through (c)),
beneficial ownership of any Common Stock and any other securities issued by the
Company having the ordinary power to vote in the election of directors of the
Company (other than securities having such power only upon the happening of a
contingency) ("Voting Stock"), any securities convertible into or exchangeable
for Voting Stock, or any other right to acquire Voting Stock (except, in any
case, by way of stock dividends or other distributions or offerings made
available to the holders of Voting Stock generally) and if the effect of such
acquisition would be to increase the voting power of all Voting Stock then owned
by Investor or which Investor has a right to acquire more than 9.9% of the total
voting power of all Voting Stock then outstanding, Investor shall provide to the
Company prior written notice of the proposed acquisition of Voting Stock. Such
notice shall include the specific terms of the proposed method of acquisition of
the securities of the Company or the Spinoff and shall be delivered to the
Company four business days prior to the closing of such transaction.
Notwithstanding the foregoing, Investor may acquire Voting Stock without first
providing the Company with prior written notice upon the following events:
(a) if any person or group not affiliated with Investor and
then owning Voting Stock representing at least 5% of the voting power of all
Voting Stock then outstanding provides written notice to the Company or files
any document with the SEC that contains terms that put the Company reasonably on
notice of the likelihood that such person or group has acquired or is proposing
to acquire any shares of Voting Stock or the right to acquire shares of Voting
Stock having aggregate voting power of more than twenty-five percent (25%) of
the total voting power of all shares of Voting Stock then outstanding and, in
the case of a proposal to acquire such shares, the proposal and any related
offers to purchase shares are not withdrawn or terminated prior to Investor
making an offer to acquire Voting Stock or acquiring Voting Stock in response
thereto; provided, however, that the negative covenants of this Section 9 will
resume following the withdrawal of any proposal or offer to purchase shares made
in accordance with this Section 9;
(b) if it is publicly disclosed or Investor otherwise learns
that the Company has entered into any letter of intent or agreement with a
person or group that, if consummated, would result in such person or group
owning or having the right to
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acquire shares of Voting Stock having aggregate voting power of more than 20% of
the total voting power of all shares of Voting Stock then outstanding;
(c) if a tender offer is made as evidenced by the filing with
the SEC of a Schedule 14D-1 (or any successor schedule or form promulgated or
adopted for such purpose by the SEC) and the actual dissemination of tender
offer materials to security holders by another person or group to purchase or
exchange for cash or other consideration any Voting Stock which, if successful,
would result in such person or group owning or having the right to acquire
shares of Voting Stock with aggregate voting power of at least 50% of the total
voting power of the Company then in effect; or
(d) upon the earlier of a merger, consolidation, or sale of
substantially all of the Company's assets or December 31, 1999.
(e) Excluded Shares. For purposes of this agreement, Investor
will not be deemed to have beneficial ownership of any Voting Stock held by an
Investor pension plan or other employee benefit program if Investor does not
have the power to control the investment decisions of such plan or program.
10. Miscellaneous.
10.1 Survival of Warranties. The warranties, representations
and covenants of the Company and Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of Investor or the Company.
10.2 Assignment; Successors and Assigns. No provision of this
Agreement may be assigned without the prior written consent of the other party
hereto. Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including transferees of any Securities).
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
10.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
10.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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10.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
10.6 Notices, etc. All notices and other communications
required or permitted hereunder shall be in writing and shall be sent by
personal delivery, facsimile, overnight courier or mailed by certified or
registered mail, postage prepaid, return receipt requested, to the facsimile
number or address as follows:
Company: Interlink Computer Sciences, Inc.
47370 Fremont Boulevard
Fremont, California 94538
Telephone: (510) 657-9800
Facsimile: (510) 659-6381
Attention: Charles W. Jepson
with a copy (which will not constitute notice) to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (415) 493-9300
Facsimile: (415) 493-6811
Attention: Thomas C. DeFilipps, Esq.
Investor: Cisco Systems, Inc.
170 West Tasman Drive
San Jose, California 95134-1706
Telephone: (408) 526-4000
Facsimile: (408) 526-7110
Attention: Dan Scheinman, Esq.
with a copy (which will not constitute notice) to:
Brobeck, Phleger & Harrison, LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Telephone: (415) 424-0160
Facsimile: (415) 496-2885
Attention: Edward M. Leonard, Esq.
or to such other facsimile number or address provided to the parties to this
Agreement in accordance with this Section 10.6. Such notices or other
communications shall be deemed delivered upon receipt, in the case of overnight
delivery, personal delivery or
22.
<PAGE>
facsimile transmission (as evidenced by the confirmation thereof), or 2 days
after deposit in the mails (as determined by reference to the postmark).
10.7 Finder's Fee. Each party represents that it neither is
nor will be obligated for any finders' fee or commission in connection with this
transaction. Investor agrees to indemnify and to hold harmless the Company from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which such Investor or any of its officers, partners, employees,
or representatives is responsible.
The Company agrees to indemnify and hold harmless Investor
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Company or any of its officers, employees or
representatives is responsible.
10.8 Expenses. Irrespective of whether the Closing is
effected, each party shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
10.9 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investor. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are convertible),
each future holder of all such securities, and the Company.
10.10 Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
10.11 Entire Agreement. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
23.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
COMPANY
By: /s/ Charles W. Jepson
-----------------------------
Title: President & CEO
-----------------------------
INVESTOR:
By: /s/ John T. Chambers
-----------------------------
Title: President & CEO
-----------------------------
[SIGNATURE PAGE TO COMMON STOCK PURCHASE AGREEMENT]
24.
<TABLE>
EXHIBIT 11.1
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(in thousands, except per share data)
<CAPTION>
Three months ended Six months ended
------------------ -----------------
12/31/96 12/31/95 12/31/96 12/31/95
-------- -------- -------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Primary and fully diluted:
Weighted average shares:
Common .................................................. 6,492 2,445 5,740 2,445
Common equivalent shares from stock options
and warrants ............................................ 1,179 -- 1,146 --
Common and common equivalent shares pursuant
to Staff Accounting Bulletin No. 83 ..................... -- 680 -- 680
------- ------- ------- -------
Shares used in per share calculation ............................. 7,671 3,125 6,886 3,125
======= ======= ======= =======
Net income (loss) ................................................ $ 903 $(8,661) $ 1,342 $(8,407)
======= ======= ======= =======
Net income (loss) per share ...................................... $ 0.12 $ (2.77) $ 0.19 $ (2.69)
======= ======= ======= =======
<FN>
(1) There is no difference between primary and fully diluted net income per
share for all periods presented.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,061
<SECURITIES> 0
<RECEIVABLES> 10,280
<ALLOWANCES> (640)
<INVENTORY> 1,327
<CURRENT-ASSETS> 40,643
<PP&E> 1,562
<DEPRECIATION> 171
<TOTAL-ASSETS> 46,614
<CURRENT-LIABILITIES> 18,019
<BONDS> 0
<COMMON> 49,924
0
0
<OTHER-SE> 24,114
<TOTAL-LIABILITY-AND-EQUITY> 46,614
<SALES> 5,960
<TOTAL-REVENUES> 9,633
<CGS> 678
<TOTAL-COSTS> 1,887
<OTHER-EXPENSES> 6,409
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 1,481
<INCOME-TAX> 578
<INCOME-CONTINUING> 1,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 903
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
