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 March 31, 1998
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
--- ---
8,066,277 shares of the registrant's Common stock, $0.001 par value,
were outstanding as of May 1, 1998
<PAGE>
INTERLINK COMPUTER SCIENCES, INC.
AND SUBSIDIARIES
CONTENTS
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
March 31, 1998 and June 30, 1997.............................4
Condensed Consolidated Statements of Operations:
Three and nine months ended March 31, 1998 and 1997..........5
Condensed Consolidated Statements of Cash Flows:
Nine months ended March 31, 1998 and 1997....................6
Notes to Condensed Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................13
Risk Factors that may affect Future Results.........................21
PART II: OTHER INFORMATION
Item 1 Legal Proceedings...................................................31
Item 4 Submission of Matters to a Vote of Security Holders.................31
Item 6 Exhibits and Reports on Form 8-K....................................32
Signatures ...............................................................33
2
<PAGE>
PART I: FINANCIAL INFORMATION
3
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
March 31, June 30,
1998 1997
-------- --------
ASSETS: (unaudited)
<S> <C> <C>
Cash and cash equivalents ........................................ $ 20,059 $ 28,106
Accounts receivable, net ......................................... 7,328 9,752
Inventories ...................................................... 334 674
Current deferred tax asset ....................................... 7,132 2,092
Other current assets ............................................. 731 1,240
-------- --------
Total current assets ........................................... 35,584 41,864
Property and equipment, net ...................................... 2,582 1,676
Long-term deferred tax asset ..................................... 3,615 1,541
Purchased software products & other non-current assets ........... 1,763 3,282
-------- --------
Total assets ................................................... $ 43,544 $ 48,363
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Current portion of long-term debt ................................ $ 780 $ 314
Accounts payable ................................................. 1,221 1,421
Deferred maintenance and product revenue ......................... 6,790 7,488
Accrued compensation ............................................. 1,682 2,694
Accrued income taxes ............................................. 1,121 2,296
Other accrued liabilities ........................................ 3,355 2,296
-------- --------
Total current liabilities ...................................... 14,949 16,509
Long-term debt, less current portion ................................. 389 802
Defered maintenance revenue .......................................... 1,143 1,403
Other liabilities .................................................... 2,379 975
Liabilities retained in connection with sale of Harbor (Note 4) ...... 1,232 --
-------- --------
Total liabilities .............................................. 20,092 19,689
-------- --------
Commitments and contingencies (Note 6)
Common stock ......................................................... 7 7
Additional paid-in capital ........................................... 52,156 50,814
Cumulative translation adjustment .................................... (507) (591)
Accumulated deficit .................................................. (28,204) (21,556)
-------- --------
Total stockholders' equity ..................................... 23,452 28,674
-------- --------
Total liabilities and stockholders' equity ..................... $ 43,544 $ 48,363
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Product ....................................... $ 4,806 $ 7,546 $ 11,027 $ 18,338
Maintenance and consulting .................... 3,194 3,611 10,036 11,177
-------- -------- -------- --------
Total revenues .............................. 8,000 11,157 21,063 29,515
-------- -------- -------- --------
Cost of revenues:
Product ....................................... 378 564 1,006 1,927
Maintenance and consulting .................... 1,202 1,139 3,707 3,585
-------- -------- -------- --------
Total cost of revenues ...................... 1,580 1,703 4,713 5,512
-------- -------- -------- --------
Gross profit ...................................... 6,420 9,454 16,350 24,003
-------- -------- -------- --------
Operating expenses:
Product development ........................... 3,048 1,957 8,599 5,827
Sales and marketing ........................... 3,473 4,142 9,271 10,400
General and administrative .................... 1,235 1,301 4,492 3,320
Purchased research and development and
product amortization ....................... 2,664 127 6,527 428
Loss on sale of Harbor ........................ -- -- 2,171 --
-------- -------- -------- --------
Total operating expenses .................... 10,420 7,527 31,060 19,975
-------- -------- -------- --------
Operating income (loss) ........................... (4,000) 1,927 (14,710) 4,028
Interest and other income, net .................... 184 256 704 344
-------- -------- -------- --------
Income (loss) before provision for (benefit
from) income taxes ............................ (3,816) 2,183 (14,006) 4,372
Provision for (benefit from) income taxes ......... (1,358) 851 (7,358) 1,698
-------- -------- -------- --------
Net income (loss) ................................. $ (2,458) $ 1,332 $ (6,648) $ 2,674
======== ======== ======== ========
Net income (loss) per share
Basic ......................................... $ (0.31) $ 0.19 $ (0.86) $ 0.43
Diluted ....................................... $ (0.31) $ 0.16 $ (0.86) $ 0.36
Shares used in per share calculation
Basic ......................................... 7,932 7,177 7,701 6,219
Diluted ....................................... 7,932 8,331 7,701 7,348
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Nine months ended March 31,
1998 1997
-------- --------
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) ......................................................... $ (6,648) $ 2,674
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Purchased research and development ...................................... 6,228 --
Loss on Sale of HARBOR .................................................. 2,171
Depreciation and amortization ........................................... 1,352 1,210
Provision for excess and obsolete inventory ............................. 93 30
Reduction of allowance for doubtful accounts ............................ (141) (24)
Exchange loss ........................................................... 86 311
Deferred income taxes ................................................... (7,519) --
Changes in operating assets and liabilities:
Accounts receivable .................................................. 2,398 (1,926)
Inventories .......................................................... 246 (592)
Other Assets ......................................................... 151 1,041
Accounts payable ..................................................... (192) (868)
Accrued liabilities .................................................. (1,200) 747
Deferred maintenance and product revenue ............................. (622) (9)
Other liabilities .................................................... (397) 48
-------- --------
Net cash provided by (used in) operating activities ............. (3,994) 2,642
Cash flows from investing activities:
Acquisition of NetLOCK network security technology ........................ (1,175) --
Acquisition of Networkers Engineering, Ltd. ............................... (724) --
Acquisition of property and equipment ..................................... (2,145) (957)
Capitalization of software development costs .............................. -- (183)
-------- --------
Net cash used in investing activities ........................... (4,044) (1,140)
Cash flows from financing activities:
Payments on capital lease obligations ..................................... (39) (190)
Payments on notes payable and other ....................................... (157) (4,400)
Payments on bank line of credit ........................................... -- (5,000)
Proceeds from issuance of common stock, net ............................... 429 29,265
-------- --------
Net cash provided by financing activities ....................... 233 19,675
-------- --------
Net increase (decrease) in cash and cash equivalents ............ (7,805) 21,177
Effect of exchange rate changes on cash ....................................... (243) (291)
-------- --------
Cash and cash equivalents, beginning of period ................................ 28,106 6,121
Cash and cash equivalents, end of period ...................................... $ 20,059 $ 27,007
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
6
<PAGE>
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 all material intercompany
balances and transactions have been eliminated. The Notes to the Consolidated
Financial Statements contained in the fiscal year 1997 report on Form 10-K
should be read in conjunction with these Condensed Consolidated Financial
Statements. The consolidated results of operations for the three and nine months
ended March 31, 1998 are not necessarily indicative of the results to be
expected for any subsequent period or for the entire fiscal year ending June 30,
1998. The June 30, 1997 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
March 31, 1998 and June 30, 1997.
3. Acquisitions:
On September 18, 1997, the Company acquired the NetLOCK technology, an
end-to-end network security technology that encrypts data and helps prevent
security break-ins, and certain other assets from Hughes Aircraft Company for
approximately $2,144,000 in cash and incurred related acquisition costs of
$300,000. The Company also licensed certain core technology that is incorporated
into the NetLOCK technology from a third party licensor. Under the terms of the
license agreement, the Company paid an up front fee of $175,000 and is obligated
to pay royalties ranging from 3% to 9% of future NetLOCK revenues on an ongoing
basis, with guaranteed future minimum royalties of $2,300,000 through 2002. As
of the date of the acquisition, the NetLOCK technology had not reached
technological feasibility nor did it have any future alternative use.
Accordingly, $3.1 million has been recorded as purchased research and
development, which consists of the amount of the purchase price allocated to
purchased research and development and the guaranteed minimum royalty payments,
net of present value discount of $724,000. The remaining portion of the purchase
price of $1,144,000 has been recorded as property and equipment. In conjunction
with the NetLOCK technology purchase, the Company employed approximately 25
people and entered into an operating lease for facilities with a third party.
The related employee and facility costs have been included in the Company's
results of operations from the date of the acquisition of the technology.
Under the terms of the NetLOCK facility operating lease, the Company is
obligated to make monthly future minimum lease payments totaling $364,000
through fiscal 2001.
7
<PAGE>
On January 13, 1998, the Company acquired Networkers Engineering Limited, a
software development company based in the United Kingdom. Under the terms of the
agreement, the Company purchased all the outstanding stock of Networkers
Engineering, including all technology rights, in exchange for cash of $600,000,
deferred cash payments with a net present value of $935,000 and 239,578 shares
of the Company's common stock valued at $914,000 on the date of the acquisition.
The deferred cash payments will be made in four quarterly payments of $250,000
beginning July 1, 1998. The acquisition was accounted for as a purchase and the
results of operations of Networkers Engineering Limited have been included with
those of the company since the date of acquisition. Of the approximate $2.9
million purchase price which includes approximately $400,000 of acquisition
costs, the Company recorded $2.6 million as in-process technology and recorded
approximately $300,000 as purchased software products relating to the completed
technology. As of January 13, 1998 the in-process technology had not reached
technological feasibility nor did it have any alternative future use.
Accordingly, $2.6 has been recorded as purchased research and development. The
Company has recorded a tax benefit $1.0 million relating to the charge to
operations for purchased research and development. In conjunction with the
acquisition, the Company employed three people and assumed an operating lease
for the facilities in the United Kingdom.
4. Write-Down of the HARBOR Purchased Software and Sale of the HARBOR Product
Line.
On December 29, 1995, the Company acquired all of the outstanding stock of New
Era Systems Services Ltd. ("New Era"), a Canadian company that develops, markets
and supports the HARBOR storage management and software distribution products
and recorded $3.2 million on the balance sheet as purchased software products.
During the quarter ended September 30, 1997, revenue expectations for the HARBOR
product line declined. As a result, the Company determined that the recorded
amount for purchased software had been impaired and recorded a loss of
approximately $550,000, the amount by which the recorded intangible at September
30, 1997 exceeded the present value of the estimated future net cash flows. On
December 18, 1997 the Company sold substantially all of the assets of the HARBOR
product line to a former executive and member of the board of directors of the
Company who resigned both posts effective as of the date of the sale. The
consideration paid to the Company consisted of $1,250,000 in installment notes
receivable plus a $600,000 convertible note receivable that may, upon the
occurrence of certain events, entitle the Company to an additional payment of
$150,000. In addition, the purchasers assumed certain liabilities and
obligations, including a note payable in the amount of $1,232,000 for which the
Company is the guarantor, and $356,000 in deferred maintenance obligations. As
the Company has continuing involvement in the HARBOR business, primarily through
its guarantee of the note payable, and there is substantial uncertainty about
the ability of HARBOR to meet its obligations, the Company has (i) not recorded
the notes receivable, (ii) provided a valuation allowance on all assets
transferred to the purchaser and (iii) recorded a liability equal to the amount
of the guarantee of the note assumed. As a result of this treatment, the Company
recorded a loss of $2,171,000 on the sale of the HARBOR product line. The
Company also recorded a tax benefit of $3.2 million relating to the sale of the
HARBOR product line, of which, $2.8 million will be realized as a refund of
federal income taxes previously paid, once the Company files its tax return for
the current fiscal year.
8
<PAGE>
5. Computation of Net Income (Loss) Per Share:
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128") effective December 31, 1997. SFAS 128 requires
the presentation of basic and diluted earnings per share. Basic EPS is computed
by dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by
giving effect to all dilutive potential common shares that were outstanding
during the period. For the Company, dilutive potential common shares consist of
the incremental common shares issuable upon the exercise of stock options and
warrants for all periods. In accordance with SFAS 128, all prior period earnings
per share amounts have been restated to reflect this method of calculation.
<TABLE>
Basic and diluted earnings per share are calculated as follows during the three
and nine month periods ended March 31, 1998 and 1997 (in thousands except for
per share amounts):
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
Basic: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Weighted average shares ......................... 7,932 7,177 7,701 6,219
------- ------- ------- -------
Shares used in per share calculation ............ 7,932 7,177 7,701 6,219
======= ======= ======= =======
Net income (loss) ............................... (2,458) 1,332 (6,648) 2,674
======= ======= ======= =======
Net income (loss) per share ..................... $ (0.31) $ (0.19) $ (0.86) $ 0.43
======= ======= ======= =======
Diluted:
Weighted average shares ......................... 7,932 7,177 7,701 6,219
Common equivalent shares from stock
options and warrants ............................ -- 1,154 -- 1,129
------- ------- ------- -------
Shares used in per share calculation .............. 7,932 8,331 7,701 7,348
======= ======= ======= =======
Net income (loss) ............................... $(2,458) $ 1,332 $(6,648) $ 2,674
======= ======= ======= =======
Net income (loss) per share ..................... $ (0.31) $ 0.16 $ (0.86) $ 0.36
======= ======= ======= =======
</TABLE>
Outstanding options and warrants to purchase the following shares of common
stock at the indicated range of price per share during the three and nine month
periods ended March 31, 1998 and 1997, were not included in the computation of
diluted earnings per share because the exercise price of options and warrants
was greater than the average market price of the common shares for each period
or the inclusion of the options and warrants in the diluted per share
calculation was antidilutive (in thousands except for per share amounts):
9
<PAGE>
Options and Range of
warrants excluded exercise prices
----------------- ---------------
Three months ended:
March 31, 1998 2,030 $ 0.70-$16.25
March 31, 1997 7 $15.00-$16.25
Nine months ended:
March 31, 1998 2,030 $ 0.70-$16.25
March 31, 1997 19 $10.50-$16.25
6. Contingencies:
The Company is involved in a commercial dispute with a former Italian
distributor ("Claimant"), which has alleged that the Company and two of its
subsidiaries have breached and unlawfully terminated various distributorship
agreements for distribution of the Company's TCPaccess and HARBOR Products in
Italy, and which has asserted various claims in two lawsuits against the
Company, its subsidiaries, and several officers of the Company.
In January 1997, the Claimant initiated a lawsuit in Milan, Italy against the
Company's Canadian Subsidiary, New Era Systems Services Ltd. ("New Era"); the
Company; the Company's French subsidiary, Interlink France S.A.R.L. ("Interlink
France"); and the Company's current distributor in Italy, an unrelated Italian
Corporation. The litigation is based on the Claimant's distribution of the
Company's HARBOR products pursuant to a distributor agreement with New Era
Systems Services Ltd., an affiliated Irish corporation ("New Era Ireland"),
which pre-dates the Company's acquisition of New Era. The distributor
relationship with the Claimant for the distribution of HARBOR products in Italy
and Spain has terminated. Pursuant to court documents, Claimant alleges damages
for breach of contract and related tort claims in the amount of 2,500,000,000
Italian Lira (approximately $1,500,000) and requests that the defendants pay all
expenses resulting from the litigation. New Era Ireland has filed a lawsuit
against the Claimant in Ireland for recovery of amounts due on outstanding
invoices and a declaration that the distributor relationship has terminated.
In March 1997 the Claimant initiated a separate lawsuit in Alameda County,
California against the Company, certain officers of the Company and of Interlink
France, and the Company's current Italian distributor. In the complaint,
Claimant alleges various tort claims related to the defendants' alleged actions
with respect to prior distribution agreements between Claimant, the Company, and
Interlink France for distribution of the Company's TCPaccess products in Italy.
The claims alleged include fraud, deceit, defamation, trade libel, unfair
competition, misappropriation, breach of confidential relationship, and
conversion. Claimant demands compensatory damages in excess of $2,000,000,
unspecified punitive damages, interest, attorneys' fees, and costs of the
litigation. The Company has successfully moved to compel arbitration of the
claims in accordance with the arbitration clauses in the earlier distributorship
agreements with the Claimant. The lawsuit was stayed as to all parties by the
Alameda County Superior Court pending arbitration of the claims against the
Company.
10
<PAGE>
On or about March 9, 1998 the Claimant initiated arbitration proceedings in San
Francisco, California under the International Chamber of Commerce ("ICC") Rules
of Arbitration. The request for arbitration purports to allege claims for breach
of contract, fraudulent inducement, trade libel, use of trade secrets and
confidential information, unfair business practices, interference with customers
and improper use of confidential information and ideas. The request seeks
damages in the amount of $3,000,000, plus punitive damages in an unspecified
amount, less an offset for amounts owed to Interlink France, and a constructive
trust.
The Company has accrued $300,000 for litigation or settlement of any liability
that may result upon resolution of these matters. No estimate of the ultimate
liability that may result upon the resolution of these matters is presently
determinable. Should the Company be unsuccessful in defending any of these
claims, the Company's business, financial condition and results of operations
could be materially adversely affected.
<TABLE>
7. Supplemental Cash Flow Disclosures (in thousands):
<CAPTION>
Nine months ended March 31
1998 1997
------ ------
<S> <C> <C>
Interest paid ............................................................................... $ 14 $ 184
Income taxes paid ........................................................................... 1,305 1,848
Non cash transactions from financing activities:
Conversion of preferred stock to common stock in connection with initial
public offering ...................................................................... -- 6,310
Liabilities assumed in connection with the purchase of the NetLOCK
network security technology .......................................................... 1,876
Liabilities assumed in connection with the purchase of Networkers
Engineering Limited .................................................................. 1,094 --
Stock issued in connection with purchase of Networkers Engineering Limited
914
Assets of the HARBOR product line sold to a related party ............................... 2,265 --
Liabilities of the HARBOR product line sold to a related party .......................... 356 --
Costs accrued related to the sales of the HARBOR product line ........................... $ 262 $ --
</TABLE>
8. Concentrations of Revenues:
During the three and nine months ended March 31, 1998, 7% and 11%, respectively,
of the Company's total revenues were derived from sales to and through Cisco
Systems, Inc. ("Cisco"). During the three and nine months ended March 31, 1997,
no one customer accounted for more than 10% of total revenues.
9. Income Taxes:
The effective tax rate was approximately 28% and 39% for the three and nine
month periods ended March 31, 1998 and 1997, respectively. The decrease in the
effective tax rate is due to operating losses experienced during the three and
nine months ended March 31, 1998. The Company will continue to evaluate the
recoverability of its deferred tax assets.
11
<PAGE>
10. Recent Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of
an Enterprise and Related Information. This statement establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for fiscal years beginning after December 15, 1997,
and requires that comparative information from earlier years be restated to
conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
In October 1997, the Accounting Standards Executive Committee issued Statement
of Position 97-2 (SOP 97-2), Software Revenue Recognition as amended on March
31, 1998, which delineates the accounting for software product and maintenance
revenues. SOP 97-2 supersedes the Accounting Standards Executive Committee
Statement of Position 91-1, Software Revenue Recognition, and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company is evaluating the requirements of SOP 97-2 and its amendments and the
effects, if any on the Company's current revenue recognition policies.
11. Shareholder Rights Plan:
In February 1998, Interlink Computer Sciences Inc's. board of directors adopted
a Shareholder Rights Plan designed to assure that the company's shareholders
receive fair and equal treatment in the event of any proposed takeover of the
company and to guard against partial tender offers and other abusive tactics to
gain control of Interlink Computer Sciences Inc.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
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.
Overview
The Company offers a suite of high-performance, network transport products and
system management applications, which efficiently transport, store and protect
the integrity of mission-critical data and applications. The Company sells its
products principally for use in data centers of Fortune 1000 companies. The
principal products include TCP/IP connectivity, fault tolerance, remote printing
services, and CICS and IMS-to-LAN application integration, as well as management
and control products built on its new "OpenMAX" technology. Interlink also
offers a suite of security products, which includes NetLOCK, the first
transparent solution to provide enterprise-wide, end-to-end protection of all
information that crosses the network; and Sentinel/IP, which provides audit and
access control for mainframe users.
In December 1996, the Company entered into a strategic alliance with Cisco
Systems, Inc. ("Cisco") pursuant to which Cisco acquired 622,000 shares of the
Company's Common Stock for $6.8 million. In January 1997, Cisco and the Company
agreed to cooperate to develop and market certain TCP/IP software known as
IOS/390. As a result of the agreement, the Company's sales personnel
significantly reduced direct selling efforts in favor of supporting the Cisco
sales teams. However, the level of sales achieved by Cisco fell short of
expectations, and in August 1997, the Company and Cisco amended the agreement to
provide that Interlink would resume selling its TCP/IP product and would also
resell the IOS/390 software and certain Cisco router products. In October 1997,
the Company formally amended the development and marketing agreement.
In September 1997, the Company acquired the NetLOCK network security technology
from Hughes Aircraft Company and recorded a charge in its fiscal first quarter
of approximately $3.1 million relating to in-process software development.
Revenue from the NetLOCK product commenced in January 1998.
In December 1997, the Company sold its HARBOR product line and recorded a charge
of $2.2 million, offset by a tax benefit of $3.2 million. Most of the tax
benefit, or $2.8 million, will be realized as a refund of federal income taxes
previously paid. The sale of the HARBOR product line resulted in a charge to
earnings because the Company guaranteed a Canadian loan in the amount of $1.2
million, which was assumed by the buyers, and because the notes receivable of
$1.9 million from the sale could not presently be recognized. Revenues from
HARBOR products were $667,000 and $1.5 million and direct expenses were $775,000
and $1.5 million for the three and nine-month periods ended March 31, 1998,
respectively.
13
<PAGE>
In January 1998, the Company purchased Networkers Engineering Limited and the
customer contracts of a related business, for a combined cost of approximately
$2.9 million, of which approximately $2.6 million was charged to purchased
research and development in the quarter ended March 31, 1998. The acquisition
gives the Company a base of technology and additional resources for the
development of its management and control products. Revenues from these new
products are expected to commence in the fourth quarter of the current fiscal
year but are only expected to become significant during fiscal year 1999.
14
<PAGE>
Results of Operations
<TABLE>
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 ended Nine months ended
March 31, March 31,
--------------------- ---------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Product ..................................................... 60.1% 67.6% 52.4% 62.1%
Maintenance and consulting .................................. 39.9 32.4 47.6 37.9
----- ----- ----- -----
Total revenues ............................................ 100.0 100.0 100.0 100.0
===== ===== ===== =====
Cost of revenues:
Product ..................................................... 4.7 5.1 4.8 6.5
Maintenance and consulting .................................. 15.0 10.2 17.6 12.2
----- ----- ----- -----
Total cost of revenues .................................... 19.7 15.3 22.4 18.7
===== ===== ===== =====
Gross Profit .................................................... 80.3 84.7 77.6 81.3
Operating expenses:
Product development ......................................... 38.1 17.6 40.8 19.7
Sales and marketing ......................................... 43.4 37.1 44.0 35.2
General and administrative .................................. 15.4 11.7 21.3 11.3
Purchased research and development and
product amortization ..................................... 33.3 1.1 31.0 1.5
Loss on sale of Harbor ...................................... -- -- 10.3 --
----- ----- ----- -----
Total operating expenses .................................. 130.3 67.5 147.5 67.7
===== ===== ===== =====
Operating income (loss) ......................................... (50.0) 17.2 (69.8) 13.6
Interest and other income, net .................................. 2.3 2.3 3.3 1.2
----- ----- ----- -----
Income (loss) before provision for
(benefit from) income taxes .............................. (47.7) 19.5 (66.5) 14.8
----- ----- ----- -----
Provision for (benefit from) income taxes ....................... (17.0) 17.6 (34.9) 5.8
----- ----- ----- -----
Net income (loss) ........................................... (30.7)% 11.9% (31.6)% 9.0%
===== ===== ===== =====
Cost of sales as a percentage of the related revenues:
Product ..................................................... 7.9% 7.5% 9.1% 10.5%
Maintenance and consulting .................................. 37.6% 31.5% 36.9% 32.1%
</TABLE>
Revenues:
Total revenues were $8.0 million and $11.2 million for the three months and
$21.1 million and $29.5 million for the nine months ended March 31, 1998 and
1997, respectively, representing a year over year decrease of 28% and 29%,
respectively. Product sales were $4.8 million and $7.5 million for the three
months and $11.0 million and $18.3 million for the nine months ended March 31,
1998 and 1997, respectively, representing a year over year decrease of 36% and
40%, respectively. These decreases were primarily due to fewer sales through the
Cisco sales force than the Company anticipated. During the period from January
1997 through August 1997, the
15
<PAGE>
Company's sales force focused attention on supporting the Cisco sales effort
pursuant to its strategic relationship instead of continuing its direct selling
efforts. From September 1997 forward, the Company's sales force was again
focused on rebuilding its sales leads as well as supporting Cisco's efforts to
sell the Company's software. An additional a factor in the decrease was $2.0
million of non-refundable, prepaid licenses from Cisco which were recognized in
the nine months ended March 31, 1997, including $1.0 million in each of the
quarters ended December 31, 1996 and March 31, 1997. Maintenance and consulting
revenues were $3.2 million and $3.6 million for the three months and $10.0
million and $11.2 million for the nine months ended March 31, 1998 and 1997,
respectively, representing a decrease of 12% and 10%, respectively. These
decreases resulted principally from a decrease in maintenance revenues from the
DECnet product line and the reduction of maintenance and consulting revenue
relating to the HARBOR product line, which was sold in December 1997.
Cost of Revenues:
Product. Cost of product revenues consists primarily of hardware, product media,
documentation, third party royalties and packaging costs. Cost of product
revenue was $378,000 and $564,000, representing 8% of total product revenues for
the three months ended March 31, 1998 and 1997. Cost of product revenue was $1.0
million and $1.9 million, representing 9% and 11% of product revenues for the
nine months ended March 31, 1998 and 1997, respectively. Both the revenue and
cost of revenue from selling hardware products declined while the Company was
receiving credit from Cisco for Cisco's sales of hardware into accounts using
the Company's products in favor of reselling hardware directly. These credits
from Cisco will cease when the Company receives total credits of $1.2 million
but not later than June 30, 1998. As of March 31, 1998 the Company has recorded
$990,000 of such credits. At that time, the Company presently intends to resell
third party hardware products once again.
Maintenance and Consulting. Cost of maintenance and consulting revenues consists
primarily of personnel related costs incurred in providing telephone support and
software updates. Cost of maintenance and consulting revenues was $1.2 million
and $1.1 million for the three month periods ended March 31, 1998 and 1997,
representing 38% and 32% of total maintenance and consulting revenues,
respectively. Cost of maintenance and consulting revenues was $3.7 million and
$3.6 million, representing 37% and 32% of total maintenance and consulting
revenues for the nine months ended March 31, 1998 and 1997, respectively. These
increases in maintenance and consulting costs as a percentage of the related
revenue is due to lower maintenance revenue with costs remaining stable as the
majority of costs are fixed.
Operating Expenses:
Total operating expenses were $10.4 million and $7.5 million, representing 130%
and 68% of total revenues for the three months ended March 31, 1998 and 1997,
respectively. Total operating expenses were $31.1 million and $20.0 million,
representing 148% and 68% of total revenues for the nine months ended March 31,
1998 and 1997, respectively. The increases in total operating expenses is
primarily due to the purchased research and development expense relating to the
acquisition of NetLOCK incurred in the quarter ended September 30, 1997, the
charge relating to the sale of the HARBOR product line in the quarter ended
December 31, 1997,
16
<PAGE>
the purchased research and development expense relating to the acquisition of
Networkers Engineering Limited incurred in the quarter ended March 31, 1998, the
costs associated with operating both HARBOR and NetLOCK operations during the
periods and one-time charges of approximately $500,000 for legal and severance
costs. See further discussion below.
Product Development. Product development expenses consist primarily of personnel
related costs. Product development expenses were $3.0 million and $2.0 million,
representing 38% and 18% of total revenues for the three months ended March 31,
1998 and 1997, respectively. Product development expenses were $8.6 million and
$5.8 million, representing 41% and 20% of total revenues for the nine months
ended March 31, 1998 and 1997, respectively. These increases in product
development expenses resulted from the expansion of the Company's product line
as a result of the acquisition of Networkers Engineering Limited and the NetLOCK
network security technology and ongoing product development efforts offset by
the sale of the HARBOR product line in December 1997. Product development
expenses related to the HARBOR product line was $1.5 million for the nine months
ended March 31, 1998, all of which was incurred prior to the sales of the
product line.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions for sales and marketing personnel and resellers, 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 94%
and 89% of product revenues for the three months ended March 31, 1998 and 1997,
respectively, and 91% and 87% of product revenues for the nine months ended
March 31, 1998 and 1997, respectively. Sales and marketing expenses were $3.5
million and $4.1 million, representing 43% and 37% of total revenues for the
three months ending March 31, 1998 and 1997, respectively. Sales and marketing
expenses were $9.3 million and $10.4 million, representing 44% and 35% of total
revenues for the three months ending March 31, 1998 and 1997, respectively. The
decreased cost was a result of lower commission expense on lower revenues.
General and Administrative. General and administrative expenses include
personnel and other costs of the finance, human resources, legal and
administrative departments of the Company. General and administrative expenses
were $1.2 million and $1.3 million, representing 15% and 12% of total revenues
for the three months ended March 31, 1998 and 1997, respectively. General and
administrative expenses were $4.5 million and $3.3 million, representing 21% and
11% of total revenues for the nine months ended March 31, 1998 and 1997,
respectively. The increases in the nine month period ended March 31, 1998 were a
result of higher legal costs, recruiting costs, severance costs and consulting
expenses, including approximately $500,000 in one-time expenses in the three
months ended December 31, 1997.
Purchased Research and Development and Product Amortization. Purchased research
and development and product amortization was $2.7 million and $127,000,
representing 33% and 1% of total revenues for the three months ended March 31,
1998 and 1997, respectively. Purchased research and development and product
amortization was $6.5 million and $428,000, representing 31% and 2% of total
revenues for the nine months ended March 31, 1998 and 1997, respectively.
One-time charges of $3.1 million and $2.6 million were recorded for purchased
research and development related to the NetLOCK acquisition in September 1997
and the Networkers
17
<PAGE>
Engineering Limited acquisition in January 1998, respectively. A write-down of
$550,000 relating to purchased research and development in connection with the
December 1995 HARBOR acquisition was recorded in September 1997. (See Notes 3
and 4 to Condensed Consolidated Financial Statements)
Loss on Sale of HARBOR Product Line. The loss on sale of the HARBOR product line
was $2.2 million, representing 10% of total revenues for the nine months ended
March 31, 1998. The sale of the HARBOR product line occurred in December 1997
and included the establishment of a valuation allowance related to certain
assets and liabilities and the continuing guarantee of a Canadian loan in the
amount of $1.2 million, which was assumed by the buyers.
(See Note 4 to Condensed Consolidated Financial Statements)
Interest and Other Income, Net. Net interest and other income was $184,000 and
$256,000 for the three months ended March 31, 1998 and 1997, respectively. Net
interest and other income was $704,000 and $344,000 for the nine months ended
March 31, 1998 and 1997, respectively. The increases in net interest and other
income for the nine month period ended March 31, 1998 was due primarily to a
reduction of bank borrowings related to the Harbor acquisition. The decline in
net interest and other income for the three month period is due to a reduction
in cash from approximately $27 million at March 31, 1997 to approximately $20
million at March 31, 1998.
Provision for (Benefit from) Income Taxes. The provision for (benefit from)
income taxes was ($1.4 million) and $851,000 for the three months ended March
31, 1998 and 1997, respectively. The provision for (benefit from) income taxes
was ($7.4 million) and $1.7 million for the nine months ended March 31, 1998 and
1997, respectively. Included in the nine months ended March 31, 1998 is a tax
benefit of $3.2 million relating to the sale of the HARBOR product line. Of this
tax benefit, $2.8 million will be realized as a refund of federal income taxes
previously paid, once the Company files its tax return for the current fiscal
year. The effective tax rate was approximately 28% and 39% for the three and
nine month periods ended March 31, 1998 and 1997, respectively. The decrease in
the effective tax rate is due to operating losses experienced during the three
and nine months ended March 31, 1998. The Company will continue to evaluate the
recoverability of its deferred tax assets.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of
an Enterprise and
18
<PAGE>
Related Information. This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supersedes Statement of Financial Accounting Standards No. 14,
Financial Reporting for Segments of a Business Enterprise. The new standard
becomes effective for fiscal years beginning after December 15, 1997, and
requires that comparative information from earlier years be restated to conform
to the requirements of this standard. The Company is evaluating the requirements
of SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
In October 1997, the Accounting Standards Executive Committee issued Statement
of Position 97-2 (SOP 97-2), Software Revenue Recognition as amended on March
31, 1998, which delineates the accounting for software product and maintenance
revenues. SOP 97-2 supersedes the Accounting Standards Executive Committee
Statement of Position 91-1, Software Revenue Recognition, and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company is evaluating the requirements of SOP 97-2 and its amendments and the
effects, if any on the Company's current revenue recognition policies.
Liquidity and Capital Resources
Working capital was $20.6 million and $25.4 million at March 31, 1998 and June
30, 1997, respectively. The decrease in working capital was primarily due to the
acquisition of NetLOCK network security technology and related assets, the
acquisition of Networkers Engineering Limited and net losses for the nine months
ended March 31, 1998.
For the nine months ended March 31, 1998, net cash used in operating activities
resulted primarily from the net loss, decreases in accrued liabilities and
deferred maintenance and product revenue, and an increase in deferred tax
assets, partially offset by a decrease in accounts receivable, increase in other
liabilities, a write-off of purchased research and development, and sale of the
HARBOR product line. For the nine months ended March 31, 1997, net cash provided
by operations resulted primarily from net income, depreciation and amortization,
an increase in accrued liabilities and a decrease in other assets, partially
offset by an increase in accounts receivable, an increase in inventories and a
decrease in accounts payable.
For the nine months ended March 31, 1998, the Company's investing activities
have consisted primarily of the acquisition of NetLOCK network security
technology, the acquisition of Networkers Engineering Limited and purchases of
property and equipment including $1.1 million purchased in the NetLOCK
acquisition. For the nine months ended March 31, 1997, the Company's investing
activities consisted primarily of purchases of property and equipment.
For the nine months ended March 31, 1998, the Company's financing activities
have consisted primarily of proceeds from the issuance of common stock. For the
nine months ended March 31, 1997, the Company's financing activities consisted
of proceeds from the initial public offering and the equity investment by Cisco
partially offset by payments on the Company's bank line of credit and notes
payable.
19
<PAGE>
At March 31, 1998, the Company had $20.1 million in cash and cash equivalents.
The Company had $7.3 million in accounts receivable, net of allowance for
doubtful accounts, and $7.9 million of unearned revenues, the majority of which
are expected to be earned over the 12 month period following March 31, 1998.
The Company believes that its current cash and cash equivalents balances as well
as 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.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.
The Company has reviewed the Year 2000 compliance status of the software and
systems used in its internal business processes and of the products that the
Company sells to third parties. As of the date of this report, the Company
believes that it is materially compliant with the Year 2000 requirements of its
internal systems and external products. The Company has and will continue to
monitor its Year 2000 compliance status but there can be no assurance that the
company will continue to remain compliant with Year 2000 requirements that may
affect the Company's business, financial condition, and results of operations.
20
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control, and include the
following:
Dependence on Current Products
During the three months ended March 31, 1998 and 1997, sales of the network
transport products, excluding maintenance and hardware, accounted for
approximately 47% and 51%, and, including related maintenance and hardware,
accounted for approximately 94% and 88%, respectively, of the Company's total
revenues. The Company's operating results have historically been significantly
dependent upon sales of the network transport products. Approximately $1.0
million per quarter of maintenance revenues is from 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.
Since its availability on May 13, 1997, the Company has experienced difficulty
in deriving significant revenues from sales by Cisco of the IOS/390 product. As
a result of renegotiating its agreement with Cisco in August 1997, the Company
has resumed direct sales of its TCPaccess product and continues to support Cisco
in its sales of IOS/390. Increased sales of network transport products is
dependent upon the Company's ability to continue to expand its sales leads and,
in part, on cooperation with Cisco in the sale of IOS/390 into larger accounts.
The failure to increase sales levels of TCPaccess or IOS/390 could adversely
affect the Company's results of operations.
Reliance on IBM and the Mainframe as an Enterprise Server
The Company's network transport 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 such 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 many 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 IOS/390 and TCPaccess product,
21
<PAGE>
and have a material adverse effect on the Company's business, financial
condition and results of operations.
New TCP/IP 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 and market products which meet changing user needs,
to continue to enhance its products and to develop and introduce in a timely
manner new products that take advantage of technological advances, keep pace
with emerging industry standards, and address the increasingly sophisticated
needs of its customers. There can be no assurance that 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 acquiring,
developing or marketing, on a timely basis, product enhancements or new products
(including new versions of TCPaccess or IOS/390), 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
acquire or 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. 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. 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.
Customer Acceptance and Scalability of New Products; History of Acquired
Technologies
During the past several quarters, the Company has expanded its market focus to
include products that provide security for and management and control of data
and programs in electronic commerce. In pursuit of that vision, the Company
acquired the NetLOCK product technology in September 1997 and the OpenMAX
technology in January 1998. Further development of these technologies is
required. There can be no assurance that the Company will be successful in
integrating the operations and personnel associated with these new product
lines, successfully commercializing the technologies, deriving significant
future sales therefrom, or in establishing and maintaining uniform standards,
controls, procedures and policies, or overcoming other problems that may be
encountered in connection with these acquisitions. To the extent that the
Company is unable to accomplish the foregoing, the Company's business, financial
condition and
22
<PAGE>
results of operations may be materially adversely affected.
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.
Competition
General. The market in which the Company operates is intensely competitive and
is characterized by extreme price competition and rapid technological change.
The competitive factors influencing the markets for the Company's products
include product performance, price, reliability, features, scalability,
interoperability across multiple platforms, adherence to industry standards, and
the provision of support and maintenance services. The Company competes with a
number of companies, principally IBM, that specialize in one or more of the
Company's product lines, and such competitors may have greater financial,
technical sales and marketing resources to devote to the development, promotion
and sale of their products, and may have longer operating histories, greater
name recognition, and greater market acceptance for their products and services
compared to those of the Company. There can be no assurance that the Company's
current competitors or any new market entrants will not develop networked
systems management products or other technologies that offer significant
performance, price or other advantages over the Company's technologies, the
occurrence of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Network Transport Products. The Company historically sold its TCPaccess suite of
products principally to customers who had installed IBM mainframes using the MVS
operating system. The Company's main competition for its IOS/390 and TCPaccess
products is IBM. IBM sells TCP/IP and associated products for its MVS mainframe
systems that compete directly with the Company's products. IBM has continued to
enhance the functionality and performance of its TCP/IP product. 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 and may
continue to lose sales of the Company's IOS/390 and TCPaccess products as a
result. 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 make marketing of the Company's
IOS/390 and TCPaccess products difficult, which would have a material adverse
23
<PAGE>
effect on the Company's business, financial condition and results of operations.
Security and System Management Products. The primary competitors for the NetLOCK
products based on the Company's recently acquired end-to-end network security
product, are Network Associates, Inc., Security Dynamics Technologies, Inc.,
Cylink, Time Step, Red Creek Communications Inc., V-One Technologies, Inc., and
Security First Technologies, Inc. In addition, security products comparable to
NetLOCK are currently available and are already incorporated into some operating
systems, thereby significantly diminishing the market for NetLOCK. The primary
competitors for the management and control products to be developed on the
OpenMAX technology acquired with the purchase of Networkers Engineering Limited,
include IBM, Computer Associates and Sterling Software. Many other companies in
the computer industry have announced products and plans to compete in the
management and control of computer systems and networks.
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.
Dependence on Distributors and New Sales Channels
The Company's sales are primarily made through the Company's direct sales force
and its distributors in some international markets. The Company is currently
investing, and plans to continue to invest, significant resources to develop new
strategic marketing relationships and channels of distribution, which
investments could adversely affect the Company's operating margins. In
particular, the Company plans to develop new channels of distribution, including
new distributors and resellers and has developed a tele-sales marketing
organization in connection with sales of its new security products. The Company
believes that its success in penetrating markets for its products depends in
large part on its ability to maintain its existing marketing and distribution
relationships, to cultivate additional relationships and to develop these new
sales channels. There can be no assurance that any distributor, systems
integrator or strategic partner will not discontinue its relationship with the
Company, form competing arrangements with the Company's competitors, or dispute
the Company's other strategic relationships.
24
<PAGE>
The loss of or a significant reduction in revenues from, the Company's
international distributors through which the Company sells certain of 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.
The Company is involved in a commercial dispute and litigation with a former
distributor (See Notes to Condensed Consolidated Financial Statements). Although
the Company has accrued amounts for potential liabilities related to this
dispute, should the distributor prevail on its claims to a greater degree, the
Company's business, financial condition and results of operations could be
materially adversely affected.
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. 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.
Product Errors; Product Liability
Software products as complex as those offered and being developed 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. In addition, in the process of
commercializing new products the Company may detect errors or failures that
delay or prevent commercialization, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
25
<PAGE>
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.
Fluctuations in Operating Results; Absence of Backlog; Seasonality
The Company's operating results have historically been subject to quarterly
fluctuations due to a variety of factors. The Company has typically sold 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, has typically been three to
nine months. In recent periods, the Company has experienced longer sales cycles
in certain instances. There can be no assurance that customers will purchase the
Company's products after a 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.
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 historically experienced and is expected to continue
to experience significant seasonality. The Company has had 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
26
<PAGE>
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.
Reliance on and Risks Associated with International Sales
During the three months ended March 31, 1998 and 1997, 31% and 34%, respectively
of the Company's total revenues were derived from sales to international
customers. During the nine months ended March 31, 1998 and 1997, 34% and 41%,
respectively, of the Company's total revenues were derived from sales to
international customers. The decrease in sales in the three and nine month
periods ended March 31, 1998 are indicative of the risks associated with
international sales and there can be no assurance that such a decrease will not
occur again in the future. The Company's international sales have been primarily
to European markets, and sales are generally denominated in local currencies.
Although the Company plans to focus its initial NetLOCK sales efforts in the
U.S. market, the regulatory environment with respect to sales of NetLOCK to
international customers is complex and uncertain. Should the Company wish to
sell NetLOCK internationally it may be unable to do so or may be required to
incur considerable regulatory costs to do so.
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 and
import licenses. There can be no assurance that foreign intellectual property
laws will adequately protect the Company's intellectual property rights. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. Substantially all of the Company's
distribution and other agreements with international distributors require any
dispute between the Company and any distributor to be settled by arbitration.
Under these agreements, the party bringing the action, suit or claim is required
to conduct the arbitration in the domicile of the defendant. The result is that,
if the Company has a cause of action against a party, it may not be feasible for
the Company to pursue such action, as arbitration in a foreign country could
prove to be excessively costly and have a less certain outcome depending on the
laws and customs in the foreign country. These international factors could have
a material adverse effect on future sales of the Company's products to
international end users and, consequently, the Company's business, financial
condition and results of operations.
Most of the Company's international sales are denominated in local currencies.
The Company generally has not attempted to reduce the risk of currency
fluctuations by hedging except in certain limited circumstances where the
Company expects to hold an account receivable for a period of at least 6 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
27
<PAGE>
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.
There can be no assurance that others will not independently develop similar
products or duplicate the Company's products. There can be no assurance that the
steps taken by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
or superior to the Company's products. A substantial amount of the Company's
sales are in international markets, and the laws of other countries may afford
the Company little or no effective protection of its intellectual property.
While the Company believes that its products and trademarks do not infringe upon
the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communications from third parties asserting that
the Company's products infringe, or may infringe, on the proprietary rights of
third parties. The Company was denied a trademark registration of the name
"Interlink" based on the use of similar names by other companies in the computer
industry. The Company expects that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in the Company's industry segments grow and the functionality's 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.
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.
28
<PAGE>
Possible Volatility of Share Price
There can be no assurance that the market price of the Company's Common Stock
will not decline or remain below current levels. 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 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 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 would 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.
29
<PAGE>
PART II: OTHER INFORMATION
30
<PAGE>
ITEM 1. Legal Proceedings
Incorporated by reference from the Notes to Condensed Consolidated
Financial StatementsItem 6. Contingencies, provided in Part I hereto.
ITEM 4: Submission of Matters to a Vote of Security Holders
On February 5, 1998, the Company held an Annual Meeting of stockholders
(the "Annual Meeting"). Votes were cast by the stockholders on the
following matters in the manner described below.
(i) At the Annual Meeting Augustus J. Berkeley and Ralph B. Godfrey
were elected and Thomas H. Bredt, Ronald W. Braniff, and Andrew
J. Fillat were reelected to the Company's Board of Directors.
Director Votes For Votes Witheld
-------- --------- -------------
Augustus Berkeley 5,760,041 38,591
Ronald W. Braniff 5,756,041 42,591
Thomas H. Bredt 5,758,619 40,013
Andrew J. Fillat 5,756,791 41,841
Ralph B. Godfrey 5,758,591 40,041
(ii) Approval of an Votes For Votes Against Votes Abstained
amendment to the --------- ------------- ---------------
1992 stock option
plan increasing the 4,905,525 839,179 53,928
the number of shares
available under the
plan from 2,105,000
to 2,405,000
(iii) Ratification of the Votes For Votes Against Votes Abstained
appointment of --------- ------------- ---------------
Coopers & Lybrand 5,742,370 19,366 36,896
L.L.P. as independent
accountants for the
1998 fiscal year
The foregoing matters are described in more detail in the Registrant's
definitive proxy statement dated December 30, 1997.
31
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 4* Shareholder Rights Plan
(b) Exhibit 10.21 Change of Control Severance Agreement
(c) Exhibit 10.22 Letter Agreement between the Company and
Augustus J. Berkeley dated 10/97
(d) Exhibit 10.23 Letter Agreement between the Company and
James A. Barth dated 11/97
(e) Exhibit 10.24 Letter Agreement between the Company and
Vic Langford dated 3/98
(f) Exhibit 10.25 Letter Agreement between the Company and
William Jones dated 4/98
(g) Exhibit 10.26 Severance Agreement between the Company
and Charles W. Jepson dated 5/97
(h) Exhibit 10.27 Severance Agreement between the Company
and Gloria Mae Purdy dated 12/98
(i) Exhibit 27 Financial Data Schedule (EDGAR version
only)
(j) Reports on Form 8-K The Company filed a current report on Form
8-K on January 2, 1998
* Incorporated by reference from the Company's report on Form 8-A
filed with the Securities and Exchange Commission on February 26,
1998.
32
<PAGE>
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.
INTERLINK COMPUTER SCIENCES INC.
AND SUBSIDIARIES
(Registrant)
Date: May 15, 1998 By: /s/ James A. Barth
-------------------
James A. Barth
Chief Financial Officer
and Secretary
Date: May 15, 1998 By: /s/ Augustus J. Berkeley
-------------------------
Augustus J. Berkeley
President and Chief
Executive Officer
33
Exhibit 10.21
INTERLINK COMPUTER SCIENCES, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made and entered
into by and between ___________________ (the "Employee") and Interlink Computer
Sciences, Inc. (the "Company"), effective as of the latest date set forth by the
signatures of the parties hereto below (the "Effective Date").
R E C I T A L S
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control. The
Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.
C. The Board believes that it is imperative to provide the Employee
with a vesting acceleration severance benefit upon Employee's termination of
employment following a Change of Control which provides the Employee with
enhanced financial security and provides incentive and encouragement to the
Employee to remain with the Company notwithstanding the possibility of a Change
of Control.
D. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the
date that all obligations of the parties hereto with respect
to this Agreement have been satisfied.
2. At-Will Employment. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be
at-will, as defined under applicable law. If the Employee's
employment terminates for any reason, including (without
limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this
Agreement, or as may otherwise be available in accordance with
the Company's established employee plans and practices or
pursuant to other agreements with the Company.
34
<PAGE>
3. Severance Benefits.
(a) Termination Following A Change of Control. If the
Employee's employment terminates at any time within twelve (12) months following
a Change of Control, then, subject to Section 5, the Employee shall be entitled
to receive the following severance benefits:
(i) Involuntary Termination other than for Cause. If
the Employee's employment is terminated as a result of Involuntary Termination
other than for Cause within twelve (12) months following a Change of Control,
then one hundred percent (100%) of the unvested portion of any stock option or
restricted stock held by the Employee shall automatically be accelerated in full
so as to become completely vested as of the date of such termination of
employment.
(ii) Voluntary Resignation; Termination For Cause. If
the Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
under the Company's then existing severance and benefits plans and practices or
pursuant to other agreements with the Company.
(iii) Disability; Death. If the Employee's employment
with the Company terminates as a result of the Employee's Disability, or if
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established under the Company's then existing
severance and benefits plans and practices or pursuant to other agreements with
the Company.
(b) Termination Apart from Change of Control. In the event the
Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the twelve (12) month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.
4. Attorney Fees, Costs and Expenses. The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.
5. Limitation on Payments. In the event that the vesting acceleration
severance benefit provided for in this Agreement or benefits otherwise payable
to the Employee (i) constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and
(ii) but for this Section 5, would be subject to the
35
<PAGE>
excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the
Employee's vesting acceleration severance benefit under Section 3 shall be
either:
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in
no portion of such severance benefits being subject to the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by the
Employee on an after-tax basis, of the greatest amount of severance benefits,
notwithstanding that all or some portion of such severance benefits may be
taxable under Section 4999 of the Code. Unless the Company and the Employee
otherwise agree in writing, any determination required under this Section 5
shall be made in writing in good faith by the accounting firm serving as the
Company's independent public accountants immediately prior to the Change of
Control (the "Accountants"). For purposes of making the calculations required by
this Section 5, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean either (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) Employee being convicted of a felony, (iii) a willful act by the
Employee which constitutes gross misconduct and which is injurious to the
Company, or (iv) following delivery to the Employee of a written demand for
performance from the Company which describes the basis for the Company's
reasonable belief that the Employee has not substantially performed his duties,
continued violations by the Employee of the Employee's obligations to the
Company which are demonstrably willful and deliberate on the Employee's part.
(b) Change of Control. "Change of Control" means the
occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities;
36
<PAGE>
(ii) A change in the composition of the Board occurring within
a two-year period, as a result of which fewer than a majority of the directors
are Incumbent Directors. "Incumbent Directors" shall mean directors who either
(A) are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination;
(iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or the entity
that controls the Company or controls such surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity or the entity that controls the Company or
controls such surviving entity outstanding immediately after such merger or
consolidation; or
(iv) The consummation of the sale or disposition by the
Company of all or substantially all the Company's assets.
(c) Disability. "Disability" shall mean that the Employee has been
unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Employee or the Employee's
legal representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days' written notice by the Company of its intention to terminate the
Employee's employment. In the event that the Employee resumes the performance of
substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
37
<PAGE>
(d) Involuntary Termination. "Involuntary Termination" shall
mean (i) without the Employee's express written consent, a material reduction of
the Employee's duties, title, authority or responsibilities, relative to the
Employee's duties, title, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Employee of such reduced duties,
title, authority or responsibilities; (ii) without the Employee's express
written consent, a material reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the base salary of the Employee as in effect immediately prior to
such reduction; (iv) a material reduction by the Company in the kind or level of
employee benefits, including bonuses, to which the Employee was entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is materially reduced; (v) the relocation of the Employee to a
facility or a location more than twenty-five (25) miles from the Employee's then
present location, without the Employee's express written consent; (vi) any
purported termination of the Employee by the Company which is not effected for
Disability or for Cause, or any purported termination for which the grounds
relied upon are not valid; (vii) the failure of the Company to obtain the
assumption of this agreement by any successors contemplated in Section 7(a)
below; or (viii) any act or set of facts or circumstances which would, under
California case law or statute constitute a constructive termination of the
Employee.
(e) Termination Date. "Termination Date" shall mean the date
upon which a notice of termination is given, provided that if within thirty (30)
days after the Company gives the Employee notice of termination, the Employee
notifies the Company that a dispute exists concerning the termination or the
benefits due pursuant to this Agreement, then the Termination Date shall be the
date on which such dispute is finally determined, either by mutual written
agreement of the parties, or a by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected).
7. Successors.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. Notice.
(a) General. Notices and all other communications contemplated
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally
38
<PAGE>
delivered or one day following mailing via Federal Express or similar overnight
courier service. In the case of the Employee, mailed notices shall be addressed
to him at the home address which he most recently communicated to the Company in
writing. In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its Secretary.
(b) Notice of Termination. Any termination by the Company for
Cause or by the Employee as a result of a voluntary resignation or an
Involuntary Termination shall be communicated by a notice of termination to the
other party hereto given in accordance with Section 8(a) of this Agreement. Such
notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than 30 days after
the giving of such notice). The failure by the Employee to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Employee hereunder or preclude the
Employee from asserting such fact or circumstance in enforcing his rights
hereunder.
9. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the value of any vesting acceleration contemplated by this Agreement,
nor shall any such vesting acceleration be reduced by any earnings or benefits
that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
represents the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior arrangements and understandings
regarding same.
(d) Choice of Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
39
<PAGE>
(f) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year set forth below.
COMPANY INTERLINK COMPUTER SCIENCES, INC.
Date:
By:____________________________________
Title:_________________________________
Date:__________________________________
EMPLOYEE _______________________________________
Date:__________________________________
The following officers have executed this agreement:
AJ Berkeley
James Barth
Bill Jones
Vic Langford
Christopher Markle
Mickey Satterwhite
40
Exhibit 10.22
October 29, 1997
Mr. A.J. Berkeley
Interlink Computer Sciences
Dear A.J.,
On behalf of the Company's shareholders, employees and Board of Directors, it
gives me great pleasure to offer you the position of President and Chief
Executive Officer.
Allow me to review the terms of the offer: as President and Chief Executive
Officer, your base salary will be $270,000 annually payable according to the
Company's standard payroll process. You are eligible to receive up to an
additional $130,000 based on attainment of individual objectives which will be
mutually agreed upon between you and the Board. These objectives will be
finalized within the first 30 days of your assuming the position.
You will also been granted 151,150 stock options (grant and initial vesting date
effective October 1, 1997) according to the terms of the Company's 1992 Employee
Stock Option Plan.
In addition, you have been granted a performance based stock option totaling an
additional 151,150 options. These options are to vest over a seven (7) year
period. According to the terms of this grant, if the average share price in
effect on October 1, 1997 doubles and the increased price is sustained over a
one month period, your performance based options will accelerate their vesting
by one year. Thereafter, an additional year of vesting will accelerate for every
$5 of incremental value added to the Company's average stock. The stock must
retain its increased value over a one month period in order for any acceleration
of options to occur. The performance based option grant will carry a two year
minimum vesting schedule regardless of acceleration factors.
In addition, the Company will provide financial coverage for up to 1/2 of your
personal investment in your previous business venture. The total anticipated
cost to the Company is limited to a maximum of $75,000.
Finally, as President and Chief Executive Officer, you will receive up to one
year of severance pay if you should involuntarily lose your position for any
reason other than for Cause.
For all purposes under this Agreement,
"Cause" shall mean (i) willful failure by the Executive to perform his
duties hereunder, (ii) a willful act by the Executive which constitutes
gross misconduct and which is injurious to the Company, (iii) a willful
breach by the Executive of a material provision of this Agreement, or (iv)
a material violation of a federal, state or
41
<PAGE>
foreign law or regulation applicable to the business of the Company. No act
or failure to act by the Executive shall be considered "willful" unless
committed without good faith or without a reasonable belief that the act or
omission was in the Company's best interest.
AJ, I am delighted that you have chosen to stay at Interlink and believe that we
have many good things ahead of us. Congratulations!
Sincerely,
Tom Bredt
Chairman of the Board
Reviewed and approved:
- ------------------------------ ---------------
A. J. Berkeley Date
42
Exhibit 10.23
November 5, 1997
James Barth
18237 Constitution Avenue
Monte Sereno, CA 95030
Dear Jim:
On behalf of Interlink Computer Sciences Inc., it gives me great pleasure to
extend you an offer for the position of Chief Financial Officer & Vice President
of Finance reporting to me. Allow me to review the details of your total
compensation:
o Your annualized Target Salary will be $224,000.00 as follows:
o Your base monthly salary will be $13,333.34 ($160,000.00
annualized)
o Your annualized bonus potential will be $64,000.00. Bonus is
paid quarterly based on attainment of predetermined objectives
established within your first 30 days of employment
o You will be granted an option to purchase 60,000 shares of the Company's
common stock subject to the details below.
o Additionally, you will be granted a performance based stock option totaling
an additional 30,000 shares subject to the details below.
o You will be eligible to participate in the Company's benefits program as
outlined below.
Because Interlink's proprietary and confidential information are among the
Company's most important assets, we must ask, as a condition of your employment
with Interlink, that you sign the enclosed Non-Disclosure Agreement when you
begin work. Additionally, you will need to provide proof of identification on
your first day of work.
BENEFITS
As a full time salaried employee of Interlink, you will be eligible for a full
range of benefits including Company paid life, health, dental and vision
insurances. These benefits are effective the first of the month following your
start date. You are also entitled to participate in the Company's 401(k)
retirement plan and the Company's Employee Stock Purchase Plan subject to the
enrollment requirements of the Plan(s). Finally, you will receive Personal Time
Accrual and paid holidays as previously outlined.
OPTION TO PURCHASE STOCK
Upon approval by the Board of Directors, you will be granted an option to
purchase shares of the Company's common stock. The price of the stock is 100% of
the fair market value of the stock on the date of the grant approval by the
Board of Directors. Vesting of these options will be effective as of the date
you start employment and vest at 1/48th per month with a 9 month cliff
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vesting waiting period. In the 10th month of your employment you will vest
10/48ths of your options.
PEFORMANCE STOCK OPTION
Upon approval by the Board of Directors, you will be granted an option to
purchase shares of the Company's common stock. The price of the stock is 100% of
the fair market value of the stock on the date of the grant approval by the
Board of Directors. Vesting of these options will be effective as of the date
you start employment. The option is to vest over a seven (7) year period.
According to the terms of this grant, if the average share price in effect on
your start date doubles and the increased price is sustained over a one month
period, your performance based options will accelerate their vesting by one
year. Thereafter, an additional year of vesting will accelerate for every $5 of
incremental value added to the Company's average stock. The stock must retain
its increased value over a one month period in order for any acceleration of
options to occur. The performance based option grant will carry a two year
minimum vesting schedule regardless of acceleration factors.
Employment at Interlink is at the mutual consent of the employee and the
Company. Accordingly, either you or the Company can terminate the employment
relationship at will, without cause. This offer is valid until November 11,
1997. Please sign this letter to indicate your acceptance.
Jim, I am very excited about the future of the Company and look forward to
having you work with us. If you have any questions, please feel free to call me
at the number listed below.
INTERLINK COMPUTER SCIENCES, INC.
AJ Berkeley
Chief Executive Officer & President
Agreed to and accepted by: _____________________________ Start Date: __________
44
Exhibit 10.24
March 4, 1998
Victor Langford
47297 Rancho Higuera Road
Fremont, CA 94539
Dear Vic:
On behalf of Interlink Computer Sciences Inc., it gives me great pleasure to
extend you an offer for the position of Vice President, Research & Development
reporting to me. Allow me to review the details of your total compensation:
o Your annualized Target Salary will be $245,000.00 as follows:
o Your base monthly salary will be $14,593.34 ($175,000.00
annualized)
o Your annualized bonus potential will be $70,000.00. Bonus is
paid quarterly based on attainment of predetermined objectives
established within your first 30 days of employment
o You will be granted an option to purchase 37,500 shares of the Company's
common stock subject to the details below.
o Additionally, you will be granted a performance based stock option totaling
an additional 37,500 shares subject to the details below.
o You will be eligible to participate in the Company's benefits program as
outlined below.
Because Interlink's proprietary and confidential information are among the
Company's most important assets, we must ask, as a condition of your employment
with Interlink, that you sign the enclosed Non-Disclosure Agreement when you
begin work. Additionally, you will need to provide proof of identification on
your first day of work.
BENEFITS
As a full time salaried employee of Interlink, you will be eligible for a full
range of benefits including Company paid life, health, dental and vision
insurances. These benefits are effective the first of the month following your
start date. You are also entitled to participate in the Company's 401(k)
retirement plan and the Company's Employee Stock Purchase Plan subject to the
enrollment requirements of the Plan(s). Finally, you will receive Personal Time
Accrual and paid holidays as previously outlined.
OPTION TO PURCHASE STOCK
Upon approval by the Board of Directors, you will be granted an option to
purchase shares of the Company's common stock. The price of the stock is 100% of
the fair market value of the stock on the date of the grant approval by the
Board of Directors. Vesting of these options will be effective as of the date
you start employment and vest at 1/48th per month with a 9 month cliff
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vesting waiting period. In the 10th month of your employment you will vest
10/48ths of your options.
PEFORMANCE STOCK OPTION
Upon approval by the Board of Directors, you will be granted an option to
purchase shares of the Company's common stock. The price of the stock is 100% of
the fair market value of the stock on the date of the grant approval by the
Board of Directors. Vesting of these options will be effective as of the date
you start employment. The option is to vest over a seven (7) year period.
According to the terms of this grant, if the average share price in effect on
your start date doubles and the increased price is sustained over a one month
period, your performance based options will accelerate their vesting by one
year. Thereafter, an additional year of vesting will accelerate for every $5 of
incremental value added to the Company's average stock. The stock must retain
its increased value over a one month period in order for any acceleration of
options to occur. The performance based option grant will carry a two year
minimum vesting schedule regardless of acceleration factors.
Employment at Interlink is at the mutual consent of the employee and the
Company. Accordingly, either you or the Company can terminate the employment
relationship at will, without cause. This offer is valid until March 11, 1998.
Please sign this letter to indicate your acceptance.
Vic, I am very excited about the future of the Company and look forward to
having you work with us. If you have any questions, please feel free to call me
at the number listed above.
INTERLINK COMPUTER SCIENCES, INC.
AJ Berkeley
Chief Executive Officer & President
Agreed to and accepted by: _____________________________ Start Date: __________
46
Exhibit 10.25
March 30, 1998
Bill Jones
Interlink Computer Sciences
Fremont, CA 94538
Dear Bill,
I am very pleased to offer you the position of Vice President of Marketing
reporting to me. In this new role, you will have full management responsibility
for the Companys marketing organization. You will also become an executive
officer of the Company and a member of my management team. Your appointment to
this position also requires a significant adjustment to your current
compensation and option position in the Company.
Effective April 1, 1998, your new annual salary will be $196,000.00. This
consists of a base salary of $140,000.00 and an on-target bonus potential of
$56,000.00 (40% of your base salary) . Human resources will explain the details
of the executive bonus program later.
In addition, your will receive 57,000 stock options subject to formal approval
by the Companys Board of Directors at the next Board meeting. These options
will be divided into two separate grants. The first grant, which consists of
40,000 options, will be granted according to the terms and conditions of the
Companys regular stock option grant guidelines. The second grant of 17,000
options will be performance based. Again, human resources will explain the
details of this option grant later.
Bill, I know you have worked long and hard and I am delighted that this
opportunity has been made available to you. Thank you for your hard work thus
far and I look forward to a long and successful career together.
Congratulations,
A. J. Berkeley
President & CEO
47
Exhibit 10.26
RESIGNATION AND MUTUAL RELEASE AGREEMENT
This Resignation and Mutual Release Agreement (the "Agreement") is made
by and between Interlink Computer Sciences, Inc., a California corporation (the
"Company") and Charles W. Jepson ("Jepson").
WHEREAS, Jepson has been employed by the Company;
WHEREAS, in connection with Jepson's resignation as an officer and
director of the Company, Jepson and the Company have mutually agreed to continue
Jepson's pre-existing employment relationship with the Company with a
predetermined future employment termination date;
NOW, THEREFORE, in consideration of the mutual promises made herein,
Jepson and the Company (collectively referred to as the "Parties") hereby agree
as follows;
1. Resignations. Jepson hereby resigns as of May 22, 1997 (the
"Effective Date") as a director and an officer of the Company, and as a director
and officer of any of the Company's subsidiaries.
2. Employment and Duties. During the Employment Period (as defined in
Section 3 below), Jepson will continue to serve as an employee of the Company.
The duties and responsibilities of Jepson shall include the duties and
responsibilities as determined by mutual agreement between the Company and
Jepson. Jepson shall perform faithfully all duties assigned to him during the
Employment Period to the best of his ability. Jepson's salary and benefits shall
continue as in effect prior to the Effective Date until termination of his
employment.
3. Termination.
(a) The Employment Period shall begin upon the Effective Date
and shall expire at 5:00 p.m., California time, on November 21, 1997 (the
"Termination Date") unless sooner terminated pursuant to the provisions of this
Agreement. The period from the Effective Date until the Termination Date is
referred to herein as the "Employment Period." The period from the Termination
Date until 5:00 p.m., California time on May 21, 1998 is referred to herein as
the "Severance Period."
(b) Early Termination. The Company may terminate Jepson's
employment for Cause (as defined in Section 3(d)) at any time during the
Employment Period and may terminate the payment of Severance (as defined in
Section 5) and Benefits (as defined in Section 6) at any
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time during the Severance Period for Cause. Jepson may terminate his employment
at any time prior to the end of the Employment Period. Except as set forth in
this Agreement, no compensation, benefits or other consideration will be paid or
provided to Jepson on account of a termination for Cause or for periods
following the date when such a termination is effective. Jepson's rights under
the benefit plans of the Company following a termination for Cause shall be
determined under the provisions of those plans.
(c) Death. The Company shall have no obligation to pay or
provide any compensation or benefits under this Agreement on account of Jepson's
death. Jepson's rights under the benefit plans of the Company in the event of
Jepson's death prior to the Termination Date shall be determined under the
provisions of those plans.
(d) Cause. For all purposes under this Agreement, "Cause"
shall mean (i) willful failure by Jepson to perform his duties hereunder, (ii) a
willful act by Jepson which constitutes gross misconduct and which is injurious
to the Company, (iii) a willful breach by Jepson of a material provision of this
Agreement, (iv) a material violation of a federal, state, or foreign law or
regulation applicable to the business of the Company, or (v) Jepson's full-time
employment (i.e. greater than 80 hours per month of employment or consulting
services) with another entity, all as determined in good faith by the Company.
No act or failure to act by Jepson shall be considered "willful" unless
committed without good faith without a reasonable belief that the act or
omission was in the Company's best interest.
4. Vesting Under Stock Option Agreement. The parties acknowledge that
the vesting of the stock options previously granted to Jepson under the
Company's stock plans will continue to the extent the options would otherwise
become exercisable through the termination of Jepson's employment. In accordance
with the terms of such options, Jepson shall have until 30 days following
termination of employment to exercise the vested portions thereof. There shall
be no further vesting of any stock options previously granted to Jepson under
the Company's stock plans following termination of employment.
5. Severance Payments. The Company agrees to pay Jepson severance at
the current base salary of $16,646 per month ("Severance"), to be automatically
deposited per the Company's existing payroll policy through the Severance Period
or until Jepson is terminated for Cause, whichever occurs earlier. The parties
understand and agree that the Severance will be reduced by all necessary and
appropriate taxes (e.g., payroll, withholding for Federal and State taxes, FICA,
etc.) which the Company has the obligation of retaining.
6. Benefits. Following the Employment Period, the Company shall
continue to make coverage available to Jepson and his dependents under the
Company's group health and dental plans and shall make all payments under such
plans which would have otherwise been paid by Jepson through the Severance
Period, and thereafter to the extent required by COBRA ("Health Coverage"). The
Company shall also pay outplacement costs incurred by Jepson up to $10,000
(together with Health Coverage, the "Benefits").
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7. Confidential Information. Jepson agrees to immediately return to the
Company all of the Company's property and confidential and proprietary
information in his possession as of the termination of his employment, and
agrees not to use or disclose any such information without the prior written
consent of the Company. The limitations described in this Section 7 are in
addition to any similar limitations to which Jepson is subject based on other
legal or contractual obligations.
8. Insider Trading. During the Employment Period, Jepson and the
Company agree that Jepson shall be subject to the restrictions and obligations
of the Company's Insider Trading Policy, as amended from time to time, a copy of
which is in Jepson's possession.
9. California Labor Code. Assuming the payments of the above severance
amounts, California Labor Code section 206.5 will not be applicable to the
parties hereto. Said section provides in pertinent part:
NO EMPLOYER SHALL REQUIRE THE EXECUTION OF ANY RELEASE OF
ANY CLAIM OR RIGHT ON ACCOUNT OF WAGES DUE, OR TO BECOME
DUE, OR MADE AS AN ADVANCE ON WAGES TO BE EARNED, UNLESS
PAYMENT OF SUCH WAGES HAS BEEN MADE.
10. Release of Claims. Jepson agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to Jepson by
the Company. The Company and Jepson, on behalf of themselves and their
respective heirs, executors, officers, directors, employees, investors,
shareholders, administrators, predecessor and successor corporations, and
assigns, hereby fully and forever release each other and their respective heirs,
executors, officers, directors, employees, investors, shareholders,
administrators, predecessor and successor corporations, and assigns, of and from
any claim, duty, obligation or cause of action relating to any matters of any
kind, whether presently known or unknown, suspected or unsuspected, that any of
them may possess arising from any omissions, acts or facts that have occurred up
to and including the Effective Date including, without limitation:
(a) any and all claims relating to or arising from Jepson's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from Jepson's
right to purchase shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment;
breach of contract, both express and implied breach of the covenant of good
faith and fair dealing, both express and implied; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; defamation; violation of any federal, state or municipal law
including, but not limited to, any claims for violation of Title VII of the
Civil rights Act of 1964, any and all claims for violation of the Age
Discrimination in Employment Act of 1967, and any and all claims for violation
of the California Fair Employment and Housing Act;
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(d) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and
(e) any and all claims for attorneys' fees and costs.
The Company and Jepson agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release as
to the matters released. This release does not extend to any obligations
incurred under this Agreement.
11. Acknowledgment of Waiver of Claims under ADEA. Jepson acknowledges
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Jepson and the Company agree that this waiver
and release does not apply to any rights or claims that may arise under ADEA
after the Effective Date of this Agreement. Jepson acknowledges that the
consideration given for this waiver and release is in addition to anything of
value to which Jepson was already entitled. Jepson further acknowledges that he
has been advised by this writing that (a) he should consult with an attorney
prior to executing this Agreement; (b) he has at least twenty-one (21) days
within which to consider this Agreement; (c) he has at least seven (7) days
following the execution of this Agreement by the Parties to revoke the
Agreement; and (d) this Agreement shall not be effective until the revocation
period has expired.
12. Civil Code Section 1542. The parties represent that they are not
aware of any claim by either of them other than the claims that are released by
this Agreement. The Company and Jepson acknowledge that they are familiar with
the provisions of California Civil Code Section 1542 which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
The Company and Jepson, being aware of said section, agree to expressly
waive any rights that they may have thereunder, as well as under any other
statute or common law principles of similar effect.
13. Confidentiality. Except as required by law, the parties hereto each
agree to use their best efforts to maintain in confidence the existence of
contents and terms of, and the consideration for this Agreement (hereinafter
collectively referred to as "Settlement Information"). Each party hereto agrees
to take every precaution to prevent disclosure of any Settlement Information to
third parties, and each agrees that there will be no publicity, directly or
indirectly, concerning any Settlement Information. The parties hereto agree to
take every precaution to disclose Settlement Information only to those
employees, officers, directors, attorneys, accountants and family members who
have a reasonable need to know of such Settlement Information.
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14. No Disparagement. Except as required by law, Jepson agrees that as
of the Effective Date, he will not comment on the Company or any of its
affiliates or employees, directors, outside consultants or any other parties
financially related thereto and upon any inquiries made to Jepson, whether
directly or indirectly, relating to such parties, Jepson will refer such
inquiries to the Company's Chief Financial Officer.
15. Indemnification. The Company agrees that nothing in this Agreement
will affect Jepson's rights to indemnification pursuant to Labor Code Section
2902 or the Company's Certificate of Incorporation or Bylaws.
16. No Admissions. The parties understand and acknowledge that this
Agreement constitutes a compromise and settlement of claims. No action taken by
the parties hereto, or either of them, either previously or in connection with
this Agreement shall be deemed or construed to be (a) an admission of the truth
or falsity of any claims heretofore made, or (b) an acknowledgment or admission
by either party of any fault or liability whatsoever to the other party or to
any third party.
17. Costs. The parties shall each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement.
18. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Jepson represents and warrants that he has the capacity to act on his own behalf
and on behalf of all who might claim through him to bind him to the term and
conditions of this Agreement. Each party warrants and represents that there are
no liens or claims of lien or assignments in law or equity or otherwise of or
against any of the claims or causes of action released herein.
19. No Representations. Each party represents that it has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied on any representations or statements made by the other party hereto which
are not specifically set forth in this Agreement.
20. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable, or
void, this Agreement shall continue in full force and effect without said
provision.
21. Entire Agreement. This Agreement represents the entire agreement
and understanding between the parties concerning Jepson's separation from the
Company and supersedes and replaces any and all prior agreements and
understandings concerning Jepson's relationship with the Company and his
compensation by the Company.
22. No Oral Modification. This Agreement may only be amended in writing
signed by the parties.
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23. Governing Law. This Agreement shall be governed by the laws of the
State of California.
24. Effective Date. This Agreement is effective seven (7) days after it
has been signed by both parties.
25. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
26. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the parties hereto, with full intent of releasing all claims, and the parties
acknowledge that:
(a) They have read the Agreement;
(b) The have been represented in the preparation,
negotiations, and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this
Agreement and of the releases it contains; and
(d) They are fully aware of the legal and binding effect of
this Agreement.
IN WITNESS THEREOF, the parties have executed or caused to be executed
by an authorized officer this Agreement on the respective dates set forth below.
CHARLES W. JEPSON INTERLINK COMPUTER SCIENCES, INC.
By: By:
---------------------------------------- --------------------------------
Dated: Dated:
------------------------------------- -----------------------------
53
Exhibit 10.27
RESIGNATION AND MUTUAL RELEASE AGREEMENT
This Resignation and Mutual Release Agreement (the "Agreement") is made
by and between Interlink Computer Sciences, Inc., a California corporation (the
"Company") and Gloria M. Purdy ("Purdy").
WHEREAS, Purdy has been employed by the Company;
WHEREAS, in connection with Purdy's resignation as an officer and
director of the Company, Purdy and the Company have mutually agreed to continue
Purdy's relationship with the Company as a consultant through June 30, 1998;
NOW, THEREFORE, in consideration of the mutual promises made herein,
Purdy and the Company (collectively referred to as the "Parties") hereby agree
as follows;
1. Resignations. Purdy hereby resigns as of December 31, 1997 (the
"Effective Date") as a director and an officer of the Company, and as a director
and officer of any of the Company's subsidiaries.
2. Consultant Duties. During the Consulting Period (as defined in
Section 3 below), Purdy will continue to work on behalf of the Company's
interest as a Consultant. The duties and responsibilities of Purdy shall include
the duties and responsibilities as determined by mutual agreement between the
Company and Purdy. Purdy shall perform faithfully all duties assigned to her
during the Consulting Period to the best of her ability.
3. Expiration.
(a) The Consulting Period shall begin upon the Effective Date
and shall expire at 5:00 p.m., California time, on June 30, 1998 (the
"Expiration Date") unless sooner terminated pursuant to the provisions of this
Agreement. The period from the Effective Date until the Expiration Date is
referred to herein as the "Consulting Period".
(b) Early Termination. The Company may terminate Purdy's
consulting agreement for Cause (as defined in Section 3(d)) at any time during
the Consulting Period.
(c) Death. The Company shall have no obligation to pay or
provide any compensation or benefits under this Agreement on account of Purdy's
death. Purdy's rights under the benefit plans of the Company in the event of
Purdy's death prior to the Expiration Date shall be determined under the
provisions of those plans.
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<PAGE>
(d) Cause. For all purposes under this Agreement, "Cause"
shall mean (i) willful failure by Purdy to perform her duties hereunder, (ii) a
willful act by Purdy which constitutes gross misconduct and which is injurious
to the Company, (iii) a willful breach by Purdy of a material provision of this
Agreement, (iv) a material violation of a federal, state, or foreign law or
regulation applicable to the business of the Company. No act or failure to act
by Purdy shall be considered "willful" unless committed without good faith
without a reasonable belief that the act or omission was in the Company's best
interest.
4. Vesting Under Stock Option Agreement. The parties acknowledge that
the vesting of the stock options previously granted to Purdy under the Company's
stock plans will continue to the extent the options would otherwise become
exercisable through the conclusion of Purdy's consulting agreement. In
accordance with the terms of such options, Purdy shall have until 30 days
following termination of her consulting agreement (June 30, 1998 or for Cause)
to exercise the vested portions thereof. There shall be no further vesting of
any stock options previously granted to Purdy under the Company's stock plans
following termination of her consulting agreement. If the Company re-prices
employee stock options during Purdy's consulting period, Purdy will be eligible
to participate in the repricing according to the same terms and conditions as
the Company's employees.
5. Severance Payment. The Company agrees to pay Purdy severance equal
to 6 months of her current base salary of $14,166.67 per month ("Severance") in
a lump sum payable on the Company's January 15th payroll run. The Company also
agrees to pay Purdy all unused, accrued vacation pay as of December 31, 1997 on
the Company's January 15, 1998 payroll run. Furthermore, the Company agrees to
pay Purdy her Q2, FY98 bonus of $17,000 (USD) on the January 15, 1998 payroll
run. The parties understand and agree that the Severance will be reduced by all
necessary and appropriate taxes (e.g., payroll, withholding for Federal and
State taxes, FICA, etc.) which the Company has the obligation of retaining.
6. Benefits. Following the Employment Period, the Company shall
continue to make coverage available to Purdy and her dependents under the
Company's group health and dental plans through COBRA.
7. Confidential Information. Purdy agrees to immediately return to the
Company all of the Company's property and confidential and proprietary
information in her possession as of the termination of her employment, and
agrees not to use or disclose any such information without the prior written
consent of the Company. The limitations described in this Section 7 are in
addition to any similar limitations to which Purdy is subject based on other
legal or contractual obligations.
8. Insider Trading. During the Consulting Period, Purdy and the Company
agree that Purdy shall be subject to the restrictions and obligations of the
Company's Insider Trading Policy, as amended from time to time, a copy of which
is in Purdy's possession.
9. California Labor Code. Assuming the payments of the above severance
amounts, California Labor Code section 206.5 will not be applicable to the
parties hereto. Said section provides in pertinent part:
55
<PAGE>
NO EMPLOYER SHALL REQUIRE THE EXECUTION OF ANY RELEASE OF
ANY CLAIM OR RIGHT ON ACCOUNT OF WAGES DUE, OR TO BECOME
DUE, OR MADE AS AN ADVANCE ON WAGES TO BE EARNED, UNLESS
PAYMENT OF SUCH WAGES HAS BEEN MADE.
10. Release of Claims. Purdy agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to Purdy by
the Company. The Company and Purdy, on behalf of themselves and their respective
heirs, executors, officers, directors, employees, investors, shareholders,
administrators, predecessor and successor corporations, and assigns, hereby
fully and forever release each other and their respective heirs, executors,
officers, directors, employees, investors, shareholders, administrators,
predecessor and successor corporations, and assigns, of and from any claim,
duty, obligation or cause of action relating to any matters of any kind, whether
presently known or unknown, suspected or unsuspected, that any of them may
possess arising from any omissions, acts or facts that have occurred up to and
including the Effective Date including, without limitation:
(a) any and all claims relating to or arising from Purdy's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from Purdy's
right to purchase shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment;
breach of contract, both express and implied breach of the covenant of good
faith and fair dealing, both express and implied; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; defamation; violation of any federal, state or municipal law
including, but not limited to, any claims for violation of Title VII of the
Civil rights Act of 1964, any and all claims for violation of the Age
Discrimination in Employment Act of 1967, and any and all claims for violation
of the California Fair Employment and Housing Act;
(d) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and
(e) any and all claims for attorneys' fees and costs.
The Company and Purdy agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release as
to the matters released. This release does not extend to any obligations
incurred under this Agreement.
11. Acknowledgment of Waiver of Claims under ADEA. Purdy acknowledges
that she is waiving and releasing any rights she may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Purdy and the Company agree that this waiver
and release does not apply to any rights or claims that may arise
56
<PAGE>
under ADEA after the Effective Date of this Agreement. Purdy acknowledges that
the consideration given for this waiver and release is in addition to anything
of value to which Purdy was already entitled. Purdy further acknowledges that
she has been advised by this writing that (a) she should consult with an
attorney prior to executing this Agreement; (b) she has at least twenty-one (21)
days within which to consider this Agreement; (c) she has at least seven (7)
days following the execution of this Agreement by the Parties to revoke the
Agreement; and (d) this Agreement shall not be effective until the revocation
period has expired.
12. Civil Code Section 1542. The parties represent that they are not
aware of any claim by either of them other than the claims that are released by
this Agreement. The Company and Purdy acknowledge that they are familiar with
the provisions of California Civil Code Section 1542 which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HER FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HER
MUST HAVE MATERIALLY AFFECTED HER SETTLEMENT WITH THE
DEBTOR.
The Company and Purdy, being aware of said section, agree to expressly
waive any rights that they may have thereunder, as well as under any other
statute or common law principles of similar effect.
13. Confidentiality. Except as required by law, the parties hereto each
agree to use their best efforts to maintain in confidence the existence of
contents and terms of, and the consideration for this Agreement (hereinafter
collectively referred to as "Settlement Information"). Each party hereto agrees
to take every precaution to prevent disclosure of any Settlement Information to
third parties, and each agrees that there will be no publicity, directly or
indirectly, concerning any Settlement Information. The parties hereto agree to
take every precaution to disclose Settlement Information only to those
employees, officers, directors, attorneys, accountants and family members who
have a reasonable need to know of such Settlement Information.
14. No Disparagement. Except as required by law, Purdy agrees that as
of the Effective Date, she will not comment on the Company or any of its
affiliates or employees, directors, outside consultants or any other parties
financially related thereto and upon any inquiries made to Purdy, whether
directly or indirectly, relating to such parties, Purdy will refer such
inquiries to the Company's Chief Financial Officer.
15. Indemnification. The Company agrees to extend Purdy's
indemnification agreement through the length of her consulting assignment and
that nothing in this Agreement will affect Purdy's rights to indemnification
pursuant to Labor Code Section 2902 or the Company's Certificate of
Incorporation or Bylaws (NOTE: Subject to final Board approval on December 18,
1997).
57
<PAGE>
16. No Admissions. The parties understand and acknowledge that this
Agreement constitutes a compromise and settlement of claims. No action taken by
the parties hereto, or either of them, either previously or in connection with
this Agreement shall be deemed or construed to be (a) an admission of the truth
or falsity of any claims heretofore made, or (b) an acknowledgment or admission
by either party of any fault or liability whatsoever to the other party or to
any third party.
17. Costs. The parties shall each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement.
18. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Purdy represents and warrants that she has the capacity to act on her own behalf
and on behalf of all who might claim through her to bind her to the term and
conditions of this Agreement. Each party warrants and represents that there are
no liens or claims of lien or assignments in law or equity or otherwise of or
against any of the claims or causes of action released herein.
19. No Representations. Each party represents that it has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied on any representations or statements made by the other party hereto which
are not specifically set forth in this Agreement.
20. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable, or
void, this Agreement shall continue in full force and effect without said
provision.
21. Entire Agreement. This Agreement represents the entire agreement
and understanding between the parties concerning Purdy's resignation from the
Company and supersedes and replaces any and all prior agreements and
understandings concerning Purdy's relationship with the Company and her
compensation by the Company.
22. No Oral Modification. This Agreement may only be amended in writing
signed by the parties.
23. Governing Law. This Agreement shall be governed by the laws of the
State of California.
24. Effective Date. This Agreement is effective seven (7) days after it
has been signed by both parties.
25. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
58
<PAGE>
26. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the parties hereto, with full intent of releasing all claims, and the parties
acknowledge that:
(a) They have read the Agreement;
(b) The have been represented in the preparation,
negotiations, and execution of this Agreement by legal counsel of their own
choice or that they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this
Agreement and of the releases it contains; and
(d) They are fully aware of the legal and binding effect of
this Agreement.
IN WITNESS THEREOF, the parties have executed or caused to be executed
by an authorized officer this Agreement on the respective dates set forth below.
GLORIA M. PURDY INTERLINK COMPUTER SCIENCES, INC.
By: By:
------------------------------------------- -----------------------------
Dated: Dated:
---------------------------------------- --------------------------
59
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