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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-19640
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RETIX
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3948704
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
4640 ADMIRALTY WAY, SUITE 600
MARINA DEL REY, CALIFORNIA 90292
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 828-3400
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the 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 (or for such shorter periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [X]
As of January 27, 1997 the aggregate market value of voting stock held by non-
affiliates was approximately $87,160,000. Shares of Common Stock held by each
officer, director and holder of 5% or more of the outstanding Common Stock of
the Registrant have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of January 27, 1997 there were 22,597,670 shares of the Registrant's common
stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Part III incorporates information by reference from the
definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 15, 1997.
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INTRODUCTORY STATEMENT
Except for the historical information presented, the matters discussed in
this Annual Report on Form 10-K are forward looking statements that involve
risks and uncertainties, including the size and timing of license fees closed
during the fiscal year, the likely continued significant percentage of quarterly
revenues recorded in the last month of the quarter which makes forecasting
difficult and subject to a substantial risk of variance with actual results, the
timely development and acceptance of new and enhanced TMN-based, ATM-access and
wireless software products in existing and new markets, the acceptance of new
technologies like TMN, ATM and pACT, the impact of competitive products and
pricing, ability of Retix and its subsidiaries (collectively, the "Company" or
"Retix") to realize the desired results of its reorganization, the ability to
attract and retain qualified key personnel and the other risks detailed from
time to time in the Company's public disclosure filings with the U.S. Securities
and Exchange Commission (SEC). Copies of such filings are available upon
request from Retix's Investor Relations Department.
PART I
ITEM 1. BUSINESS
GENERAL
Retix is a supplier of networking solutions for telecommunications carrier
and enterprise networks. The Company focuses on three market sectors:
internetworking products for enterprise networks as well as broadband access
equipment supplied to telecommunications service providers; network management
software solutions enabling seamless operation and management of carrier
networks and equipment over diverse transmission media and protocols; and
networking infrastructure software installed by wireless carriers that enables
mobile users to send and receive data over cellular and Personal Communications
Service (PCS) networks. During 1996, the Company completed the reorganization
of its operations into three subsidiaries specializing in each of these areas of
business: the internetworking business unit; the TMN business unit; and the
wireless data business unit. References made in this report to the "Company" or
"Retix" generally include the operations of all subsidiaries except where
otherwise specifically described.
Historically, Retix has primarily focused on the development and marketing
of products designed to serve the needs of the enterprise network customer and
telecommunications infrastructure and equipment providers. The Company has
recently expanded its strategy to leverage its core enterprise networking
strengths in routing, switching, wireless data and network management
technologies to develop and market products for the telecommunications service
and carrier market.
In the internetworking sector, the Company supplies high-performance
routing and distributed switching products that enable organizations to
consolidate networks, link branch offices and remote sites, provide wide area
network access and improve enterprise network performance. The Company's
broadband access products, with new equipment offerings and future product
strategies announced in December 1996, enable telecommunications service
providers to offer high speed interconnection services that link corporate LANs,
voice and video systems. The Company's Vertel business unit develops and
markets software solutions for the management of telecommunications elements and
systems which enable full standards-based management functionality of complex
public telecommunications networks through implementation of the TMN
(telecommunications management network) model. In the wireless infrastructure
software area, the Company is a pioneer in wireless data communications
technology enabling service carriers to provide users mobility in data transfers
on cellular networks.
The Company is a California corporation incorporated in 1985. The
Company's principal offices are located at 4640 Admiralty Way, Suite 600, Marina
del Rey, California 90292 and its telephone number is (310) 828-3400.
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INDUSTRY BACKGROUND
In the 1990's, the networking environment both within the corporate
enterprise and among telecommunications carriers has increased dramatically in
complexity and performance. Bandwidth requirements have escalated, driven by
the proliferation of computers, higher graphical content of information, the
explosive growth of the Internet and the deployment of new client/server
applications. In addition, the proliferation of laptop computers, mobile users
and small office/home office computers has generated new networking requirements
for wireless data communications and remote access. Telecommunications carriers
have responded by deploying new networking technologies within their
infrastructure that enable the provision of flexible high performance data
communications services such as ATM (Asynchronous Transfer Mode), cellular and
PCS services. In addition, within this increasingly complex and competitive
environment, remote network management has become a critical tool for carriers
that must supply a variety of high performance digital services meeting user
requirements for quick installation, remote configuration and reliability.
Telecommunications and enterprise networking have become two of the world's
largest and fastest growing sectors in the networking industry.
STRATEGY AND PRODUCTS
Retix's strategy is to leverage its core routing, switching, wireless data
and network management technology strengths to develop and market products for
its primary markets: the telecommunications carrier market and the enterprise
network market. The Company's corporate strategy is to focus efforts on
maximizing its opportunities over the long term, while managing expenses in the
short term. The Company believes that further market development and broader
industry acceptance of its products and technologies will improve predictability
in the Company's business performance and operating results. The Company
expects that it will continue in the investment mode through at least the first
half of 1997.
The Company's products are founded upon its advanced routing and
distributed switching platforms, comprehensive TMN-based network management
software modules and wireless data technology. Retix's products include: (i)
broadband access devices and internetworking products that provide LAN and WAN
connectivity; (ii) software solutions which provide integrated implementation
of the network element, element management and service management layers of the
telecommunications management infrastructure set forth in the TMN
specifications; and (iii) wireless data solutions consisting of mobile data and
messaging software products within the infrastructure of a wireless data
network.
INTERNETWORKING BUSINESS UNIT
Retix's internetworking business unit has historically targeted the market
for enterprise bridging, routing and switching products that interconnect
corporate LANs. Starting in 1988, the Company initially served the early
corporate internetworking market with bridging solutions that provided simple
interconnection between LANs. Over time, the Company's product line evolved and
expanded to include multiple internetworking technologies encompassing both the
LAN and the WAN requirements of the corporate enterprise. By the mid-1990's the
Company had developed broad expertise in bridging, switching, multiprotocol
routing, frame and cell technologies, and network management.
The early revenue growth achieved by the Company in the enterprise
networking marketplace was later followed by a decline in revenue starting in
1993. However, the company recently has expanded beyond the corporate
internetworking market to address the growing gap at the edge of enterprise
networks by enabling service providers to offer broadband services to
corporate users. In today's competitive carrier marketplace, service providers
are competing to capture the business customer by providing tailored, cost-
effective and high-bandwidth services that seamlessly connect to corporate
enterprise networks. Increasingly, these services are based upon ATM. Drawing
upon the Company's core competencies in internetworking, the Company's strategy
is to eliminate the bandwidth bottleneck that plagues today's enterprise
networks by enabling telecommunications service providers to extend broadband
services to corporate users. The Company has recently introduced its first ATM
access products, designed to enable carriers to offer transparent, high speed
LAN interconnection services to corporate users over ATM facilities.
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The internetworking business unit initially entered the telecommunications
service provider market in 1995 with the introduction of the MetroLAN product
line, which was designed to supply an interface between carriers' DS3 facilities
and corporate LAN's, enabling carriers to offer a transparent LAN
interconnection service. With a goal of extending its existing presence in high
bandwidth service provider access solutions, the Company has recently expanded
its MetroLAN access product family to include ATM as well as non-ATM access.
The Company's current MetroLAN product line is specifically targeted at data-
oriented broadband access services such as Transparent LAN Service (TLS) and
Internet access. The Company is also completing the development of a new
generation of broadband access products. These products will provide high-speed
multimedia access solutions, transparent multimedia services (TMS), that not
only address the TLS and Internet access markets, but also aggregate broader
high speed traffic such as voice and video. Using ATM switches and the Company's
access products, a service provider can offer a turnkey service that
interconnects voice and video networks as well as enterprise LANs at fully
native speeds with a subscriber-to-network interface provided by standard PBX,
video, Ethernet, Fast Ethernet, Token Ring or FDDI ports.
As voice and video are added to the broadband access services market,
carrier requirements for broadband access are expected to intensify and broaden
in scope. At the same time, carriers will require more cost-effective solutions
for the increasingly competitive local loop environment. To meet these needs,
the internetworking business unit has developed an open systems architecture
that strategically leverages technology's highest performance standards while
also delivering low cost. This new platform, the Open Internetworking
Architecture-TM- (OIA)-TM-, centers around the Intel Pentium processor and the
PCI bus to provide performance, low cost and flexibility. The Company will
provide the network management required for carrier-class products,
incorporating a Web browser device management interface with support for legacy
Telnet, SLIP and SNMP protocols. The OIA platform leverages the third-party
development resources and volume manufacturing already deployed for computer
markets. The internetworking business unit's family of broadband access product
will be based on OIA and are targeted for initial introduction during the first
half of 1997, with subsequent upgrades and volume production slated for the
second half of 1997 and beyond. See "Risk Factors - New Products and
Technological Changes."
The Company's enterprise networking and broadband access products are
marketed directly to service providers and original equipment manufacturers
(OEMs), and indirectly to end-users and service providers through Value Added
Resellers (VARs), distributors and systems integrators (collectively,
Resellers). The Company's OEM agreements provide either for the private
labeling and resale of the Company's internetworking products, or the custom
modification of the Company's internetworking products. The Company's United
States, Pacific Rim and Latin American sales regions for its internetworking
products are managed from its headquarters in Southern California and three
sales offices throughout the United States. The Company also serves
internetworking customers located in the United Kingdom and the remainder of
Europe, the Middle East and Africa from its United Kingdom sales and technical
support facility.
Internetworking business unit revenues represented approximately 48.1%,
59.9% and 60.0% of net corporate revenues for fiscal years 1996, 1995 and 1994,
respectively. As a percentage of fiscal year revenues, enterprise networking
product revenues are decreasing as carrier access product revenues increase.
Through fiscal 1994, substantially all of the internetworking business unit's
product revenues were from sales of enterprise networking products. The Company
is currently completing the final phases of certain large end-user installation
programs in the United States based upon its enterprise networking products.
The Company is experiencing continuing demand for its enterprise networking
products through its distribution channels, particularly in international
markets. Specifically, the Company has introduced new product features and
appointed new resellers in the European, Middle East and African market (EMEA)
to support the ongoing demand for existing products. During the fourth quarter,
the Company announced it had extended its RX7220 branch routers to include basic
rate ISDN for the European market. The Company intends to appoint only the top
distributors in the EMEA market who can provide excellence in technical support
and customer service.
VERTEL BUSINESS UNIT
In 1995, Vertel migrated its focus from mature OSI related product lines
developed by the Company since its inception in 1985 to emerging
telecommunications management network ("TMN") software-based products. Vertel is
specifically dedicated to the needs of telecommunications carriers for
standards-based network management solutions. The Company's primary strategy is
to increase its share of the developing TMN market through extending technology
leadership, early introduction of leading-edge products, solutions integrated
directly into the customer's environments and the development of strong
strategic relationships with key industry members.
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Vertel develops, markets and supports vertically integrated, object-
oriented software solutions for the management of public telecommunications
networks. Vertel's solutions, which are based upon the International
Telecommunications Union's telecommunications network management standard,
support seamless network operation and management over diverse transmission
media and protocols. Vertel believes that it offers the only commercially
available, fully-interoperable suite of products and tools that span the network
element, element management, network management and services management layers
of the TMN model.
Vertel's products are designed to reduce network management costs by
automating critical network management functions and to derive incremental
revenue by enabling the more rapid deployment of advanced services. Vertel's
TMN products consist of embedded software for network equipment, software that
allows telecommunications service providers to integrate proprietary or SNMP-
based network management systems with a TMN standards-based solution and object-
oriented software platforms that facilitate the rapid development of network and
service management applications and features such as fault detection and
automatic response, remote improvement of network configuration, automation of
accounting and billing functions, optimization of network traffic and security.
Vertel believes that its TMN solutions allow enhanced communications among
service providers and with customers by enabling telecommunications service
providers to develop and deploy systems that manage new and existing services
across multiple service providers while preserving their existing network
investments, and enable network operators to develop and deploy
systems to manage services from multiple service providers. Vertel also
provides professional services to implement and maintain a complete TMN-based
solution efficiently, including system engineering, application development and
technical support.
Vertel believes that the broad adoption and deployment of TMN will be key
to its success. Vertel believes that the adoption of TMN will depend, in part,
upon the ability of service providers to quickly and cost-effectively implement
TMN solutions. Vertel will continue to target telecommunications service
providers and network equipment manufacturers for adoption of its TMN solutions,
and at the same time commit substantial resources to the promotion of the TMN
standard for telecommunications network management solutions. To date, leading
service providers and equipment manufacturers that have deployed Vertel's
technology include US West Communications, Inc., GTE Service Corporation,
British Telecom and Telenor (Norway).
Vertel's TMN software is licensed directly to telecommunications service
providers, equipment manufacturers and network management platform providers,
and through software systems integrators to large end users. Vertel derives
revenue from license fees and royalties from its software products, professional
services and technical support services, including maintenance. Vertel
generally licenses source code to its customers. Customers may distribute
binary or embedded versions of Vertel's software in their products. Revenue
from license fees generally is recognized upon shipment of the source code and
corresponding royalties from the distribution of binary or embedded versions of
the software can be earned in future periods. See "Notes to Consolidated
Financial Statements - Note 2 - Revenue Recognition." Vertel sells its products
in the United States and internationally primarily through a direct sales
organization of highly technical sales people. In addition, Vertel plans to
continue to license source code to service providers, network equipment
manufacturers and independent software developers with a right to distribute
products, services and applications based on such source code in exchange for
royalty payments. Vertel's distribution strategy is designed to establish its
TMN solutions as the premier TMN products, and to accelerate the adoption of TMN
generally.
Vertel is headquartered in Woodland Hills, California, and has established,
in addition to three sales offices in the United States, local sales offices in
Belgium, United Kingdom and Ireland to serve its European customer base as well
as Japan and Korea to address the emerging markets and key customers in the
Pacific Rim.
Vertel was incorporated as a subsidiary of Retix in June 1995 and began
conducting business as a separate entity in February 1996. Revenues from
Vertel's TMN and OSI related product lines represented approximately 42.6%,
32.1%, and 33.2% of the Company's net revenues for the fiscal years 1996, 1995
and 1994, respectively.
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WIRELESS DATA BUSINESS UNIT
Retix's strategy in wireless data solutions is to continue the development
and installation of mobile data and messaging software products to provide
mobile users with the ability to transfer data over wireless networks.
In 1993, the Company entered the market for cellular-based wireless data
products after adapting its OSI-based software for the needs of the cellular
digital packet data (CDPD) market. The Company is a leading vendor in the market
for wireless data communications software and equipment through its wireless
data subsidiary. Its Mobile Data-Intermediate System (MD-IS) provides the core
infrastructure switching element enabling data transfers via CDPD. MD-IS, which
ensures data continuity, accuracy and security, first shipped in 1994.
Subsequently, the Company developed and marketed other central site components
including the Accounting Server (AS) and Network Management System (NMS)
specified in the CDPD system. The Company has sold its CDPD system to, among
others, McCaw Cellular (now AT&T Wireless Services, Inc.), Airtouch
Communications and Korea Mobile Telecom, which was the first international
carrier to enter the wireless data services market. The Company also signed an
agreement with Ericsson Inc., a leading telecommunications system integrator, to
include the Company's CDPD Infrastructure products as a component of Ericsson
Inc.'s wireless data network integration offerings.
In 1995, the Company's wireless data business unit gained entry into the
two-way paging marketplace as AT&T Wireless Services selected the Company as the
sole supplier of the pACT Data Intermediate System (PD-IS). PD-IS provides the
core infrastructure enabling two-way message transfer over narrowband Personal
Communications Services (N-PCS) networks that are now being deployed across the
U.S. PD-IS conforms to the Personal Air Communications Technology (pACT)
standard which is the basis of the AT&T Wireless narrowband PCS network. The
Company has been a key architectural contributor to the pACT protocol, which
provides guaranteed message delivery and optimized spectrum utilization for PCS
carriers. Among the routing and management functionality provided by PD-IS is
message switching, encryption, user authentication and roaming.
In the first quarter of 1996, the Company formally introduced its N-PCS
messaging product family, including the IMpACT PD-IS Messaging Switch, the
industry's first product delivered in support of the pACT specification. Also
in the first quarter of 1996, the Company was awarded a multi-million dollar
contract to supply Ericsson Inc. with its IMpACT Messaging Switch and other pACT
central site infrastructure products, enabling Ericsson Inc. to deliver turn-key
messaging solutions to N-PCS carriers. The Company further expanded its pACT
narrowband PCS market position during 1996 with the signing of a reseller
agreement with PCSI, formerly a subsidiary of Cirrus Logic, and now a subsidiary
of ADC Telecommunications. In addition, the Company has developed enhancements
to its wireless data technology for narrowband PCS based software applications,
including network management system applications which enable wireless
communications providers to expand service offerings within the two-way
messaging marketplace.
The Company's wireless data business unit strategy is to continue to pursue
opportunities in the cellular and PCS markets, while also pursuing private
wireless applications specialized for internal corporate use. In this regard,
the Company signed a reseller agreement with M/A-Com in the fourth quarter of
1996.
Revenues from wireless data product lines represented approximately 9.3%,
8.0%, and 6.8% of net revenues for the fiscal years 1996, 1995 and 1994,
respectively. To date, substantially all of the Company's wireless data
revenues have been derived from pilot installations of its wireless data
software solutions. In the fourth quarter of 1996, the Company shipped its
first CDPD system for deployment in a commercial environment. In addition, the
Company's IMpACT product line for PCS networks is now being deployed by AT&T
Wireless Services as it builds out its pACT network, scheduled for commercial
launch in late 1997.
The Company's wireless data products are marketed directly to OEMs, and
indirectly to end-users through VARs, distributors and systems integrators.
Retix's wireless data business unit serves its worldwide customer base from its
headquarters in Southern California.
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SALES, MARKETING AND CUSTOMERS
The Company markets its products to telecommunications service providers,
telecommunications equipment manufacturers and end users through its direct
sales force located in the United States, Europe, Korea and Japan and multiple
distribution channels. The Company's direct sales force is supported by a
network of Value Added Resellers ("VARs"), distributors and systems integrators
located throughout the world.
The Company currently transacts business in U.S. currency worldwide, except
for the United Kingdom where certain products and services are sometimes sold in
local currency. International sales totaled approximately 51.1%, 54.1%, and
53.6% of net revenues for each of the fiscal years 1996, 1995 and 1994. See
"Risk Factors - International Sales and Operations" and "Currency Fluctuations."
Historically, the Company has not had significant backlog because it fills
substantially all orders within 30 days after receipt of a firm purchase order.
CUSTOMER SERVICE AND SUPPORT
The Company provides customer service and support through systems
engineers, training instructors and administrative support personnel located in
the United States and Europe. Service activities include extensive product
training, software update and maintenance services provided to TMN and wireless
data software licensees, installation and maintenance services for end-user
products, and professional services consulting. The Company also offers several
customer support programs including its "Hot Spare" program for its
internetworking products, which provides overnight replacement in the event of
hardware failures. The Company's Resellers and OEMs provide service and support
to customers, with secondary support from the Company as required.
The Company warrants software for 90 days, and hardware products for one
year. To date, the Company has not encountered any significant product
maintenance problems. See "Risk Factors - New Products and Technological
Changes."
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends in large part on its
ability to enhance existing products and to develop new products in order to
maintain technological competitiveness and meet a wide range of customer needs.
Accordingly, the Company intends to continue to make substantial investments in
product development activities. The Company's product development strategy is
to develop products that build upon the Company's technological assets for
emerging markets. The Company's current research and development programs
include developing new internetworking products, including multimedia broadband
access products utilizing the OIA platform. The Company also continues to
invest significant resources in developing a comprehensive offering and
integrated implementation of TMN standards-conformant network management
software products of stacks, agent and manager toolkits and object compilers.
Extension of the Company's wireless data communications technologies include
ongoing development of its MD-IS, PD-IS and network management software product
lines. The Company's primary research and development facilities are located in
Southern California, with additional facilities in Ireland and the United
Kingdom. See "Risk Factors - New Products and Technological Changes" and
"Competition."
In fiscal years 1996, 1995 and 1994, the Company's research and development
expenditures were approximately $10,534,000, $13,725,000, and $11,221,000,
respectively.
MANUFACTURING
In conjunction with the restructuring of the internetworking business unit
announced in 1995, the Company outsourced its manufacturing operations and
subleased its manufacturing facilities to turnkey vendors in 1996 in order to
obtain the benefits from larger economies of scale. See Item 2- "Properties."
Currently, manufacturing operations consist primarily of system level test and
quality control.
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PROPRIETARY RIGHTS AND LICENSES
The Company currently has one patent application pending, holds no other
patents and a combination of copyright, trade secret and trademark laws, and
nondisclosure and other contractual restrictions on copying and distribution to
protect its proprietary technology. In addition, as part of its confidentiality
procedures, the Company generally enters into nondisclosure agreements with its
employees, consultants, distributors and corporate partners and limits access to
and distribution of its software, documentation and other proprietary
information. However, because the computer networking and telecommunications
industries are characterized by rapid technological change, the Company believes
its success is more dependent upon its continuing technical expertise and
relationships with customers. See "Risk Factors - Risks Associated with
Intellectual Property."
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this document in evaluating the Company and
its prospects:
NEW PRODUCTS AND TECHNOLOGICAL CHANGES; DEPENDENCE UPON NEW PRODUCTS;
REGULATION. The markets for the Company's products are characterized by rapidly
changing technology and frequent new product introductions. Accordingly, the
Company believes that its future success will depend on its ability to enhance
its existing products and to develop and introduce in a timely fashion new
products that achieve market acceptance. There can be no assurance that the
Company will be able to identify, develop, manufacture, market or support such
products successfully or that the Company will be able to respond effectively to
technological changes, industry standards revisions or product announcements by
competitors. Delays in new product introductions or product enhancements, or
the introduction of unsuccessful products, could adversely affect the Company.
The Company's revenues are dependent on, among other things, the acceptance of
these products by customers, and no assurance concerning their acceptance can be
given. From time to time, the Company may announce new products, capabilities
or technologies that have the potential to replace the Company's existing
product offerings. There can be no assurance that announcements of new product
offerings will not cause customers to defer purchasing or licensing existing
Company products, adversely affecting the Company. See "Business-Strategy and
Products" and "Research and Product Development."
The Company has, from time to time, experienced delays in the development
of new products and the enhancement of existing products. There can be no
assurance that the Company will be successful in developing and marketing, on a
timely basis or at all, competitive products, product enhancements and new
products that respond to technological change, changes in customer requirements
and emerging industry standards, or that the Company's enhanced or new products
will adequately address the changing needs of the marketplace. The inability of
the Company, due to resource constraints or technological or other reasons, to
develop and introduce new products or product enhancements in a timely manner
could have a material adverse effect on the Company's business, financial
condition or results of operations.
The Company expects that new products and related services will account for
a substantial portion of its revenues in the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for broadband access
products, TMN software or wireless data products, such as competition for new
products, lack of customer acceptance of the Company's products, or failure of
the Company to develop and introduce new and enhanced versions of its products
on a timely basis, could have a material adverse effect on its business,
operating results and financial condition. The historical financial results
presented herein reflect declines in revenue and net income for the past five
years resulting primarily from lower sales of its traditional enterprise
networking and OSI products. There can be no assurance of an increase in
revenues and net income attributable to the Company's new broadband access-based
or TMN-based products, or that such increase, if any, will offset the declines
attributable to the Company's other product lines. See Item 6 - "Selected
Consolidated Financial Data."
The telecommunications industry is subject to regulation in the United
States and other countries, and the Company's customers could be required to
receive regulatory approvals in conducting their businesses. The enactment by
federal, state or foreign governments of new laws or regulations or change in
the interpretation of existing regulations could adversely affect the Company's
customers, and thereby affect the Company's business, operating results and
financial conditions.
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PARTICIPATION IN EMERGING MARKETS. As part of its corporate strategy, the
Company has targeted emerging markets in the early stage of their development,
including the ATM, TMN and wireless data markets. There can be no assurance
that these markets will attain broad acceptance or generate long-term growth
opportunities in line with the Company's objectives. The Company believes that
the broadband access, TMN and wireless data markets will take years to develop
and that development of the markets will require the availability of a
sufficient number of high quality, commercially successful communications
applications. Widespread adoption of the TMN standard also will depend on the
availability of communications stacks, information models and applications
suites that allow telecommunications equipment manufacturers and service
providers to implement TMN in their products. The Company cannot predict the
size of the market or the rate at which the market will grow. If the markets
fail to grow, grow more slowly than anticipated, or become saturated with
competitors, the Company's business, financial condition and results of
operations would be materially adversely affected. See "--Competition,"
"Business-Strategy and Products," and "--Research and Product Development."
SUBSTANTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS, FUTURE OPERATING
RESULTS UNCERTAIN. A significant portion of the Company's software revenues have
been, and will continue to be, along with the Company's new broadband access
products, derived from substantial orders placed by large organizations after
extended evaluation. The timing of such orders and their fulfillment has caused
and will continue to cause material fluctuations in the Company's operating
results, particularly on a quarterly basis. In addition, the Company's
quarterly operating results have in the past and will in the future vary
significantly depending upon factors such as the timing of significant orders
and shipments, the lengthy sales cycle of the Company's products, capital
spending patterns of the Company's customers, changes in pricing policies by the
Company or its competitors, increased competition, the cancellation of service
or maintenance agreements, changes in operating expenses, personnel changes,
demand for the Company's products, the number, timing and significance of new
product and product enhancement announcements by the Company and its
competitors, the ability of the Company to develop, introduce and market new and
enhanced versions of the Company's products on a timely basis, the mix between
domestic and international sales, the mix of direct and indirect sales and
general economic factors, among others. Due to the foregoing factors, quarterly
revenue and operating results have been and will continue to be difficult to
forecast.
The Company typically realizes a significant portion of its TMN-based and
wireless data software license revenues in the last month of a quarter, and
frequently in the last weeks or even days of a quarter. The Company's expense
levels are based, in part, on its expectations of future revenue levels. If
revenue levels are below expectations, operating results are likely to be
materially adversely affected. In particular, because only a small portion of
the Company's expenses varies with revenue in the short term, net income may be
disproportionately affected by a reduction in revenue. The Company's business
has experienced and is expected to continue to experience seasonality in
customer purchasing patterns particularly from the fourth quarter to the
following first quarter. In addition, the Company currently intends to increase
its funding of research and product development, increase its sales and market
development activities and expand distribution channels for its Vertel
subsidiary. To the extent such expenses are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition could be materially and adversely affected.
Based upon all of the foregoing, the Company believes that quarterly
revenues and operating results are likely to vary significantly in the future
and that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. There can be no assurance that the Company's revenue will increase
or be sustained in future periods or that the Company will be profitable in any
future period. Further, it is likely that in some future quarter 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
is likely to be materially adversely affected. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
9
<PAGE>
LENGTHY SALES CYCLES; IMPORTANCE OF IMPLEMENTATION. The Company's products
are complex and generally involve significant investment decisions after
extended evaluations by prospective customers. Accordingly, the Company must
engage in a lengthy sales cycle to provide a significant level of education
regarding the use and benefits of the Company's products, executive level
approval is often required to license the Company's products and the agreements
pursuant to which the Company licenses its products often involve lengthy
negotiation. In addition, the implementation of the Company's software products
involves a significant commitment by customers over an extended period of time.
As a result, the Company's sales cycle is subject to a number of significant
delays over which the Company has little control.
The Company believes that rapid implementation is critical to success in
the TMN market. Significant delays in implementation, whether or not such
delays are within the Company's control, could materially adversely affect its
business, operating results and financial condition. The Company from time to
time enters into fixed price arrangements for its professional services. Fixed
price arrangements could in the future result in losses primarily due to delays
in the implementation process or other complexities associated with completion
of the project. Such losses could have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business-- Sales, Marketing and Customers."
SALES AND MARKETING RISKS. During the second-half of 1996, the Company
increased, and plans to continue to increase, the number of direct sales and
marketing personnel to support the further development of TMN market
opportunities as well as the announced extension of its broadband access product
family. As the Company hires new sales personnel it is anticipated that there
will be a significant delay before such personnel become effective. There can
be no assurance that the Company will be successful in attracting or retaining
qualified direct sales personnel, that this expansion will result in sales of
the its products, that the costs of such expansion will not exceed the revenues
generated, or that the Company's sales and marketing organization will
successfully compete against the larger and better funded sales and marketing
organizations of the Company's competitors.
COMPETITION. Competition in the markets in which the Company competes is
characterized by rapidly changing technologies, evolving industry standards, in-
house or proprietary solutions, frequent new product introductions, and rapid
changes in customer requirements. To maintain and improve its competitive
position, the Company must continue to develop and introduce, in a timely and
cost-effective manner, new services, products and product features that keep
pace with competitors' offerings, technological developments and changing
industry standards. The principal competitive factors in the Company's market
are quality, performance, product features such as scalability,
interoperability, functionality, customizability and ease of use, customer
support, services and maintenance.
The Company experiences significant competition in the enterprise
networking and broadband access markets from vendors and manufacturers such
as Cisco Systems, Inc., Bay Networks, 3Com Corporation, NetEdge, ADC Kentrox
and Racal Datacom, and in telecommunications network management from TCSI,
OSI, IBM, Sun Microsystems, and major telecommunication vendors such as AT&T.
There can be no assurance that the Company will be able to identify, develop,
manufacture, market or support products successfully or that the Company will
be able to respond effectively to technological changes or product
announcements by its competitors. The complexities of the Company's existing
products could result in delays to product releases or product enhancements.
Delays in new product introductions or product enhancements or the
introduction of unsuccessful products could adversely affect the Company.
Many of the Company's current and potential competitors have longer
operating histories and have greater financial, technical, sales, marketing and
other resources than the Company. Moreover, the Company's current and potential
competitors may respond more quickly than the Company to new or emerging
technologies or changes in customer requirements. In addition, as the market
develops, a number of companies with significantly greater resources than the
Company could attempt to increase their presence in the market by acquiring or
forming strategic alliances with competitors of the company resulting in
increased competition to the Company. There can be no assurance that the
Company will be able to compete successfully with such competitors. See
"Business-Strategy and Products."
10
<PAGE>
RISKS ASSOCIATED WITH COMPLEX SOFTWARE-BASED PRODUCTS. The development,
enhancement and implementation of the Company's products entail risks of product
defects or failures. The Company has in the past discovered software bugs in
certain of its products and software solutions. Although to date the Company
has not experienced material adverse effects resulting from any such bugs, there
can be no assurance that errors will not be found in existing or new products or
releases after commencement of commercial licensing, which may result in delay
or loss of revenue, loss of market share, failure to achieve market acceptance,
or may otherwise adversely impact the Company's business, operating results and
financial condition. Moreover, the complexities involved in implementing and
customizing the Company's software solutions entail additional risks of
performance failures. There can be no assurance that the Company will not
encounter substantial delays or other difficulties due to such complexities.
Any such occurrence could have a material adverse effect upon the Company's
business, operating results and financial condition.
FLUCTUATIONS IN MARKET PRICE OF COMMON STOCK. Announcement of new products
by the Company or its competitors and quarterly variations in financial results
could cause the market price of the Company's Common Stock to fluctuate
substantially. In addition, the stock market has experienced price and volume
fluctuations from time to time that have affected the market prices of many
technology based companies and that are not necessarily related to the operating
performance of such companies. These broad market fluctuations may adversely
affect the price of the Company's Common Stock.
INTERNATIONAL SALES AND OPERATIONS. Sales to third party customers outside
of the United States accounted for over half of the Company's net revenues for
1996, 1995 and 1994. The Company expects that international sales will continue
to be a significant portion of its business. Operating costs in many countries,
including some of those in which the Company operates, are often higher than in
the United States. International sales and operations may also be subject to
risks such as the imposition of governmental controls, export license
requirements, restrictions on the export of critical technology, currency
exchange fluctuations, political instability, trade restrictions, changes in
tariffs and difficulties in staffing and managing international operations. In
addition, sales in Europe are adversely affected in the third quarter of each
year as many customers and end users reduce their business activities during the
summer months. These seasonal factors and currency fluctuation risks may have an
effect on the Company's quarterly results of operations. Further, because the
Company has operations in different countries, the Company's management must
address differences in regulatory environments and cultures. Failure to address
these differences successfully could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company must obtain governmental and public telephone company approvals for
certain of its products in most countries. See "Management's Discussion and
Analysis of Financial Condition - Results of Operations" and "Business - Sales,
Marketing, and Customers."
DEPENDENCE ON SUPPLIERS AND LICENSES. Although the Company generally
uses standard parts for its hardware products, certain components, circuit
boards, connectors, mechanical assemblies, and power supplies, are presently
available only from a single source or from limited sources. The Company has
generally been able to obtain adequate supplies of all components in a timely
manner from existing sources or, when necessary, from alternative sources of
supply. The inability to obtain sufficient sole or limited source components or
subassemblies as required or to develop alternative sources if and as required
could adversely affect the Company's operating results. The Company shifted to
an outsourcing strategy for the manufacture of its products during 1996. Any
difficulties experienced by the Company's manufacturing partners, on which the
Company could become solely dependent for the supply of its products, could
adversely affect the Company's operating results. Also, the Company licenses
certain technology included in its products; if the Company becomes unable to
utilize such technology, the Company could be adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continued contributions of its key management,
sales, marketing, research and development and manufacturing personnel, many of
whom would be difficult to replace. If certain of these employees were to
leave, the Company could be adversely affected. The Company believes its future
success will also depend in large part upon its ability to attract and retain
highly skilled software and hardware engineers, and managerial, sales and
marketing personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
the necessary personnel. In addition, the Company is undertaking a
reorganization and refocusing of its business. To the extent the Company is not
successful in attracting or retaining key personnel, the Company could also be
adversely affected. See "Business-Strategy and Products" and "Business -
Employees" and "Executive Officers and Key Personnel of the Company."
11
<PAGE>
CURRENCY FLUCTUATIONS. While the Company's consolidated financial
statements are prepared in United States dollars, a portion of the Company's
worldwide operations have a functional currency other than the United States
dollar. In particular, the Company maintains a development and customer service
operation in Ireland where the functional currency is the Irish Pound, and a
customer service and sales operation in the United Kingdom where the functional
currency is the British Pound Sterling. A portion of the Company's revenues are
also denominated in currencies other than the United States dollar.
Fluctuations in exchange rates may have a material adverse effect on the
Company's results of operations and could also result in exchange losses. The
impact of future exchange rate fluctuations cannot be predicted adequately. To
date, the Company has not sought to hedge the risks associated with fluctuations
in exchange rates, but may undertake such transactions in the future. The
Company does not have a policy relating to hedging. There can be no assurance
that any hedging techniques implemented by the Company would be successful or
that the Company's results of operations will not be materially adversely
affected by exchange rate fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations."
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY. The Company regards its
products as proprietary and relies primarily on a combination of statutory and
common law copyright, trademark, and trade secret laws, customer licensing
agreements, employee and third-party nondisclosure agreements and other methods
to protect its proprietary rights. The Company generally enters into
confidentiality and invention assignment agreements with its employees and
consultants. Additionally, the Company enters into confidentiality agreements
with certain of its customers and potential customers and limits access to, and
distribution of, its proprietary information. Despite these precautions, it may
be possible for a third party to copy or otherwise obtain and use the Company's
technologies without authorization, or to develop similar technologies
independently. Furthermore, the laws of certain countries in which the Company
does business do not protect the Company's software and intellectual property
rights to the same extent as do the laws of the United States. The Company does
not include in its software any mechanisms to prevent or inhibit unauthorized
use, but generally either requires the execution of an agreement that restricts
copying and use of the Company's products or provides for the same in a break-
the-seal license agreement. If unauthorized copying or misuse of the Company's
products were to occur to any substantial degree, the Company's business,
financial condition and results of operations could be materially adversely
affected. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology.
While the Company has not received claims alleging infringement of the
proprietary rights of third parties which the Company believes would have a
material adverse effect on the Company's business, financial condition or
results of operations, nor is it aware of any similar threatened claims, there
can be no assurance that third parities will not claim that the Company's
current or future products infringe the proprietary rights of others. Any such
claim, with or without merit, could result in costly litigation or might require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all. See "Business - Proprietary Rights and Licenses."
EMPLOYEES
As of December 28, 1996 the Company employed 211 persons, of whom 99 were
primarily engaged in research and development activities, 10 in manufacturing,
69 in sales, marketing, customer support and related activities, and 33 in
general management, administration and finance. The Company has no collective
bargaining agreements with its employees. The Company believes that it
maintains competitive compensation, benefit, equity participation and workplace
policies which assist in attracting and retaining qualified employees. The
Company believes that its future success will depend, in part, on its ability to
attract and retain qualified personnel. The Company has experienced no work
stoppages and believes that its employee relations are good.
12
<PAGE>
EXECUTIVE OFFICERS AND KEY PERSONNEL OF THE COMPANY
The executive officers of the Company and their ages as of December 28,
1996 are as follows:
Name Age Position
----------------------- --- ----------------------------------------
Joe Stephan............ 52 President and Chief Executive Officer
Steven M. Waszak....... 39 Vice President, Finance and
Administration, and Chief Financial
Officer
Philip Mantle.......... 46 Senior Vice President, Sales and
Marketing
The key divisional employees and their ages as of December 28, 1996 are
as follows:
Bruce Brown............ 46 President and Chief Executive Officer,
Vertel Corporation
Simon Backer........... 41 President and Chief Executive Officer,
Wireless data business unit
Randolph Fardal........ 44 Vice President, Marketing,
Internetworking business unit
Paul Wang.............. 55 Vice President, Engineering,
Internetworking business unit
Mr. Stephan has served as President and Chief Executive Officer since
October 1995. Prior to joining the Company, Mr. Stephan served in several
executive positions during his 25 years at NCR Corporation, a large computer and
business equipment company including Senior Vice President, International from
1993, Vice President, Europe Group from 1992, Vice President, Corporate
Marketing and Strategy Planning from 1991 and Vice President, Latin
America/Middle East/Africa from 1986.
Mr. Waszak has served as Vice President, Finance and Administration and
Chief Financial Officer since September 1994. Prior to September 1994, Mr.
Waszak served the Company as Associate Vice President of Finance and
Administration. Before joining the Company in June 1990, Mr. Waszak worked for
Deloitte & Touche LLP, a public accounting firm, where Mr. Waszak held the
position of Senior Manager since May 1989.
Mr. Mantle is a U.K. citizen and has served as Senior Vice President, Sales
and Marketing since November 1995. Prior to joining the Company, Mr. Mantle
served for over 18 years at NCR in various top-level sales and marketing
positions, including Chairman and Managing Director of AT&T Global Information
Solutions U.K. from August 1993 to October 1995. Mr. Mantle also served as a
director of all NCR subsidiaries in the U.K. as well as a Vice President and an
officer of AT&T Global Information Solutions U.K. Mr. Mantle also served as
Area Managing Director of NCR Turkey from March 1991 to July 1993. Prior to
March 1991, Mr. Mantle served as a Director of NCR U.K.
Mr. Brown has served as President and Chief Executive Officer of Vertel
Corporation since August 1995. Prior to joining the Company, Mr. Brown served
as President of ADC Fibermux Corporation from July 1993 to August 1995. From
October 1990 to July 1993, Mr. Brown was with Ungermann-Bass where his last
position was Executive Vice President.
13
<PAGE>
Mr. Backer has served as President and Chief Executive Officer of the
Company's wireless data business unit since August 1996. Prior to joining the
Company, Mr. Backer served for over 12 years at Motorola Wireless Data Group in
British Columbia in various senior level management positions, including
Director, Architecture from June 1995 to August 1996, and Director, CDPD
Infrastructure from October 1993 to June 1995, and Director, Product Strategy
and System Product Marketing from January 1991 to October 1993.
Mr. Fardal has served as Vice President, Marketing of the Company's
internetworking business unit since December 1994. Mr. Fardal served the
Company as Associate Vice President of the Customer Network Design Group from
May 1994 to December 1994, as Associate Vice President of Product Marketing from
February 1994 to May 1994, as Associate Vice President of Strategic Marketing
from February 1993 to February 1994, and as Director of Marketing from February
1990 to February 1993. Mr. Fardal also worked as a design engineer and has
earned several patents.
Mr. Wang has served as Vice President of Engineering for the Company's
internetworking business unit since June 1996. Prior to joining the Company,
Mr. Wang worked for Spectragraphics Corporation. His last position there was
Senior Vice President of Spectragraphics Products Division from December 1992 to
June 1996. Previously he served as Vice President of Spectragraphics Products
Division from June 1990 to December 1992, and as Vice President of Engineering
from November 1989 to June 1990.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research and
development, and support facilities are located in Southern California. The
Company's headquarters and primary internetworking and wireless data operations
are located in Marina del Rey, California, and consist of approximately 30,000
square feet under a lease that will expire in October 1999, with one 47-month
renewal option. Annual gross rent for this facility lease approximates $575,000.
The Company's Vertel subsidiary is headquartered in Woodland Hills, California,
and consists of approximately 30,000 square feet under leases that will expire
in 2002. Annual gross rent for this facility lease approximates $604,000. The
Company's manufacturing facility in Moorpark, California, has been subleased to
the vendor which has taken over its operations via an outsourcing arrangement.
See "Business - Manufacturing." Total sublease income offsets annual rental
payments. The Company has established European services and support facilities
located in Dublin, Ireland and Guildford, England. The Dublin facility consists
of approximately 8,000 square feet of leased space under a lease expiring in
2008. Annual gross rents for the facility currently approximates $189,000. The
Company's field sales and service offices worldwide, other than those in its
Southern California locations, consist of leased office space totaling
approximately 19,000 square feet with current aggregate gross rents of
approximately $273,000. The Company believes that its existing facilities are
adequate for presently foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to, nor is their
property the subject of, any material pending legal proceeding. The Company
may, from time to time, become a party to various legal proceedings arising in
the normal course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
<PAGE>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's common stock (Nasdaq symbol RETX) is traded on the Nasdaq
National Market. The low and high sales prices for each quarterly period in the
two fiscal years ended December 28, 1996 are as follows:
1995 Quarters Ended
--------------------------------------------
April 1 July 1 Sept 30 Dec 30
------- ------ ------- ------
Low bid. . . . . . . . . . . . . . $3 1/2 $3 5/8 $3 1/2 $1 13/16
High bid . . . . . . . . . . . . . $5 1/8 $4 3/4 $5 1/2 $4 5/8
1996 Quarters Ended
--------------------------------------------
March 29 June 28 Sept 27 Dec 28
-------- ------- ------- ------
Low bid. . . . . . . . . . . . . . $1 7/8 $5 $3 3/8 $5 1/4
High bid . . . . . . . . . . . . . $5 3/8 $10 7/8 $8 5/8 $9 1/4
There were approximately 390 holders of record on January 27, 1997.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The
Company currently anticipates that it will retain all available funds for use in
its business, and does not anticipate paying any cash dividends in the
foreseeable future.
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial information has been derived from the
Company's Consolidated Financial Statements. The information set forth below is
not necessarily indicative of results of future operations, and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1996
Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues:
Product. . . . . . . . . . . . . . . . . . . . $ 26,477 $ 33,078 $ 48,431 $ 55,986 $ 68,950
Service. . . . . . . . . . . . . . . . . . . . 4,638 5,709 10,627 10,559 7,436
-------- -------- -------- -------- --------
Net revenues. . . . . . . . . . . . . . . . . 31,115 38,787 59,058 66,545 76,386
-------- -------- -------- -------- --------
Cost of revenues:
Product. . . . . . . . . . . . . . . . . . . . 8,073 14,269 20,812 22,224 22,969
Service. . . . . . . . . . . . . . . . . . . . 2,051 2,697 7,906 7,156 3,849
-------- -------- -------- -------- --------
Total cost of revenues. . . . . . . . . . . . 10,124 16,966 28,718 29,380 26,818
-------- -------- -------- -------- --------
Gross profit. . . . . . . . . . . . . . . . . . 20,991 21,821 30,340 37,165 49,568
-------- -------- -------- -------- --------
Operating expenses:
Research and development . . . . . . . . . . . 10,534 13,725 11,221 12,882 11,218
Sales and marketing. . . . . . . . . . . . . . 11,785 18,082 19,709 21,084 21,498
General and administrative . . . . . . . . . . 5,223 6,415 6,513 6,799 6,887
Restructuring expense (benefit). . . . . . . . (2,050) 15,919 1,725 1,250 --
-------- -------- -------- -------- --------
Total operating expenses. . . . . . . . . . . 25,492 54,141 39,168 42,015 39,603
-------- -------- -------- -------- --------
Income (loss) from operations . . . . . . . . . (4,501) (32,320) (8,828) (4,850) 9,965
Litigation settlement and related costs . . . . -- -- -- (4,025) --
Other income (expense), net . . . . . . . . . . 660 511 546 265 880
-------- -------- -------- -------- --------
Income (loss) before provision
for income taxes. . . . . . . . . . . . . . . (3,841) (31,809) (8,282) (8,610) 10,845
Provision (benefit) for income taxes . . . . . -- -- 3,650 (1,278) 3,789
-------- -------- -------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle. . . . . . . (3,841) (31,809) (11,932) (7,332) 7,056
Cumulative effect of change in
accounting principle . . . . . . . . . . . . . -- -- -- 204 --
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . $ (3,841) $(31,809) $(11,932) $(7,128) $ 7,056
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
COMMON AND COMMON EQUIVALENT SHARE DATA:
Income (loss) before cumulative effect
of change in accounting principle. . . . . . . $ (0.19) $ (1.78) $ (.68) $ (.43) $ .41
-------- -------- -------- -------- --------
Net income (loss):
Primary. . . . . . . . . . . . . . . . . . . . $ (0.19) $ (1.78) $ (.68) $ (.42) $ .41
-------- -------- -------- -------- --------
Fully diluted. . . . . . . . . . . . . . . . . $ (0.19) $ (1.78) $ (.68) $ (.42) $ .41
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . $ 14,972 $14,126 $ 37,361 $47,006 $ 52,239
Total assets. . . . . . . . . . . . . . . . . . 28,073 29,398 59,550 76,048 77,100
Long term obligations, less current portion . . 276 4,184 3,231 3,268 3,252
Shareholders' equity. . . . . . . . . . . . . . 17,602 14,360 44,928 55,282 59,576
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Retix was formed in 1985 and licensed its first OSI technology software in
that year. The Company entered the internetworking market in 1987 with
shipments of its first local bridge products. To broaden its internetworking
product base, the Company acquired a U.K.-based manufacturer of remote bridges
in late 1988 and began volume shipments of an enhanced series of remote bridges
in 1989. In 1990, the Company commenced shipments of its PC-based end-user OSI
workgroup products. In 1991, the Company further expanded its internetworking
product family with initial shipments of multi-protocol routers. During 1993,
the Company entered the market for wireless data products with the development
of its Mobile Data Intermediate System utilizing the Company's multi-protocol
routers and associated OSI based applications that enable data to be transmitted
over existing voice communication wireless networks. In 1994 and 1995, the
Company continued to expand its enterprise networking product lines with the
introduction of several low-priced router models for the branch office
networking market segment, including a family of low-priced Ethernet remote
office routers, and the offering of LAN switching and fiber networking
technology as a result of the Company's March 1994 acquisition of Raycom
Systems, Inc. ("Raycom"). In 1995, the Company directed the focus of its OSI
technology business to the emerging telecommunications network management
market. The Company has developed an integrated implementation of the network
element, element management and network and service management layers set forth
in the TMN specifications through the introduction of its Cougar-TM-, Jaguar-TM-
, and Panther-TM- product lines. Also in 1995, the Company gained entry into
the two-way paging marketplace with its pACT Data Intermediate System (PD-IS).
In the first quarter of 1996, the Company formally introduced its N-PCS
messaging product family, including the IMpACT PD-IS Messaging Switch, the
industry's first product delivered in support of the pACT specification.
During the last four years, the Company has experienced declining revenues
on a consolidated basis. The overall decrease in sales is primarily the result
of lower demand for the Company's internetworking products as enterprise network
users are demanding more sophisticated technology for network operations. While
internetworking products continue to comprise a large portion of the Company's
total sales mix, a combination of marketing and distribution resources and
aggressive pricing strategies of large competitors, and delays in releasing new
features and products has limited the Company's ability to capitalize on areas
of price/performance and to gain greater share of the market.
During late 1995 and the first half of 1996, the Company responded to the
challenges it faced by restructuring its internetworking operations and
assembling a new management team to lead the Company. The restructuring
initiated in October 1995 involved a significant effort to streamline
internetworking sales channels, territories and product lines, resulting in a
restructuring charge of $15.9 million in the fourth quarter of 1995. The
Company also spun off the operations of its OSI/TMN, internetworking and
wireless data product-lines into three subsidiaries. The Company believes that
this structure will allow each operation to execute its respective strategies in
a more focused and entrepreneurial fashion.
The Company's primary objective with this reorganization was to direct
fully dedicated management resources to attractive opportunities in emerging
markets. The Company's Vertel subsidiary leveraged the assets of its OSI
software technologies to introduce a suite of cost-effective, value-added TMN-
based software-solutions for the telecommunications network management market.
Additionally, the Company's internetworking business unit significantly
increased operating efficiencies, while extending its market presence with the
announcement in December 1996 of a family of broadband access products for the
service provider market. Lastly, the Company's wireless data business unit
continues to be a pioneer in wireless data solutions to provide users mobility
in data transfers on wireless networks. The Company believes that the progress
made in 1996 in redirecting its resources and focusing on meaningful
opportunities while substantially improving its efficiencies provides a stronger
base for the future.
As part of the Company's corporate strategy, all three Retix
subsidiaries are continuing to focus their efforts on maximizing their
opportunities over the long term, while managing expenses in the short term.
The Company believes that further market development and broader industry
acceptance of its products and technologies will improve predictability in
the Company's business performance and operating results. The Company
expects that Retix will continue in the investment mode during 1997.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net revenues:
Year Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of revenues . . . . . . . . . . . . 32.5 43.7 48.6
---- ---- ----
Gross margin . . . . . . . . . . . . . . 67.5 56.3 51.4
Operating expenses:
Research and development. . . . . . . . 33.8 35.4 19.0
Sales and marketing . . . . . . . . . . 37.9 46.6 33.4
General and administrative. . . . . . . 16.8 16.6 11.0
Restructuring expense (benefit) . . . . (6.6) 41.0 2.9
---- ---- ----
Total operating expenses . . . . . . . 81.9 139.6 66.3
---- ---- ----
Loss from operations . . . . . . . . . . (14.4)% (83.3)% (14.9)%
---- ---- ----
---- ---- ----
NET REVENUES. Net revenues decreased 19.8% to $31,115,000 in 1996 as
compared to $38,787,000 in 1995 following a 34.3% decrease from 1994. The
decreases experienced in net revenues over the past two years were primarily due
to declines in demand for the Company's internetworking products. Sales of
internetworking products totaled $14,957,000 in 1996, representing a decrease of
35.6% from $23,242,000 in 1995 following a decrease of 34.4% from $35,442,000 in
1994. Greater marketing and distribution resources of larger competitors in
addition to increased pricing pressures have affected the Company's ability to
gain or retain market share in the general distribution internetworking market.
In addition, during 1996, the planned closure of unprofitable sales channels and
narrowing of product lines have resulted in decreases in internetworking
revenues. The Company's internetworking sales have also been adversely affected
by delays in releasing new products and features. The Company is currently
completing the final phases of certain large end-user installation programs in
the United States based upon its enterprise networking products.
Increased internetworking revenues in the future will be primarily
dependent on expansion of distribution channels for existing products as well as
the success of the Company with regard to enhancing its presence in the
broadband services market through the development of a new generation of
broadband access products. These products are high speed multimedia access
solutions that address the transparent multimedia services (TMS) and Internet
access markets. The Company has targeted new product introductions to its
broadband access product-line in the first half of 1997, with subsequent
upgrades and volume production projected for the second half of 1997 and beyond.
Sales generated by the Company's Vertel subsidiary consist of network
management software license and service revenues primarily from source license
fees, royalties and services, including professional services, technical support
and maintenance. Source license fees consist primarily of licenses of the
Company's TMN-based software solutions and development platforms and typically
have accounted for a substantial portion of total revenue in each quarter.
Source license revenue is recognized upon transfer of the source code to the
customer, provided there are no significant remaining obligations and
collectibility is deemed probable by management in accordance with Statement of
Position 91-1. Although Vertel experienced a shortfall in revenues during the
fourth quarter of 1996 as compared to the prior year, annual revenues increased
6.7% to $13,269,000 during 1996 from $12,439,000 in 1995 following a 36.6%
decline from $19,610,000 in 1994. The increase in revenues in 1996 following
the significant decline in 1995 as compared to prior years reflects Vertel's
migration strategy in deploying TMN-based software and service solutions to
carriers and network equipment manufacturers for the management of public
telecommunications networks.
18
<PAGE>
Wireless data revenues totaled $2,889,000 in 1996, representing a decrease
of 7.0% from $3,106,000 in 1995 following a decrease of 22.5% from $4,006,000 in
1994. The decline in wireless data revenues from 1995 to 1996 represents a
transition from engineering project-based revenues to sales of software products
in addition to a one-time sale of a source license from the company's CDPD
product line in 1995. This license sale marked the culmination of a
nonrecurring engineering project contract. In prior years, the Company focused
on contracts which generated source code and nonrecurring engineering service
revenues. Revenues in 1996 primarily consisted of sales of commercial wireless
data software products to carriers and resellers.
The Company intends to introduce several new products to expand its
position in the internetworking, TMN and wireless data markets; however, net
revenues and operating results of future periods may be adversely affected if
the Company experiences additional delays in releasing new products, if such new
products are not accepted by the marketplace, or if the Company experiences
unanticipated decreases in other product revenues.
Sales to customers outside of the United States comprised approximately
51.1%, 54.1% and 53.6%, respectively, of net revenues in 1996, 1995 and 1994.
The Company's high percentage of sales to customers outside of the United States
has historically been due primarily to strong European distribution channels for
its internetworking products and strong international demand for its OSI and TMN
standards-based network management software. The decrease in international
sales in 1996 reflects, in part, the narrowing of internetworking product lines
and tiered distribution channels, thus eliminating unprofitable selling
activities, in connection with the Company's 1995 plan of restructuring (see
Restructuring Expenses). Historically, the Company's international sales are
denominated primarily in U.S. dollars. As such, the effects of fluctuations in
foreign exchange rates, in comparison with the U.S. dollar, have not had a
significant impact on the results of the Company's operations.
GROSS MARGIN. Cost of revenues consists primarily of manufacturing costs
(material, labor, packaging, documentation and overhead) and, to a lesser
extent, technical services and royalties paid under software licensing
agreements and warranty costs. Gross margin increased to 67.5% of net revenues
in 1996, from 56.3% in 1995 and from 51.4% in 1994 due to a shift in product mix
and operating efficiencies. The increases in gross margin for 1996 and 1995
were more specifically due to a shift in product mix towards software-based
products which have significantly higher gross margins than engineering services
or internetworking products. In addition, gross margins on hardware shipments
improved in 1996 as compared to 1995 and 1994 as substantial operating
efficiencies, including elimination of excess production capacity related to
internetworking products, were achieved as a result of the restructuring efforts
announced in late 1995 (see Restructuring Expenses). The Company anticipates
continued pricing pressures in the internetworking product areas and, although
the Company is responding with a shift to outsourced manufacturing production
and reductions in product costing as well as changes to pricing structures and
distribution strategies, margins may fluctuate and could decline in future
periods.
RESEARCH AND DEVELOPMENT. The Company has invested heavily in research and
development to develop new enterprise and broadband access internetworking
products, to expand its expertise in TMN-based software solutions and wireless
data pACT and CDPD technologies and to continue sustaining support of its
product offerings. The major components of research and development expenses
are engineering salaries, employee benefits and associated overhead, fees to
outside contractors, the cost of facilities and depreciation of capital
equipment, primarily computer and test equipment. Costs related to research and
development can be offset by customer reimbursement of non-recurring engineering
efforts and capitalized software costs. Certain software development costs are
capitalized pursuant to Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("FAS 86") upon the establishment of technological feasibility of the
product.
In 1996, the Company's research and development expenses decreased 23.2% to
$10,534,000 from $13,725,000 in 1995. Research and development expenses
increased 22.3% in 1995, from $11,221,000 in 1994. As a percentage of revenue,
research and development expenses were 33.8% in 1996, 35.4% in 1995, and 19.0%
in 1994. The decrease in reported research and development expense in 1996 as
compared to 1995 both in absolute spending and as a percentage of revenues
represents an increase in expenditures for further expansion of TMN-based
software development tools, stacks and platforms as well as new projects
including the open internetworking architecture which serves as the foundation
for the Company's broadband access products announced in December 1996, offset
by operating efficiencies realized from the restructuring activities within the
internetworking product lines whereby significant reductions in facilities and
infrastructure costs were made during 1996 (see Restructuring Expenses). The
increase in research and development expense in 1995 as compared to 1994
reflects reductions in net expenses as a result of significant nonrecurring
engineering projects during 1994; such efforts resulted in the reimbursement of
engineering costs from customers.
19
<PAGE>
The Company expects to continue to make significant investments in the
development of new products and feature enhancement to existing product lines,
although such expenses may fluctuate from quarter to quarter both in absolute
dollars and as a percentage of revenue depending on the status of various
development projects and the level of custom engineering services that are
reallocated to costs of revenue.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel and associated costs related to selling, support and marketing
activities, including marketing programs such as trade shows and other
promotional costs. The Company believes that substantial sales and marketing
expenditures are essential to developing the opportunities for revenue growth
and to renewing the Company's competitive position. Sales and marketing
expenses are expected to continue to comprise a significant percentage of the
Company's total expenses because of costs associated with supporting the
worldwide sales and service functions necessary to meet the needs of the
Company's customer base and respond to the opportunities apparent in the rapidly
growing enterprise networking marketplace.
Sales and marketing expenses decreased 34.8% to $11,785,000 in 1996 from
$18,082,000 in 1995 and decreased 8.3% in 1995 from $19,709,000 in 1994. Sales
and marketing expenses decreased as a percentage of revenues to 37.9% in 1996
from 46.6% in 1995 primarily due to reduced spending as a result of the
restructuring effort within the internetworking sales functions during 1996.
The increase in sales and marketing expense as a percentage of net revenues from
33.4% in 1994 to 46.6% in 1995 is the result primarily of the decrease in net
revenues. The decrease in the absolute amount of sales and marketing expenses
in 1996 as compared to 1995 and 1994 reflects efforts to increase productivity
within the Company's internetworking sales activities through both direct and
indirect channels, to size expenditures to revenue producing opportunities and
to consolidate management of its worldwide sales organization. The decrease in
absolute sales and marketing expenses were offset during 1996 by increases in
Vertel's direct sales force including opening of offices in Korea and Japan and
additional marketing programs to support the launch of new TMN-based product and
entry into new markets.
The Company's subsidiary, Vertel, has developed a strategy to capitalize
on the emerging TMN market through the establishment and growth of offices and
sales personnel around the world. In conjunction with this strategy, Vertel
intends to further expand its sales and marketing functions to support
anticipated broader market adoption of TMN. The Company anticipates that sales
and marketing expenses will increase in absolute dollars, although such expenses
may fluctuate from quarter to quarter both in absolute dollars and as a
percentage of revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related expenses of administrative, executive
and financial personnel. General and administrative expenses decreased 18.6% to
$5,223,000 in 1996 as compared to $6,415,000 in 1995, and decreased 1.5% in 1995
from $6,513,000 in 1994. The decrease in general and administrative costs in
1996 as compared to 1995 is primarily attributable to significant reductions in
headcount and infrastructure costs as a result of the restructuring activities
during the first quarter of 1996 within the Company's internetworking
operations. Offsetting such reductions were increases in infrastructure costs
related to the Company's subsidiary, Vertel, as the entity developed more
autonomous operations during 1996. These infrastructure costs included
facilities relocation costs, professional fees and the recruitment of staff and
the expansion of an executive team. The decrease in general and administrative
costs in 1995 as compared to 1994 is primarily attributable to the net effect of
headcount reductions through efficiencies gained in restructuring efforts
executed in the latter half of 1994.
RESTRUCTURING EXPENSE. The Company operates in an industry that is
characterized by rapid development of new technology, which profoundly affects
product and marketing strategies of companies operating within the industry. In
October 1995, the Company announced a major restructuring of its internetworking
operating unit. The restructuring related to streamlining specific sales
channels, territories and product lines. The Company's strategic reorganization
plan utilized the technology backbone of previous products, including routing,
bridging and switching technologies, to develop the next generation of broadband
access internetworking products. The Company sells these products through
leveraged distribution channels in certain key territories. The estimated costs
of restructuring recorded in the financial statements for the year ended
December 31, 1995 were $15,919,000 and included costs of elimination of excess
manufacturing capacity, inventory reductions related to product line and
distribution streamlining, facility and asset consolidation, employee severance
pay and other related charges. During the fourth quarter of 1996, the Company
recorded a reversal of certain restructuring reserves and accruals totaling
$2,050,000. This reversal was primarily the result of favorable exits from
certain
20
<PAGE>
leases which minimized the losses originally projected for such facilities and,
to a lesser extent, the reversal of accruals for other restructuring activities
which were in excess of the actual costs incurred. The restructuring plan
entailed work force reductions of 108 employees within manufacturing,
engineering, sales and marketing and administration, as well as the disposition
of various sales, service and engineering facilities. For the year ended
December 31, 1996, $2,470,000 of the restructuring costs had been paid,
$1,053,000 of the costs were utilized to write off inventory, fixed assets and
receivables, and reserves remaining totaled $1,223,000 as of December 31, 1996.
The remaining reserves primarily relate to the costs for facilities and
infrastructure consolidation anticipated to continue through 1997 in addition to
customer warranty and return costs for products which are no longer available.
In late June 1994, the Company developed a reorganization plan to focus its
resources primarily on enhancing its position within the router market and
toward developing switch based networking products for emerging enterprise
networking markets. The reorganization plan entailed work force reductions of
approximately 40 employees within manufacturing, engineering, sales, marketing
and administration departments as well as the elimination of certain leased
facilities. The $1,725,000 restructuring expense in 1994 was comprised of
approximately $725,000 of severance related costs and $1,000,000 of lease costs
of vacated space for the estimated period of time until such space was sublet.
All amounts were utilized by December 31, 1995.
LOSS FROM OPERATIONS. The Company incurred a loss from operations of
$4,501,000 in 1996, $32,320,000 in 1995, and $8,828,000 in 1994. The losses
from operations are primarily attributable to declines in net revenues for
internetworking products, which were offset in 1996 by increases in TMN-based
revenues and decreases in operating expenses within the internetworking business
unit as a result of the restructuring activities in late 1995.
OTHER INCOME. Other income, net, increased to $660,000 in 1996 from
$511,000 in 1995 and $546,000 in 1994. The fluctuations in other income are
primarily attributable to increases in interest income from increasing cash
balances during 1996 and varying interest rates earned on investments, and to
fluctuations in exchange rates used in translating foreign interest income.
PROVISION FOR INCOME TAXES. The Company recorded no provision for income
taxes on a pre-tax loss of $3,841,000 in 1996 and $31,809,000 in 1995. A
valuation allowance against the total amount of net deferred tax assets has been
established. In 1994, the Company recorded a net provision for income taxes of
$3,650,000 on a pre-tax loss of $8,282,000, primarily reflecting the fourth
quarter 1994 increase in the valuation allowance.
As a result of the increase in the valuation allowance, the Company has net
deferred tax assets of $27,382,000 for which no benefit has been provided at
December 31, 1996. The net deferred tax assets will be realized to the extent
that the Company operates profitably in the future during the respective
carryforward periods.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company's principal sources of liquidity consisted
of $16,696,000 in cash, cash equivalents and short-term investments. The
Company's cash management system includes a sweep account which enables the
Company to consolidate its operating cash into a central account daily and
advance cash to the Company's subsidiaries to fund operating cash requirements.
The Company has experienced operating losses and restructuring expenses
totaling $4,501,000, $32,320,000 and $8,282,000 in 1996, 1995 and 1994,
respectively. Operating activities required the use of cash of $2,761,000,
$8,890,000 and $2,313,000, respectively, during 1996, 1995 and 1994. In
addition, the use of cash from operations was due to cash payments for
restructuring expenses which totaled $2,470,000 and $1,849,000 for 1996 and
1995, respectively. The use of cash from operations during 1995 and 1994 was
partially offset by a net decrease in trade accounts receivable of $7,842,000
and $6,885,000, respectively. The decrease in trade receivables is attributable
to decreased sales levels from the prior year and the positive impact of efforts
to reduce the average number of days sales included in accounts receivable
during the year.
The change in shareholders' equity in 1996, 1995 and 1994 arising from the
net loss from operations was partially offset by the issuance of stock under
private placement in 1996, issuances of stock under option plans, and from stock
sales under the employee stock purchase plan.
At December 31, 1996 the Company's long-term liquidity needs consisted
principally of operating lease commitments (see Note 8 to Consolidated Financial
Statements) related to facilities, and office equipment.
The Company's capital expenditures approximated $1,757,000 for 1996,
$1,680,000 for 1995 and $3,398,000 for 1994. The Company currently anticipates
that capital expenditures for the next twelve months will be utilized for the
acquisition of computer, test and office equipment as well as tenant
improvements in connection with the expansion of facilities for the Company's
subsidiary, Vertel. The Company believes that existing sources of liquidity,
capital resources and funds from operations will satisfy the Company's
anticipated cash needs for at least the next twelve months. From time to time,
the Company may also consider the acquisition of, or evaluate investments in,
certain products and businesses complimentary to the Company's business. Any
such acquisition or investment may require additional capital resources.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RETIX
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
------------------
1996 1995
------- -------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $8,948 $5,518
Short-term investments . . . . . . . . . . . . . . . 7,748 9,432
Trade accounts receivable (net of allowances of
$1,543 and $1,878 for 1996 and 1995, respectively) 5,161 5,445
Inventories . . . . . . . . . . . . . . . . . . . . 1,744 2,855
Prepaid expenses and other current assets . . . . . 1,566 1,730
------- -------
Total current assets . . . . . . . . . . . . . . 25,167 24,980
Property and equipment, net . . . . . . . . . . . . . 1,252 3,073
Other assets . . . . . . . . . . . . . . . . . . . . 1,654 1,345
------- -------
$28,073 $29,398
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 2,138 $ 1,336
Accrued wages and related liabilities . . . . . . . 1,282 1,060
Accrued restructuring expenses. . . . . . . . . . . 1,223 4,334
Other accrued liabilities . . . . . . . . . . . . . 4,310 3,012
Deferred revenue. . . . . . . . . . . . . . . . . . 1,242 1,058
Current portion of long-term obligations. . . . . . -- 54
------- -------
Total current liabilities . . . . . . . . . . . . 10,195 10,854
Long-term obligations, less current portion . . . . . 276 4,184
------- -------
Total liabilities . . . . . . . . . . . . . . . . 10,471 15,038
------- -------
Shareholders' equity:
Preferred stock, par value $.01, 2,000,000 shares
authorized; none issued and outstanding
Common stock, par value $.01, 50,000,000 shares
authorized shares issued and outstanding 1996,
22,597,427; 1995, 18,052,582 . . . . . . . . . . 226 181
Additional paid-in capital . . . . . . . . . . . . 78,089 65,821
Accumulated deficit . . . . . . . . . . . . . . . . (53,850) (50,009)
Cumulative translation adjustment . . . . . . . . . (1,961) (1,633)
------- -------
22,504 14,360
Less notes receivable from issuance of
common stock . . . . . . . . . . . . . . . . . . (4,902) --
------- -------
Total shareholders' equity . . . . . . . . . . . . . 17,602 14,360
------- -------
$28,073 $29,398
------- -------
------- -------
See accompanying notes to consolidated financial statements.
23
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Product. . . . . . . . . . . . . . . . . . . . 26,477 33,078 48,431
Service. . . . . . . . . . . . . . . . . . . . 4,638 5,709 10,627
--------- --------- ---------
Net revenues . . . . . . . . . . . . . . . . 31,115 38,787 59,058
--------- --------- ---------
Cost of revenues:
Product. . . . . . . . . . . . . . . . . . . . 8,073 14,269 20,812
Service. . . . . . . . . . . . . . . . . . . . 2,051 2,697 7,906
--------- --------- ---------
Total cost of revenues . . . . . . . . . . . 10,124 16,966 28,718
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . 20,991 21,821 30,340
--------- --------- ---------
Operating expenses:
Research and development . . . . . . . . . . . 10,534 13,725 11,221
Sales and marketing. . . . . . . . . . . . . . 11,785 18,082 19,709
General and administrative . . . . . . . . . . 5,223 6,415 6,513
Restructuring expense (benefit). . . . . . . . (2,050) 15,919 1,725
--------- --------- ---------
Total. . . . . . . . . . . . . . . . . . . . 25,492 54,141 39,168
--------- --------- ---------
Loss from operations . . . . . . . . . . . . . . (4,501) (32,320) (8,828)
Other income, net. . . . . . . . . . . . . . . . 660 511 546
--------- --------- ---------
Loss before provision for income taxes . . . . . (3,841) (31,809) (8,282)
Provision for income taxes . . . . . . . . . . . -- -- 3,650
--------- --------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . $ (3,841) $(31,809) $(11,932)
--------- --------- ---------
--------- --------- ---------
Per common and common equivalent share data:
Net loss per common and common equivalent share. $ (0.19) $ (1.78) $ (0.68)
--------- --------- ---------
--------- --------- ---------
Common and common equivalent shares used
in computing per share amounts . . . . . . . . 20,322 17,886 17,591
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ------ ------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 . . . . . 17,173,990 $172 $63,523 $(6,268)
Issuance of common stock upon
exercise of options . . . . . . . 311,275 3 850
Issuance of common stock under
employee stock purchase plan. . . 83,803 1 333
Cumulative translation adjustment .
Net loss. . . . . . . . . . . . . . (11,932)
---------- ----- ------- --------
Balance at December 31, 1994 . . . . 17,569,068 176 64,706 (18,200)
Issuance of common stock upon
exercise of options . . . . . . . 381,230 4 875
Issuance of common stock under
employee stock purchase plan. . . 102,284 1 240
Cumulative translation adjustment .
Net loss. . . . . . . . . . . . . . (31,809)
---------- ----- ------- --------
Balance at December 31, 1995 . . . . 18,052,582 181 65,821 (50,009)
Issuance of common stock upon . . .
private placement . . . . . . . . 2,000,000 20 4,070
Issuance of common stock upon . . .
exercise of options . . . . . . . 2,458,999 25 7,938
Issuance of common stock under. . .
employee stock purchase plan. . . 85,846 260
Cumulative translation adjustment..
Net loss. . . . . . . . . . . . . . (3,841)
---------- ----- ------- --------
Balance at December 31, 1996 . . . . 22,597,427 $ 226 $78,089 $(53,850)
---------- ----- ------- --------
---------- ----- ------- --------
</TABLE>
CUMULATIVE
TRANSLATION NOTES
ADJUSTMENT RECEIVABLE TOTAL
---------- ---------- -----
Balance at January 1, 1994 . . . . . $(2,145) $ -- $55,282
Issuance of common stock upon
exercise of options . . . . . . . 853
Issuance of common stock under
employee stock purchase plan. . . 334
Cumulative translation adjustment . 391 391
Net loss. . . . . . . . . . . . . . (11,932)
-------- -------- --------
Balance at December 31, 1994. . . . (1,754) 44,928
Issuance of common stock upon
exercise of options . . . . . . . 879
Issuance of common stock under
employee stock purchase plan. . . 241
Cumulative translation adjustment . 121 121
Net loss. . . . . . . . . . . . . . (31,809)
-------- -------- --------
Balance at December 31, 1995 . . . . (1,633) 14,360
Issuance of common stock upon
private placement . . . . . . . . 4,090
Issuance of common stock upon
exercise of options . . . . . . . (4,902) 3,061
Issuance of common stock under
employee stock purchase plan. . . 260
Cumulative translation adjustment. (328) (328)
Net loss. . . . . . . . . . . . . . (3,841)
-------- -------- --------
Balance at December 31, 1996 . . . . $ (1,961) $ (4,902) $ 17,602
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
25
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
---------------------------
1996 1995 1994
------ ------ ------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . $(3,841) $(31,809) $(11,932)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization. . . . . . . 2,281 4,170 4,166
Reserve for returns and bad debts . . . . (335) (140) (1,156)
Restructuring expense (benefit). . . . . . (2,050) 15,919 --
Valuation provision for deferred tax
assets. . . . . . . . . . . . . . . . . . 4,065 9,735 7,690
Litigation settlement . . . . . . . . . . -- -- (3,600)
Deferred income taxes. . . . . . . . . . . (4,065) (9,735) (3,465)
Deferred rent . . . . . . . . . . . . . . (99) (132) (102)
Changes in operating assets and
liabilities (Note 13) . . . . . . . . . . 1,283 3,102 6,086
-------- -------- --------
Net cash used for operating activities . . (2,761) (8,890) (2,313)
-------- -------- --------
Cash flows from investing activities:
Net sales of short-term investments. . . . . 1,685 2,827 4,170
Additions to property and equipment. . . . . (1,757) (1,680) (3,398)
Increase in other assets . . . . . . . . . . (853) (531) (23)
-------- -------- --------
Net cash provided by (used for )
investing activities . . . . . . . . . . (925) 616 749
-------- -------- --------
Cash flows from financing activities:
Repayment of long-term obligations . . . . . (98) (144) (91)
Net repayments under line of credit,
short-term borrowings and notes payable . . -- -- (396)
Proceeds from issuance of common stock . . . 7,409 1,120 1,187
-------- -------- --------
Net cash provided by financing
activities. . . . . . . . . . . . . . . . 7,311 976 700
-------- -------- --------
Effect of exchange rate changes on cash. . . . (195) 121 468
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . 3,430 (7,177) (396)
Cash and cash equivalents, beginning
of year . . . . . . . . . . . . . . . . . . . 5,518 12,695 13,091
-------- -------- --------
Cash and cash equivalents, end of year . . . . $ 8,948 $ 5,518 $ 12,695
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
26
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements include the accounts of Retix and its
subsidiaries (the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company was founded in 1985 and designs, develops, manufactures, markets and
supports networking system products that allow otherwise incompatible computing
equipment and software applications to connect and interoperate among local area
networks and wide area networks as well as software solutions for network
management and wireless data services. Trading of the Company's common stock on
the Nasdaq National Market commenced following the Company's initial public
offering in December 1991.
Revenues are generated primarily from sale of hardware products and accessories,
software license agreements and maintenance contracts. Sales to one customer,
either directly or through a reseller, comprised approximately 15.3% and 9.9% of
net revenues in 1996 and 1995, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of short-term investments purchased with original
maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of highly liquid municipal bonds and
commercial paper purchased with original maturities greater than three months.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The recorded values of the Company's financial instruments approximate their
fair values.
REVENUE RECOGNITION
The Company derives revenue primarily from shipment of hardware products and
accessories, software license fees, maintenance and customer support and, to a
lesser extent, professional services and custom engineering consulting
contracts. The Company recognizes hardware revenue at the time of shipment.
Revenues from software licenses, for which there is a signed contract,
collection is probable and customer acceptance is not dependent on fulfillment
of other significant vendor obligations, is generally recognized upon transfer
of the product to the customer. Costs associated with insignificant vendor
obligations are accrued. Software license royalty revenue is recognized upon
notification by the licensee that products incorporating the Company's software
have been shipped by the licensee or, for products for which the Company has
sufficient historical information, upon estimated amounts which the Company
expects the customer to report. Revenues from maintenance and support contracts
are recognized on a straight-line basis over the term of the contract. Revenues
from professional services and custom engineering contracts, which are
separately contracted for and priced from software license contracts, are
generally recognized using the percentage of completion method of accounting or
a time and materials basis.
Deferred revenues include unearned amounts received under maintenance and
support contracts and amounts billed to customers but not recognized as revenue.
The Company, subject to certain limitations, permits its customers to exchange
products or to return products in exchange for credits against future purchases.
An allowance for sales returns and price protection is accrued concurrently with
the recognition of revenue.
27
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash, cash equivalents, short term
investments and accounts receivable. The Company places its cash, cash
equivalents and short term investments with high credit-quality institutions and
limits the amount of credit exposure to any one institution. The Company's
accounts receivable arise from sales directly to customers and indirectly
through resellers, systems integrators and OEMs. The Company performs ongoing
credit evaluations of its customers before granting uncollateralized credit and
to date has not experienced any material credit related losses.
The Company has recorded an allowance for doubtful accounts to cover the
difference between recorded revenues and collections from distributors,
resellers and customers. The allowance and provision for bad debts are adjusted
periodically based upon the Company's evaluation of historical collection
experiences, industry reimbursement trends and other relevant factors.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the weighted average cost method.
PROPERTY AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of 18 to 24 months for
machinery and computer equipment, 3 to 4 years for furniture and fixtures and
the term of the lease for leasehold improvements.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported therein. Due to the inherent uncertainty involved in
making estimates, actual results reported in future periods may be based upon
amounts which differ from these estimates.
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of software products
are expensed as incurred until the technological feasibility of the products has
been established. After technological feasibility is established, certain
additional costs of coding and testing are capitalized. Unamortized software
development costs of $885,000, $649,000, and $647,000 were included in other
assets at December 31, 1996, 1995, and 1994, respectively. Amortization of
capitalized software development costs for the years ended December 31, 1996,
1995 and 1994 totaled $484,000, $458,000 and $346,000, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized based on differences between
financial statement and tax bases of assets and liabilities using presently
enacted rates.
INTERNATIONAL CURRENCY TRANSLATION
Assets and liabilities of international subsidiaries are translated into United
States dollars at the exchange rate in effect at the close of the period, and
income and expenses of these subsidiaries are translated at the weighted average
exchange rate during the period. The aggregate effect of translating the
financial statements of international subsidiaries is included as a separate
component of shareholders' equity.
28
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR
The Company's fiscal year is the 52 or 53-week period ending on the Saturday
nearest to December 31. For simplicity of presentation, the Company has
described the 52 weeks ended December 28, 1996 as December 31, 1996, the 52
weeks ended December 30, 1995 as December 31, 1995, and the 52 weeks ended
December 31, 1994 as December 31, 1994.
EARNINGS PER SHARE
Per share information is computed using the weighted average number of shares of
common stock outstanding and dilutive common equivalent shares from stock
options using the treasury stock method. Common stock equivalents were excluded
from the 1996, 1995, and 1994 per share computations as their effect was
antidilutive.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which was effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. Companies are permitted,
however, to continue to apply APB Opinion No. 25, which recognizes compensation
cost based on the intrinsic value of the equity instrument awarded. The Company
has elected to continue to apply APB Opinion No. 25 in accounting for its
stock-based compensation arrangements. Had the Company elected to measure
compensation cost based on the fair value of stock options awarded in 1996 and
1995, the net loss and net loss per share would have been $5,190,000 and $0.26,
respectively, for the year ended December 31, 1996 and $32,021,000 and $1.79,
respectively, for the year ended December 31, 1995. Stock options issued during
1996 and 1995 were assumed to be valued using the Black-Scholes model using a
risk-free interest rate of 6.0%, expected life of 36 months, expected volatility
of 107% and expected dividends of zero. However, because options vest over
several years and grants prior to 1995 are excluded from these calculations,
these amounts may not be representative of the impact on future years earnings,
assuming grants are made in those years.
3. SHAREHOLDERS' EQUITY
Effective January 30, 1996, Sierra Ventures V, L.P. ("Sierra"), a venture
capital firm, purchased 2,000,000 shares of the Company's Common Stock in a
private placement at $2.00 per share. Additionally, Sierra was granted a
warrant to purchase an additional 2,000,000 shares of the Company's Common Stock
at prices ranging from $2.00 to $5.00 per share over the three year term of the
warrant. Sierra's equity investment totaled $4.2 million and was recorded in
common stock and additional paid-in capital.
Notes receivable from issuance of Common Stock arose from the exercise of stock
options. During the first quarter of 1996, the Board of Directors approved the
exercise of stock options held and outstanding by certain key employees and
consultants in exchange for promissory notes. The 1,793,250 shares of Common
Stock issued upon such exercise of options is subject to repurchase by the
Company based upon continuation of the terms of employment or consultancy
agreements, with vesting and release from the Company's repurchase right on a
cumulative basis from original date of option grant at a rate of 25% one year
after the vesting commencement date and 1/48th of the shares subject to the
original option in equal monthly installments thereafter. For purposes of
computing earnings per share, the Common Stock issued subject to notes
receivable are treated as options and are excluded from the calculation of
earnings per share because they are considered antidilutive.
29
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
------------------
1996 1995
------ ------
Raw materials and component parts. . . . . $ 136 $1,718
Work-in-process. . . . . . . . . . . . . . 1,196 491
Finished goods . . . . . . . . . . . . . . 412 646
------ ------
$1,744 $2,855
------ ------
------ ------
Work-in-process and finished goods inventories consist of material, direct labor
and overhead associated with the manufacturing process.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31,
--------------------
1996 1995
-------- -------
Buildings. . . . . . . . . . . . . . . . . $ -- $ 2,229
Machinery and equipment. . . . . . . . . . 4,817 4,071
Furniture and fixtures . . . . . . . . . . 510 992
Leasehold improvements . . . . . . . . . . 202 283
-------- -------
5,529 7,575
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . 4,277 4,502
-------- -------
Property and equipment, net. . . . . . . . $ 1,252 $ 3,073
-------- -------
-------- -------
Buildings consisted of capitalized leases for office space in the United Kingdom
which were canceled during 1996. See Note 14 -"Restructuring Expenses."
6. LONG TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
December 31,
-------------------
1996 1995
------- -------
Notes payable. . . . . . . . . . . . . . . $ -- $ 54
Deferred rent. . . . . . . . . . . . . . . 276 375
Accrued restructuring expenses . . . . . . -- 1,200
Capitalized lease obligations. . . . . . . -- 2,609
------- -------
Total. . . . . . . . . . . . . . . . . . 276 4,238
Less current portion . . . . . . . . . . . -- 54
------- -------
Total . . . . . . . . . . . . . . . . . $ 276 $ 4,184
------- -------
------- -------
The Company recognizes rent expense on operating leases with scheduled rent
increases on a straight-line basis over the term of the lease. Deferred rent
consists of timing differences between the recognition of rent expense and cash
payments for rent. Interest expense related to a prior capital lease for the
years ended December 31, 1995 and 1994 was $474,000 and $408,000, respectively.
30
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
The components of loss before income taxes consist of the following (in
thousands):
December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Domestic . . . . . . . . . . . . . . . . . . $(5,747) $(26,707) $ (5,906)
Foreign. . . . . . . . . . . . . . . . . . . 1,906 ( 5,102) (2,376)
------- -------- --------
Total . . . . . . . . . . . . . . . . . $(3,841) $(31,809) $ (8,282)
------- -------- --------
------- -------- --------
The provision (benefit) for income taxes consists of the following (in
thousands):
December 31,
------------------------------
1996 1995 1994
---- ---- ----
Current:
Federal. . . . . . . . . . . . . . . . . . $ -- $ -- $ (207)
State. . . . . . . . . . . . . . . . . . . -- -- --
Foreign. . . . . . . . . . . . . . . . . . -- -- (368)
-------- -------- -------
Total current . . . . . . . . . . . . . -- -- (575)
Deferred . . . . . . . . . . . . . . . . . . (4,065) (9,735) (3,465)
Valuation allowance. . . . . . . . . . . . . 4,065 9,735 7,690
-------- -------- -------
Total . . . . . . . . . . . . . . . . . $ -- $ -- $ 3,650
-------- -------- -------
-------- -------- -------
The Company's effective income tax rate differs from the federal statutory
income tax rate applied to income before provision for income taxes due to the
following:
December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Federal statutory income tax rate. . . . . . (34.0)% (34.0)% (34.0)%
Increases (reductions) in taxes resulting from:
Effects of foreign operations . . . . . . (17.2) 2.6 5.3
State taxes, net of federal benefit . . . 0.1 (5.3) (3.1)
Research and development tax credit . . . (3.5) 1.3 (17.5)
Tax exempt interest income. . . . . . . . -- (0.1) (1.1)
Other . . . . . . . . . . . . . . . . . . (2.1) 4.9 1.6
Valuation allowance . . . . . . . . . . . 56.7 30.6 92.9
----- ----- -----
Effective tax rate . . . . . . . . . . . . . -- % -- % 44.1%
----- ----- -----
----- ----- -----
31
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Current and noncurrent deferred tax assets (liabilities) consist of the
following (in thousands):
December 31,
----------------------
Deferred tax assets: 1996 1995
---- ----
Expenses accrued . . . . . . . . . . . . . $ 3,799 $ 6,292
Credit for research and development expenses 4,853 4,361
Credit for foreign taxes withheld. . . . . 809 658
Depreciation . . . . . . . . . . . . . . . 312 --
Net operating loss carryforwards . . . . . 17,873 12,781
-------- --------
27,646 24,092
-------- --------
Deferred tax liabilities:
Capitalized software . . . . . . . . . . (264) (269)
Depreciation. . . . . . . . . . . . . . . -- (506)
-------- --------
(264) (775)
-------- --------
Valuation allowance. . . . . . . . . . . . . (27,382) (23,317)
-------- --------
Net deferred tax assets . . . . . . . . $ -- $ --
-------- --------
-------- --------
The Company's credits for research and development expenses, which may be
carried forward fifteen years, expire in 2005 through 2011; credits for foreign
taxes withheld, which may be carried forward five years, expire in 1997 through
2001. Exclusive of Raycom, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $41,576,000, which expire in 2007
through 2011. The Company also has net operating loss carryforwards for state
purposes of approximately $17,834,000 which expire in 1997 through 2001. Raycom
has separately accumulated net operating loss carryforwards for federal tax
purposes of approximately $14,555,000 which expire in 1997 through 2009. Such
losses may only be used to offset Raycom's future taxable income and utilization
is limited to approximately $390,000 per year.
Tax benefits arising from the disposition of certain shares issued upon exercise
of stock options within two years of the date of grant or within one year of the
date of exercise by the option holder provide the Company a tax deduction equal
to the difference between the exercise price and the fair market value of the
stock on the date of exercise. The tax effect of the deduction is excluded from
the provision (benefit) for income taxes and credited directly to additional
paid in capital. For the years ended December 31, 1996, 1995 and 1994, tax
benefits creditable directly to shareholders' equity totaled $1,954,000,
$151,000 and $146,000, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancellable
operating leases. At December 31, 1996, future minimum rental payments, net of
applicable sublease income, under leases that have initial or remaining
noncancellable lease terms in excess of one year are as follows (in thousands):
1997. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,779
1998. . . . . . . . . . . . . . . . . . . . . . . . . 1,574
1999. . . . . . . . . . . . . . . . . . . . . . . . . 1,098
2000. . . . . . . . . . . . . . . . . . . . . . . . . 521
2001. . . . . . . . . . . . . . . . . . . . . . . . . 371
Thereafter. . . . . . . . . . . . . . . . . . . . . . 53
------
Total . . . . . . . . . . . . . . . . . . . . . . $5,396
------
------
32
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense under operating leases for the years ended December 31, 1996, 1995
and 1994 was $2,025,000, $3,116,000 and $3,169,000, respectively.
The Company is subject to certain legal proceedings and claims which arise in
the conduct of its business. Additionally, the Company is contingently liable
for the repayment of certain employment, training and capital grants from the
government of Ireland. In the opinion of management,, the amount of any
liability with respect to these actions will not have a material affect on the
financial condition or results of operations of the Company.
9. STOCK AND OPTION PLANS
Under the Company's stock purchase and stock option plans in effect at December
31, 1996, approximately 7,787,000 shares of Common Stock may be issued to
employees directly or upon exercise of stock options to employees and in certain
cases to consultants. The Company has eight stock and option plans that were in
effect at December 31, 1996: the 1988 Stock Option Plan, the 1990 Stock Option
Plan for Irish Employees, the 1991 Employee Stock Purchase Plan, the 1991
Directors' Stock Option Plan, the 1983 Raycom Stock Option Plan, the 1993 Raycom
Stock Option Plan, the 1995 Executive Stock Option Plan and the 1996 Directors'
Stock Option Plan. Under the foregoing option plans, options may be granted at
an exercise price not less than the fair market value of the shares on the date
of grant. Options under the 1990 Stock Option Plan for Irish Employees become
exercisable at a rate of 25% after one year from the date of grant and 25% each
year thereafter. Stock options for employees of Raycom (see Note 11 - "Merger
with Raycom Systems, Inc.") were previously priced at $0.02 per share, the fair
market value of Raycom's common stock on the date of grant. After the pooling
of interests of Retix and Raycom, these options were converted to Retix stock
options at a price of $1.14 per share. Options granted under the 1988 Stock
Option Plan and the 1995 Executive Stock Option Plan generally become
exercisable 25% after one year from date of grant, then ratably over the
following thirty-six months based on continuous employment from the date of
grant. The initial options granted to a director under the 1991 and 1996
Directors' Stock Option Plan become exercisable 25% on each of the first four
anniversaries of the date of grant. Each subsequent option grant under the
Directors' Stock Option Plans becomes exercisable in whole on the fourth
anniversary of the date of grant. The 1991 Directors' Stock Option Plan was
suspended upon shareholder approval of the 1996 Directors' Stock Option Plan at
the most recent annual shareholders' meeting. All options expire ten years from
the date of grant. On August 15, 1994, options to purchase 1,578,104 shares
were repriced to $5.00 except those options granted under the 1991 Directors'
Stock Option Plan.
The following summarizes activity in the option plans for the three years ended
December 31, 1996:
Number of
Options Exercise Price Per Share
--------- ------------------------
Outstanding
December 31, 1993 . . . . . . 2,294,874 $ 1.14 - $ 17.50
Granted. . . . . . . . . . . . . 1,499,956 4.00 - 10.75
Exercised. . . . . . . . . . . . (311,275) 1.14 - 8.45
Canceled . . . . . . . . . . . . (756,473) 1.14 - 15.75
-----------
Outstanding
December 31, 1994 . . . . . . 2,727,082 1.14 - 15.50
Granted. . . . . . . . . . . . . 2,259,925 2.13 - 4.45
Exercised. . . . . . . . . . . . (371,491) 1.14 - 3.50
Canceled . . . . . . . . . . . . (1,291,150) 1.14 - 5.25
-----------
Outstanding,
December 31, 1995 . . . . . . 3,324,366 1.14 - 15.50
Granted. . . . . . . . . . . . . 625,500 2.00 - 3.98
Exercised. . . . . . . . . . . . (2,461,241) 1.14 - 5.25
Canceled . . . . . . . . . . . . (1,103,241) 1.14 - 5.25
-----------
Outstanding,
December 31, 1996 . . . . . . 385,384 $ 1.14 - $ 15.50
-----------
-----------
33
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995, options to purchase 175,384 shares and 709,551
shares, respectively, were exercisable under all Retix stock option plans at a
weighted average exercise price of $6.67 and $3.43 per share, respectively.
During the year ended December 31, 1996, the weighted average exercise price of
options granted was $3.40 per share, of options exercised was $4.03 per share
and of options canceled was $3.40 per share. The weighted average fair value of
options granted during the twelve months ended December 31, 1996 was $2.32 per
share.
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Range of Number Weighted Avg. Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life (yrs) Exercise Price Exercisable Exercise Price
- --------------- ----------- ----------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.14 215 0.4 $ 1.14 215 $ 1.14
2.00 - 2.13 177,500 9.7 2.10 2,500 2.10
4.00 - 4.35 37,991 3.4 4.20 22,991 4.34
4.90 - 5.25 104,678 0.4 5.12 104,678 5.12
9.88 45,000 7.0 9.88 30,000 9.88
15.50 20,000 6.2 15.50 15,000 15.50
------- -------
$1.14 - 15.50 385,384 6.1 $ 4.73 175,384 $ 6.67
------- -------
------- -------
</TABLE>
At December 31, 1996 1,767,438 shares were available for future grants under all
option plans.
The 1991 Employee Stock Purchase Plan allows eligible employees (including
officers and employee directors) to purchase Common Stock of the Company through
payroll deductions. Employees are eligible to participate if they are employed
by the Company for at least twenty hours per week and more than five months per
year. The purchase price per share is the lower of 85% of the fair market value
of the Common Stock at either the beginning or end of the relevant six-month
offering period. The Board of Directors may alter the duration of the offering
periods without shareholder approval.
During 1996, the Company transferred the net assets and employees of its
principal business divisions into three wholly-owned subsidiaries (the
"Subsidiaries") and received Preferred Stock in amounts equivalent to the
then-current fair value of the respective entities. In addition, the
Subsidiaries created separate stock option plans (the "Subsidiary Option Plans")
whereby Common Stock of the Subsidiaries may be issued to the respective
employees and non-employee directors at the fair market value as of the date of
grant. Total shares available for issuance under Subsidiary Option Plans
represent 25%, 20% and 15% of all shares outstanding for Vertel, the
internetworking unit and the wireless data unit, respectively. Vesting under
the Subsidiary Option Plans generally reflect the vesting schedule as described
above for the Retix employee stock option plans. All options are issued at fair
market value and expire ten years from the date of grant.
Under the Vertel option plan, total options granted during the year ended
December 31, 1996 at a weighted average exercise price of $3.00 per share were
3,028,047, of which 118,832 had been canceled, and 495,872 were exercisable as
of December 31, 1996. Under the internetworking and wireless data subsidiary
option plans, total options granted during the year ended December 31, 1996 were
1,905,650, and 1,675,450, respectively, at weighted average exercise prices of
$0.50 and $0.25 per share, respectively, of which none were exercisable as of
December 31, 1996.
10. EMPLOYEE BENEFIT PLANS
Qualified employees are eligible to participate in the Company's 401(k) tax
deferred savings plan. Individual participants may contribute up to 15% of
their compensation, subject to certain limitations, and the Company may make
discretionary contributions. To date, the Company has made no contributions to
the plan. The Company does not provide any other post retirement benefits to
its employees.
34
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. MERGER WITH RAYCOM SYSTEMS, INC.
On March 3, 1994, Retix Acquisition Corp. (a wholly-owned subsidiary of Retix)
merged into Raycom Systems, Inc. ("Raycom") pursuant to an Agreement and Plan of
Reorganization (the "Agreement") as a result of which Raycom became a wholly
owned subsidiary of Retix. The transaction was accounted for as a pooling of
interests. Raycom is a manufacturer of stackable Ethernet switching products,
Token Ring bridges and fiber optic multiplexers. Under the terms of the
Agreement, the Company issued 754,842 shares of Common Stock in exchange for all
of the outstanding capital stock of Raycom. As of the date of the merger, the
Company also reserved an aggregate of 61,500 shares of its Common Stock for
issuance upon exercise of previously outstanding options to purchase Raycom
Common Stock, which options vest and become exercisable in accordance with the
terms of the respective original Raycom stock option agreements.
The assets and liabilities of Retix and Raycom have been combined at their
recorded amounts at the date of the merger. The historical results of Retix
have been combined with the results of operations of Raycom for all periods
presented. The financial statements of Retix have been restated to present the
consolidated financial position and results of operations of the combined
companies as if the merger had been consummated at the beginning of the periods
presented.
The combined net loss per share applicable to common shareholders is based upon
the weighted average number of common and common equivalent shares of Retix and
Raycom for each period presented. The weighted average number of common and
common equivalent shares of Raycom for each period presented have been restated
as the equivalent number of shares of Retix, based on the ratio of exchange of
stock in the merger, and combined with the weighted average
number of common and common equivalent shares of Retix for each period
presented.
12. OPERATIONS BY GEOGRAPHIC AREA
The Company operates in one industry segment. The following presents a summary
of operations by geographic area
(in thousands):
December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
Net revenues
U.S. operations . . . . . . . . $23,787 $ 29,092 $43,947
European operations . . . . . . 7,328 9,695 15,111
------- ------- -------
Consolidated. . . . . . . . . . $31,115 $ 38,787 $59,058
------- ------- -------
------- ------- -------
Transfers between
operations. . . . . . . . . . $ 1,025 $ 1,222 $ 7,938
------- ------- -------
------- ------- -------
Income (loss) from operations
U.S. operations . . . . . . . . $(6,382) $(28,069) $(6,961)
European operations . . . . . . 1,881 ( 4,251) (1,867)
------- ------- -------
Consolidated. . . . . . . . . . $(4,501) $(32,320) $(8,828)
------- ------- -------
------- ------- -------
Identifiable assets at end of period
U.S. operations . . . . . . . . $23,569 $21,340 $44,410
European operations . . . . . . 4,504 8,058 15,140
------- ------- -------
Consolidated. . . . . . . . . . $28,073 $29,398 $59,550
------- ------- -------
------- ------- -------
Included in U.S. operations are export sales of $10,530,000, $11,272,000 and
$21,151,000 for the years ended 1996, 1995 and 1994, respectively.
35
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STATEMENT OF CASH FLOWS
Increases (decreases) in operating cash flows arising from changes in assets and
liabilities consist of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Trade accounts receivable . . . . . . . . . . . . $ 156 $7,842 $6,885
Inventories . . . . . . . . . . . . . . . . . . . 1,035 1,191 251
Prepaid expenses and other current assets . . . . 46 759 1,026
Accounts payable. . . . . . . . . . . . . . . . . 802 (2,027) (1,654)
Accrued wages and related liabilities . . . . . . 223 (588) 42
Cash payments for restructuring expenses. . . . . (2,470) (1,849) --
Other accrued liabilities . . . . . . . . . . . . 1,306 (1,953) (544)
Deferred revenue. . . . . . . . . . . . . . . . . 185 (273) 80
------ ------ ------
$1,283 $3,102 $6,086
------ ------ ------
------ ------ ------
</TABLE>
Cash paid (received) during the years for interest and income taxes is as
follows (in thousands):
December 31,
----------------------------------
1996 1995 1994
---- ---- ----
Interest. . . . . . . . . . . . . $ -- $ 474 $ 417
Income taxes. . . . . . . . . . . $(240) $ 30 $ 77
During 1996, the Company wrote off fully depreciated assets totaling $643,000.
Notes receivable from the issuance of common stock arose from the exercise of
stock options and totaled $4,902,000 during 1996.
During 1995, the Company recorded a restructuring expense of $15,919,000
including inventory-related reserves of $4,115,000 and fixed asset-related
reserves of $4,090,000. See also Note 14 - "Restructuring Expenses."
14. RESTRUCTURING EXPENSES
The Company has experienced operating losses of $4,501,000, $32,320,000 and
$8,828,000 in 1996, 1995, and 1994, respectively, while operating activities
required a use of cash of $2,761,000, $8,890,000 and $2,313,000 during the same
periods. In response to these factors, the Company commenced a major
restructuring of its internetworking business unit during the fourth quarter of
1995.
The total charges related to restructuring included in the financial statements
for the year ended December 31, 1995 were $15,919,000. The charge included
one-time costs of elimination of excess manufacturing capacity, inventory
reductions related to product line and distribution streamlining, facility and
asset consolidation, employee severance pay and other related charges. The
restructuring plan entailed work force reductions of 108 employees within
manufacturing, engineering, sales, marketing and administration, of which 103
positions had been eliminated as of December 31, 1996. The plan also included
the consolidation of various sales, service and engineering facilities to the
Company's California and United Kingdom offices. During the fourth quarter of
1996, the Company recorded a reversal of restructuring reserves and accruals
totaling $2,050,000. This reversal was primarily the result of favorable exits
from certain leases which minimized the losses originally projected and, to a
lesser extent, the reversal of accruals for other restructuring activities which
were in excess of the actual costs incurred.
36
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1994, the Company developed a reorganization plan to allow the Company to
focus on enhancing the Company's position in the router market and on the
development of switch-based enterprise networking products. The reorganization
plan entailed work force reductions of approximately 40 employees within
manufacturing, engineering, sales, marketing and administration departments as
well as the elimination of certain leased facilities.
Restructuring expenses and benefit for 1996, 1995 and 1994 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Restructuring Expenses
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Write down of assets to be sold,
vacated or disposed of (in thousands):
Inventory . . . . . . . . . . . . . . . . . . . $ -- 5,200 $ --
Fixed assets. . . . . . . . . . . . . . . . . . -- 4,090 --
Facilities. . . . . . . . . . . . . . . . . . . (1,993) 3,600 1,000
Severance and related costs . . . . . . . . . . (46) 1,699 725
Other . . . . . . . . . . . . . . . . . . . . . (11) 1,330 --
-------- -------- --------
$ (2,050) $ 15,919 $ 1,725
-------- -------- --------
-------- -------- --------
</TABLE>
With respect to the 1995 restructuring and corresponding reversal in 1996,
facility related reserves remaining as of December 31, 1996 totaled $400,000 and
are expected to be paid in 1997. Substantially all of the $823,000 in other
reserves remaining as of December 31, 1996, including $256,000 in severance
reserves, are expected to be utilized in 1997, requiring the disbursement of
approximately $406,000 in cash and primarily relating to costs associated with
customer returns, warranties and final payments to terminated employees. All
restructuring expenses accrued in 1994 were utilized as of December 31, 1995.
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RETIX:
We have audited the accompanying consolidated balance sheets of Retix and its
subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Retix and its subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 14, 1997
38
<PAGE>
RESULTS OF OPERATIONS - UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables present unaudited quarterly financial information for the
two years ended December 28, 1996. In the opinion of management, this
information contains all adjustments, consisting only of normal, recurring
adjustments, necessary for a fair presentation thereof. The operating results
are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
1996 Quarters Ended
-----------------------------------------------------
March 30 June 29 Sept. 28 Dec. 28
-------- ------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Quarterly results of operations:
Net revenues. . . . . . . . . . . . . . . . . . . $ 7,581 $ 8,190 $ 8,197 $ 7,147
Gross profit. . . . . . . . . . . . . . . . . . . 4,803 5,380 5,953 4,855
Restructuring benefit . . . . . . . . . . . . . . -- -- -- (2,050)
Loss from operations. . . . . . . . . . . . . . . (1,510) (1,162) (954) (875)
Net loss. . . . . . . . . . . . . . . . . . . . . (1,409) (951) (592) (889)
Net loss per common
and common equivalent share:. . . . . . . . . . $ (0.07) $ (0.05) $ (0.03) $ (0.04)
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
1995 Quarters Ended
-----------------------------------------------------
Apr. 1 July 1 Sept. 30 Dec. 30
------ ------ -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Quarterly results of operations:
Net revenues. . . . . . . . . . . . . . . . . . . $ 13,128 $ 10,525 $ 7,509 $ 7,625
Gross profit. . . . . . . . . . . . . . . . . . . 6,944 6,622 3,783 4,472
Restructuring expense . . . . . . . . . . . . . . -- -- -- 15,919
Loss from operations. . . . . . . . . . . . . . . (2,056) (3,279) (6,141) (20,844)
Net loss. . . . . . . . . . . . . . . . . . . . . (1,814) (3,201) (5,783) (21,011)
Net loss per common
and common equivalent share:. . . . . . . . . . $ (0.10) $ (0.18) $ (0.32) $ (1.17)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The Company's future revenues and operating results may be subject to
quarterly fluctuations as a result of factors such as the timing of
significant licenses of, or orders for, the Company's products, shifts in
product mix, changes in distribution channels, the introduction of new
products by the Company or its competitors, competitive pricing, changes in
product demand resulting from fluctuations in foreign currency exchange
rates, decreased European business activity during the summer months and
changes in operating and material costs. Accordingly, quarter-to-quarter
comparisons should not be relied upon as indicators of future performance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14(A) as promulgated
by the U.S. Securities and Exchange Commission (the "Proxy Statement") for
its annual meeting of shareholders to be held April 15, 1997, and the
information included therein is incorporated herein by reference to the
extent detailed below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of Retix is incorporated by
reference from the information under the caption "Election of Directors -
Nominees" in the Registrant's Proxy Statement.
Information with respect to executive officers of Retix is set forth in
Part I in this Annual Report on Form 10-K under "Item I - Business -
Executive Officers of the Company".
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
Incorporated by reference from the information under the captions
"Compensation of Executive Officers" and "Transactions with Management and
Others" in the Registrant's Proxy Statement.
ITEM 12. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "
Common Stock Ownership of Certain Beneficial Owners and Management" in the
Registrant's Proxy Statement.
ITEM 13. TRANSACTIONS WITH MANAGEMENT AND OTHERS
Incorporated by reference from the information under the captions
"Compensation of Executive Officers" and "Transactions with Management and
Others" in the Registrant's Proxy Statement.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements and supplementary financial information
listed below are filed as part of this annual report.
Consolidated Balance Sheets at December 31, 1995 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1996. . . . . . . . . . . . . . . 24
Consolidated Statements of Shareholders' Equity for each
of the three years in the period ended December 31, 1996 . . . . . 25
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1996. . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 27
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . 38
2. The supplementary financial information listed below are filed as
part of this annual report.
Unaudited Quarterly Financial Information . . . . . . . . . . . . 39
Schedules have been omitted since the required information is not present in
amounts sufficient to require submission of the schedules, or because the
information required is included in the consolidated financial statements.
3. Exhibits included herein, numbered in accordance with Item 601 of
Regulation S-K.
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated January 28, 1994 among
Registrant, Retix Acquisition Corporation and Raycom Systems, Inc.
(6)
2.2 Articles of Merger dated March 3, 1994 among Registrant, Retix
Acquisition Corporation and Raycom Systems, Inc. as filed with the
Colorado Secretary of State on March 3, 1994. (6)
3.3 Amended and Restated Articles of Incorporation of the Registrant. (8)
3.4 Bylaws of the Registrant, as amended to date. (12)
10.1 1985 Incentive Stock Option Plan and form of option agreement
thereunder. (2)
10.2 1988 Stock Option Plan and forms of option agreements thereunder.
(11)
10.3 1990 Stock Option Plan for Irish Employees and form of option
agreement thereunder. (1)
10.4 1991 Directors' Stock Option Plan and forms of option agreements
thereunder, as amended to date. (13)
10.5 1991 Employee Stock Purchase Plan and form of subscription agreement
thereunder. (3)
41
<PAGE>
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------
10.6 Form of Indemnification Agreement. (2)
10.7 Registration Rights Agreement, dated May 18, 1989, among the
Registrant and certain
shareholders. (2)
10.12 Colorado Place Office Lease between the Registrant and Maguire Thomas
Partners - Colorado Place, a California general partnership ("Maguire
Thomas") dated February 5, 1991, and Letter Agreement between the
Registrant and Maguire Thomas dated February 5, 1991. (2)
10.13 Lease Agreement between The University of Surrey and Retix Systems
Limited, dated May 18, 1990. (2)
10.14 Lease Agreement between The University of Surrey and TSL
Communications Limited, dated September 30, 1987. (2)
10.15 Lease Agreement between Cofton Irish Investments and Retix B.V., dated
August 4, 1993. (7)
10.16 Lease Agreement between Cofton Irish Investments and Retix B.V., dated
August 4, 1993. (7)
10.18 Credit Agreement between the Registrant and the Bank of America, N.T.
and S.A. dated October 24, 1991, including an Electronic Payment
Services Agreement, an Acceptance Credit Agreement and Security
Agreement attached thereto. (2)
10.19 Letter Agreements between Retix Ireland and Allied Irish Banks plc
dated August 24, 1988 and May 2, 1989, including a Guarantee and
Indemnity Agreement between the Registrant and the Allied Irish Banks
Group. (2)
10.22 Lease Agreement between the Registrant and Moorpark Associates, a
California Limited Partnership, dated February 5, 1993. (4)
10.23 Credit Agreement between the Registrant and Bank of America National
Trust and Savings Association, dated June 16, 1992. (4)
10.24 Second Amendment dated June 30, 1993 to Credit Agreement between the
Registrant and Bank of America National Trust and Savings Association,
dated June 16, 1992.(5)
10.25 Amendment dated July 20, 1993 to Letter Agreements between Retix
Ireland and Allied Irish Banks plc dated August 24, 1988 and May 2,
1989 including a Guarantee and Indemnity Agreement between the
Registrant and the Allied Irish Banks Group. (7)
10.26 Transition Agreement between Stephen Frankel and Retix, dated July 26,
1995. (10)
10.27 Lease Agreement between the Registrant and OMA El Segundo Properties,
a California general partnership, dated May 23, 1995. (12)
10.28 Employment Agreement between M.Y. Stephan and Retix, dated September
27, 1995. (12)
10.29 Employment Agreement between Philip Mantle and Retix, dated November
1, 1995. (12)
10.30 Common Stock and Warrant Purchase Agreement by and between Retix and
Sierra Ventures V, L.P., dated January 30, 1996. (12)
10.31 Master Agreement dated February 28, 1996 for Spin-Off of Open Systems
Interconnection Technology between Telaware Corporation and Retix.
(12)
42
<PAGE>
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------
10.32 1996 Directors' Stock Option Plan and forms of option agreement
thereunder.(13)
10.33 Form of Exercise Notice and Stock Purchase Agreement between the
Company and M.Y. Stephan, dated January 30, 1996.(13)
10.34 Form of Exercise Notice and Stock Purchase Agreement between the
Company and M.Y. Stephan, dated March 18, 1996. (13)
10.35 Form of Exercise Notice and Stock Purchase Agreement between the
Company and M.Y. Stephan, dated March 18, 1996. (13)
10.36 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Philip Mantle, dated January 30, 1996. (13)
10.37 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Philip Mantle, dated March 18, 1996. (13)
10.38 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 18, 1996. (13)
10.39 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated January 30, 1996. (13)
10.40 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated February 21, 1996. (13)
10.41 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996. (13)
10.42 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996. (13)
10.43 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996. (13)
10.44 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996. (13)
10.45 Sublease Agreement dated May, 1996 between Value Behavioral Health and
Retix.(14)
10.46 Master Agreement between Retix and Internetworking Solutions dated May
31, 1996.(14)
10.47 Master Agreement between Retix and Wireless Solutions dated May 31,
1996.(14)
10.48 Lease Agreement between the Registrant and Nomura-Warner Center
Associates, L.P., dated November 26, 1996.(15)
21.1 Subsidiaries of the Registrant. (15)
24.1 Independent Auditors' Consent. (15)
25.1 Power of Attorney (see page 45). (15)
- --------------------------------
43
<PAGE>
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 28, 1991.
(2) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrants Registration
Statement on Form S-1 and Amendment No. 1 thereto (File No. 33-43544)
which became effective on December 9, 1991.
(3) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 26, 1992.
(4) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993.
(5) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 3, 1993.
(6) Incorporated by reference to identically numbered exhibits filed in
response to Item 7(c), "Exhibits," of the Registrant's Form 8-K dated
March 17, 1994.
(7) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(8) Incorporated by reference to identically numbered exhibit filed in
response to Item 6(a), "Exhibits," of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 1, 1994.
(9) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.
(10) Incorporated by reference to identically numbered exhibit filed in
response to Item 6(a), "Exhibits," of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 1, 1995.
(11) Incorporated by reference from Registrant's Registration Statement on
Form S8 (No. 33-82154) filed on July 28, 1994.
(12) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a)(3), "Exhibits," of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(13) Incorporated by reference to identically numbered exhibit filed in
response to Item 6(a), "Exhibits," of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 30, 1996.
(14) Incorporated by reference to identically numbered exhibit filed in
response to Item 6(a), "Exhibits," of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1996.
(15) Filed herewith.
(b) Reports on Form 8-K
None
44
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
RETIX
/S/ Steven M. Waszak
----------------------
Date: February 4, 1997 Steven M. Waszak
Vice President, Finance & Administration
and Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joe Stephan and Steven M. Waszak, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report on
Form 10-K has been signed by the following persons in the capacities and on the
date indicated.
Signature Title Date
- -------------------------- -------------------------- -----------------
/S/ Joe Stephan President, Chief Executive February 4, 1997
- -------------------------- Officer and Director
Joe Stephan (Principal Executive Officer)
/S/ Steven M. Waszak Vice President of Finance February 4, 1997
- -------------------------- and Administration and
Steven M. Waszak Chief Financial Officer
(Principal Financial and
Accounting Officer)
/S/ Neil J. Hynes Director February 4, 1997
- --------------------------
Neil J. Hynes
/S/ Craig W. Johnson Director February 4, 1997
- --------------------------
Craig W. Johnson
/S/ Gilbert P. Williamson Director February 4, 1997
- --------------------------
Gilbert P. Williamson
/S/ Jeffrey M. Drazan Director February 4, 1997
- --------------------------
Jeffrey M. Drazan
45
<PAGE>
OFFICE LEASE
THIS LEASE by and between Nomura - Warner Center Associates, L.P.
("Landlord") and Vertel Corporation, a California Corporation ("Tenant") is
dated November 26, 1996 for reference purposes only.
DEMISING CLAUSE
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord,
Suite Number 1200, Eight Thousand Nine Hundred and Seventy-Six rentable square
feet (8,976 RSF) and Suite 700, approximately (13,654 RSF) Thirteen Thousand,
Six Hundred and Fifty-four rentable square feet, for a total of approximately
(22,630 RSF) ("Premises") outlined on the location plan attached hereto and
marked Exhibit "A", said Premises being situated on the 7th and 12th floors of
that certain office building located at 21300 Victory Boulevard, Woodland Hills,
California ("Building"), together with a nonexclusive license to use in common
with other tenants in the Building and subject to the Rules and Regulations
("Rules and Regulations" mean the rules and regulations from time to time
established by Landlord for the Building pursuant to Article 30) the following
areas, facilities, and equipment ("Common Areas") appurtenant to the Premises.
"Common Areas" mean those interior and exterior portions of the Building
and such other areas, facilities and equipment from time to time serving the
Building, in each case which are designated by Landlord for the use and benefit,
in common with other entitled, of tenants and occupants of the Building and/or
their respective employees, customers and invitees and/or members of the public,
and include, without limitation, any entrances and exits, lobbies, elevators,
stairways, corridors and passageways, public washrooms, parking facilities,
loading and unloading areas, plazas, sidewalks and landscaped areas, walkways,
mechanical, electrical and telephone rooms, utility and service facilities,
electrical, mechanical, sprinkler, fire detection and fire prevention and
security equipment and facilities, duct shafts, operating maintenance and
storage areas and service areas, equipment and facilities, all as from time to
time existing.
Tenant acknowledges that the rent payable to Landlord under this Lease
includes sums attributable to the Tenant's use of the Common Areas. The parties
agree the leasing is upon and subject to the terms, covenants and conditions set
forth herein and Tenant covenants as a material part of the consideration for
this Lease to keep and perform each and all the terms, covenants and conditions
by it to be kept and performed and that this Lease is made upon the condition of
such performance.
1. TERM
1. The Term of this Lease ("Term") shall be for approximately Five (5)
years, subject to adjustment as provided herein. The Commencement Date shall be
January 7, 1997 or the date upon which the Tenant occupies the Premises which in
any event shall not exceed the date of March 1, 1997. The Termination Date
shall be January 6, 2002 or the last day of the sixtieth (60th) month from the
Commencement Date, unless the Term is terminated sooner as hereinafter provided.
The Term of this Lease shall commence on the "Commencement Date".
1
<PAGE>
2. NOTICE OF LEASE TERM COMMENCEMENT DATE
2. The Commencement Date shall be established by Landlord in accordance
with the provisions of Article 1 of this Lease and shall be specified in a
Notice of Lease Term Commencement Date ("NLT") to be served upon Tenant after
Landlord delivers or tenders possession of the Premises to Tenant. Tenant shall
execute such NLT acknowledging the Commencement Date and the condition of the
Premises on such Commencement Date and return such NLT to Landlord within five
(5) business days whereupon such NLT shall be attached to this Lease and become
a part hereof. In the event Tenant fails to execute and return such NLT within
said five (5) day period, or fails to serve notice in writing upon Landlord of
Tenant's objection on the Commencement Date and condition of the Premises as
specified in such NLT within said five (5) day period, the Commencement Date and
condition of the Premises and other terms specified in the NLT shall be
conclusive between Landlord and Tenant.
3. BASIC RENT
3.1 Commencing upon the Commencement Date, and thereafter during each year
of the Term, Tenant shall pay to Landlord "Basic Rent". During months one (1)
through thirty (30) of the Term, Tenant shall pay Basic Rent in the amount of
Nineteen dollars and 80/00 ($19.80) per rentable square foot per annum which is
Four Hundred Forty-eight Thousand and Seventy- Four dollars and 00/00 dollars
($448,074.00), one-twelfth (1/12) of which is equal to the "Basic Monthly Rent"
in the amount of Thirty-Seven Thousand Three Hundred Thirty-Nine dollars and
50/00 ($37,339.50), subject in each case to certain adjustments as herein
provided. Commencing on the first day of the thirty-first (31st) month of the
Term, the Basic Rent shall increase to Twenty-One dollars and 00/00 ($21.00) per
rentable square foot per annum which is Four Hundred Seventy-five Thousand Two
Hundred Thirty dollars and 00/00 ($475,230.00), and the Basic Monthly Rent shall
correspondingly increase to Thirty-Nine Thousand Six Hundred and Two dollars and
50/00 ($39,602.50). Except for the first installment of Basic Monthly Rent,
which is due on or before the execution of this Lease, Basic Rent shall be
payable in monthly installments in advance on the first day of each calendar
month during the Term, provided that if the Commencement Date is other than on
the first day of a calendar month, the installment of Basic Rent payable on the
Commencement Date for the fractional part of a calendar month at the beginning
of the Term shall be calculated at a rate per day of one-thirtieth (1/30) of the
initial Basic Monthly Rent.
3.2 Tenant shall pay to Landlord, in addition to Basic Rent, all other
amounts which shall become due and payable hereunder by Tenant to Landlord
(including, without limitation, the payments by Tenant of Tax Rent and Expense
Rent pursuant to Articles 4 and 5 hereof) and any and all of such other amounts
so payable ("Additional Rent") shall be deemed to be rent, receivable as such,
and when in default all remedies of Landlord on nonpayment of rent shall be
applicable thereto. The obligation of Tenant to pay any of the aforementioned
amounts owing, accrued or unpaid at the end of the Term shall survive the
expiration or earlier termination of this Lease.
3.3 Said rentals shall be paid to Landlord, without deduction or offset,
in lawful money of the United States of America, which shall be legal tender at
the time of payment, at the office of Landlord or to such other person or at
such other place as Landlord may from time to time designate in writing.
2
<PAGE>
4. TAX RENT
4.1 For the purposes of this Article 4 and this Lease, the following words
and phrases shall have the meaning indicated:
(a) "Property Taxes" mean all costs and expenses incurred by Landlord
for real and personal property taxes, leasehold taxes in lieu thereof,
and any assessments upon the Building and the Common Areas and all or
any improvements therein, together with the land upon which they are
located (as set out on Exhibit "B" hereto), and taxes or assessments
levied in lieu thereof, or in addition thereto, imposed by a
governmental authority or agency; and any taxes resulting from a
reassessment resulting from the determination by a court that any law,
regulation, statute, or constitutional provision purporting to limit
tax increases is invalid, either in whole or in part; and any non-
progressive tax on or measured with respect to or by gross rentals
received from the rental of space in the Building; and including any
expenses of Landlord in contesting any of the foregoing or the
assessed valuation of the Building, the Common Areas and/or the land
thereunder; but excluding any net income, franchise, capital stock,
estate, gift or inheritance taxes. Notwithstanding anything to the
contrary contained in this Lease, Tenant shall not be required to pay
any portion of any tax or assessment expense in excess of the amount
which would be payable if such tax or assessment expense were paid in
installments over the longest possible term; or imposed on land and
improvements other than the Building and Common Area.
(b) "Tax Base" means Property Taxes for the calendar year 1997.
(c) "Tenant Tax Share" means 9.075%
(d) "Comparison Year" means each successive calendar year of the Term
after the calendar year 1997.
(e) Notwithstanding anything to the contrary contained in this Lease,
Tenant will not be responsible for any tax increase due to a change of
ownership during the primary term of this Lease.
4.2 Tenant shall pay to Landlord during each Comparison Year of the Term,
in the manner and at the times herein provided, the Tenant Tax Share of the
amount, if any, by which the aggregate annual Property Taxes exceed the Tax Base
("Tax Rent"). Should the Termination Date be other than the last day of a
Comparison Year, Tax Rent for such year shall be prorated.
4.3 Prior to the beginning of each Comparison Year within the Term, or as
soon thereafter as practical, Landlord shall notify Tenant in writing of
Landlord's estimate of the aggregate amount of Property Taxes for such
Comparison Year together with the amount, if any, of Tax Rent calculated using
such estimate. Tenant shall pay to Landlord such estimated Tax Rent during such
Comparison Year in equal monthly installments in advance on the first day of
each month.
In the event that Landlord's notification is received by Tenant after
the commencement of such Comparison Year, the first monthly payment of Tax Rent
shall also include any Tax Rent payable for the period from the commencement of
such Comparison Year until such first monthly payment. As soon as practical
after the end of each Comparison Year of the Term, Landlord shall notify Tenant
of its determination of the aggregate Property Taxes incurred for such just
prior Comparison Year. If on the basis of such determination for, and
respecting, such just prior Comparison Year (i) Tenant has underpaid its Tax
Rent, Tenant shall forthwith pay to Landlord the full amount of such deficiency,
or (ii) Tenant has overpaid its Tax Rent, Landlord shall credit the full amount
of such overpayment towards the next Tax Rent due from Tenant, or if determined
after expiration of the term, promptly refunded to Tenant.
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4.4 Notwithstanding anything otherwise contained in this Lease, the
calculation and payment of either and both of Basic Rent and Expense Rent under
Articles 3 and 5 hereof are separate and distinct from, and shall not in any way
be affected by, the calculation and payment of Tax Rent under Article 4.
5. EXPENSE RENT
5.1 For the purposes of this Article 5 and this Lease, the following words
and phrases shall have the meaning indicated:
(a) "Operating Expenses" mean all the costs and expenses, exclusive
of real estate brokerage commissions, incurred by or on behalf of
Landlord, without offset for any revenue derived, from any source
whatsoever, by or on behalf of Landlord, in the operation,
maintenance, repair, improvement, management and administration of the
Building and Common Areas, calculated as though the Building was
ninety-five percent (95%) occupied and as though all building services
had been provided to all such occupants (whether or not so occupied),
including the following by way of illustration but not limitation:
wages, salaries, benefits, payroll taxes and similar governmental
charges, and all other direct costs of personnel performing services
rendered, whether or not situated in the Building, to the extent such
personnel render services to or for the Building, including Building
managers, their assistants and Landlord's clerical and accounting
staff; utilities; janitorial, mechanical, security, landscaping,
elevator, waste disposal and alarm maintenance and services; parking
facility operation, maintenance and management; labor; lighting; air-
conditioning; heating; ventilating; water and sewage charges;
supplies; materials; tools; equipment; uniforms; operation,
maintenance and repair of systems and facilities; structural and non-
structural repair; modification, addition, improvement or capital
improvement (or, if according to generally accepted accounting
principles, such item is properly capitalized the amortized cost
thereof, plus interest at the rate set forth in article 38) to the
Building, Common Areas and/or the machinery, equipment and facilities
thereof either (i) required by directive of a governmental or
regulatory entity, or (ii) made by or on behalf of Landlord and
intended to reduce the cost of other Operating Expenses, or (iii)
which are deemed necessary by Landlord; rent, gross receipts, business
or similar taxes assessed; insurance costs required or deemed
necessary by Landlord in connection with ownership or operation of the
Building; enumeration, fees and other expenses of professional persons
and companies to the extent engaged in management or operational
services; the expenses of maintaining a Building management office
including, but not limited to, a sum equivalent to rent which Landlord
would have received had Landlord leased such Premises at the scheduled
rate in the Building during the year; and a management fee. Such
management fee shall not exceed the percentage charged by independent
property management companies for similar buildings in the area.
(b) Notwithstanding the foregoing, costs and expenses occasioned by
the following shall not be included as "Operating Expenses" under this
Lease, nor shall Landlord otherwise seek reimbursement from the Tenant
under this Lease for costs or expenses associated with:
(i) the correction of any construction defect or other
condition in the Premises or the Building required by applicable
law in existence as of the Commencement Date;
(ii) Landlord's violation of any applicable law;
(iii) except as provided in Section 60 of this Lease, claims
relating to Hazardous Materials law;
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(iv) Money Landlord pays and is reimbursed in reference to the
following; overstandard utility installations by other tenants,
costs of disputes with other tenants; depreciation, amortization
and mortgage expense.
(c) "Expense Base" means the Operating Expense for the calendar year
1997.
(d) "Tenant Expense Share" means 9.075%.
(e) "Comparison Year" means each successive calendar year of the Term
after the calendar year 1997.
(f) If Landlord obtains earthquake insurance the deductible will be
limited as it is allocated to "operating expenses" by the standards
set in the insurance industry.
5.2 Tenant shall pay to Landlord during each Comparison Year of the Term,
in the manner and at the times herein provided, the Tenant Expense Share of the
amount, if any, by which the aggregate annual Operating Expenses exceed the
Expense Base ("Expense Rent"). Should the Termination Date be other than the
last day of a Comparison Year, Expense Rent for such year shall be prorated.
Prior to the beginning of each Comparison Year within the Term, or as soon
thereafter as practical, Landlord shall notify Tenant in writing of Landlord's
estimate of the aggregate amount of Operating Expenses for such Comparison Year
together with the amount, if any, of Expense Rent calculated using such
estimate. Tenant shall pay to Landlord such estimated Expense Rent during such
Comparison Year in equal monthly installments in advance on the first day of
each month. In the event that Landlord's notification is received by Tenant
after the commencement of such Comparison Year, the first monthly payment of
Expense Rent shall also include any Expense Rent payable for the period from the
commencement of such Comparison Year until such first monthly payment. As soon
as practical after the end of each Comparison Year of the Term, Landlord shall
notify Tenant of its determination of the aggregate Operating Expenses incurred
for such just prior Comparison Year. If on the basis of such determination for,
and respecting, such just prior Comparison Year (i) Tenant has underpaid its
Expense Rent, Tenant shall forthwith pay to Landlord the full amount of such
deficiency, or (ii) Tenant has overpaid its Expense Rent, Landlord shall refund
the full amount of such overpayment if such overpayment is greater than
$2,000.00 or if the determination is made after the expiration of the Term or
credit the full amount towards the next Expense Rent due from Tenant if such
overpayment is $2,000.00 or less. Notwithstanding anything to the contrary
contained in this Lease, within thirty (30) days after receipt by Tenant of
Landlord's statement of Operating Expenses for any prior calendar year during
the Term, Tenant or its authorized representative shall have the right to
inspect the books of Landlord during the business hours of Landlord at
Landlord's office in the Building, or, at Landlord's option, such other location
as Landlord reasonably may specify, for the purpose of verifying the information
contained in the statement. Unless Tenant asserts specific errors within thirty
(30) days after receipt of the statement, the statement shall be deemed correct
as between Landlord and Tenant. In the event that Tenant believes that an error
has been made by landlord, Tenant shall nevertheless pay any amount requested by
landlord pending resolution of any dispute related thereto.
5.3 Notwithstanding anything otherwise contained in this Lease, the
calculation and payment of either and both of Basic Rent and Tax Rent under
Articles 3 and 4 hereof are separate and distinct from, and shall not in any way
be affected by, the calculation and payment of Expense Rent under this Article
5.
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6. SECURITY DEPOSIT
6.1 Tenant shall deposit with Landlord on or before the January 3, 1997
the sum of One Hundred Fifty-Five Thousand, Five Hundred, Sixty-Eight Dollars
and 80/100 ($155,568.80) ("Initial Security Deposit"),based on the following
schedule:
DATE: AMOUNT:
Lease Execution $50,000.00
December 15, 1996 $75,000.00
January 3, 1997 $30,568.80
Landlord shall transfer the Security Deposit of $29,620.80 and last month's rent
of $14,810.40 from the Lease dated May 23, 1996 between the parties, to this
Security Deposit. Upon Commencement of the Lease, Landlord shall have a
$200,000.00 Security Deposit.
This sum, or as adjusted as provided for herein ("Security Deposit"), shall be
held by Landlord as security for the faithful performance by Tenant of all of
the terms, covenants and conditions of this Lease to be kept and performed by
Tenant. If Tenant defaults with respect to any provision of this Lease,
including but not limited to the provisions relating to the payment of rent,
Landlord may, but shall not be required to, use, apply or retain all or any part
of the Security Deposit for the payment of any rent or other sum in default, or
for payment of any other amount which Landlord may spend or become obligated to
spend by reason of Tenant's default, or to compensate Landlord for any other
loss or damage which Landlord may suffer by reason of Tenant's default. If any
portion of the Security Deposit is so used or applied, Tenant shall, upon
demand, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to the amount held by Landlord immediately prior to Landlord's
use or application. Landlord shall not be required to keep the Security Deposit
separate from its general funds, and Tenant shall not be entitled to interest on
the Security Deposit. If Tenant shall fully and faithfully perform every
provision of this Lease, the Security Deposit, or any balance thereof, shall be
returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's
interests hereunder), provided that Landlord may retain the Security Deposit
until such time as any amounts due from Tenant under this Lease have been
determined and paid in full including, but not limited to, any sums due pursuant
to Articles 3, 4 and 5, such refund of the Security Deposit shall be returned in
(30) days pursuant to this paragraph.
Provided Tenant is not in default of the Lease, the Security Deposit shall be
reduced by crediting the monthly Base Rent as follows:
MONTH AMOUNT
----- ------
25 $37,339.50
26 $ 7,104.50
37 $39,602.50
38 $ 4,841.50
49 $39,602.50
50 $ 4,841.50
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7. USE
7.1 Tenant shall use the Premises solely for general office use. Tenant
shall not use or permit the Premises to be used for any other purpose without
the prior written consent of Landlord. Tenant shall not use or occupy the
Premises in violation of law or of the Certificate of Occupancy issued for the
Building, and shall, upon written notice from Landlord, discontinue any use of
the Premises which is declared by any governmental authority having jurisdiction
to be a violation of law or of said Certificate of Occupancy.
7.2 Tenant acknowledges and agrees that the use to which Tenant is
permitted to put the Premises, as set forth above, is a material provision of
this Lease. Landlord reserves the right, in its sole discretion, to withhold
its consent to any other use to which the Tenant or Tenant's proposed assignee
or sublessee may wish to put the Premises. Landlord retains the right, in its
sole discretion, to determine and control the type and proportion of tenant
business within the Building. Any consent by Landlord to a change of use by
Tenant shall not be deemed a waiver of Landlord's right to withhold its consent
to any subsequent proposed change of use.
7.3 Tenant, at its expense, shall comply with all certificates, rules,
orders and regulations of public authorities, including Federal, State, County
and Municipal authorities and with any direction of any public officer or
officers which relate to Tenant's use or occupation of the Premises; provided
that, such obligation shall not include the obligation to make structural
improvements to the Premises required by applicable law or relieve Landlord from
its obligations under Section 14.2 hereof.
7.4 Tenant shall not do or permit to be done anything which will
invalidate or increase the cost of any fire, extended coverage or any other
insurance policy covering the Building and Common Area, and/or property located
therein, and/or the land upon which the Building is located and shall comply
with all rules, orders, regulations and requirements of any insurance fire
rating bureau or any other organization performing a similar function. Tenant
shall promptly upon demand reimburse Landlord for any additional premium charged
for such policy by reason of Tenant's failure to comply with the provisions of
this Article. Tenant shall not do or permit anything to be done in or about the
Premises which will obstruct or unreasonably interfere with the rights of other
tenants or occupants of the Building, or injure or annoy them, or use or allow
the Premises to be used for any improper, immoral, unlawful or objectionable
purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about
the Premises. Tenant shall not commit or suffer to be committed any waste in or
upon the Premises.
8. NOTICES
8.1 Any notice required or permitted to be given pursuant to the terms of
this Lease must be in writing and must be given either by personal delivery
evidenced by a signed written receipt therefor, or by certified or registered
mail evidenced by a signed written receipt therefore or by overnight courier
service. Notice shall be given to Tenant at:
VERTEL CORPORATION
21300 Victory Boulevard
Suite 1200
Woodland Hills, California 91367
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Notice shall be given to Landlord at:
Nomura-Warner Center Associates, L.P.
c/o Nomura Real Estate International, Inc.
515 S. Figueroa Street, Suite 1515
Los Angeles, California 90017
and at:
Nomura-Warner Center Associates, L.P.
c/o O'Connor Realty Advisors
525 Market Street
Suite 1420
San Francisco, California 94105
Either party may by written notice to the other specify a different
address for notice purposes. In the event Tenant or Landlord fails or refuses to
accept certified or registered mail, or refuses to execute a receipt for
personal delivery or overnight courier service, the other party may serve notice
upon the party receiving notice by first class mail, postage prepaid, at the
address of the Premises. Landlord and Tenant agree that the purpose of the
receipts for notice provided for in this Article 8 is to eliminate, insofar as
possible, disputes concerning receipt of such notice, and further agree that,
except as set forth above, no other evidence of such notice shall be competent
or admissible in a court of law or in any arbitration proceeding to prove such
notice. The term "notice" as used herein shall not include any bills, invoices,
rent statements or statement of any other charges or sums due from Tenant to
Landlord, nor shall it include any notice required or permitted to be given
pursuant to any law or statute. The acquiescence by Landlord or Tenant, or the
failure by Landlord or Tenant to object, on one or more occasions, to some other
or different method of notice, shall not be deemed to be a waiver of the
requirements of this Article upon any other occasion, nor shall the parties be
estoppel, by reason of any such conduct, to insist upon strict compliance with
the terms of this Article.
8.2 Notice shall be deemed effective at the time of delivery if personally
delivered or by overnight courier service. If mailed, as provided in this
Article 8, notice shall be deemed effective, for all purposes, forty-eight (48)
hours after deposit in the mail, properly addressed, postage prepaid.
9. BROKERS
9. Tenant warrants to Landlord that no broker, agent or finder was
instrumental in negotiating or consummating this Lease, excepting only Charles
Dunn Company, Inc. and The Kaufman Group and that Tenant knows of no other real
estate broker, agent, finder, person or entity ("Broker") who is, or might be,
entitled to a commission or compensation in connection with the execution of
this Lease. Any Broker that Tenant has failed to disclose herein shall be paid
by Tenant. Landlord shall pay the commission due to Charles Dunn Company, Inc.
Both parties shall hold each other harmless from all damages and indemnify the
other party for all costs and expenses, including reasonable attorneys' fees,
resulting from any claims that may be asserted against either party by any
Broker not disclosed herein and who claims a right to compensation through
either party.
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10. HOLDING OVER; LIQUIDATED DAMAGES
10.1 If Tenant holds over after the Term, with the prior written consent of
Landlord, Tenant shall become a tenant from month to month, upon the same terms,
conditions and covenants contained in this Lease, including Base Monthly Rent,
except that Tenant agrees to pay to Landlord a monthly rent equal to one hundred
twenty-five percent (125%) of the basic monthly rent for the last month of the
of the Term payable by Tenant to Landlord. Landlord's consent to such holding
over, and acceptance by Landlord of rent, after expiration or earlier
termination of this Lease, shall not result in a renewal or extension thereof.
10.2 If Tenant holds over after the Term, without the prior written consent
of Landlord, Tenant shall become a tenant at sufferance only, and agrees to
perform each and every term, condition and covenant of this Lease for such
period of holding over, except as Tenant's covenant to pay rent is modified as
hereinafter set forth. Tenant acknowledges that Tenant's failure to surrender
possession of the Premises at the end of the Term will cause actual damage to
Landlord which is impractical or extremely difficult to ascertain, including, by
way of specification but not of limitation, possible increases in the cost of
tenant improvements for prospective tenants of the Premises as well as liability
to a new tenant of the Premises on account of the Landlord's inability to
deliver timely possession. Tenant agrees that the damage, which would otherwise
be measured by the reasonable rental value of the Premises for the time of the
unlawful holding over, shall be liquidated in an amount equal to one hundred
fifty percent (150%) of the Basic Monthly Rent, payable by Tenant to Landlord
for the last month of the Term for each month, or portion thereof, the Tenant
unlawfully holds over.
10.3 The foregoing provisions of this Article are in addition to any other
rights of Landlord hereunder, or as otherwise provided by law, including, but
not limited to, the right to bring an action for unlawful detainer.
11. TAXES ON TENANT'S PROPERTY
11. Tenant shall be liable for and shall pay, prior to delinquency, taxes
levied against any personal property or trade fixtures placed by Tenant in or
about the Premises. If the Tenant's improvements in the Premises, whether
installed and/or paid for by Landlord or Tenant, and whether or not affixed to
the real property so as to become a part thereof, are assessed for real property
tax purposes at a valuation higher than the valuation at which Tenant's
improvements conforming to Landlord's building standards in other space in the
Building are assessed, then the real property taxes and assessments levied
against Landlord or the property, by reason of such excess valuation, shall be
deemed to be taxes levied against the personal property or trade fixtures of
Tenant and Tenant shall pay to Landlord all such taxes so levied upon demand of
Landlord. If the records of the County Assessor are available and sufficiently
detailed to serve as a basis for determining whether said Tenant's improvements
are assessed at a higher valuation than Landlord's building standards, such
records shall be binding on Landlord and Tenant. If the records of the County
Assessor are not available or sufficiently detailed to serve as a basis for
making said determination, the actual cost of construction shall be used. In
the event Tenant fails to pay any tax, as provided for herein, Landlord may pay
such tax on behalf of Tenant, and the amount of tax so paid by Landlord shall
constitute Additional Rent due Landlord upon demand.
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12. CONDITION OF PREMISES
12.1 Tenant acknowledges that neither Landlord nor any agent of Landlord
has made any representation or warranty with respect to the Premises or the
Building, or with respect to the suitability of either for the conduct of
Tenant's business, and Tenant accepts same in AS IS, WHERE IS and WITH ALL
FAULTS condition, subject to the provisions of Article 68. Notwithstanding
anything to the contrary contained in this Lease, as of the Commencement Date
and at no cost to Tenant, the heating, ventilating and air conditioning ("HVAC")
system, and the electrical, plumbing & sewer (collectively, "Building Systems")
serving the Premises shall be in good working order and repair. If during the
first (30) days of the term any building system is not in good order or repair,
Landlord shall repair or the same at no cost to Tenant.
12.2 If Landlord has obligated itself to perform work in or about the
Premises, Tenant shall give Landlord written notice of any claimed deficiencies
in such work within thirty (30) days of the Commencement Date and, providing if
Landlord concurs (such concurrence not to be unreasonably withheld) with
Tenant's contentions, as set forth in the said notice, Landlord shall, within
thirty (30) days after Landlord's inspection of the Premises, begin any
corrective work required and diligently pursue to completion. Tenant shall not
be entitled to any rent abatement or offset on account of any interference with
Tenant's business caused by such work. If Tenant fails to give such notice to
Landlord within said time, Tenant shall be deemed, for all purposes, to have
accepted the Landlord's work as completed in accordance with Landlord's
obligations.
12.3 Any American Disabilities Act ("ADA") code requirement for compliance
to the common area of the building if any, shall be the responsibility of the
Landlord. Any ADA requirement for compliance to the Premises shall be the
responsibility of the Tenant.
13. ALTERATIONS
13.1 Except for non-structural alterations costing not more than $25,000.00
per work of improvement Tenant shall not make any alterations, additions or
improvements in or to the Premises without Landlord's prior written consent,
which shall not be unreasonably withheld or delayed, and then only by licensed
contractors reasonably approved by Landlord. For such alterations Tenant shall
provide copies of as-built drawings to Landlord, if available. As a condition
of such consent, Landlord reserves the right to require Tenant to submit working
drawings and specifications for any proposed alterations, decorations, additions
or improvements, together with Tenant's budgeted costs therefor. Tenant agrees
not to install or construct any improvements or create other obstructions which
might interfere with Landlord's free access to, or use of, the Common Areas.
All work, to be done by Tenant, shall be done at such times, and in such manner,
as Landlord may designate. Tenant covenants and agrees that all work done by
Tenant shall be performed in full compliance with all laws, rules and/or
directives of any governmental or regulatory entity. Before commencing any
work, Tenant shall supply Landlord with copies of all required permits and
approvals, and Tenant shall further give Landlord at least ten (10) days prior
written notice of the proposed commencement of such work and if Landlord
reasonably requests shall secure, at Tenant's expense, a lien and completion
bond satisfactory to Landlord. Tenant shall also supply Landlord with evidence
that Tenant's contractors and subcontractors have course of construction,
products liability, completed operations, workers' compensation and public
liability insurance in amounts reasonably satisfactory to Landlord. Landlord
shall be named as an additional insured in all such policies.
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13.2 All alterations, decorations, additions or improvements upon the
Premises ("Additions"), made by either party, including, without limiting the
generality of the foregoing, all wall coverings, drapes, built-in cabinet work
paid for by Landlord, paneling and the like, shall, unless Landlord elects
otherwise, and so informs Tenant at time of consent, become the property of
Landlord at the expiration of the Term and shall be surrendered with the
Premises.
Any Additions in or to the Premises by Tenant not in compliance with
the provisions of Article 13.1 shall, upon notice from Landlord, be immediately
removed by Tenant and the Premises restored to its original condition at
Tenant's expense. Upon Tenant's failure to restore the Premises, as hereinabove
provided, Tenant agrees to pay Landlord, upon demand, all expenses incurred by
Landlord in such restoration, together with an administrative fee of fifteen
percent (15%) of such expenses.
13.3 All articles of personal property and all machinery and equipment,
furniture and movable partitions owned by Tenant and, in each instance, which
are not affixed or attached to the Building, shall be and remain the property of
Tenant and may be removed by Tenant at any time during the Term. If Tenant
shall fail to remove all of its effects from said Premises upon termination of
this Lease for any cause whatsoever, Landlord may, at its option, remove the
same as provided in Civil Code Sections 1980 et seq., and Tenant agrees to pay
Landlord, upon demand, any and all expenses and costs recoverable by Landlord
pursuant to said Code Sections. In addition to such costs and expenses, Tenant
agrees to pay all reasonable attorneys' fees and court costs incurred by
Landlord in removing and disposing of the effects.
13.4 All work performed by Tenant, excluding cabinetry and wall coverings,
pursuant to Article 13 shall be supervised by Landlord. Tenant shall pay,
forthwith upon receipt of Landlord's invoice, as Additional Rent, all expenses
pertaining to such supervision, including the examination by Landlord's
architect, engineer, and any other consultant of the drawings and specifications
of such work, and in addition Landlord's fee in the amount of five percent (5%)
of the cost of such work. Notwithstanding the foregoing, nothing in this
Paragraph 13.4 shall be deemed to apply to the improvements to be performed by
Tenant, prior to occupancy, or within thirty (30) days after, nor to the
installation of Tenant's work stations or Tenant's data communications or
telephone cabling or wiring.
14. REPAIRS
14.1 Except as otherwise provided in Article 14.2, Tenant shall, at
Tenant's expense, keep the Premises in good condition and repair, including the
maintenance, cleaning and repair of all interior glass panels and partitions.
Landlord shall have no obligation to alter, remodel, improve, repair, decorate
or paint the Premises. Tenant shall, subject to the provisions of Article 13.3,
upon the expiration of the Term, surrender the Premises to Landlord in the same
condition as received, ordinary wear and tear and casualty damage, condemnation
and alterations with respect to which Landlord has not reserved the right to
require removal excepted. At the expiration of the Term, Tenant shall remove
all trash and rubbish from the Premises and return the Premises in broom clean
condition.
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14.2 Notwithstanding anything to the contrary contained in Article 14.1,
and subject to Article 14.3, and Tenant's obligation to pay Expense Rent
pursuant to Article 5, Landlord shall repair and maintain the structural
portions of the Building including the Premises, including the basic plumbing,
air conditioning and electrical systems installed or furnished by Landlord.
Should such maintenance and repair be caused in part or in whole by the act,
neglect, fault of or omission of any duty by Tenant, its agents, servants,
employees, licensees, or invitees, Tenant shall pay to Landlord, within (20)
days after receipt of written notice thereof, the reasonable cost of such
maintenance and repairs. Landlord shall not be liable for any failure to make
any such repairs or to perform any maintenance unless such failure shall persist
for any unreasonable time after written notice of the need of such repairs or
maintenance is given to Landlord by Tenant. Except as provided in Article 21
hereof, and so long as Landlord is making reasonable efforts to minimize
interference, there shall be no abatement of rent and no liability of Landlord
by reason of any injury to, or interference with, Tenant's business arising from
the making of any repairs, alterations or improvements in or to any portion of
the Building or the Premises. Tenant waives the right to make repairs at
Landlord's expense under Section 1942 of the California Civil Code, or under any
law, statute or ordinance now or hereafter in effect. Tenant agrees that the
Premises described herein do not constitute a "Dwelling Unit" or "Dwelling" as
the term is used in California Civil Code Section 1940 et seq.
14.3 Notwithstanding anything to the contrary contained in Articles 14.1
and 14.2, Tenant shall maintain and repair, at its expense, all lavatory,
shower, toilet, wash basin and kitchen facilities and heating and air
conditioning systems fully contained in the Premises, including all plumbing and
electrical connections.
The provisions of this Article 14.3 shall not apply to the basic
plumbing, heating and air conditioning systems provided by Landlord to all
tenants of the Building.
15. LIENS
15. Tenant shall keep the Premises, the Building and the land upon which
the Building is situated, free from any liens arising out of any work performed,
materials furnished or obligations incurred by, or on behalf of Tenant. In the
event that any mechanic's lien is recorded for work claimed to have been done
for, or on behalf of, or for materials claimed to have been furnished to Tenant,
Tenant agrees to discharge such mechanic's lien, by bond or otherwise, on demand
of Landlord, at Tenant's expense. In the event Tenant fails to perform the
provisions of this Article, Landlord may discharge any such lien and Tenant
shall pay to Landlord, as Additional Rent, all sums paid by Landlord, including
attorneys' fees, to remove such lien or liens.
16. ENTRY BY LANDLORD
16. Landlord shall at all times have the right to enter the Premises, at
reasonable times and with reasonable notice to Tenant except in case of
emergency, to inspect the same, supply janitorial and other services to be
provided by Landlord, submit the Premises to prospective purchasers or tenants,
post notices of non-responsibility, alter, improve or repair the Premises, or
any portion of the Building, without being deemed guilty of any eviction of
Tenant and without abatement of rent, and may, for that purpose, erect all
necessary structures, where reasonably required by the character of the work to
be performed, providing that the business of Tenant shall be interfered with as
little as is reasonably practical. Tenant hereby waives any claim for damages
for injury to, or interference with, Tenant's business, loss of occupancy or
quiet enjoyment of the Premises, and any other loss occasioned by such entry or
work, so long as Landlord is making reasonable efforts to minimize interference.
Landlord shall at all times have a key with which to unlock all of the doors,
in, upon and about the Premises, excluding Tenant's vaults and safes, and
Landlord shall have the right
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to use any means which Landlord may deem proper to open said doors in an
emergency in order to obtain entry to the Premises. If Tenant changes locks on
any doors, without Landlord's prior written consent, Landlord shall have the
right to change, remove and/or replace such locks and repair or restore any
damage and Tenant agrees to pay Landlord, upon demand, all expenses incurred in
accomplishing the foregoing. Entry to the Premises obtained by Landlord by said
means, or for said purposes, or otherwise, shall, under no circumstances, be
construed to be forcible or unlawful entry into, or a detainer of, the Premises,
or an eviction of Tenant from the Premises, and any damages caused on account
thereof shall be paid by Tenant. Except as otherwise expressly set forth, no
provision of the Lease shall be construed as obligating Landlord to perform any
repairs, alterations or decorations.
17. UTILITIES AND SERVICES
17. Landlord agrees to furnish to the Premises during Business Hours,
subject to any governmental restriction, requirement or standard relating
thereto, reasonable quantities of electric current for building standard
lighting and receptacles, water for lavatory and drinking purposes, heat and air
conditioning as required, in Landlord's judgment, for the comfortable use and
occupation of the Premises and elevator services by non-attended automatic
elevators. Business Hours mean the hours from 7:00 a.m. to 6:00 p.m. Monday to
Friday and 9:00 a.m. to 1:00 p.m. on Saturday, exclusive of all statutory or
legal holidays generally recognized in the State of California, or such other
reasonable hours as Landlord may from time to time specify. Janitorial and
security services will be furnished by Landlord to the extent and during such
times as are standard in Class "A" office buildings in the Woodland Hills,
California area. Landlord shall not be liable for, and Tenant shall not be
entitled to, any abatement or reduction of rent by reason of Landlord's failure
to furnish any of the foregoing, when such failure is caused by governmental
action, accident, breakage, repairs, strike, lockout, other labor dispute,
disturbance of any character or for any other cause beyond Landlord's reasonable
control, except to the extent caused by the gross negligence or willful
misconduct of Landlord, its agents, employees, contractors or invitees. If
Tenant requires or utilizes more water or electric power than Landlord is
required to provide hereinabove, or if Tenant requires HVAC outside of Business
Hours, or if Tenant has special water, electric power, cooling or ventilation
needs created in certain areas by the use of devices or machines which include,
but are not limited to, telephone equipment, computers, high-power consumption
office equipment, or other similar devices, Landlord may at its option require
Tenant to pay, as Additional Rent, the cost, as reasonably determined by
Landlord, incurred by such usage. In addition, Landlord, at Tenant's expense,
may install separate meter(s) for the Premises or separately meter such devices
and machinery, and Tenant thereafter shall pay all charges of the utility
providing the service thereto. High-power consumption office equipment is
defined as equipment which consumes power in excess of the normal consumption of
a Tenant in a Class "A" office building in the Woodland Hills, California area.
In the event of Tenant's request, Landlord shall have the exclusive
right, but shall not be required to supply, install, maintain, repair, replace,
improve or alter, at Tenant's sole expense, all plumbing, electrical, heating,
air conditioning and lighting systems in the Premises.
Notwithstanding anything to the contrary, Landlord reserves the right
to make reasonable and nondiscriminatory modifications to the standards for
utilities and services noted hereinabove.
Tenant shall have the right to abate its rent if there is more than
five (5) consecutive business days of disruption in services that are within the
control of Landlord, unless Landlord is making reasonable efforts to restore.
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18. BANKRUPTCY AND INVOLUNTARY ASSIGNMENT
18.1 No interest of Tenant in this Lease shall be assignable by operation
of law, including, without limitation, the transfer of this Lease by will or
intestacy. Each of the following acts shall be considered an involuntary
assignment.
(a) If Tenant, or any guarantors of this Lease, shall become
insolvent or file a petition under Chapter 7, 10, 11 or any other
provision of the Bankruptcy Act, as now or hereafter in effect, or
make an assignment for the benefit of creditors, or if the Tenant, or
such guarantor be adjudicated a bankrupt in involuntary bankruptcy
proceedings, and such adjudication shall not have been vacated within
sixty (60) days from the date thereof;
(b) If a receiver or trustee be appointed of the Tenant's property,
or that of any guarantor of this Lease, and the order appointing such
receiver or trustee is not set aside or vacated within sixty (60) days
after the entry thereof;
(c) If a writ of attachment or execution is levied on this Lease, or
upon the property of Tenant or any guarantor of this Lease, unless
such writ of attachment or execution be removed within sixty (60) days
after such levy;
(d) If this Lease shall otherwise by operation of law pass to any
person or persons other than Tenant.
18.2 The word "insolvent" as used herein shall mean either (a) an inability
on the part of a person or entity to meet its obligations as they become due, or
(b) that the liabilities of a person or entity exceed its assets, or (c) both.
18.3 An involuntary assignment shall constitute a default by Tenant and
Landlord shall have the right to terminate this lease, and, in the event of an
involuntary assignment, this Lease shall not be treated as an asset of Tenant.
Landlord, in addition to all rights and remedies allowed by law or equity,
shall, upon such termination, be entitled to recover damages in an amount equal
to the then present value of the rent reserved in this Lease for the entire
residue of the stated Term hereof, less the fair rental value of the Premises
for the residue of the stated Term hereof, and neither Tenant nor any person
claiming through or under Tenant, or by virtue of any statute or order of any
court, shall be entitled to possession of the Premises, but they shall forthwith
surrender the Premises to Landlord. Nothing herein contained shall limit or
prejudice the right of Landlord to prove and obtain as damages, by reason of
such termination, an amount equal to the maximum amount allowed by any statute
or rule of law in effect at the time when, and governing the proceeding in
which, such damages are to be proved, whether or not such amount be greater,
equal to or less than the amount of damages recoverable under the provisions of
this Article.
19. INDEMNIFICATION
19.1 Tenant shall indemnify and hold Landlord harmless against and from all
claims arising from Tenant's use of the Premises, the conduct of its business,
or from any activity, work, or thing done, permitted or suffered by the Tenant,
Tenant's agents, employees, licensees or invitees, in or about the Premises,
Common Area, Building and parking facilities and Tenant shall further indemnify
and hold Landlord harmless against and from all claims arising from any breach
or default in the performance of any obligation on Tenant's part to be performed
under this Lease, or arising from any act, neglect, fault or omission of the
Tenant, its agents or employees, and from and against all costs, reasonable
attorneys' fees, expenses and liabilities incurred in or about such claims,
actions or proceedings brought thereon. In case any actions or proceedings are
brought against Landlord by reason of any such claims, Tenant, upon notice from
the Landlord, shall defend the same, at Tenant's expense, by counsel reasonably
satisfactory to Landlord. Tenant, as a material part of the
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consideration to Landlord, hereby assumes all risk of damage to property or
injury to persons in, on or about the Premises, Common Areas, Building and
parking facilities from any cause whatsoever, except that which is caused by the
gross negligence or willful misconduct of Landlord, its agents, servants, or
employees, or other tenants or by the failure of Landlord to observe any of the
terms and conditions of this Lease, where such failure has persisted for an
unreasonable period of time after Landlord's receipt of written notice of such
failure, and Tenant hereby waives all claims in respect thereof against Landlord
except as specifically provided otherwise in this Article 19. Notwithstanding
anything to the contrary contained in this Lease, Landlord shall not be released
from, and Tenant shall have no indemnity obligation with respect to, liabilities
arising out of the gross negligence or willful misconduct of Landlord or its
agents, employees, contractors or invitees; Landlord's violation of law; or a
breach of landlord's obligations or representations under this Lease.
19.2 Tenant shall pay for, indemnify and hold Landlord harmless from and
against all damage to the Premises, Building and Common Areas to the extent
caused, by Tenant, its agents, servants, employees, licensees or invitees. In
the event Landlord reasonable believes that Tenant, its agents, servants,
employees, licensees or invitees are causing damage to the Premises, Building or
Common Areas, either singly or as a continuous course of conduct, Tenant shall,
upon Landlord's written notice, take all necessary action to prevent such
damage, and Tenant's failure to prevent such damage shall be a material breach
of this Lease.
20. DAMAGE TO TENANT'S PROPERTY
20. Notwithstanding any provisions of Article 19 to the contrary, Landlord
or its agents shall not be liable for any damage to property of Tenant entrusted
to employees of the Building, or for loss of, or damage to, any such property by
theft, or otherwise, or for any injury or damage to persons or property
resulting from fire, explosion, falling plaster, steam, gas, electricity, water
or rain which any leak from any part of the Building, or from the pipes,
appliances or plumbing works therein, or from the roof, street or sub-surface,
or from any other place, or resulting from dampness or any other cause
whatsoever except to the extent caused by Landlord's willful misconduct or gross
negligence, or that of its agents, employees, contractors or invitees, and
Tenant hereby releases Landlord from any claim for such damage. Neither
Landlord nor its agents shall be liable for interference with light or other
incorporeal hereditaments. Tenant shall give prompt notice to Landlord of fire
or accidents in the Premises or Building.
21. DAMAGE OR DESTRUCTION
21.1 If the exterior of the Premises, the Building or the Common Areas are
damaged as a result of any cause other than the negligence or fault of Tenant,
its agents, employees or invitees, then Landlord shall forthwith repair the
same, to substantially the same condition immediately prior to damage, provided
the extent of the destruction be less than twenty-five (25%) percent of the then
full replacement value of the Premises, the Building or the Common Areas. If
the destruction of the exterior of the Premises, the Building or the Common
Areas is to an extent greater than twenty-five (25%) percent of the then full
replacement value, Landlord shall then have the option either: (a) to repair or
restore such damage, this Lease continuing in full force and effect and the
Tenant shall be entitled to a proportionate reduction of rent while such repairs
are being made, such reduction to be based upon the extent to which the making
of such repairs shall substantially interfere with and prevent Tenant from
carrying on its business in the Premises during the time such repairs are being
made; or (b) give notice to Tenant at any time within sixty (60) days after
such damage, terminating this Lease as of the date specified in
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such notice. If Landlord gives such notice, this Lease shall expire and all
interest of the Tenant in the Premises shall terminate on the date so specified
in such notice of Landlord, and the rent, reduced by any proportionate reduction
(as provided in (a) above), shall be paid up to the date of such termination.
Tenant shall have the right to terminate this Lease if either (i) the
restoration work required to be performed by Landlord pursuant to this Section
21.1 has not commenced within ninety days (90) after the casualty causing the
destruction so required to be restored, or (ii) after commencing the restoration
work required to be performed by Landlord pursuant to this Section 21.1,
Landlord fails thereafter to diligently prosecute such work to completion, or
such work is not substantially completed (i.e., sufficient to permit Tenant to
conduct its business within the Premises in substantially the same manner as
prior to the casualty causing the destruction so required to be restored) within
one hundred twenty (120) days after such casualty.
21.2 Notwithstanding anything to the contrary contained in this Article, if
the damage, as defined in 21.1, to the Premises, the Building or the Common
Areas occurs as a result of any casualty covered in this Article during the last
nine (9) months of the Term or any extension thereof, either Landlord or Tenant
shall have the right to terminate this Lease.
21.3 Landlord shall not be required to repair the interior of the Premises
as a result of any injury or damage by fire or other cause, or to repair or
replace any panels, decoration, office fixtures, railing, ceiling, floor
covering, partitions, or any other property in the Premises belonging to Tenant.
21.4 The provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the Civil Code of the State of California are hereby waived by
Tenant and these provisions shall have no force and effect in governing the
termination of this Lease.
22. EMINENT DOMAIN
22. In case the Premises, Building, land or Common Areas, or such part of
any thereof, as shall substantially interfere with the Tenant's use and
occupancy of the Premises, shall be taken for any public or quasi-public purpose
by any lawful power or authority by exercise of the right of appropriation,
condemnation or eminent domain, or sold to prevent such taking, this Lease shall
terminate on the earlier of the date of such sale or the date possession is
required to be surrendered to said authority. Tenant shall not, because of such
taking, assert any claim against the Landlord, for any compensation because of
such taking of any interest in this Lease, the land, Building, Premises or
Common Areas and Landlord shall be entitled to receive the entire amount of any
award without deduction for any estate or interest of Tenant, except as is
separately awarded to Tenant by the condemning authority. In the event the
amount of property or the type of estate taken shall not substantially interfere
with the conduct of Tenant's business, Landlord shall be entitled to the entire
amount of the award, without deduction for any estate or interest of Tenant, and
Landlord, at its option, may terminate this Lease. If Landlord does not so
elect, Landlord shall promptly proceed to restore the Premises to substantially
its same condition prior to such partial taking, and a proportionate allowance
shall be made to Tenant for the rent corresponding to the time during which, and
to the part of the Premises of which, Tenant shall be so deprived on account of
such taking and restoration, and Tenant hereby waives the provisions of Code of
Civil Procedure Section 1265.130. Nothing contained in this Article shall be
deemed to give Landlord an interest in any award made to Tenant for the taking
of personal property belonging to Tenant, moving costs, relocation expenses,
loss of goodwill and the unamortized cost of any alterations installed by
Tenant.
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23. DEFAULTS
23. The occurrence of any one or more of the following events shall
constitute a default hereunder by Tenant:
(a) The failure by Tenant to make any payment required to be made by
Tenant within five (5) days of written notice by Landlord to Tenant
that payment is due; provided that, if Landlord has delivered such a
written notice to Tenant within the twelve (12) month period preceding
such delinquency, Tenant shall be in default hereunder if any payment
is not made within five (5) days of when due and Landlord shall have
no notice obligation with respect to such delinquency.
(b) Any default specified in Article 18 of this Lease; or
(c) The failure by Tenant to observe or perform any express or
implied covenants or provisions of this Lease, other than as specified
in (a) or (b) above, where such failure shall continue for a period of
twenty (20) days after notice from Landlord to Tenant; provided,
however, that any such notice shall be in lieu of, and not in addition
to, any notice required under California Code of Civil Procedure
Section 1161; and provided, further, that if the nature of Tenant's
default is such that more than twenty (20) days are reasonably
required for its cure, then Tenant shall not be deemed to be in
default if Tenant shall commence such cure within said twenty (20) day
period and thereafter diligently prosecute such cure to completion;
24. REMEDIES
24.1 In the event of Tenant's default, in addition to any other remedies
available to Landlord, Landlord shall have the immediate option to terminate
this Lease and all rights of Tenant hereunder. In the event that Landlord
elects to terminate this Lease, then in addition to all rights available to
Landlord pursuant to California Code of Civil Procedure Section 1161 et seq.,
Landlord may recover from Tenant:
(a) The worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus
(b) The worth at the time of award of the amount by which the unpaid
rent, which would have been earned after termination until the time of
award, exceeds the amount of such rental loss that the Tenant proves
could have been reasonably avoided; plus
(c) The worth at the time of award of the amount by which the unpaid
rent, for the balance of the Term after the time of award, exceeds the
amount of such rental loss that the Tenant proves could be reasonably
avoided; plus
(d) Any other amount necessary to compensate Landlord for all the
detriment approximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things
could be likely to result therefrom.
24.2 As used in Article 24.1(a) and 24.1(b) the "worth at the time of
award" is computed by allowing interest at the rate specified in Article 38 of
this Lease.
24.3 As used in Article 24.1(c), the "worth at the time of award" is
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
24.4 In the event of default by Tenant, Landlord shall have the right to
maintain Tenant's right to possession, in which case this Lease shall continue
in effect, whether or not Tenant shall have abandoned the Premises. In such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due hereunder.
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24.5 In the event of default by Tenant, Landlord shall have the right to
pursue any other remedy or remedies now or hereafter available to Landlord.
24.6 Tenant waives all right to relief pursuant to California Code of Civil
Procedure Section 1179.
24.7 Notwithstanding any other provision of this Lease to the contrary, nor
any other characterization contained herein, all amounts payable by Tenant to
Landlord, of every kind and description, arising out of or related to Tenant's
obligations to Landlord under this Lease are payable as rent, and in the event
of Tenant's default in the payment thereof, Landlord shall have all rights and
remedies available to Landlord on account of Tenant's default in the payment of
rent, including, but not limited to, the maintenance of an action for the
unlawful detainer of the Premises. Tenant agrees to pay all rent to Landlord
when due without any deduction, off-set, or counterclaim whatsoever.
25. ATTORNEYS' FEES
25.1 If either Landlord or Tenant should bring suit to enforce any
provision of this Lease, or any rights of either party hereto, or to interpret
this Lease, the substantially prevailing party shall recover from the other
party all costs and expenses, including reasonable attorneys' fees, incurred by
the prevailing party. Notwithstanding the provisions of Civil Code Section
1717, the term "prevailing party" as used herein shall include by way of
specification, but not of limitation, (1) a party as to whom a lawsuit is
dismissed, either with or without prejudice, without the written consent of the
opposing party, and (2) in the event the lawsuit is one for declaratory relief,
that party whose contentions as to the interpretations to be given to this Lease
are substantially upheld. Landlord and Tenant agree that any attorneys' fees
payable pursuant to this Article may be claimed as court costs, to be fixed by
the Court in which the lawsuit was filed, or to which it was transferred, upon
motion and notice to the opposing party, or in a separate lawsuit.
25.2 Should Landlord be named as a defendant in any suit brought against
Tenant in connection with, or arising out of, Tenant's occupancy hereunder and
not directly related to Landlord's acts or omissions, Tenant shall pay to
Landlord its costs and expenses incurred in such suit, including Landlord's
reasonable attorneys' fees.
26. ASSIGNMENT AND SUBLETTING
26.1 Tenant, and any other party acting for, on behalf of or through
Tenant, shall not during the Term pledge, hypothecate, encumber or assign this
Lease, or Tenant's interest therein, or sublet all or any part of the Premises
without the prior written consent of the Landlord, which Landlord agrees not to
unreasonably withhold or delay subject to the term and provisions of this
Article 26. Any assignment, sublease, mortgage, pledge, encumbrance or transfer
by Tenant, or any other party, made in contravention of this Article shall be
void. Notwithstanding the foregoing, Landlord's consent shall not be required
to list the Premises for assignment or sublet with a broker.
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26.2 (a) Should Tenant wish from time to time to assign this Lease, or to
sublet all or a portion of the Premises, it shall first provide
Landlord written notice thereof, together with the name and address of
the proposed "bona fide" assignee or subtenant and other information
as to the nature of its business and financial responsibility as
Landlord may require, together with all the specific terms and
conditions of the proposed assignment or sublease (such information is
hereinafter collectively the "Tenant Notice"). By way of
specification, but not of limitation, the Tenant Notice shall include
the following information about the proposed assignee or subtenant: a
detailed statement of facts about the proposed assignee or subtenant,
the type of use to which the Premises will be put, a balance sheet as
of a date within 90 days of the proposed effective date of the
assignment or sublease, statements of income, profit and loss for the
two (2) year period preceding such date, a written statement
containing reasonable detail as to business experience during the
preceding five (5) years, and bank and credit references. The Tenant
Notice must be given to Landlord at least thirty (30) days prior to
the date such proposed assignment or sublease is to be effective.
(b) Upon Landlord's receipt of the Tenant Notice, it may, within ten
(10) days thereafter ("Notice Period"), advise Tenant in writing
("Landlord Notice") that:
(i) In the case of a sublease, Landlord either elects to take
such sublease from Tenant in its own name, or in the name of its
designee, upon all the terms and conditions of the Tenant Notice,
or Landlord elects to reduce the area of the Premises by the area
which Tenant desires to sublease, in which latter event Landlord
shall re-determine the area of the Premises, the Tenant Tax and
Expense Shares and the Basic Rent in each case as of the date of
such election; or
(ii) In the case of an assignment, Landlord elects to terminate
this Lease; or
(iii) Landlord grants its consent and the Tenant may proceed, at
its discretion, with such assignment or sublease on the terms
contained in the Tenant Notice without amendment thereto; or
(iv) Landlord withholds its consent to such assignment or
sublease on any reasonable basis; provided, however, that any
withholding of consent on the grounds that (a) the financial
worth of the proposed assignee or subtenant may be insufficient
to enable it to meet all its financial obligations as required
under this Lease, (b) the reputation, character and/or the
operation of the proposed assignee or subtenant is not in keeping
with the nature of the Building, (c) the proposed use of the
Premises is not consistent with general business office use, or
(d) the proposed use of the Premises conflicts with any exclusive
right granted by Landlord with respect to the Building, shall be
deemed reasonable.
(v) The failure of Landlord to provide Tenant with the Landlord
Notice within the Notice Period shall not be deemed to constitute
the Landlord's consent to the proposed assignment or sublease as
in (b) (iii) above and Landlord shall use its best efforts to
respond to the Tenant Notice as soon thereafter as reasonably
practical.
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(iv) Notwithstanding the foregoing, if Landlord exercises either
of the elections set forth in subsections (i) or (ii) above,
Tenant shall have ten (10) days after receipt of landlord's
Notice to rescind its request for Landlord's consent to the
assignment or sublease, and to affirm to landlord that no
assignment or sublease has been made or entered into, in which
case this Lease shall continue in full force and effect.
(c) Landlord's consent to an assignment or sublease shall be a
specific consent only to the subletting or assignment upon all the
terms and information contained in the Tenant Notice related thereto.
In the event that Tenant receives such consent and within thirty (30)
days thereafter does not consummate any such assignment or sublease,
then in each case thereafter Tenant must prepare and submit to
Landlord another Tenant Notice for each and every assignment or
sublease it proposes to enter into, even if on the same terms as
contained in the Tenant Notice for which the Landlord's consent was
received.
26.3 Throughout the Term, in the event of any permitted assignment or
sublease, Tenant shall pay to Landlord forthwith any "Lease Premium" unless
Tenant continues to occupy substantially all of the Premises. For the purposes
hereof, "Lease Premium" means fifty percent (50%) of all consideration,
including rents, received by or on behalf of Tenant from its assignee or
sublessee for or from such assignment or sublease which (a) in the case of an
assignment are received by or on behalf of Tenant respecting such assignment of
this Lease, after deducting therefrom Tenant's reasonable costs to effect the
assignment, including brokerage commissions, legal fees, redecoration and
refurbishing costs, and (b) in the case of a sublease are received by or on
behalf of Tenant in excess of Tenant's leasing expenses (and including, without
limitation, Tenant's reasonable legal fees, redecoration and refurbishing costs)
and rents (including without limitation Basic Rent, Expense Rent, Tax Rent and
Additional Rent) which are payable by Tenant to Landlord hereunder for or in
respect of the portion of the Premises so sublet.
26.4 Any permitted assignment of this Lease, or permitted subletting of all
or a portion of the Premises, shall not act to release Tenant from any liability
under this Lease.
26.5 In the event of any permitted assignment, Tenant shall cause any such
assignee to execute an agreement with Landlord, upon a form furnished by
Landlord, to be bound by all the terms of this Lease. Such separate agreement
shall not release the Tenant from its primary liability. In the event of any
permitted sublease, Tenant shall deliver to Landlord a fully executed copy of
the sublease within ten (10) days after it is executed or the sublessee occupies
the space, whichever occurs first.
26.6 Tenant shall have the right to sublease all or any portion of the
premises during the term of the Lease, or option term, to an affiliate, parent,
or subsidiary company without the Landlord's written approval. Additionally,
Tenant may house in its premises related entities and/or non-related third-party
clients from time-to-time, without such being deemed a sublease.
26.7 The provisions of this Article apply to all subsequent proposed
assignments or sublettings in the same manner as to an initial proposed
assignment or subletting. Tenant shall pay a reasonable processing fee to
Landlord for each assignment or sublease submitted to Landlord not to exceed
$500.00. Tenant shall not, either voluntarily or by operation of law, sell,
hypothecate, transfer or otherwise encumber this Lease, or permit the Premises
or any part thereof to be occupied by anyone other than Tenant or Tenant's
employees, without the prior written consent of Landlord. Any sale, assignment,
mortgage, or transfer of this Lease or occupancy of the Premises not in
compliance with the provisions of this Article shall be void and shall
constitute a material breach of this Lease.
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26.8 The sale of 51% or more of the value of the assets of Tenant, shall be
deemed to be a voluntary assignment prohibited without Landlord's written
consent. The phrase "controlling percentage" means the ownership of, or the
right to vote, stock possessing at least 51% of the total combined voting power
of all classes of Tenant's capital stock issued, outstanding, and entitled to
vote for the election of Directors. Notwithstanding anything to the contrary
contained in this Article 26, Tenant, without Landlord's prior written consent,
may sublease the premises or assign this Lease to: (i) a subsidiary, affiliate,
division or corporation controlling, controlled by or under common control with
Tenant; (ii) a successor corporation related to Tenant by merger,
consolidation, or non-bankruptcy reorganization, so long as the surviving entity
has a financial net worth equal to or greater than that of Tenant at the time of
the merger; or (iii) a purchaser of substantially all of Tenant's assets located
at the Premises. For purposes of this Lease, the sale of Tenants capital stock
through any public exchange shall not be deemed a transfer of this Lease or the
Premises requiring Landlord's consent.
27. SUBORDINATION AND ATTORNMENT
27.1 This Lease, and any option or right of first refusal granted hereby,
at Landlord's option, shall be subordinate to any ground lease, mortgage, deed
of trust, or any other hypothecation or security hereafter placed upon the
Building or the land upon which the Building is situated or both, and to any and
all advances made on the security thereof and to all renewals, modifications,
consolidations, replacements and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgages, trustee or
ground lessor shall elect to have this Lease and any Options granted hereby
prior to the lien of its mortgage, deed of trust or ground lease, and shall give
written notice thereof to Tenant, this Lease and such Options shall be deemed
prior to such mortgage, deed of trust or ground lease, whether this Lease or
such Options are dated prior or subsequent to the date of said mortgage, deed of
trust or ground lease or the date of recording thereof. Landlord will use its
best efforts to provide a standard lender non-disturbance agreement.
27.2 Tenant agrees, at the request of any successor of Landlord, to attorn
to such successor and Tenant further agrees to execute any reasonable documents
required to effectuate an attornment, a subordination, or to make this Lease or
any Option granted herein prior to the lien of any mortgage, deed of trust or
ground lease, as the case may be. Tenant's failure to execute such documents
within ten (10) business days after receipt of written demand shall constitute a
material default by Tenant hereunder without further notice to Tenant.
28. OFFSET STATEMENT
28.1 Tenant shall, at any time and from time to time, upon not less than
ten (10) business days prior written notice from Landlord, execute, acknowledge
and deliver to Landlord a statement in writing (a) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease as so modified is in full force
and effect) and the dates to which the rental and other charges are paid in
advance, if any, and (b) acknowledging that Tenant has no knowledge of any
uncured defaults on the part of Landlord hereunder, or specifying such defaults
if any are claimed; and (c) containing such other information as reasonably
required by a prospective purchaser or encumbrancer of all or any portion of the
real property of which the Premises are a part. Any such statement may be
relied upon by any prospective purchaser or encumbrancer of all or any portion
of the real property of which the Premises are a part.
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28.2 Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant (a) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (b) that there are no
uncured defaults in Landlord's performance, and (c) that not more than one
month's rental has been paid in advance.
29. HOURS OF SERVICE
29. Tenant shall have access to the building twenty-four (24) hours a day,
seven (7) days per week. Building standard HVAC operations are Monday through
Friday, 7:00 a.m. to 6:00 p.m., Saturday 9:00 a.m. to 1:00 p.m., except legal
holidays
30. RULES AND REGULATIONS
30. Tenant shall faithfully observe and comply with the Rules and
Regulations, annexed to this Lease as Exhibit "D", and all reasonable and
nondiscriminatory modifications thereof, and additions thereto, from time to
time put into effect by upon written notice to Tenant by Landlord. Landlord
shall not be responsible to Tenant for the violation or nonperformance by any
other tenant or occupant of the building of any of the Rules and Regulations, or
by reason of any act or omission of any such other tenant or occupant of the
Building.
31. CONFLICT OF LAWS
31. This Lease shall be governed by and construed pursuant to the laws of
the State of California.
32. IDENTIFICATION OF TENANT
32.1 If more than one person executes this Lease as Tenant, (a) each of
them is jointly and severally liable for the keeping, observing and performing
of all of the terms, covenants, conditions, provisions and agreements of this
Lease to be kept, observed and performed by Tenant, and (b) the term "Tenant" as
used in this Lease shall mean and include each of them jointly and severally and
the act or notice from, or notice or refund to, or the signature of, any one or
more of them, with respect to the tenancy or this Lease, including, but not
limited to, any renewal, extension, expiration, termination or modification of
this Lease, shall be binding upon each and all of the persons executing this
Lease as Tenant with the same force and effect as if each and all of them had so
acted or so given or received such notice or refund or so signed.
32.2 If Tenant is a corporation, each individual executing this Lease on
behalf of said corporation represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said corporation, in accordance with
a duly adopted resolution of the Board of Directors of said corporation or in
accordance with the bylaws of said corporation and that this Lease is binding
upon said corporation.
33. SUCCESSORS AND ASSIGNS
33. Except as otherwise provided in this Lease, all of the covenants,
conditions and provisions of this Lease shall be binding upon and shall inure to
the benefit of the parties hereto, their respective heirs, personal
representatives, successors and permissible assigns.
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34. SURRENDER OF PREMISES
34. The voluntary or other surrender of the Premises by Tenant, or mutual
cancellation of this Lease, shall, at the option of Landlord, operate as an
assignment to it of any or all subleases or subtenancies, and no merger shall be
effected in the event of such surrender.
35. PERFORMANCE BY TENANT
35. All covenants and agreements to be performed by Tenant under the terms
of this Lease shall be performed at Tenant's expense and without any abatement
of rent, except as where provided otherwise in this Lease. If Tenant shall fail
to perform any act on its part to be performed hereunder, other than payment of
money to Landlord, and such failure shall continue for ten (10) days after
notice thereof by Landlord, Landlord may, without waiving or releasing Tenant
from any obligation of Tenant, but shall not be obligated to, perform any such
act on Tenant's part to be performed. All costs incurred by Landlord, together
with interest thereon at the rate specified in Article 38 of this Lease, from
the date of such payment by Landlord shall be payable by Tenant to Landlord on
demand.
36. DEFINITION OF LANDLORD
36. The term "Landlord" as used in this Lease, so far as covenants or
obligations on the part of Landlord are concerned, shall be limited to mean and
include only the owner or owners at the time in question of the fee or owner or
owners of the leasehold interest under a ground lease or leases of the land. In
the event of any transfer, assignment or other conveyance or transfers of any
such title or leasehold, Warner Center Associates, L.P. and in case of any
subsequent transfers or conveyances, the then grantor, shall be automatically
freed and relieved from and after the date of such transfer, assignment or
conveyance of all liability as respects the performance of any covenants or
obligations on its part contained in this Lease thereafter to be performed. If
any Security Deposit or prepaid rent has been paid by Tenant, Landlord can
transfer the Security Deposit or prepaid rent to Landlord's successor and on
such transfer Landlord shall be discharged from any further liability in
reference to the Security Deposit or prepaid rent.
37. WAIVER
37. The waiver by Landlord or Tenant of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition herein
contained, nor shall any custom or practice which may grow up between the
parties in the administration of the terms hereof be deemed a waiver of, or in
any way affect, the right of Landlord or Tenant to insist upon the performance
by the other in strict accordance with said terms. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
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38. INTEREST CHARGES
38. Tenant agrees that if any sum payable by Tenant to Landlord under this
Lease, whether constituting rent or otherwise, is not paid to Landlord within
five (5) days after receipt of written notice from Landlord that such sum is
due, (provided that, if Landlord has delivered such a written notice to Tenant
within the twelve (12) month period preceding such delinquency, Landlord shall
have no notice obligation with respect in such interest charge), such sum shall
thereafter bear interest at a rate equal to the higher of (a) ten percent (10%)
per annum, or (b) five percent (5%) per annum, plus the rate prevailing on the
25th day of the month preceding the date of execution of this Lease established
by the Federal Reserve Bank of San Francisco on advances to member banks under
Section 13 and 13(a) of the Federal Reserve Act as now in effect, or hereafter
from time to time amended (or if there is not such single determinable rate of
advances, the closest counterpart of such rate as shall be designated by the
Superintendent of Banks of the State of California, unless some other person or
agency is delegated such authority by the legislature) and Landlord shall have
no notice obligation with respect to such interest charge. Tenant hereby agrees
that the use of such interest rate herein shall not be deemed to be interest
upon a loan or forbearance of money, for goods or things in action for use
primarily for personal, family, or household purposes within the meaning of
California Constitution, Article 15, Section 1.
39. LATE CHARGES
39. Tenant acknowledges that the late payment by Tenant to Landlord of any
sums due under this Lease will cause Landlord to incur costs not contemplated by
this Lease, the exact amount of such costs being extremely difficult and
impractical to fix. Therefore, if any installment of rent is not received by
Landlord (within five (5) days of written notice by Landlord to Tenant that
payment is due, provided that, if Landlord has delivered such a written notice
to Tenant within the twelve (12) month period preceding such delinquency,
Landlord shall have no notice obligation with respect to such delinquency) or if
any Additional Rent or any other sum due under this Lease is not paid by Tenant
within five (5) days of receipt of a statement therefore from Landlord, Tenant
shall pay to Landlord an additional sum of six percent (6%) of the overdue
amount as a late charge. Such late charge shall be in addition to, and not in
lieu of, any interest which may become due upon such sum pursuant to Article 38
of this Lease. The parties to this Lease agree that this late charge represents
a fair and reasonable estimate of costs that Landlord will incur by reason of
any late payment by Tenant. Acceptance of any late charge shall not constitute
a waiver of Tenant's default with respect to the overdue amount or prevent
Landlord from exercising any of the other rights and remedies available to
Landlord under this Lease, or pursuant to any law now or hereafter in effect.
The aforesaid late charge shall be considered Additional Rent.
40. TERMS AND HEADINGS
40. The words "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular. Words used in any gender include other genders.
The obligations imposed hereunder upon Tenant shall be joint and several. The
article headings of this Lease are not a part of this Lease, are for convenience
only, and shall have no effect upon the construction or interpretation of any
part hereof.
41. TIME
41. Time is of the essence with respect to the performance of every
provision of this Lease in which time of performance is a factor.
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42. PRIOR AGREEMENTS; AMENDMENTS
42. This Lease contains the entire agreement of the parties hereto with
respect to any matter covered or mentioned in this Lease, and no prior agreement
or understanding, oral or written, express or implied, pertaining to any such
matter shall be effective for any purpose. No provision of this Lease may be
amended or added to except by an agreement in writing signed by the parties
hereto or their respective successors in interest. The parties acknowledge that
all prior agreements, representations and negotiations concerning the subject
matter of this Lease, or collateral thereto, are deemed superseded by the
execution of this Lease to the extent they are not incorporated herein, and that
this agreement shall be deemed to be integrated.
43. SEPARABILITY
43. Any provision of this Lease which shall prove to be invalid, void or
illegal in no way affects, impairs or invalidates any other provisions hereof,
and such other provisions shall remain in full force and effect.
44. RECORDING
44. Tenant shall not record this Lease, or a short form memorandum
thereof, without the written consent of the Landlord, and any such recording,
without Landlord's written consent, shall be a material breach of this Lease.
45. TENANT'S AND LANDLORD'S INSURANCE AND SUBROGATION
45.1 Tenant agrees to obtain and keep in force during the Term, at Tenant's
expense, comprehensive public liability and property damage insurance with
combined single liability limit of $1,000,000.00 or such greater amount as
Landlord shall require from time to time. Landlord shall be named as an
additional insured in said policy. In the event the Premises are on the street
level floor of the Building, Tenant shall keep in force throughout the Term
plate glass window insurance and Tenant shall pay all costs of replacement of
such glass not covered by such insurance. Tenant shall, from time to time, upon
Landlord's request, furnish Landlord with evidence that all required insurance
is in effect with premiums paid. Landlord's failure to request such evidence
shall not be deemed a waiver of Landlord's right to require such evidence at any
time.
45.2 Tenant agrees that during the Term it shall carry insurance against
loss or damage by fire or other casualty in the full replacement value of any
panels, decorations, office fixtures, railings, ceiling, floor coverings, wall
coverings, partitions and all other improvements in the Premises and of any
property or equipment of Tenant in or upon the Premises. Landlord will not
carry insurance on Tenant's possessions or upon any improvements in or upon the
Premises.
Landlord agrees to obtain and maintain insurance as required by its
first mortgage lender. The premium for such insurance shall be included in the
building operating expenses. Both parties hereby waive all rights and claims
against each other for insured losses and waive all right of subrogation of
their insurers.
45.3 All insurance policies required in Article 45 shall contain a
provision which prohibits cancellation or termination of the policy without
thirty (30) days prior notice to Landlord.
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46. PARKING LICENSE
46. Landlord grants Tenant a revocable license to park in common with
other tenants of Landlord four (4) automobiles per 1000 RSF of space, in the
parking facilities appurtenant to the Building. Four (4) spaces shall be
reserved and all the other spaces shall be unreserved. All parking spaces shall
be at $55/space, per month including Los Angeles City Tax, for the term of the
Lease. Any additional reserved parking spaces shall be at the building's
prevailing parking rate, presently $104.50 per space, per month, and $55 per
unreserved space per month, subject to availability in the building's parking
structure. Visitor parking shall be at the building's posted rate during the
lease term. Tenant's license shall be revoked and expire concurrently with the
termination of the Lease, unless sooner terminated pursuant to the terms and
conditions of this Article. If and only if Tenant is in default, beyond
applicable cure periods, under any term or condition of the Lease, or of this
Article, Landlord may, at Landlord's option, revoke this license and thereafter
prohibit Tenant's use of the parking facilities, without liability to Tenant,
until such default is cured, except that Tenant may thereafter use the parking
facilities of the building upon the same terms and conditions that members of
the public generally who are not tenants of the building may use said parking
facilities. Tenant agrees to abide by all of the rules and regulations for the
parking facilities that Landlord, or its designee, may from time to time
establish upon written notice to Tenant. This Article creates only a revocable
license to use such parking facilities and does not convey to Tenant any estate
in the Building, the Common Areas, the real property on which the Building is
located or in any parking facilities located at or on said real property. No
bailment is created hereby, and Tenant for itself, its agents, servants,
employees, successors and assigns, hereby releases Landlord and Landlord's
agents, servants, employees and independent contractors from all claims for loss
or damage arising out of or related to Tenant's use of the parking facilities.
If tenant exercises its option(s) to renew (if any) pursuant to Article 58 of
this Lease, the monthly parking rates for reserved and unreserved spaces shall
be the regularly scheduled parking rates for the Building.
47. PLATS, RIDERS, CLAUSES
47. Clauses, plats, riders and provisions inserted herein, if any, signed
by Landlord and Tenant and endorsed on or affixed to this Lease are a part
hereof, and in the event of variation or discrepancy, the duplicate original
hereof, including such clauses, plats, riders and provisions inserted herein, if
any, held by Landlord shall control.
48. BUILDING NAME
48. The Tenant shall not use the name of the Building for any purpose
other than as the address of the business to be conducted by Tenant in the
Premises. Landlord shall have the right, without liability to Tenant for any
damage or any injury (all claims for damage or injury being hereby released and
without giving rise to any claim for off-sets or abatement of rent), to change
the name or street address of the Building.
49. QUIET POSSESSION
49. Tenant, upon paying the rents reserved hereunder and observing and
performing all of the covenants, conditions and provisions on Tenant's part to
be observed and performed hereunder, shall have quiet possession of the Premises
for the entire Term, subject to all the provisions of this Lease.
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50. CUMULATIVE REMEDIES
50. No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies.
51. WAIVER OF JURY TRIAL
51. Landlord and Tenant hereby waive their respective right to trial by
jury of any cause of action, claim, counterclaim or cross-complaint in any
action, proceeding and/or hearing brought by either Landlord against Tenant or
Tenant against Landlord on any matter whatsoever arising out of, or in any way
connected with, this Lease, the relationship of Landlord and Tenant, Tenant's
use or occupancy of the Premises, or any claim of injury or damage, or the
enforcement of any remedy under any law, statute, or regulation, emergency or
otherwise, now or hereafter in effect. Notwithstanding the foregoing, Landlord
and Tenant agree that this waiver shall not be effective where the legal effect
of such waiver would be to invalidate, in whole or in part, or to limit or
impair in any manner any policy of insurance in force for the benefit of
Landlord or Tenant or to limit or impair any rights, remedies or coverage
afforded by such policy or policies of insurance. Tenant agrees that any
lawsuit brought by Tenant against Landlord must be filed in a court of competent
jurisdiction in the County of Los Angeles.
52. EXAMINATION AND DELIVERY OF LEASE
52. Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or option to lease, and it is not effective
as a lease or otherwise until execution by and delivery to both Landlord and
Tenant. This Lease becomes a binding legal instrument only upon its having been
executed and delivered by all parties, together with payment in full of all sums
required upon such delivery. Prior to such execution and delivery, the Lease is
not legally binding or effective.
53. CONFIDENTIALITY OF LEASE
53. Tenant agrees to keep the terms of this Lease confidential and shall
not disclose same to any other person not a party hereto, without the prior
written consent of Landlord, provided that Tenant may disclose the terms hereof
to Tenant's accountants, attorneys, managing employees, and others in privity
with Tenant to the extent reasonably necessary for Tenant's business purposes
without such prior written consent. Tenant agrees that a breach of this Article
would cause irreparable injury to Landlord, and Landlord shall be entitled,
together with all other remedies in law or equity available to Landlord, to
injunctive relief to restrain such breach.
54. FINANCIAL STATEMENTS
54. Landlord shall have the right during the Term,once each year, upon
written request, to require Tenant to furnish to Landlord financial statements
prepared by a Certified Public Accountant according to generally recognized
accounting principles showing Tenant's financial condition as of a date not more
than ninety (90) days prior to the date such statements are required to be
submitted to Landlord.
55. AGREED FIGURES
55. All figures set forth in this Lease represent negotiated sums and
percentages and are conclusive as between Landlord and Tenant.
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56. FORCE MAJEURE
56.1 If either party hereto shall be delayed or hindered in or prevented
from the performance of any act required hereunder by reason of unavoidable
delays caused by fire, catastrophe, acts of God, strikes, lockouts, labor
troubles, inability to procure materials, failure of power, restrictive
governmental laws or regulations, riots, insurrection, civil commotion, war or
other reason of a like nature not the fault of the party delayed in performing
work or doing acts required under the terms of this Lease, then performance of
such act shall be excused for the period of the delay and the period for the
performance of any such act shall be extended for a period equivalent to the
period of such delay.
56.2 Neither party shall in any event be liable for damages or otherwise,
nor shall the other party be released from any obligations hereunder because of
the interruption of any service, or a termination, or disturbance (except to the
extent, if any, expressly provided elsewhere in this Lease) attributable to
strike, lockout, breakdown, accident, war, or other emergency, order or
regulation of or by any governmental authority, failure of supply, inability to
obtain supplies, parts or employees, or any cause beyond such party's reasonable
control.
56.3 The provisions of this Article shall not operate to extend the date
for the exercise of any options or excuse Tenant from the prompt payment of
rents, or any other payments required from either party to the other by the
terms of this Lease.
57. TENANT IMPROVEMENTS
57. Landlord shall provide Tenant with a tenant improvement allowance
equal to $____________________ which was calculated by multiplying the square
footage on the twelfth floor by $6.50 and the square footage on the seventh
floor by $16.50. Tenant shall be entitled to allocate the tenant improvement
allowance no in excess of the $_____________ to either floor. Landlord shall
fund the tenant improvement allowance pursuant to Exhibit C until Tenant has
completed the tenant improvements or Landlord has exhausted the funds it is
obligated to provide pursuant to this Article 57. Said Tenant Improvement
allowance shall only be utilized for tenant improvements, furniture, fixtures
and equipment, governmental permits and fees, and all architectural design
expenses such as programming, space planning and construction drawings,
including any mechanical engineering expense.
Any additional Tenant Improvement expense shall be paid for by Tenant
prior to commencement of construction. Landlord and Tenant shall approve final
plans and Tenant Improvement expenses prior to commencement of the construction
by the approved contractor(s).
Tenant shall have the right to competitively bid the Tenant
Improvement work, and select the contractor, subcontractors and be responsible
for the Tenant Improvement work.
Landlord shall have the right to approve the contractor(s),
subcontractor(s) and the final construction contracts, which approval shall not
be unreasonably withheld or delayed. If the Landlord is responsible for
construction management and completion of the Tenant Improvements, Landlord
shall receive an administrative fee for Landlord's actual costs not to exceed
$.50/RSF.
Any unused portion of the Tenant Improvement allowance shall not be
credited against Base Rent.
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58. SIZE OF PREMISES
58. The determinations contained in this Lease which are based on the size
of the Premises, including, but not limited to, the Basic Rent and Tenant's
share of Operating and Tax Expense assume that the Premises contains Twenty-Two
Thousand Six Hundred Thirty (22,630) rentable square feet of the building
containing 249,344 rentable square feet.
59. HVAC
59. The HVAC system is a VAV multi-zoned system controlled by digital
thermostats utilizing direct air expansion with one building air handler and
perimeter re-heat coils. The entire system is electric. The after-hours HVAC
is activated by Tenant through computer located in the ground floor mailroom.
Tenant shall pay for after-hours HVAC use at the prevailing rate. The present
rate is $20.00 per hour, per zone; and both Suite 700 and Suite 1200 have two
(2) zones which can be utilized individually or together.
60. HAZARDOUS MATERIALS
60. Landlord shall represent and warrant to Tenant that to its knowledge,
there are no hazardous substances located in or under the building, property, or
the premises, and there has been no violation thereof of any law governing
hazardous substances. Except as set forth below in this paragraph 60, if any
hazardous materials are discovered during Tenant's occupancy it will be removed
or encapsulated as appropriate by Landlord, at Landlord's sole cost and expense.
Notwithstanding anything to the contrary contained in this Lease, Tenant shall
not itself, and shall not permit any of its agents, employees, contractors or
other invitees to, use or store or otherwise discharge any hazardous materials
on or about the Premises, the Building or the Common Areas (other than small
quantities of cleaning solutions and ordinary office products in customary
amounts necessary for Tenant's permitted use of the Premises). Except to the
extent that Tenant is in violation of the foregoing provision, Tenant shall not
be responsible to Landlord with respect to any hazardous material present on or
about the premises, the Building or the surrounding property, or the soil,
groundwater or surface water thereof, without regard to whether the hazardous
materials were present on the Premises or the Building as of the Commencement
Date. For purposes of this Lease, "hazardous materials" shall mean any material
or substance that is now or hereafter prohibited or regulated by any statute,
law, rule, regulation or ordinance or that is now or hereafter designated by any
governmental authority to be radioactive, toxic, hazardous or otherwise a danger
to health, reproduction or the environment.
61. OPTION TO RENEW
61.1 Tenant shall have three (3), one (1) year option(s) to extend the
Lease. The basic rent for the first one year option term shall be at the then
fair market rental rate for space in comparable size, quality, and location in
the Woodland Hills area. If exercised, the second and third option terms basic
rent shall increase five (5%) percent from the prior years basic rent. To
exercise an option, Tenant must provide written notice to that effect to
Landlord at least six (6) months prior to the expiration of the initial Term of
the Lease or any extension thereof.
61.2 Except for Basic Monthly Rental rate and parking charges all terms and
conditions of the Lease, including tax rent and expense rent, shall be in full
force and effect during any option term. During any option term hereof, the
monthly rental shall be computed in accordance with Articles 61.1.
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61.3 Tenant's option or options may be exercised only if Tenant is not in
default, beyond applicable cure periods, under the Lease as of the date notice
is served and remains so through the expiration of the initial Term or any
extension thereof. If the option is properly exercised and Tenant is not in
default, beyond applicable cure periods, the Term shall be extended for the
period provided above.
61.4 . Tenant must be occupying seventy-five (75%) percent of the Premises
when it exercises an option.
61.5 If the parties cannot agree within thirty (30) days prior to the
commencement of the extended term, then the Fair Market Rent shall be determined
by three appraisers selected and governed by the Rules of the American
Arbitration Association. All other terms and conditions contained in this Lease
and this Addendum, as the same may be amended from time to time by the parties
in accordance with the provisions of this Lease, shall remain in full force and
effect and shall apply during the Option term.
Rescission. Notwithstanding anything to the contrary contained in
this Paragraph, if the monthly rent during an Option period is determined by
appraisal and if Tenant does not, in its discretion, approve the rental amount
established by the appraisal, Tenant may rescind its exercise of the Option by
giving Landlord written notice of its election to rescind within ten (10) days
after receipt of all appraisals. If Tenant rescinds its exercise of the Option,
then (i) the Lease shall terminate on the sixtieth (60th) day after Tenant's
notice of rescission or on the date this Lease would have otherwise terminated
absent Tenant's exercise of the Option, whichever date is later; and (ii)
Tenant shall pay all costs and expenses of the appraisal.
62. CONDITION OF PREMISES UPON TERMINATION
62. (a) Upon the expiration or termination of this Lease, Tenant shall
leave the Premises peaceably and quietly and in as good order and
condition as the same were on the date the Term of this Lease
commenced, or were thereafter placed in, reasonable wear and tear,
damage by fire or other casualty, acts of God and the elements
excepted. Any property left on the Premises after the expiration or
termination of this Lease shall be deemed to have been abandoned and
the property of Landlord to dispose of as Landlord deems expedient.
(b) Tenant shall have the right to remove from its walls any
furniture or millwork attached to the walls (unless paid for by the
Landlord), and to remove any phone equipment purchased by Tenant and
attached to walls. Any discoloration of paint or wall covering, or
any nail or screw holes apparent from such removal, shall be deemed
normal wear and tear, as will the condition of the walls resulting
from the customary removal of said items from the walls.
63. BUILDING SECURITY
63. Landlord shall provide twenty-four (24) hours on-site security to the
building. Tenant at its sole cost and expense shall be permitted, with
Landlord's reasonable consent, to install its own security system for the
Premises.
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64. MUST TAKE SPACE
64. Tenant shall lease the remainder of the seventh floor, approximately
7,862 rentable square feet, commencing the first day of the tenth (10th) month
from the Commencement Date as stated in paragraph one (1). The Lease of the
expansion space shall be the same as the then existing space, except for the
Tenant Improvement Allowance. The rental rate shall be the same per RSF Base
Rent, and expansion space shall be coterminous with the existing Lease term,
December 31, 2001.
Tenant shall pay Landlord the Security Deposit of ($12,972.30) three
(3) months prior to the Commencement Date of the "MUST TAKE SPACE" . Should
Landlord not receive the above referenced payment of ($12,972.30) by three (3)
months prior to the Commencement Date of the "MUST TAKE SPACE", the Tenant's
"Must Take Space" rights shall terminate due to Tenant's default. Both parties
agree that it would be impractical or extremely difficult to fix actual damages
in case of Tenant's default, and that the amount of $116,750.00 is a reasonable
estimate of Landlord's damages. Landlord shall reduce the security deposit by
$116,750.00 as Landlord's sole right to damages as it relates to the "Must Take"
space. Additionally, Tenant shall reimburse the Security Deposit by the
$116,750.00 amount.
Landlord shall provide Tenant a Tenant Improvement Allowance equal to
$14.03 per rentable square foot. Any unused portion of the Tenant Improvement
Allowance shall not be credited against Base Rent.
The "Must Take" rights shall be transferable to any related entity(s)
or affiliate(s) either controlling, controlled by, or under control of Vertel,
provided that such entity or affiliate shall have comparable or greater
financial strength than that of Vertel as of the date Vertel executes this
lease.
65. JANITORIAL SERVICE
65. Landlord shall provide standard five day janitorial service for the
premises.
66. SEISMIC COMPLIANCE
66. The Landlord is presently completing the testing of the Warner
Corporate Center per Los Angeles City Ordinance 170406. Landlord may be
required to complete repairs to the building's structural components during the
term of the Lease.
If required to complete repairs (which shall be completed at no cost
to Tenant), Landlord shall make best efforts to complete in a manner as not to
impose any burden on the Tenant's quiet possession of the Premises. Any repairs
made by Landlord pursuant to this Paragraph 66 shall, to the extent practical,
be made outside of Tenant's normal business hours. If any work cannot be
performed outside of normal business hours, Landlord will provide Tenant as much
notice as is reasonably possible. if work that cannot be performed outside of
normal business hours continues more than one full day, Tenant's rent will be
abated. If work continues more than fifteen (15) consecutive days, Landlord
will have the right to relocate Tenant within the building. If Landlord is
unable to relocate Tenant within the building within the fifteen (15) day
period, Tenant will have the right to terminate the Lease at the end of the
fifteen (15) day period. Any work done by Landlord after hours shall be
cleaned-up to as not to interfere with Tenant's use of the Premises on the
following business day.
31
<PAGE>
67. DIRECTORY AND SUITE SIGNAGE
67. Tenant shall have the right to include the company name on the
building directory board in the main lobby and on each suite entrance sign at
Tenant's sole cost, using building standard signage.
68. CLEAN UP
68. Landlord shall thoroughly clean Suite 700, including the windows,
immediately before and after Tenant's move-in.
69. CONCURRENT LEASE TERMINATION
69. Upon the commencement of this Lease term, the Lease dated May 23, 1996
executed between the parties for Suite 1200, 21300 Victory Blvd, Woodland Hills,
shall terminate and be null and void. The last months prepaid rent and security
deposit shall be transferred to this Lease as specified in paragraph six (6),
Security Deposit, of this Lease.
THE PARTIES HERETO HAVE EXECUTED THIS LEASE ON THE DATES SPECIFIED IMMEDIATELY
ADJACENT TO THEIR RESPECTIVE SIGNATURES.
"LANDLORD"
NOMURA - WARNER CENTER
ASSOCIATES, L.P.
Date: November 26, 1996 /s/ KIYOSHI MURAKATA
----------------------- --------------------------------
By: Kiyoshi Murakata, President
Nomura Warner, Inc.
General Partnership
"TENANT"
VERTEL CORPORATION, A
CALIFORNIA CORPORATION
Date: November 26, 1996 /s/ BRUCE W. BROWN
------------------------ --------------------------------
By: Bruce W. Brown, President
32
<PAGE>
ADDENDUM TO OFFICE LEASE BETWEEN
NOMURA - WARNER CENTER ASSOCIATES, L.P. ("LANDLORD")
AND VERTEL CORPORATION ("TENANT")
DATED DECEMBER 31, 1996
The following paragraphs of the Office Lease between the above parties dated
November 26, 1996, are amended and supplemented as follows:
DEMISING CLAUSE. Suite 700 is increased by 117 rentable square feet to
13,771 RSF which increases the total Premises to 22,747 RSF.
3. Basic Rent. The monthly Basic Rent shall increase by $193.05 to
$37,532.55 per month ($450,390.60 annually), for the first thirty months
of the Lease and increased by $204.75 to $39,807.25 per month
($477,687.00 annually) for the second thirty months of the Lease.
Tenant shall pay Landlord $193.05 for the first installment of Basic
Monthly rent concurrently with the execution of this Addendum to Lease.
4.1(c) "TENANT TAX SHARE" means 9.12%.
5.1(d) "TENANT EXPENSE SHARE" means 9.12%.
6. SECURITY DEPOSIT. Provided Tenant is not in default of the Lease, the
Security Deposit shall be reduced by crediting the monthly Base Rent as
follows:
MONTH AMOUNT
----- ------
25 $37,532.55
26 $ 6,911.45
37 $39,807.25
38 $ 4,636.75
49 $39,807.25
50 $ 4,636.75
57. TENANT IMPROVEMENTS. The Tenant Improvement Allowance shall be
increased by $1,930.50 to $285,565.50.
58. SIZE OF PREMISES. Size of the Premises shall increase 117 RSF to 22,747
rentable square feet.
64. MUST TAKE SPACE. Must Take Space shall be reduced by 117 RSF to 7,745
RSF and the expansion space shall be coterminous with the existing Lease
Term. The Must Take Space Security Deposit shall remain the same. The
Must Take Space Tenant Improvement Allowance shall be $108,662.35 at
$14.03 RSF.
THE PARTIES HERETO HAVE EXECUTED THIS ADDENDUM TO LEASE ON THE DATES SPECIFIED
IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES.
"LANDLORD"
NOMURA - WARNER CENTER
ASSOCIATES, L.P.
Date: November 26, 1996 By: /s/ KIYOSHI MURAKATA
-------------------------- ---------------------------
Kiyoshi Murakata, President
Nomura Warner, Inc.
General Partnership
"TENANT"
VERTEL CORPORATION
A CALIFORNIA CORPORATION
Date: November 26, 1996 By: /s/ BRUCE W. BROWN
-------------------------- -------------------------
Bruce W. Brown, President
33
<PAGE>
Exhibit 21.1
RETIX
SUBSIDIARIES OF THE REGISTRANT
OTHER NAME(S)
JURISDICTION UNDER WHICH THE
OF SUBSIDIARY DOES
NAME OF SUBSIDIARY INCORPORATION BUSINESS
Internetworking Solutions California Retix Network
Systems
Wireless Solutions California Retix Wireless
Retix Australia, Pty, Ltd. Australia None
Retix Property Company, Ltd. Netherlands None
Retix Canada Inc. Canada None
Retix (Deutschland) GmbH Germany None
Retix Europe, Ltd. United Kingdom Retix Network
Systems
Retix UK, Ltd. United Kingdom Retix Network
Systems
Recodif Retix France (TM) France None
Retix Italia SARL Italy None
Retix V.I., Ltd. U.S. Virgin Islands None
Vertel Corporation California Telaware,
Telegenics
Retix B.V. Netherlands Retix Ireland
Vertel Pacific California None
<PAGE>
Exhibit 24.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements
filed on Forms S-8 in connection with the Company's 1988 stock Option Plan, the
1990 Stock Option Plan for Irish Employees, the 1991 Employee Stock Purchase
Plan, the 1991 Directors' Stock Option Plan, the 1983 Raycom Stock Option Plan,
the 1993 Raycom Stock Option Plan, the 1995 Executive Stock Option Plan, and the
1996 Directors' Stock Option Plan of our report dated January 14, 1997 appearing
in this Annual Report on Form 10-K of Retix for the year ended December 28,
1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K
DATED DECEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 8,948
<SECURITIES> 7,748
<RECEIVABLES> 5,161<F1>
<ALLOWANCES> 1,543
<INVENTORY> 1,744
<CURRENT-ASSETS> 25,167<F2>
<PP&E> 5,529
<DEPRECIATION> 4,277
<TOTAL-ASSETS> 28,073
<CURRENT-LIABILITIES> 10,195
<BONDS> 0
0
0
<COMMON> 226
<OTHER-SE> 17,376
<TOTAL-LIABILITY-AND-EQUITY> 28,073<F3>
<SALES> 31,115
<TOTAL-REVENUES> 31,115
<CGS> 10,124
<TOTAL-COSTS> 35,616<F4>
<OTHER-EXPENSES> (660)<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,841)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,841)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<FN>
<F1>IS NET OF ALLOWANCES
<F2>INCLUDES PREPAID & OTHER CURRENT ASSETS OF $1,566.
<F3>INCLUDES $276 OF LONG TERM OBLIGATIONS
<F4>INCLUDES OVERATING EXPENSES OF $25,492
<F5>INCLUDES INTEREST INCOME, NET
</FN>
</TABLE>
