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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 27, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21300 VICTORY BOULEVARD, SUITE 1200, WOODLAND HILLS, CALIFORNIA 91367
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(818) 227-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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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 period 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 [_]
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. [_]
As of February 26, 1998 the aggregate market value of voting stock held by
non-affiliates was approximately $106,498,000. 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 of the Registrant. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.
As of February 26, 1998 there were 24,146,518 shares of the Registrant's
Common Stock outstanding.
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 March 31,
1998.
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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 risks of the timely deployment and
success of new and enhanced telecommunications management network (TMN)
products, the loss of key customer relationships, the impact of competitive
products and the dependence on key partners and alliances, the length of the
Company's sales cycle, 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, a likely
decline in the Company's ownership position in its investment in Sonoma
Systems if additional funding is required and the Company is unable or
unwilling to participate, the acceptance of new technologies like TMN, the
impact of competitive products and pricing 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 through its only operating subsidiary, Vertel Corporation ("Vertel"),
develops and markets software for the management and operations of
telecommunications networks. The Company provides advanced telecommunications
management software and solutions, including communications infrastructure
products, network management platforms and applications software for
telecommunication carrier networks worldwide. In addition, the Company
provides products and services to telecommunications equipment manufacturers,
computer systems OEMs and Internet access providers.
In December 1997, the Company announced plans to discontinue further
investment in its broadband access equipment subsidiary, Sonoma Systems, Inc.
("Sonoma"). As a result of the successful completion of financing by outside
private investors in early 1998, the Company's voting ownership in this
subsidiary has been reduced to 19.9%. The remaining operating subsidiary,
Vertel comprises substantially all of the Company's operating activities. The
Company has announced plans to change its name from Retix to Vertel assuming
shareholder approval is obtained at the 1998 annual shareholders' meeting.
References made in this report to the "Company" or "Retix" generally include
the operations of all ongoing subsidiaries except where otherwise specifically
described.
The Company is a leader in developing, marketing and supporting vertically
integrated, object oriented TMN based software solutions for the management of
public telecommunications networks. The Company's solutions, which are based
upon the International Telecommunications Union's TMN standard, support
seamless network operation and management over diverse transmission media and
protocols. The Company 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 service management
layers of the TMN model. The Company offers embedded software for network
equipment and software solutions to allow telecommunications service providers
to integrate proprietary or SNMP based network management systems with a TMN
standards based solution. In addition the Company offers 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 and optimization of network traffic and
security. The Company provides professional services that enable service
providers to deploy and maintain a complete TMN solution complementing
Vertel's software products and development platforms. The Company's
professional services include system analysis and design, source code
portation and interface, custom application development, conformance and
certification testing and technical support services.
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The Company offers what it believes to be the only commercially available,
fully interoperable suite of products and tools that span the network element,
element management, network management and service management layers of the
TMN model. In addition, the Company's TMN solutions utilize object-oriented
interfaces, with object definitions that serve as reusable building blocks.
The object interfaces hide the complexity of underlying implementations while
providing all the functionality of the services and protocols of that
implementation. The Company's TMN solutions therefore reduce the complexity of
management system interoperability and provide systems that are more efficient
and simpler to build and deploy.
The Company believes that its TMN solutions allow telecommunications service
providers and their customers to reduce network operations costs, manage
diverse networks and network equipment with a single, integrated management
system, derive incremental revenue by bringing new functionality and services
to market more rapidly, implement a complete network management solution and
preserve existing investments by integrating existing proprietary, TL1 and
SNMP-based systems.
The Company's products enhance communications among service providers and
customers by enabling telecommunications service providers to develop and
deploy systems that manage new and existing services across multiple service
providers and enabling enterprise network operators to develop and deploy
systems to manage services from multiple service providers.
The Company has committed itself to customer services including: 24 hours a
day, 7 days a week technical support worldwide, training in the Company's
office or at customer sites and customized software design and engineering
professional services.
The Company believes that the broad adoption and deployment of TMN will be
key to its success and that the adoption of TMN will depend, in part, upon the
ability of service providers to implement TMN solutions quickly and cost-
effectively. The Company targets and will continue to target
telecommunications service providers and network equipment manufacturers for
adoption of its TMN solutions, and at the same time will commit substantial
resources to the promotion of the TMN standard for telecommunications network
management. The Company has, as its customers, virtually all U.S. Regional
Bell Operating Companies, as well as many other service providers, network
operators worldwide and network element (NE) vendors worldwide. Not all of
these customer names are mentioned in this document because, due to
contractual obligations and OEM agreements, some customers have requested that
the Company not use their names in documents published for distribution
outside of Vertel.
The Company derives revenue from license fees and royalties from its
software products, professional services and technical support services,
including maintenance. The Company licenses binary or source code to
customers. Customers may distribute binary or embedded versions of the
Company's software in their products. Revenue from license fees generally is
recognized upon shipment of the binary or source code. Royalties from the
distribution of the binary or embedded versions of the software are 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. The Company sells its products in
the United States and internationally primarily through a direct sales
organization of highly technical sales people and, in certain territories, the
Company utilizes commissioned third party agents.
During 1997, the Company also announced plans to develop, market and sell
certain products jointly with Hewlett Packard's OpenView Telecom division.
Jointly developed products are co-marketed and sold through both companies'
sales and distribution channels. In addition, the Company plans to continue to
license code to service providers, network equipment manufacturers and
independent software developers; licensing includes a right to distribute
products, services and applications based on such source code in exchange for
royalty payments. The Company believes that its distribution strategy will
help to establish its TMN solutions as the premier TMN products and to
accelerate the general adoption of TMN.
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The Company is a California corporation incorporated in 1985. The Company's
principal offices are located at 21300 Victory Boulevard, Suite 1200, Woodland
Hills, California 91367 and its telephone number at that location is (818)
227-1400.
INDUSTRY BACKGROUND
The worldwide telecommunications industry continues to undergo significant
transformation. Global deregulation and international privatization have
resulted in intense intra-industry, cross-industry and geographic competition
in providing telecommunications services. Long distance and local
telecommunications service providers are beginning to compete in each other's
markets. Wireless service providers, cable television operators and utilities
are leveraging existing infrastructure to provide voice, video and data
transmission and switching networks. In addition, independent service
providers are leasing transmission facilities from long distance carriers;
local telephone companies and other emerging network providers to provide
competing voice, video and data services. At the same time, the complexity and
size of public networks have increased. The emergence of the Internet,
intranets, graphical user interfaces and telecommuting, as well as numerous
new telecommunications services such as high-speed data services, video
teleconferencing and video-on-demand have increased demand for bandwidth,
reliability, data integrity and security. In this dynamic environment, service
providers are being forced to interoperate with external public and private
networks and to differentiate themselves on the basis of price,
responsiveness, services offered, reliability and security.
To meet increased demands and remain competitive in this dynamic
environment, traditional telecommunications service providers must upgrade
existing voice-based public networks. In addition, these providers, along with
new competitors, must deploy new networks to provide increased functionality
and more reliable and secure services. Upgrading and deploying new
telecommunications networks and services requires the integration of diverse
transmission media and protocols, network equipment, network operations
platforms and network management systems. Moreover, the competitive
environment requires more effective network management, such as detection of
and automatic response to fault indications, remote configuration of networks
and equipment, automation of accounting and billing functions, optimization of
network performance and improvement of security. Network management systems
must operate seamlessly among service providers and interface with customer
network management systems.
Until recently, most telecommunications service providers managed their
voice networks exclusively with mainframe-based, proprietary systems written
in early generation programming languages. While these systems are tightly
integrated and can provide operating efficiencies within a single network,
they are expensive to develop, operate and maintain, often requiring a large,
specialized and expensive technical organization. In addition, because these
legacy systems are not based on a common standard, management among
telecommunications service providers and the provision of end-to-end services
are more difficult, and the equipment choices of service providers are limited
to vendors who conform to the provider's standard. Furthermore, because these
systems are proprietary and are based on earlier-generation programming
languages, they generally do not easily scale, usually require substantial
development effort to add new functionality and provide new services, and are
often incompatible with the additional software and hardware service providers
require to upgrade networks.
Service providers have augmented their proprietary systems by incorporating
the Simple Network Management Protocol (SNMP) to manage their data networks.
SNMP has been widely accepted as a de facto network management standard in
private enterprise data networks. SNMP-based systems interoperate, permit the
addition of incremental functionality, hardware and software without
substantial additional development effort and are generally adequate to manage
equipment in enterprise data networks. A major drawback of SNMP-based systems,
however, is in bandwidth-constrained public networks, where their polling
architecture requires continuous communication among equipment and management
platforms; this communication can consume substantial bandwidth and limit
network scalability. In addition, SNMP provides for limited data integrity,
does not identify a security protocol and does not effectively manage the flow
of data on networks. While SNMP has
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permitted service providers to begin their transition away from proprietary
systems, it has also identified the need for a new family of systems that is
highly scalable, cost-effective and offers high bandwidth.
In response to the shortcomings of available network management solutions,
the International Telecommunications Union (ITU), an organization of
telecommunications companies and governments, identified the need for a
standard that, permitted interoperability among network management solutions
independent of the telecommunications service providers operating systems,
management systems and network equipment. In addition, the ITU recognized the
need for the standard to provide a framework within which network management
systems could more cost-effectively be designed, developed and deployed and at
the same time provide functionality beyond that enabled by proprietary and
SNMP-based systems. The standard established by the ITU is known as the
telecommunication management network (TMN) standard. The specifications
comprising the TMN standard divide the telecommunications management
infrastructure into a framework of five logical layers: network elements
(equipment), element management, network management, service management and
business management. The TMN standard includes a set of interface
specifications for communicating within and among layers to enable
interoperability among service providers (and their customers), network
operating systems, network management systems and network equipment.
TMN has been established as the international standard for public
telecommunications network management. If implemented correctly, TMN has the
potential to offer significant advantages over proprietary and SNMP-based
systems, including a reduction in network operations costs, the ability to
derive incremental revenue from new services and enhanced communications with
other service providers and with customers.
STRATEGY AND PRODUCTS
The Company's products provide TMN capabilities through configurable
components and platforms. Vertel products incorporate easy-to-use, high
performance development environments, platforms, tools, applications and
components. The Company's products provide solutions at the network element,
element management, network management and service management layers of the
TMN model. Products include TMN-conformant management application development
environments, distributed platforms, RTOS-based embedded TMN software,
wireless applications, FCAPS TMN applications, OSI protocol components and
tools and aeronautical telecommunications network (ATN) routers.
The Company's products fall into four families: TMN Telecore, TMN Access,
Wireless Applications and ATN Router Software products.
The Company considers the engineering services, provided through its
technical support and the professional services unit, to be key to its success
of its customers. The technical support department provides pre-and post-sales
support, training and maintenance services, while PSU provides customized
software design and engineering, including designing, developing, deploying
and maintaining turnkey telecommunications management solutions.
The Company's TMN solutions allow telecommunications service providers and
their customers to:
Reduce costs. The Company's TMN solutions enable telecommunications services
providers to reduce costs by efficiently managing diverse networks and network
equipment with a single, integrated management system. Unlike many proprietary
systems, the Company's TMN solutions adhere to an object-oriented architecture
and do not require large, expensive technical organizations for additional
development and maintenance. Because the Company's TMN solutions use standard
interfaces, the solutions enable interoperability across applications,
networks, vendors and systems. This interoperability enables service providers
to purchase the most cost-effective equipment from a broad range of vendors.
In addition, by taking advantage of the Company's professional services unit,
customers can reduce the cost of in-house development.
Derive incremental revenue. The Company's TMN solutions enable
telecommunications services providers to bring new functionality and services
to market more rapidly by providing an integrated, standards-
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based suite of tools that facilitate the rapid development and deployment of
new applications across heterogeneous networks. For example, the Company's
agent, manager and adapter products have been used by telecommunications
switch equipment manufacturers, operation support system (OSS) vendors and
telecommunications service providers to provide data collection information to
support billing, support trouble ticketing and enable electronic bonding.
Implement complete solutions. Successful implementation of the TMN standard
requires seamless vertical integration of all the layers of the TMN standard.
The Company believes that it provides the only commercially available complete
family of products and services for implementing a fully integrated TMN
network management system. Network management systems based on Vertel's full
suite of products and services operate seamlessly with other TMN systems as
well as with proprietary legacy systems and can be adapted to SNMP systems.
The Company's products are fully integrated within and across the layers of
the TMN architecture.
Preserve existing investments. The Company's TMN solutions enable
telecommunications services providers to continue to use and integrate their
existing TL1, ASCii message-based and SNMP-based network components in a total
TMN solution. The Company's Q-Adapter technology and solutions manage TL1,
SNMP and other legacy equipment and systems within Vertel's TMN solution
framework.
Enhance communications across service providers and with customers. The
Company's TMN products enable the deployment of systems that allow
telecommunications service providers and network operators to manage new and
existing services and equipment across multiple service provider domains. The
products also enable enterprise network operators to deploy systems that
manage services of multiple service providers. Vertel TMN agent and manager
products have been deployed by key service providers who used the products in
electronically bonded OSSs that manage trouble tickets and work orders across
service providers.
Strategy
The Company's goal is to be the leading provider of complete, vertically
integrated TMN solutions to telecommunications services providers, equipment
manufacturers, platform vendors and independent software developers. Key
elements of the Company's strategy include:
EXTEND VERTICAL SOLUTIONS. The Company's strategy is to provide complete
suites of software and services that enable businesses to implement
telecommunications management solutions efficiently. The Company intends to
provide management applications that leverage the Company's experience in TMN
implementation across layers and use the unique features of the TMN
architecture. The Company currently plans to develop applications for inter-
service provider exchange of management information (electronic bonding),
integrated alarm management and ATM element management.
LEVERAGE TECHNOLOGICAL LEADERSHIP. The Company believes that its
technological leadership, as evidenced by the breadth and functionality of its
products and services are, in part, the result of its 11 years of experience
deploying products that implement the protocols and services that adhere to
the ITU-specified open system interconnection (OSI) model and its associated
standards and specifications. The OSI model defines seven hierarchical layers
of communication between network management entities. Because the ITU M.3100
standard is based directly upon and incorporates the OSI specifications, the
Company leads the industry in experience and expertise in OSI and, hence, TMN
standards-based solutions. The Company plans to continue to invest significant
resources in research and development to extend its technological leadership
in TMN technologies, maintain a time-to-market advantage and develop
management solutions that leverage its TMN implementation expertise.
TARGET SERVICE PROVIDERS. The Company believes that increased penetration of
telecommunications service providers is necessary to hasten the broad
deployment of TMN. To this end, the Company provides management platforms,
solutions for OSSs, customization and implementation services, software that
is easy to use and install and high quality training, consulting and support.
In addition, the Company offers Q-Adapter
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products that enable customers to maintain their investment in legacy systems,
bringing TL1, proprietary and enterprise network components into the realm of
TMN. The Company has, as its customers, virtually all U.S. Regional Bell
Operating Companies, as well as many other service providers, network operator
worldwide and network element vendors worldwide. Not all of these customer
names are mentioned in this document because, due to contractual obligations
and OEM agreements, some customers have requested that the Company not use
their names in documents published for distribution outside of the Company.
LEVERAGE EXISTING RELATIONSHIPS WITH EQUIPMENT MANUFACTURERS. Historically,
the Company has derived a significant portion of its TMN revenue from the sale
of software to be embedded by telecommunications equipment manufacturers. The
Company believes that the availability of its products in telecommunications
equipment will facilitate the adoption of the Company's TMN solutions in the
marketplace by service providers.
ESTABLISH LEADERSHIP IN NEW MARKETS. One of the first areas to adopt the TMN
standard was the SONET/SDH (fiber optic transmission) market, where new
networks were being deployed without the requirement to interoperate with
legacy systems. As data has become a greater portion of the traffic on
telecommunications networks and SNMP is proving inadequate for the performance
and traffic demands of public networks, the Company has also begun to target
leading data communications companies.
EXPAND GLOBAL SALES AND DISTRIBUTION CAPABILITY. The Company currently sells
its products primarily through a direct sales force in the United States and
internationally. The Company intends to expand its sales and distribution
infrastructure in the United States and internationally to increase sales
coverage and position itself to capture market share. The Company plans to
leverage its direct sales efforts by pursuing sales prospects generated by
partners and by selling through select systems integrators and other indirect
sales channels. In addition, the Company plans to continue to license binary
and source code to service providers, network equipment manufacturers and
independent software developers. The Company's customers have the right to
distribute products, services and applications, developed using the Company's
binary and source code, in exchange for royalty payments. The Company believes
that its distribution strategy will help to establish its TMN solutions as the
premier TMN products; and accelerate the general adoption of TMN.
PROMOTE THE DEPLOYMENT OF TMN. The Company believes that the broad adoption
and deployment of TMN will be key to its success. Correspondingly, it commits
substantial resources to the promotion of the TMN standard for
telecommunications network management. The Company is working with leading
industry experts, forums and working groups to define, refine and develop
specifications for TMN and OSI solutions. In addition, the Company sponsors
the Global TMN Summit and is a participant in trade shows, seminars and
industry conferences.
DEVELOP STRATEGIC RELATIONSHIPS. The Company believes that it can expand its
visibility, improve its product offerings and broaden its potential market
through the development of relationships with other companies within the
telecommunications network market. To date, relationships with companies such
as Hewlett Packard and Microsoft have been established resulting in the
introduction of a number of new products and the increased visibility of TMN
within the telecommunications marketplace.
Products
For the past two years, Vertel has focused primarily on developing,
marketing, selling and supporting TMN software products and services.
The Company generally licenses its binary and source code to customers who
may either sublicense the code in binary form or integrated into additional
products. Revenue is derived from license fees received upon the shipment of
the source code and royalties relating to the distribution of the binary or
embedded versions of the software.
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The Company's product families provide full TMN capabilities through
configurable components and platforms. Its products and platforms incorporate
high performance communications stacks, transport providers, routing software
and application services. The following sections briefly describe the
Company's principal product families and the market segments they serve.
VERTEL TMN TELECORE PRODUCTS
Development Environment Products
Vertel TMN Development Environment products provide tools, platforms and
components that automate the development of TMN-conformant management
applications. TMN Development Environment product interfaces are standards-
conformant and object-oriented. The products include:
TMN Agent Development Environment (TMN ADE) and TMN Manager Development
Environment (TMN MDE) enable TMN-conformant agent and manager applications to
be quickly and easily developed. The TMN ADE and TMN MDE are foundations for
TMN-conformant OSS applications deployed in element management, network
management and service management layers of the TMN model.
TMN Qx Development Environment (TMN QxDE) allows service providers, network
operators, systems integrators and others build TMN-based OSSs that can manage
Network Elements (NEs) with TL1 or other proprietary interfaces. Q-adaption
the process that translates between TMN and TL1 or proprietary protocols is
automated with the QxDE. The QxDE provides tools that quickly and easily build
"TMN-manageable" descriptions of the proprietary interfaces of NEs. The QxDE
includes run-time configurable "engines" that provide immediate, transparent
adaption between the NE protocol and TMN operations.
TMN Agent and Manager Simulators may be used with the DE products above, or
with any TMN-conformant agent or manager. The Simulators use standard TCL
scripts to emulate the behavior of a TMN-conformant agent, manager, or both.
Simulators have graphical user interfaces, read in the latest network
information (are dynamically configurable) at run-time and provide script
generation tools that produce test cases for an information model.
UNIX/NT Telecommunications Solutions (UTS) family includes standards
compliant OSI products that provide LAN and WAN communications, directory
services and file transfer for the TMN Telecore product family. These products
also integrate with other vendors' products that require OSI based networking.
The UTS LAN, WAN and TCP over OSI products provide wide area and local area
network communications. UTS FTAM (File, Transfer, Access and Management)
provides development kits to create file transfer client applications, server
applications and the server staff. UTS X.500 provides directory service client
and server. TARP is utilized in SONET networks for networked system address
resolution. UTS TARP can be used with TMN Telecore products licensed for
development of management systems in SONET networks.
Vertel/HP OpenView Telecom TMN Product Suite combines the strengths of HP
OpenView Telecom platforms and the Company's TMN development environments.
Products include TMN Designer, for prototyping and designing TMN-conformant
information models. The Designer includes HP OpenView Modeling Tool, as well
as the Company's TMN Agent and Manager Simulators, TMN Agent and TMN Manager
products, for developing and deploying agent and manager applications. These
products include HP OpenView DM platform and Event Correlation Services (ECS),
as well as the Company's TMN development environment components and TMN Proxy,
for developing TL1-to-TMN adaption applications which combines the HP OpenView
DM Platform and ECS with the Company's QxDE components for automated, run-time
adaption.
VERTEL TMN ACCESS PRODUCTS
Embedded Telecommunications Solutions (ETS)
The Company's Embedded Telecommunication Solutions (ETS) products provide
TMN software for deployment in NEs and gateway network elements (GNEs). These
products are designed to be ported to an
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embedded system running a Real-Time Operating System (RTOS). ETS was designed
with NE hardware and software vendors in mind. The ETS product family is
standards based and is comprised of a variety of integrated, modular products
and components. The core product is the ETS-ADE. Based on the TMN ADE, the
ETS-ADE enables developers to quickly design, develop and deploy fully
functional TMN-conformant embedded agents. ETS products also include fully
implemented, standards-conformant information models specifically for targeted
technologies and network configurations. ETS products also provide
encapsulated portation functions, OSI software and transport interfaces.
VERTEL WIRELESS PRODUCTS
The Company's wireless applications provide cellular service providers,
telecommunications systems integrators, mobile equipment vendors and other
suppliers of wireless data services with vertical solutions for wireless data
communications.
Configuration Management Tool (CMT) Wireless Base Station Products
Include configuration, operation and management tools for CDPD base
stations. The products are easily adaptable to support CDMA, GSM and TDMA base
stations. The flagship product is the Configuration Management Tool, which
enables wireless service providers and base station manufacturers to deploy
configuration, operational management and automatic radio frequency update
applications.
IS-124 Products
Include the IS-124 Development Environment and IS-124 Integration
Environment. IS-124 products implement the TIA IS-124 standard. These products
allow equipment and systems in a wireless network to format and communicate
call detail information used in billing. IS-124 components include the stacks,
interfaces and platform tools to lead project teams through IS-124/DMH
function development, testing and deployment.
The Data Message Handler (DMH)
A North American Standard, implemented by TIA/IS-124, defines a standard for
exchange call details (CDRS), including billing information between wireless
service providers. IS-124 is a standard that defines all services involving
non-signaling data communications that require intersystem cooperation. The
standard defines a data message handler (DMH) to manage the exchange of call
detail records.
VERTEL ATN ROUTER SOFTWARE PRODUCTS
The Company's ATN Router Software products implement the Aeronautical
Telecommunications Network (ATN) specifications, the aeronautics industry's
version of TMN. ATN router products are specifically for routing end systems
and intermediate systems in air-to-ground and ground communication. The
products provide complete ATN-compliant design, implementation; test and
deployment based on the ATN specifications.
Vertel high performance platforms and products are built upon standards
based technology that can be easily integrated into the customer's products
and/or network. The Vertel platforms and application development environments
include products that automate the deployment of agent and manager
applications. Vertel supplies fully implemented information models for OSI,
CDPD, ATM SONET/SDH and other technologies. Vertel platforms incorporate
object-oriented, fully integrated building blocks and development
environments. Vertel TMN Platforms and tools use the NMF TMN/C++ API as the
upper interface to the product. The TMN/C++ API hides the complexities of the
underlying agent or manager functionality behind easy-to-use C++ object
classes. Vertel's communications stacks employ the seven layer Open Systems
Interconnect (OSI) model and TCP/IP. Routing software packages and other
specialized stacks are also available. Vertel produced the industry's first
fully functional, portable and/or ported, OSI protocols for all seven OSI
stack layers.
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COMPETITION
The Company offers Telecommunication Management Solutions for
telecommunications equipment manufacturers, service providers and network
management platform suppliers. The Company competes on the basis of product,
including quality, performance, ease of use, functionality, interoperability,
reliability, scalability and extensibility and speed of implementation; price;
implementation and development services; technical support; training and
maintenance.
Competition in this market is intense and is characterized by rapidly
changing technologies, evolving industry standards, in-house or proprietary
solutions, frequent new product introductions and rapid changes in customer
requirements. Moreover, it is expected that this market will continue to
experience several new entrants in the foreseeable future. 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 Company's current and prospective competitors offer a variety of
solutions to address the telecommunications network management systems and
management applications market. These competitors generally fall within four
categories:
Customers' internal design and development organizations that produce
telecommunications network management systems and management applications
for their particular needs (e.g., Bellcore-based systems)
Current TMN software providers including DSET and to a more limited extent
ONE, NetMansys, ISR Global, Cabletron, Euristix, Object Stream and Bull
Hardware and software vendors including IBM, Sun Microsystems and DEC
Providers of specific market applications, including TCSI and OSI
Many of the Company's current and potential customers continuously evaluate
whether to design, develop and support their own telecommunications network
management systems and applications or purchase them from outside vendors.
These customers have traditionally designed and developed their own software
solutions internally for their particular needs and may therefore be reluctant
to purchase products offered by independent vendors such as the Company. The
Company estimates that a significant percentage of telecommunications network
management solutions are still developed in-house. In addition, despite its
limitations for deployment in public or very large enterprise networks, SNMP
continues to serve as the de facto standard for managing enterprise data
networks.
As a result, the Company must continuously educate existing and prospective
customers as to the advantages of TMN and of its products in particular versus
internally developed telecommunication network management systems and
management applications.
The global acceptance of TMN could lead to increased competition as third
parties develop telecommunications network management systems and management
applications competitive with those offered by the Company. Any of these
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products than the
Company. There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to those
developed by the Company or adapt more quickly than the Company to new
technologies, evolving industry standards, new product introduction or
changing customer requirements.
PROPRIETARY TECHNOLOGY
The Company primarily relies on a combination of copyright, trade secret and
trademark laws and nondisclosure and other contractual restrictions on copying
and distribution to protect its proprietary technology.
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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. It may be
possible for a third party to copy or otherwise obtain and use the Company's
products or technology without authorization, or to develop similar
technology, particularly in light of the fact that the Company licenses
portions of its source code to certain customers and distributors, there can
be no assurance that the foregoing measures used by the Company are adequate
to protect its proprietary technology. In addition, the Company's products are
licensed in other countries and the laws of such countries may treat the
protection of proprietary rights differently from, and may not protect the
Company's proprietary rights to the same extent as the law in the United
States. See "Risk Factors Dependence upon Proprietary Technology."
SALES, MARKETING AND CUSTOMERS
The Company markets and sells its products and services through an internal
sales and marketing organization that consisted of 36 people as of December
27, 1997. The Company's marketing efforts are focused on increasing awareness
of Vertel and its TMN solutions, and TMN in general, among telecommunications
service providers, network equipment manufacturers, independent software
developers and platform vendors, and on positioning the Company as the leading
provider of TMN software solutions. The Company's marketing programs have
three primary goals: market education and awareness, sales effectiveness and
product management. The Company's education and awareness activities include
seminars, speaking engagements, sponsorship of conferences, including the
Global TMN Summit, articles in industry publications, participation in
industry forums and working groups, and inclusion in market studies by leading
industry analysts. In addition, to disseminate its marketing message and
improve sales effectiveness, Vertel uses direct mail, advertising,
presentations, demos, press releases, press/analyst tours, marketing
literature, public relations, trade shows and a world-wide web site. Vertel's
product management staff works with customers and industry experts to ensure
that the Company's products will satisfy market requirements.
The sales cycle for the Company's products is lengthy and often requires the
Company to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products. As a result, the
Company sells its products primarily through a direct sales organization of
highly technical sales people. See "Risk Factors--Lengthy Sales and
Implementation Cycle." Of the 36 people engaged in sales and marketing, the
Company's direct sales organization consisted of 18 people as of December 31,
1997.
In addition, the Company sells software through distributors and agents in
certain other countries, and enables its customers through source code
licenses to distribute the Company's products in exchange for royalty
payments.
The Company currently transacts business in U.S. currency worldwide.
International sales totaled approximately 40.3%, 52.6% and 46.6% of net
revenues for each of the fiscal years 1997, 1996 and 1995. 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
Professional Services
The Company believes that the adoption of TMN will depend, in part, upon the
ability of service providers, network operators, network hardware and software
vendors, and systems integrators to implement TMN solutions quickly and cost-
effectively. The Company's professional services organization works with
systems integrators, application developers and in-house customer engineers to
enable customers to deploy a complete TMN solution. Professional services
include system analysis and design, source code portation, conformance testing
and
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<PAGE>
certification and custom application development. Many of the Company's
customers contract for professional services. The Company generally provides
professional services based on a detailed statement of work. Fees generally
depend upon the size, timing and complexity of the implementation and are
typically billed upon attainment of certain milestones or on a time and
materials basis. Professional services are typically delivered in the second
and third quarter following delivery of the source code.
The Company has devoted substantial resources to the provision of
professional services in order to facilitate the implementation of its TMN
products by service providers and to differentiate itself from competitors. As
of December 27, 1997, the Company's professional services organization
consisted of 20 people, including consultants and employees.
Technical Support
In order to assist customers in fully designing and operating integrated TMN
solutions, the Company believes it is important to offer a broad range of
technical support services for its customers. The Company charges customers
separately for training, product support and maintenance and on-site
consulting. Product support and maintenance revenues have historically
constituted a substantial majority of overall technical support revenues and
are typically realized beginning in the third quarter following delivery of
the source code. Annual product support and maintenance fees typically range
from 10% to 20% of the initial license fee. Technical support consists of the
following services:
TRAINING. The Company provides training to its customers on a per-product
basis. Training services range from detailed technical tutorials on technology
products to product configuration, management and administration training on
end user products.
PRODUCT SUPPORT. The Company can provide global coverage 24 hours per day,
seven days per week with direct access to technicians and product support
engineers on demand. In response to great demand for expert-level, on site-
support, product support also offers an on-demand service staffed by highly
competent product experts. The Company's product support is provided by
personnel primarily located in the Company's California and Ireland
facilities.
MAINTENANCE. Customers subscribing for product support also receive software
updates and maintenance releases. The Company typically issues software
updates every six to twelve months.
ONSITE CONSULTING. The Company's engineers travel to customer sites for an
initially specified period and provide expert level consultation including
additional system design, training, customization and development support.
As of December 27, 1997, the Company's technical support organization
consisted of 9 people.
The Company typically warrants software for 90 days. To date, the Company
has not encountered any significant product maintenance problems. See "Risk
Factors--New Products and Technological Changes; Dependence upon New Products;
Regulation."
RESEARCH AND PRODUCT DEVELOPMENT
The Company has made substantial investments in the development of its
products. The Company believes that its future success depends in a 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 research and development for the foreseeable
future. Overall product development efforts include:
Vertel/HP OpenView Telecom TMN Product Suite. The Vertel/HP OpenView Telecom
product suite will continue to build upon the combined strengths of HP
OpenView Telecom platforms and the Company's TMN development products.
Products include TMN Designer, TMN Agent and TMN Manager Developer and runtime
products and TMN Proxy.
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TMN Managers and Agents. Vertel deployed the industry's first TMN agent
toolkit in the early 1990's and the industry's first TMN agent and manager
products based upon the NMF TMN/C++ API (NMF API)--an emerging standard for a
three-tiered, object-oriented interface. The TMN Agent Development Environment
(ADE) and TMN Manager Development Environment (MDE) are two industry-leading
products in the market today. The MDE is highly regarded as the most easy-to-
use C++ implementation of TMN available.
Vertical Integration and Optimization. The Company uniquely provides a
single-vendor, object-oriented, integrated implementation of OSI stacks, TMN
agent and manager products, Q-adaption and MIB translation. The Company's
product software modules can be tightly integrated and optimized for
performance and efficient memory usage.
Portability. The Company's products can be ported in network elements, on
UNIX and NT platforms, in popular run-time operating systems, in a wide range
of client-server, fault-tolerant architectures and environments. These
products provide: encapsulations of the underlying communication network
portation details and flexible OSI and transport stack interfaces and
communication networks. Portability allows the Company to implement changes
and enhancements to the core technology once and to host those changes to many
environments simultaneously. Currently, the Company supports five Real-Time
Embedded Operating Systems (RTOSs), Solaris, HP-UX and Windows NT.
Standards Conformance. The Company's implementations have successfully
undergone many conformance tests in a variety of contexts and environments.
Conformance testing guarantees that the standards have been implemented
properly and enables interoperability to occur.
The Company's research and development organization is located principally
in Woodland Hills, California. As of December 27, 1997, the Company's research
and development group consisted of 51 people.
In fiscal years 1997, 1996 and 1995, the Company's research and development
expenditures net of customer reimbursements were approximately $5,600,000,
$5,461,000 and $5,156,000, respectively.
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<PAGE>
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:
Adoption of Standards. The Company's success is based in large part on the
adoption of the TMN standard by major telecommunications service providers in
the United States and abroad. There can be no assurance regarding the timing
of such acceptance, that telecommunications service providers will adopt
standards different from those currently employed, or that if they choose to
do so, TMN will be the standard adopted. In light of the industry's historical
dependence on proprietary systems and the emergence of competing standards
such as SNMP2 and CMIP, the Company's focus on TMN-based systems represents a
risk for the Company. While the Company invests substantial efforts in
encouraging the adoption of the TMN standard, the Company does not have direct
control over such adoption. Delays in the adoption of the TMN standard or the
adoption by the telecommunications service providers of a standard other than
TMN would have the effect of materially adversely affecting the Company's
financial condition and results of operations.
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 "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 TMN software or
wireless applications 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. There can be no assurance of an increase in revenues
and net income attributable to the Company's TMN-based products. See "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 TMN and wireless applications 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 TMN and wireless applications 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," "Strategy and Products," and
"Research and Product Development."
Substantial Fluctuations in Quarterly Operating Results; Timing of Orders;
Future Operating Results Uncertain. A significant portion of the Company's
software revenues have been, and will continue to be, 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 U.S. and international
sales, the mix of direct and indirect sales and general economic factors,
among others. Due to the foregoing factors, quarterly revenues 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. 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. 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."
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
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<PAGE>
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 "Sales, Marketing and Customers."
Sales and Marketing Risks. During 1998, the Company plans to increase the
number of direct sales and marketing personnel to support the further
development of TMN market opportunities. As the Company hires new sales and
marketing 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 sales and
marketing personnel, that this expansion will result in sales of 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, price and maintenance.
The Company experiences significant competition in telecommunications
network management from TCSI, OSI, IBM, Sun Microsystems, DSET 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 "Strategy and Products."
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
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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 approximately half of the Company's net
revenues for 1997, 1996 and 1995. 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 "Sales, Marketing and
Customers."
Dependence on Suppliers and Licenses. 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 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 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 "Strategy and Products", "Employees" and "Executive Officers and
Key Personnel of the Company."
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 professional service operation in Ireland
where the functional currency is the Irish Pound. A small portion of the
Company's revenues are also denominated in currencies other than the United
States dollar. In addition, international sales denominated in U.S. Dollars
may nonetheless be adversely affected by exchange rate fluctuations if the
relative cost of the Company's products
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becomes substantially more expensive. 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 "Proprietary Technology."
Risks Associated With Year 2000. New releases of the Company's software have
been designed to address processing for the year 2000 to the extent it has
been required. It is the Company's intent to have all of its actively
supported software on releases which are ready for the year 2000 by the end of
1998. However, to the extent that others such as system integrators make use
of the Company's software in developing solutions for third parties, the
Company may have no knowledge as to the year 2000 readiness of those third
party products. In addition, it is possible third parties could assert claims
against the Company or its customers concerning year 2000 issues and,
regardless of their merits or lack thereof, these claims could be material.
As with other organizations, the Company's internal computer systems and
programs were originally designed to recognize calendar years by their last
two digits. Calculations performed using these truncated fields would not work
properly with dates from the year 2000 and beyond. The Company has initiated
efforts to remedy this situation and expects all systems to be replaced and
tested prior to the year 2000. The incremental costs of this project have not
yet been quantified by the Company and could be material.
EMPLOYEES
As of December 27, 1997 the Company employed 111 persons, of whom 63 were
primarily engaged in research and development activities or professional
services, 36 in sales, marketing, customer support and related activities and
12 in general management, administration and finance. The Company has no
collective bargaining
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agreements with its employees. The Company believes that it maintains
competitive compensation, benefit, equity participation and workplace policies
that 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.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of December 28, 1997
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bruce Brown............. 47 President and Chief Executive Officer
James Brill............. 46 Vice President, Finance and Administration and Chief Financial Officer
The key divisional employees and their ages as of December 28, 1997 are as
follows:
Lawrence Asten.......... 51 Senior Vice President, Worldwide Sales, Vertel
Michael Stark........... 39 Vice President, Research and Development, Vertel
Cyrus Irani............. 39 Vice President, Marketing, Vertel
Fred Rampey............. 43 Vice President, Professional Services, Vertel
</TABLE>
Mr. Brown was elected to the position of President and Chief Executive
Officer of the Company in fiscal January 1998. Mr. Brown also serves as
President and Chief Executive Officer of Vertel, a position to which he was
elected in November 1995. Mr. Brown joined Vertel in August 1995 and has
served as a director of Vertel since October 1995. From October 1995 to
December 1996, Mr. Brown also served as Chief Financial Officer of Vertel.
Prior to joining Vertel, Mr. Brown served as President of ADC Fibermux
Corporation ("Fibermux"), a supplier of fiber optic networking products from
July 1993 until August 1995. Prior to his role at Fibermux, Mr. Brown was
Executive Vice President, Customer Operations at Ungermann-Bass Networks, Inc.
from October 1990 until July 1993. Mr. Brown holds a B.S. degree from Iowa
State University and an M.P.A. from Drake University.
Mr. Brill has served as Vice President, Finance and Administration and Chief
Financial Officer of the Company since the beginning of fiscal 1998. He joined
the Company as Vice President, Finance and Administration and Chief Financial
Officer of the Company's Vertel subsidiary in December 1996. Prior to joining
the Company, Mr. Brill served for over eight years at Merisel, Inc., a
computer software and hardware distributor, from May 1988 to October 1996,
where his most recent role was Chief Financial Officer and a member of the
Board of Directors. Mr. Brill holds a B.S. degree from the U.S. Naval Academy
and an M.B.A. from the UCLA Anderson Graduate School of Management.
Mr. Asten has served as Senior Vice President, Worldwide Sales, for the
Company's Vertel subsidiary since joining Vertel in November 1995. Prior to
joining the Company, Mr. Asten served as Vice President, Sales, Marketing and
Customer Service for ADC Telecommunications, Inc., a telecommunications
equipment manufacturer, from January 1992 to October 1995. Previously, he
served as Vice President, Worldwide Sales, for Telco Systems, Inc., a
telecommunications equipment manufacturer, from July 1987 to January 1992.
Mr. Stark has been with the Company's Vertel subsidiary since February 1996
where he has served as Vice President, Research and Development. Prior to
joining the Company, Mr. Stark served as Vice President, Product Development,
for BellSouth/Dataserv, a provider of data communications, from April 1992 to
January 1996. Previously, he served in various management positions at
NCR/Teradata Corporation, a database company, and Nucleus International
Corporation, a database company.
Mr. Irani joined the Company's Vertel subsidiary in February 1996 and
currently serves as Vice President, Marketing. Prior to joining the Company,
Mr. Irani served as Vice President of Marketing and Sales for The Alchemy
Group, a network management software company, from August 1994 to February
1996. Previously, he was Product Line Manager for AT&T Global Information
Systems, a telecommunications service provider, from March 1993 to August
1994. From December 1989 to March 1993, he served as Director of Product
Marketing for the Company.
19
<PAGE>
Mr. Rampey has served as Vice President, Professional Services, for the
Company's Vertel subsidiary since December 1997. Prior to joining the Company,
Mr. Rampey served in various management roles, including most recently
Operations Manager, for Hewlett Packard's OpenView Telecom Division from
September 1996 to December 1997.
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 operations are located in Woodland Hills,
California, and consist of approximately 30,000 square feet under a lease that
will expire in January 2002. Annual gross rent for this facility lease
approximates $650,000. The Company's field sales and service offices
worldwide, other than its headquarters, consist of leased office space
totaling approximately 13,500 square feet with current aggregate gross rents
of approximately $82,000. In addition, the Company has various facilities
under lease, which have been subleased to tenants for which rental income
approximately offsets rental obligations. 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.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market
(NASDAQ:RETX). The low and high sales prices for each quarterly period in the
two fiscal years ended December 27, 1997 are as follows:
<TABLE>
<CAPTION>
1996 FISCAL QUARTERS ENDED
---------------------------------
MARCH 30 JUNE 29 SEPT. 28 DEC. 28
-------- ------- -------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1997 FISCAL QUARTERS ENDED
---------------------------------
MARCH 29 JUNE 28 SEPT. 27 DEC. 27
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Low bid.................................. $4 $3 5/8 $4 $4 1/32
High bid................................. $7 3/16 $5 7/8 $7 $7 3/8
</TABLE>
There were approximately 400 holders of record on February 26, 1998.
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.
20
<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.
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net revenues:
License..................... $ 12,590 $11,714 $ 10,222 $ 12,209 $15,574
Service and other........... 5,887 4,443 5,324 11,428 7,183
-------- ------- -------- -------- -------
Net revenues.............. 18,477 16,157 15,546 23,637 22,757
-------- ------- -------- -------- -------
Cost of revenues:
License..................... 876 1,059 943 715 1,275
Service and other........... 3,606 1,917 2,346 7,445 4,282
-------- ------- -------- -------- -------
Total cost of revenues.... 4,482 2,976 3,289 8,160 5,557
-------- ------- -------- -------- -------
Gross profit.................. 13,995 13,181 12,257 15,477 17,200
-------- ------- -------- -------- -------
Operating expenses:
Research and development ... 5,600 5,461 5,156 1,730 3,643
Sales and marketing......... 7,829 7,625 4,279 5,622 8,226
General and administrative.. 3,719 3,223 2,188 3,493 3,480
Restructuring expense
(benefit).................. 1,513 (197) 2,277 397 906
-------- ------- -------- -------- -------
Total operating expenses.. 18,661 16,112 13,900 11,242 16,255
-------- ------- -------- -------- -------
Operating income (loss) from
continuing operations........ (4,666) (2,931) (1,643) 4,235 945
Litigation settlement and
related costs................ -- -- -- -- (4,025)
Other income, net............. 171 591 1,046 780 540
-------- ------- -------- -------- -------
Income (loss) from continuing
operations before
provision for income taxes .. (4,495) (2,340) (597) 5,015 (2,540)
Provision (benefit) for income
taxes ....................... -- -- -- 2,006 (1,016)
-------- ------- -------- -------- -------
Income (loss) from continuing
operations................... (4,495) (2,340) (597) 3,009 (1,524)
Loss from discontinued
operations................... (6,415) (1,501) (31,212) (14,941) (5,808)
-------- ------- -------- -------- -------
Loss before cumulative effect
of change in accounting
principle.................... (10,910) (3,841) (31,809) (11,932) (7,332)
-------- ------- -------- -------- -------
Cumulative effect of change in
accounting
principle.................... -- -- -- -- 204
-------- ------- -------- -------- -------
Net income (loss)............. $(10,910) $(3,841) $(31,809) $(11,932) $(7,128)
======== ======= ======== ======== =======
BASIC AND DILUTED INCOME
(LOSS) PER COMMON SHARE:
Income (loss) from continuing
operations................... $ (0.21) $ (0.12) $ (0.03) $ 0.08 $ (0.07)
Loss from discontinued
operations................... (0.30) (0.07) (1.75) (0.76) (0.36)
Cumulative effect of change in
accounting principle....... -- -- -- -- 0.01
-------- ------- -------- -------- -------
Net loss.................... $ (0.52) $ (0.19) $ (1.78) $ (0.68) $ (0.42)
======== ======= ======== ======== =======
CONSOLIDATED BALANCE SHEET
DATA:
Working capital .............. $ 6,411 $15,338 $ 12,145 $ 27,191 $35,548
Total assets.................. 13,450 23,622 22,584 37,065 51,838
Long term obligations, less
current portion.............. 10 236 65 478 1,422
Shareholders' equity ......... 7,733 17,602 14,360 44,928 55,282
</TABLE>
21
<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 over the past ten years, the Company expanded to offer routing,
switching and most recently, broadband access equipment. The Company's primary
concentration was in the internetworking market until 1996 when it split the
operating divisions of the Company into three business units, each with its
own management structure. These three units focused on internetworking,
network management software (developed from its roots in OSI technology) and
wireless applications software. In 1997, the Company merged the wireless
applications software subsidiary into its network management software
subsidiary, Vertel. Additionally, in 1997, the Company's internetworking
hardware subsidiary, Sonoma Systems Inc. ("Sonoma"), announced it would focus
solely on broadband access equipment for the telecommunications marketplace.
In December 1997, it was announced that the Company would discontinue
investment in Sonoma and seek outside investors. Such financing was arranged
in early 1998 and the results of operations have been reclassified to present
the operating results of Sonoma as a discontinued operation (See Note 3 to
Financial Statements). The Company's remaining subsidiary, Vertel, was
expanded from its OSI background to begin offering network management software
for the telecommunications industry. This product line of telecommunications
network management ("TMN") software experienced increasing revenues during
1996 and 1997. Further references to the Company in Management's Discussion
and Analysis of Financial Condition refer solely to the continuing operations
of Vertel unless specifically identified otherwise.
Vertel was organized as a wholly-owned subsidiary of Retix in February 1996.
In conjunction with the formation, Retix transferred to the Company the net
assets of Retix's TMN and OSI product lines, including the direct and indirect
subsidiaries through which Retix historically conducted such business. The
Company released its first TMN software products and services in 1995. By
1996, the Company no longer sold new licenses to its OSI software products,
but still receives a limited amount of related royalty and support revenue. As
a result of the product line transition in the Company's business, the
Company's results of operations prior to 1996 should not be relied upon as
indicative of future results.
The Company is a leader in developing, marketing and supporting vertically
integrated, object-oriented software solutions for the management of public
telecommunications networks. The Company's solutions, which are based upon the
International Telecommunications Union's TMN standard, support seamless
network operation and management over diverse transmission media and
protocols. The Company's products are designed to reduce network management
costs by automating critical network management functions and to assist
telecommunications service providers in deriving incremental revenue by
enabling the rapid deployment of advanced services.
The Company offers 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. The Company provides professional services to implement
and maintain a complete TMN-based solution efficiently, including system
engineering, custom application development and technical support.
The Company sells its products and services primarily through a direct sales
force in the United States and abroad and, in certain territories, utilizes
commissioned third-party agents. Additionally, the Company announced in 1997
that it had signed a joint development agreement with Hewlett Packard's
OpenView division whereby the two companies would jointly develop, market and
sell certain products. The Company's customers include telecommunications
service providers and their customers, network equipment manufacturers,
independent software developers and software platform vendors.
22
<PAGE>
The Company derives revenue primarily from software 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 software products and development platforms. Source license
revenue is recognized upon transfer of the source code to the customer,
provided there are no significant remaining obligations and collectability is
deemed probable by management in accordance with Statement of Position 91-1,
Software Revenue Recognition ("SOP 91-1"). To date, substantially all source
license fees have been recognized upon transfer. Source license fees typically
have accounted for a substantial portion of total revenue in each quarter.
Source license agreements generally do not provide for a right of return.
Reserves are maintained for returns and potential credit losses, neither of
which has had a material effect on the Company's results of operations or
financial condition through December 31, 1997.
Pursuant to source code license agreements, licensees may distribute binary
or embedded versions of the Company's software in the licensees' products.
Royalties become due upon shipment of products containing the binary or
embedded code and generally are recognized upon notification by the licensee
to Vertel that products have been shipped. Because of the development times
required for licensees to design and ship products containing binary or
embedded software, the Company generally does not receive royalties from
shipments of such products for at least three quarters from the date the
Company initially ships source code. Certain of the Company's source license
agreements provide for prepayment of royalties. The Company typically
recognizes guaranteed minimum prepaid royalties, which are not subject to
future obligations upon shipment of the underlying source code. Royalty
revenue that exceeds minimum guarantees, or is subject to significant vendor
obligations, or where collection cannot be assured, is recognized in the
period when earned or collection is assured.
The Company separately offers professional services, including system design
and engineering, custom application development, source code portation,
conformance testing and certification and application development. Many of the
Company's customers contract for professional services. These services are
typically based on a detailed statement of work. Professional services revenue
varies according to the size, timing and complexity of the project and are
typically billed based upon the attainment of certain milestones or a per day
fee. Revenue from professional services generally is recognized using the
percentage of completion method, or on a time and materials basis. In certain
cases, the Company is reimbursed for non-recurring engineering efforts by
customers, with reclassification of such costs from research and development
to costs of revenues.
Technical support services consist of product support and maintenance,
training and onsite consulting. Product support and maintenance fees have
constituted the majority of technical support and service revenue. Product
support and maintenance fees typically have ranged from 10-20% of the initial
source license fee and are recognized ratably over the term of the maintenance
agreement, which is typically one year. Other revenue from training and onsite
consulting are recognized as performed.
The Company also derives revenue from the sale of its messaging products and
certain other miscellaneous products and services. The Company expects this
revenue to continue to decline as the Company focuses on its TMN-based
products and services.
The Company's operating expenses have increased substantially since 1995 as
the Company has made investments related to the development and introduction
of its TMN products, expanded its sales force and established additional
general and administrative functions. The Company anticipates that operating
expenses will continue to increase for the foreseeable future as it continues
to develop its technology, increase sales and marketing efforts, establish and
expand distribution channels and institute additional general and
administrative functions.
The Company's prospects are dependent on market acceptance of the TMN
standard and must be evaluated in light of the risks and uncertainties
frequently encountered by companies dependent upon such early stage standards
and products. In addition, the Company's markets are new and rapidly evolving
which heightens these risks and uncertainties. To address these risks, the
Company must, among other things, successfully implement
23
<PAGE>
its marketing strategy, respond to competitive developments, continue to
develop and upgrade its products and technologies more rapidly than its
competitors and commercialize its products and services incorporating these
enhanced technologies. There can be no assurance that the Company will succeed
in addressing any or all of these risks. See "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Revenues.................... 100.0 % 100.0 % 100.0 %
Cost of revenues............ 24.3 18.4 21.2
----- ----- -----
Gross margin................ 75.7 81.6 78.8
Operating expenses:
Research and development.. 30.3 33.8 33.2
Sales and marketing....... 42.4 47.2 27.5
General and
administrative........... 20.1 19.9 14.1
Restructuring expense
(benefit)................ 8.2 (1.2) 14.6
----- ----- -----
Total operating
expenses............... 101.0 99.7 89.4
----- ----- -----
Operating loss from
continuing operations...... (25.3)% (18.1)% (10.6)%
===== ===== =====
</TABLE>
Net Revenues. Net revenues increased 14.4% to $18,477,000 in 1997 as
compared to $16,157,000 in 1996 following a 3.9% increase from 1995. The
increases experienced in net revenues over the past two years were primarily
due to growth in demand for the Company's TMN-based products through both new
product offerings and new customers. Additionally, revenues were generated
from existing customers who began to utilize TMN for new systems as well as to
interface with existing legacy systems. Sales generated by the Company consist
of network management software license, service and other revenues.
License revenues consist primarily of licenses and royalties 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 fees are 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 SOP 91-1.
Annual license revenues increased 7.5% to $12,590,000 during 1997 from
$11,714,000 in 1996 following a 14.6% increase from $10,222,000 in 1995. The
increase in license revenues in 1997 as compared to 1996 was primarily due to
$1,900,000 in final billings resulting from the termination of a contract to
develop wireless messaging products to a single customer. These billings will
not recur in 1998. The increase in license revenues in 1996 as compared to
1995 reflects a full year of revenues in deploying the Company's TMN-based
software and service solutions to carriers and network equipment manufacturers
for the management of public telecommunications networks.
Service and other revenues consist primarily of professional services,
maintenance, technical support, non-recurring engineering projects, training
and other revenues. Service and other revenues increased 32.5% to $5,887,000
during 1997 from $4,443,000 in 1996 following a 16.5% decrease from $5,324,000
in 1995. The increase in service and other revenues in 1997 as compared to
1996 was primarily due to higher revenues from professional services,
nonrecurring engineering projects and maintenance revenues. The decrease in
service and other revenues in 1996 as compared to 1995 was primarily due to
decreases in nonrecurring engineering projects and maintenance revenues as the
Company shifted its product lines from its traditional OSI products to TMN-
based products.
24
<PAGE>
The Company intends to continue to introduce several new products to expand
its position as a leader in providing telecommunications management solutions;
however, net revenues and operating results of future periods may be adversely
affected if the Company experiences 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
40.3%, 52.6% and 46.6%, respectively, of net revenues in 1997, 1996 and 1995.
The Company's high percentage of sales to customers outside of the United
States has historically been due primarily to strong international demand for
its OSI and TMN standards-based network management software which the Company
believes is due to the high degree of international investment in new
infrastructure products, whereas investment in the U.S. tends to be in
upgrading pre-existing proprietary systems. Historically, the Company's
international sales have been 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 professional
engineering services, primarily comprised of payroll and related costs, and
royalties paid under software licensing agreements and warranty costs. Gross
margin decreased to 75.7% of net revenues in 1997, from 81.6% in 1996 and from
78.8% in 1995 due to a shift in product mix. The decrease in gross margin for
1997 was more specifically due to a greater composition of professional
services revenue in the product mix, which tend to have lower margins versus
license revenue. Gross margins increased in 1996 as compared to 1995 due to
fewer projects with customers for non-recurring engineering efforts which
typically are generally performed at relatively low margins. The Company
anticipates that changes to pricing structures and distribution strategies may
occur, and that margins may fluctuate and could decline in future periods.
Research and Development. The Company has invested heavily in research and
development to expand its expertise in TMN-based software solutions
applications 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 in certain cases are offset by customer reimbursement of non-
recurring engineering efforts.
Total research and development expenses increased 2.5% to $5,600,000 in 1997
from $5,461,000 in 1996 and increased 5.9% in 1996 from $5,156,000 in 1995. As
a percentage of revenue, research and development expenses were relatively
constant at 30.3% in 1997, 33.8% in 1996, and 33.2% in 1995. The increase in
research and development expense in 1997 and 1996 as compared to prior years
was primarily due to an increase in expenditures for further expansion of TMN-
based software development tools, stacks and applications. The decrease in
research and development expense as a percentage of revenue in 1997 as
compared to 1996 reflects the overall increase in revenues noted for the
period.
The Company expects to continue to make significant investments in the
development of new products and feature enhancements 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 non-recurring engineering
services.
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 in the TMN
marketplace.
25
<PAGE>
Sales and marketing expenses increased 2.7% to $7,829,000 in 1997 from
$7,625,000 in 1996 and increased 78.2% in 1996 from $4,279,000 in 1995. Sales
and marketing expenses increased slightly in 1997 as compared to 1996, but
decreased as a percentage of revenues to 42.4% in 1997 from 47.2% in 1996
primarily due to slower growth of additional sales offices in early 1997 as
revenues increased over the prior year. The increase in the absolute amount of
sales and marketing expenses and as a percentage of revenues in 1996 as
compared to 1995 reflects efforts to increase Vertel's direct sales force
including opening of offices in Germany, France, the United Kingdom, Korea and
Japan and additional marketing programs to support the launch of new TMN-based
products and entry into new markets.
The Company 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, the Company intends to
expand its sales and marketing functions further 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 as well as professional fees and insurance premiums.
General and administrative expenses increased 15.4% to $3,719,000 in 1997 as
compared to $3,223,000 in 1996, and increased 47.3% in 1996 from $2,188,000 in
1995. The increase in general and administrative costs in 1997 as compared to
1996 is primarily attributable to increases in infrastructure costs including
severance and professional fees related to the merger of the Company's
subsidiary, Wireless Solutions, into Vertel in mid-1997, and charges for
reductions in the Company's Irish offices and staffing. The increase in
general and administrative costs in 1996 as compared to 1995 is primarily
attributable to increases in infrastructure costs related to 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.
Restructuring Expense (Benefit). 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 December 1997, the Company announced plans to discontinue investment in its
broadband access equipment subsidiary, Sonoma. As a result, the Company's
management structure was reorganized and downsized to reflect the reduction of
the number of operating subsidiaries to one (see Notes 3 and 12 to Financial
Statements). The estimated costs of restructuring recorded in the financial
statements for the year ended December 31, 1997 was $1,816,000 and included
costs of officer severance pay, acceleration of vesting for certain officer
and director stock options, facility consolidation, professional fees and
other related charges. It is anticipated these costs will be paid during the
first half of 1998. Additionally, during the fourth quarter of 1997, the
Company recorded a reversal of certain restructuring reserves and accruals
originally recorded in 1995 totaling $303,000, resulting in a net
restructuring expense recorded for fiscal 1997 of $1,513,000.
In 1995, the Company announced a major restructuring of its operations
resulting from the significant downsizing of its internetworking hardware
business unit, later known as Sonoma. The resulting restructuring charge
included costs for exiting certain leased facilities by the Company, inventory
and fixed asset write downs, severance payments for terminated employees,
foreign office closure costs and other reserves. The estimated costs of
restructuring recorded in the financial statements for the year ended December
31, 1995 was $2,277,000. Subsequently, the Company recorded the reversal of
excess restructuring reserves totalling $303,000 and $197,000 for the years
ended December 31, 1997 and 1996, respectively, primarily as a result of
favorable lease exit costs and lower than anticipated severance costs. As of
December 31, 1997, substantially all reserves related to the 1995
restructuring charge, except for $149,000 related to costs for final closures
of foreign subsidiaries, had been utilized or reversed.
Loss from Continuing Operations. The Company incurred a loss from continuing
operations of $4,666,000 in 1997, $2,931,000 in 1996, and $1,643,000 in 1995.
The increase in loss from continuing operations in 1997
26
<PAGE>
as compared to 1996 is primarily attributable to the restructuring reserve as
a result of the reorganization of the Company's management structure (See
Restructuring Expense (Benefit)). The loss from continuing operations in 1996
is primarily attributable to increases in operating costs as the Company
expanded infrastructure of its subsidiary, Vertel. The loss from continuing
operations in 1995 is primarily attributable to declines in net revenues
versus 1994 as the Company transitioned from its traditional OSI products to
TMN products.
Other Income. Other income, net, includes interest income and expense,
foreign tax withholdings and foreign currency gains and losses. Decreases in
other income, net, to $171,000 in 1997 from $591,000 in 1996 and $1,046,000 in
1995 were primarily attributable to decreases in interest income from
decreasing cash balances during 1997 and varying interest rates earned on
investments.
Provision for Income Taxes. The Company recorded no provision for income
taxes on pre-tax losses from continuing operations of $4,495,000, $2,340,000,
and $597,000 in 1997, 1996 and 1995 respectively. Deferred tax assets and
liabilities are recognized based on differences between financial statement
and tax bases of assets and liabilities using presently enacted rates. A
valuation allowance equal to the total amount of the Company's net deferred
tax assets of $25,344,000 at December 31, 1997, has been established. The net
deferred tax assets will be realized to the extent that the Company operates
profitably in the future during the respective carryforward periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred net losses of $ 10,910,000, $3,841,000 and
$31,809,000 and operating losses from continuing operations of $4,666,000,
$2,931,000 and $1,643,000 for the years ended December 31, 1997, 1996 and
1995, respectively. As a result, the Company's principal sources of liquidity,
consisting of cash and cash equivalents and short-term investments, have
decreased to $2,253,000 and $3,999,000, respectively, at December 31, 1997. In
response to these factors, as more fully discussed at Note 3 to the Financial
Statements, in December 1997, the Company's board of directors adopted a plan
to discontinue further investment in the Company's broadband access equipment
subsidiary, Sonoma. The plan, which was substantially completed in January
1998, reduces the Company's level of investment in Sonoma to that of a passive
investor and, as a result, the Company will no longer contribute to the future
working capital requirements of Sonoma. Net cash used by Sonoma was
$6,313,000, $6,057,000 and $11,591,000 in 1997, 1996 and 1995, respectively.
In response to the losses at the Company's remaining operating subsidiary,
Vertel, the Company reduced ongoing operating expenses in the second half of
1997 to align with anticipated sales levels. Additionally, the Company has
streamlined its management structure through the restructuring activities
announced in December 1997 (see Note 11).
The Company believes the effects of the disposition of Sonoma and reductions
in ongoing operating expenses in the second half of 1997 will result in cash
flows in 1998 which, when combined with the Company's cash and short term
investment balances, will be sufficient to meet the Company's liquidity
requirements for the next 12 months.
The Company has experienced operating losses from continuing operations
before provision for income taxes totaling $4,495,000, $2,340,000 and $597,000
in 1997, 1996 and 1995, respectively. Operating activities required the use of
cash of $4,277,000 during 1997 primarily as a result of the operating loss in
that year. Additionally, the Company experienced overall decreases in payables
and accruals in 1997 as compared to the prior year. Offsetting the loss in
1996 were cash flow increases primarily due to increases in accounts payable
and accrued liabilities compared to the prior year.
The Company has received net cash of $256,000, $3,321,000, and $1,120,000
from the exercise of stock options and stock sales under the employee stock
purchase plans in 1997, 1996 and 1995, respectively. In 1997, the Company also
received cash of $510,000 as a result of the repayment of certain notes
receivable originally issued from the exercise of certain stock options.
Additionally, in 1996, the Company received cash of $4,090,000 as a result of
the private placement of its common stock in that year.
27
<PAGE>
At December 31, 1997 the Company's long-term liquidity needs consisted
principally of operating lease commitments related to facilities and office
equipment.
The Company's capital expenditures approximated $480,000 for 1997, $340,000
for 1996 and $858,000 for 1995. 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. 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.
New releases of the Company's software have been designed to address
processing for the year 2000 to the extent it has been required. It is the
Company's intent to have all of its actively supported software on releases
which are ready for the year 2000 by the end of 1998. However, to the extent
that others such as system integrators make use of the Company's software in
developing solutions for third parties, the Company may have no knowledge as
to the year 2000 readiness of those third party products. In addition, it is
possible third parties could assert claims against the Company or its
customers concerning year 2000 issues and, regardless of their merits or lack
thereof, these claims could be material.
As with other organizations, the Company's internal computer systems and
programs were originally designed to recognize calendar years by their last
two digits. Calculations performed using these truncated fields would not work
properly with dates from the year 2000 and beyond. The Company has initiated
efforts to remedy this situation and expects all systems to be replaced and
tested prior to the year 2000. The incremental costs of this project have not
yet been quantified by the Company and could be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RETIX
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,253 $ 8,219
Short-term investments .................................. 3,999 7,748
Trade accounts receivable (net of allowances of $452 and
$368 for 1997 and 1996, respectively)................... 4,941 4,315
Prepaid expenses and other current assets................ 925 840
-------- --------
Total current assets................................... 12,118 21,122
Property and equipment, net................................ 766 913
Other assets............................................... 566 1,587
-------- --------
$ 13,450 $ 23,622
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 733 $ 1,064
Accrued wages and related liabilities ................... 660 903
Accrued restructuring expenses .......................... 1,487 491
Other accrued liabilities ............................... 2,100 2,493
Deferred revenue......................................... 531 739
Net liabilities of discontinued operations............... 196 94
-------- --------
Total current liabilities ............................. 5,707 5,784
Deferred rent.............................................. 10 236
-------- --------
Total liabilities...................................... 5,717 6,020
-------- --------
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 1997,
24,146,518; 1996, 22,597,427............................ 227 226
Additional paid-in capital .............................. 78,661 78,089
Accumulated deficit ..................................... (64,760) (53,850)
Cumulative translation adjustment ....................... (2,003) (1,961)
-------- --------
12,125 22,504
Less notes receivable from issuance of common stock ..... (4,392) (4,902)
-------- --------
Total shareholders' equity ............................ 7,733 17,602
-------- --------
$ 13,450 $ 23,622
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Net revenues:
License......................................... $ 12,590 $11,714 $ 10,222
Service and other............................... 5,887 4,443 5,324
-------- ------- --------
Net revenues.................................. 18,477 16,157 15,546
-------- ------- --------
Cost of revenues:
License......................................... 876 1,059 943
Service and other............................... 3,606 1,917 2,346
-------- ------- --------
Total cost of revenues ....................... 4,482 2,976 3,289
-------- ------- --------
Gross profit ..................................... 13,995 13,181 12,257
-------- ------- --------
Operating expenses:
Research and development........................ 5,600 5,461 5,156
Sales and marketing............................. 7,829 7,625 4,279
General and administrative ..................... 3,719 3,223 2,188
Restructuring expense (benefit)................. 1,513 (197) 2,277
-------- ------- --------
Total......................................... 18,661 16,112 13,900
-------- ------- --------
Operating loss from continuing operations ........ (4,666) (2,931) (1,643)
Other income, net ................................ 171 591 1,046
-------- ------- --------
Loss from continuing operations before provision
for income taxes................................. (4,495) (2,340) (597)
Provision for income taxes........................ -- -- --
-------- ------- --------
Loss from continuing operations................... (4,495) (2,340) (597)
Loss from discontinued operations (including
provision for operating losses of $100 during
phase out period)................................ (6,415) (1,501) (31,212)
-------- ------- --------
Net loss.......................................... $(10,910) $(3,841) $(31,809)
======== ======= ========
Basic and diluted loss per common share:
Loss from continuing operations .................. $ (0.21) $ (0.12) $ (0.03)
Loss from discontinued operations ................ $ (0.30) $ (0.07) $ (1.75)
-------- ------- --------
Net loss.......................................... $ (0.52) $ (0.19) $ (1.78)
======== ======= ========
Common shares used in computing per share amounts
................................................. 21,120 20,322 17,886
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------- PAID-IN ACCUMULATED TRANSLATION NOTES
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT RECEIVABLE TOTAL
---------- ------ ---------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... 17,569,068 $176 $64,706 $(18,200) $(1,754) $ -- $ 44,928
Issuance of common
stock upon exercise of
options .............. 381,230 4 875 879
Issuance of common
stock under employee
stock purchase plan .. 102,284 1 240 241
Cumulative translation
adjustment............ 121 121
Net loss............... (31,809) (31,809)
---------- ---- ------- -------- ------- ------- --------
Balance at December 31,
1995................... 18,052,582 181 65,821 (50,009) (1,633) 14,360
Issuance of common
stock upon exercise of
options............... 2,458,999 25 7,938 (4,902) 3,061
Issuance of common
stock upon private
placement ............ 2,000,000 20 4,070 4,090
Issuance of common
stock under employee
stock purchase plan... 85,846 260 260
Cumulative translation
adjustment ........... (328) (328)
Net loss............... (3,841) (3,841)
---------- ---- ------- -------- ------- ------- --------
Balance at December 31,
1996................... 22,597,427 226 78,089 (53,850) (1,961) (4,902) 17,602
Issuance of common
stock upon exercise of
warrants ............. 1,457,627
Issuance of common
stock upon exercise of
options............... 35,985 41 41
Payment of notes
receivable from
issuance of common
stock................. 510 510
Compensation expense
from acceleration of
stock options......... 317 317
Issuance of common
stock under employee
stock purchase plan... 55,479 1 214 215
Cumulative translation
adjustment............ (42) (42)
Net loss .............. (10,910) (10,910)
---------- ---- ------- -------- ------- ------- --------
Balance at December 31,
1997.................. 24,146,518 $227 $78,661 $(64,760) $(2,003) $(4,392) $ 7,733
========== ==== ======= ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations.............. $(4,495) $(2,340) $ (597)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization ................. 1,017 1,003 2,300
Reserve for returns and bad debts.............. 84 277 91
Restructuring expense (benefit) ............... 1,513 (197) 2,277
Deferred rent.................................. (226) 171 (413)
Changes in operating assets and liabilities
(Note 10)..................................... (2,170) 2,300 (1,976)
------- ------- --------
Net cash (used for) provided by operating
activities ................................... (4,277) 1,214 1,682
------- ------- --------
Cash flows from investing activities:
Net sales of short-term investments ............. 3,749 1,684 2,827
Additions to property and equipment ............. (480) (340) (858)
Change in other assets........................... 631 (883) (478)
------- ------- --------
Net cash provided by investing activities...... 3,900 461 1,491
------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .......... 766 7,411 1,120
------- ------- --------
Net cash provided by financing activities...... 766 7,411 1,120
------- ------- --------
Net cash used by discontinued operations........... (6,313) (6,057) (11,591)
------- ------- --------
Effect of exchange rate changes on cash............ (42) (328) 121
------- ------- --------
Net (decrease) increase in cash and cash
equivalents....................................... (5,966) 2,701 (7,177)
Cash and cash equivalents, beginning of year ...... 8,219 5,518 12,695
------- ------- --------
Cash and cash equivalents, end of year............. $ 2,253 $ 8,219 $ 5,518
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<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. As discussed more
thoroughly in Note 3, the Company's broadband access equipment subsidiary,
Sonoma Systems, Inc. ("Sonoma"), is presented as a discontinued operation for
all periods presented.
The Company was founded in 1985 and develops and markets software for the
management and operations of telecommunications networks. The Company provides
advanced telecommunications management solutions ("TMN") including
communications infrastructure products, network management platforms and
applications software for telecommunication carrier networks worldwide. In
addition, the Company serves telecommunications equipment manufacturers,
computer systems original equipment manufacturers ("OEMs") and Internet access
providers. Trading of the Company's common stock on the Nasdaq National Market
(symbol: RETX) commenced following the Company's initial public offering in
December 1991. In conjunction with its annual shareholders' meeting to be held
in March 1998, the Company has announced plans to change the name of the
Company to Vertel. The Company expects to change its ticker symbol to VRTL,
assuming the symbol is available after the name change is approved.
Revenues are generated primarily from software licenses, royalty agreements,
professional services and maintenance contracts. Sales to one customer
comprised approximately 10.2% of net revenues in 1997.
The Company has incurred net losses of $ 10,910,000, $3,841,000 and
$31,809,000 and operating losses from continuing operations of $4,666,000,
$2,931,000 and $1,643,000 for the years ended December 31, 1997, 1996 and
1995, respectively. As a result, the Company's principal sources of liquidity
consisting of cash and cash equivalents and short-term investments, have
decreased to $2,253,000 and $3,999,000, respectively, at December 31, 1997. In
response to these factors, as more fully discussed in Note 3, in December
1997, the Company's board of directors adopted a plan to discontinue further
investment in the Company's broadband access equipment subsidiary, Sonoma
Systems, Inc. ("Sonoma"). The plan, which was substantially completed in
January 1998, reduces the Company's level of investment in Sonoma to that of a
passive investor and, as a result, the Company will no longer contribute to
the future working capital requirements of Sonoma. Net cash used by Sonoma was
$6,313,000, $6,057,000 and $11,591,000 in 1997, 1996 and 1995, respectively.
In response to the losses at the Company's remaining operating subsidiary,
Vertel, the Company has reduced ongoing operating expenses in the second half
of 1997 to align with anticipated sales levels. Additionally, the Company has
streamlined its management structure through the restructuring activities
announced in December 1997 (see Note 11).
The Company believes the effects of the disposition of Sonoma and reductions
in ongoing operating expenses in the second half of 1997 will result in cash
flows in 1998 which, when combined with the Company's cash, cash equivalents
and short term investments as of December 31, 1997, will be sufficient to meet
the Company's liquidity requirements for the next 12 months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents & Short-term Investments
Cash equivalents consist of short-term investments purchased with original
maturities of three months or less. Short-term investments consist primarily
of highly liquid municipal bonds and commercial paper purchased with original
maturities greater than three months. Such investments are recorded at cost
which approximates their fair market values.
33
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Depreciation
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of one to two years
for machinery and computer equipment, three years for furniture and fixtures
and the term of the lease for leasehold improvements
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 $250,000 and $885,000 were included in other
assets at December 31, 1997 and 1996, respectively. Amortization of
capitalized software development costs for the years ended December 31, 1997,
1996 and 1995 totaled $390,000, $484,000 and $458,000, respectively.
Deferred Rent
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.
Revenue Recognition
The Company derives revenue primarily from software license and royalty
fees, maintenance and customer support and, to a lesser extent, professional
services and custom engineering consulting contracts. Revenues from software
licenses and applications, 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 in accordance with Statement of Position 91-1,
Software Revenue Recognition ("SOP 91-1"). 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
are generally recognized using the percentage of completion method of
accounting or on 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. An allowance for sales returns and price protection is accrued
concurrently with the recognition of revenue.
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. A valuation allowance equal to the total amount of
the Company's net deferred tax assets of $25,344,000 at December 31, 1997 has
been established. The net deferred tax assets will be realized to the extent
that the Company operates profitably in the future during the respective
carryforward periods.
34
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. The
Company has reflected the provisions of SFAS 128 in the accompanying financial
statements for all periods presented. SFAS 128 replaces the presentation of
primary Earnings Per Share ("EPS") with a presentation of basic EPS, which
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. The Statement also requires the dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Accounting Principles Board Opinion No. 15. Due to the losses
reported by the Company in each of the last three years, any potential common
shares to be included in diluted earnings per share as a result of common
stock options and warrants are anti-dilutive and thus diluted earnings per
share and basic earnings per share are equal. Potentially dilutive securities
not included in the computation of basic earnings per share consisted solely
of stock options outstanding as of December 31, 1997 (See Note 7).
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 revenues 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. Substantially all of the
Company's sales are denominated in U.S. dollars.
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.
Impairment of Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, a
write-down would be recorded to reduce the related asset to its estimated fair
value.
Fair Market Value of Financial Instruments
The recorded values of the Company's financial instruments approximate their
fair values.
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 differ from these estimates.
35
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 27, 1997 as December 31, 1997, the 52
weeks ended December 28, 1996 as December 31, 1996, and the 52 weeks ended
December 30, 1995 as December 31, 1995.
Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor specific objective evidence, as defined. SOP
97-2 is effective for software transactions entered into by the Company in
fiscal 1998 and subsequent periods.
As a result of certain issues raised in applying SOP 97-2, on February 11,
1998, the AICPA issued an exposure draft of a Statement of Position which will
delay for one year the effective date of certain provisions of SOP 97-2 with
respect to what constitutes vendor-specific objective evidence of fair value
of the delivered software element in certain multiple-element arrangements
that include service elements entered into by entities that never sell the
software elements separately. The proposed SOP will be effective on issuance
which is expected to occur before March 15, 1998. The Company does not
anticipate that the adoption of SOP 97-2 and the proposed SOP, when issued,
will have a material effect on the Company's results of operations. However,
the ultimate resolution of the implementation issues referred to above, or
additional issues not yet raised or addressed by the AICPA, could change the
Company's expectation.
3. DISCONTINUED OPERATIONS
In December 1997, in order to focus exclusively on the telecommunications
network management software business, the Company's Board of Directors adopted
a formal plan to reduce the Company's investment in its broadband access
equipment subsidiary, Sonoma Systems, Inc., ("Sonoma") through direct
investment in Sonoma by certain venture capital firms. The plan, as adopted by
the Board of Directors, calls for the Company to reduce its ownership interest
in Sonoma to that of a passive investor with no significant influence over the
former subsidiary's operations. In January 1998, Sonoma closed the first round
of such investment and expects to complete the second and final round of
financing in the first quarter of 1998. When completed, the financing will
result in Sonoma raising approximately $9 million through the issuance of
preferred stock and will reduce the Company's voting ownership in Sonoma to
19.9%. Subsequent to the financing, the Company will account for its
investment in Sonoma using the cost method and expects to record an increase
in its net investment in Sonoma of $1.9 million with a corresponding credit to
additional paid-in-capital in the first quarter of 1998 to reflect the
increase in its share of Sonoma's net assets.
As a result of the foregoing, the Company's financial statements and related
Notes to financial statements reflect the results of operations and net
liabilities of Sonoma as a discontinued operation for all periods presented.
36
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Operating results from discontinued operations have been segregated from the
previously reported consolidated statements of operations and are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Net revenues.................................... $ 6,342 $14,958 $ 23,241
Cost of revenues................................ 3,094 7,148 13,677
Operating expenses.............................. 9,311 9,380 40,241
------- ------- --------
Operating loss.................................. (6,063) (1,570) (30,677)
Other income (expense).......................... (252) 69 (535)
Provision for estimated losses during phase-out
period......................................... (100) -- --
------- ------- --------
Net loss........................................ $(6,415) $(1,501) $(31,212)
======= ======= ========
</TABLE>
Summarized balance sheet information for the discontinued operations is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Current assets............................................ $ 1,366 $ 4,045
Total assets.............................................. 1,908 4,451
Current liabilities....................................... (2,104) (4,505)
Total liabilities......................................... (2,104) (4,545)
Net liabilities of discontinued operations................ $ (196) $ (94)
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Machinery and equipment....................................... $3,454 $2,895
Furniture and fixtures........................................ 325 424
Leasehold improvements........................................ 147 127
------ ------
3,926 3,446
Less accumulated depreciation and amortization................ 3,160 2,533
------ ------
Property and equipment, net................................... $ 766 $ 913
====== ======
</TABLE>
5. INCOME TAXES
The components of loss from continuing operations before income taxes
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Domestic.......................................... $(5,429) $(2,835) $ 1,217
Foreign........................................... 934 495 (1,814)
------- ------- -------
Total........................................... $(4,495) $(2,340) $ (597)
======= ======= =======
</TABLE>
37
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ -- $ --
State........................................... -- -- --
Foreign......................................... -- -- --
------- ------- -------
Total current................................. -- -- --
Deferred.......................................... (699) (5,700) (6,648)
Valuation allowance............................... 699 5,700 6,648
------- ------- -------
Total......................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The Company's effective income tax rate differs from the federal statutory
income tax rate applied to loss from continuing operations before provision for
income taxes due to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory income tax
rate....................... (34.0)% (34.0)% (34.0)%
Increases (reductions) in
taxes resulting from:
Effects of foreign
operations............... (7.3) (7.4) 106.4
State taxes, net of
federal benefit.......... 0.1 0.1 0.2
Research and development
tax credit............... (3.4) (4.5) (53.1)
Tax exempt interest
income................... -- -- 2.5
Dividends received
deduction................ -- -- 15.5
Expiration of foreign tax
credits.................. 7.2 -- --
Other................... (0.2) 1.6 --
Valuation allowance..... 37.6 44.2 (37.5)
----- ----- -----
Effective tax rate.......... -- % -- % -- %
===== ===== =====
</TABLE>
38
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Current and noncurrent deferred tax assets (liabilities) consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Expenses accrued....................................... $ 1,514 $ 1,328
Credit for research and development expenses........... 6,046 4,756
Credit for foreign taxes withheld...................... 484 809
Depreciation........................................... 323 243
Foreign deferred tax assets............................ 233 --
Net operating loss carryforwards......................... 16,853 17,773
-------- --------
25,453 24,909
Deferred tax liabilities:
Capitalized software................................... (109) (264)
Valuation allowance...................................... (25,344) (24,645)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
The Company's credits for research and development expenses, which may be
carried forward fifteen years, expire in 2004 through 2012; credits for
foreign taxes withheld, which may be carried forward five years, expire in
1998 and 1999. The Company has net operating loss carryforwards for federal
income tax purposes of approximately $43,363,000, which expire in 2007 through
2012. The Company also has net operating loss carryforwards for state purposes
of approximately $17,500,000 which expire in 1998 through 2002.
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, when realized, will be excluded from the provision (benefit) for
income taxes and credited directly to additional paid-in capital. At December
31, 1997, deferred tax assets creditable directly to shareholders' equity upon
realization totaled $4,540,000.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancellable
operating leases. At December 31, 1997, 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):
<TABLE>
<S> <C>
1998.............................................................. $ 1,847
1999.............................................................. 1,794
2000.............................................................. 1,134
2001.............................................................. 643
-------
Total operating lease commitments............................... 5,418
Less: sublease income............................................. (2,044)
-------
Total........................................................... $ 3,374
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1997,
1996 and 1995 was $1,126,000, $1,725,000 and $2,899,000, respectively.
39
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 effect on
the financial condition or results of operations of the Company.
7. SHAREHOLDERS' EQUITY
Common Stock
Effective January 30, 1996, Sierra Ventures VLP ("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 in 1996. During 1997,
the warrant was exercised with respect to 1,457,627 shares of Common Stock for
no cash consideration with the balance of the warrant being cancelled and the
difference between the then market price of the Company's Common Stock and the
exercise price of the warrant serving as the consideration for the exercise of
the balance of the warrant.
Notes receivable from issuance of Common Stock arose from the exercise of
stock options. During 1996, the Board of Directors approved the exercise of
stock options held and outstanding by certain key employees in exchange for
promissory notes with a repayment date equal to the original termination date
of the option exercise. The 1,793,250 shares of Common Stock issued upon such
exercise of options were subject to repurchase by the Company based upon
continuation of employment, 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. As a result, the Common Stock subject to the notes receivable vest
in a manner identical to the original with respect to options. In connection
with the Company's 1997 restructuring (see Note 11), the vesting and release
from the Company's repurchase right with respect to shares issued upon the
exercise of stock options subject to notes receivable held by certain officers
were accelerated, resulting in full vesting of 76,063 shares to the employees.
Additionally, vesting of 50,000 options to purchase the Company's common stock
issued to a non-continuing director were also accelerated in 1997. The Company
has recorded a compensation charge of $317,000 related to the accelerated
stock and options held by the officers and the director. 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.
In April 1997, the Company's Board of Directors adopted a shareholders'
rights plan and distributed a dividend of one right (the "Right") to purchase
one one-thousandth of a share of Series A participating Preferred Stock
("Preferred Shares") for each outstanding share of common stock of the
Company. The rights become exercisable per share at an exercise price of
$25.00 ten days after a person or group announces acquisition of 20% or more
of Retix's outstanding common stock or the commencement of a tender offer
which would result in ownership by the person or group of 20% or more of the
outstanding common stock. The Preferred Shares have been approved by the Board
but are not made part of the Company's charter until needed; as a result, the
Preferred Shares have not been formally authorized. The Company will be
entitled to redeem the Rights at $0.01 per right at any time on or before the
tenth day following acquisition by a person or group of 20% or more of the
Company's common stock.
If a person or group acquires 20% or more of the Company's common stock
prior to redemption of the Rights, the Rights will entitle shareholders other
than the potential acquirer to purchase, at the then current exercise price,
that number of shares of the Company's common stock (or, in certain
circumstances as
40
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
determined by the board, cash, other property or other securities) having a
market value at that time of twice the exercise price. If, after the tenth day
following acquisition by a person or group of 20% or more of the Company's
common stock, the Company sells more than 50% of its assets or earning power
or is acquired in a merger or other business combination transaction, the
acquirer must assume the obligations under the Rights, and the Rights will
become exercisable to acquire common stock of the acquirer at the discounted
price. Under certain circumstances the Company's board of directors may also
exchange the Rights (other than those owned by the acquirer or its affiliates)
for its common stock at an exchange ratio of one share of common stock per
Right. The Rights expire on April 29, 2007.
Stock Purchase and Stock Option Plans
Under the Company's stock purchase and stock option plans in effect at
December 31, 1997, approximately 7,787,000 shares of Common Stock may be
issued to employees directly or upon exercise of stock options issued to
employees and in certain cases to consultants. The Company has six stock and
option plans that were in effect at December 31, 1997: 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 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. 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 1/48 per month over the remaining 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. All
options expire ten years from the date of grant.
The following summarizes activity in the option plans for the three years
ended December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
---------- ----------------
<S> <C> <C>
Outstanding, January 1, 1995.................... 2,727,082 $4.68
Granted....................................... 2,259,925 2.50
Exercised..................................... (371,491) 2.37
Canceled...................................... (1,291,150) 4.73
----------
Outstanding, December 31, 1995.................. 3,324,366 3.43
Granted....................................... 625,500 3.40
Exercised..................................... (2,461,241) 4.03
Canceled...................................... (1,103,241) 3.40
----------
Outstanding, December 31, 1996.................. 385,384 4.73
Granted....................................... 40,000 6.75
Exercised..................................... (35,985) 4.40
Canceled...................................... (92,098) 5.10
----------
Outstanding, December 31, 1997.................. 297,301 $4.92
==========
</TABLE>
As of December 31, 1997, 1996 and 1995 options to purchase 102,301 shares,
175,384 shares and 709,551 shares, respectively, were exercisable under all
Retix stock option plans. At December 31, 1997, 1,819,779 shares were
available for future grants under all option plans.
41
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additional information regarding options outstanding as of December 31, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------------
RANGE OF NUMBER WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- -------------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.00-2.13 175,000 8.1 2.10 40,000 2.09
4.00 15,000 7.0 4.00 -- --
5.00-5.25 2,301 6.8 5.15 2,301 5.15
6.75 40,000 9.0 6.75 -- --
9.88 45,000 6.0 9.88 40,000 9.88
15.50 20,000 5.2 15.50 20,000 15.50
------- -------
$2.00-15.50 297,301 7.6 $ 4.92 102,301 $ 7.83
======= =======
</TABLE>
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 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.
Subsidiary Stock Option Plans
During 1996, the Company transferred the net assets and employees of its
principal business divisions into wholly owned subsidiaries, and received
Preferred Stock in amounts equivalent to the then-current fair value of the
respective entities. In addition, separate stock option plans were created
whereby options to purchase Common Stock of the respective subsidiaries were
issued to the employees and directors of these subsidiaries. Vesting under the
subsidiary option plans generally reflects the vesting schedule as described
above for the Retix employee and director stock option plans. All options were
issued with an exercise price approximating the fair market value of the
respective subsidiaries' common stock and expire ten years from the date of
grant.
During 1997, the Company's wireless subsidiary was merged into its network
management software subsidiary, Vertel Corporation ("Vertel"). In connection
with this merger, vested options to purchase 416,829 shares of the Company's
wireless subsidiary at $0.25 per share were purchased by Vertel at $0.40 per
share and unvested options were cancelled. The difference between the grant
price and the purchase price per share was recognized as compensation expense
during 1997. During 1996, options to purchase 3,045,547 shares of Vertel were
issued at a weighted average exercise price of $2.56 per share, 53,277 of such
options were canceled at a weighted average exercise price of $1.00 and no
options were exercised. During 1997, options to purchase 1,156,648 Vertel
shares with a weighted average exercise price of $3.12 were issued, 203,565
options with an exercise price of $1.00 were exercised and 597,326 options
with a weighted average exercise price of $2.30 were canceled. Also during
1997, options to purchase 221,500 Vertel shares with an original exercise
price of $6.00 were repriced to $2.50. At December 31, 1997, options to
purchase 1,213,688 shares with a weighted average exercise price of $1.88 were
exercisable under the Vertel option plans. Subject to shareholder approval at
its 1998 shareholders' meeting, the Company intends to exchange each option to
purchase shares of Vertel common stock for options to purchase shares of the
Company's common stock at a ratio of 1.26 shares of the Company's common stock
per share of Vertel common stock originally subject to the option. The
exercise price of such exchanged options is not expected to be less than the
original exercise price per share of Vertel common stock divided by the
exchange ratio.
42
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value Information
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.
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
the Company elected to measure compensation cost based on the fair value of
stock options awarded in 1997, 1996 and 1995, the loss from continuing
operations and loss per share would have been $6,964,000 and $0.33,
respectively, for the year ended December 31, 1997, $3,624,000 and $0.18,
respectively, for the year ended December 31, 1996 and $809,000 and $0.05,
respectively, for the year ended December 31, 1995. The weighted average fair
value of options granted during the twelve months ended December 31, 1997,
1996 and 1995 was $4.59, $2.32 and $1.69 per share, respectively. Stock
options issued during 1997, 1996 and 1995 were assumed to be valued using the
Black-Scholes model using a risk-free interest rate of 5.4% in 1997 and 6.0%
in 1996 and 1995, an 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.
8. 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.
43
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. OPERATIONS BY GEOGRAPHIC AREA
The Company operates in one industry segment. The following presents a
summary of operations by geographic area (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net revenues
U.S. operations................................ $17,722 $14,500 $15,046
Foreign operations............................. 755 1,657 500
------- ------- -------
Consolidated................................... $18,477 $16,157 $15,546
======= ======= =======
Transfers between operations................... $ 715 $ 619 $ 1,102
======= ======= =======
Income (loss) from continuing operations
U.S. operations................................ $(5,429) $(2,835) $ 1,217
Foreign operations............................. 934 495 (1,814)
------- ------- -------
Consolidated................................... $(4,495) $(2,340) $ (597)
======= ======= =======
Identifiable assets at end of period
U.S. operations................................ $13,224 $23,370 $21,983
Foreign operations............................. 226 252 601
------- ------- -------
Consolidated................................... $13,450 $23,622 $22,584
======= ======= =======
</TABLE>
Included in U.S. operations are export sales of $6,687,000, $6,837,000 and
$6,743,000 for the years ended 1997, 1996 and 1995, respectively.
10. 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,
------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Trade accounts receivable......................... $ (710) $ (472) $ 1,002
Prepaid expenses and other current assets......... (85) 396 353
Accounts payable.................................. (331) 753 (457)
Accrued wages and related liabilities............. (243) 523 (217)
Cash payments for restructuring expenses.......... (200) (112) (1,477)
Other accrued liabilities......................... (393) 1,180 (973)
Deferred revenue.................................. (208) 32 (207)
------- ------ -------
$(2,170) $2,300 $(1,976)
======= ====== =======
</TABLE>
Cash paid (received) during the years for interest and income taxes is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Interest.................................................... $-- $ -- $474
Income taxes................................................ $18 $(240) $ 30
</TABLE>
44
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RESTRUCTURING EXPENSES
As discussed in Note 3, Discontinued Operations, in December 1997, the
Company announced plans to discontinue investment in its broadband access
equipment subsidiary, Sonoma. As a result, the Company's management structure
was consolidated to reflect the reduction of the number of operating
subsidiaries to one. The estimated costs of restructuring recorded in the
financial statements for the year ended December 31, 1997 was $1,816,000 and
included costs of severance pay for three of the Company's officers,
acceleration of vesting for certain officer and director stock options (see
Note 7), facility and asset consolidation, professional fees and other related
charges. It is anticipated these costs will be paid during the first half of
1998. Additionally, during the fourth quarter of 1997, the Company recorded a
reversal of certain 1995 restructuring reserves and accruals totaling
$303,000, resulting in a net restructuring expense recorded for fiscal 1997 of
$1,513,000.
In 1995, the Company announced a major restructuring of its operations,
resulting from the significant downsizing of its internetworking hardware
business unit, later known as Sonoma. The resulting restructuring charge
included costs for exiting certain leased facilities, inventory and fixed
asset write downs, severance payments for terminated employees, foreign office
closure costs and other reserves. The estimated costs of restructuring
recorded in the financial statements for the year ended December 31, 1995 were
$2,277,000. Subsequently, the Company recorded the reversal of excess
restructuring reserves totaling $303,000 and $197,000 recorded in the
financial statements for the years ended December 31, 1997 and 1996,
respectively, primarily as a result of favorable lease exit costs and lower
than anticipated severance costs.
Restructuring expenses and benefit for 1997, 1996 and 1995 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
RESTRUCTURING EXPENSES (BENEFIT)
------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Write down of assets to be sold,
vacated or disposed of
(in thousands):
Inventory.......................... $ -- $ -- $ 120
Fixed assets....................... -- (25) 181
Facilities......................... -- (98) 920
Severance and related costs.......... 1,025 (59) 594
Stock option acceleration............ 317 -- --
Professional fees.................... 176 -- --
Foreign subsidiary closings.......... -- -- 200
Other................................ (5) (15) 262
----------- ---------- -----------
$1,513 $(197) $2,277
=========== ========== ===========
</TABLE>
With respect to the 1997 restructuring charge, substantially all of the
reserves remaining as of December 31, 1997, are expected to be utilized in
1998, requiring the disbursement of approximately $1,499,000 in cash. As of
December 31, 1997, substantially all reserves related to the 1995
restructuring charge, except for $149,000 related to costs for final closures
of certain non-operating foreign subsidiaries, had been utilized or reversed.
45
<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, 1997 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
January 23, 1998, except for the last paragraph of Note 2,
as to which the date is February 11, 1998
46
<PAGE>
RESULTS OF OPERATIONS--UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables present unaudited quarterly financial information for
the two years ended December 27, 1997. 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>
1997 QUARTERS ENDED
---------------------------------
JUNE SEPT.
MARCH 29 28 27 DEC. 27
-------- ------ ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
Quarterly results of continuing operations:
Net revenues............................... $ 3,774 $5,870 $3,694 $ 5,140
Gross profit............................... 2,672 4,884 2,594 3,848
Restructuring expense...................... -- -- -- 1,513
Operating income (loss) from continuing
operations................................ (2,630) 326 (866) (1,494)
Net income (loss) from continuing
operations................................ (2,667) 399 (826) (1,401)
Net income (loss) from continuing
operations per common and common
equivalent share.......................... $ (0.13) $ 0.02 $(0.04) $ (0.06)
======= ====== ====== =======
<CAPTION>
1996 QUARTERS ENDED
---------------------------------
JUNE SEPT.
MARCH 30 29 28 DEC. 28
-------- ------ ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
Quarterly results of continuing operations:
Net revenues............................... $ 3,778 $3,752 $4,803 $ 3,824
Gross profit............................... 2,981 3,084 4,098 3,018
Restructuring benefit...................... -- -- -- (197)
Operating loss from continuing operations.. (428) (788) (4) (1,711)
Net income (loss) from continuing
operations................................ (254) (626) 352 (1,812)
Net income (loss) from continuing
operations per common and common
equivalent share.......................... $ (0.01) $(0.03) $ 0.02 $ (0.09)
======= ====== ====== =======
</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. See "Business--
Risk Factors."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
<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 March 31, 1998, 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 "Report of
the Compensation Committee--Chief Executive Officer Compensation" 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions "Report of
the Compensation Committee--Executive Officer Compensation" and "Transactions
with Management and Others" in the Registrant's Proxy Statement.
48
<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.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets at December 31, 1996 and December 31, 1997..... 29
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1997............................................ 30
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended December 31, 1997..................................... 31
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997............................................ 32
Notes to Consolidated Financial Statements................................. 33
Independent Auditors' Report............................................... 46
2. The supplementary financial information listed below are filed as part of
this annual report.
Unaudited Quarterly Financial Information.................................. 47
Schedule filed as part of Form 10-K:
Schedule II--Valuation and Qualifying Accounts........................... S-1
Independent Auditors' Report on Supplemental Schedule.................... S-2
</TABLE>
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.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.3 Amended and Restated Articles of Incorporation of the Registrant.(5)
3.4 Bylaws of the Registrant, as amended to date.(13)
10.2 1988 Stock Option Plan and forms of option agreements thereunder.(6)
1990 Stock Option Plan for Irish Employees and form of option agreement
10.3 thereunder.(1)
10.4 1991 Directors' Stock Option Plan and forms of option agreements
thereunder, as amended to date.(8)
1991 Employee Stock Purchase Plan and form of subscription agreement
10.5 thereunder.(3)
10.6 Form of Indemnification Agreement.(2)
10.22 Lease Agreement between the Registrant and Moorpark Associates, a
California Limited Partnership, dated February 5, 1993.(4)
10.27 Lease Agreement between the Registrant and OMA El Segundo Properties, a
California general partnership, dated May 23, 1995.(7)
10.28 Employment Agreement between M.Y. Stephan and Retix, dated September
27, 1995.(7)
10.29 Employment Agreement between Philip Mantle and Retix, dated November 1,
1995.(7)
10.30 Common Stock and Warrant Purchase Agreement by and between Retix and
Sierra Ventures V.LP., dated January 30, 1996.(7)
10.31 Master Agreement dated February 28, 1996 for Spin-Off of Open Systems
Interconnection Technology between Telaware Corporation and Retix.(7)
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.(8)
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.34 Form of Exercise Notice and Stock Purchase Agreement between the
Company and M.Y. Stephan, dated March 18, 1996.(8)
10.35 Form of Exercise Notice and Stock Purchase Agreement between the
Company and M.Y. Stephan, dated March 18, 1996.(8)
10.36 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Philip Mantle, dated January 30, 1996.(8)
10.37 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Philip Mantle, dated March 18, 1996.(8)
10.38 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 18, 1996.(8)
10.39 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated January 30, 1996.(8)
10.40 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated February 21, 1996.(8)
10.41 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996.(8)
10.42 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996.(8)
10.43 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996.(8)
10.44 Form of Exercise Notice and Stock Purchase Agreement between the
Company and Steven M. Waszak, dated March 26, 1996.(8)
10.45 Sublease Agreement dated May, 1996 between Value Behavioral Health and
Retix.(9)
10.46 Master Agreement between Retix and Internetworking Solutions dated May
31, 1996.(9)
10.47 Master Agreement between Retix and Wireless Solutions dated May 31,
1996.(9)
10.48 Lease Agreement between the Registrant and Nomura-Warner Center
Associates, L.P., dated November 26, 1996.(10)
10.49 Stock Transfer Agreement between Retix, Vertel Corporation and Wireless
Solutions dated June 10, 1997.(11)
10.50 Surrender of Lease between Cofton Irish Investments and Retix B.V.,
dated August 21, 1997.(12)
10.51 Sub-Sublease Agreement between TSN, L.L.C., and Retix, dated August 22,
1997.(12)
10.52 Executive Separation Agreement between Retix and M.Y. Stephan dated
December 27, 1997. (13)
10.53 Executive Separation Agreement between Retix and Philip Mantle dated
December 27, 1997. (13)
10.54 Executive Separation Agreement between Retix and Steve Waszak dated
December 27, 1997. (13)
10.55 Amended and Restated Articles of Incorporation of Sonoma Systems, Inc.,
and related documents dated January 7, 1998.(13)
10.56 Sub-sublease between Retix and Sonoma Systems, Inc., dated December 28,
1997.(13)
21.1 Subsidiaries of the Registrant.(13)
24.1 Independent Auditors' Consent.(13)
25.1 Power of Attorney (see page 52).(13)
27.1 Financial Data Schedule.(13)
</TABLE>
- --------
(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.
50
<PAGE>
(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 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.
(6) Incorporated by reference from Registrant's Registration Statement on
Form S-8 (No. 33-82154) filed on July 28, 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, 1995.
(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 March 30, 1996.
(9) 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.
(10) 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, 1996.
(11) 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 28, 1997.
(12) 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 September 27, 1997.
(13) Filed herewith.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on November 11, 1997 with
regard to the exercise by Sierra Ventures V, L.P., of its warrant to purchase
the Company's Common Stock.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange 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/ James Brill
Date: February 26, 1998 By: _________________________________
James Brill
Vice President, Finance &
Administration
and Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bruce W. Brown and James Brill, 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 Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Bruce W. Brown President, Chief Executive February 26, 1998
____________________________________ Officer and Director
Bruce W. Brown (Principal Executive
Officer)
/s/ James Brill Vice President of Finance February 26, 1998
____________________________________ and Administration and
James Brill Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Jeffrey M. Drazan Director February 26, 1998
____________________________________
Jeffrey M. Drazan
/s/ Neil J. Hynes Director February 26, 1998
____________________________________
Neil J. Hynes
/s/ Craig W. Johnson Director February 26, 1998
____________________________________
Craig W. Johnson
/s/ Joe Stephan Director February 26, 1998
____________________________________
Joe Stephan
/s/ Gilbert P. Williamson Director February 26, 1998
____________________________________
Gilbert P. Williamson
</TABLE>
52
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ---------------------
AT CHARGES
BEGINNING CHARGED TO TO
OF COSTS & OTHER BALANCE AT
DESCRIPTION PERIOD EXPENDITURES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- --------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales
returns:
Year ended December
31, 1997............. $368,000 $249,000 $165,000(a) $452,000
Year ended December
31, 1996............. $ 91,000 $371,000 $ 94,000(a) $368,000
Year ended December
31, 1995............. $ -- $ 91,000 $ -- $ 91,000
</TABLE>
- --------
(a) Write-off of uncollectible accounts, net of recoveries.
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RETIX:
We have audited the consolidated financial statements of Retix and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, and have issued our report thereon
dated January 23, 1998, except for the last paragraph of Note 2, as to which
the date is February 11, 1998; such report is included elsewhere in this Form
10-K. Our audits also included the financial statement schedule of Retix and
subsidiaries, listed in Item 14. This financial statement schedule is the
responsibility of Retix's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Los Angeles, California
January 23, 1998
S-2
<PAGE>
BYLAWS
OF
RETIX
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I - CORPORATE OFFICES................................................ 1
1.1 PRINCIPAL OFFICE.................................................... 1
1.2 OTHER OFFICES....................................................... 1
ARTICLE II - MEETINGS OF SHAREHOLDERS........................................ 1
2.1 PLACE OF MEETINGS................................................... 1
2.2 ANNUAL MEETING...................................................... 1
2.3 SPECIAL MEETING..................................................... 2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS.................................... 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................ 3
2.6 QUORUM.............................................................. 3
2.7 ADJOURNED MEETING; NOTICE........................................... 3
2.8 VOTING.............................................................. 4
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT................... 4
2.10 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING......................... 5
2.11 PROXIES............................................................ 5
2.12 INSPECTORS OF ELECTION............................................. 6
2.13 ADVANCE NOTICE OF SHAREHOLDER NOMINEES............................. 6
2.14 ADVANCE NOTICE OF SHAREHOLDER BUSINESS............................. 7
ARTICLE III - DIRECTORS...................................................... 8
3.1 POWERS.............................................................. 8
3.2 NUMBER OF DIRECTORS................................................. 8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS............................ 8
3.4 RESIGNATION AND VACANCIES........................................... 9
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................ 9
3.6 REGULAR MEETINGS.................................................... 9
3.7 SPECIAL MEETINGS; NOTICE............................................ 10
3.8 QUORUM.............................................................. 10
3.9 WAIVER OF NOTICE.................................................... 10
3.10 ADJOURNMENT........................................................ 10
3.11 NOTICE OF ADJOURNMENT.............................................. 11
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................. 11
3.13 FEES AND COMPENSATION OF DIRECTORS................................. 11
3.14 APPROVAL OF LOANS TO OFFICERS...................................... 11
ARTICLE IV - COMMITTEES...................................................... 11
4.1 COMMITTEES OF DIRECTORS............................................. 11
4.2 MEETINGS AND ACTION OF COMMITTEES................................... 12
ARTICLE V - OFFICERS......................................................... 12
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
5.1 OFFICERS............................................................ 12
5.2 ELECTION OF OFFICERS................................................ 13
5.3 SUBORDINATE OFFICERS................................................ 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS................................. 13
5.5 VACANCIES IN OFFICES................................................ 13
5.6 CHAIRMAN OF THE BOARD............................................... 13
5.7 PRESIDENT........................................................... 14
5.8 VICE PRESIDENTS..................................................... 14
5.9 SECRETARY........................................................... 14
5.10 CHIEF FINANCIAL OFFICER............................................ 15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
OTHER AGENTS.................................................. 15
6.1 INDEMNIFICATION..................................................... 15
6.2 PAYMENT OF EXPENSES IN ADVANCE...................................... 15
6.3 INDEMNITY NOT EXCLUSIVE............................................. 16
6.4 INSURANCE INDEMNIFICATION........................................... 16
6.5 CONFLICTS........................................................... 16
ARTICLE VII - RECORDS AND REPORTS............................................ 16
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER........................ 16
7.2 MAINTENANCE AND INSPECTION OF BYLAWS................................ 17
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS............... 17
7.4 INSPECTION BY DIRECTORS............................................. 18
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER............................... 18
7.6 FINANCIAL STATEMENTS................................................ 18
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...................... 19
ARTICLE VIII - GENERAL MATTERS............................................... 19
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING............... 19
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS........................... 19
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED.................. 19
8.4 CERTIFICATES FOR SHARES............................................. 20
8.5 LOST CERTIFICATES................................................... 20
8.6 CONSTRUCTION; DEFINITIONS........................................... 20
ARTICLE IX - AMENDMENTS...................................................... 21
9.1 AMENDMENT BY SHAREHOLDERS........................................... 21
9.2 AMENDMENT BY DIRECTORS.............................................. 21
</TABLE>
-ii-
<PAGE>
EXHIBIT 3.4
BYLAWS
-------
OF
--
RETIX
-----
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 PRINCIPAL OFFICE
----------------
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the board of directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of shareholders shall be held each year within 180 days
following the end of the fiscal year of the Corporation at a date and time
designated by the Board of Directors. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
--------------------------------
All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but, subject to the provisions of the next paragraph of this Section 2.4,
action may be taken on any matter properly brought before the meeting pursuant
to Section 2.15 of these bylaws). The notice of any meeting at which directors
are to be elected shall include the name of any nominee or nominees who, at the
time of the notice, the board intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, then the notice shall also state the general nature of that
proposal.
-2-
<PAGE>
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
------
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced
-3-
<PAGE>
at the meeting at which the adjournment is taken. However, if a new record date
for the adjourned meeting is fixed or if the adjournment is for more than forty-
five (45) days from the date set for the original meeting, then notice of the
adjourned meeting shall be given. Notice of any such adjourned meeting shall be
given to each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
2.8 VOTING
------
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.10 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
--------
however, that any election for directors must be by ballot if demanded by any
- -------
shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal, but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or a vote by classes is
required by the Code or by the articles of incorporation.
So long as the Company's Articles of Incorporation so provide, there shall
be no right with respect to shares of stock of the corporation to cumulate votes
in the election of directors.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
-------------------------------------------------
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is taken
or proposed to be taken for approval of any of those
-4-
<PAGE>
matters specified in the second paragraph of Section 2.4 of these bylaws, the
waiver of notice or consent or approval shall state the general nature of the
proposal. All such waivers, consents, and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting, and in such event only shareholders of record on
the date so fixed are entitled to notice and to vote, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided in the Code. If the board of directors does not so
fix a record date, the record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held. The record date for any other purpose
shall be as provided in Article VIII of these bylaws.
2.11 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) the person who executed the proxy
revokes it prior to the time of voting by delivering a writing to the
corporation stating that the proxy is revoked or by executing a subsequent proxy
and presenting it to the meeting or by voting in person at the meeting, or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the corporation before the vote pursuant to that proxy is counted; provided,
--------
however, that no proxy shall be valid after the expiration of eleven (11) months
- -------
from the date of the proxy, unless otherwise provided in the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Code.
-5-
<PAGE>
2.12 INSPECTORS OF ELECTION
----------------------
Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies,
(b) receive votes, ballots or consents:
(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) count and tabulate all votes or consents
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
2.13 ADVANCE NOTICE OF SHAREHOLDER NOMINEES
--------------------------------------
Nominations of persons for election to the board of directors of the
corporation may be made at a meeting of shareholders by or at the direction of
the board of directors or by any shareholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made
by or at the direction of the board of directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
-------- -------
the event less than thirty (30) days notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the
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date of the meeting was mailed or such public disclosure was made. Such
shareholder's notice shall set forth (a) as to each person, if any, whom the
shareholder proposes to nominate for election or re-election as a director: (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the corporation which are beneficially owned by such person, (iv) any
other information relating to such person that is required by law to be
disclosed in solicitations of proxies for election of directors, and (v) such
person's written consent to being named as a nominee and to serving as a
director if elected; and (b) as to the shareholder giving the notice: (i) the
name and address, as they appear on the corporation's books, of such
shareholder, and (ii) the class and number of shares of the corporation which
are beneficially owned by such shareholder, and (iii) a description of all
arrangements or understandings between such shareholder and each nominee and any
other person or persons (naming such person or persons) relating to the
nomination. At the request of the board of directors any person nominated by the
Board for election as a director shall furnish to the secretary of the
corporation that information required to be set forth in the shareholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in this Section. The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
bylaws, and if he should so determine, he shall so declare at the meeting and
the defective nomination shall be disregarded.
2.14 ADVANCE NOTICE OF SHAREHOLDER BUSINESS
--------------------------------------
At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) as specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of Directors, or (c) otherwise
properly brought before the meeting by a shareholder. Business to be brought
before an annual meeting by a shareholder shall not be considered properly
brought if the shareholder has not given timely notice thereof in writing to the
secretary of the corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than twenty (20) nor more than sixty (60) days prior to the
meeting provided, however, that in the event that less than thirty (30) days
-------- -------
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A shareholder's notice to the secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address of the shareholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
shareholder, (iv) any material interest of the shareholder in such business, and
(v) any other information that is required by law to be provided by the
shareholder in his capacity as a proponent of a shareholder proposal.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at any annual meeting
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except in accordance with the procedures set forth in this Section. The chairman
of the annual meeting shall, if the facts warrant, determine and declare at the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section, and, if he should so determine,
he shall so declare at the meeting that any such business not properly brought
before the meeting shall not be transacted.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Code and any limitations in the articles
of incorporation and these bylaws relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The number of directors of the corporation shall be not less than five (5)
nor more than nine (9). The exact number of directors shall be seven (7) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote of holders of a majority of the outstanding shares entitled to vote;
provided, however, that an amendment reducing the fixed number or the minimum
number of directors to a number less than five (5) cannot be adopted if the
votes cast against its adoption at a meeting are equal to more than sixteen and
two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon.
No amendment may change the stated maximum number of authorized directors to a
number greater than two (2) times the stated minimum number of directors minus
one (1). No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
So long as the Company's Articles of Incorporation so provide, directors
shall be elected at each annual meeting of shareholders to hold office as
follows. At the first annual meeting of shareholders held after September 10,
1994, one-half of the directors shall be elected for a term of two years and
one-half of the directors shall be elected for a term of one year. If the
number of directors is not divisible by two, the extra director shall be elected
for a term of two years. At subsequent annual meetings of shareholders, a
number of directors shall be elected equal to the number of directors with terms
expiring at that annual meeting. Directors elected at each such annual meeting
shall be elected for a term expiring with the annual meeting of shareholders two
years thereafter.
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3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the shareholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next annual meeting of the shareholders and until a successor has been
elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
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3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to this provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of
the Code (as to appointment of committees), Section 317(e) of the Code (as to
indemnification of directors), the articles of incorporation, and other
applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by alleges a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding this meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of this minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
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3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
this meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed
with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guaranties
provided that (i) the board of directors determines that such a loan or guaranty
or plan may reasonably be expected to benefit the corporation, (ii) the
corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the Code) on the date of approval by
the board of directors, and (iii) the approval of the board of directors is by a
vote sufficient without counting the vote of any interested director or
directors.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the
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committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have all
the authority of the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors
or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members provided, however, that the time of regular meetings
-------- -------
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of
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the board, one or more vice presidents, one or more assistant secretaries, one
or more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
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5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
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5.10 CHIEF FINANCIAL OFFICER.
------------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION
---------------
The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors, officers, employees and agents
against expenses (as defined in Section 317(a) of the Code), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding (as defined in Section 317(a) of the Code), arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Article VI, a "director," "officer," "employee" or "agent" of
the corporation includes any person (i) who is or was a director, officer,
employee or agent of the corporation, (ii) who is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was a director or officer of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
6.2 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 6.1 shall be paid by
the corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to repay
such amount if it shall ultimately be determined that the indemnified party is
not entitled to be indemnified as authorized in this Article 6.
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6.3 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification provided by this Article 6 shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.4 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article 6.
6.5 CONFLICTS
---------
No indemnification or advance shall be made under this Article 6, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstances where it
appears:
(a) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
--------------------------------------------
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records
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of shareholders' names, addresses, and shareholdings during usual business hours
on five (5) days prior written demand on the corporation, (ii) obtain from the
transfer agent of the corporation, on written demand and on the tender of such
transfer agent's usual charges for such list, a list of the names and addresses
of the shareholders who are entitled to vote for the election of directors, and
their shareholdings, as of the most recent record date for which that list has
been compiled or as of a date specified by the shareholder after the date of
demand. Such list shall be made available to any such shareholder by the
transfer agent on or before the later of five (5) days after the demand is
received or five (5) days after the date specified in the demand as the date as
of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
------------------------------------
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of these
bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
-----------------------------------------------------
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
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7.4 INSPECTION BY DIRECTORS
-----------------------
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
-------------------------------------
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS
--------------------
If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
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<PAGE>
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever, is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the
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name of and on behalf of the corporation; such authority may be general or
confined to specific instances. Unless so authorized or ratified by the board of
directors or within the agency power of an officer, no officer, agent or
employee shall have any power or authority to bind the corporation by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
-----------------------
A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the chairman of the board or
the vice chairman of the board or the president or a vice president and by the
chief financial officer or an assistant treasurer or the secretary or an
assistant secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
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ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENT BY SHAREHOLDERS
-------------------------
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote of holders of a majority of the outstanding shares entitled to vote;
provided, however, that if the articles of incorporation of the corporation set
forth the number of authorized directors of the corporation, then the authorized
number of directors may be changed only by an amendment of the articles of
incorporation.
9.2 AMENDMENT BY DIRECTORS
----------------------
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.
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<PAGE>
EXHIBIT 10.32
RETIX
1996 DIRECTORS' STOCK OPTION PLAN
---------------------------------
1. PURPOSES OF THE PLAN. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Retix, a California corporation.
-------
(e) "Continuous Status as a Director" shall mean the absence of any
-------------------------------
interruption or termination of service as a Director.
(f) "Director" shall mean a member of the Board.
--------
(g) "Employee" shall mean any person, including any officer or
--------
director, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(i) "Option" shall mean a stock option granted pursuant to the Plan.
------
All options shall be nonstatutory stock options (i.e., options that are not
intended to qualify as incentive stock options under Section 422 of the Code).
(j) "Optioned Stock" shall mean the Common Stock subject to an
--------------
Option.
(k) "Optionee" shall mean an Outside Director who receives an Option.
--------
(l) "Outside Director" shall mean a Director who is not an Employee.
----------------
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<PAGE>
(m) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(n) "Plan" shall mean this 1996 Directors' Stock Option Plan.
----
(o) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(p) "Subsidiary" shall mean a "subsidiary corporation," whether now
----------
or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 360,000 Shares (the "Pool") of Common Stock. The Shares may
----
be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
------------------------------------------------------
(a) ADMINISTRATOR. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an Option
to purchase Shares (the "First Option") as follows: (A) with respect to persons
------------
who are Outside Directors on the effective date of this Plan, as determined in
accordance with Section 6 hereof, 40,000 shares on such effective date, and (B)
with respect to any other person, 40,000 shares on the date on which such person
first becomes an Outside Director.
(iii) After the First Option has been granted to an Outside Director,
such Outside Director shall thereafter be automatically granted an Option to
purchase 10,000 Shares (a "Subsequent Option") on January 1 of each year,
-----------------
provided that, on such date, he or she shall have served on the Board as an
Outside Director for at least six (6) months.
-2-
<PAGE>
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that a grant would cause the number of Shares subject to
outstanding Options plus the number of Shares previously purchased upon exercise
of Options to exceed the Pool, then each such automatic grant shall be for that
number of Shares determined by dividing the total number of Shares remaining
available for grant by the number of Outside Directors receiving an Option on
such date on the automatic grant date. Any further grants shall then be
deferred until such time, if any, as additional Shares become available for
grant under the Plan through action of the shareholders to increase the number
of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
(v) The terms of each First Option granted hereunder shall be as
follows:
(1) the First Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Section 9
hereof;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the First Option, determined in
accordance with Section 8 hereof; and
(3) the First Option shall become exercisable in installments
cumulatively as to 25% of the Shares subject to the First Option on each of the
first, second, third and fourth anniversaries of the date of grant of the
Option.
(vi) The terms of each Subsequent Option granted hereunder shall
be as follows:
(1) the Subsequent Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Subsequent Option, determined
in accordance with Section 8 hereof; and
(3) the Subsequent Option shall become exercisable as to one
hundred percent (100%) of the Shares subject to the Subsequent Option on the
fourth anniversary of the date of grant of the Subsequent Option.
(c) POWERS OF THE BOARD. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 8(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
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<PAGE>
(d) EFFECT OF BOARD'S DECISION. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) SUSPENSION OR TERMINATION OF OPTION. If the President or his or
-----------------------------------
her designee reasonably believes that an Optionee has committed an act of
misconduct, the President may suspend the Optionee's right to exercise any
option pending a determination by the Board of Directors (excluding the Outside
Director accused of such misconduct). If the Board of Directors (excluding the
Outside Director accused of such misconduct) determines an Optionee has
committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation
owed to the Company, breach of fiduciary duty or deliberate disregard of the
Company rules resulting in loss, damage or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his or her estate shall be
entitled to exercise any option whatsoever. In making such determination, the
Board of Directors (excluding the Outside Director accused of such misconduct)
shall act fairly and shall give the Optionee an opportunity to appear and
present evidence on Optionee's behalf at a hearing before the Board or a
committee of the Board.
5. ELIGIBILITY. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon
----------------------------
its adoption by the Board. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 13 of the Plan.
7. TERM OF OPTIONS. The term of each Option shall be ten (10) years from
---------------
the date of grant thereof.
8. EXERCISE PRICE AND CONSIDERATION.
--------------------------------
(a) EXERCISE PRICE. The per Share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
(b) FAIR MARKET VALUE. The fair market value shall be determined by
-----------------
the Board; provided, however, that where there is a public market for the Common
-------- -------
Stock, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the
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<PAGE>
over-the-counter market on the date of grant, as reported in The Wall Street
---------------
Journal (or, if not so reported, as otherwise reported by the National
- -------
Association of Securities Dealers Automated Quotation ("Nasdaq") System) or, in
the event the Common Stock is traded on the Nasdaq National Market or listed on
a stock exchange, the fair market value per Share shall be the closing price on
such system or exchange on the date of grant of the Option (or, in the event
that the Common Stock is not traded on such date, on the immediately preceding
trading date), as reported in The Wall Street Journal.
-----------------------
(c) FORM OF CONSIDERATION. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. EXERCISE OF OPTION.
------------------
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be
issued to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director
-----------------------------------
ceases to serve as a Director, he or she may, but only within ninety (90) days
after the date he or she ceases to be a Director of the Company, exercise his or
her Option to the extent that he or she was entitled to exercise it at the date
of such termination. Notwithstanding the foregoing, in no event may the Option
be exercised after its term set forth in Section 7 has expired. To the extent
that such Outside Director was not entitled to exercise an Option at the date of
such termination, or does not
-5-
<PAGE>
exercise such Option (which he or she was entitled to exercise) within the time
specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 9(b) above, in
----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Board) from the date of such termination, exercise his or her Option to
the extent he or she was entitled to exercise it at the date of such
termination. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
he or she was not entitled to exercise the Option at the date of termination, or
if he or she does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
-----------------
(i) During the term of the Option who is, at the time of his or
her death, a Director of the Company and who shall have been in Continuous
Status as a Director since the date of grant of the Option, the Option may be
exercised, at any time within six (6) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in Continuous
Status as Director for six (6) months (or such lesser period of time as is
determined by the Board) after the date of death. Notwithstanding the foregoing,
in no event may the Option be exercised after its term set forth in Section 7
has expired.
(ii) Within (3) months after the termination of Continuous Status as a
Director, the Option may be exercised, at any time within six (6) months
following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
Notwithstanding the foregoing, in no event may the option be exercised after its
term set forth in Section 7 has expired.
10. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
------------------------------------------------------------------
(a) ADJUSTMENT. Subject to any required action by the shareholders
----------
of the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon
-6-
<PAGE>
cancellation or expiration of an Option, and the number of shares of Common
Stock to be granted under the provisions set forth in Section 4 of the Plan, as
well as the price per share of Common Stock covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company; provided,
--------
however, that conversion of any convertible securities of the Company shall not
- -------
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
(b) CORPORATE TRANSACTIONS. In the event of (i) a dissolution or
----------------------
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, (iii) a merger or consolidation in which the Company is not
the surviving corporation, or (iv) any other capital reorganization in which
more than fifty percent (50%) of the shares of the Company entitled to vote are
exchanged, the Company shall give to the Eligible Director, at the time of
adoption of the plan for liquidation, dissolution, sale, merger, consolidation
or reorganization, either a reasonable time thereafter within which to exercise
the Option, including Shares as to which the Option would not be otherwise
exercisable, prior to the effectiveness of such liquidation, dissolution, sale,
merger, consolidation or reorganization, at the end of which time the Option
shall terminate, or the right to exercise the Option, including Shares as to
which the Option would not be otherwise exercisable (or receive a substitute
option with comparable terms), as to an equivalent number of shares of stock of
the corporation succeeding the Company or acquiring its business by reason of
such liquidation, dissolution, sale, merger, consolidation or reorganization.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
-------------------------------------
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
- -------- ----
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the shareholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
Notwithstanding the foregoing, the provisions set forth in Section 4 of this
Plan (and any other Sections of this Plan that affect the formula award terms
required to be specified in this Plan by Rule 16b-3) shall not be amended more
than once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder.
-7-
<PAGE>
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As a
condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares, if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this
---------------------
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan. Inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
16. OPTION AGREEMENT. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. SHAREHOLDER APPROVAL. To the extent permitted by Rule 16b-3 of
--------------------
the Exchange Act (or any successor provision thereto) and in order to obtain the
benefits provided by such rule, the Company may, but shall not be required to,
obtain shareholder approval for Option grants made hereunder. To the extent the
Company obtains such shareholder approval, it shall be deemed to apply with
respect to Option grants made on or after the date of such approval.
-8-
<PAGE>
Exhibit 10.52
EXECUTIVE SEPARATION AGREEMENT
THIS EXECUTIVE SEPARATION AGREEMENT (the "Agreement") is entered into this
__ day of January, 1998, by and between Retix ("Company") and M.Y. Stephan
("Employee").
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship and to establish a consulting arrangement between them.
NOW, THEREFORE, IT IS AGREED as follows:
I. Terms of Separation and Transition
1. Employee's resignation as President and Chief Executive Officer shall
be deemed effective as of the close of business on December 27, 1997 (the
"Termination Date"). Employee's resignation from any other positions with any
other entity which may be deemed to be an affiliate of the Company shall also be
effective on the Termination Date.
2. In contemplation of the separation, the parties agree:
(a) Employee's termination has arisen as a result of a "constructive
termination" under Section 5(b)(i) of Employee's Employment Agreement with the
Company dated September 27, 1995 (the "Employment Agreement") and Employee will
receive the payments, benefits and other severance provisions as provided in the
Employment Agreement and the confirming letter executed by Employee and the
members of the Compensation Committee of the Board of Directors of the Company
dated December 17, 1997 (the "Confirming Letter"). As a result, the Company and
Employee agree that Sections 1, 2 and 3 of the Addendum to Employment Agreement
dated December 17, 1997 shall not apply or remain operative.
(b) As indicated in the Confirming Letter, due to the consolidation
of operations between the Company and its Vertel Corporation subsidiary, under
the terms of Employee's Employment Agreement, all options previously granted to
Employee by the Company have become fully vested and all shares of the Company's
Common Stock that Employee has received upon exercise of these options have been
released from any rights of repurchase by the Company (other than related to the
pledging of such shares as security for the payment of any notes executed by
Employee in connection with their purchase).
(c) If Employee requests the release of any shares of the Company's
Common Stock held as security for the payment of outstanding promissory notes
owed to the Company by Employee in connection with the proposed sale or other
disposition of such shares by Employee, Employee agrees to repay at least that
percentage of the then outstanding principal owed under all such notes as is
equal to the percentage of shares then held by the Company as security as a
condition to the release of such shares.
<PAGE>
(d) To the extent provided by the Employment Agreement, the
Company's obligations to provide medical coverage or to reimburse for payments
made by Employee for continued medical coverage under the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") shall terminate at such time as
Employee becomes eligible to receive medical coverage providing a general level
of benefits similar to those offered by the Company to its employees generally
from another employer from which Employee is permitted to accept employment
under Section 7 of this Agreement.
(e) In addition to Employee's regular base compensation through the
Termination Date and the payments provided otherwise in this Agreement, Employee
shall be provided an additional severance payment of $255,000, which Employee
acknowledges has already been paid to him or deposited for his account in
accordance with his instructions, and shall pay an additional severance payment
of $120,000 on July 1, 1998.
(f) As contemplated by paragraph (2) of the Confirming Letter, the
Company shall retain Employee as a consultant as set forth in Article II below.
(g) Following the Termination Date, Employee shall remain a member
of the Board of Directors of the Company. As a member of the Board of Directors
of the Company who is not an employee of the Company following the Termination
Date, Employee will be eligible to receive options to purchase Common Stock of
the Company as and to the extent provided in the Company's 1996 Directors' Stock
Option Plan. The Company and Employee understand that the Board of Directors
will review continuing membership on the Board of Directors with respect to all
members as a result of the consolidation of operations of the Company with that
of its subsidiary Vertel Corporation and the search for additional Board
members, and that the Chief Executive Officer of the Company will provide his
recommendations in these regards. In all events, Employee's continued service as
a member of the Board of Directors shall be subject to the nomination of
Employee to such position and his election by the shareholders of the Company.
II. CONSULTING RELATIONSHIP
3. Employee will make himself available at reasonable times and places to
perform consulting services for the Company during the period beginning on the
Termination Date and ending four years after the Termination Date (the
"Consulting Term"). The Consulting Term shall be unaffected by any possible
future termination in Employee's status as a member of the Board of Directors of
the Company. Such services will include:
(a) continuing reasonable and customary transition support as
requested by the Company's current executive officers during the six months
following the Termination Date. Such support, generally in the form of
telephonic, fax or e-mail communication, shall be with respect to areas within
the general scope of Employee's duties while he was employed as an executive
officer by the Company, e.g. strategic and product planning and general business
direction and key account relationships in which Employee participated in a
meaningful way. No additional compensation shall be paid for such transition
support unless extraordinary in nature, in which case it shall be at Employee's
option to provide such extraordinary support and
<PAGE>
for such additional compensation as may be agreed between the Company and
Employee.
(b) additional services concerning business strategy, market
development or such other subjects as may be agreed between the Company and
Employee. All consulting assignments and pertinent terms, including
compensation, shall be determined by Employee and the Chief Executive Officer or
Board of Directors of the Company.
4. Employee agrees that he will from time to time during the Consulting
Term keep the Company advised as to Employee's progress in performing any agreed
upon services and that Employee will, as requested by the Company, prepare
written reports with respect thereto.
5. The Company shall reimburse Employee for reasonable expenses incurred
on behalf of Company during the Consulting Term with respect to the provision of
consulting services, provided that such expenses are substantiated in accordance
with Company policies.
6. Employee understands and agrees that his obligations to the Company
under his existing Retix Employee Proprietary Information and Inventions
Agreement between Employee and Company dated August 1, 1995 (the "Proprietary
Information Agreement"), a copy of which is attached hereto as Exhibit A, shall
---------
continue through the Consulting Term and shall thereafter survive termination of
his relationship with Company under this Agreement.
7. Employee and the Company acknowledge and agree that Section 8
(Noncompetition Covenant) of the Employment Agreement shall continue to apply
through December 31, 1998 as a result of the payments Employee is receiving
pursuant to the Employment Agreement. Employee may engage in other employment,
consulting or businesses other than as provided in such Section 8 provided such
activity does not preclude him from making himself available to provide periodic
consulting services to the Company.
8. Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of the Company, and Employee
shall perform the consulting services contemplated in this Article II as an
independent contractor.
III. RELEASE OF CLAIMS
9. Employee agrees that the foregoing provisions represent settlement in
full of all outstanding obligations owed to Employee by the Company. Employee
and the Company, on behalf of themselves, and their respective heirs, executors,
officers, directors, employees, investors, shareholders, administrators,
predecessor and successor corporations, and assigns, hereby fully and forever
release each other and their respective heirs, executors, officers, directors,
employees, investors, shareholders, administrators, predecessor and successor
corporations, and assigns, from, and agree not to sue concerning, any claim,
duty, obligation or cause of action relating to any matters of any kind, whether
presently known or unknown, suspected or unsuspected, that any of them may
possess arising from any omissions, acts or facts
<PAGE>
that have occurred up until and including the Effective Date of this Agreement
relating to Employee's employment with the Company including, without
limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor
Standards Act, and the California Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fee and costs.
The Company and Employee agree that the release set forth in this
section shall be and remain in effect in all respects as a complete general
release as to the matters released. This release does not extend to any
obligations incurred under this Agreement.
10. Employee acknowledges that he is waiving and releasing any rights he
may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and
that this waiver and release is knowing and voluntary. Employee and the Company
agree that this waiver and release does not apply to any rights or claims that
may arise under ADEA after the Effective Date of this Agreement. Employee
acknowledges that the consideration given for this waiver and release Agreement
is in addition to anything of value to which Employee was already entitled.
Employee further acknowledges that he has been advised by this writing that:
(a) he should consult with an attorney prior to executing this
-----
Agreement;
(b) he has at least twenty-one (21) days within which to consider
this Agreement;
(c) he has at least seven (7) days following the execution of this
Agreement by the parties to revoke the Agreement; and
(d) this Agreement shall not be effective (the "Effective Date")
until the revocation period has expired.
<PAGE>
11. The Company and the Employee represent that they are not aware of any
claim by either of them other than the claims that are released by this
Agreement. Employee and the Company acknowledge that they have had the
opportunity to consult with legal counsel concerning, and are familiar with, the
provisions of California Civil Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Employee and the Company, being aware of said code section, agree to waive
expressly any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect.
IV. OTHER PROVISIONS; GENERAL
12. Each party agrees to refrain from any disparagement, defamation,
slander of the other, or tortious interference with the contracts and
relationships of the other.
13. Employee retains any rights to indemnification that he may have under
California law. The Company will continue to be obligated to indemnify and
defend Employee to the full extent required by California Labor Code Section
2802 and any rights under the Company's Articles of Incorporation, Bylaws and
Indemnification Agreement between the Company and Employee dated as of August 1,
1995.
14. This Agreement together with the written agreements referenced in this
Agreement represent the entire agreement and understanding between the Company
and Employee concerning Employee's separation from the Company, and together
supersede and replace any and all prior agreements and understanding concerning
Employee's relationship with the Company and his compensation by the Company.
15. This Agreement may only be amended in writing signed by Employee and
the Chief Executive Officer of the Company.
16. This Agreement shall be governed by the laws of the State of
California without reference to provisions concerning conflicts of laws.
17. This Agreement is effective seven days after it has been signed by
both parties.
18. This Agreement may be executed in counterparts, and each counterpart
shall have the same force and effect as an original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
<PAGE>
19. This Agreement is executed voluntarily and without any duress or undue
influence on the part or behalf of the parties hereto, with the full intent of
releasing all claims. The parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement and
of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS THEREOF, the parties have executed this Agreement on the
respective dates set forth below.
RETIX
Dated: January ____, 1998 By _______________________________________
Bruce Brown, President & CEO
EMPLOYEE
Dated: January ____, 1998
_______________________________________
M.Y. Stephan
<PAGE>
EXHIBIT A
---------
PROPRIETARY INFORMATION AGREEMENT
<PAGE>
EXHIBIT 10.53
EXECUTIVE SEPARATION AGREEMENT
THIS EXECUTIVE SEPARATION AGREEMENT (the "Agreement") is entered into this
__ day of January, 1998, between Retix ("Company") and Philip Mantle
("Employee").
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship and to establish a consulting arrangement between them.
NOW, THEREFORE, IT IS AGREED as follows:
I. TERMS OF SEPARATION AND TRANSITION
1. Employee's resignation as Senior Vice President of Sales and Marketing
was effective as of the close of business on July 15, 1997 (the "Termination
Date"). Employee's resignation from any other positions with any other entity
which may be deemed to be an affiliate of the Company and its former subsidiary
Retix U.K. Ltd. ("Retix U.K.") shall also be effective on the Termination Date.
2. In contemplation of the separation, the parties agree Employee's
termination has arisen as a result of a "constructive termination" under Section
5(e)(iii) of Employee's Employment Agreement with the Company and Retix U.K.
dated November 1, 1995 (the "Employment Agreement") and the confirming letter
executed by Employee and the Company dated May 17, 1996 (the "Confirming
Letter"). As a result, the Company and Employee agree:
(a) Employee shall continue to receive his base salary at the annual
rate of U.S. $180,000 through July 15, 1998, payable on Retix's normal pay dates
for its employees. Should Employee accept full time employment with another
organization prior to July 15, 1998, a lump sum payout of the remaining unpaid
salary continuation shall be payable immediately.
(b) Employee shall continue to receive the balance of one-half of a
U.S. $50,000 bonus being paid over a twelve month period through July 15, 1998
on Retix' normal pay dates in addition to the salary continuation provided in
the prior paragraph.
(c) In addition to the payments provided otherwise in this Agreement,
Employee shall receive U.S. $105,000 for his assistance to the Company in its
development of the strategic plan for its former Sonoma Systems subsidiary, such
amount to be paid in the sums of U.S. $70,000 upon execution of this Agreement
by both parties and U.S. $35,000 on July 1, 1998.
(d) the Benefit and Pension Schemes outlined in the Employment
Agreement shall continue to be provided through July 15, 1998, except such
Schemes shall terminate on the date of any lump sum payout of amounts owing to
Employee under Section 2 (a) of this Agreement.
<PAGE>
(e) As contemplated by the Company and Employee in the Employment
Agreement, shares of the Company's Common Stock issued upon the prior exercise
by Employee of options to purchase such shares issued to Employee (consisting of
an option to purchase of 300,000 shares issued December 29, 1995 and an
additional option to purchase 100,000 shares issued on March 18, 1996) shall
continue to vest and be released from the applicable Company repurchase option
through July 15, 1998. On July 15, 1998, 50 percent of the then unvested shares
described in the preceding sentence shall also be released from the applicable
Company repurchase option, with the balance of any shares remaining then
unvested being canceled by the Company in satisfaction of the relevant portion
of principal of the applicable promissory notes provided by Employee to the
Company in connection with the earlier exercise of the underlying stock options.
(f) As contemplated by the Employment Agreement, the parties confirm
that any notes provided by the Employee to the Company in connection with the
exercise of stock options described in the preceding paragraph shall be paid in
full by Employee not later than four years following the Termination Date. If
Employee requests the release of any shares of the Company's Common Stock held
as security for the payment of such notes by Employee in connection with the
proposed sale or other disposition of such shares by Employee, Employee agrees
to repay at least that percentage of the then outstanding principal owed under
all such notes as is equal to the percentage of shares then held by the Company
as security as a condition to the release of such shares.
(g) Employee hereby releases Retix U.K., a former subsidiary of the
Company, from all remaining obligations under the Employment Agreement and the
Company hereby assumes all such obligations.
II. CONSULTING RELATIONSHIP
3. Employee will make himself available at reasonable times and places to
perform consulting services for the Company during the period beginning on the
Termination Date and ending July 15, 1999 (the "Consulting Term"). Such
services will include:
(a) continuing reasonable and customary transition support as requested
by the Company's current executive officers during the first nine months
following the Termination Date. Such support, generally in the form of
telephonic, fax or e-mail communication, shall be with respect to areas within
the general scope of Employee's duties while he was an executive officer of the
Company, e.g. strategic and product planning and key account relationships in
which Employee participated in a meaningful way. No additional compensation
shall be paid for such transition support unless extraordinary in nature, in
which case it shall be at Employee's option to provide such extraordinary
support and for such additional compensation as may be agreed between the
Company and Employee.
(b) additional services concerning business strategy, market
development, major account opportunities or such other subjects as may be agreed
between the Company and Employee. All consulting assignments and pertinent
terms, including compensation, shall be determined by Employee and the Chief
Executive Officer or the Board of Directors of the
<PAGE>
Company.
4. Employee agrees that he will from time to time during the Consulting
Term keep the Company advised as to Employee's progress in performing any agreed
upon services and that Employee will, as requested by the Company, prepare
written reports with respect thereto.
5. The Company shall reimburse Employee for reasonable expenses incurred
on behalf of Company during the Consulting Term with respect to the provision of
consulting services, provided that such expenses are substantiated in accordance
with Company policies.
6. Employee understands and agrees that his obligations to the Company
under his existing Retix Employee Proprietary Information and Inventions
Agreement between Employee and Company dated November 1, 1995 (the "Proprietary
Information Agreement"), a copy of which is attached hereto as Exhibit A, shall
---------
continue through the Consulting Term and shall thereafter survive termination of
his relationship with Company under this Agreement.
7. Employee and the Company acknowledge and agree that Section 11 (Non
competition Covenant) of the Employment Agreement shall continue to apply
through July 15, 1998 as a result of payments Employee is receiving pursuant to
the Employment Agreement. Employee may engage in other employment, consulting
or businesses other than as provided in such Section 11 provided such activity
does not preclude him from making himself available to provide periodic
consulting services to the Company.
8. Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of the Company and Employee
shall perform the consulting services contemplated in this Article II as an
independent contractor.
III. RELEASE OF CLAIMS
9. Employee agrees that the foregoing provisions represent settlement in
full of all outstanding obligations owed to Employee by the Company or Retix
U.K. Employee and the Company, on behalf of themselves, and their respective
heirs, executors, officers, directors, employees, investors, shareholders,
administrators, predecessor and successor corporations, and assigns, hereby
fully and forever release each other and their respective heirs, executors,
officers, directors, employees, investors, shareholders, administrators,
predecessor and successor corporations, and assigns, from, and agree not to sue
concerning, any claim, duty, obligation or cause of action relating to any
matters of any kind, whether presently known or unknown, suspected or
unsuspected, that any of them may possess arising from any omissions, acts or
facts that have occurred up until and including the Effective Date of this
Agreement relating to Employee's employment with the Company or Retix U.K.
including, without limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company or Retix U.K. and the termination of
that relationship;
<PAGE>
(b) any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment; breach of
contract, both express and implied; breach of a covenant of good faith and fair
dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;
(d) any and all claims for violation of any United Kingdom or U.S.
federal, state or municipal statute, including, but not limited to, Title VII of
the U.S. Civil Rights Act of 1964, the U.S. Civil Rights Act of 1991, the U.S.
Age Discrimination in Employment Act of 1967, the Americans with Disabilities
Act of 1990, the U.S. Fair Labor Standards Act, and the California Fair
Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fee and costs.
The Company and Employee agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release as
to the matters released. This release does not extend to any obligations
incurred under this Agreement.
10. Employee acknowledges that he is waiving and releasing any rights he
may have under the U.S. Age Discrimination in Employment Act of 1967 ("ADEA")
and that this waiver and release is knowing and voluntary. Employee and the
Company agree that this waiver and release does not apply to any rights or
claims that may arise under ADEA after the Effective Date of this Agreement.
Employee acknowledges that the consideration given for this waiver and release
Agreement is in addition to anything of value to which Employee was already
entitled. Employee further acknowledges that he has been advised by this
writing that:
(a) he should consult with an attorney prior to executing this
-----
Agreement;
(b) he has at least twenty-one (21) days within which to consider this
Agreement;
(c) he has at least seven (7) days following the execution of this
Agreement by the parties to revoke the Agreement; and
(d) this Agreement shall not be effective (the "Effective Date") until
the revocation period has expired
IV. OTHER PROVISIONS; GENERAL
11. Each party agrees to refrain from any disparagement, defamation,
slander of the other, or tortious interference with the contracts and
relationships of the other.
<PAGE>
12. Employee retains any rights to indemnification that he may have under
applicable law. The Company will continue to be obligated to indemnify and
defend Employee to the full extent required by applicable law and pursuant to
any rights under the Company's Articles of Incorporation and Bylaws and the
Indemnification Agreement between the Company and Employee dated as of September
27, 1995.
13. This Agreement together with the written agreements referenced in this
Agreement represent the entire agreement and understanding between the Company
and Employee concerning Employee's separation from the Company and Retix U.K.,
and together supersede and replace any and all prior agreements and
understanding concerning Employee's relationship with the Company and Retix U.K.
and his compensation by the Company and Retix U.K.
14. This Agreement may only be amended in writing signed by Employee and
the Chief Executive Officer of the Company.
15. This Agreement shall be governed by the laws of the United Kingdom.
16. This Agreement is effective seven days after it has been signed by
both parties.
17. This Agreement may be executed in counterparts, and each counterpart
shall have the same force and effect as an original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
18. This Agreement is executed voluntarily and without any duress or undue
influence on the part or behalf of the parties hereto, with the full intent of
releasing all claims. The parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement and
of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS THEREOF, the parties have executed this Agreement on the
respective dates set forth below.
RETIX
Dated: January ____, 1998 By _______________________________
Bruce Brown, President & CEO
<PAGE>
EMPLOYEE
Dated: January ____, 1998 _______________________________
Philip Mantle
<PAGE>
EXHIBIT A
---------
PROPRIETARY INFORMATION AGREEMENT
<PAGE>
EXHIBIT 10.54
EXECUTIVE SEPARATION AGREEMENT
THIS EXECUTIVE SEPARATION AGREEMENT (the "Agreement") is entered into this
__ day of January, 1998, by and between Retix ("Company") and Steve Waszak
("Employee").
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship between them.
NOW, THEREFORE, IT IS AGREED as follows:
I. TERMS OF SEPARATION AND TRANSITION
1. Employee's resignation as Vice President of Finance and Administration
and Chief Financial Officer shall be deemed effective as of the close of
business on December 27, 1997 (the "Termination Date"). Employee's resignation
from any other positions with any other entity which may be deemed to be an
affiliate of the Company shall also be effective on the Termination Date, other
than with respect to Sonoma Systems and its subsidiaries, in which positions
Employee shall continue at the discretion of the Board of Directors of such
corporation.
2. In contemplation of the separation, the parties agree:
(a) In addition to all regular compensation owing to Employee through
the Termination Date, Employee shall be entitled to severance payments as
follows: (i) an amount equal to three months of Employee's base rate of
compensation as in effect immediately prior to the Termination Date shall be
paid as soon as practical following the Effective Date (as defined in Section
6(d) below) of this Agreement; (ii) an additional amount also equal to three
months of Employee's base rate of compensation as in effect immediately prior to
the Termination Date shall be paid on the next regular Company payroll date
occurring on or after March 31, 1998; (iii) a further payment of $70,000 payable
on the execution of this Agrement by both parties; and (iv) a final severance
payment of $30,000 payable on July 1, 1998.
(b) The vesting of all options to purchase shares of Common Stock of
the Company previously issued and outstanding under the Company's 1988 Stock
Option Plan to Employee shall be accelerated in full with the effect that
Employee shall be entitled to exercise all such options, or in the event they
have been previously exercised, to have the underlying shares of Common Stock
issued upon exercise of such options released from any rights of repurchase in
favor of the Company.
(c) All notes previously provided by Employee to the Company in
connection with such exercises shall become due and payable in full on December
31, 1998 (the "Repayment Date") If Employee requests the release of any shares
of the Company's Common Stock held as security for the payment of such notes by
Employee in connection with the
<PAGE>
proposed sale or other disposition of such shares by Employee, Employee agrees
to repay at least that percentage of the then outstanding principal owed under
all such notes as is equal to the percentage of shares then held by the Company
as security as a condition to the release of such shares.
(d) Employee shall remain available to provide continuing reasonable
and customary transition support as requested by the Company's current executive
officers during the first six months following the Termination Date. Such
support, generally in the form of telephonic, fax or e-mail communication shall
be with respect to areas within the general scope of Employee's duties while he
was employed as an executive officer by the Company. No additional compensation
shall be paid for such transition support unless extraordinary in nature, in
which case it shall be at Employee's option to provide such extraordinary
support and for such additional compensation as may be agreed between the
Company and Employee.
II. NON-DISCLOSURE AND NONCOMPETITION AGREEMENT
3. Employee understands and agrees that his obligations to the Company
under his existing Retix Employee Proprietary Information and Inventions
Agreement between Employee and Company dated June 21, 1990 (the "Proprietary
Information Agreement"), a copy of which is attached hereto as Exhibit A, shall
---------
survive termination of his relationship with Company under this Agreement.
4. Executive hereby agrees that he shall not do any of the following on or
prior to the Repayment Date without the prior written consent of the President
or the Board of Directors of the Company:
(a) Carry on anywhere in the United States any business or activity
(whether directly or indirectly, as a partner, shareholder, principal, agent,
director, affiliate or consultant) which is directly competitive with the
business conducted by the Company at the time of termination of Executive's
employment. It is agreed that ownership of no more than one percent of the
outstanding voting stock of a publicly traded corporation, ownership of no more
than five percent of the outstanding voting stock of a privately held
corporation or ownership of no more than ten percent of the limited partnership
interests of a partnership shall not constitute a violation of this provision.
(b) Solicit or influence or attempt to influence any client, customer
or other person either directly or indirectly, to direct, his or its purchase of
the Company's products and/or services to any person, firm, corporation,
institution or other entity in competition with the business of the Company.
(c) Solicit or influence or attempt to influence any person employed by
the Company to terminate or otherwise cease his employment with the Company or
become an employee of any competitor of the Company.
(d) The covenants set forth in this Section 4 shall be effective
commencing as of the date hereof and shall continue for so long as cash payments
continue to be made to
<PAGE>
Executive under this Agreement.
III. RELEASE OF CLAIMS
5. Employee agrees that the foregoing provisions represent settlement in
full of all outstanding obligations owed to Employee by the Company. Employee
and the Company, on behalf of themselves, and their respective heirs, executors,
officers, directors, employees, investors, shareholders, administrators,
predecessor and successor corporations, and assigns, hereby fully and forever
release each other and their respective heirs, executors, officers, directors,
employees, investors, shareholders, administrators, predecessor and successor
corporations, and assigns, from, and agree not to sue concerning, any claim,
duty, obligation or cause of action relating to any matters of any kind, whether
presently known or unknown, suspected or unsuspected, that any of them may
possess arising from any omissions, acts or facts that have occurred up until
and including the Effective Date of this Agreement relating to Employee's
employment with the Company including, without limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment; breach of
contract, both express and implied; breach of a covenant of good faith and fair
dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;
(d) any and all claims for violation of any federal, state or municipal
statute, including, but not limited to, Title VII of the Civil Rights Act of
1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of
1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act,
and the California Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this
section shall be and remain in effect in all respects as a complete general
release as to the matters released. This release does not extend to any
obligations incurred under this Agreement.
6. Employee acknowledges that he is waiving and releasing any rights he
may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and
that this waiver and release is knowing and voluntary. Employee and the Company
agree that this waiver and release does not apply to any rights or claims that
may arise under ADEA after the Effective Date of this
<PAGE>
Agreement. Employee acknowledges that the consideration given for this waiver
and release Agreement is in addition to anything of value to which Employee was
already entitled. Employee further acknowledges that he has been advised by this
writing that:
(a) he should consult with an attorney prior to executing this
-----
Agreement;
(b) he has at least twenty-one (21) days within which to consider this
Agreement;
(c) he has at least seven (7) days following the execution of this
Agreement by the parties to revoke the Agreement; and
(d) this Agreement shall not be effective (the "Effective Date") until
the revocation period has expired.
7. The Company and the Employee represent that they are not aware of any
claim by either of them other than the claims that are released by this
Agreement. Employee and the Company acknowledge that they have had the
opportunity to consult with legal counsel concerning, and are familiar with, the
provisions of California Civil Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Employee and the Company, being aware of said code section, agree to waive
expressly any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect.
IV. OTHER PROVISIONS; GENERAL
8. Each party agrees to refrain from any disparagement, defamation,
slander of the other, or tortious interference with the contracts and
relationships of the other.
9. Employee retains any rights to indemnification that he may have under
California law. The Company will continue to be obligated to indemnify and
defend Employee to the full extent required by California Labor Code Section
2802 and any rights under the Company's Articles of Incorporation, Bylaws and
Indemnification Agreement between the Company and Employee dated as of September
27, 1994.
10. This Agreement together with the written agreements referenced in this
Agreement represent the entire agreement and understanding between the Company
and Employee concerning Employee's separation from the Company, and together
supersede and
<PAGE>
replace any and all prior agreements and understanding concerning Employee's
relationship with the Company and his compensation by the Company.
11. This Agreement may only be amended in writing signed by Employee and
the Chief Executive Officer of the Company.
12. This Agreement shall be governed by the laws of the State of
California without reference to provisions concerning conflicts of laws.
13. This Agreement is effective seven days after it has been signed by
both parties.
14. This Agreement may be executed in counterparts, and each counterpart
shall have the same force and effect as an original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
15. This Agreement is executed voluntarily and without any duress or undue
influence on the part or behalf of the parties hereto, with the full intent of
releasing all claims. The parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement and
of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS THEREOF, the parties have executed this Agreement on the
respective dates set forth below.
RETIX
Dated: January ____, 1998 By
________________________________
Bruce Brown, President & CEO
EMPLOYEE
Dated: January ____, 1998 ________________________________
Steve Waszak
<PAGE>
EXHIBIT A
---------
PROPRIETARY INFORMATION AGREEMENT
<PAGE>
EXHIBIT 10.55
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SONOMA SYSTEMS
The undersigned, Gregory Koss and Craig W. Johnson, certify that:
1. They are the President and Secretary, respectively, of Sonoma Systems,
a California corporation.
2. The Articles of Incorporation of this corporation are amended and
restated to read in full as follows:
"I
The name of this corporation is Sonoma Systems.
II
The purpose of this corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III
(A) Classes of Stock. This corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the corporation is authorized to issue is
44,250,000 shares, of which 25,000,000 shares shall be Common Stock and
19,250,000 shares shall be Preferred Stock, each with a par value of $0.01.
(B) Reverse Split. Upon the effective date of filing of these Amended and
-------------
Restated Articles of Incorporation, each outstanding share of this corporation's
Common Stock shall be converted and reconstituted into 0.535088633 of a share of
this corporation's Common Stock (the "Common Reverse Split"). Any fractional
--------------------
number of shares remaining after applying the Common Reverse Split to each
certificate representing shares of Common Stock then held by any holder shall be
redeemed at a purchase price of $0.15 per full share of Common Stock. Upon the
effective date of filing of these Amended and Restated Articles of
Incorporation, each outstanding share of this corporation's Preferred Stock
shall be converted and reconstituted into 0.045481421 of a share of this
corporation's Series A Preferred Stock, 0.032540820 of a share of
<PAGE>
this corporation's Series B Preferred Stock and 0.0675183063 of a share of this
corporation's Series C Preferred Stock (the "Preferred Reverse Split"). Any
-----------------------
fractional number of shares remaining after applying the Preferred Reverse Split
to each certificate representing shares Preferred Stock then held by any holder
shall be redeemed at a purchase price of $1.4876 per full share of Preferred
Stock. All amounts per share and all per share numbers set forth in these
Amended and Restated Articles of Incorporation have been appropriately adjusted
to reflect the Common Reverse Split and the Preferred Reverse Split.
(C) Rights, Preferences and Restrictions of Preferred Stock. The Preferred
-------------------------------------------------------
Stock authorized by these Restated Articles of Incorporation may be issued from
time to time in one or more series. The Board of Directors is authorized to fix
the number of shares of any series of Preferred Stock and to determine the
designation of any such series. The Board of Directors is also authorized,
except as to matters fixed as to Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock hereinafter stated in this Article III(C), to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and to increase
or decrease the number of shares of that series, but not below the number of
shares of such series then outstanding. The first series of Preferred Stock
shall be designated "Series A Preferred Stock" and shall consist of 1,000,000
------------------------
shares. The second series of Preferred Stock shall be designated "Series B
--------
Preferred Stock" and shall consist of 715,475 shares. The third series of
- ---------------
Preferred Stock shall be designated "Series C Preferred Stock" and shall consist
------------------------
of 7,534,525 shares. Subject to the rights, preferences, privileges and
restrictions of any future series of Preferred Stock, the rights, preferences,
privileges, and restrictions granted to and imposed on the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock are as follows:
(1) Dividends.
---------
(aa) Dividends on Series A Preferred Stock. The holders of
-------------------------------------
outstanding Series A Preferred Stock shall receive in each fiscal year after the
Original Issue Date (as defined in Section 3(cc) below), dividends in cash at
the rate of $0.06 per share per annum, out of any assets legally available
therefor, before any cash dividend is paid on Series B Preferred Stock, Series C
Preferred Stock or Common Stock. Dividends or distributions (other than
dividends payable solely in shares of Common Stock) may be declared and paid
upon shares of Series B Preferred Stock, Series C Preferred Stock and Common
Stock in any fiscal year of the corporation only if dividends shall have been
paid on or declared and set apart upon all shares of Series A Preferred Stock at
such annual rate; and no further dividends shall be paid to holders of shares of
Series A Preferred Stock in excess of such annual rate in any fiscal year.
Dividends on Series A Preferred Stock shall accrue on each share from the
Original Issue Date, and shall accrue from day to day, whether or not earned or
declared, and shall be cumulative so that, if such dividends in respect of any
previous or current annual dividend period, at the annual rate specified above,
shall not have been paid, the deficiency shall first be fully paid before any
dividend or other distribution shall be paid on or declared and set apart for
the Series B Preferred Stock, Series C Preferred Stock or Common Stock. Any
accumulation of dividends on the Series A Preferred Stock shall not bear
interest. Cumulative dividends with respect to a share of Series A Preferred
Stock which are accrued, payable and/or in arrears shall be paid to the extent
-2-
<PAGE>
assets are legally available therefor, and any amounts for which assets are not
legally available shall be paid promptly as assets become legally available
therefor; any partial payment will be made pro rata among the holders of such
shares.
(bb) The holders of outstanding Series B Preferred Stock and Series C
Preferred Stock shall be entitled to receive in any fiscal year, when, if and as
declared by the Board of Directors, out of any assets at the time legally
available therefor, dividends in cash at the rate of $0.12 per share of Series B
Preferred Stock per annum and $0.12 per share of Series C Preferred Stock per
annum, each before any cash dividend is paid on Common Stock. Such dividend or
distribution may be payable annually or otherwise as the Board of Directors may
from time to time determine. Dividends or distributions (other than dividends
payable solely in shares of Common Stock) may be declared and paid upon shares
of Common Stock in any fiscal year of the corporation only if dividends shall
have been paid on or declared and set apart upon all shares of Series B
Preferred Stock and Series C Preferred Stock at such annual rates; and no
further dividends shall be paid to holders of shares of Series B Preferred Stock
and Series C Preferred Stock in excess of such annual rates in any fiscal year
unless at the same time equivalent dividends are paid to holders of shares of
Common Stock. The right to such dividends on shares of Series B Preferred Stock
and Series C Preferred Stock shall not be cumulative and no right shall accrue
to holders of shares of Series B Preferred Stock and Series C Preferred Stock by
reason of the fact that dividends on said shares are not declared in any prior
year, nor shall any undeclared or unpaid dividend bear or accrue interest.
(cc) In the event this corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by this
corporation or other persons, assets (excluding cash dividends) or options or
rights to purchase any such securities or evidences of indebtedness, then, in
each such case the holders of the Series B Preferred Stock and Series C
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of the Series B Preferred Stock and Series C
Preferred Stock were the holders of the number of shares of Common Stock of the
corporation into which their respective shares of Series B Preferred Stock and
Series C Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the corporation entitled to
receive such distribution.
(2) Voting Rights.
-------------
(aa) Neither the Series A Preferred Stock nor the Series B Preferred
Stock shall have voting rights with respect to the election of directors or any
other matter to be put before the shareholders of the corporation, except in
those matters for which a vote of either such series is required by law, in
which event each share of Series A Preferred Stock and Series B Preferred Stock
shall have one vote per share.
(bb) Each holder of shares of Series C Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Series C Preferred Stock could be converted on the
record date for the vote or consent of shareholders and shall have voting rights
and powers equal to the voting rights and powers of the
-3-
<PAGE>
Common Stock. The holder of each share of Series C Preferred Stock shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the corporation and shall vote with holders of the Common Stock as a single
class upon any matter submitted to a vote of shareholders, except in those
matters required by law to be submitted to a class vote, and those matters
specified in Section (C)(5) below. Fractional votes by the holders of Series C
Preferred Stock shall not, however, be permitted and any fractional voting
rights resulting from the above formula (after aggregating all shares into which
shares of Series C Preferred Stock held by each holder could be converted) shall
be rounded to the nearest whole number.
(3) Conversion. The holders of Series B Preferred Stock and Series C
----------
Preferred Stock shall have conversion rights as follows (the "Conversion
----------
Rights"):
(aa) Right to Convert.
----------------
(i) Subject to the adjustments described in this Section
(C)(3), each share of Series B Preferred Stock shall be convertible, at the
option of the holder thereof, at the office of this corporation or any transfer
agent for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $1.4876 by the Series B Conversion
Price in effect on the date the certificate is surrendered for conversion, at
any time (1) after the earlier of the closing of the corporation's sale of
Common Stock pursuant to a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to an underwritten firm
---------------
commitment public offering; provided, however, that the provisions of Section
-------- -------
(C)(3)(aa)(iii) below shall apply in the event of an Initial Public Offering as
defined therein, (2) the corporation becoming subject to the periodic reporting
requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, or (3) immediately prior to the closing of the corporation's sale of
all or substantially all of its property or business or merger into or
consolidation with any other corporation (other than a wholly-owned subsidiary
corporation) or other transaction or series of related transactions in which
more than 50% of the voting power of the corporation is disposed of (other than
a merger effected exclusively for the purpose of changing the domicile of the
corporation). The initial "Series B Conversion Price" shall be $1.4876 per share
-------------------------
of Series B Preferred Stock. Such initial Series B Conversion Price shall be
subject to adjustment as set forth below. The number of shares of Common Stock
into which each share of Series B Preferred Stock may be converted is hereafter
referred to as the "Series B Conversion Rate."
------------------------
(ii) Subject to the adjustments described in this Section
(C)(3), each share of Series C Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share, at the office of this corporation or any transfer agent for such stock,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $1.4876 by the Series C Conversion Price in effect on the
date the certificate is surrendered for conversion. The initial "Series C
--------
Conversion Price" shall be $1.4876 per share of Series C Preferred Stock.
- ----------------
Such initial Series C Conversion Price shall be subject to adjustment as set
forth below. The number of shares of Common Stock into which each share of
Series C Preferred Stock may be converted is hereafter referred to as the
"Series C
--------
-4-
<PAGE>
Conversion Rate." The Series B Conversion Rate and Series C Conversion Rate
- -----------
are sometimes referred to herein as the "Conversion Rate(s)."
-----------------
(iii) Each share of Series B Preferred Stock and Series C
Preferred Stock shall automatically be converted into shares of Common Stock at
the then effective Conversion Rate upon the earlier of (1) the closing of the
corporation's sale of Common Stock pursuant to a registration statement under
the Securities Act pursuant to an underwritten firm commitment public offering,
provided that such offering results in $20,000,000 or more in cash proceeds to
the corporation, net of underwriting discounts and commissions, and such shares
are offered at a price to the public of at least $8.00 per share (as adjusted
proportionately for stock splits, stock dividends and reverse stock splits) (an
"Initial Public Offering"), or (2) the date specified by written consent or
-----------------------
agreement of the holders of 66-2/3% of the then outstanding shares of Series C
Preferred Stock and a majority of the then outstanding shares of Series B
Preferred Stock, each series voting separately.
(iv) No fractional shares of Common Stock shall be issued upon
conversion of the Series B Preferred Stock or Series C Preferred Stock and any
such shares surrendered for conversion which would otherwise result in a
fractional share of Common Stock shall be redeemed for the then fair market
value thereof as determined by the corporation's Board of Directors, payable as
promptly as possible whenever funds are legally available therefor. If more
than one share of Series B Preferred Stock or Series C Preferred Stock is
surrendered for conversion at any one time by the same holder, the number of
full shares of Common Stock to be issued upon conversion shall be computed on
the basis of the aggregate number of shares of Series B Preferred Stock or
Series C Preferred Stock so surrendered.
(bb) Mechanics of Conversion.
-----------------------
(i) Before any holder of Series B Preferred Stock or Series C
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the corporation or of any transfer agent for the
Preferred Stock, and shall give written notice to the corporation at such office
that such holder elects to convert the same and shall state in such notice the
name or names in which such holder wishes the certificate or certificates for
the number of shares of Common Stock to be issued. The corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Series B Preferred Stock or Series C Preferred Stock, or to such holder's
nominee or nominees, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series B Preferred Stock
or Series C Preferred Stock to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
(ii) If the conversion is in connection with an underwritten offering
of securities pursuant to the Securities Act, the conversion may, at the option
of any
-5-
<PAGE>
holder tendering shares of Series B Preferred Stock or Series C Preferred
Stock for conversion, be conditioned upon the closing with the underwriters of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to received the Common Stock upon conversion of the Series B Preferred
Stock or Series C Preferred Stock shall not be deemed to have converted such
Series B Preferred Stock or Series C Preferred Stock until immediately prior to
the closing of such sale of securities.
(cc) Adjustment of Conversion Rate For Subdivisions or Combinations of
-----------------------------------------------------------------
Common Stock. In the event the corporation, at any time or from time to time
- ------------
after the effective date of a written agreement by the corporation for the
initial sale of Series C Preferred Stock (hereinafter referred to as the
"Original Issue Date"), effects a subdivision or combination of its outstanding
- --------------------
Common Stock into a greater or lesser number of shares without a proportionate
and corresponding subdivision or combination of its outstanding Series B
Preferred Stock or Series C Preferred Stock, then and in each such event the
Series B Conversion Rate or Series C Conversion Rate, as applicable, shall be
increased or decreased proportionately.
(dd) Adjustment of Conversion Rate for Dividends, Distributions and
--------------------------------------------------------------
Common Stock Equivalents. In the event the corporation at any time or from time
- ------------------------
to time after the Original Issue Date shall make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights (hereinafter referred to as "Common Stock Equivalents")
------------------------
convertible into or entitling the holder thereof to receive additional shares of
Common Stock without payment of any consideration by such holder for such Common
Stock Equivalents or the additional shares of Common Stock, then and in each
such event the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable in payment of such dividend
or distribution or upon conversion or exercise of such Conversion Stock
Equivalents shall be deemed to be issued and outstanding as of the time of such
issuance or, in the event such a record date shall have been fixed, as of the
close of business on such record date. In each such event, the Conversion Rate
for the Series B Preferred Stock and Series C Preferred Stock shall be increased
as of the time of such issuance or, in the event such a record date shall have
been fixed, as of the close of business on such record date, by multiplying the
Conversion Rate for each such series by a fraction,
(i) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding or deemed to be issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date plus the number of shares of Common Stock issuable in payment of
such dividend or distribution or upon conversion or exercise of such Common
Stock Equivalents and
(ii) the denominator of which shall be the total number of shares of
Common Stock issued and outstanding or deemed to be issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date provided, however, (A) if such record date shall have been fixed and
such dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Rate for
-6-
<PAGE>
each such series shall be recomputed accordingly as of the close of business on
such record date and thereafter the Conversion Rate for each such series shall
be adjusted pursuant to this Section (C)(3)(dd) as of the time of actual payment
of such dividends or distribution; (B) if such Common Stock Equivalents provide,
with the passage of time or otherwise, for any decrease in the number of shares
of Common Stock issuable upon conversion or exercise thereof, the Conversion
Rate for each such series shall, upon any such decrease becoming effective, be
recomputed to reflect such decrease insofar as it affects the rights of
conversion or exercise of the Common Stock Equivalents then outstanding, and (C)
upon the expiration of any rights of conversion or exercise under any
unexercised Common Stock Equivalents, the Conversion Rate for each such series
computed upon the original issue thereof shall, upon such expiration, be
recomputed as if the only additional shares of Common Stock issued were the
shares of such stock, if any, actually issued upon the conversion or exercise of
such Common Stock Equivalents.
(ee) No Impairment. The corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section (C)(3) and in the taking of all such action as may be necessary
or appropriate in order to protect the Conversion Rights of the holders of the
Series B Preferred Stock and Series C Preferred Stock against impairment.
(ff) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Rates pursuant to this Section
(C)(3), the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series B Preferred Stock and Series C Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The corporation shall,
upon the written request at any time of any holder of Series B Preferred Stock
or Series C Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
applicable Conversion Rate at the time in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of the property which at the time would
be received upon the conversion of such holder's shares of Series B Preferred
Stock or Series C Preferred Stock.
(gg) Notices of Record Date. In the event of the establishment by the
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any Common Stock
Equivalents or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, the corporation shall mail to each holder of Preferred Stock,
at least 20 days prior to the date specified therein, notice specifying the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
-7-
<PAGE>
(hh) Reservation of Stock Issuable Upon Conversion. The corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series B Preferred Stock and Series C Preferred Stock such number
of its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all then outstanding shares of the Series B Preferred Stock
and Series C Preferred Stock; and, if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series B Preferred Stock and Series C
Preferred Stock, the corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(ii) Notices. Any notices required by the provisions of this Section
-------
(C)(3) to be given to the holders of shares of Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at such holder's address appearing on the books of the
corporation.
(jj) Issue Taxes. The corporation shall pay any and all issue and
-----------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series B Preferred Stock or Series C Preferred
Stock pursuant hereto; provided, however, that the corporation shall not be
obligated to pay any transfer taxes resulting from any transfer requested by any
holder in connection with any such conversion.
(4) Liquidation Preference.
----------------------
(aa) In the event of any liquidation, dissolution or winding up of the
corporation, either voluntary or involuntary, the holders of the Series B
Preferred Stock and Series C Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the corporation to the holders of the Series A Preferred Stock or Common Stock
by reason of their ownership thereof, the amount of (i) $1.4876 per share for
each share of Series B Preferred Stock then held by them, and (ii) $1.4876 per
share for each share of Series C Preferred Stock then held by them, and, in
addition, an amount equal to all declared but unpaid dividends on each such
series of Preferred Stock. If, upon the occurrence of such event, the assets
and funds thus distributed among the holders of the Series B Preferred Stock and
Series C Preferred Stock shall be insufficient to permit the payment to such
holders of the full preferential amount, then the entire assets and funds of the
corporation legally available for distribution shall be distributed ratably
among the holders of the Series B Preferred Stock and Series C Preferred Stock.
After payment has been made to the holders of the Series B Preferred Stock and
Series C Preferred Stock of the full amounts to which they shall be entitled as
aforesaid, any remaining assets shall be distributed ratably to the holders of
the corporation's Series B Preferred Stock and Series C Preferred Stock and
Common Stock on an as-converted basis.
-8-
<PAGE>
(bb) Certain Acquisitions.
--------------------
(i) Deemed Liquidation.
------------------
(A) For purposes of this Section (C)(4), a liquidation,
dissolution or winding up of the corporation shall be deemed to occur if the
corporation shall sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any other transaction or series of related transactions in which more
than 50% of the voting power of the corporation is disposed of, provided that
--------
this Section (C)(4)(bb)(i) shall not apply to a merger effected exclusively for
the purpose of changing the domicile of the corporation.
(B) In the event of a deemed liquidation as described
in Section (C)(4)(bb)(i)(A) above in which the aggregate consideration received
by the corporation is less than $8.00 per share on an as-converted basis,
provision shall be made in connection with such transaction and upon the
consummation thereof for the payment of the Series A Redemption Price (as
defined below) on or before December 31, 2002 to the holders of the Series A
Preferred Stock by the corporation or its successors or assigns.
(C) In the event of a deemed liquidation as described
in Section 4(bb)(i)(A) above in which the aggregate consideration received by
the corporation is equal to or greater than $8.00 per share on an as-converted
basis, the holders of Series A Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the corporation to the holders of the Common Stock by reason of their
ownership thereof, but pari passu with any distribution to the holders of the
Series B Preferred Stock and Series C Preferred Stock, the amount of $1.00 per
share of each share of Series A Preferred Stock then held by them, plus an
amount equal to all declared but unpaid dividends on the Series A Preferred
Stock.
(ii) Valuation of Consideration. In the event of a deemed
--------------------------
liquidation as described in Section (C)(4)(bb)(i) above, if the consideration
received by the corporation is other than cash or securities, its value will be
deemed its fair market value as determined in good faith by the Board of
Directors of the corporation. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability:
(1) If traded on a securities exchange or the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three days prior to the closing;
-9-
<PAGE>
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three days prior to the
closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Series C Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in Section (C)(4)(bb)(ii)(A) to reflect the
approximate fair market value thereof, as mutually determined by the corporation
and the holders of at least a majority of the voting power of all then
outstanding shares of Series C Preferred Stock.
(iii) Notice of Transaction. The corporation shall give each
---------------------
holder of record of Series B Preferred Stock and Series C Preferred Stock
written notice of such impending transaction not later than 10 days prior to the
shareholders' meeting called to approve such transaction, or 10 days prior to
the closing of such transaction, whichever is earlier, and shall also notify
such holders in writing of the final approval of such transaction. The first of
such notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section (C)(4), and the corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than 10 days after the
corporation has given the first notice provided for herein or sooner than 10
days after the corporation has given notice of any material changes provided for
herein; provided, however, that such periods may be shortened upon the written
consent of the holders of Series C Preferred Stock that are entitled to such
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of such Series C Preferred
Stock.
(iv) Effect of Noncompliance. In the event the requirements
-----------------------
of this Section (C)(4)(bb) are not complied with, the corporation shall
forthwith either cause the closing of the transaction to be postponed until such
requirements have been complied with, or cancel such transaction, in which event
the rights, preferences and privileges of the holders of Series B Preferred
Stock and Series C Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior to the date of the
first notice referred to in Section (C)(4)(bb)(iii) hereof.
(5) Protective Provisions.
---------------------
(aa) In addition to any other rights provided by law, so long
as any Series C Preferred Stock shall be outstanding, this corporation shall
not, without first obtaining
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<PAGE>
the affirmative vote or written consent of the holders of not less than 66-2/3%
in voting interest of such outstanding shares of Series C Preferred Stock,
voting together as a single class:
(i) effect (x) any merger (other than a merger with or into a
wholly-owned subsidiary of the corporation), (y) a sale of all or substantially
all of the assets of the corporation (other than to a wholly-owned subsidiary of
the corporation) or (z) any transaction or series of related transactions (other
than a public offering of the corporation's securities) in which the corporation
will have issued shares representing more than 50% of the voting power of the
corporation after giving effect to such transaction or transactions;
(ii) amend or repeal any provision of, or add any provision to, this
corporation's Bylaws if such action would alter or change the rights,
preferences or privileges of, or restrictions provided for the benefit of, the
Series C Preferred Stock in a way that is adverse to the holders of the Series C
Preferred Stock;
(iii) amend or repeal any provision of, or add any provision
to, this corporation's Articles of Incorporation, including without limitation,
any of the rights, preferences, privileges or restrictions relating to the
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock;
(iv) increase the authorized number of shares of Common
Stock or Preferred Stock or of any series of Preferred Stock;
(v) authorize or issue shares of any class of stock having any
preference or priority superior to or on a parity with any preference or
priority of the Series C Preferred Stock, or authorize or issue shares of stock
of any class or any bonds, debentures, notes or other obligations convertible
into or exchangeable for, or having option rights to purchase, any shares of
stock of this corporation having any preference or priority superior to or on a
parity with any preference or priority of the Series C Preferred Stock;
(vi) do any act or thing that would result in taxation of the
holders of Series C Preferred Stock under Section 305 of the Internal Revenue
Code of 1986;
(vii) declare or pay any dividend;
(viii) voluntarily dissolve, liquidate or wind up or carry out
any partial liquidation or distribution or transaction in the nature of a
partial liquidation or distribution; or
(ix) effect a repurchase of shares of Common Stock except a
repurchase at the original purchase price for such shares pursuant to Section
(C)(9) below, or except a repurchase that shall have been unanimously approved
by the Board of Directors.
-11-
<PAGE>
(6) Redemption.
----------
(aa) The Series C Preferred Stock shall not be redeemable.
(bb) The corporation shall redeem Series A Preferred Stock, from
any source of funds legally available therefor, on the earlier of (i) the
closing of the corporation's sale of Common Stock pursuant to an Initial Public
Offering, (ii) December 31, 2002 or (iii) at any time at the option of the Board
of Directors (each, a "Series A Redemption Date"). The corporation shall effect
------------------------
such redemption on the applicable Redemption Date by paying in cash in exchange
for the shares of Series A Preferred Stock to be redeemed a sum equal to $1.00
per share of Series A Preferred Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares) plus all declared or
accumulated but unpaid dividends on such shares (the "Series A Redemption
-------------------
Price"). Any redemption effected pursuant to this Section (C)(6)(bb) shall be
- -----
made on a pro rata basis among the holders of Series A Preferred Stock in
proportion to the number of shares of Series A Preferred Stock then held by such
holders.
(cc) The corporation may redeem Series B Preferred Stock, from
any source of funds legally available therefor, as provided in this Section
(C)(6)(cc). The corporation may effect such redemption at any time after a vote
of the shareholders of the corporation has been taken with respect to a proposed
amendment to the corporation's Articles of Incorporation as to which the holders
of the Series B Preferred Stock are entitled to a series vote under applicable
law (a "Series Amendment"), and (1) at least 66-2/3% of the then outstanding
----------------
Series C Preferred Stock have voted in favor of the Series Amendment, (2) the
Series Amendment is not approved by the holders of the Series B Preferred Stock,
and (3) the Series Amendment has the same effect on the Series B Preferred Stock
and the Series C Preferred Stock. The date of any such redemption of the Series
B Preferred Stock shall be referred to herein as the "Series B Redemption Date,"
------------------------
and together with the Series A Redemption Date, the "Redemption Date(s)." The
------------------
corporation shall effect such redemption on the Series B Redemption Date by
paying in cash in exchange for the shares of Series B Preferred Stock to be
redeemed a sum equal to $1.4876 per share of Series B Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) plus all declared but unpaid dividends on such shares (the " Series B
--------
Redemption Price," and together with the Series A Redemption Price, the
- -----------------
"Redemption Price(s)."). Any redemption effected pursuant to this Section
- --------------------
(C)(6)(cc) shall be made on a pro rata basis among the holders of Series B
Preferred Stock in proportion to the number of shares of Series B Preferred
Stock then held by such holders.
(dd) At least 15 but no more than 30 days prior to the Series A
Redemption Date or Series B Redemption Date, written notice shall be mailed,
first class postage prepaid, to each holder of record (at the close of business
on the business day next preceding the day on which notice is given) of the
Preferred Stock to be redeemed, at the address last shown on the records of the
corporation for such holder, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder, the
Redemption Date, the Redemption Price, the place at which payment may be
obtained and calling upon such holder to surrender to the corporation, in the
manner and at the place designated, his, her or its certificate or certificates
representing the shares to be redeemed (the "Redemption Notice").
-----------------
-12-
<PAGE>
Except as provided in Section (C)(6)(ee) below on or after any Redemption Date,
each holder of Series A Preferred Stock or Series B Preferred Stock, as
applicable, to be redeemed shall surrender to the corporation the certificate or
certificates representing such shares, in the manner and at the place designated
in the Redemption Notice, and thereupon the Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(ee) From and after the Series A Redemption Date or Series B
Redemption Date, unless there shall have been a default in payment of the Series
A Redemption Price or Series B Redemption Price, respectively, all rights of the
holders of shares of Series A Preferred Stock or Series B Preferred Stock
designated for redemption in the Redemption Notice as holders of Series A
Preferred Stock or Series B Preferred Stock (except the right to receive the
Redemption Price upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the corporation or be deemed to be outstanding for
any purpose whatsoever. Subject to the rights of series of Preferred Stock
which may from time to time come into existence, if the funds of the corporation
legally available for redemption of shares of Series A Preferred Stock or Series
B Preferred Stock on any Redemption Date are insufficient to redeem the total
number of shares of Series A Preferred Stock or Series B Preferred Stock to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably among the holders of
such shares to be redeemed based upon their holdings of Series A Preferred Stock
or Series B Preferred Stock. The shares of Series A Preferred Stock or Series B
Preferred Stock not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, at any time
thereafter when additional funds of the corporation are legally available for
the redemption of shares of Series A Preferred Stock or Series B Preferred
Stock, such funds will immediately be used to redeem the balance of the shares
which the corporation has become obliged to redeem on any Redemption Date but
which it has not redeemed.
(7) No Reissuance of Preferred Stock. No share or shares of Preferred
--------------------------------
Stock acquired by the corporation by reason of purchase, conversion or otherwise
shall be reissued, and all such shares shall be canceled, retired and eliminated
from the shares that the corporation shall be authorized to issue. The
corporation may from time to time take such appropriate corporate action as may
be necessary to reduce the authorized number of shares of Preferred Stock
accordingly.
(8) Residual Rights. All rights accruing to the outstanding shares of
---------------
this corporation not expressly provided for to the contrary herein shall be
vested in the Common Stock.
(9) Consent for Certain Repurchases of Common Stock Deemed to be
------------------------------------------------------------
Distributions. Each holder of Preferred Stock shall be deemed to have
- -------------
consented, for purposes of Sections 502, 503 and 506 of the California
Corporations Code, to distributions made by the
-13-
<PAGE>
corporation in connection with the repurchase of shares of Common Stock issued
to or held by employees or consultants upon termination of their employment or
services pursuant to agreements providing for such right of repurchase between
the corporation and such persons which have been approved by the Board of
Directors of the corporation.
(D) Common Stock.
------------
(1) Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when, if and as
declared by the Board of Directors of the corporation, out of any assets of the
corporation legally available therefor, such dividends as may be declared from
time to time by the Board of Directors.
(2) Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of the corporation, the assets of the corporation shall be distributed as
provided in Section III(C)(4) hereof.
(3) Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote, and shall be entitled to notice of any shareholders'
meeting in accordance with Section III(C)(2)(bb) and the Bylaws of this
corporation, and shall be entitled to vote upon such matters and in such manner
as may be provided by law.
(4) Protective Provision. In addition to any other rights provided by
--------------------
law, so long as any shares of Common Stock shall be outstanding, this
corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority in voting interest of such
outstanding shares of Common Stock, voting separately as a class, amend or
repeal Section III(D)(3) of these Articles of Incorporation.
IV
(A) Limitation on Directors' Liability. The liability of the directors of
----------------------------------
the corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
(B) Indemnification of Corporate Agents. The corporation is authorized to
-----------------------------------
provide indemnification of agents (as defined in Section 317 of the California
Corporations Code) through bylaw provisions, agreements with agents, vote of
shareholders or disinterested directors or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in Section
204 of the California Corporations Code with respect to actions for breach of
duty to the corporation and its shareholders.
(C) Repeal or Modification. Any repeal or modification of the foregoing
----------------------
provisions of this Article IV by the shareholders of the corporation shall not
adversely affect any right or protection of a director of the corporation
existing at the time of such repeal or modification."
-14-
<PAGE>
* * *
3. The foregoing amendment has been approved by the Board of Directors of
this corporation.
4. The foregoing amendment was approved by the holders of the requisite
number of shares of this corporation in accordance with Sections 902 and 903 of
the California General Corporation Law. The total number of outstanding shares
entitled to vote with respect to the foregoing amendment was 22,719 shares of
Common Stock and 21,987,000 shares of Preferred Stock. The number of shares
voting in favor of the foregoing amendment equaled or exceeded the vote
required. The percentage vote required was a majority of the outstanding shares
of Common Stock and a majority of the outstanding shares of Preferred Stock,
voting separately.
(Signature Page Follows)
-15-
<PAGE>
The undersigned certify under penalty of perjury under the laws of the
State of California that the matters set forth herein are true and correct of
our own knowledge.
Executed at Marina Del Rey, California, on January 7, 1998.
---------------------------
Gregory Koss, President
---------------------------
Craig W. Johnson, Secretary
-16-
<PAGE>
SONOMA SYSTEMS
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series C Preferred Stock Purchase Agreement (the "Agreement") is made
---------
as January 15, 1998 by and between Sonoma Systems, a California corporation (the
"Company"), the investors listed on Exhibit A attached hereto (each a
------- ---------
"Purchaser" and together the "Purchasers"), and with respect to Section 2 and
--------- ----------
Section 6, by Retix, a California corporation ("Retix").
-----
The parties hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED STOCK.
------------------------------------
1.1 SALE AND ISSUANCE OF SERIES C PREFERRED STOCK.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of State of
the State of California on or before the Initial Closing (as defined below) the
Amended and Restated Articles of Incorporation in the form attached hereto as
Exhibit B (the "Restated Articles").
- --------- -----------------
(b) Subject to the terms and conditions of this Agreement, each
Purchaser severally agrees to purchase at the Closing and the Company agrees to
sell and issue to each Purchaser at the Closing that number of shares of Series
C Preferred Stock set forth opposite each such Purchaser's name on Exhibit A
---------
attached hereto at a purchase price of $1.4876 per share. The shares of Series
C Preferred Stock issued to the Purchasers pursuant to this Agreement shall be
hereinafter referred to as the "Stock."
-----
1.2 CLOSING; DELIVERY.
-----------------
(a) The initial closing of the purchase and sale of the Stock
shall take place at the offices of Venture Law Group, A Professional
Corporation, 2800 Sand Hill Road, Menlo Park, California, on January 15, 1998
(the "Initial Closing") or at such other time and place as the Company and the
------- -------
Purchasers mutually agree upon, orally or in writing (the date of the Initial
hereinafter referred to as the "Initial Closing Date"). The subsequent
--------------------
Closing is closing(s) of the purchase and sale of the Stock (the "Subsequent
----------
Closing(s)") shall take place at a date and time agreed upon by the Company and
- ----------
the Purchasers participating in the respective Subsequent Closing (the date(s)
of the Subsequent Closing(s) is hereinafter referred to as the "Subsequent
-----------
Closing Date(s)"), which shall occur in any event no later than February 28,
- --------------
1998). In the event that Newbury Ventures does not purchase the entire 504,157
shares of Stock available for issuance at a Subsequent Closing(s), then
Crosspoint Venture Partners 1997, VantagePoint Associates, L.L.C. and Lazard
Freres & Co. L.L.C. each agree, severally and not jointly, to purchase 33-1/3%
of such remaining shares of Stock in a Subsequent Closing on or before February
28, 1998.
For purposes of this Agreement, the terms "Closing" and "Closing
------- -------
Date," unless otherwise indicated, refer to the applicable closing and closing
- ----
date of the Initial Closing or the Subsequent Closing(s), as the case may be.
-17-
<PAGE>
(b) At each Closing, the Company shall deliver to each Purchaser a
certificate representing the Stock being purchased thereby against payment of
the purchase price therefor by check payable to the Company or by wire transfer
to the Company's bank account.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company and Retix
---------------------------------------------
hereby jointly and severally represent and warrant to each Purchaser that,
except as set forth on a Schedule of Exceptions attached hereto as Exhibit C and
---------
subject to the limitations on liability with respect to Retix provided in
Section 6.18 of this Agreement:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its business. Retix Europe, Ltd. and Sonoma Systems Europe, Ltd.
(together, the "European Subsidiaries") are duly organized, validly existing
---------------------
and in good standing under the laws of England and Wales and have all requisite
corporate power and authority to carry on their respective businesses. The
Company and each European Subsidiary are duly qualified to transact business and
are in good standing in each jurisdiction in which the failure so to qualify
would have a material adverse effect on each entity's respective business or
properties.
2.2 CAPITALIZATION. The authorized capital of the Company consists,
--------------
or will consist, immediately prior to the Initial Closing, of:
(a) 19,250,000 shares of Preferred Stock, 1,000,000 shares of
which have been designated Series A Preferred Stock, all of which will be issued
and outstanding immediately prior to the Closing, 715,475 shares of which have
been designated Series B Preferred Stock, all of which will be issued and
outstanding immediately prior to the Closing, and 7,534,525 shares of which have
been designated Series C Preferred Stock, 1,484,525 of which will be issued and
outstanding immediately prior to the Closing. The rights, privileges and
preferences of the Preferred Stock are as stated in the Restated Articles. All
of the outstanding shares of Preferred Stock have been duly authorized, fully
paid and nonassessable and issued in compliance with all applicable federal and
state securities laws.
(b) 25,000,000 shares of Common Stock, 12,154 shares of which will be
issued and outstanding immediately prior to the Closing. All of the
outstanding shares of Common Stock have been duly authorized, fully paid and are
nonassessable and issued in compliance with all applicable federal and state
securities laws.
(c) The Company has reserved 2,750,000 shares of Common Stock for
issuance to officers, directors, employees and consultants of the Company
pursuant to its 1996 Stock Option Plan duly adopted by the Board of Directors
and approved by the Company shareholders (the "Stock Plan"). Of such reserved
----------
shares of Common Stock, 9,719 shares have been issued upon exercise of options
previously granted, options to purchase 1,705,000 shares have been granted and
are currently outstanding, and 1,045,000 shares of Common Stock remain available
for issuance to officers, directors, employees and consultants pursuant to the
Stock Plan.
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<PAGE>
(d) Except for outstanding options issued pursuant to the Stock
Plan, there are no outstanding options, warrants, rights (including conversion
or preemptive rights and rights of first refusal or similar rights) or
agreements, orally or in writing, for the purchase or acquisition from the
Company, either directly or indirectly, of any shares of its capital stock.
2.3 SUBSIDIARIES. The Company does not currently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. Retix currently owns 100% of the outstanding capital
Stock of Retix Europe, Ltd. ("Retix Europe"). Retix Europe currently owns
-------------
100% of the outstanding capital stock of Sonoma Systems Europe, Ltd. As soon as
reasonably practical after the Closing, Retix shall transfer to the Company all
of the capital stock of the European Subsidiaries, whereby the Company shall own
100% of the outstanding capital stock of the European Subsidiaries.
2.4 AUTHORIZATION. All corporate action on the part of the Company,
-------------
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement, the Amended and Restated Rights
Agreement, in the form attached hereto as Exhibit D (the "Rights Agreement") and
--------- ----------------
together with this Agreement, the "Agreements"), the performance of all
----------
obligations of the Company hereunder and thereunder and the authorization,
issuance (or reservation for issuance), sale, and delivery of the Stock and the
Common Stock issuable upon conversion of the Stock (together, the "Securities")
----------
have been taken or will be taken prior to the Closing, and the Agreements, when
executed and delivered by the Company, shall constitute valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of
general application affecting enforcement of creditors' rights generally, as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies, or (ii) to the extent the indemnification
provisions contained in the Rights Agreement may be limited by applicable
federal or state securities laws.
2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to
----------------------------
the Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, and all of the outstanding
capital stock of the European Subsidiaries as of the Closing, will be duly and
validly issued, fully paid and nonassessable and free of restrictions on
transfer other than restrictions on transfer under this Agreement, the Rights
Agreement and applicable state and federal securities laws. Based in part upon
the representations of the Purchasers in this Agreement and subject to the
provisions of Section 2.6 below, the Stock will be issued in compliance with all
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Stock has been duly and validly reserved for issuance, and
upon issuance in accordance with the terms of the Restated Articles, shall be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the Rights
Agreement and applicable federal and state securities laws and will be issued in
compliance with all applicable federal and state securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local
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<PAGE>
governmental authority on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement, except for filings pursuant to Section 25102(f) of the California
Corporate Securities Law of 1968, as amended, and the rules thereunder, other
applicable state securities laws and Regulation D of the Securities Act of 1933,
as amended (the "Securities Act").
--------------
2.7 LITIGATION. There is no action, suit, proceeding or
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company, Retix or either European Subsidiary, or with respect to the
Company's officers or directors, that questions the validity of the Agreements
or the right of the Company to enter into them, or to consummate the
transactions contemplated hereby or thereby, or that is reasonably likely to
result, either individually or in the aggregate, in any material adverse changes
in the assets, business, operations, condition or affairs of the Company or
either European Subsidiary or in any of their respective properties or assets,
financially or otherwise, or any change in the current equity ownership of the
Company or either European Subsidiary, nor is the Company aware that there is
any basis for the foregoing. Neither the Company, Retix or either European
Subsidiary nor, to the Company's knowledge, any of their respective officers or
directors, is a party or subject to, nor are any of the Company's nor either
European Subsidiary's respective assets or properties subject to, the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality relating to the Company or either European
Subsidiary's assets. There is no action, suit, proceeding or investigation by
the Company, Retix or any of the Company's officers or directors relating to the
Company or its assets or any material impairment of the right or ability of the
Company or either European Subsidiary to carry on their respective business as
now conducted or as proposed to be conducted, or any material liability on the
part of the Company or either European Subsidiary, currently pending or which
the Company or either European Subsidiary or, to the knowledge of the Company,
any of their respective officers or directors, intend to initiate.
2.8 INTELLECTUAL PROPERTY. The Company owns or possesses
---------------------
sufficient legal rights to all patents, patent applications, trademarks, service
marks, tradenames, copyrights, trade secrets, licenses, information and
proprietary rights and processes necessary for its business without any conflict
with, or infringement of, the rights of others. The Schedule of Exceptions
hereto contains a list or description of the registered trademarks, service
marks, tradenames, patents, patent applications and copyrights of the Company
and each European Subsidiary. There are no outstanding options, licenses or
agreements of any kind relating to the foregoing proprietary rights, other than
end-user licenses or agreements entered into in the ordinary course of business,
nor is the Company bound by or a party to any options, licenses or agreements of
any kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, proprietary rights or
processes of any other person or entity, other than end user licenses entered
into in the ordinary course of business. The Company is not aware of any third
party that is infringing or violating any of its patents, licenses, trademarks,
service marks, trade names, inventions, processes, formulae, trade secrets,
franchises, copyrights or other proprietary rights. Neither the Company nor
either European Subsidiary has received any communications alleging that the
Company has violated or, by conducting its business, would violate any of the
patents, trademarks, service marks, tradenames, copyrights, trade secrets or
-20-
<PAGE>
other proprietary rights or processes of any other person or entity. The Company
is not aware that any of its employees or employees of either European
Subsidiary is obligated under or in violation of any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with the use of such employee's best efforts to promote the
interest of the Company or that would conflict with the Company's business.
Neither the execution or delivery of this Agreement, nor the carrying on of the
Company's business by the employees of the Company or employees of either
European Subsidiary, nor the conduct of the Company's business as proposed,
will, to the Company's knowledge, conflict with or result in a breach of the
terms, conditions, or provisions of, or constitute a default under, any
contract, covenant or instrument under which any such employee is now obligated.
The Company does not believe it is or will be necessary to use any inventions of
any of its employees or employees of either European Subsidiary (or persons it
currently intends to hire) made prior to their employment by the Company or
either European Subsidiary.
2.9 COMPLIANCE WITH OTHER INSTRUMENTS.
---------------------------------
(a) Neither European Subsidiary is in violation of any provisions
of their respective Memoranda and Articles of Association. The Company is not in
violation or default of any provisions of its Restated Articles or Bylaws nor is
the Company nor either European Subsidiary in violation or default of any
instrument, judgment, order, writ, decree or contract to which they are a party
or by which they are bound or, to the Company's knowledge, of any provision of
federal or state statute, rule or regulation applicable to them. The execution,
delivery and performance of the Agreements and the consummation of the
transactions contemplated hereby or thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company or either European Subsidiary.
(b) To the Company's knowledge, the Company and each European
Subsidiary has avoided every condition, and has not performed any act, the
occurrence of which would result in the loss of any right granted under any
license, distribution agreement or other agreement.
(c) Neither the Company nor either European Subsidiary is a party
to or bound by any judgment, order, writ or decree which materially affects, or,
so far as the Company may now reasonably foresee in the future, is reasonably
likely to adversely affect their respective business, their respective
properties or financial condition.
2.10 AGREEMENTS; ACTION.
------------------
(a) There are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof. There are no agreements, understandings or proposed
transactions between either European Subsidiary and any of its respective
officers, directors, affiliates or any affiliate thereof.
-21-
<PAGE>
(b) Except for agreements explicitly contemplated by the Agreements,
there are no agreements, understandings, instruments, contracts, commitments or
proposed transactions to which the Company or any of European Subsidiaries is a
party or by which it is bound that involve (i) obligations (contingent or
otherwise) of, or payments to, the Company or any of the European Subsidiaries
in excess of, $25,000, (ii) the license of any patent, copyright, trade secret
or other proprietary right to or from the Company or any of the European
Subsidiaries, other than end-user licenses granted in the ordinary course of
business, or (iii) the grant of rights to manufacture, produce, assemble,
license, market, or sell its products to any other person or affect the
Company's exclusive right to develop, manufacture, assemble, distribute, market
or sell its products (collectively, "Contracts"). All such Contracts are valid,
---------
binding and in full force and effect in all material respects, without any
material breach by any party thereto.
(c) Neither the Company nor either European Subsidiary has (i)
declared or paid any dividends, or authorized or made any distribution upon or
with respect to any class or series of their respective capital stock, (ii)
neither the Company nor either European Subsidiary has any indebtedness for
borrowed money, or other liabilities (fixed or contingent), which they have
directly or indirectly created, incurred, assumed, or guaranteed, or with
respect to which the Company or either European Subsidiary has otherwise become
directly or indirectly liable other than trade payables and leases entered into
in the ordinary course of business, (iii) made any loans or advances to any
person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of their respective assets or rights,
other than the sale of its inventory in the ordinary course of business.
(d) Neither the Company nor either European Subsidiary is a party to
or is bound by any contract, agreement or instrument, or subject to any
restriction under its Restated Articles or Bylaws or Memorandum and Articles of
Association, as applicable, that adversely affects or, so far as the Company may
now reasonably foresee in the future, is reasonably likely to adversely affect
their respective business, assets, properties or financial condition.
(e) Neither the Company nor either European Subsidiary has any
liability or obligation in connection with any Contract which has been
terminated by the Company or either European Subsidiary within the last three
years or for which notice of termination has been delivered by the Company or
other European Subsidiary.
2.11 DISCLOSURE. The Company has fully provided the Purchasers with
----------
all the information that the Purchasers have requested for deciding whether to
acquire the Stock and all information that the Company believes is reasonably
necessary to enable the Purchasers to make such a decision, including certain of
the Company's projections describing its business (collectively, the "Business
--------
Plan"). No representation or warranty of the Company contained in this
- ----
Agreement and the exhibits attached hereto, any certificate furnished or to be
furnished to Purchasers at the Closing, or the Business Plan (when read
together) contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
The Business Plan and the financial and other projections contained in the
-22-
<PAGE>
Business Plan were prepared in good faith and management of the Company
reasonably believes that the projections are attainable; however, neither the
Company nor Retix warrants that the Company will achieve such projections.
2.12 NO CONFLICT OF INTEREST. Neither the Company nor either
-----------------------
European Subsidiary is indebted, directly or indirectly, to, nor is the Company
or either European Subsidiary a party to any transaction or arrangement with
Retix, any of the officers or directors of the Company or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. None of Retix's or the Company's or the
European Subsidiary's officers or directors, or any members of their immediate
families, are, directly or, to the Company's knowledge, indirectly, indebted to
the Company or either European Subsidiary (other than in connection with
purchases of the Company's or the European Subsidiary's stock) or, to the
Company's knowledge, have any direct or indirect ownership interest in any firm
or corporation with which the Company is affiliated or with which the Company
has a business relationship, or any firm or corporation which competes with the
Company except that officers, directors and/or shareholders of the Company may
own stock in (but not exceeding one percent of the outstanding capital stock of)
any publicly traded company that may compete with the Company. To the Company's
knowledge, none of the Company's or either European Subsidiary's officers or
directors or any members of their immediate families are, directly or
indirectly, interested in any material contract with the Company or either
European Subsidiary. Neither the Company nor either European Subsidiary is a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
2.13 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as
----------------------------------------
contemplated in the Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity. To the Company's knowledge, except as contemplated in the Rights
Agreement, no shareholder of the Company has entered into any agreements with
respect to the voting of capital shares of the Company.
2.14 TITLE TO PROPERTY AND ASSETS. The Company and each European
----------------------------
Subsidiary owns their respective property and assets free and clear of all
mortgages, liens, loans and encumbrances, except such encumbrances and liens
which arise in the ordinary course of business and do not materially impair the
Company's nor either European Subsidiary's ownership or use of such property or
assets. With respect to the property and assets each leases, the Company and
each European Subsidiary is in compliance with such leases and holds a valid
leasehold interest free of any liens, claims or encumbrances. All of such
property and assets are in good and operative condition, reasonable wear and
tear excepted.
2.15 FINANCIAL STATEMENTS. The Company has delivered to each
--------------------
Purchaser its unaudited consolidated financial statements (including balance
sheet, income statement and statement of cash flows) as of December 27, 1997 and
for the twelve-month period then ended (collectively, the "Financial
---------
Statements"). The Financial Statements have been prepared in accordance with
- ----------
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated, except that the Financial Statements may not
contain all footnotes required by generally accepted accounting principles which
would not, individually, or in the aggregate, be material. The Financial
Statements fairly present the financial condition and operating results of the
Company and each European Subsidiary as of the dates, and for the periods,
indicated therein, subject to normal year-end audit adjustments which would not,
individually or
-23-
<PAGE>
in the aggregate, be material. The Financial Statements: (i) contain and reflect
adequate provisions for all liabilities and all taxes, federal, state, local or
foreign, with respect to the periods then ended and all prior periods; (ii) with
respect to contracts and commitments, contain and reflect adequate reserves for
all reasonably anticipated losses and costs and expenses in excess of expected
receipts. Except as set forth in the Financial Statements, since December 27,
1997, neither the Company nor either European Subsidiary has accrued, and none
of their respective assets or properties are subject to, any liabilities or
obligations (accrued, absolute, contingent or otherwise), whether or not such
liabilities are normally shown or reflected on a balance sheet prepared in a
manner consistent with generally accepted accounting principles, other than
unsecured trade accounts payable arising in the ordinary course of business,
federal, or state income taxes accrued in respect of the operations of the
Company and each European Subsidiary or other normal expenses and liabilities
accrued in the ordinary course of business, which liabilities do not exceed
$50,000 in the aggregate. So far as the Company is aware, there are no facts in
existence which are reasonably likely to serve as the basis for any liabilities
or obligations of the Company nor either European Subsidiary not disclosed in
this Agreement, the Financial Statements or the Schedules attached hereto.
2.16 CHANGES. Since December 27, 1997, there has not been:
-------
(a) any change in the assets, liabilities, financial condition
or operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business that have not been
individually, or in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties or
financial condition of the Company (as such business is presently conducted and
as it is proposed to be conducted in the Business Plan);
(c) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the business, properties or
financial condition of the Company (as such business is presently conducted and
it is proposed to be conducted in the Business Plan);
(e) any material change to a material contract or agreement by
which the Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee, officer, director or shareholder;
-24-
<PAGE>
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any officer or key
employee of the Company; and the Company, is not aware of any impending
resignation or termination of employment of any such officer or key employee;
(i) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(j) any loan or guarantee made by the Company to or for the benefit of
its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business;
(k) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
(l) any declaration, setting aside or payment or other distribution in
respect to any of the Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by the Company;
(m) to the Company's knowledge, any other event or condition of any
character that is reasonably likely to materially and adversely affect the
business, properties or financial condition of the Company (as presently
conducted and as proposed to be conducted in the Business Plan); or
(n) any arrangement or commitment by the Company to do any of the
things described in this Section 2.16.
For the purposes of this Section 2.16, the term "Company" shall
include the European Subsidiaries.
2.17 EMPLOYEE BENEFIT PLANS. There is no pension, health, profit
----------------------
sharing, bonus, stock purchase, stock option, hospitalization, insurance,
severance, vacation, sick pay or any other employee benefit or welfare benefit
plan with respect to any officer or employee of the Company or either European
Subsidiary, including, without limitation, any Employee Benefit Plan as defined
in the Employee Retirement Income Security Act of 1974.
2.18 TAX RETURNS AND PAYMENTS. The Company and each European Subsidiary
------------------------
have filed all tax returns and reports as required by applicable law. These
returns and reports are true and correct in all material respects. The Company
and each European Subsidiary have paid all taxes and other assessments due. The
Company has not elected to be treated as an S Corporation or a collapsible
corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has
it made any other elections pursuant to the Internal Revenue Code of 1986, as
amended (other than elections that relate solely to methods of accounting,
depreciation or amortization) that would have a material effect on the Company,
its financial condition, its
-25-
<PAGE>
business as presently conducted or proposed to be conducted in the Business Plan
or any of its properties or material assets. Neither the Company or either
European Subsidiary has ever had any tax deficiency proposed or assessed against
it that has not been discharged and has not executed any waiver of any statute
of limitations on the assessment or collection of ant tax or governmental
charge.
2.19 INSURANCE. The Company and each European Subsidiary have
---------
adequate insurance, with financially sound and reputable insurers, with respect
to their respective properties, business and operations, that are of a character
customarily insured by entities engaged in the same or a similar business
similarly situated, against loss or damage of the kinds customarily insured
against by such entities, which insurance is of such types (including public
liability insurance) as are customarily carried under similar circumstances by
such other entities. The Company has delivered a list of all of such insurance,
including coverage amounts and deductibles, to the Purchasers or their
representatives.
2.20 LABOR AGREEMENTS AND ACTIONS. Neither the Company nor either
----------------------------
European Subsidiary is bound by or subject to (and none of their respective
assets or properties are bound by or subject to) any written or oral, express or
implied, contract, commitment or arrangement with any labor union, and no labor
union has requested or, to the knowledge of the Company, has sought to represent
any of the employees, representatives or agents of the Company. There is no
strike or other labor dispute involving the Company or either European
Subsidiary pending, or to the knowledge of the Company threatened, which could
have a material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company or either European Subsidiary, nor
is the Company aware of any labor organization activity involving its employees.
The employment of each officer and employee of the Company and each European
Subsidiary is terminable at the will of the Company. The Company and each
European Subsidiary have complied in all material respects with all applicable
state and federal equal employment opportunity laws and with other laws related
to employment.
2.21 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS.
------------------------------------------------------------
Each employee, consultant and officer of the Company and each European
Subsidiary has executed an agreement with the Company and each European
Subsidiary, as applicable, regarding confidentiality and proprietary information
substantially in the form or forms delivered to the counsel for the Purchasers.
The Company is not aware that any of its employees or consultants is in
violation thereof, and the Company will use its best efforts to prevent any such
violation.
2.22 PERMITS. The Company and each European Subsidiary have all
-------
franchises, permits, licenses and any similar authority necessary for the
conduct of their respective business as presently proposed to be conducted in
the Business Plan, the lack of which could materially and adversely affect the
business, properties or financial condition of the Company. Such material
franchises, permits, licenses and similar authority are in full force and
effect, no material violations have been or are expected to have been recorded
in respect thereof, and no proceeding is pending or, to the knowledge of the
Company, threatened that could result in the revocation or limitation of any of
such franchises, permits, licenses or similar authority.
-26-
<PAGE>
The Company has conducted its business so as to comply in all material respects
with all such franchises, permits, licenses and similar authority.
2.23 CORPORATE DOCUMENTS. The Restated Articles and Bylaws of the
-------------------
Company are in the form provided to counsel for the Purchasers. The Memoranda
and Articles of Association for each European Subsidiary are in the form as
provided to Purchaser's counsel. The copy of the minute books of the Company and
each European Subsidiary provided to the Purchasers' counsel contains minutes of
all meetings of directors, committees thereof, and shareholders and all actions
by written consent without a meeting by the directors and shareholders since the
date of incorporation and reflects all actions by the directors, committees
thereof, and shareholders with respect to all transactions referred to in such
minutes accurately in all material respects.
2.24 QUALIFIED SMALL BUSINESS STOCK. The Company represents and
------------------------------
warrants to the Purchasers that, to the Company's knowledge, the Stock should
qualify as "Qualified Small Business Stock" as defined in Section 1202(c)
------------------------------
of the Internal Revenue Code of 1986, as amended as of the date hereof.
2.25 REAL PROPERTY HOLDING COMPANY. The Company is not a real
-----------------------------
property holding company within the meaning of section 897 of the Code.
2.26 INVENTORIES. All of the inventories of the Company and each
-----------
European Subsidiary are, and on the Closing Date all of the items comprising the
inventories of the Company and each European Subsidiary will become usable and
saleable in the ordinary course of business of the Company, exclusive of
inventories against which reserves have been provided on the December 27, 1997
balance sheet. No items included in the inventories have been pledged as
collateral or are held by the Company or either European Subsidiary on a
consignment from others. All inventories shown in the Financial Statements are
valued at the lower of cost (determined on a first in first out basis,) or
market value.
2.27 ACCOUNTS RECEIVABLE. The Accounts Receivables reflected in the
-------------------
December 27, 1997 balance sheet and all accounts receivable created after the
date thereof, arose from valid sales in the ordinary course of business of the
Company and each European Subsidiary and have been collected or to the Company's
best knowledge are collectible in full, net of the allowance from uncollectible
amounts set forth on the December 27, 1997 balance sheet.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
------------------------------------------------
hereby represents and warrants severally and not jointly to the Company that:
3.1 AUTHORIZATION. Such Purchaser has full power and authority
-------------
to enter into this Agreement. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement of
creditors' rights generally, and as limited by laws relating to the availability
of a specific performance, injunctive relief, or other equitable remedies, or
(b) to the extent the
-27-
<PAGE>
indemnification provisions contained in the Rights Agreement may be limited by
applicable federal or state securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
---------------------------------
with the Purchaser in reliance upon the Purchaser's representation to the
Company, which by the Purchaser's execution of this Agreement, the Purchaser
hereby confirms, that the Securities to be acquired by the Purchaser will be
acquired for investment for the Purchaser's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that the Purchaser has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, the Purchaser further represents that the Purchaser does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any third
person, with respect to any of the Securities. The Purchaser has not been formed
for the specific purpose of acquiring the Securities.
3.3 DISCLOSURE OF INFORMATION. The Purchaser believes that it,
-------------------------
or its representatives, have received all information as such Purchaser
considers necessary for evaluating the risks and merits of acquiring the
Securities and has had the opportunity to make further inquiries of the Company
and its representatives for additional information. The foregoing, however, does
not limit or modify the representations and warranties of the Company in Section
2 of this Agreement or the right of each Purchaser to rely thereon.
3.4 RESTRICTED SECURITIES. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Securities indefinitely
unless they are registered with the Securities and Exchange Commission (the
"SEC") and qualified by state authorities, or an exemption from such
---
registration and qualification requirements is available. The Purchaser
acknowledges that the Company has no obligation to register or qualify the
Securities for resale except as set forth in the Rights Agreement. The Purchaser
further acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Securities,
and on requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
3.5 NO PUBLIC MARKET. The Purchaser understands that no public
----------------
market now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 LEGENDS. The Purchaser understands that the Securities,
-------
and any securities issued in respect of or exchange for the Securities, may bear
one or all of the following legends:
-28-
<PAGE>
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor
-------------------
as defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
3.8 FOREIGN INVESTORS. If the Purchaser is not a United States
-----------------
person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986,
as amended), such Purchaser hereby represents that it has satisfied itself as to
the full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Stock or any use of this Agreement, including
(i) the legal requirements within its jurisdiction for the purchase of the
Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii)
any governmental or other consents that may need to be obtained, and (iv) the
income tax and other tax consequences, if any, that may be relevant to the
purchase, holding, redemption, sale, or transfer of the Stock. Such Purchaser's
subscription and payment for and continued beneficial ownership of the Stock,
will not violate any applicable securities or other laws of the Purchaser's
jurisdiction.
4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations
----------------------------------------------------
of each Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 PERFORMANCE. The Company shall have performed and complied with
-----------
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 COMPLIANCE CERTIFICATE. The President or Chief Financial
----------------------
Officer of the Company shall deliver to the Purchasers at the Closing a
certificate certifying that the conditions specified in Sections 4.1 and 4.2
have been fulfilled.
-29-
<PAGE>
4.4 QUALIFICATIONS. All authorizations, approvals or permits,
--------------
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Stock pursuant to this Agreement shall be obtained and effective as of
the Closing. No stop order or other order enjoining the sale of the Stock shall
have been issued and no proceedings for such purpose shall be pending or, to the
knowledge of the Company, threatened by the SEC, the California Commissioner of
Corporations, or similar of any other state having jurisdiction over this
transaction. At the time of the Closing, the sale and issuance of the Stock
shall be legally permitted by all laws and regulations to which the Purchasers
and the Company are subject.
4.5 OPINION OF COMPANY COUNSEL. The Purchasers shall have received
--------------------------
from Venture Law Group, counsel for the Company, an opinion, dated as of the
Closing, in substantially the form of Exhibit E.
---------
4.6 BOARD OF DIRECTORS. As of the Closing, the Board shall be
------------------
comprised of: Robert Hoff, Jeffrey Marshall and the Chief Executive Officer of
Sonoma Systems. As of the Closing, the Bylaws (or the Restated Articles) shall
provide that Board shall consist of not less than four nor more than seven
directors, with the initial number at five, which number shall not be changed
without the affirmative vote or written consent of the holders of not less than
66-2/3% in voting interest of the Stock. In addition, the Bylaws shall provide
indemnity to the Company's officers and directors to the fullest extent
authorized by law.
4.7 RIGHTS AGREEMENT. The Company and each Purchaser shall have
----------------
executed and delivered the Rights Agreement in substantially the form attached
as Exhibit D.
---------
4.8 RESTATED ARTICLES. The Company shall have filed the Restated
-----------------
Articles with the Secretary of State of California on or prior to the Initial
Closing Date, which shall continue to be in full force and effect as of the
Closing Date.
4.9 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT.
-----------------------------------------------------------
The Company and each of its employees shall have entered into the Company's
standard form Confidential Information and Invention Assignment Agreement, in
substantially the form provided to the Purchasers.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations
--------------------------------------------------
of the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 PERFORMANCE. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
-30-
<PAGE>
5.3 QUALIFICATIONS. All authorizations, approvals or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing. No stop order or other order enjoining the sale of the Stock shall have
been issued and no proceedings for such purpose shall be pending or, to the
knowledge of the Company, threatened by the SEC, the California Commissioner of
Corporations, or similar officer of any other state having jurisdiction over
this transaction. At the time of the Closing, the sale and issuance of the Stock
shall be legally permitted by all laws and regulations to which the Purchasers
and the Company are subject.
6. MISCELLANEOUS.
-------------
6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement, any investigation made by any
Purchaser, and the Closing of the transactions contemplated hereby and shall in
no way be affected by any investigation of the subject matter thereof made by or
on behalf of the Purchasers or the Company. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto shall be deemed to be representations and warranties
by the Company hereunder as of the date of such certificate or instrument.
6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
6.4 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 TITLES AND SUBTITLES. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 NOTICES. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at
-31-
<PAGE>
such party's address as set forth below or on Exhibit A hereto, or as
---------
subsequently modified by written notice.
6.7 FINDER'S FEE. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which each Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.8 FEES AND EXPENSES. The Company shall pay at the Closing the
-----------------
reasonable fees and expenses of Stradling, Yocca, Carlson & Rauth, the counsel
for the Purchasers, incurred with respect to this Agreement, the documents
referred to herein and the transactions contemplated hereby and thereby,
provided such fees and expenses do not exceed $45,000.
6.9 ATTORNEY'S FEES. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
----------------------
amended (either generally or in a particular instance, either retroactively or
prospectively, and either for a specified period of time or indefinitely), with
the written consent of the Company and the holders of at least a majority of the
Common Stock issued or issuable upon conversion of the Stock, except that any
amendment to Section 2 herein or the Schedule of Exceptions relating thereto
which would result in an increase in the liability of Retix under Section 6.18
herein or otherwise, as well as any amendment to such Section 6.18, shall
require the further written consent of Retix. Any amendment or waiver effected
in accordance with this Section 6.10 shall be binding upon the Purchasers and
each transferee of the Stock (or the Common Stock issuable upon conversion
thereof), each future holder of all such securities, the Company, and, with
respect to Section 2 and Section 6.18 if amended as set forth in the prior
sentence, Retix.
6.11 SEVERABILITY. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(a) such provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any such
right, power or remedy of such non-breaching
-32-
<PAGE>
or non-defaulting party nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any party, shall be cumulative
and not alternative, except that with respect to Retix, such remedies shall be
restricted to those provided in Section 6.18 herein.
6.13 ENTIRE AGREEMENT. This Agreement, and the documents referred
----------------
to herein constitute the entire agreement between the parties hereto pertaining
to the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE
------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
6.15 CONFIDENTIALITY. Each party hereto agrees that, except with
---------------
the prior written permission of the other party and except as required by
applicable law, it shall at all times keep confidential and not divulge, furnish
or make accessible to anyone any confidential information, knowledge or data
concerning or relating to the business or financial affairs of the other parties
to which such party has been or shall become privy by reason of this Agreement,
discussions or negotiations relating to this Agreement, the performance of its
obligations hereunder or the ownership of Stock purchased hereunder. The
provisions of this Section 6.15 shall be in addition to, and not in substitution
for, the provisions of any separate nondisclosure agreement executed by the
parties hereto with respect to the transactions contemplated hereby.
6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges
----------------------------
that it is not relying upon any person, firm or corporation, other than the
Company and its officers and directors, in making its investment or decision to
invest in the Company. Each Purchaser agrees that no Purchaser nor the
respective controlling persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable to any other Purchaser for any action
heretofore or hereafter taken or omitted to be taken by any of them in
connection with the purchase of the Securities.
6.17 WAIVER OF CONFLICTS. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES
-------------------
THAT VENTURE LAW GROUP, COUNSEL FOR THE COMPANY
-33-
<PAGE>
AND RETIX, HAS IN THE PAST PERFORMED AND MAY CONTINUE TO PERFORM LEGAL SERVICES
FOR CERTAIN OF THE PURCHASERS IN MATTERS UNRELATED TO THE TRANSACTIONS DESCRIBED
IN THIS AGREEMENT, INCLUDING THE REPRESENTATION OF SUCH PURCHASERS IN VENTURE
CAPITAL FINANCINGS AND OTHER MATTERS. ACCORDINGLY, EACH PARTY TO THIS AGREEMENT
HEREBY (A) ACKNOWLEDGES THAT THEY HAVE HAD AN OPPORTUNITY TO ASK FOR INFORMATION
RELEVANT TO THIS DISCLOSURE; AND (B) GIVES ITS INFORMED CONSENT TO VENTURE LAW
GROUP'S REPRESENTATION OF CERTAIN OF THE PURCHASERS IN SUCH UNRELATED MATTERS
AND TO VENTURE LAW GROUP'S REPRESENTATION OF THE COMPANY AND RETIX IN CONNECTION
WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
6.18 INDEMNIFICATION.
---------------
(a) Indemnity.
---------
(i) Retix shall indemnify the Company in the manner herein
provided against and in respect of any loss, cost, expense, liability, judgment
or damage (including reasonable legal fees and expenses) incurred by the
Company, directly or indirectly, caused by or arising from any breach of the
representations and warranties set forth in Section 2 of this Agreement
(collectively, the "Losses"). Retix will not be liable under this Section 6.18
------
with respect to the first $150,000 in aggregate Losses. Solely for purposes of
illustration, in the event of an initial Loss totaling $150,000, or series of
Losses totaling $150,000 in the aggregate, Retix shall have no liability under
this Section 6.18; however, thereafter Retix shall be liable under this Section
6.18 for any and all further Losses up to the Indemnity Cap (as defined below).
(ii) Notwithstanding any other provision herein to the
contrary, in no event shall Retix be liable to the Company for Losses in excess
of $3,270,000 plus the total number of shares of the Company's Series A
Preferred Stock held by Retix as of the Closing (the "Indemnity Cap"). In
-------------
addition, Retix's liability under this Section 6.18 shall be net of the
following amounts: (1) Retix's liability for any Loss shall be net of amounts
refunded to the Company for taxes paid by Retix on behalf or for the account of
Retix Europe Ltd. or Sonoma Systems Europe Ltd., and (2) Retix's liability for
any Losses related to any of the Company's customers or distributors or the
Company's products shall be net of the aggregate amount of the Specified
Reserves. As used herein, the "Specified Reserves" shall mean all reserves and
------------------
allowances for doubtful accounts, sales returns, inventory shrinkage and
obsolescence and warranty claims reflected in the Company's balance sheet as of
December 27, 1997.
(b) Payment of Claims. If the Company shall have any claim of
-----------------
indemnification pursuant to this Section 6.18, the Company shall promptly give
formal written notice thereof to Retix, including a brief description of the
facts or other matters upon which such claim is based and the amount of the Loss
as reasonably determined by the Company. The failure of the Company to give
prompt notice shall not limit the right of the Company to make a claim unless
Retix shall be materially prejudiced by such failure. Retix shall within
fifteen (15)
-34-
<PAGE>
business days following receipt of such notice deliver to the Company (i) a
number of shares of the Company's Series A Preferred Stock, in whole shares,
most nearly equal to the sum of the amount of the Loss to be satisfied divided
by the Series A Price (as defined below), (ii) a number of shares of the
Company's Series B Preferred Stock, in whole shares, most nearly equal to the
sum of the amount of the Loss to be satisfied divided by the Series B Price (as
defined below), (iii) a number of shares of the Company's Series C Preferred
Stock, in whole shares, most nearly equal to the sum of the amount of the Loss
to be satisfied divided by the Series C Price (as defined below), (iv) an amount
of cash equal to the amount of the Loss to be satisfied, or (v) any combination
of the foregoing as determined by Retix in its discretion. As used herein, the
"Series A Price" shall be $1.00 per share, and the "Series B Price" and the
-------------- --------------
"Series C Price" shall each be equal to the most recent price at which the
--------------
Company has sold its capital stock to professional or institutional investors in
a financing in which the Company has received aggregate net proceeds of at least
$5,000,000.
(c) Dispute Resolution. Disputes with respect to any claims of
------------------
indemnification hereunder shall be resolved as follows:
(i) If Retix shall, in good faith, notify the Company in writing of
its objection to a claim of indemnification hereunder, including a brief
description of the facts or other matters upon which such objection is based,
the Company and Retix shall attempt in good faith to agree upon the rights of
the respective parties with respect to each of such claims.
(ii) If no such agreement can be reached after good faith
negotiation, either Retix or the Company may demand arbitration of the matter
unless the amount of the Loss is at issue in pending litigation with a third
party, in which event arbitration shall not be commenced until such amount is
ascertained or both parties agree to arbitration. Any arbitration hereunder
shall be conducted by three arbitrators. Retix and the Company shall each select
one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The decision of a majority of the three arbitrators as to the
validity and amount of any Loss shall be binding and conclusive upon the parties
to this Agreement. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may
be entered in any court having jurisdiction. Any such arbitration shall be held
in Los Angeles, California, under the rules then in effect of the American
Arbitration Association.
(iv) If the arbitrators shall determine that some or all of the
subject Loss is to be paid, Retix shall within fifteen (15) business days
following receipt of a copy of such determination deliver to the Company the
amount of the Loss to be satisfied in accordance with the provisions of Section
6.18(b) above.
(d) Third Party Claims. In the event the Company becomes aware of a
------------------
third party claim which the Company believes may result in a claim of
indemnification under this Section 6.18, the Company shall notify Retix, which
shall be entitled, at its expense, to
-35-
<PAGE>
participate in any defense of such claim, or in its discretion, assume overall
control of such defense if the maximum liability (including attorneys' fees and
costs) under such claim would not exceed the Liability Cap. Retix shall have the
right in its sole discretion to settle any such claim so long as the settlement
does not result in Losses in excess of the Indemnity Cap and Retix has
acknowledged its responsibility under the indemnity provisions of this Section
6.18 for such claim.
(e) Termination. The obligations of Retix under this Section 6.18
-----------
shall apply only to claims with respect to Losses made on or before January 15,
1999.
(g) Exclusive Remedy. In the absence of fraud, the indemnity provided
----------------
in this Section 6.18 shall be the sole and exclusive remedy of the Company and
the Investors against Retix with respect to all losses, costs or expenses
incurred by the Company or the Investors pursuant to the transactions
contemplated by this Agreement.
6.19 CAPITAL CONTRIBUTION. At the Closing, all indebtedness of the
--------------------
Company to Retix as of January 8, 1998 shall be discharged and canceled and
shall be treated as a capital contribution by Retix to the Company. Any
indebtedness of the Company to Retix incurred after January 8, 1998 shall be
repaid by the Company in accordance with the terms thereof.
[Signature Pages Follow]
-36-
<PAGE>
The parties have executed this Series C Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
SONOMA SYSTEMS
By:_____________________________________
Name:___________________________________
(print)
Title:__________________________________
Address: 4640 Admiralty Way
Marina del Rey, CA 90292-6695
PURCHASERS:
________________________________________
(Print Name of Purchaser)
By:_____________________________________
Name:___________________________________
(print)
Title:__________________________________
Address:________________________________
________________________________
As to Sections 2 and 6 Only:
RETIX:
By:_____________________________________
Name:___________________________________
(print)
Title:__________________________________
Address: 4640 Admiralty Way
Marina del Rey, CA 90292-6695
SIGNATURE PAGE TO PURCHASE AGREEMENT
<PAGE>
EXHIBITS
--------
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Amended and Restated Articles of Incorporation
Exhibit C - Schedule of Exceptions to Representations and Warranties
Exhibit D - Form of Amended and Restated Rights Agreement
Exhibit E - Form of Legal Opinion of Venture Law Group
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
INITIAL CLOSING
---------------
January 15, 1998
<TABLE>
<CAPTION>
Name Number of Shares Total Purchase Price
---- ---------------- --------------------
<S> <C> <C>
Rock Ventures, L.L.C. 33,611 $49,999.73
Three Allied Drive
Suite 135
Dedham, MA 02026
VantagePoint Venture Associates 1996 2,520,838 $3,749,998.60
By: VantagePoint Associates, L.L.C.
1001 Bayhill Drive
San Bruno, CA 94066
Crosspoint Venture Partners 1997 2,520,838 $3,749,998.60
18552 MacArthur Boulevard
Suite 400
Irvine, CA 92612
Lazard Freres & Co. L.L.C. 470,556 $699,999.10
30 Rockefeller Center
New York, NY 10022
Total: 5,545,843 $8,249,996.03
</TABLE>
<TABLE>
<CAPTION>
SECOND CLOSING
--------------
___________ ___, 1998
Name Number of Shares Total Purchase Price
---- ---------------- --------------------
<S> <C> <C>
504,157 $749,983.95
TOTAL: 6,050,000 $8,999,979.98
- -----
</TABLE>
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
<PAGE>
EXHIBIT B
---------
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
-3-
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS TO
REPRESENTATIONS AND WARRANTIES
-4-
<PAGE>
EXHIBIT D
---------
AMENDED AND RESTATED RIGHTS AGREEMENT
-5-
<PAGE>
EXHIBIT E
---------
LEGAL OPINION
OF
VENTURE LAW GROUP
-6-
<PAGE>
SONOMA SYSTEMS
AMENDED AND RESTATED RIGHTS AGREEMENT
This Amended and Restated Rights Agreement (the "Agreement") is entered
---------
into as of January 15, 1998, by and among Sonoma Systems, a California
corporation (the "Company"), the investors set forth on Exhibit A attached
------- ---------
hereto (each an "Investor" and together "Investors"), and Retix, a California
-------- ---------
corporation.
In consideration of the mutual promises and covenants hereinafter set
forth, the parties agree as follows:
1. RESTRICTIONS ON TRANSFERABILITY; REGISTRATION RIGHTS.
----------------------------------------------------
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Registrable Securities" means (i) the Common Stock issuable upon
----------------------
conversion of the Preferred Shares (the "Conversion Shares") and (ii) any Common
-----------------
Stock issued or issuable in respect of the Preferred Shares or Conversion Shares
or other securities issued or issuable with respect to the Preferred Shares or
Conversion Shares upon any stock split, stock dividend, recapitalization or
similar event or any Common Stock otherwise issued or issuable with respect to
the Preferred Shares or Conversion Shares; provided, however, that shares of
-------- -------
Common Stock or other securities shall only be treated as Registrable Securities
(1) if and so long as they have not been (A) sold to or through a broker or
dealer or underwriter in a public distribution or a public securities
transaction, or (B) sold in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act under Section 4(1)
thereof so that all transfer restrictions and restrictive legends with respect
thereto are removed upon the consummation of such sale, or (2) if with respect
to any Holder all shares of the Company's capital stock then held by Holder may
not be sold in any single three month period without registration pursuant to
Rule 144 promulgated under the Securities Act.
"Holder" shall mean any person holding Registrable Securities and any
------
person holding Registrable Securities to whom the rights under this Agreement
have been transferred in accordance with Section 1.14 hereof.
"Preferred Shares" shall mean the Series B Preferred Stock and the
----------------
Series C Preferred Stock of the Company.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
-7-
<PAGE>
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legend set forth in Section 1.3 of this Agreement.
"Retix" shall mean Retix, a California corporation, and any of its
-----
successors, transferees or assigns.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Section 1.9).
"Qualifying IPO" shall mean the Company's first underwritten, firm
--------------
commitment public offering of its Common Stock for sale to the public pursuant
to a registration statement under the Securities Act of 1933, as amended, the
anticipated aggregate offering price, net of underwriting discounts and
commissions, of which would exceed $20,000,000 and the offering price to the
public of which would be at least $8.00 per share, subject to adjustment for
stock splits, stock dividends or other recapitalizations.
"Initiating Holders" shall mean the Holders or any transferees of the
------------------
Holders under Section 1.14 hereof who in the aggregate are Holders of not less
than 40% of the Registrable Securities.
1.2 RESTRICTIONS. The Preferred Shares and the Conversion Shares
------------
shall not be sold, assigned, transferred or pledged except upon the conditions
specified in this Agreement, which conditions are intended to ensure compliance
with the provisions of the Securities Act. The Holders will cause any proposed
purchaser, assignee, transferee or pledgee of the Preferred Shares and the
Conversion Shares to agree to take and hold such securities subject to the
provisions and upon the conditions specified in this Agreement.
1.3 RESTRICTIVE LEGEND. Each certificate representing: (i) the
------------------
Preferred Shares; (ii) the Conversion Shares; (iii) the Series A Preferred Stock
of the Company; and (iv) any other securities issued in respect of the
securities referenced in clauses (i), (ii) and (iii) upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted by the provisions of Section 1.4 below) be stamped
or
-8-
<PAGE>
otherwise imprinted with legends in the following form (in addition to any
legend required under applicable state securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD,
TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION OR
UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE
COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT
SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT."
"THE SHARES EVIDENCED HEREBY ARE SUBJECT TO VOTING RESTRICTIONS
SET FORTH IN AN AMENDED AND RESTATED RIGHTS AGREEMENT DATED
JANUARY ___, 1998 BY AND AMONG THE COMPANY AND CERTAIN
SHAREHOLDERS OF THE COMPANY (A COPY OF WHICH MAY BE OBTAINED FROM
THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE
PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND
SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID AGREEMENT."
Each Holder consents to the Company making a notation on its records and
giving instructions to any transfer agent of the Restricted Securities in order
to implement the restrictions on transfer established in this Section 1.
1.4 NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
----------------------------
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (i) a written opinion of legal
counsel who shall, and whose legal opinion shall be, reasonably satisfactory to
the Company, to the effect that the proposed transfer of the Restricted
Securities may be effected without registration under the Securities Act, or
(ii) a "no action" letter from the Commission to the effect that the transfer of
such securities without registration will not result in a recommendation by the
staff of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the holder to the Company. The Company will not require such a legal opinion or
"no action" letter (a) in any transaction in compliance with Rule 144, (b) in
any transaction in which a Holder which is a corporation
-9-
<PAGE>
distributes Restricted Securities after six months after the purchase thereof
solely to its majority-owned subsidiaries or affiliates for no consideration, or
(c) in any transaction in which a Holder which is a partnership distributes
Restricted Securities after six months after the purchase thereof solely to
partners thereof on a pro rata basis for no consideration, provided that each
transferee agrees in writing to be subject to the terms of this Agreement. Each
certificate evidencing the Restricted Securities transferred as above provided
shall bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in Section 1.3 above, except that such
certificate shall not bear such restrictive legend if, in the opinion of counsel
for such holder and the Company, such legend is not required in order to
establish compliance with any provisions of the Securities Act.
1.5 REQUESTED REGISTRATION.
----------------------
(a) REQUEST FOR REGISTRATION. In case the Company shall receive
------------------------
from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to the Registrable
Securities, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
the execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within 30 days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to take any
-------- -------
action to effect any such registration, qualification or compliance pursuant to
this Section 1.5:
(1) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(2) Prior to the expiration of the Company's market
stand-off agreements in connection with a Qualifying IPO;
(3) During the period starting with the date 60 days
prior to the Company's estimated date of filing of, and ending on the date 90
days immediately following the effective date of, any registration statement
pertaining to securities of the Company (other than a registration of securities
in a Rule 145 transaction or with respect to an employee benefit plan), provided
that the Company is actively employing in good faith all reasonable
-10-
<PAGE>
efforts to cause such registration statement to become effective and that the
Company's estimate of the date of filing such registration statement is made in
good faith;
(4) After the Company has effected two such
registrations pursuant to this Section 1.5(a), such registrations which have
been declared or ordered effective and the securities offered pursuant to such
registrations have been sold; or
(5) If the Company shall furnish to such Holders a
certificate, signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.5 shall be deferred for a single period
not to exceed 120 days from the date of receipt of written request from the
Initiating Holders.
Subject to the foregoing clauses (1) through (5) and this paragraph, the
Company shall file a registration statement covering the Registrable Securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Initiating Holders. In the event that Holders of
Registrable Securities wish to join in the request of the Initiating Holders
made pursuant to this Section 1.5(a), the provisions of Section 1.5(b) of this
Agreement shall govern the ability of such Holders to join in such request.
(b) UNDERWRITING. In the event that a registration pursuant to
------------
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested, to the
extent provided in this Agreement.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders (which managing underwriter shall
be reasonably acceptable to the Company). Notwithstanding any other provision
of this Section 1.5, if the managing underwriter advises the Holders requesting
their Registrable Securities to be included in the registration, in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders of Registrable
Securities and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Initiating Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities requested to be to included by such Holders at
the time of filing the registration statement. No Registrable Securities
excluded from the underwriting by reason of the underwriter's marketing
limitation shall be included in such registration. To facilitate the allocation
of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest 100 shares.
-11-
<PAGE>
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to the expiration of the market
stand-off period as provided in Section 1.15.
1.6 COMPANY REGISTRATION.
--------------------
(a) NOTICE OF REGISTRATION. If at any time or from time to time,
----------------------
the Company shall determine to register any of its securities, either for its
own account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved in such registration, all the Registrable Securities specified in a
written request or requests made within 30 days after receipt of such written
notice from the Company by any Holder, but only to the extent that such
inclusion will not diminish the number of securities included by the Company or
by holders of the Company's securities who have demanded such registration.
(b) UNDERWRITING. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration). Notwithstanding any other
provision of this Section 1.6, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be included in such registration or exclude them entirely. The Company shall so
advise all Holders, and the number of shares of Registrable Securities and other
securities that may be included in the registration and underwriting shall be
allocated among all Holders and other holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders and other securities held by other holders at the time of filing the
registration statement; provided, however, that no officer, director or employee
-------- -------
shall be entitled to have any securities held personally by them included in the
registration until all Registrable Securities requested to have been included
are so included. To facilitate the allocation of shares in accordance with the
above provisions, the Company or the underwriters may round the
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<PAGE>
number of shares allocated to any Holder or other holder to the nearest 100
shares. If any Holder or other holder disapproves of the terms of any such
underwriting, he or she may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 180 days after the effective date
of the registration statement relating thereto.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 1.6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
1.7 REGISTRATION ON FORM S-3.
------------------------
(a) If any Holder requests that the Company file a registration
statement on Form S-3 (or any successor form to Form S-3) for a public offering
of shares of the Registrable Securities, the reasonably anticipated aggregate
price to the public of which, net of underwriting discounts and commissions,
would exceed $1,000,000, and the Company is a registrant entitled to use Form S-
3 to register the Registrable Securities for such an offering, the Company shall
use its best efforts to cause such Registrable Securities to be registered for
the offering on such form; provided, however, that the Company shall not be
-------- -------
required to effect more than two registrations pursuant to this Section 1.7 in
any 12 month period. The Company will (i) promptly give written notice of the
proposed registration to all other Holders, and (ii) as soon as practicable, use
its best efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within 30 days after receipt of such written notice from the
Company. The provisions of Section 1.5(b) shall be applicable to each
registration initiated under this Section 1.7.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act, (ii) during the period
starting with the date 60 days prior to the filing of, and ending on a date 90
days following the effective date of, a registration statement (other than with
respect to a registration statement relating to a Rule 145 transaction, an
offering solely to employees or any other registration which is not appropriate
for the registration of Registrable Securities), provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective, or (iii) if the Company shall
furnish to such Holder a certificate signed by the President
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<PAGE>
of the Company stating that, in the good faith judgment of the Board of
Directors, it would be seriously detrimental to the Company or its shareholders
for registration statements to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a single period not to exceed 120 days from the receipt of the
request to file such registration by such Holder or Holders.
1.8 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
---------------------------------------------
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the Registrable Securities then
outstanding, enter into any agreement granting any holder or prospective holder
of any securities of the Company registration rights with respect to such
securities unless (i) such new registration rights, including standoff
obligations, are on a pari passu basis with those rights of the Holders under
this Agreement, or (ii) such new registration rights, including standoff
obligations, are subordinate to the registration rights granted Holders under
this Agreement.
1.9 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
------------------------
connection with any registration pursuant to Sections 1.5, 1.6 and 1.7 and the
reasonable cost of one special legal counsel to represent all of the Holders
together in any such registration under Section 1.5 shall be borne by the
Company, provided that the Company shall not be required to pay the Registration
Expenses of any registration proceeding begun pursuant to Section 1.5, the
request of which has been subsequently withdrawn by the Initiating Holders. In
such case, the Holders of Registrable Securities to have been registered shall
bear all such Registration Expenses pro rata on the basis of the number of
shares to have been registered. Notwithstanding the foregoing, however, if at
the time of the withdrawal, the Holders have learned of a material adverse
change in the condition, business or prospects of the Company from that known to
the Holders at the time of their request, then the Holders shall not be required
to pay any of said Registration Expenses and such registration shall not be
treated as a counted registration under Section 1.5. Unless otherwise stated,
all other Selling Expenses relating to securities registered on behalf of the
Holders shall be borne by the Holders of the registered securities included in
such registration pro rata on the basis of the number of shares so registered.
1.10 REGISTRATION PROCEDURES. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least 120 days or
until the distribution described in the registration statement has been
completed;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
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<PAGE>
(c) Furnish to the Holders participating in such registration and
to the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that as thereafter delivered
to the purchasers of such shares, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration; and
(g) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least 12 months, but not more than 18 months, beginning with the
first month after the effective date of the Registration Statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
1.11 INDEMNIFICATION.
---------------
(a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on
-15-
<PAGE>
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Company of any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder,
each of its officers and directors, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder,
controlling person or underwriter and stated to be specifically for use therein.
The indemnity provided under this Section 1.11(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if the
Company has defended such matter and if such settlement is effected without the
Company's consent, which consent shall not be unreasonably withheld.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein. Notwithstanding any other term or
provision of this Agreement to the contrary, no Holder will be liable for any
amount under this Section 1.11 in excess of the net proceeds received by such
Holder in connection with such registration statement.
(c) Each party entitled to indemnification under this Section
1.11 (the "Indemnified Party") shall give notice to the party required to
-----------------
provide indemnification (the "Indemnifying Party") promptly after such
------------------
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
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<PAGE>
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided that the Indemnified Party may
participate in such defense (with the Indemnifying Party continuing to control
the defense) with its own counsel at the Indemnifying Party's expense if a
conflict of interest may exist between the Indemnifying Party and the
Indemnified Party; and provided, further, that the failure of any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 1 unless the failure to give such notice
is materially prejudicial to an Indemnifying Party's ability to defend such
action. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation, whether or not the Indemnified Party is a party to such claim or
litigation.
(d) If the indemnification provided for in this Section 1.11 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
1.12 INFORMATION BY HOLDER. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.13 RULE 144 REPORTING. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date that the Company becomes subject to the periodic
reporting requirements of the Securities Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act");
------------
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<PAGE>
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) So long as a Holder owns any Restricted Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
1.14 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company
-------------------------------
to register securities granted Holders under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by a Holder
(together with any affiliate); provided, that (a) such transfer may otherwise be
--------
effected in accordance with applicable securities laws, (b) notice of such
assignment is given to the Company, and (c) such transferee or assignee (i) is a
wholly-owned subsidiary, constituent partner (including limited partners),
shareholder, parent, child or spouse of such Holder or is Holder's estate, or
(ii) acquires from such Holder the lesser of (a) 250,000 or more shares of
Restricted Securities (as appropriately adjusted for stock splits and the like)
or (b) all of the Restricted Securities then owned by such Holder.
1.15 STANDOFF AGREEMENT. In connection with the initial public
------------------
offering of the Company's securities and upon request of the Company or the
underwriters of such offering, each Holder agrees not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose of any
Registrable Securities (other than those included in the registration) without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed 180 days) from the effective date of
such registration as may be requested by the Company or such managing
underwriters, provided that each of the Company's officers and directors shall
have agreed to be bound by the same restrictions in connection with the
Company's initial public offering.
1.16 TERMINATION OF RIGHTS. The rights of any particular Holder to
---------------------
cause the Company to register securities under Sections 1.5, 1.6 and 1.7 shall
terminate with respect to such Holder following a Qualifying IPO at such time as
such Holder is able to dispose of all its Registrable Securities and other
shares of capital stock of the Company then held or then issuable upon exercise
of options or warrants in one three-month period pursuant to the provisions of
Rule 144; provided, that such Holder holds Registrable Securities and other
--------
shares of capital stock of the Company then held or then issuable upon exercise
of options or warrants constituting less than 1% of the outstanding voting stock
of the Company. Notwithstanding the
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<PAGE>
foregoing, or any other provision herein to the contrary, the rights to cause
the Company to register its securities under this Agreement shall in any event
terminate five years after the closing of a Qualifying IPO.
2. COVENANTS.
---------
2.1 COVENANTS OF RETIX.
-------------------
(a) Retix grants to each of the Investors the following rights
with respect to any proposed sale to a third party of the Company's capital
stock held by Retix:
(i) In the event that Retix desires to sell or transfer to
any person (the "Proposed Sale") any of the shares of the Company's capital
-------------
stock held by Retix (the "Retix Shares"), then Retix first shall provide the
------------
Investors, or a single representative designated by the Investors (the "Investor
--------
Representative"), with written notice (the "First Notice") of such intent. The
------------
First Notice shall state in reasonable detail the terms and conditions of any
such Proposed Sale, including, without limitation, the number of Retix Shares to
be sold, the nature of such sale, the consideration to be paid, and the name of
each prospective purchaser or transferee (if any). The Investors shall have the
right, exercisable upon written notice to Retix within 30 days after receipt of
the First Notice (the "First Notice Period"), to purchase the Retix Shares on
-------------------
the same material terms and conditions specified in the First Notice. Each
Investor may elect to purchase or obtain up to that portion of the Retix Shares
which equals the proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Investor bears to the total number of shares of
Common Stock then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities). Retix shall notify each Investor that
purchases all of the Retix shares available to it (each, a "Fully-Exercising
----------------
Investor") of any other Investor's failure to do likewise. After receipt of
- --------
such notice, but in any event prior to the expiration of the First Notice
Period, each Fully-Exercising Investor shall be entitled to obtain that portion
of the Retix Shares for which the Investors were entitled to subscribe but which
were not subscribed for that is equal to the proportion that the number of
shares of Common Stock issued and held, or issuable upon conversion and exercise
of all convertible or exercisable securities then held, by such Fully-Exercising
Investor bears to the total number of shares of Common Stock then held (assuming
full conversion and exercise of all convertible or exercisable securities) by
all of the other Fully Exercising Investors. If the Investors elect not to
purchase any of the Retix Shares subject to the First Notice, then Retix may
enter into an agreement to sell such shares at a price and on terms and
conditions not materially more favorable to the prospective purchasers than
those described in the First Notice, which agreement must provide for the
closing of the sale of the Retix shares not later than 90 days from the date of
the First Notice. Any proposed transfer on terms and conditions materially more
favorable to the prospective purchasers than those described in the First
Notice, as well as any subsequent proposed transfer of any of the Retix Shares
by Retix, shall be subject this Section 2.1(a)(i). This Section 2.1(a)(i) shall
terminate upon the earlier of January 15, 1999, or the date specified in Section
2.4(a) below.
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<PAGE>
(ii) If this Section 2.1(a) has not been terminated earlier
pursuant to Section 2.4(a) below, in the event of a Proposed Sale by Retix after
January 15, 1999, Retix shall provide the Investors or the Investor
Representative with written notice (the "Second Notice") thereof. The Second
-------------
Notice shall state in the terms and conditions of any such Proposed Sale,
including, without limitation, the number of Retix Shares to be sold, the nature
of such sale, the consideration to be paid, and the name of each prospective
purchaser or transferee, in each case to the extent such information is
reasonably known to Retix. Retix shall negotiate the terms of such Proposed Sale
with an Investor Representative in good faith and on a non-exclusive basis for a
period not to exceed 30 days after the date of the Second Notice (the
"Discussion Period"). Retix shall keep the Investor Representative generally
-----------------
informed of its discussions with any third parties regarding the Proposed Sale
during the Discussion Period to the extent that such disclosure does not violate
the terms of any contractual obligation of Retix. Retix and the Investors
acknowledge and agree that Retix shall have no obligation under this Section
2.1(a)(ii) to enter into a definitive agreement with the Investors concerning
any Proposed Sale if it so elects in its discretion. Following expiration of the
Discussion Period, in the event Retix has not entered into written, binding
letter of intent or definitive, written agreement regarding such Proposed Sale
with the Investors, Retix may thereafter enter into a definitive, written
agreement with a third party regarding such Proposed Sale within the next
succeeding 120 day period. Following expiration of such 120 day period, in the
event Retix has not entered into a definitive, written agreement regarding such
Proposed Sale, such sale shall again be subject to this Section 2.1(a)(ii).
(iii) Notwithstanding any other provision herein, the rights
created in this Section 2.1(a) shall not be deemed to apply to a bona fide
business acquisition of Retix, whether by merger, consolidation, sale of assets,
sale or exchange of a majority of the capital stock or otherwise.
(b) Notwithstanding any other provision in this Agreement to the
contrary, Retix shall not transfer or otherwise distribute any of the
Registrable Securities held by Retix to its shareholders or any other transfer
which would result in the Company becoming subject to the periodic reporting
requirements of Sections 13 and 15(d) of the Exchange Act without the prior
approval of the Board of Directors of the Company.
(c) In the event that shares of the Company's Series A Preferred Stock
or Series B Preferred Stock have a right to vote on any matter submitted to the
Company's shareholders under applicable law, then Retix shall vote any shares of
the Company's Series A Preferred Stock or Series B Preferred Stock, as
applicable, held by Retix consistent with the vote of 66-2/3% of the Company's
Series C Preferred Stock. In the event that holders of at least 66-2/3% of the
then outstanding shares of Series C Preferred Stock elect to convert
automatically all shares of Series C Preferred Stock under Section
III(3)(aa)(iii) of the Company's Amended and Restated Articles of Incorporation,
Retix shall contemporaneously consent to the conversion of the then outstanding
shares of Series B Preferred Stock under the same conditions applicable to the
conversion of the Series C Preferred Stock. Notwithstanding the foregoing,
Retix shall not be obligated to vote or provide its consent with respect to any
shares of the Company's Series A Preferred Stock or Series B Preferred Stock
held by Retix pursuant to this Section 2.1(c) with
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<PAGE>
respect to any matter or action if the effect thereof would be to treat the
Series B Preferred Stock in a manner adversely and differently than the Series C
Preferred Stock or to materially and adversely affect the rights, preferences
and privileges of the Series A Preferred Stock.
2.2 COVENANTS OF THE COMPANY.
------------------------
(a) DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver
--------------------------------
to each Holder of at least 250,000 shares of Registrable Securities with respect
to clauses (i) and (ii) below and at least 1,000,000 shares of Registrable
Securities with respect to clause (iii) below (other than a Holder reasonably
deemed by the Company to be a competitor of the Company):
(i) as soon as practicable, but in any event within 90 days
after the end of each fiscal year of the Company, a consolidated income
statement for such fiscal year, a consolidated balance sheet of the Company and
statement of shareholder's equity as of the end of such year, and consolidated
statements of income and cash flows for such year, such year-end financial
reports to be in reasonable detail, prepared in accordance with generally
accepted accounting principles consistently applied ("GAAP"), and audited and
----
certified by an independent public accounting firm of nationally recognized
standing selected by the Company;
(ii) as soon as practicable, but in any event within 30 days
after the end of each of the first three (3) quarters of each fiscal year of the
Company, an unaudited consolidated profit or loss statement, consolidated
statements of income and cash flows for such fiscal quarter and an unaudited
consolidated balance sheet as of the end of such fiscal quarter prepared in
accordance with GAAP consistently applied; and
(iii) as soon as practicable, but in any event 30 days prior
to the end of each fiscal year, a budget and business plan for the next fiscal
year, prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company.
(b) INSPECTION. The Company shall permit each Holder of at
----------
least 1,000,000 shares of Registrable Securities or such Holder's representative
(except for a Holder reasonably deemed by the Company to be a competitor of the
Company), at such Holder's expense, to visit and inspect the Company's
properties, to examine its books of account and records and to discuss the
Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by such holder; provided, however, that the
-------- -------
Company shall not be obligated pursuant to this Section 2.2(b) to provide access
to any information which it reasonably considers to be a trade secret or similar
confidential information unless such Holder and its representative shall execute
a confidentiality agreement in customary form acceptable to the Company.
(c) RIGHT OF FIRST OFFER. Subject to the terms and conditions
--------------------
specified in this Section 2.2(c), the Company hereby grants to each Holder a
right of first offer with respect to future sales by the Company of its Shares
(as hereinafter defined). A Holder who chooses to exercise the right of first
offer may designate as purchasers under such right itself or
-21-
<PAGE>
its partners or affiliates in such proportions as it deems appropriate. Each
time the Company proposes to offer any shares of, or securities convertible into
or exercisable for any shares of, any class of its capital stock ("Shares"), the
------
Company shall first make an offering of such Shares to each Holder in accordance
with the following provisions:
(i) The Company shall deliver a notice as provided in Section
3.5 below (the "Notice") to the Holder stating (i) its bona fide intention to
------
offer such Shares, (ii) the number of such Shares to be offered, and (iii) the
price and terms, if any, upon which it proposes to offer such Shares.
(ii) Within 15 calendar days after delivery of the Notice,
the Holder may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Holder bears to the total number of shares of
Common Stock then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities). The Company shall promptly, in writing,
inform each Holder that purchases all the shares available to it (each, a
"Fully-Exercising Holder") of any other Holder's failure to do likewise. During
-----------------------
the 10-day period commencing after receipt of such information, each Fully-
Exercising Holder shall be entitled to obtain that portion of the Shares for
which Holders were entitled to subscribe but which were not subscribed for that
is equal to the proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Fully-Exercising Holder bears to the total number
of shares of Common Stock then outstanding (assuming full conversion and
exercise of all convertible or exercisable securities).
(iii) The Company may, during the 90-day period following the
expiration of the period provided in Section 2.2(c)(ii) hereof, offer the
remaining unsubscribed portion of the Shares to any person or persons at a price
not less than, and upon terms no more favorable to the offerees than those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Shares within such period, or if such agreement is not consummated
within 60 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such Shares shall not be offered unless first reoffered
to the Holders in accordance herewith.
(iv) The right of first offer in this Section 2.2(c) shall
not be applicable (i) to the issuance or sale of up to 2,750,000 shares (or such
greater number as is unanimously approved by the Board of Directors) of Common
Stock (or options therefor) to employees, consultants and directors, pursuant to
plans or agreements approved by the Board of Directors for the primary purpose
of soliciting or retaining their services, (ii) to or after consummation of a
Qualified IPO, (iii) to the issuance of securities pursuant to the conversion or
exercise of presently outstanding convertible or exercisable securities, (iv) to
the issuance of securities in connection with a bona fide business acquisition
of or by the Company, whether by merger, consolidation, sale of assets, sale or
exchange of stock or otherwise, (v) to the issuance of securities to financial
institutions or lessors in connection with commercial credit
-22-
<PAGE>
arrangements, equipment financings, or similar transactions, (vi) to the
issuance or sale of the Company's Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock, (vii) to the issuance of securities that,
with unanimous approval of the Board of Directors of the Company, are not
offered to any existing shareholder of the Company, or (viii) to any issuance as
to which Holders of 66-2/3% of the then outstanding Registrable Securities have
waived such right of first offer; provided, however, that (1) the Holders voting
-------- -------
to waive such right of first offer may not thereafter acquire shares of the
Company's capital stock in such issuance, and (2) the sale of the Company's
capital stock in such issuance shall not be less than $1,4876 per share (as
adjusted for stock splits, dividends and the like).
(d) BOARD OBSERVER RIGHTS. Retix shall have the right to
---------------------
designate one representative to attend all meetings of the Company's Board of
Directors in a nonvoting observer capacity, and, in this respect, the Company
shall give Retix copies of all notices, minutes, consents, and other material
that the Company provides to its directors; provided, however, that the Company
reserves the right to exclude Retix from any meeting or portion thereof, and
deny Retix access to any material, if the Company believes upon advice of
counsel that such exclusion or denial of access is reasonably necessary to
preserve the attorney-client privilege, to protect highly confidential
proprietary information, or for other similar reasons. Retix agrees to hold in
confidence and trust and not use or disclose any confidential information
provided to Retix or learned in connection with Retix's rights under this
Section 2.2(d). Confidential information does not include information, technical
data or know-how which (i) is in the possession of Retix at the time of
disclosure as shown by Retix's files and records immediately prior to the time
of disclosure; (ii) prior or after the time of disclosure becomes public
knowledge, not as a result of any action or inaction of the receiving party;
(iii) is approved for release by Company; or (iv) is required to be produced by
Retix pursuant to statute, regulation, subpoena, criminal or civil investigative
demand or similar process, provided that Retix provides the Company with prompt
written notice of such requirement so that the Company may seek (with the
cooperation and reasonable efforts of Retix) a protective order, confidential
treatment or other appropriate remedy. Nothing in this Section 2.2(d) shall be
deemed, however, to abridge Retix' rights with respect to the election of
directors or access to information as provided by applicable law or the
Company's Bylaws.
2.3 COVENANTS OF ALL INVESTORS.
--------------------------
(a) Notwithstanding any other provision in this Agreement to the
contrary, neither Retix nor any Investor shall sell, transfer or otherwise
dispose of any Registrable Securities to any of the following parties without
the prior written consent of the Company and the holders of 66-2/3% of the
Registrable Securities then outstanding: Ascend Communications, Inc., Sahara
Networks, Inc., Xylan Corporation, 3Com Corporation, Yurie Systems, Inc. or
Cisco Systems, Inc., or their respective successors or assigns.
(b) Notwithstanding the foregoing, this Section 2.3 shall not be
applicable to (i) the sale, transfer or other disposition of any Registrable
Securities by Retix in connection with a bona fide business acquisition of
Retix, whether by merger, consolidation, sale of assets, sale or exchange of a
majority of the capital stock or otherwise, or (ii) the transfer by
-23-
<PAGE>
any Investor of any Registrable Securities by such Investor to any constituent
partner (including limited partners) thereof for no value.
2.4 TERMINATION OF COVENANTS.
------------------------
(a) The covenants set forth in Section 2.1 and Section 2.2(d)
shall be of no further force or effect (i) immediately prior to the consummation
of a Qualified IPO, or (ii) at such time as Retix owns less than 50% of the
capital stock of the Company held by Retix upon the consummation of the Series C
Preferred Stock financing of the Company.
(b) The covenants set forth in Sections 2.1, 2.2 and 2.3 shall
terminate as to each Holder and be of no further force or effect (i) immediately
prior to the consummation of a Qualified IPO, (ii) when the Company shall sell,
convey, or otherwise dispose of all or substantially all of its property or
business or merge into or consolidate with any other corporation (other than a
wholly-owned subsidiary corporation) or effect any other transaction or series
of related transactions in which more than 50% of the voting power of the
Corporation is disposed of, provided that this subsection (ii) shall not apply
to a merger effected exclusively for the purpose of changing the domicile of the
Company, or (iii) when the Company first becomes subject to the periodic
reporting requirements of Sections 13 or 15(d) of the Exchange Act, if this
occurs earlier than the events described in Section 2.4(a) above or in this
Section 2.4(b).
3. MISCELLANEOUS.
-------------
3.1 ASSIGNMENT. Except as otherwise provided in this Agreement, the
----------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties to this
Agreement.
3.2 THIRD PARTIES. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
3.3 GOVERNING LAW. This Agreement shall be governed by and construed
-------------
under the laws of the State of California in the United States of America.
3.4 COUNTERPARTS. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
3.5 NOTICES. All notices or other communications which shall or may
-------
be given pursuant to this Agreement shall be in writing, shall be effective upon
receipt, and shall be delivered by Federal Express or a similar courier,
personal delivery, certified or registered mail, or by facsimile transmission
(with confirmation of transmission receipt), addressed as set forth on the
signature page of this Agreement (or as is provided in the future by written
notice as provided herein).
-24-
<PAGE>
3.6 SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, portions of such provisions, or
such provisions in their entirety, to the extent necessary, shall be severed
from this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
3.7 AMENDMENT AND WAIVER. Any provision of this Agreement may be
--------------------
amended or waived, either prospectively or retroactively, with the written
consent of the Company, and the Holders of at least a majority of the
outstanding Registrable Securities; provided, however that no amendment or
waiver shall be made that adversely affects any Holder of Registrable Securities
in a manner that does not similarly affect all Holders of Registrable Securities
without the consent of the affected Holder. Notwithstanding the foregoing, no
amendment to Section 2.1, Section 2.2(d) or Section 2.3(a) which increases
Retix' obligations or diminishes its rights may be amended or waived with
respect to Retix without Retix' written consent. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each Holder of
Registrable Securities and the Company. In addition, the Company may waive
performance of any obligation owing to it, as to some or all of the Holders of
Registrable Securities, or agree to accept alternatives to such performance,
without obtaining the consent of any Holder of Registrable Securities. In the
event that an underwriting agreement is entered into between the Company and any
Holder, and such underwriting agreement contains terms differing from this
Agreement, as to any such Holder the terms of such underwriting agreement shall
govern. This Agreement may also be amended by the Company solely to include
additional Purchasers at any Subsequent Closing under the Company's Series C
Preferred Stock Purchase Agreement of even date herewith as "Investors" and
"Holders" for all purposes hereunder.
3.8 EFFECT OF AMENDMENT OR WAIVER. The Holders and their successors
-----------------------------
and assigns acknowledge that by the operation of Section 3.7 of this Agreement
the holders of a majority of the outstanding Registrable Securities, acting in
conjunction with the Company, will have the right and power to diminish or
eliminate rights or increase obligations pursuant to this Agreement to the
extent provided in such Section 3.7.
3.9 RIGHTS OF HOLDERS. Each Holder of Registrable Securities shall
-----------------
have the absolute right to exercise or refrain from exercising any right or
rights that such Holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such Holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.
3.10 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any
-25-
<PAGE>
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be made in writing and
shall be effective only to the extent specifically set forth in such writing.
All remedies, either under this Agreement, or by law or otherwise afforded to
any holder, shall be cumulative and not alternative.
3.11 TERMINATION OF PRIOR AGREEMENT. The Rights Agreement between
------------------------------
Retix and the Company dated May 31, 1996, as amended is hereby terminated and is
superseded in its entirety by the terms of this Agreement.
[SIGNATURE PAGE FOLLOWS]
-26-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Rights Agreement as of the day and year first above written.
"COMPANY"
SONOMA SYSTEMS
By:_________________________________
Title:______________________________
Address: 4640 Admiralty Way
Suite 600
Marina del Rey, CA 90292-6695
"INVESTORS" RETIX
_____________________________ By:______________________________
(Print Name of Investor)
By:__________________________ Title:___________________________
Title:_______________________ Address: 4640 Admiralty Way
Marina del Rey, CA 90292-6695
Address:_____________________
_____________________________
_____________________________
-27-
<PAGE>
EXHIBIT A
---------
SCHEDULE OF INVESTORS
INITIAL CLOSING - JANUARY 15, 1998
<TABLE>
<CAPTION>
INVESTOR NUMBER OF REGISTRABLE SECURITIES T0TAL PURCHASE PRICE
- -------- -------------------------------- --------------------
<S> <C> <C>
Rock Ventures, L.L.C. 33,611 $49,999.73
Three Allied Drive
Suite 135
Dedham, MA 02026
VantagePoint Venture Associates 1996 2,520,838 $3,749,998.60
By: VantagePoint Associates, L.L.C.
1001 Bayhill Drive
San Bruno, CA 94066
Crosspoint Venture Partners 1997 2,520,838 $3,749,998.60
18552 MacArthur Boulevard
Suite 400
Irvine, CA 92612
Lazard Freres & Co. L.L.C. 470,556 $699,999.10
30 Rockefeller Center
New York, NY 10022
Total: 5,545,843 $8,249,996.03
</TABLE>
SECOND CLOSING
--------------
___________ ___, 1998
<TABLE>
<CAPTION>
NAME NUMBER OF REGISTRABLE SECURITIES T0TAL PURCHASE PRICE
---- -------------------------------- --------------------
<S> <C> <C>
TBD 504,157 $749,983.95
---
TOTAL: 6,050,000 $8,999,979.98
- ------
</TABLE>
<PAGE>
January 15, 1998
To the Purchasers of Series C Preferred
Stock of Sonoma Systems Listed
on Exhibit A to the Series C Preferred Stock
---------
Purchase Agreement
Ladies and Gentlemen:
We have acted as counsel for Sonoma Systems, a California corporation (the
"Company") and Retix, a California corporation ("Retix") in connection with the
-------
sale by the Company to you of 5,545,843 shares of the Company's Series C
Preferred Stock (the "Shares") pursuant to the Series C Preferred Stock Purchase
------
Agreement (the "Purchase Agreement") dated January 15, 1998 among the Company,
------------------
Retix, and the persons listed on Exhibit A attached thereto (the "Purchasers"),
--------- ----------
and the negotiation, execution and delivery by the Company of the Amended and
Restated Rights Agreement dated January 15, 1998 (the "Rights Agreement"). This
----------------
opinion is given to you in compliance with Section 4.5 of the Purchase
Agreement. The Purchase Agreement and the Rights Agreement are referred to
herein collectively as the "Agreements." Unless defined herein, capitalized
----------
terms have the meaning given them in the Agreements.
In rendering this opinion, we have made such legal and factual examinations
and inquiries as we have deemed advisable or necessary for the purpose of
rendering this opinion. In addition, we have examined originals or copies of
documents, corporate records and other writings which we consider relevant for
the purposes of this opinion. In such examination, we have assumed the
genuineness of all signatures on original documents, the conformity to original
documents of all copies submitted to us and the due execution and delivery of
all documents, other than those executed and delivered by the Company and Retix,
where due execution and delivery are a prerequisite to the effectiveness
thereof. In making our examination of documents executed by entities other than
the Company and Retix, we have assumed that each other entity had the power to
enter into and perform all its obligations thereunder and we also have assumed
the due authorization by each such other entity of all requisite actions and the
due execution and delivery of such documents by each such other entity.
Whenever our opinion herein with respect to the existence or absence of
facts is indicated to be based on our knowledge or belief, it is intended to
signify that in the course of our representation of the Company and Retix in
connection with the transactions referred to in the first paragraph hereof after
an examination of documents made available to us by the Company and Retix, and
after inquiries of officers of the Company and Retix, and after such other
inquiry or investigation as we have deemed necessary or appropriate, no
information has come to the attention of Craig W. Johnson, Elias J. Blawie,
David M. Jargiello, Laura A. Gordon or Vivian P.
<PAGE>
Morris (the only lawyers at Venture Law Group working on this transaction) that
would give them actual knowledge of the existence or absence of such facts.
Except as otherwise indicated herein, we have not undertaken any independent
investigation to determine the existence or absence of such facts, and no
inference as to our knowledge of the existence or absence of such facts should
be drawn from the fact of our representation of the Company.
In rendering the opinion set forth in paragraph (c) below relating to the
fully paid status of all of the issued shares of capital stock of the Company,
we have relied without independent verification on the Certificate of Gregory
Koss, President and Chief Executive Officer of the Company (the "Opinion
-------
Certificate"), to the effect that the Company has received the consideration
- -----------
approved by the Board of Directors for all of the issued shares of capital stock
of the Company.
In rendering the opinion set forth in paragraph (c) below, to the extent it
relates to the outstanding capital stock of the Company, we have relied on our
review of the minute books and stock records of the Company. In rendering the
opinion set forth in paragraph (c) below, to the extent it relates to options,
warrants or any other conversion privileges or rights of the Company, we have
relied without further investigation on our review of the stock records of the
Company and statements in the Opinion Certificate relating to the capitalization
of the Company.
In rendering the opinion set forth in paragraph (a) below, (1) in order to
determine in which states qualification is appropriate, we have assumed that
qualification may be required only in those states in which the Company owns or
leases real property, maintains offices, performs services or has employees, and
we have relied on the Company's listing of those states in the Opinion
Certificate, and (2) as to the qualification and good standing of the Company in
the states so identified in such Opinion Certificate, we have relied exclusively
on certificates of public officials, although we have not obtained tax good
standing certificates (other than a California franchise tax certificate for the
Company) and no opinion is provided with respect to tax good standing (other
than with respect to the Company in California).
In rendering the opinion in paragraph (e) below, we have reviewed and are
providing an opinion only with respect to those judgments and orders set forth
in the Opinion Certificate and/or the Schedule of Exceptions to the Purchase
Agreement, if any.
In rendering the opinion expressed in paragraph (h) below, we have assumed
and express no opinion with respect to the following: (1) that the
representations and warranties of the Purchasers set forth in the Agreements are
true and complete; and (2) the accuracy and completeness of the information
provided by the Company to the Purchasers in connection with such offer and
sale. We have also assumed the accuracy of, and have relied upon, the Company's
representations to us that the Company has made no offer to sell the Shares by
means of any "general solicitation," as defined in Regulation D under the
--------------------
Securities Act or the "publication of any advertisement" (as defined under the
--------------------------------
California Corporate Securities Law of 1968, as amended, and the regulations
thereunder) and that no offer or sale of the Shares has been made or will be
made in any states other than California.
<PAGE>
The opinions hereinafter expressed are subject to the following further
qualifications:
(i) Our opinions are qualified by the effect of bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
relating to or affecting the rights of creditors generally, including, without
limitation, laws relating to fraudulent transfers or conveyances, preferences
and equitable subordination;
(ii) Our opinions are qualified by the limitations imposed by general
principles of equity upon the availability of equitable remedies or the
enforcement of provisions of the Agreements; and the effect of judicial
decisions which have held that certain provisions are unenforceable when their
enforcement would violate the implied covenant of good faith and fair dealing,
or would be commercially unreasonable, or where their breach is not material;
(iii) A requirement that provisions of the Agreements may only be
waived in writing will not be enforced to the extent an oral agreement has been
executed modifying provisions of the Agreements;
(iv) Our opinion is based upon current statutes, rules, regulations,
cases and official interpretive opinions;
(v) The effect of judicial decisions which may permit the introduction
of extrinsic evidence to modify the terms or the interpretation of the
Agreements;
(vi) The enforceability of provisions of the Agreements providing that
rights or remedies are not exclusive, that every right or remedy is cumulative,
or that the election of a particular remedy or remedies does not preclude
recourse to one or more other remedies.
(vii) We express no opinion as to compliance with applicable
antifraud statutes, rules or regulations of applicable state and federal laws
concerning the issuance or sale of securities;
(viii) Provisions in the Rights Agreement purporting to provide for
indemnification and contribution under certain circumstances may be
unenforceable; and
(ix) We express no opinion as to the enforceability of Section 2.3(a)
or Section 2.1(c) of the Rights Agreement.
Based upon and subject to the foregoing, and except as set forth in the
Schedule of Exceptions, we are of the opinion that:
(a) The Company is a corporation duly organized and validly existing under
the laws of the State of California, and is in good standing under such laws.
The Company has the requisite corporate power to own and operate its properties
and assets, and to carry on its business as presently conducted. The Company is
qualified to do business as foreign corporations in each state in which the
failure to be so qualified would have a material adverse effect on the Company.
<PAGE>
(b) Each of Retix and the Company has the requisite legal and corporate
power to execute and deliver the Agreements and to carry out and perform its
obligations under the terms of the Agreements. The Company has the requisite
legal and corporate power to sell and issue the Shares thereunder and to issue
the Common Stock issuable upon conversion of the Shares.
(c) The authorized capital stock of the Company consists or will, upon the
filing of the Restated Articles, consist of 25,000,000 shares of Common Stock,
par value $0.01 per share, 12,154 of which are issued and outstanding as of the
Closing Date, and 19,250,000 shares of Preferred Stock, par value $0.01 per
share, 1,000,000 shares of which have been designated Series A Preferred Stock
("Series A Preferred"), all of which are issued and outstanding prior to the
------------------
Closing, 715,475 shares of which have been designated Series B Preferred Stock
("Series B Preferred"), all of which are issued and outstanding prior to the
------------------
Closing, and 7,534,525 shares of which have been designated Series C Preferred
Stock ("Series C Preferred"), 1,484,525 of which are issued and outstanding
------------------
prior to the Closing. All such issued and outstanding shares of Common Stock
and Preferred Stock have been duly authorized and validly issued in compliance
with all applicable federal and state laws regarding the registration or
qualification of securities, and are fully paid and nonassessable and free of
any preemptive or similar rights contained in the Company's Amended and Restated
Articles of Incorporation, and Bylaws, as amended, or to our knowledge, in any
other agreement to which the Company is a party. The Company has reserved
8,250,000 shares of Common Stock for issuance upon conversion of Preferred
Stock, and 6,050,000 shares of Series C Preferred for issuance under the
Purchase Agreement. There are options outstanding for the purchase of 1,705,000
shares of Common Stock under the Company's 1996 Stock Option Plan, 9,719 shares
of Common Stock have been issued upon exercise of options granted thereunder,
and 1,045,000 shares of Common Stock are available for issuance thereunder. To
our knowledge, except as described above, there are no preemptive rights,
options or warrants or other conversion privileges or rights presently
outstanding to purchase or otherwise acquire any of the authorized but unissued
shares of capital stock or other unissued securities of the Company or any other
agreements to issue any such securities or rights, other than the rights of
first offer set forth in Section 2.2 of the Rights Agreement.
(d) All corporate action on the part of the Company and Retix, and their
respective directors and shareholders necessary for the authorization,
execution, delivery and performance of the Agreements by the Company and Retix,
the authorization, sale, issuance and delivery of the Shares (and the Common
Stock issuable upon conversion thereof) as to the Company, and the performance
of all of the obligations of the Company and Retix under the Agreements,
including, without limitation, the execution and filing with the Secretary of
State of the State of California of the Restated Articles, has been taken. The
Agreements have been duly and validly authorized, executed and delivered by the
Company and Retix and constitute valid and binding obligations of the Company
and Retix enforceable in accordance with their terms. The Shares have been
validly issued, and are fully paid and nonassessable and have the rights,
preferences and privileges described in the Restated Articles; the shares of
Common Stock issuable upon conversion of the Shares have been duly and validly
reserved and, when issued in compliance with the provisions of the Purchase
Agreement and the Restated Articles, will be duly authorized, validly issued,
fully paid and nonassessable and free of any liens, encumbrances and preemptive
or similar rights.
<PAGE>
(e) The execution, delivery and performance of and compliance with the
Agreements, and the issuance of the Shares and the Common Stock issuable upon
conversion of the Shares, have not resulted and will not result in any material
violation of, or conflict with, or constitute a material default under, (i) the
Company's Articles of Incorporation or Bylaws, or (ii) to our knowledge, any
statute, rule or regulation or any judgment or order known to us of Federal or
California law to which the Company is a party, or by which the Company is
bound.
(f) To our knowledge, there are no actions, suits, proceedings or
investigations pending against the Company or any of its officers or directors
or its properties before any court or governmental agency (nor, to our
knowledge, has the Company or Retix or any of their respective officers or
directors received any threat thereof), which, either in any case or in the
aggregate, are likely to result in any material adverse change in the business
or financial condition of the Company or any of its properties, or in any
material impairment of the right or ability of the Company to carry on its
business as now conducted, or which questions the validity of any of the
Agreements or any action taken or to be taken by the Company or any of its
officers or directors in connection therewith.
(g) No consent, approval, permit or authorization of or designation,
qualification, registration, declaration or filing with any governmental
authority on the part of the Company or Retix is required in connection with the
valid execution and delivery of the Agreements or the offer, sale or issuance of
the Shares (and the Common Stock issuable upon conversion thereof) or the
consummation of any other transaction contemplated by the Agreements except (a)
filing of the Amended and Restated Articles of Incorporation in the Office of
the Secretary of the State of California, and (b) qualification (or taking such
action may be necessary to secure an exemption from qualification, if available)
under the California Corporate Securities Law of 1968, as amended, and other
applicable state blue sky laws (but excluding jurisdictions outside of the
United States) of the offer and sale of the Shares (and the Common Stock
issuable upon conversion thereof) and the modification of the rights of the
shareholders contemplated in the Agreements. Our opinion herein is otherwise
subject to the timely and proper completion of all filings and other actions
contemplated by clause (b) of this paragraph where such filings and actions are
to be undertaken on or after the date hereof.
(h) The offer, sale and issuance of the Shares in conformity with the terms
of the Purchase Agreement and the issuance of the Common Stock, if any, to be
issued upon conversion thereof, constitute transactions exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended, and exempt from the qualification requirements of the California
Corporate Securities Law of 1968, as amended.
(i) The certificates representing the Shares purchased at the Closing are
in due and proper form and have been duly and validly executed by the officers
of the Company.
We express no opinion as to matters governed by any laws other than the
laws of the State of California and the federal law of the United States of
America. We express no opinion as to whether the laws of any particular
jurisdiction apply, and no opinion to the extent that the
<PAGE>
laws of any jurisdiction other than those identified above are applicable to the
Agreements or the transactions contemplated thereby.
This opinion is furnished to you pursuant to Section 4.5 of the Purchase
Agreement and is solely for your benefit and may not be relied on by, nor may
copies be delivered to, any other person without our prior written consent. We
assume no obligation to inform you of any facts, circumstances, events or
changes in the law that may hereafter be brought to our attention that may
alter, affect or modify the opinion expressed herein.
Sincerely,
VENTURE LAW GROUP,
A Professional Corporation
EJB
<PAGE>
SONOMA SYSTEMS
SCHEDULE OF EXCEPTIONS
This Schedule of Exceptions is made and given pursuant to Section 2 of the
Series C Preferred Stock Purchase Agreement (the "Agreement") by and between
---------
Sonoma Systems and the Investors named therein dated as of January 15, 1998.
The Section numbers in this Schedule of Exceptions correspond to the Section
numbers in the Agreement; however, any information disclosed herein under any
Section number shall be deemed to be disclosed and incorporated into any other
Section number under the Agreement where the Purchasers could reasonably
determine that such disclosure would be appropriate. Any terms used in this
Schedule of Exceptions shall have the meanings defined for them in the Agreement
unless otherwise defined herein.
SECTION 2.1 - ORGANIZATION, GOOD STANDING AND QUALIFICATION
- -----------------------------------------------------------
The Company has a sales office in Massachusetts, and has employees who reside
in Arizona, Rhode Island and Massachusetts. The Company may be required to
qualify to do business in such states although it has not done so to date. The
failure to so qualify, if required, will not have a material adverse effect on
the business or financial condition of the Company.
SECTION 2.2 - CAPITALIZATION
- ----------------------------
The Company has in place a 1996 Directors' Option Plan (the "Plan"), pursuant
----
to which options to purchase 100,000 shares of the Company's Common Stock are
currently outstanding and 100,000 shares remain available for future grant under
the Plan. The Company shall terminate the Plan, with the consent of its former
directors, and all outstanding options thereunder effective as of the Closing.
The Company has reserved shares of Common Stock for issuance to officers,
directors, employees and consultants of the Company pursuant to its 1996 Stock
Option Plan and has issued options pursuant to this plan as follows:
<TABLE>
<CAPTION>
Pre-Closing Conversion Ratio Post-Closing(1)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Original Option Pool 3,800,000 0.535088633 2,033,336
Options Granted 3,037,214(2) 0.535088633 1,625,178
Options Committed, but not yet 535,000(3) 0.535088633 286,272
granted
</TABLE>
- ----------------------------
(1) Actual number of shares reserved may vary immaterially due to fractional
share rounding/truncation as a result of the reverse split effected by the
Restated Articles.
(2) Includes 9,719 shares issued upon exercise of options granted under the 1996
Stock Option Plan.
(3) Includes 200,000 options reserved for issuance to G. Koss upon completion of
one year of employment with the Company contingent upon Board of Directors
approval of Mr. Koss's performance during such period. Includes 335,000 options
reserved for issuance pursuant to outstanding offers of employment, of which
200,000 are reserved for Walter Mahla as Vice President of Technology.
<PAGE>
<TABLE>
<S> <C> <C> <C>
Options to be added to Plan -- -- 716,664
Total Option Pool Post-Closing -- -- 2,750,000
</TABLE>
As a result of the foregoing, options to purchase 838,550 shares remain
available for future issuance under the 1996 Stock Option Plan. Copies of the
Company's stock option plans and schedule of granted, issued and outstanding
stock options as of December 17, 1997 have been made available to counsel for
the Purchasers.
SECTION 2.3 - SUBSIDIARIES
- --------------------------
Retix Europe Ltd., a wholly owned subsidiary of Retix, owns all of the
interests in Sonoma Systems Europe Ltd. (formerly Retix U.K. Ltd.). The Company
and Retix shall transfer ownership of Retix Europe Ltd. to the Company in a tax
free transfer pursuant to Section 351 of the Internal Revenue Code of 1986, as
amended, as set forth in the Letter Agreement between Retix and the Company of
even date with the Agreement. Corporate documents for such entities, including
stock records, charter documents and Board minutes have been provided to counsel
for the Purchasers.
Raycom Systems, Inc. was merged into the Company on September 24, 1996.
Merger documents and the tax clearance certificate for Raycom Systems, Inc. have
been provided to counsel for the Purchasers.
SECTION 2.8 - INTELLECTUAL PROPERTY
- -----------------------------------
The Company is currently using and has applied for the following registered
trademarks, service marks and/or trade names:
. Sonoma
. Sonoma Systems
. Sonoma Systems Europe
. Sonoma Access
. Sonoma Access+/Plus
The Company has abandoned applications for the following registered trademarks
based upon feedback from the U.S. Trademark Office and/or Company counsel:
. OIA - Open Internetworking Architecture
. OSA - Open Systems Architecture
. NLS - Native LAN Services
. TLS - Transparent LAN Services
The Company is the registered user of the internet domain name "Sonoma
Systems."
<PAGE>
The Company does not currently hold any patents and/or patent applications.
The Company is preparing a patent application related to its dynamically loading
software rules.
The Company currently holds no registered copyrights. The Company is in the
process of registering copyrights for Sonoma Systems' software and publications.
Pursuant to the terms of the Master Agreement between the Company and Retix
dated May 31, 1996, the Company's technology was subject to a Grant-Back License
Agreement with Retix dated May 31, 1996 (the "Grant-Back License"), a copy of
------------------
which has been made available to counsel for the Purchasers. Pursuant to the
terms of a Letter Agreement between the Company and Retix of even date with the
Agreement, the Grant-Back License has been terminated.
Retix has licensed technology for incorporation into its products and the
Company's products, which licenses are licensed from the following:
. 3Com (formerly through NICECOM/NICE Systems & BIRD Foundation)
. ISI (formerly Epilogue Technologies)
. Midnight Networks
. Network Managers
. Seagate Technologies
. Xerox
. Digital Technology
. JTEC
. Motorola
. RAD Network Devices
. Willemijn
The Company shall succeed to all of Retix's rights, privileges and obligations
under such licenses. The Company and Retix shall each use their best efforts to
obtain any consents required for the transfer of the license from Retix to the
Company.
The Company is in compliance with and has paid all royalties due pursuant to
its technology license agreements, subject to amounts due in accordance with
future shipments of its products, with the exception of:
. Willemijn has requested that Retix enter a license agreement related to
Raycom products. Retix has responded to these requests by indicating
that such products should be covered without further liability to the
Company, with which Willemijn concurred, under Retix's existing license
agreement with Willemijn.
. Motorola issued a letter to Retix in December of 1995 addressing possible
"industry-wide" patent infringement involving various data compression
communications protocol standards. Upon internal investigation, Retix
believes that the identified patents do not pertain to the technologies
utilized in its internetworking products. No subsequent follow-up has
been made, to Retix's knowledge, by Motorola, nor has
<PAGE>
Retix or the Company received any further communications from Motorola
regarding the possible patent infringement.
SECTION 2.9 - COMPLIANCE WITH OTHER INSTRUMENTS
- -----------------------------------------------
The Company, directly or through its parent Retix, has entered into the
reseller/distributor, marketing, OEM, development and technology license
contracts listed on Schedule 2.9A herein. Copies of these contracts have been
made available to counsel for the Purchasers. Third party consents to the
transactions contemplated by the Agreement are required from the entities listed
on Schedule 2.9B herein. The Company will use its best efforts to acquire such
consents.
At the Closing, Retix and the Company shall enter into an agreement pursuant
to which Retix shall transfer to Sonoma all of its rights and obligations under
the above-referenced contracts that are related to the Company's worldwide
internetworking/data networking equipment business and where Retix is listed as
a contracting party. The Company shall succeed to all of Retix's rights,
privileges and obligations under such contracts.
SECTION 2.10 - AGREEMENTS; ACTION
- ---------------------------------
Pursuant to the terms of a Letter Agreement between the Company and Retix of
even date with the Agreement, the Grant-Back License has been terminated. A
copy of the Letter Agreement providing for such termination has been provided to
counsel for the Purchasers.
Retix and the Company are parties to the following agreements, copies of which
have been made available to counsel for the Purchasers:
. Master Agreement dated May 31, 1996;
. Preferred Stock Purchase Agreement dated May 31, 1996;
. Rights Agreement dated May 31, 1996, as amended on December 17, 1997;
. Loan Agreement dated May 31, 1996, as amended on July 31, 1997 and December
. 17, 1997;
. Security Agreement dated May 31, 1996;
. Grant-Back License Agreement dated May 31, 1996;
. Intercompany License Agreement dated May 31, 1996;
. Preferred Stock Purchase Agreement dated December 17, 1997;
The Company has entered into standard indemnification agreements with its
officers and directors, copies of which have been made available to counsel for
the Purchasers.
The agreements to which the Company is a party or is bound in excess of
$25,000 are as follows:
<PAGE>
1) Contracts related to the procurement or licensing of technology:
---------------------------------------------------------------
. Agreements under negotiations include Maker Communications for licensing of
circuit emulation technology, IMA and voice cards; Trillium Digital Systems
for licensing of signaling, LANE and MPOA technologies
. Conclusion and termination of development contract with Wipro related to
IMA, Token Ring and test scripts
. Compaq Computer for the purchase of Token Ring and FDDI I/O cards. The
exact amount is not determinable as commitment pertains to bill-back for
past purchases should annual minimum quantity purchases not be made by the
Company, but the Company estimates that the maximum potential liability
under such agreement to be approximately $300,000.
2) Contracts related to facility leases:
------------------------------------
. Boston Technology Center at $4,230/month through August 2002 with
termination clause at month thirty-six (Sept. 2001)
. European sales headquarters in Guildford, UK at 4,677BP/month through
October 1999, with break clause in October 1998
. Company headquarters in Marina del Rey at ~$25k/month through October 1999
(through intercompany sublease with Retix)
3) Contracts related to office equipment:
-------------------------------------
. Xerox 5100 copier (Marina del Rey offices) at $2,383/month through July
2000. The Company is currently attempting to sell and/or trade to reduce
the monthly financial commitment relating to such copier.
. 2 Minolta copiers (UK offices) with quarterly payment of 5,786 BP through
September 1998
4) Commitments related to raising equity capital:
---------------------------------------------
. Minimum commitment fee to raise equity capital for Sonoma Systems: $50k
with Interactive Capital Partners in Stamford, CT.
. Fairness opinion on behalf of Retix's Board of Directors: Sonoma's portion
of fee from Alliant Partners ($18,333)
. Professional fees incurred in connection with the representation of the
Company for preparation of investment documents, due diligence, etc.:
$75k-$125k for Venture Law Group, Stradling Yocca Carlson & Rauth and
Deloitte and Touche
5) Commitments related to non-billable product warranty and customer
-----------------------------------------------------------------
support:
-------
. Product warranty costs average of $42k/quarter during 1997
. European product repair and services agreement with NetVantage (formerly
MicroBug) for 5,625BP/month for one year term through October 1998
. The following open or potential customer/field product issues collectively
could exceed $25,000, although, the Company believes aggregate costs
related to these issues will be covered by warranty or sales returns
reserves recorded in the Company's Financial Statements as of December
27, 1997:
. Memphis, Light Gas and Electric - FibeRing
. Digital Solutions - FE/Full duplex issue with SMC controller chips
<PAGE>
. Mid-Plains Telephone - ML2 & SwitchStak
. Siemens Nixdorf- Support contract
6) Contracts related to the development of technology under OEM agreements:
-----------------------------------------------------------------------
. JTEC: The Company entered into a joint-development agreement with JTEC
under which Retix would provide JTEC certain router functionality in
exchange for access to certain ISDN products developed by JTEC. The
companies are currently in discussion to wind down the relationship. The
Company anticipates the outcome to involve the supply of certain elements
of its source router code for use by JTEC in support of its installed
customer base in exchange for the Company's continued right to
distribute/resell certain of its JTEC's ISDN products in conjunction with
its 7200 series router products. No significant financial payments, if
any, are anticipated to conclude this relationship.
SECTION 2.12 - NO CONFLICT OF INTEREST
- --------------------------------------
The Company and Retix are parties to a Loan Agreement dated May 31, 1996, as
amended, pursuant to which the Company may borrow up to $2,500,000 on or before
its fiscal year end, on December 27, 1997. As of the Closing, the Company shall
have no outstanding balance under such Loan Agreement by operation of Section
6.19 of the Agreement.
The Company has entered into standard indemnification agreements with its
officers and directors, copies of which have been made available to counsel for
the Purchasers.
Jeffrey Drazan, a director of the Company and of Retix, is a general partner
of Sierra Ventures, a venture capital firm. Sierra Ventures makes venture
capital investments in a variety of technology companies, some of which may be
competitors of the Company or Retix.
Coincident with the Closing, the Company and Retix will enter into the
following intercompany agreements:
. The Letter Agreement of even date herewith providing for the sharing of
administrative expenses (the "Shared Administrative Expenses Letter
-------------------------------------
Agreement"), a copy of which has been provided to the Purchaser's
---------
counsel.
. Sublease of facilities, at terms and conditions identical to the primary
lease, under which Retix is the contracting party and the Company is
occupant, including 4601 Admiralty Way, #600, Marina del Rey, CA.
Certain intercompany accounts receivable and payable between Retix and the
European Subsidiaries will be settled in connection with the transfer of the
European Subsidiaries to the Company as set forth in the Shared Administrative
Expenses Letter Agreement.
SECTION 2.13 - RIGHTS OF REGISTRATION; VOTING RIGHTS
- ----------------------------------------------------
<PAGE>
Retix and the Company are parties to a Rights Agreement dated May 31, 1996, as
amended December 17, 1997, which Rights Agreement is being amended and restated
concurrently with the execution and delivery with the Agreement.
SECTION 2.16 - CHANGES
- ----------------------
Subsequent to December 27, 1997, the Company has made offers of employment, in
the ordinary course of business and in support of its 1998 Business Plan, for
positions within its Engineering and Marketing organizations. Regarding key
employees, Walter Mahla has accepted an offer to join the Company as Vice
President of Technology with an anticipated start date of January __, 1998.
Pursuant to the terms of a Letter Agreement between the Company and Retix of
even date with the Agreement, the Grant-Back License Agreement has been
terminated. A copy of the Letter Agreement has been provided to counsel for the
Purchasers.
Coincident with the Closing, the following employment and employee
compensation matters will require attention by the Company:
. Conversion of stock options currently granted to Company employees and
consultants (and pending grants per offers of employment made since
December 17, 1997) pursuant to its 1996 Stock Option Plan as a consequence
of the recapitalization of the Company.
. Approximately 60 Retix employees transferred to the Company on December 29,
1997 without liability for severance from Retix or for past service.
. Arrangements to carry forward current employee benefit plans (see Section
2.17).
SECTION 2.17 - EMPLOYEE BENEFIT PLANS
- -------------------------------------
The Company has in place a 1996 Stock Option Plan (see Section 2.2). The
Company had in place a 1996 Directors' Option Plan which will be terminated
immediately prior to the Initial Closing.
The Company participates in the following employee benefit plans currently
under administration by Retix:
. Customary medical, dental, vision, EAP, life/ad&d, disability (std/LTD)
plans (shared company/employee contributions to premium costs)
. Standard holiday, vacation, sick and maternity leave pay plans
. 125 cafeteria plan (no company contributions)
. 401(k) plan (contributions limited to employees only)
<PAGE>
. Group money purchase pension scheme (UK employees: company 8%; employee 7%
of salary contributions). The Company has no liability for any unfunded
amounts payable under such pension plan.
. Workers compensation plans
. Immigration processing and reimbursements
. Car allowances: Some positions within the Company qualify for car
allowances or company provided cars (primarily European-
based/international employees)
SECTION 2.18 - TAX RETURNS AND PAYMENTS
- ---------------------------------------
For U. S. domestic taxing purposes, the Company's operations are included
within the consolidated/combined income, franchise, sales and use, personal
property, city and county tax returns of its parent corporation, Retix. Upon
Closing, the Company will no longer qualify to file as part of Retix's
controlled group. As such, the income tax loss carryforwards in the approximate
amount of $5,000,000 specific to the Company (generated since establishment of
separate legal entity in June 1996) will be subject to the restrictions and
limitations of tax regulations associated with a change-of-control. Retix has
filed all tax returns as required by law and paid taxes and assessment due.
There has not been any separate tax deficiency proposed or assessed. Statute of
limitation waivers have been signed for the following tax years:
Federal 1991, 1990
California 1991, 1990
Georgia 1991, 1990
Illinois 1991, 1990
Mass. 1991, 1990
New Jersey 1991, 1990
Ohio 1991, 1990
Pennsylvania 1991, 1990
Texas 1991, 1990
Virginia 1991, 1990
SECTION 2.19 - INSURANCE
- ------------------------
The Company's operations, for business, property and operations insurance
purposes, have been included within the consolidated operations of its parent
corporation, Retix. All relevant insurable aspects of the Company have been
separately identified within the December 1997 policy renewal documents for
Retix's combined entities. After the Closing, the policies will be split and
issued in the Company's name.
SECTION 2.22 - PERMITS
- ----------------------
The Company may be required to qualify to do business in Arizona, Rhode Island
and Massachusetts. See Section 2.1 above.
<PAGE>
EXHIBIT 10.56
SUB-SUBLEASE AGREEMENT
----------------------
THIS SUB-SUBLEASE AGREEMENT ("Sub-Sublease"), dated as of the 28th day of
December, 1997, for reference purposes only, between RETIX, a California
corporation, having an office at 4640 Admiralty Way, 6th Floor, Marina del Rey,
California 90292-6695 ("Sub-Sublessor"), and SONOMA SYSTEMS, INC., a California
corporation, having an office at the Subleased Premises (as defined below) from
and after the Commencement Date (as defined below) ("Sub-Subtenant").
W I T N E S S E T H:
- - - - - - --- - -
1. DEMISE AND TERM.
----------------
1.1 Demise. Sub-Sublessor hereby leases to Sub-Subtenant, and Sub-
------
Subtenant hereby hires from Sub-Sublessor, certain office space comprising the
entire 6th floor in the building known as 4640 Admiralty Way, Marina Del Rey,
California 90292 (the "Building"), as shown hatched on the plan attached hereto
as Exhibit A (the "Sub-Subleased Premises"), containing approximately 15,090
---------
rentable square feet, which Sub-Subleased Premises are leased under the Main
Lease (as hereinafter defined) to Value Behavioral Health of California, Inc., a
California corporation, formerly known as American PsychManagement of
California, Inc. (Sublessor).
1.2 Term. The term ("Term") of this Sub-Sublease shall be for the
----
period commencing on December 28, 1997 (the "Commencement Date"), and (ii)
ending on October 31, 1999 ("Expiration Date"), unless sooner terminated as
herein provided. Notwithstanding the foregoing, if the Commencement Date does
not occur on or before December 28, 1997, Sub-Sublessor shall not be subject to
any liability on account of said failure to deliver, nor shall such failure
affect the validity of this Sub-Sublease or the obligations of Sub-Subtenant
hereunder or extend the term hereof, but in such event, Sub-Subtenant shall not
be obligated to pay rent for the Sub-Subleased Premises until possession of the
Sub-Subleased Premises is tendered to Sub-Subtenant, provided that the delay is
not attributable to Sub-Subtenant. If possession of the Sub-Subleased Premises
is delayed as a result of any act or omission of Sub-Subtenant, its agents,
employees or contractors, Sub-Sublessor shall be deemed to have delivered
possession of the Sub-Subleased Premises as of the Commencement Date or such
later date as Sub-Sublessor would have delivered possession if no Sub-Subtenant
delay or delays had occurred.
2. SUBORDINATE TO MAIN LEASE AND SUBLEASE. This Sub-Sublease is and shall
---------------------------------------
be subject and subordinate to (a) the office space Lease dated as of April 2,
1993, as amended (such Lease, as so amended, herein called the "Main Lease")
between Marina Airport Buildings, Ltd., a California limited partnership, as
landlord, and Sublessor (under its former name of American PsychManagement of
California, Inc.), as tenant, (b) the Sublease Agreement dated as of May 29,
1996 (such Sublease herein called the Sublease) between Sublessor and Sub-
Sublessor, as subtenant, and (c) the matters to which the Main Lease and
<PAGE>
the Sublease are or shall be subject and subordinate. The Main Lease, a copy of
which is attached hereto as Exhibit B, and the Sublease, a copy of which is
---------
attached hereto as Exhibit C, are incorporated by reference herein.
---------
3. INCORPORATION BY REFERENCE.
---------------------------
3.1 Main Lease. The terms, covenants and conditions of the Main
----------
Lease are incorporated herein by reference so that, except to the extent that
they are inapplicable or modified by the provisions of this Sub-Sublease for the
purpose of incorporation by reference, each and every term, covenant and
condition of the Main Lease binding or inuring to the benefit of the landlord
thereunder shall, in respect of this Sub-Sublease, bind or inure to the benefit
of Sub-Sublessor, and each and every term, covenant and condition of the Main
Lease binding or inuring to the benefit of the tenant thereunder shall, in
respect of this Sub-Sublease, bind or inure to the benefit of Sub-Subtenant,
with the same force and effect as if such terms, covenants and conditions were
completely set forth in this Sub-Sublease, and as if the words "Landlord" and
"Tenant," or words of similar import, wherever the same appear in the Main
Lease, were construed to mean, respectively, "Sub-Sublessor" and "Sub-Subtenant"
in this Sub-Sublease, and as if the word "Premises," or words of similar import,
wherever the same appear in the Main Lease, were construed to mean "Sub-
Subleased Premises" in this Sub-Sublease, and as if the word "Lease," or words
of similar import, wherever the same appear in the Main Lease, were construed to
mean this "Sub-Sublease." Sub-Subtenant shall not be required to pay any rent
or additional rent due under the Main Lease, except that Sub-Subtenant shall pay
to Sub-Sublessor, at the cost charged to Sub-Sublessor, the charges for any
special services or requirements of Sub-Subtenant, including, without
limitation, overtime air conditioning, overtime/excess electrical usage, extra
cleaning, extra elevator use, and extra water use. Sub-Subtenant shall have the
right to request such special services or requirements directly from the
landlord under the Main Lease. The time limits contained in the Main Lease for
the giving of notices, making of demands or performing of any act, condition or
covenant on the part of the tenant thereunder, or for the exercise by the tenant
thereunder of any right, remedy or option, are changed for the purposes of
incorporation herein by reference by shortening the same in each instance by two
(2) days, so that in each instance Sub-Subtenant shall have two (2) fewer days
to observe or perform hereunder than the Tenant under the Main Lease.
Notwithstanding the foregoing, the following articles or sections of the Main
Lease shall be deemed deleted for the purpose of incorporation by reference in
this Sub-Sublease: Sections 1.1(a), (b), (d), (e), (f), (h), (i), (k) and (l);
Article 2; the words "together with any monthly installments of 'Operating
Expense Rent' and 'Capital Expenditure Rent'" in Section 3.1; the first sentence
of Section 4.1; the last sentence of Section 5.1; the reference to "100%
occupied" in the second line of Section 5.2 (which shall be replaced with the
words "95% occupied"); Article 7; the first sentence of Section 12.1; the words
"provided, however, that Tenant shall not be required to demolish or remove any
Leasehold Improvements" in Section 12.2; Article 17; Article 25; Article 36;
Article 37; Article 38; Article 39; Article 40; Article 41; Article 42; Addendum
No.1, Addendum to Article 3, Section 3.8; Addendum No.1, Addendum to Article
10; Addendum No.1, Addendum to Article 23; Addendum No.1, Addendum to Article
34; Addendum No. 2; Exhibits A-1, F ("Broker Registration
2
<PAGE>
Agreement") and I; and the Guaranty. Notwithstanding anything to the contrary
contained in this Sub-Sublease, Sub-Subtenant shall not exercise the termination
right set forth in Section 21.5 of the Main Lease without the prior written
consent of Sub-Sublessor, which shall not be unreasonably withheld or delayed.
Any non-liability, release, indemnity or hold harmless provision in the Main
Lease for the benefit of the landlord under the Main Lease, that is incorporated
herein by reference, shall be deemed to inure to the benefit of Sub-Sublessor,
Sublessor and the landlord under the Main Lease, for the purpose of
incorporation by reference in this Sub-Sublease. Any right of the landlord under
the Main Lease of access or inspection and any right of the landlord under the
Main Lease to do work in the premises under the Main Lease or in the Building
and any right of the landlord under the Main Lease in respect of rules and
regulations shall be deemed to inure to the benefit of Sub-Sublessor, Sublessor
and the landlord under the Main Lease, for the purpose of incorporation by
reference in this Sub-Sublease. If any of the express provisions of this Sub-
Sublease shall conflict with any of the provisions incorporated by reference,
such conflict shall be resolved in every instance in favor of the express
provisions of this Sub-Sublease.
3.2 Sublease. The terms, covenants and conditions of the Sublease
--------
are incorporated herein by reference so that, except to the extent that they are
inapplicable or modified by the provisions of this Sub-Sublease for the purpose
of incorporation by reference, each and every term, covenant and condition of
the Sublease binding or inuring to the benefit of the Sublessor thereunder
shall, in respect of this Sub-Sublease, bind or inure to the benefit of Sub-
Sublessor, and each and every term, covenant and condition of the Sublease
binding or inuring to the benefit of the subtenant thereunder shall, in respect
of this Sub-Sublease, bind or inure to the benefit of Sub-Subtenant, with the
same force and effect as if such terms, covenants and conditions were completely
set forth in this Sub-Sublease, and as if the words "Sublessor" and "Subtenant,"
or words of similar import, wherever the same appear in the Sublease, were
construed to mean, respectively, "Sub-Sublessor" and "Sub-Subtenant" in this
Sub-Sublease, and as if the word "Subleased Premises," or words of similar
import, wherever the same appear in the, were construed to mean "Sub-Subleased
Premises" in this Sub-Sublease, and as if the word "Sublease," or words of
similar import, wherever the same appear in the Sublease, were construed to mean
this "Sub-Sublease." Sub-Subtenant shall not be required to pay any rent or
additional rent due under the Sublease, except that Sub-Subtenant shall pay to
Sub-Sublessor, at the cost charged to Sub-Sublessor, the charges for any special
services or requirements of Sub-Subtenant, including, without limitation,
overtime air conditioning, overtime/excess electrical usage, extra cleaning,
extra elevator use, and extra water use. Sub-Subtenant shall have the right to
request such special services or requirements directly from the landlord under
the Main Lease. Notwithstanding the foregoing, the following sections of the
Sublease shall be deemed deleted for the purpose of incorporation by reference
in this Sub-Sublease: Sections 1, 2, 3, 7, 8, 9, 10, 12, 14, 17, 18, 19, 21, 26,
29, 31, 32, 33, 37, 38 and 40.
4. PERFORMANCE BY SUB-SUBLESSOR. Any obligation of Sub-Sublessor which is
-----------------------------
contained in this Sub-Sublease by the incorporation by reference of the
provisions of the Sublease shall be observed or performed by Sub-Sublessor using
reasonable efforts to cause
3
<PAGE>
the Sublessor under the Sublease to observe and/or perform the same (including
causing the Sublessor to obtain the performance of the landlord under the Main
Lease), and Sub-Sublessor shall have a reasonable time to enforce its rights to
cause such observance or performance. Sub-Sublessor shall not be required to
furnish, supply or install anything under any article of the Main Lease,
including, without limitation, any article requiring landlord to make repairs,
provide insurance or perform reconstruction in the event of damage, construction
or condemnation. Sub-Subtenant shall not in any event have any rights in respect
of the Sub-Subleased Premises greater than Sub-Sublessor's rights under the
Sublease, and notwithstanding any provision to the contrary, as to obligations
that pertain to the Sub-Subleased Premises and are contained in this Sub-
Sublease by the incorporation by reference of the provisions of the Main Lease
and the Sublease, Sub-Sublessor shall not be required to make any payment or
perform any obligation, and Sub-Sublessor shall have no liability to Sub-
Subtenant for any matter whatsoever, except for Sub-Sublessor's obligation to
pay the rent and additional rent due under the Sublease, and for Sub-Sublessor's
obligation to use reasonable efforts, upon request of Sub-Subtenant, to cause
the Sublessor under the Sublease to observe and/or perform its obligations under
the Sublease. If Sub-Sublessor fails, after using reasonable efforts, to cause
the Sublessor under the Sublease to observe and/or perform its obligations under
the Sublease, Sub-Subtenant shall have the right, upon notice to Sub-Sublessor,
to bring an action in Sub-Sublessor's name (but at Sub-Subtenant's sole cost),
to accomplish such purpose. Sub-Sublessor shall not be responsible for any
failure or interruption, for any reason whatsoever, of the services or
facilities that may be appurtenant to or supplied at the Building by the
landlord under the Main Lease or by Sublessor or otherwise, including, without
limitation, heat, air conditioning, water, electricity, elevator service and
cleaning service, if any; and no failure to furnish, or interruption of, any
such services or facilities shall give rise to any liability on the part of Sub-
Sublessor except to the extent caused by Sub-Sublessor's failure to use
reasonable efforts to cause Sublessor to perform such obligations under the
Sublease.
5. NO BREACH OF MAIN LEASE OR SUBLEASE. Sub-Subtenant shall not do or
------------------------------------
permit to be done any act or thing which may constitute a breach or violation of
any term, covenant or condition of the Sublease by the sublessee thereunder,
whether or not such act or thing is permitted under the provisions of this Sub-
Sublease. Sub-Sublessor shall perform its obligations under the Sublease except
to the extent Sub-Subtenant is obligated herein to perform same.
6. NO PRIVITY OF ESTATE. Nothing containing in this Sub-Sublease shall be
---------------------
construed to create privity or estate or of contract between Sub-Subtenant and
the landlord under the Main Lease or between Sublessor and Sub-Subtenant.
7. INDEMNITY. Sub-Subtenant shall indemnify, protect, defend with counsel
----------
reasonably acceptable to Sub-Sublessor and hold harmless Sub-Sublessor,
Sublessor and the landlord under the Main Lease (collectively, the
Indemnitees) from and against all losses, costs, damages, expenses and
liabilities, including, without limitation, reasonable attorneys'
4
<PAGE>
fees and costs, which the Indemnitees or any of them may incur or pay out by
reason of (a) any accidents, damages or injuries to persons or property
occurring in, on or about the Sub-Subleased Premises, (b) any breach or default
hereunder (including, without limitation, the provisions of the Main Lease and
the Sublease that are incorporated by reference herein) on Sub-Subtenant's part,
(c) the enforcement of Sub-Sublessor's rights under this Section, Section 4 or
any other section of this Sub-Sublease, (d) any work done after the date hereof
in or to the Sub-Subleased Premises except if done by Sub-Sublessor, (e) the
negligence or willful misconduct on the part of Sub-Subtenant and/or its
officers, employees, agents, contractors and/or invitees, or any person claiming
through or under Sub-Subtenant, (f) with respect to Sub-Sublessor only, any
action brought by Sub-Subtenant against the Sublessor under the Sublease
pursuant to Sections 4 and 14 of this Sub-Sublease, or (g) the existence of any
hazardous substances (as defined in the Main Lease) which are proven to have
been present in or about the Sub-Subleased Premises only after the Commencement
Date which resulted from Sub-Subtenant's storage, release, use or disposal of
hazardous substances in or about the Sub-Subleased Premises, or the storage,
release, use or disposal of Sub-Subtenant's agents, employees, contractors or
invitees.
Sub-Sublessor shall indemnify, protect, defend with counsel reasonably
acceptable to Sub-Subtenant and hold harmless Sub-Subtenant from and against all
losses, costs, damages, expenses and liabilities, including, without limitation,
reasonable attorney's fees and costs, which Sub-Subtenant may incur or pay out
by reason of (a) any accidents, damages or injuries to persons or property
occurring in, on or about the Sub-Subleased Premises if the same shall have been
caused by Sub-Sublessor's negligence or willful misconduct, or that of its
agents, employees, contractors or invitees, (b) any breach or default hereunder
or under the Sublease or the Main Lease (to the extent incorporated by reference
in the Sublease as an obligation of Sub-Sublessor) on Sub-Sublessor's part, (c)
the enforcement of Sub-Subtenant's rights under this Section or any other
section of this Sub-Sublease, (d) any negligence or willful misconduct on the
part of Sub-Sublessor and/or its officers, employees, agents or contractors with
respect to the Sub-Subleased Premises, or (e) the existence of any hazardous
substances which are proven to have been present in or about the Sub-Subleased
Premises prior to the Commencement Date which resulted from Sub-Sublessor's
storage, use or disposal of hazardous substances in or about the Sub-Subleased
Premises, or the storage, use or disposal of Sub-Sublessor's agents, employees,
contractors or invitees.
8. RENT.
-----
8.1 Monthly Basic Rent. From and after the Commencement Date, Sub-
------------------
Subtenant shall pay without deduction or offset, monthly basic rent ("Monthly
Basic Rent") in the following amounts:
MONTH Monthly Basic Rent
----- ------------------
12/28/97 - 10/31/98 $23,842.20 ($1.58/sf)
5
<PAGE>
11/1/98 - 10/31/99 $26,558.40 ($1.76/sf)
Monthly Basic Rent and Additional Rent (as defined below) shall be payable
in advance on the first day of each month during the term of this Sub-Sublease
in lawful money of the United States at the address of Sub-Sublessor set forth
at the head of this Sub-Sublease or to such other person and/or at such other
address as Sub-Sublessor may from time to time designate by notice to Sub-
Subtenant. If the Commencement Date is other than the first day of a calendar
month, or if the Expiration Date is other than the last day of a calendar month,
Monthly Base Rent and Additional Rent shall be prorated on the basis of a thirty
(30)- day month. Payment of first month=s Monthly Basic Rent shall be paid to
Sub-Sublessor on the Commencement Date. No payment by Sub-Subtenant or receipt
by Sub-Sublessor of any lesser amount than the amount stipulated to be paid
hereunder shall be deemed other than on account of the earliest stipulated
Monthly Basic Rent or Additional Rent; nor shall any endorsement or statement on
any check or letter be deemed an accord and satisfaction, and Sub-Sublessor may
accept any check or payment without prejudice to Sub-Sublessor's right to
recover the balance due or to pursue any other remedy available to Sub-
Sublessor. Any provision in the Main Lease referring to basic rent or
additional rent incorporated herein by reference shall be deemed to refer to the
Monthly Basic Rent or Additional Rent, as the case may be, due under this Sub-
Sublease.
8.2 Additional Rent. Commencing on the first day of the January, 1999,
---------------
Sub-Subtenant shall pay to Sub-Sublessor, within five (5) business days after
receipt of demand, any amounts that are payable by Sub-Sublessor to the
Sublessor for payment to landlord under the Main Lease in respect to the Sub-
Subleased Premises pursuant to the provisions thereof regarding (a) "Tax Rent"
(as defined in the Main Lease) in excess of the annual amount payable therefor
by Sub-Sublessor for the 1997/1998 fiscal tax year, and (b) "Operating Expense
Rent" (as defined in the Main Lease) in excess of the annual amount payable
therefor by Sub-Sublessor for the calendar year 1998. Sub-Subtenant shall not
be obligated to pay any Tax Rent due to a sale or transfer of the Building. The
1998 base year over which all increases shall be determined shall include all
actual operating expenses and taxes, adjusted to reflect the Building being
ninety-five percent (95%) occupied. In addition, all other sums (excluding
Monthly Basic Rent) payable by Sub-Subtenant hereunder shall be deemed to be
Additional Rent.
9. SECURITY DEPOSIT. Notwithstanding anything to the contrary contained
-----------------
in this Sub-Sublease, the Sublease or the Main Lease,Sub-Sublessor shall not
require payment of a security deposit in connection with this Sub-Sublease.
10. USE. Sub-Subtenant shall use and occupy the Sub-Subleased Premises
----
for general office purposes and any other legally permitted non-retail uses
compatible with a first class office building. Sub-Subtenant shall use the Sub-
Subleased Premises for no other purposes without the consent of Sub-Sublessor,
which consent shall not be unreasonably withheld or delayed, Sublessor and
landlord.
6
<PAGE>
11. CONDITION OF SUB-SUBLEASED PREMISES; USE OF FACILITIES. Sub-Subtenant
------------------------------------------------------
is leasing the Sub-Subleased Premises in its "as is" condition, and Sub-
Sublessor has no obligation to make any repairs to the Sub-Subleased Premises or
to construct any improvements therein for the benefit of Sub-Subtenant. In
making and executing this Sub-Sublease, Sub-Subtenant has relied solely on such
investigations, examinations and inspections as Sub-Subtenant has chosen to make
or has made. Sub-Subtenant acknowledges that Sub-Sublessor has afforded Sub-
Subtenant the opportunity for full and complete investigations, examinations,
and inspections.
12. CONSENTS AND APPROVALS. In any instance when Sub-Sublessor's consent
-----------------------
or approval is required under this Sub-Sublease, Sub-Sublessor's refusal to
consent to or approve any matter or thing shall be deemed reasonable if, inter
-----
alia, such consent or approval has not been obtained from the landlord under the
- ----
Main Lease or from the Sublessor under the Sublease. Otherwise, Sub-Sublessor's
consent or approval as required under this Sub-Sublease shall not be
unreasonably withheld or delayed, except with respect to any use of the Sub-
Subleased Premises which is not a permitted use.
13. NOTICES. All notices, consents, approvals, demands and requests which
--------
are required or desired to be given by either party to the other hereunder shall
be in writing and shall be either (a) personally delivered or (b) sent by United
States postal service, return receipt requested and postage prepaid or (c) by
nationally recognized overnight courier. Notices, consents, approvals, demands
and requests which are served upon Sub-Sublessor or Sub-Subtenant in the manner
provided herein shall be deemed to have been given or served for all purposes
hereunder (i) on the date of delivery if personally delivered or sent by courier
service or (ii) on the date on which such notice, consent, approval, demand or
request shall have been mailed if mailed as aforesaid. All notices, consents,
approvals, demands and requests given to Sub-Sublessor shall be addressed to
Sub-Sublessor at the address for Sub-Sublessor set forth above, Attention: Chief
Financial Officer, or at such other place as Sub-Sublessor may from time to time
designate in a notice given in accordance with the provisions of this Section.
All notices, consents, approvals, demands and requests given to Sub-Subtenant
shall be addressed to Sub-Subtenant at the Sub-Subleased Premises, Attention:
Chief Financial Officer, or at such other place as Sub-Subtenant may from time
to time designate in a notice given in accordance with the provisions of this
Section. All notices to landlord shall be addressed to landlord as set forth in
the Main Lease and all notices to the Sublessor shall be addressed to Sublessor
as set forth in the Sublease.
14. TERMINATION OF MAIN LEASE OR SUBLEASE. If for any reason the term of
--------------------------------------
the Main Lease or the Sublease shall terminate prior to the expiration date of
this Sub-Sublease, this Sub-Sublease shall thereupon be terminated and Sub-
Sublessor shall not be liable to Sub-Subtenant by reason thereof unless said
termination shall have been effected because of the breach, default or voluntary
surrender by Sub-Sublessor under the Sublease or this Sub-Sublease. If the
landlord under the Main Lease or Sublessor under the Sublease wrongfully
terminates or attempts to wrongfully terminate the Main Lease or the Sublease,
as the case may be, Sub-Sublessor shall cooperate with Sub-Subtenant to keep the
Main Lease and the Sublease
7
<PAGE>
in full force and effect. Such cooperation shall include permitting Sub-
Subtenant to bring or defend an action or proceeding in Sub-Sublessor's name
(but at Sub-Subtenant's expense) in connection with such termination or
attempted termination.
15. INSURANCE. Sub-Subtenant shall maintain throughout the term of this
----------
Sub-Sublease the insurance required under the Main Lease. All insurance
maintained by Sub-Subtenant shall name Sub-Sublessor, Sublessor and the landlord
under the Main Lease as additional insureds. Sub-Subtenant shall deliver to Sub-
Sublessor, Sublessor and the landlord under the Main Lease certificates of
insurance issued by the carriers or their duly authorized agents prior to the
Commencement Date. Sub-Subtenant shall procure and pay for renewals of such
insurance from time to time before the expiration thereof, and Sub-Subtenant
shall deliver to Sub-Sublessor, Sublessor and the landlord under the Main Lease
such renewal policies or certificates at least ten (10) days before the
expiration of any existing policy. All such policies shall meet the requirements
in the Main Lease and shall be issued by companies of recognized responsibility
licensed to do business in the State of California, and all such policies shall
contain a provision whereby the same cannot be canceled or modified unless Sub-
Sublessor, Sublessor and the landlord under the Main Lease are given at least 20
days' prior written notice by certified or registered mail of such cancellation
or modification.
16. ESTOPPEL CERTIFICATES. Sub-Subtenant and Sub-Sublessor shall, within
----------------------
ten (10) business days after receipt of each and every request by the other
party hereto, execute, acknowledge and deliver to the party that made the
request a statement in writing (a) certifying that this Sub-Sublease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), (b) specifying the dates to which the Monthly Basic Rent and
Additional Rent (as defined in Section 8.2 hereof) have been paid, (c) stating
whether or not, to the best knowledge of the party signing same, Sub-Sublessor
or Sub-Subtenant is in default in performance or observance of its obligations
under this Sub-Sublease, and, if so, specifying each such default, (d) stating
whether or not, to the best knowledge of the party signing same, any event has
occurred which with the giving of notice or passage of time, or both, would
constitute a default by Sub-Sublessor or Sub-Subtenant under this Sub-Sublease,
and, if so specifying each such event, and (e) stating whether Sub-Subtenant has
exercised any option(s) to extend the term of this Sub-Sublease, and, if so,
specifying each such extension. Any such statement delivered pursuant to this
Section may be relied upon by any prospective assignee or transferee of the
leasehold estate under the Main Lease, the subleasehold estate under the
Sublease or the sub-subleasehold estate under this Sub-Sublease.
17. ALTERATIONS. Sub-Subtenant shall not make, cause or permit the making
------------
of any alterations, addition, change, replacement, or installation in or to the
Sub-Subleased Premises without obtaining the prior consent of the Sub-Sublessor
(which shall not be unreasonably withheld or delayed), and Sub-Subtenant will be
required to obtain the consent of the landlord under the Main Lease and the
Sublessor under the Sublease in each instance if required under the Main Lease
or the Sublease, respectively. Any alterations made by Sub-Subtenant shall be
performed in accordance with the applicable provisions of the Sublease and
8
<PAGE>
Main Lease. Unless specifically agreed to in writing by Sub-Sublessor, Sublessor
and landlord at the time that Sub-Subtenant requests consent to an alteration,
Sub-Subtenant shall be required to remove all alterations upon the expiration or
earlier termination of this Sub-Sublease.
18. RIGHT TO CURE SUB-SUBTENANT'S DEFAULTS. If Sub-Subtenant shall at any
---------------------------------------
time fail to make any payment or perform any other obligation of Sub-Subtenant
hereunder, then Sub-Sublessor shall have the right, but not the obligation,
after ten (10) days' notice to Sub-Subtenant, or without notice to Sub-Subtenant
in the case of any emergency, and without waiving or releasing Sub-Subtenant
from any obligations of Sub-Subtenant hereunder, to make such payment or perform
such other obligation of Sub-Subtenant in such manner and to such extent as Sub-
Sublessor shall deem necessary, and in exercising any such right, to pay any
incidental costs and expenses, employ attorneys, and incur and pay reasonable
attorneys' fees. Sub-Subtenant shall pay to Sub-Sublessor within five (5) days
after receipt of demand all sums so paid by Sub-Sublessor and all incidental
costs and expenses of Sub-Sublessor in connection therewith, together with
interest thereon at the rate of one and one-half percent per calendar month or
any part thereof or the then maximum lawful interest rate, whichever shall be
less, from the date of the making of such expenditures.
19. BROKERAGE. Sub-Subtenant and Sub-Sublessor each represents to the
----------
other that it dealt with no broker or other person in bringing about this Sub-
Sublease, and each party hereto shall indemnify, protect, defend and hold
harmless the other party from and against any loss, liability, damage, cost and
expense (including, without limitation, reasonable attorneys' fees) in
connection with (a) any claims made by any broker or other person for a
brokerage commission, finder's fee, or similar compensation, by reason of or in
connection with this Sub-Sublease if such other broker or other person claims to
have had dealings with the indemnifying party, and/or (b) the enforcement of the
indemnified party's rights under this Section.
20. NO WAIVER. The failure of Sub-Sublessor or Sub-Subtenant to insist in
---------
any one or more cases upon the strict performance or observance of any
obligation of Sub-Subtenant or Sub-Sublessor hereunder or to exercise any right
or option contained herein shall not be construed as a waiver or relinquishment
for the future of any such obligation of Sub-Subtenant or Sub-Sublessor or any
right or option of Sub-Sublessor or Sub-Subtenant. Sub-Sublessor's receipt and
acceptance of Monthly Basic Rent or Additional Rent, or Sub-Sublessor's
acceptance of performance of any other obligation by Sub-Subtenant, with
knowledge of Sub-Subtenant's breach of any provision of this Sub-Sublease, shall
not be deemed a waiver of such breach. No waiver by Sub-Sublessor or Sub-
Subtenant of any term, covenant or condition of this Sub-Sublease shall be
deemed to have been made unless expressed in writing and signed by Sub-Sublessor
or Sub-Subtenant, as the case may be.
21. COMPLETE AGREEMENT. There are no representations, warranties,
-------------------
agreements, arrangements or understandings, oral or written, between the parties
or their representatives relating to the subject matter of this Sub-Sublease
which are not fully expressed
9
<PAGE>
in this Sub-Sublease. This Sub-Sublease cannot be changed or terminated orally
or in any manner other than by a written agreement executed by both parties.
22. SUCCESSORS AND ASSIGNS. The provisions of this Sub-Sublease, except
-----------------------
as herein otherwise specifically provided, shall extend to, bind and inure to
the benefit of the parties hereto and their respective personal representatives,
heirs, successors and permitted assigns. In the event of any assignment or
transfer of Sub-Sublessor's interest in the leasehold estate under the Sublease,
the transferor or assignor, as the case may be, shall be and hereby is entirely
relieved and freed of all obligations under this Sub-Sublease arising after the
date of such assignment or transfer. No such assignment by Sub-Sublessor shall
be effective unless and until the transferee assumes in writing all of Sub-
Sublessor's obligations under this Sub-Sublease.
23. THIRD PARTY CONSENTS. Sub-Sublessor and Sub-Subtenant acknowledge and
---------------------
agree that, pursuant to Section 26.9 of the Main Lease and Section 3 of the
Sublease, Sub-Sublessor is not required to obtain the prior written consent of
the landlord under the Main Lease or the Sublessor under the Sublease.
24. NO THIRD PARTY BENEFICIARY. None of the provisions of this Sub-
--------------------------
Sublease shall be construed to accrue to the benefit of, or be enforceable by,
any third party, other than the landlord under the Main Lease or the Sublessor
under the Sublease.
25. INTERPRETATION. Irrespective of the place of execution or
---------------
performance, this Sub-Sublease shall be governed by and construed in accordance
with the laws of the State of California. If any provision of this Sub-Sublease
or the application thereof to any person or circumstances shall, for any reason
and to any extent, be invalid or unenforceable, the remainder of this Sub-
Sublease and the application of that provision to other persons or circumstances
shall not be affected but rather shall be enforced to the extent permitted by
law. The captions, headings and titles, if any, in this Sub-Sublease are solely
for convenience or reference and shall not affect its interpretation. This Sub-
Sublease shall be construed without regard to any presumption or other rule
requiring construction against the party causing this Sub-Sublease to be
drafted. If any words or phrases in this Sub-Sublease shall have been stricken
out or otherwise eliminated, whether or not any other words or words or phrases
so stricken out or otherwise eliminated. Each covenant, agreement, obligation
or separate and independent covenant of the party bound by, undertaking or
making same, not dependent on any other provision of this Sub-Sublease unless
otherwise expressly provided. All terms and words used in this Sub-Sublease
shall mean a natural person or persons, a partnership, a corporation or any
other form of business or legal association or entity.
26. DEFAULT. Sub-Subtenant's performance of each of its obligations
--------
under this Sub-Sublease constitutes a condition as well as a covenant, and Sub-
Subtenant's right to continue in possession of the Sub-Subleased Premises is
conditioned upon such performance. In addition, Sub-Subtenant shall be in
material default of its obligations under this Sub-Sublease if Sub-Subtenant is
responsible for the occurrence of any of the events of default set
10
<PAGE>
forth in Section 30 of the Main Lease.
27. REMEDIES. In the event of any default by Sub-Subtenant under
---------
this Sub-Sublease (including, without limitation, a default pursuant to Section
30 of the Main Lease), Sub-Sublessor shall have all remedies provided by
applicable law, including, without limitation, all rights pursuant to Section 31
of the Master Lease and under California Civil Code Sections 1951.2 and 1951.4.
Sub-Sublessor may resort to its remedies cumulatively or in the alternative.
28. REPRESENTATIONS. Sub-Sublessor represents and warrants that:
----------------
(a) the Main Lease, attached hereto as Exhibit B, is a complete copy
---------
of the Main Lease and is in full force and effect, has not been further modified
or amended, and, to the best knowledge of Sub-Sublessor, there exists under the
Main Lease no default or event of default, nor has there occurred any event
which, with the giving of notice or passage of time or both, could constitute
such a default or event of default;
(b) the Sublease, attached hereto as Exhibit C, is a complete copy of
---------
the Sublease and is in full force and effect, has not been further modified or
amended, and, to the best knowledge of Sub-Sublessor, there exists under the
Sublease no default or event of default, nor has there occurred any event which,
with the giving of notice or passage of time or both, could constitute such
default or event of default;
(c) to the best knowledge of Sub-Sublessor, there is no pending
termination of the Main Lease. Sub-Sublessor will notify Sub-Subtenant promptly
if it becomes aware of any impending termination of the Main Lease;
(d) there are no pending or threatened actions, suits or proceedings
before any court or administrative agency against Sub-Sublessor or, to the best
of Sub-Sublessor's knowledge, against landlord or Sublessor which could, in the
aggregate, adversely affect the Sub-Subleased Premises or any part thereof or
the ability of landlord to perform its obligations under the Main Lease or of
Sublessor to perform its obligations under the Sublease or of Sub-Sublessor to
perform its obligations under this Sub-Sublease, and Sub-Sublessor is not aware
of any facts which might result in any such actions, suits or proceedings; and
(e) Sub-Sublessor has not received any written notice from any
insurance company of any defects or inadequacies in the Sub-Subleased Premises
or any part thereof which could adversely affect the insurability of the Sub-
Subleased Premises or the premiums for the insurance thereof.
29. AMENDMENT OR MODIFICATION. Sub-Sublessor and Sublessor shall not
-------------------------
amend or modify the Sublease in any way so as to materially or adversely affect
Sub-Subtenant or its interest hereunder or in the Sub-Subleased Premises,
materially increase Sub-Subtenant's obligations hereunder or materially restrict
Sub-Subtenant's rights hereunder, without the prior
11
<PAGE>
written consent of Sub-Subtenant, which shall not be unreasonably withheld or
delayed.
30. QUIET ENJOYMENT; RIGHT TO CURE. Sub-Subtenant shall peacefully have,
------------------------------
hold and enjoy the Sub-Subleased Premises, subject to the terms and conditions
of this Sub-Sublease, provided that Sub-Subtenant pays all Monthly Basic Rent
and Additional Rent owing under this Sub-Sublease (and performs all other of
Sub-Subtenant's covenants and agreements contained herein). In the event,
however, that Sub-Sublessor defaults in the performance or observance of any of
Sub-Sublessor's obligations hereunder or under the Sublease, then Sub-Subtenant
shall give Sub-Sublessor notice specifying in what manner Sub-Sublessor has
defaulted, and if such default shall not be cured by Sub-Sublessor within thirty
(30) days thereafter (except that if such default cannot be cured within said
thirty (30)-day period, this period shall be extended for an additional
reasonable time, provided that Sub-Sublessor commences to cure such default
within such thirty (30)-day period and proceeds diligently thereafter to effect
such cure as quickly as possible), then, upon the passage of five (5) business
days after the date of a second written notice from Sub-Subtenant of the
default, if Sub-Sublessor has failed to so cure, in addition, Sub-Subtenant
shall be entitled, at Sub-Subtenant's option, to cure such default and promptly
collect from Sub-Sublessor Sub-Subtenant's reasonable expenses in so doing
(including, without limitation, reasonable attorneys' fees and court costs).
Sub-Sublessor shall provide copies to Sub-Subtenant of all notices received from
landlord pursuant to the Main Lease and from Sublessor pursuant to the Sublease.
31. TERMINATION OF SUBLEASE BY SUB-SUBLESSOR. Sub-Sublessor shall not
----------------------------------------
voluntarily terminate the Sublease during the Sub-Sublease term unless and until
Sublessor has agreed in writing to continue this Sub-Sublease in full force and
effect as a direct sublease between Sublessor and Sub-Subtenant upon and subject
to all of the terms, covenants and conditions of this Sub-Sublease for the
balance of the term hereof. If Sublessor so consents, Sub-Subtenant shall
attorn to Sublessor in connection with any such voluntary termination and shall
execute an attornment agreement in such form as may reasonably be requested by
Sublessor; provided, however, that the attornment agreement does not materially
adversely affect the use by Sub-Subtenant of the Sub-Subleased Premises in
accordance with the terms of this Sub-Sublease, materially increase Sub-
Subtenant's obligations under this Sub-Sublease or materially decrease Sub-
Subtenant's rights under this Sub-Sublease. If this Sub-Sublease terminates as
a result of Sub-Sublessor's default under the Sublease, then, so long as Sub-
Subtenant is not then in default beyond any applicable cure period under the
terms of this Sub-Sublease, and so long as Sublessor so agrees in writing, this
Sub-Sublease shall continue in full force and effect as a direct sublease
between Sub-Subtenant and Sublessor, upon and subject to all of the terms,
covenants and conditions of this Sub-Sublease for the balance of the term
hereof. In such event, Sub-Subtenant shall attorn to Sublessor as set forth in
this Section 31.
32. WAIVER OF SUBROGATION. Landlord and Sublessor expressly agree that
---------------------
the provisions of Section 18.4 of the Main Lease regarding waiver of rights of
subrogation shall be extended to and be between landlord and Sub-Subtenant and
Sublessor and Sub-Subtenant.
33. PARKING. Sub-Subtenant shall have the non-exclusive use of six (6)
-------
parking
12
<PAGE>
spaces per 1,000 square feet of the Sub-Subleased Premises in the Building
parking lot. During the Term, as extended, Sub-Subtenant shall pay the
prevailing rates offered by the landlord under the Main Lease for such parking
spaces.
34. COUNTERPARTS. This Sub-Sublease may be executed in counterparts, each
------------
of which, when taken together as a whole, shall constitute one (1) original
document.
35. ASSIGNMENT AND SUBLETTING. Notwithstanding anything to the contrary
--------------------------
contained in the Main Lease or the Sublease, and subject to obtaining
Sublessor's and the landlord's consent to this Section 35 and to any such
assignment or sublet, Sub-Subtenant shall have the right, without the prior
written consent of Sub-Sublessor, to assign this Sub-Sublease or to further
sublet all or any portion of the Sub-Subleased Premises to a subsidiary,
affiliate or parent corporation of Sub-Subtenant so long as (i) Sub-Subtenant
owns fifty percent (50%) of more of the stock of the transferee subsidiary or
affiliate; (ii) Sub-Subtenant and its parent corporation remain fully liable for
the obligations of Sub-Subtenant during the remaining Term of this Sub-Sublease;
(iii) any such assignment or sublet shall be subject to all of the terms,
covenants and conditions of this Sub-Sublease; (iv) any transferee of Sub-
Subtenant shall fully assume in writing all of the obligations of Sub-Subtenant
hereunder; and (v) the form of assignment or sublet shall be reasonably
acceptable to Sub-Sublessor. Any other proposed assignment or sublet by Sub-
Subtenant shall be in conformance with the provisions of Article 26 of the Main
Lease, and Sub-Subtenant shall pay to Sub-Sublessor fifty percent (50%) of any
"excess rent" i.e., rent in excess of the Monthly Base Rent and Additional Rent
payable by Sub-Subtenant hereunder) obtained by Sub-Subtenant in connection
therewith, calculated after Sub-Subtenant has deducted from such excess rent
Sub-Subtenant's reasonable brokerage commissions, legal fees, refurbishment and
redecorating costs.
36. OPTION TO EXTEND. So long as (i) Sub-Sublessor has exercised its
-----------------
option to extend the term of the Sublease for the sixth floor pursuant to
Paragraph 19 of the Sublease, which option shall be exercised or not in Sub-
Sublessor's sole discretion; and (ii) Sub-Subtenant is not in default under this
Sub-Sublease, beyond applicable cure periods, either at the time of the exercise
of the option or the commencement of the extension term, Sub-Subtenant shall
have the option to extend the Term for an additional forty-seven (47) months,
commencing as of the expiration of the initial Term. If Sub-Sublessor exercises
its option to extend the Sublease, Sub-Sublessor shall provide written notice to
Sub-Subtenant of its exercise not later than one hundred fifteen (115) days
prior to the end of the initial Term, and Sub-Subtenant shall provide written
notice of the irrevocable exercise of its option to extend not later than thirty
(30) days after the date of Sub-Sublessor's notice. If Sub-Subtenant fails to
exercise its option within the thirty (30)- day period, Sub-Subtenant shall be
deemed to have elected not to extend the Term of this Sub-Sublease, and the
option shall terminate and be of not further force or effect.
The extension term shall be upon all of the terms, covenants and conditions
contained in this Sub-Sublease, except that (i) there shall be no further option
to extend; and (ii) Monthly Base Rent for the original Sub-Subleased Premises
and the additional space shall be equal to
13
<PAGE>
the amount payable by Sub-Sublessor under the Sublease, which is as follows:
Extension Term Months Monthly Base Rent
--------------------- -----------------
1-8 $26,558.40
9-47 $23,238.60
If Sub-Subtenant exercises its option to extend, the parties hereto promptly
shall execute an amendment to this Sub-Sublease extending the Term hereof and
setting forth the Monthly Base Rent for the expanded Sub-Subleased Premises for
extended term.
If Sub-Subtenant does not exercise the option to extend, Sub-Subtenant
shall be required to restore the Sub-Subleased Premises to their condition on
the Commencement Date, normal wear and tear excepted (unless Sub-Sublessor
indicates otherwise in writing to Sub-Subtenant with respect to removal of
alterations not later than September 30, 1999), and this Sub-Sublease shall
terminate on October 31, 1999.
37. SIGNAGE. Subject to receipt of approval from Sublessor and
--------
landlord, Sub-Subtenant, at Sub-Subtenant's sole cost and expense, shall have
the right to Building standard signage in the Building's main floor lobby
directory, and to Building standard exterior suite door signage at a location to
be designated by Sub-Sublessor.
IN WITNESS WHEREOF, Sub-Sublessor and Sub-Subtenant have hereunto executed this
Sub-Sublease as of the day and year first above written.
SUB-SUBTENANT: SONOMA SYSTEMS, INC.,
a California corporation
By: __________________________
Title: __________________________
Date: __________________________
SUB-SUBLESSOR: RETIX,
a California corporation
By: __________________________
Title: __________________________
Date: __________________________
14
<PAGE>
EXHIBIT A
SUB-SUBLEASED PREMISES
<PAGE>
EXHIBIT B
MASTER LEASE
<PAGE>
EXHIBIT C
SUBLEASE
<PAGE>
EXHIBIT 21.1
RETIX
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
OTHER NAME(S)
JURISDICTION UNDER WHICH THE
OF SUBSIDIARY DOES
NAME OF SUBSIDIARY INCORPORATION BUSINESS
- ------------------ ------------- ---------------
<S> <C> <C>
Vertel Corporation............... California Telaware, Telegenics
Vertel Pacific................... California Vertel Asia Pacific, Vertel Korea
Retix B.V........................ Netherlands Retix Ireland, Vertel Ireland,
Vertel France, Vertel Germany,
Vertel U.K.
Wireless Solutions............... California Vertel, Retix Wireless
Retix Australia, Pty, Ltd........ Australia None
Retix Property Company, Ltd...... Netherlands Vertel U.K.
Retix Canada Inc................. Canada None
Retix (Deutschland) GmbH......... Germany None
Retix Europe, Ltd................ United Kingdom Retix Network Systems
Sonoma Systems Europe, 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
</TABLE>
<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 23, 1998, except for the last paragraph of Note 2 as to which the date
is February 11, 1998, appearing in this Annual Report on Form 10-K of Retix
for the year ended December 31, 1997.
Deloitte & Touche LLP
Los Angeles, California
February 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997 10K
DATED DECEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> DEC-27-1997
<CASH> 2,253
<SECURITIES> 3,999
<RECEIVABLES> 5,393
<ALLOWANCES> 452
<INVENTORY> 0
<CURRENT-ASSETS> 12,118
<PP&E> 766<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,450<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 227
<OTHER-SE> 7,506
<TOTAL-LIABILITY-AND-EQUITY> 13,450
<SALES> 18,477
<TOTAL-REVENUES> 18,477
<CGS> 4,482
<TOTAL-COSTS> 13,143<F3>
<OTHER-EXPENSES> (171)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,495)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,495)
<DISCONTINUED> (6,415)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,910)
<EPS-PRIMARY> ($0.52)
<EPS-DILUTED> ($0.52)
<FN>
<F1>PP&E IS NET OF ACCUMULATED DEPRECIATION OF $3,160.
<F2>TOTAL ASSETS INCLUDE $566 OF OTHER ASSETS.
<F3>TOTAL COSTS INCLUDE CGS AND $18,661 OF OPERATING EXPENSES, INCLUDING
RESTRUCTURING.
</FN>
</TABLE>
