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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 31, 1998
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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VERTEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 95-3948704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21300 Victory Boulevard, Suite 1200, Woodland Hills, California 91367
(Address of principal executive offices) (zip code)
(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:
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 March 1, 1999 there were 25,002,362 shares of the Registrant's Common
Stock outstanding, and the aggregate market value of the stock held on that
date by non-affiliates was approximately $35,945,000 based on the closing
price of $1.75 per share. 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.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Registrant's Annual Meeting of Shareholders to be held on
May 13, 1999 (the "Annual Meeting").
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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, 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 Vertel's
Investor Relations Department.
PART I
ITEM 1. BUSINESS
General
Vertel Corporation, founded as Retix in 1985, is a provider of
telecommunications network management software and solutions. We offer
multiple software technologies supporting end-to-end network and service
management with high quality grade of service for network operations support
systems. Vertel's solutions are deployed worldwide by service providers,
network operators, telecommunications equipment manufacturers, independent
software vendors and systems integrators. Vertel also delivers turn-key
management applications that fit individual customer requirements through its
Professional Services organization.
In December 1997, we discontinued further investment in our broadband access
equipment subsidiary, Sonoma Systems, Inc. As a result of the successful
completion of financing by outside private investors in early 1998, voting
ownership in this subsidiary was reduced to 19.9%. In December 1998, we sold
Vertel's holdings of Series B and Series C preferred stock in Sonoma Systems
to a party related to Newbridge Networks Corporation. We retain an investment
in Sonoma Systems primarily consisting of $1.0 million of Series A Preferred
Stock that is non-convertible and non-voting.
In March 1998, our shareholders approved a change in our name from Retix to
Vertel Corporation, the name of the only operating subsidiary of Retix at that
time. At the same time, the subsidiary's name was changed to Vertel
Corporation I. Except where specifically noted, Vertel includes the parent and
all subsidiary companies. We also changed our Nasdaq Stock Market ticker
symbol to VRTL from RETX.
Vertel develops, markets and supports vertically integrated, object oriented
TMN based software solutions for the management of public telecommunications
networks. Vertel's solutions, are based upon the International
Telecommunications Union's TMN standard and support seamless network operation
and management over diverse transmission media and protocols. We believe that
we offer 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. Vertel 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,
Vertel 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. Vertel has plans to expand into other network
management software and solutions that provide additional features and
capabilities for public and Internet protocol (IP) networks. An example is our
recently announced acquisition of Expersoft Corporation, a provider of Common
Object Request Broker Architecture (CORBA) technology.
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We also provide professional services that enable service providers to
deploy and maintain a complete network management solution complementing our
software products and development platforms. Our professional services include
system analysis and design, source code portation and interface, custom
application development, conformance and certification testing and technical
support services.
Our TMN solutions reduce the complexity of management system
interoperability and provide systems that are more efficient and simpler to
build and deploy. In addition, our solutions utilize object-oriented
interfaces, with object definitions that serve as reusable building blocks.
The object interfaces mask the complexity of underlying implementations while
providing all the functionality of the services and protocols of that
implementation.
Vertel 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 propriety systems
including TL-1 and SNMP.
Vertel's products enhance communications among service providers and
customers by enabling telecommunications service providers and enterprise
network operators to develop and deploy systems that manage new and existing
services across multiple service providers networks.
We have committed ourselves to customer service including: worldwide, 24
hours per day, 7 days per week technical support, on and off-site training
customized software design and engineering professional services.
We believe that the broad adoption and deployment of TMN and other
standards-based technologies will be key to our success and that this adoption
will depend, in part, upon the ability of service providers to implement
management solutions quickly and cost-effectively. Therefore we target
telecommunications service providers and network equipment manufacturers for
adoption of our standards-based solutions, and at the same time have committed
and will continue to commit substantial resources to the promotion of these
standards for telecommunications network management. Our customers include
U.S. Regional Bell Operating Companies, as well as many other service
providers, network operators worldwide and network element (NE) vendors
worldwide.
During 1997, Vertel began development and marketing of certain products
jointly with Hewlett Packard's Communications Telecom division (HP). In 1998,
the Company continued to develop, market and sell these products with HP
through both companies' sales and distribution channels. In addition, we plan
to continue to license code to service providers, network equipment
manufacturers and independent software developers. We believe that our
distribution strategy will help to establish our TMN solutions as the premier
standards-based products and will accelerate the general adoption of TMN.
We are a California corporation incorporated in 1985. The Company's
principal offices are located at 21300 Victory Boulevard, Suite 1200, Woodland
Hills, California 91367 and our 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 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 emerging network providers to provide competing voice, video and data
services. At
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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 operate with
external public and private networks and need 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 that provide increased
functionality, reliability 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, and often require 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 provisioning 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 for new functionality and 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 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 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 permitted service providers to begin their transition
away from proprietary systems, it has also identified the need for a new
family of systems that are highly scalable, cost-effective and offer 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.
The ITU recognized the need for this 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 or TMN standard. The
specifications comprising the TMN standard divide the telecommunications
management infrastructure into a framework of five logical layers: network
element (NEL) (equipment), element management (EML), network management (NML),
service management (SML) and business management (BML). The TMN standard
includes a set of interface specifications for
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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 an 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
Vertel provides a broad suite of next-generation, telecommunication
management applications software and services that are facilitating the growth
of communications. These products provide TMN capabilities through
configurable components and platforms. Vertel products incorporate easy-to-
use, high performance development environments, platforms, tools, applications
and components that provide solutions at the NEL, EML, NML and SML of the TMN
model. Products include TMN-conformant management application development
environments, distributed platforms, Real-Time Embedded Operating Systems
(RTOS) based embedded TMN software, and Fault Configuration Accounting
Performance Security (FCAPS) TMN applications.
Vertel considers its engineering services, provided through its technical
support and professional services units, to be key to its success with its
customers. Our technical support department provides pre-and post-sales
support, training and maintenance services, while our professional services
unit provides customized software design and engineering, including designing,
developing, deploying and maintaining turn-key telecommunications management
solutions.
Vertel's TMN solutions allow telecommunications service providers and their
customers to:
Reduce costs. Vertel'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, our TMN solutions adhere to an object-oriented architecture and do
not require large, expensive technical organizations for additional
development and maintenance. Because our products and solutions use standard
interfaces, they allow multiple systems to work with each other across
applications, networks, vendors and systems. This interoperability allows
service providers to purchase the most cost-effective equipment from a broad
range of vendors. In addition, by utilizing the Company's professional
services customers can reduce the cost of in-house development.
Derive incremental revenue. The TMN solutions also enable telecommunications
services providers to bring new functionality and services to market more
rapidly by providing an integrated, standards-based suite of tools that
facilitate the rapid development and deployment of new applications across
heterogeneous networks. For example, our agent, manager and adapter products
have been used by telecommunications switch equipment manufacturers, operation
support system vendors and telecommunications service providers to provide
data collection information to support billing, trouble ticketing and inter-
service provider exchange of management information (electronic bonding).
Implement complete solutions. Successful implementation requires seamless
vertical integration of all the layers of the TMN standard. We believe that we
provide the only commercially available complete family of products and
services for implementing a fully integrated TMN network management system.
Network management systems based on our 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 and now CORBA.
Preserve existing investments. Our 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. Our
technology and solutions manage TL1, SNMP and other legacy equipment and
systems within Vertel's solution framework.
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Enhance communications across service providers and with customers. Our
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.
Strategy
Our goal is to position Vertel as a leading provider of complete, vertically
integrated TMN solutions to telecommunications service providers, equipment
manufacturers, platform vendors and independent software developers.
Additionally, we plan to provide next generation communication services and
software solutions that support multiple management technologies. These
solutions are targeted to provide public and IP network operation support
systems, the key components required for end-to-end network and service
management with carrier-grade quality of service. Key elements of our strategy
include:
Extend Vertical Solutions. Our strategy is to provide complete suites of
software and services that enable businesses to implement telecommunications
management solutions efficiently. We intend to provide management applications
that leverage our experience in TMN implementation across layers and use the
unique features of the TMN architecture. We currently plan to develop
applications for electronic bonding, integrated alarm management and ATM
element management.
Leverage Technological Leadership. We believe that our technological
leadership, as evidenced by the breadth and functionality of our products and
services are, in part, the result of 12 years of experience deploying products
that implement the protocols and services that adhere to ITU specifications.
We plan to continue to invest significant resources in research and
development, to extend our technological leadership in TMN technologies,
maintain a time-to-market advantage and develop management solutions that
leverage our TMN implementation expertise.
Target Service Providers. We believe that increased penetration of
telecommunications service providers is necessary to hasten the broad
deployment of TMN. To this end, we provide management platforms, solutions for
operation support systems, customization and implementation services, software
that is easy to use and install and high quality training, consulting and
support. In addition, we offer Q-Adapter products that enable customers to
maintain their investment in legacy systems, bringing TL1, proprietary and
enterprise network components into the realm of TMN. Our customers include
U.S. Regional Bell Operating Companies, as well as many other service
providers, network operators worldwide and network element vendors worldwide.
Leverage Existing Relationships with Equipment Manufacturers. Historically,
we have derived a significant portion of our TMN revenue from the sale of
software to be embedded by telecommunications equipment manufacturers. We
believe that the availability of our products in telecommunications equipment
will facilitate the adoption of our 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 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, we have also begun to target leading data
communications companies.
Expand Global Sales and Distribution Capability. We currently sell our
products primarily through a direct sales force in the United States and
internationally. We intend to expand our sales and distribution infrastructure
in the United States and internationally to increase sales coverage and
position ourselves to capture market share. We plan to leverage our direct
sales efforts by pursuing sales prospects generated by partners and by selling
through select systems integrators and other indirect sales channels. In
addition, we plan to continue to license binary and source code to service
providers, network equipment manufacturers and independent
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software developers. Our customers have the right to distribute products,
services and applications, developed using our binary and source code, in
exchange for royalty payments. We believe that our distribution strategy will
help to establish our TMN solutions as the premier TMN products; and
accelerate the general adoption of TMN.
Promote the Deployment of TMN. We believe that the broad adoption and
deployment of TMN will be our key to our success. Correspondingly, we commit
substantial resources to the promotion of the TMN standard for
telecommunications network management. We are working with leading industry
experts, forums and working groups to define, refine and develop
specifications for TMN solutions. In addition, we sponsor the Global TMN
Summit and are a participant in trade shows, seminars and industry
conferences.
Develop Strategic Relationships. We believe that we can expand our
visibility, improve our product offerings and broaden our potential market
through the development of relationships with other companies within the
telecommunications network market. To date we have established relationships
with companies such as Hewlett Packard and Microsoft resulting in the
introduction of a number of new products and the increased visibility of TMN
within the telecommunications marketplace.
Expand PSU Customer Base. We believe that there is a large market for
customized network management solutions. Our professional services unit
provides customized software design and engineering, including designing,
developing, deploying and maintaining turn-key telecommunications management
solutions. By utilizing or enhancing existing Vertel products, our
professional services unit is capable of customizing and delivering carrier-
grade quality solutions that enable businesses to efficiently implement
network management solutions quickly and cost-effectively.
Products
For the past three years, Vertel has focused primarily on developing,
marketing, selling and supporting TMN software products and services.
We generally license our 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.
Our three product families, TMNTelecore(TM), TMNAccess(TM), and
TMNWorks(TM), provide full TMN capabilities through configurable components
and platforms. The products incorporate easy-to-use, high performance
development environments, platforms, tools, applications and components into
open, standards-based solutions. We supply fully implemented information
models for OSI, ATM, SONET/SDH and other telecommunications transport
technologies. The platforms incorporate object-oriented, fully integrated
building blocks and development environments. Our TMN Platforms and tools use
the TMF TMN/C++ API as the upper interface to the products. The TMN/C++ API
masks the complexities of the underlying agent or manager functionality behind
easy-to-use C++ object classes. Our communications stacks employ the seven
layer Open Systems Interconnect model and TCP/IP. Routing software packages
and other specialized stacks are also available. We produced the industry's
first fully functional, portable and/or ported, OSI protocols for all seven
OSI stack layers.
TMNTelecore Products
Our TMNTelecore product family provides comprehensive, telecom software
development environments and integrated deployment platforms for service
providers, network operators and system integrators. TMNTelecore facilitates
the quick deployment of TMN-conformant agents, managers, Q-adapters, and the
creation of analytical applications for network generated events.
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Based on the Vertel/HP jointly developed product suite, TMNTelecore
automates the tasks associated with the deployment of EMS, NMS, and OSS
interconnection applications. TMNTelecore is available for both UNIX and NT
environments.
The TMNTelecore product suite benefits telecommunication application
providers by offering shortened development cycles, improved application
quality and the reduction of ongoing support costs through the use of new and
integrated technologies. It provides a comprehensive platform that enables the
creation of integrated telecom management solutions. The environments offered
include:
Agent Development Environment (ADE) enables developers to build
customizable, dynamically configurable TMN conformant agents. Vertel's
TMNTelecore ADE automates most of the tasks associated with building an agent
application, leading each stage of application development--design,
prototyping, development, testing, and deployment. The resulting, fully
functional TMN Agent provides value added, agent role process for network
elements, Q-Adaptors, and mediation devices at all of the lower four layers of
the TMN model.
Manager Development Environment (MDE) enables developers to easily build
customizable, dynamically configurable, scalable, TMN conformant, manager
applications. TMNTelecore MDE automates most of the tasks associated with
building a manager application. The structure of the TMNTelecore MDE and its
integrated components leads the project team through each stage of manager
application development--design, prototyping, development, testing, and
deployment.
TMNTelecore Simulator uses TCL scripts to emulate the behavior of a fully
implemented, Q3-conformant management entity. It is easy to use and can act in
the role of agent, manager, or both. A customer can use the TMNTelecore
Simulator with a "live" agent or manager, a prototype agent or manager, or
with a script-driven responder. The TMNTelecore Simulator allows the customer
to test during any stage of development, greatly reducing the time to market.
TMNTelecore Designer provides all the software needed to quickly design and
build a prototype application. TMNTelecore Designer provides off-the-shelf
functionality and tools that simplify the process of designing object models
to integrate heterogeneous networks elements. It is part of an integrated TMN
family of products that streamlines the creation and deployment of complex
management solutions. Object models that are designed and tested with the
TMNTelecore Designer product may be used with other Vertel components
throughout the applications product lifecycle.
TMNTelecore Proxy provides automated TL1-to-TMN Q-adaption to simplify and
enhance the manageability of TL1 network elements, while accelerating the
development of TMN management solutions for TL1 NEs. TMNTelecore Proxy
provides integrated components that simultaneously monitor and control
hundreds of TL1-based NEs, preserving investments in existing NE
infrastructures and providing TMN based management of NEs based on
technologies such as SONET/SDH.
TMNAccess Products
Our TMNAccess products provide telephony and data communication equipment
vendors standards-based interoperability features in network elements.
TMNAccess consists of products and protocol options targeted for specific
industry technologies and markets, and acts as the bridge for mission critical
data transportation from the network to the operation support systems.
TMNAccess is comprised of a range of products and solutions:
TMNAccess ETS (Embedded Telecommunications Solutions) provides the most
complete and mature set of products for equipment vendors developing domestic
and international digital loop carrier devices (DLC), SONET/SDH transport
equipment, ATM switches, DWDM devices, SM, CDMA, TDMA, CDPD base stations and
newer optical switching devices.
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TMNAccess FTAM (File, Transfer, Access and Management) is a file transfer
protocol, used to download call detail records (CDR) that contain the critical
billing information that is passed to the billing systems.
TMNAccess DMH (Data Message Handler) is a set of development tools and
applications for real-time billing record exchange between cellular service
providers. It is based on TIA's IS-124 standard and enables the equipment
vendor and application developer to direct and process billing information.
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.
TMNWorks Products
TMNWorks consists of operation support systems applications for telecom
service providers, system integrators, network operators and equipment
manufacturers. A range of fault, configuration, accounting, performance,
security and connection management solutions are available to address multiple
network infrastructures. TMNWorks also includes a flexible mediation platform
to facilitate the adaption, translation and transport of data between
dissimilar or incompatible operational support systems.
Vertel Wireless Products
During 1998, we sold our CDPD and pACT wireless products, technologies and
contracts to AMP Incorporated. This enabled us to strengthen core product
offerings and expand our solutions portfolio for the access, operations
support system and backbone vertical markets. The remaining wireless products
are now part of our TMNAccess DMH product line.
Vertel ATN Router Software Products
In June 1998, Vertel granted a semi-exclusive license for its Aeronautical
Telecommunications Network (ATN) Router Software product line to Airtel ATN
plc, an independent supplier of communications software products and services
for the aeronautical industry. ATN router products are specifically designed
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 capabilities based on ATN standards. We
retain intellectual property rights in these products.
Competition
We compete on the basis of product characteristics, 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 our competitive position, we believe that we must continue to develop
and introduce or acquire, 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.
Our 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),
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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 our 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 Vertel. We
estimate 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, we believe that we must continuously educate existing
and prospective customers as to the advantages of TMN and related open
management technology versus internal, proprietary 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 Vertel. Any of these
competitors may be able to respond more quickly with different technologies
and changes in customer requirements and to devote greater resources to the
development, promotion and sale of their products than Vertel. There can be no
assurance that our current or potential competitors will not develop products
comparable or superior to those developed by Vertel or adapt more quickly than
Vertel to new technologies, evolving industry standards, new product
introduction or changing customer requirements. See "Risk Factors--Our Markets
are Very Competitive and Many of Our Competitors are Larger than We Are."
Proprietary Technology
We primarily rely on a combination of copyright, trade secret and trademark
laws and nondisclosure and other contractual restrictions on copying and
distribution to protect our proprietary technology. In addition, as part of
our confidentiality procedures, we generally enter into nondisclosure
agreements with our employees, consultants, distributors and corporate
partners and limit access to and distribution of our software, documentation
and other proprietary information. It may be possible for a third party to
copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology, particularly in light of the
fact that we license portions of our source code to certain customers and
distributors, there can be no assurance that the foregoing measures are
adequate to protect our proprietary technology. In addition, our 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 our
proprietary rights to the same extent as the law in the United States. See
"Risk Factors--Our Current Efforts to Protect Our Intellectual Property May Be
Insufficient."
Sales, Marketing and Customers
We market and sell our products and services through an internal sales and
marketing organization that consisted of 29 people as of December 31, 1998.
Our marketing efforts are focused on increasing awareness of Vertel, TMN and
related technology solutions, and TMN in general, among telecommunications
service providers, network equipment manufacturers, independent software
vendors, systems integrators and platform vendors, and on positioning Vertel
as the leading provider of TMN software solutions. Our marketing programs have
three primary goals: market education and awareness, sales effectiveness and
product management. Our 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 our marketing message and improve sales
effectiveness, we use direct mail, advertising, presentations, demos, press
9
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releases, press/analyst tours, marketing literature, public relations, trade
shows and a world-wide web site. Our product management staff work with
customers and industry experts to ensure that our products will satisfy market
requirements.
The sales cycle for our products is lengthy and often requires us to provide
a significant level of education to prospective customers regarding the use
and benefits of our 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 Cycles Make Predictions of Revenues
Difficult." Of the 29 people engaged in sales and marketing, our direct sales
organization consisted of 19 people as of December 31, 1998.
In addition, we sell software through distributors and agents in certain
other countries, and enable our customers through source code licenses to
distribute our products in exchange for royalty payments.
We typically transact business in U.S. currency worldwide. International
sales totaled approximately 43%, 40% and 53% of net revenues for each of the
fiscal years 1998, 1997 and 1996. See "Risk Factors--Our International Sales
are Subject to Factors Outside of Our Control," and "Our International Sales
are Subject to Currency Fluctuations."
Historically, we have not had significant license backlog because we fill
substantially all orders within 30 days after receipt of a firm purchase
order.
Customer Service and Support
Professional Services
We believe 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. Our 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
certification and custom application development. Many of our software
customers contract for professional services. We generally provide
professional services based on a detailed statement of work.
We have devoted substantial resources to the provision of professional
services in order to facilitate the implementation of our TMN products by
service providers and to differentiate ourselves from competitors. As of
December 31, 1998, our professional services organization consisted of 15
people, including consultants and employees.
Technical Support
In order to assist customers in fully designing and operating integrated TMN
solutions, we believe that it is important to offer a broad range of technical
support services for our customers. Technical support consists of the
following services:
Training. We provide training to our 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 and Maintenance. We 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 a high demand for expert-level, on-site
product support, we offer an on-demand service staffed by highly competent
product experts. Personnel primarily located in the Company's California and
Berlin facilities provide product support. Customers subscribing for product
support also receive software updates and maintenance releases. We typically
issue software updates every six to twelve months.
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On-site consulting. Our 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 31, 1998, our technical support organization consisted of 9
people.
We typically warrant software for 90 days. To date, we have not encountered
any significant product maintenance problems. See "Risk Factors--We Need to
Develop New Products to be Successful," and "Our Software is Complex and
Therefore is Prone to Bugs."
Research and Product Development
We have made substantial investments in the development of our products. We
believe that our future success depends in a large part on our ability to
enhance existing products, develop new products, maintain technological
competitiveness and meet a wide range of customer needs. Accordingly, we
intend to continue to make substantial investments in research and development
for the foreseeable future. Overall product development efforts include:
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 TMF 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.
Vertel/HP Communications Telecom TMN Product Suite. We intend to continue to
build upon the combined strengths of HP Communications Telecom platforms and
the Company's TMN development products. With our Vertel/HP Communications
Telecom product suite, products include TMNDesigner, TMNAgent and TMNManager
Developer, runtime products and TMN Proxy.
Vertical Integration and Optimization. We believe that we are unique in
providing a single-vendor, object-oriented, integrated implementation of OSI
stacks, TMN agent and manager products, Q-adaption and MIB translation. Our
product software modules can be tightly integrated and optimized for
performance and efficient memory usage.
Portability. Our 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,
flexible OSI and transport stack interfaces and communication networks.
Portability allows us to implement changes and enhancements to the core
technology once and to host those changes to many environments simultaneously.
Currently, we support five RTOSs, Solaris, HP-UX and Windows NT.
Standards Conformance. Our 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.
Our research and development organization is located principally in Woodland
Hills, California. As of December 31, 1998, our research and development group
consisted of 54 people.
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RISK FACTORS
Our Success is Dependent on Widespread, Timely Adoption of the TMN
Standard. Our software and services are all based on the TMN standard. If a
different protocol becomes the standard in the telecommunications industry,
service providers are unlikely to purchase our products. In recent years
standards that compete with TMN, such as SNMP and CMIP, have emerged. In
addition, telecommunications service providers have historically depended on
proprietary systems, which do not rely on any standards. While we invest
substantial efforts in encouraging service providers to adopt the TMN
standard, we do not have direct control over this process and we cannot
provide any assurance that the TMN standard will be adopted.
Telecommunications service providers could adopt a competing standard or no
standard at all. Similarly, they could adopt the TMN standard, but not do so
within the timeframe that we expect them to. If telecommunications service
providers adopt a standard other than TMN, adopt the TMN standard but not in a
timely way or fail to adopt any standard at all, our business, operating
results, financial condition and strategic position would be materially
adversely affected.
We Need to Develop New Products to be Successful. The markets for our
products are characterized by rapidly changing technology and frequent new
product introductions. Therefore we believe that our future success will
depend on our ability to enhance our existing products and to develop and
introduce in a timely fashion new products that achieve market acceptance. We
have, from time to time, experienced delays in developing new products and
enhancements, and while these have not had a material adverse effect on our
business, if in the future, we are unable to develop and introduce new
products or product enhancements in a timely manner, this could have a
material adverse effect on our business, financial condition and results of
operations. In addition, if the products we develop are not widely accepted by
customers, we are not able to identify, develop, manufacture, market or
support new products successfully or we are unable to respond effectively to
technological changes, revisions in industry standards or product
announcements by competitors, our business, operating results and financial
condition would be adversely affected.
We Expect Our Revenue to be Primarily from New Products. We expect that new
products and related services will account for a substantial portion of our
revenues in the foreseeable future. Since we expect to rely less on existing
products for revenue, factors adversely affecting the pricing of or demand for
our newer TMN-related software and services, such as competition for new
products or lack of customer acceptance, could have a disproportionately
adverse effect on our business, operating results and financial condition.
Potential Future Products May Limit Current Product Sales. From time to time
we announce new products, capabilities or technologies that have the potential
to replace our existing product offerings. These announcements can cause
customers to defer purchasing or licensing our existing products, which would
adversely affect our business, operating results and financial condition.
Changes in Governmental Regulations Could Make our Products Less
Marketable. The telecommunications industry is subject to regulation in the
United States and other countries, and therefore our products and the
businesses of our current and potential customers are required to receive
regulatory approvals from multiple organizations using different standards.
The enactment or amendment by federal, state or foreign governments of new
laws or regulations or changes in the interpretation of existing regulations
could adversely affect our products and the businesses of our current and
potential customers, and therefore affect our business, operating results and
financial conditions.
Our Products are Targeted at Undeveloped Markets; Our Success Depends on
their Maturation. As part of our corporate strategy, we have targeted product
markets which are in the early stage of their development, including the TMN
market. If these markets do not mature as we expect them to, we will not have
the growth opportunities we currently hope for. We believe that the TMN
applications market will take years to develop and that development of this
market will require: (1) a sufficient number of high quality, commercially
successful communications applications based on the TMN Standard, and (2) the
availability of software infrastructure products that allow telecommunications
equipment manufacturers and service providers to implement TMN in
12
<PAGE>
their products. There can be no assurance that these conditions will be met in
a timely way, if at all. We cannot predict the size of the market or the rate
at which the market will grow and if the markets fail to grow, grow more
slowly than anticipated, or become saturated with competitors, our business,
financial condition and results of operations would be materially adversely
affected.
Our Quarterly Results are Based on a Small Number of Large Orders that are
Subject to Many Factors Outside of Our Control. A substantial portion of our
software revenues have been, and will continue to be, derived from a small
number of large orders placed by large organizations after extended
evaluation. The timing of orders and their fulfillment has caused and will
continue to cause material fluctuations in our operating results, particularly
on a quarterly basis. In addition, our quarterly operating results have in the
past and will in the future vary significantly depending upon factors such as:
.capital spending patterns of our customers;
.changes in pricing policies by ourselves and our competitors;
.increased competition;
.the cancellation of service or maintenance agreements;
.changes in operating expenses, personnel changes, demand for our products;
. the number, timing and significance of new product and product
enhancement announcements by either ourselves or our competitors;
. our ability to develop, introduce and market new and enhanced versions
of our products on a timely basis;
.the mix between U.S. and international sales;
.seasonality; and
.the mix of direct and indirect sales and general economic factors.
Based upon all of these factors, we believe that quarterly revenues and
operating results are likely to vary significantly in the future and that
period-to-period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that our revenue will increase or be sustained in
future periods or that we will be profitable in any future period. Further, it
is likely that in some future quarter our revenue or operating results will be
below the expectations of public market analysts and investors. In such event,
the price of our common stock is likely to be materially adversely affected.
A Portion of Our Revenues Are Seasonal. Our 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 may have an effect on our quarterly results of operations.
The Timing of Our Orders May Result in Large Swings in Quarterly Operating
Results. We typically realize a significant portion of our software license
revenues in the last month of a quarter, and frequently in the last weeks or
even days of a quarter. Since our revenues are based in large part on a
limited number of large orders, small delays in a limited number of orders can
have a dramatic effect on quarterly results.
Certain Portions of Our Costs are Fixed in the Short Term. We currently
intend to increase funding of research and product development, increase sales
and market development activities and expand our distribution channels which
will increase our expense rates. Because only a small portion of our expenses
varies with revenue in the short term, net income may be disproportionately
affected by a reduction in revenue, particularly since reductions in revenue
may not be apparent until the last days of a quarter. Similarly, to the extent
additional expenses are not subsequently followed by increased revenues, our
business, operating results and financial condition could be materially and
adversely affected. If revenue levels are below expectations, operating
results are likely to be materially adversely affected.
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Lengthy Sales Cycles Make Predictions of Revenues Difficult. Our sales cycle
is subject to a number of significant delays over which we have little
control. Therefore, significant delays in implementation, or delays in
purchases by customers, whether or not such delays are within our control,
could materially adversely affect our business, operating results and
financial condition. Our products are complex and generally involve
significant investment decisions after extended evaluations by prospective
customers. Accordingly, we must engage in a lengthy sales cycle to provide a
significant level of education regarding the use and benefits of our products
to potential customers. Our customers often must secure executive level
approval to license our products and our license agreements often involve
lengthy negotiation. In addition, the implementation of our software products
involves a significant commitment by customers over an extended period of
time.
Our Fixed Price Arrangements Could Result in Losses. From time to time we
enter into fixed price arrangements for professional services. Fixed price
arrangements could in the future result in losses due to delays in the
implementation process or other complexities associated with completion of the
project underlying these arrangements, such as unknown characteristics of the
customer software for which we are providing services.
Increased Sales and Marketing Expenditures May Not Be Effective. During
1999, we plan to increase our number of direct sales and marketing personnel
to support the further development of TMN market opportunities. As we hire new
sales and marketing personnel we anticipate that there will be a delay before
they become effective. There can be no assurance that we will be successful in
attracting or retaining qualified sales and marketing personnel, that this
expansion will result in sales of our products, that the costs of this
expansion will not exceed the revenues generated, or that our sales and
marketing organization will successfully compete against the larger and better
funded sales and marketing organizations of our competitors.
Our Markets are Very Competitive and Many of Our Competitors are Larger than
We Are. We experience significant competition in telecommunications network
management from TCSI, OSI, IBM, Sun Microsystems, DSET and major
telecommunication vendors such as AT&T, all of whom have longer operating
histories and have greater financial, technical, sales, marketing and other
resources than we do. There can be no assurance that we will be able to
identify, develop, manufacture, market or support products successfully or
that we will be able to respond effectively to technological changes or
product announcements by our competitors. Moreover, our current and potential
competitors may respond more quickly than we do 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 us
could attempt to increase their presence in the market by acquiring or forming
strategic alliances with our competitors resulting in increased competition.
There can be no assurance that we will be able to compete successfully with
these competitors.
Our Software is Complex and Therefore is Prone to Bugs. The development,
enhancement and implementation of our products entail risks of product defects
or failures. In the past we have discovered software bugs in certain of our
products and software solutions. Although to date we have not experienced
material adverse effects resulting from any 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 our business, operating results and financial
condition. Moreover, the complexities involved in implementing and customizing
our software solutions entail additional risks of performance failures.
Our Software Operates with Third-Party Software Which May Not be Year 2000
Compliant. New releases of our software have been designed to address
processing for the Year 2000 to the extent it has been required. We have
completed a review of all of our developed products and believe that all of
our products will be Year 2000 compliant by April 1999. However, to the extent
that others, such as system integrators, make use of our software in
developing solutions for third parties, we may have no knowledge as to the
Year 2000 readiness of those third party products. In addition it is possible
that third parties could assert claims against us or our customers concerning
Year 2000 issues and regardless of their merits or lack thereof, any claims
could be material.
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Our Internal Systems May Not Be Year 2000 Compliant. As with other
organizations, our 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. We have completed an evaluation of Year 2000 issues
associated with our internal computer systems. Most of our computer systems
are already Year 2000 compliant. Other internal computer and other systems
that have been identified as non-compliant and will be upgraded to be Year
2000 compliant by June 1999, however if we are unsuccessful in completing
these upgrades in a timely way, our business could be materially adversely
affected.
Our Suppliers' Systems May Not Be Year 2000 Compliant. We have also
completed an evaluation of the possible effects on our operations of the Year
2000 readiness of our key suppliers. We rely on third party manufacturers for
the proper functioning of our information systems, software and products. The
failure of those manufacturers to address Year 2000 issues could have a
material impact on our operations and financial results; however, the
potential impact and related costs are not known at this time.
Our Stock Price Could be Volatile. Announcement of new products by us or our
competitors and quarterly variations in financial results could cause the
market price of our 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 these
companies.
Our Stock May be Delisted. The Nasdaq Stock Market has announced a policy of
delisting securities that trade below the price of $1.00 per share for more
than 10 business days. Our stock price closed once below $1.00 in 1998 and it
has approached $1.00 in recent periods. If the price of our common stock falls
below $1.00 and our common stock is subsequently delisted our shares would
become highly illiquid. In addition, we could spend material financial and
management resources in an attempt to avoid delisting.
Our International Sales are Subject to Factors Outside of Our Control. Sales
to customers outside of the United States accounted for a substantial fraction
of our net revenues for 1996, 1997 and 1998 and we expect that international
sales will continue to be a significant portion of our business. International
sales and operations are subject to many factors outside of our control, such
as the imposition of governmental controls, export license requirements,
restrictions on the export of critical technology, political instability,
trade restrictions and tariffs. Furthermore, because we have to maintain sales
offices in different countries in order to make these sales, our management
must address differences in regulatory environments and cultures. If we are
unable to address these differences successfully our business, financial
condition and results of operations would be adversely affected.
Our International Sales are Subject to Currency Fluctuations. Although our
international sales are typically denominated in U.S. Dollars, they still may
be adversely affected by exchange rate fluctuations if the relative cost of
our products becomes higher. Fluctuations in exchange rates could also result
in exchange losses. The impact of future exchange rate fluctuations cannot be
predicted adequately. To date, we have not sought to hedge the risks
associated with fluctuations in exchange rates, but may begin hedging in the
future. There can be no assurance that our results of operations will not be
materially adversely affected by exchange rate fluctuations.
We Depend on Third-Parties for Key Elements of Our Technology. We license
certain technology included in our products. While we do not believe that any
of this technology could not be replaced, it might require substantial time
and effort to do so. If we become unable to utilize this technology our
operations could be adversely affected.
Losing a Limited Number of Key Employees Could Adversely Affect Our
Business. Our success depends to a significant degree upon the continued
contributions of key management, sales, marketing, engineering and research
and development personnel, many of whom would be difficult to replace. If
certain of these employees were to leave, we would be adversely affected.
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Recruiting the Type of Employees We Require is Difficult. We believe our
future success will also depend in large part upon our ability to attract and
retain highly skilled software engineers, and managerial, sales and marketing
personnel. Competition for these types of personnel is intense and there can
be no assurance that we will be successful in attracting and retaining the
necessary personnel. To the extent we are not successful in attracting or
retaining key personnel, we could also be adversely affected.
Our Current Efforts to Protect Our Intellectual Property May Be
Insufficient. We regard our products as proprietary and rely 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 our proprietary rights. We also
generally enter into confidentiality and invention assignment agreements with
our employees and consultants. Additionally, we enter into confidentiality
agreements with certain of our customers and potential customers and limit
access to, and distribution of, our source code and other proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use our technologies without authorization, or
to develop similar technologies independently. Furthermore, the laws of
certain countries in which we do business, such as China and Korea, do not
protect our software and intellectual property rights to the same extent as do
the laws of the United States. We do not include in our software any
mechanisms to prevent or inhibit unauthorized use, but generally either
require the execution of an agreement that restricts copying and use of our
products or provides for the same in a break-the-seal license agreement. If
unauthorized copying or misuse of our products were to occur to any
substantial degree, our business, financial condition and results of
operations could be materially adversely affected. We cannot provide any
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors will not independently develop similar technology.
It is Possible that We Infringe the Intellectual Property of Third
Parties. While we have not received claims alleging infringement of the
proprietary rights of third parties which we believe would have a material
adverse effect on our business, financial condition or results of operations,
nor are we aware of any similar threatened claims, we cannot provide any
assurance that third parities will not claim that our current or future
products infringe the proprietary rights of others. Any claim, with or without
merit, could result in costly litigation or might require us to enter into
royalty or licensing agreements. Royalty or licensing agreements, if required,
may not be available on reasonable terms, or at all.
This document contains statements regarding the future including, among
other things, our expectations, beliefs, intentions and strategies. All of
these statements are based on information available to us as of the date of
this risk factors in addition to the risk factors set forth in our filings
with the SEC before making a decision to purchase any shares.
Employees
As of December 31, 1998 we employed 121 persons, of whom 69 were primarily
engaged in research and development activities or professional services, 38 in
sales, marketing, customer support and related activities and 14 in general
management, administration and finance. We have no collective bargaining
agreements with our employees. We believe that we maintain competitive
compensation, benefit, equity participation and workplace policies that assist
in attracting and retaining qualified employees. We believe that our future
success will depend, in part, on our ability to attract and retain qualified
personnel. We have experienced no work stoppages and believe that our employee
relations are good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research and
development and support facilities are located in Woodland Hills, California.
The Company's headquarters and primary operations consist of approximately
34,000 square feet under a lease that will expire in January 2002. The
Company's field sales and service offices worldwide, exclusive of its
headquarters, consist of leased office space totaling approximately 15,000
square feet with leases expiring between 1999 and 2003. Vertel believes that
its existing facilities are adequate for presently foreseeable needs.
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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.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON AND RELATED SHAREHOLDER MATTERS
Market Information
Our Common Stock is traded on the Nasdaq National Market under the symbol
VRTL. Prior to April 1998, we were known as Retix and traded under the symbol
RETX. The low and high closing sales prices for our stock during each
quarterly period in the two fiscal years ended December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
1998 Fiscal Quarters Ended
---------------------------------
March 28 June 27 Sept 26 Dec 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Low bid.................................. $4 $3 7/16 $ 29/32 $1 3/8
High bid................................. $5 3/8 $6 3/16 $3 15/16 $2 1/2
<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 shareholders of record on March 1, 1999.
Recent Sales of Unregistered Securities
On September 29, 1998, the Company sold 2,000,000 shares of common stock for
$1.50 per share ($3,000,000 in gross proceeds). The price per share was
determined as the greater of (a) the average closing price of the common stock
for the five days preceding the closing date and (b) $1.50.
Of the total shares issued, 1,000,000 shares were purchased by Sierra
Ventures V, a venture capital firm. Jeffrey M. Drazan, a General Partner of
Sierra Ventures, is a member of the Company's Board of Directors. The
remaining shares were purchased by Pequot Private Equity Fund, L.P. and Pequot
Offshore Private Equity Fund, Inc.
No underwriter was used in connection with the sale of such shares, which
was made in reliance upon Section 4 (2) of the Securities Act of 1933 as
exempt from registration.
Dividend Policy
We have never paid cash dividends on our capital stock. We currently
anticipate that we will retain all available funds for use in our business and
do not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial information has been derived from Vertel'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, 1998
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations:
Net revenues:
License..................... $12,564 $ 12,590 $11,714 $ 10,222 $ 12,209
License--related party...... 737 -- -- -- --
Service and other........... 5,066 5,887 4,443 5,324 11,428
------- -------- ------- -------- --------
Net revenues.............. 18,367 18,477 16,157 15,546 23,637
------- -------- ------- -------- --------
Cost of revenues:
License..................... 816 876 1,059 943 715
Service and other........... 3,863 3,606 1,917 2,346 7,445
------- -------- ------- -------- --------
Total cost of revenues.... 4,679 4,482 2,976 3,289 8,160
------- -------- ------- -------- --------
Gross profit.................. 13,688 13,995 13,181 12,257 15,477
------- -------- ------- -------- --------
Operating expenses:
Research and development ... 6,639 5,600 5,461 5,156 1,730
Sales and marketing......... 7,310 7,829 7,625 4,279 5,622
General and administrative.. 3,014 3,719 3,223 2,188 3,493
Restructuring expense
(benefit).................. -- 1,513 (197) 2,277 397
------- -------- ------- -------- --------
Total operating expenses.. 16,963 18,661 16,112 13,900 11,242
------- -------- ------- -------- --------
Operating income (loss) from
continuing operations........ (3,275) (4,666) (2,931) (1,643) 4,235
Other income, net............. 10,998 171 591 1,046 780
------- -------- ------- -------- --------
Income (loss) from continuing
operations before provision
for income taxes............. 7,723 (4,495) (2,340) (597) 5,015
Provision for income taxes ... 446 -- -- -- 2,006
------- -------- ------- -------- --------
Income (loss) from continuing
operations................... 7,277 (4,495) (2,340) (597) 3,009
Loss from discontinued
operations................... -- (6,415) (1,501) (31,212) (14,941)
------- -------- ------- -------- --------
Net income (loss)............. 7,277 (10,910) (3,841) (31,809) (11,932)
Other comprehensive income
(loss), net of tax........... 425 (42) (328) 121 391
------- -------- ------- -------- --------
Net comprehensive income
(loss)....................... $ 7,702 $(10,952) $(4,169) $(31,688) $(11,541)
======= ======== ======= ======== ========
Basic net income (loss) per
common share:
Income (loss) from continuing
operations................... $ 0.31 $ (0.21) $ (0.12) $ (0.03) $ 0.08
Loss from discontinued
operations................... -- (0.31) (0.07) (1.75) (0.76)
------- -------- ------- -------- --------
Net income (loss)............. $ 0.31 $ (0.52) $ (0.19) $ (1.78) $ (0.68)
======= ======== ======= ======== ========
Diluted net income (loss) per
common share:
Income (loss) from continuing
operations................... $ 0.29 $ (0.21) $ (0.12) $ (0.03) $ 0.08
Loss from discontinued
operations................... -- (0.31) (0.07) (1.75) (0.76)
------- -------- ------- -------- --------
Net income (loss)............. $ 0.29 $ (0.52) $ (0.19) $ (1.78) $ (0.68)
======= ======== ======= ======== ========
Consolidated Balance Sheet
Data:
Working capital .............. $19,345 $ 6,401 $15,338 $ 12,145 $ 27,191
Total assets.................. 28,317 13,731 23,622 22,584 37,065
Long term obligations, less
current portion.............. -- -- 236 65 478
Shareholders' equity ......... 22,172 7,733 17,602 14,360 44,928
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Vertel Corporation (the "Company"), founded as Retix in 1985, was originally
concentrated in the internetworking market. In 1996 the operating divisions of
the Company were split into three business units, each with its own management
structure. These three units focused on internetworking, network management
software and wireless applications software. In 1997, the Company merged the
wireless applications software subsidiary into its network management software
subsidiary. Additionally, in 1997, the Company's internetworking hardware
subsidiary, Sonoma Systems, Inc. ("Sonoma"), restructured to focus solely on
broadband access equipment for the telecommunications marketplace. In January
1998, the Company discontinued investing in Sonoma and its voting ownership
was subsequently reduced to 19.9% as Sonoma raised additional capital from
outside investors. In December 1998, the Company sold its holdings of Series B
and Series C preferred stock in Sonoma to a party related to Newbridge
Networks Corporation, a significant customer of Sonoma. The Company retains an
investment in Sonoma primarily consisting of $1.0 million of Series A
preferred stock that is non-convertible and non-voting. The results of
operations for 1997 have been reclassified to present the operating results of
Sonoma as a discontinued operation. The Company is now focused on its network
management software for the telecommunications industry. Further references to
the Company in Management's Discussion and Analysis of Financial Condition and
Results of Operations refer solely to the continuing operations of Vertel
unless specifically identified otherwise.
Vertel Corporation I 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 product line, 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.
The Company is a leading provider of telecommunications network management
software and solutions. The Company offers multiple technologies supporting
end-to-end network and service management with high quality grade of service
for network operations support systems. Vertel's solutions are deployed
worldwide by service providers, network operators, telecommunications
equipment manufacturers, independent software vendors and systems integrators.
The Company also delivers turn-key management applications that fit individual
customer requirements through its professional services organization. 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 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 has a joint
development agreement with Hewlett Packard's Communications division whereby
the two companies 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.
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
20
<PAGE>
Company's TMN software products and development platforms. The Company
recognizes product revenue upon delivery if a signed contract exists, the fee
is fixed and determinable, collection of the resulting receivables is probable
and no significant production, modification or customization of software is
required. For contracts with multiple elements (e.g., software products,
maintenance services and other services), the Company allocates revenue to
each element of the contract based on objective evidence of the element's fair
value. This objective evidence of fair value is specific to the Company and
consists either of prices derived from sales of elements when they are sold
separately or the price established by management for sale of elements in the
ordinary course of business. To date, substantially all source license fees
have been recognized upon delivery to the customer. 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, 1998.
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. Generally, 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. 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.
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, customers reimburse the Company for non-recurring engineering efforts.
Such reimbursements are recognized as revenue and associated costs are
reflected as cost of revenues.
Technical support services consist of product support and maintenance,
training and on-site 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 on a straight-line basis over the term
of the contract, which is generally six to twelve months. Other revenue from
training and on-site consulting are recognized as performed.
The Company's operating expenses have increased substantially since 1996 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 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 Item 1: Business; "Risk Factors--Our
Success is Dependent on Widespread, Timely Adoption of the TMN Standard."
21
<PAGE>
Results of Operations
The following table sets forth certain items from the Company's Statement of
Operations as a percentage of net revenues:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net revenues................ 100.0% 100.0% 100.0%
Cost of revenues............ 25.5 24.3 18.4
----- ----- -----
Gross margin................ 74.5 75.7 81.6
Operating expenses:
Research and development.. 36.1 30.3 33.8
Sales and marketing....... 39.8 42.4 47.2
General and
administrative........... 16.4 20.1 19.9
Restructuring expense
(benefit)................ -- 8.2 (1.2)
----- ----- -----
Total operating
expenses............... 92.3 101.0 99.7
----- ----- -----
Operating loss from
continuing operations...... (17.8)% (25.3)% (18.1)%
===== ===== =====
</TABLE>
Net Revenues. Net revenues remained relatively unchanged between 1997 and
1998, decreasing 0.6% to $18,367,000 in 1998 from $18,477,000 in 1997
following a 14.4% increase from $16,157,000 in 1996. The slight decrease in
net revenues in 1998 was due primarily to lower revenues from professional
service contracts and custom software engineering services, which was
partially offset by an increase in license revenues. The increase in net
revenues in 1997 was 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 and 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. Annual license revenues increased 5.6% to $13,301,000 during 1998
from $12,590,000 in 1997 following a 7.5% increase from $11,714,000 in 1996.
The increase in license revenues in 1998 as compared to 1997 was due primarily
to two large license contracts. During the second quarter of 1998 the Company
completed a $1,000,000 semi-exclusive licensing contract of the Company's
Aeronautical Telecommunications Network (ATN) Router software. During the
third quarter of 1998 the Company licensed approximately $800,000 of
background technology in connection with the Company's sale of its CDPD and
pACT technologies to AMP. Additionally, the Company realized increases in
licensing of telecore and access products including joint HP/Vertel telecore
products that were introduced in 1998. These increases were partially offset
by the one time final billing of $1,900,000 related to the discontinuance of
the pACT-based two-way paging messaging products in the corresponding period
in 1997. The increase in license revenues in 1997 as compared to 1996 was
primarily due to the above-noted $1,900,000 in final billings.
Service and other revenues consist primarily of professional services,
maintenance, technical support, non-recurring engineering projects, training
and other revenues. Service and other revenues decreased 13.9% to $5,066,000
during 1998 from $5,887,000 in 1997 following a 32.5% increase from $4,443,000
in 1996. The decrease in service and other revenues in 1998 as compared to
1997 was primarily the result of fewer professional service contracts and
lower custom software engineering services. The increase in service and other
revenues in 1997 as compared to 1996 was primarily due to higher revenues from
professional service contracts, custom software engineering services and
maintenance revenues.
The Company intends to continue to introduce 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 delays in releasing new products, if such
new products are not accepted by the marketplace, or if the Company
experiences unanticipated decreases in other product revenues.
22
<PAGE>
Sales to customers outside of the United States comprised approximately
42.9%, 40.3% and 52.6%, respectively, of net revenues in 1998, 1997 and 1996.
The Company has historically reported a high percentage of sales to customers
outside of the United States which the Company believes reflects a high degree
of investment by non-U.S. companies in new infrastructure, compared to their
U.S. counterparts. The Company expects to continue significant international
sales, however, continued economic turmoil in Asia and other parts of the
world could impact future sales in those regions.
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 74.5% of net revenues in 1998, from 75.7% in 1997 and from
81.6% in 1996. The decrease in 1998 compared to 1997 was primarily due to
reduced margins on professional engineering services. The decrease in 1997 as
compared to 1996 was primarily due to higher professional services revenue in
the product mix, which have lower margins compared to license revenue. 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 R&D expenses are engineering salaries,
employee benefits and associated overhead, fees to outside contractors, the
cost of facilities and depreciation of capital equipment, which consists
primarily of computer and test equipment. Costs related to R&D in certain
cases are offset by customer reimbursement of non-recurring engineering
efforts.
Total R&D expenses increased 18.6% to $6,639,000 in 1998 from $5,600,000 in
1997 and increased 2.5% in 1997 from $5,461,000 in 1996. As a percentage of
revenue, R&D expenses increased to 36.1% in 1998, as compared to 30.3% in 1997
and 33.8% in 1996. The increase in R&D expenses during 1998 was primarily the
result of additional salaries and related expenses due to additional personnel
and an increase in the average level of compensation, as well as a reduction
in the amount of expenses being reimbursed by customers as a result of lower
non-recurring engineering services. The increase in R&D expense in 1997 as
compared to 1996 was primarily due to an increase in expenditures for further
expansion of TMN-based software development tools, stacks and applications.
The increase in R&D expense as a percentage of revenues reflects the increase
in expenditure levels, whereas the decrease in R&D expense as a percentage of
revenue in 1997 as compared to 1996 reflects the overall increase in revenues
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, the level of non-recurring engineering services
and the amount of license revenue.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and associated costs related to selling, support and marketing
activities, including marketing programs such as trade shows and other
promotional costs. The Company believes that substantial sales and marketing
expenditures are essential to developing the opportunities for revenue growth
and to sustaining 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.
Sales and marketing expenses decreased 6.6% to $7,310,000 in 1998 from
$7,829,000 in 1997 and increased 2.7% in 1997 from $7,625,000 in 1996. Sales
and marketing expenses decreased in 1998 as compared to 1997, and decreased as
a percentage of revenues to 39.8% in 1998 from 42.4% in 1997 due primarily to
lower promotional expenses for trade shows during 1998 compared to the 1997.
In addition, sales salaries, commissions, and related expenses in the 1998
period were lower as a result of certain staff reductions which occurred
during 1997, and decreased technical support expenses as a result of the
Company's disposition of its
23
<PAGE>
Irish operations in July 1998. The Company's Irish operations had previously
been devoted primarily to the development and support of the Company's ATN
software products. 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 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 during 1999 to support
anticipated broader market adoption of TMN and anticipates those dollar
expenditures on sales and marketing will be higher in 1999 as a result
thereof.
General and Administrative. General and administrative expenses consist
primarily of salaries, rent and other related expenses of administrative,
executive and financial personnel as well as professional fees, investor
relations costs and insurance premiums. General and administrative expenses
decreased 19.0% to $3,014,000 in 1998 as compared to $3,719,000 in 1997, and
increased 15.4% in 1997 from $3,223,000 in 1996. The decrease in 1998 was due
primarily to the elimination of certain corporate overhead expenses incurred
in 1997 when the Company had a holding company structure to oversee the
operations of its subsidiaries, including Sonoma Systems. The increase in
general and administrative costs in 1997 as compared to 1996 was 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.
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. The estimated costs of
restructuring recorded in the financial statements for the year ended December
31, 1997 were $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. These
costs were paid in 1998 except for $119,000 related to facility reserves.
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, 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, 1998, substantially all reserves related to the 1995 restructuring charge,
except for $105,000 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 $3,275,000 in 1998, $4,666,000 in 1997, and $2,931,000 in 1996.
The decrease in loss from continuing operations in 1998 as compared to 1997 is
primarily attributable to the restructuring expense in 1997, as the 1998
reductions in sales and marketing and general and administrative expenses are
partially offset by the lower gross margin and increased research and
development costs as noted above. The loss from continuing operations in 1996
is primarily attributable to increases in operating costs as the Company
expanded infrastructure.
24
<PAGE>
Other Income, Net. Other income, net, in 1998 is principally comprised of
the following items: (i) an approximately $7,600,000 net gain that was
realized by the Company from the sale of its holdings of Series B Preferred
Stock and Series C Preferred Stock of Sonoma Systems; (ii) an approximately
$2,200,000 net gain from the sale of the Company's CDPD and pACT technologies
to AMP; (iii) an approximately $600,000 net gain resulting from the
curtailment of a non-U.S. pension plan that previously covered the Company's
Irish employees; (iv) a $437,000 gain on the sale of a software library and
the assignment of certain assets and liabilities of the Company's ATN
operations in Ireland to a subsidiary of Airtel ATN plc and, (v) net interest
income of $420,000. These amounts were partially offset by the realization of
a cumulative exchange loss of approximately $436,000 related to the
disposition of the Company's Irish operations. Other income, net, of $171,000
in 1997 was primarily interest income and the decrease from $591,000 in 1996
was primarily attributable to decreases in interest income from decreasing
cash balances during 1997 and lower interest rates earned on investments. It
is not expected that other income, net, will continue at the 1998 level.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $446,000 on pre-tax income from continuing operations of $7,277,000
in 1998. No income tax benefit was recognized on pre-tax losses from
continuing operations of $4,495,000, and $2,340,000 in 1997 and 1996,
respectively. The Company's 1998 tax provision was positively impacted by the
utilization of approximately $6,330,000 of net operating losses carried
forward from prior years. 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 $21,680,000 at
December 31, 1998, 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
Net cash generated from operating activities during 1998 was $1,755,000
compared to $4,277,000 used by operating activities in 1997 and $1,214,000
generated by operating activities in 1996. The positive cash flow from
operations in 1998 was comprised primarily of proceeds from the sale of the
Company's CDPD and pACT technologies ($2,000,000), non-cash depreciation and
amortization ($1,124,000), a decrease in accounts receivable ($954,000) and an
increase in accrued taxes ($310,000). These amounts were partially offset by
payments in 1998 of restructuring expenses that were accrued in 1997
($1,263,000). The negative cash flow from operating activities in 1997 was
comprised primarily of net loss ($4,495,000) and an increase in accounts
receivable ($710,000). These amounts were partially offset by non-cash
depreciation and amortization ($1,017,000). The positive cash flow from
operations in 1996 was comprised primarily of non-cash depreciation and
amortization ($1,003,000), an increase in other accrued liabilities ($926,000)
and an increase in accounts payable of ($753,000). These amounts were
partially offset by the net loss from continuing operations ($2,340,000).
Net cash provided by investing activities was $7,881,000, $7,899,000 and
$461,000 for 1998, 1997 and 1996 respectively. The net cash provided in 1998
was primarily due to the sale of the Company's holdings of Series B and Series
C Preferred Stock of Sonoma Systems ($10,093,000) partially offset by
purchases of property and equipment ($1,161,000) and purchases of short-term
investments ($978,000). The net cash provided in 1997 was primarily due to
sales of short-term investments ($7,748,000) and a reduction in others assets
($631,000), which was partially offset by purchases of property and equipment
($480,000). The net cash provided in 1996 was primarily due to sales of short-
term investments ($1,684,000), partially offset by an increase in others
assets ($883,000) and purchases of property and equipment ($340,000).
Net cash provided by financing activities was $3,338,000, $766,000 and
$7,411,000 for 1998, 1997 and 1996, respectively of which $2,971,000 and
$4,090,000 was received from private placements of Common Stock in 1998 and
1996, respectively; $341,000, $256,000 and $3,321,000 was received from the
exercise of stock options and stock sales under the employee stock purchase
plans in 1998, 1997 and 1996, respectively; and $25,000 and $510,000 was
received in 1998 and 1997, respectively, as the result of the repayment of
certain notes receivable originally issued from the exercise of certain stock
options.
Net cash provided by (used for) discontinued operations was $281,000,
($6,313,000) and ($6,057,000) for 1998, 1997 and 1996, respectively.
25
<PAGE>
The Company believes that cash and short term investment balances
($20,473,000 at December 31, 1998) will be sufficient to meet the Company's
liquidity requirements for the next twelve months. From time to time, the
Company may also consider the acquisitions of, or evaluate investments in,
certain products and businesses complementary to the Company's business. Any
such acquisitions or investments may require additional capital resources.
At December 31, 1998 the Company's long-term liquidity needs consisted
principally of operating lease commitments related to facilities and office
equipment.
Year 2000 Issues
General. The Company is currently conducting a company-wide Year 2000
readiness program ("Y2K Program"). The Y2K Program is addressing the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000. Therefore, some computer hardware and
software will need to be modified prior to the Year 2000 in order to remain
functional. The Company anticipates that Year 2000 compliance will be
substantially complete by April 1999.
Y2000 Program. The Company's Y2K Program is divided into four major
sections: (1) Company developed products, (2) internal information processing
("IP") system, (3) non-IP system, and (4) third-party suppliers and customers.
The general phases common to all sections are: (1) inventorying Year 2000
items; (2) assessing the Year 2000 compliance of items determined to be
material to the Company; and (3) repairing or replacing material items that
are determined not to be Year 2000 compliant.
The Company has completed the review of all Company developed products for
Year 2000 compliance purposes. The Company believes that most (80%) of the
Company's products are Year 2000 compliant and that those that are not Year
2000 compliant will be upgraded to be Year 2000 compliant by April 1999, or
discontinued and replaced with Year 2000 compliant products providing the same
functionality. 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 that third parties could assert
claims against the Company or its customers concerning Year 2000 issues and
regardless of their merits or lack thereof, and such claims could be material.
The Company has completed an evaluation of Year 2000 issues associated with
its internal IP computer systems. Most of the Company's computer systems are
already Year 2000 compliant. Other internal computer systems that have been
identified as non-compliant will be upgraded to be Year 2000 compliant by
March 1999.
The Company has completed an evaluation of Year 2000 issues associated with
its non-IP systems. Most of them are Year 2000 compliant. Those non-IP systems
that are not Year 2000 compliant will be repaired or replaced by June 1999.
The Company has completed an evaluation of the possible effects on the
Company's operations of the Year 2000 readiness of its key suppliers. The
Company relies on third party manufacturers for the proper functioning of its
information systems, software and products. The failure of those manufacturers
to address Year 2000 issues could have a material impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time.
Costs. The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. Through December 31, 1998, the Company has spent less than $60,000
to implement the Year 2000 compliance program. That amount has been expensed.
The Company estimates that it may spend up to an additional $250,000 for other
replacements or upgrades and for communicating with key suppliers and
customers. Approximately $100,000 of that amount will relate to new computer
equipment and software and will be capitalized, and the remainder will be
expensed as incurred.
26
<PAGE>
Risks. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Y2K Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the Y2K Program as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
The Company does not yet have a contingency plan to address the Year 2000
problem, but it is expected to create one by June 1999 if it appears that the
Company or its key suppliers and customers will not be Year 2000 compliant and
that such non-compliance is expected to have a material adverse impact on the
Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
(a) Quantitative Information About Market Risk.
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company
maintains an investment policy that ensures the safety and preservation of
its invested funds by limiting default risk, market risk and investment
risk. As of December 31, 1998, the Company had $19,495,000 and $978,000 in
cash and cash equivalents and short-term investments, respectively, with a
weighted average variable rate 5.48% and 5.34%, respectively.
The Company mitigates default risk by investing in high credit quality
securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor and by placing its portfolio under the
management of professional money managers who invest within specified
parameters established by the Board of Directors. The portfolio includes
only marketable securities with active secondary or resale markets to
ensure portfolio liquidity and maintains a prudent amount of
diversification.
The Company currently has no short-term or long-term debt outstanding.
(b) Qualitative Information About Market Risk
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 operations in France, Germany, Japan, Korea and the
United Kingdom, where the functional currencies are: French Francs,
Deutschemarks, Yen, Won and British Pounds, respectively. Most of the
Company's revenues are denominated in the United States Dollar.
Fluctuations in exchange rates may have a material adverse effect on the
Company's results of operations and could also result in exchange losses.
The impact of future exchange rate fluctuations cannot be predicted
adequately. To date, exchange fluctuations have not had a material impact
on the Company's earnings and 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.
(c) Euro Impact
In January 1999, eleven European countries, including France and Germany,
where the Company maintains operations, implemented a single currency (the
"Euro") to replace their separate currencies. While transactions may still
be consummated in the individual currencies of the member countries, the
27
<PAGE>
Company will be required to, and is currently in the process of,
implementing modifications to its payroll and benefits systems as well as
its contracts and other obligations in order to accommodate the Euro. The
Company does not currently believe that it will incur a material financial
expense in connection with such modifications. The introduction of the
Euro, presents certain risks for the Company including, risks associated
with its reduced ability to adjust pricing of its products based on local
currencies, fluctuations in the Euro based on economic turmoil in countries
other than those in which the Company does business and other risks
normally associated with doing business in international currencies, any of
which could have an adverse effect on the Company's business, financial
condition and results of operations.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VERTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 19,495 $ 6,252
Short-term investments .................................. 978 --
Trade accounts receivable (net of allowances of $556 and
$452 for 1998 and 1997, respectively)................... 3,883 4,941
Prepaid expenses and other current assets................ 1,134 925
Net assets of discontinued operations.................... -- 281
-------- --------
Total current assets................................... 25,490 12,399
Property and equipment, net................................ 1,025 766
Investments................................................ 1,437 --
Other assets............................................... 365 566
-------- --------
$ 28,317 $ 13,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 426 $ 733
Accrued wages and related liabilities ................... 1,351 660
Accrued restructuring expenses .......................... 224 1,487
Accrued taxes payable.................................... 1,087 777
Other accrued liabilities ............................... 1,942 1,810
Deferred revenue......................................... 1,115 531
-------- --------
Total liabilities...................................... 6,145 5,998
-------- --------
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: 1998,
24,954,545; 1997, 24,146,518............................ 249 227
Additional paid-in capital .............................. 79,553 78,661
Accumulated deficit ..................................... (57,483) (64,760)
Accumulated comprehensive loss........................... (147) (2,003)
-------- --------
Total.................................................. 22,172 12,125
Less notes receivable from issuance of common stock ..... -- (4,392)
-------- --------
Total shareholders' equity ............................ 22,172 7,733
-------- --------
$ 28,317 $ 13,731
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Net revenues:
License.......................................... $12,564 $ 12,590 $11,714
License--related party........................... 737 -- --
Service and other................................ 5,066 5,887 4,443
------- -------- -------
Net revenues................................... 18,367 18,477 16,157
------- -------- -------
Cost of revenues:
License.......................................... 816 876 1,059
Service and other................................ 3,863 3,606 1,917
------- -------- -------
Total cost of revenues ........................ 4,679 4,482 2,976
------- -------- -------
Gross profit ...................................... 13,688 13,995 13,181
------- -------- -------
Operating expenses:
Research and development......................... 6,639 5,600 5,461
Sales and marketing.............................. 7,310 7,829 7,625
General and administrative ...................... 3,014 3,719 3,223
Restructuring expense (benefit).................. -- 1,513 (197)
------- -------- -------
Total.......................................... 16,963 18,661 16,112
------- -------- -------
Operating loss from continuing operations ......... (3,275) (4,666) (2,931)
Other income, net ................................. 10,998 171 591
------- -------- -------
Income (loss) from continuing operations before
provision for income taxes........................ 7,723 (4,495) (2,340)
Provision for income taxes......................... 446 -- --
------- -------- -------
Income (loss) from continuing operations........... 7,277 (4,495) (2,340)
Loss from discontinued operations (including
provision for operating losses of $100 during
phase out period in 1997)......................... -- (6,415) (1,501)
------- -------- -------
Net income (loss).................................. 7,277 (10,910) (3,841)
Other comprehensive income (loss).................. 425 (42) (328)
------- -------- -------
Comprehensive income (loss)........................ $ 7,702 $(10,952) $(4,169)
======= ======== =======
Basic net income (loss) per common share:
Income (loss) from continuing operations ........ $ 0.31 $ (0.21) $ (0.12)
Loss from discontinued operations. .............. $ -- $ (0.31) $ (0.07)
------- -------- -------
Net income (loss)................................ $ 0.31 $ (0.52) $ (0.19)
======= ======== =======
Diluted net income (loss) per common share:
Income (loss) from continuing operations......... $ 0.29 $ (0.21) $ (0.12)
Loss from discontinued operations. .............. $ -- $ (0.31) $ (0.07)
------- -------- -------
Net income (loss)................................ $ 0.29 $ (0.52) $ (0.19)
======= ======== =======
Weighted average shares outstanding used in net
income (loss) per common share calculations:
Basic............................................ 23,321 21,120 20,322
Diluted.......................................... 24,698 21,120 20,322
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------ Paid-In Accumulated Comprehensive Notes
Shares Amount Capital Deficit Income (Loss) Receivable Total
----------- ------ ---------- ----------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 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
Other comprehensive
loss.................. (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
Other comprehensive
loss.................. (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
Issuance of common
stock upon private
placement, net........ 2,000,000 20 2,951 2,971
Issuance of common
stock upon exercise of
options............... 394,277 18 323 341
Payment of notes
receivable from
issuance of common
stock................. 25 25
Cancellation of notes
receivable in exchange
for share repurchase.. (1,586,250) (16) (4,351) 4,367 --
Increase in value of
Sonoma investment..... 1,969 1,431 3,400
Other comprehensive
income................ 425 425
Net income............. 7,277 7,277
----------- ---- ------- -------- ------- ------- --------
Balance at December 31,
1998................... 24,954,545 $249 $79,553 $(57,483) $ (147) $ -- $ 22,172
=========== ==== ======= ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
VERTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations...... $ 7,277 $(4,495) $(2,340)
Adjustments to reconcile net loss from continuing
operations to net cash provided by (used for)
operating activities
Gain on sale of Sonoma investment............... (7,641) -- --
Depreciation and amortization .................. 1,124 1,017 1,003
Reserve for returns and bad debts............... 104 84 277
Restructuring expense (benefit) ................ -- 1,513 (197)
Changes in operating assets and liabilities..... 891 (2,396) 2,471
------- ------- -------
Net cash provided by (used for) operating
activities .................................... 1,755 (4,277) 1,214
------- ------- -------
Cash flows from investing activities:
Net (purchases) sales of short-term investments... (978) 7,748 1,684
Proceeds from sale of Sonoma investment........... 10,093 -- --
Purchases of property and equipment .............. (1,161) (480) (340)
Change in other assets............................ (73) 631 (883)
------- ------- -------
Net cash provided by investing activities....... 7,881 7,899 461
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock ........... 3,338 766 7,411
------- ------- -------
Net cash provided by (used for) discontinued
operations......................................... 281 (6,313) (6,057)
------- ------- -------
Effect of exchange rate changes on cash............. (12) (42) (328)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 13,243 (1,967) 2,701
Cash and cash equivalents, beginning of year ....... 6,252 8,219 5,518
------- ------- -------
Cash and cash equivalents, end of year.............. $19,495 $ 6,252 $ 8,219
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The consolidated financial statements include the accounts of Vertel
Corporation (formerly Retix) and its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. 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. In conjunction with its annual shareholders' meeting held in March
1998, the Company changed its name from Retix to Vertel Corporation. Trading
of the Company's common stock on the Nasdaq National Market (symbol: VRTL,
formerly RETX) commenced following the Company's initial public offering in
December 1991.
Revenues are generated primarily from software licenses, royalty agreements,
professional services and maintenance contracts. For the years ended December
31, 1998 and 1996, no individual customer accounted for more than 10% of net
revenues. For the year ended December 31, 1997, one customer comprised
approximately 10.2% of net revenues.
2. Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of
three months or less at the date of acquisition. The carrying value
approximates fair market value due to the short maturity of these investments.
Property and Depreciation
Property and equipment are stated at cost. Depreciation is provided for
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. Subsequent to 1996, costs incurred after the
establishment of technological feasibility have not been material. Unamortized
software development costs of $250,000 were included in other assets at
December 31, 1997. Amortization of capitalized software development costs for
the years ended December 31, 1998, 1997 and 1996 totaled $250,000, $390,000
and $484,000, respectively.
Investments
Investments consist primarily of highly liquid municipal bonds and
commercial paper ("marketable securities") and equity securities. Marketable
securities are categorized as available for sale and are carried at fair
value. Fair value of marketable securities is determined by the quoted market
prices for each investment. Marketable securities with a maturity of less than
one year but greater than three months when purchased are classified as short-
term investments. Marketable securities with a maturity greater than one year
when purchased, are classified as long-term investments. Unrealized holding
gains and losses on investments held for sale are included as a component of
shareholder's equity until realized. Investments in equity securities for
which fair market values are not readily determinable or for which sale is
restricted for periods exceeding twelve months are carried at cost.
33
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company derives revenue primarily from software license and royalty
fees, maintenance and customer support services and, to a lesser extent,
professional services and custom engineering consulting contracts. Effective
January 1, 1998, the Company adopted the provisions of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4,
"Deferral of the Effective Date of Certain Provisions of SOP 97-2, Software
Revenue Recognition." SOP 97-2 superseded SOP 91-1, "Software Revenue
Recognition," and delineates the accounting for software product and
maintenance revenue. Under SOP 97-2, the Company recognizes product revenue
upon delivery if a signed contract exists, the fee is fixed and determinable,
collection of the resulting receivables is probable and no significant
production, modification or customization of software is required. For
contracts with multiple elements (e.g., software products, maintenance
services and other services), the Company allocates revenue to each element of
the contract based on objective evidence of the element's fair value. This
objective evidence of fair value is specific to the Company and consists
either of prices derived from sales of elements when they are sold separately
or the price established by management for sale of elements in the ordinary
course of business. The adoption did not have a material impact on the
Company's consolidated financial statements.
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, which is
generally six to twelve months. Revenues from professional services are
generally recognized using the percentage of completion method of accounting
or on a time and materials basis. In certain cases, customers reimburse the
Company for non-recurring engineering efforts. Such reimbursements are
recognized as revenue and associated costs are reflected as cost of revenues.
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 $21,680,000 at December 31, 1998 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.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period plus the number of additional common shares
that would have been outstanding if all potentially dilutive common shares had
been issued. Due to the losses reported by the Company in 1997 and 1996, 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 in those periods.
34
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share computations for the years ended December 31,
1998, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
1998 1997 1996
------ -------- -------
<S> <C> <C> <C>
Numerator:
Income (loss)-numerator for basic and diluted
income (loss) per share from continuing
operations .................................... $7,277 $ (4,495) $(2,340)
====== ======== =======
Net income (loss)-numerator for basic and
diluted net income (loss) per share............ $7,277 $(10,910) $(3,841)
====== ======== =======
Denominator:
Denominator for basic income (loss) per common
share weighted average shares.................. 23,321 21,120 20,322
Effect of dilutive securities-stock options....... 1,377 -- --
------ -------- -------
Denominator for diluted income (loss) per common
share............................................ 24,698 21,120 20,322
====== ======== =======
</TABLE>
Common shares related to stock options that are antidilutive amounted to
approximately 2,001,613, 102,301 and 175,384 for the years ended December 31,
1998, 1997 and 1996 respectively.
Other Comprehensive Income
The Company has reflected the provisions of Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, in the
accompanying consolidated financial statements for all periods presented. The
accumulated comprehensive loss and other comprehensive income (loss) as
reflected on the accompanying consolidated financial statements, respectively,
consist of foreign currency translation adjustments.
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 and foreign exchange
gains/losses have been insignificant.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash, cash equivalents, investments and
accounts receivable. The Company places its cash, cash equivalents and
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.
35
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 herein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may differ from these estimates.
Fiscal Year
In the fourth quarter of 1998, the Company adopted a calendar-year
convention for its fiscal year end and quarter ends. Accordingly, the fiscal
year end for 1998 was December 31, 1998. Prior to the fourth quarter of 1998,
the Company's fiscal year was the 52 or 53-week period ending on the Saturday
nearest to December 31, and the fiscal quarter ends ended on the thirteenth
Saturday of the quarter period. For simplicity of presentation, the Company
has described the 52 weeks ended December 27, 1997 and the 52 weeks ended
December 28, 1996 as the years ended December 31, 1997 and December 31, 1996,
respectively. As a result of this change, 1998 contained 369 days; however,
the effect on the Company's financial position and results of operations was
not significant.
Reclassification
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 consolidated financial statement
presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which the Company is required to adopt effective
fiscal 2000. SFAS 133 will require the Company to record all derivatives on
the balance sheet at fair value. Changes in derivative fair values will either
be recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments, or, for forecasted
transactions, deferred and recorded as a component of other comprehensive
income until the hedge transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
immediately recognized in earnings. The Company does not believe the effect of
adopting SFAS 133 will be material to its financial position.
In March 1998, the Accounting Standards Executive Committee, or AcSEC,
released SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 requires companies to capitalize certain
costs of computer software developed or obtained for internal use, provided
that those costs are not research and development. SOP 98-1 is effective for
fiscal years beginning after December 15,
36
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998. The Company has evaluated the requirements of SOP 98-1 and the effects,
if any, on the Company's current policies on accounting for software costs.
SOP 98-1 is not expected to have a material impact on the Company's
consolidated financial statements.
In December 1998, AcSEC released SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple
element arrangements by means of the "residual method" when (1) there is
vendor-specific objective evidence (VSOE) of the fair values of all the
undelivered elements that are not accounted for by means of long-term contract
accounting, (2) VSOE of fair value does not exist for one or more of the
delivered elements, and (3) all revenue recognition criteria of SOP 97-2
(other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. The provisions of SOP 98-9 that extend the deferral of
certain paragraphs of SOP 97-2 became effective December 15, 1998. These
paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that
are entered into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. The Company is currently evaluating the
requirements of SOP 98-9 and the effects on the Company's current revenue
recognition policies.
3. Investments
Investments at December 31, 1998, consist of the following (in thousands):
<TABLE>
<CAPTION>
1998
------
<S> <C> <C>
Sonoma Systems, Inc. Series A Preferred Shares................ $1,000
Airtel ATN plc Common Stock................................... 437
------
$1,437
======
4. Property and Equipment
Property and equipment at December 31, 1998 and 1997 consist of the
following (in thousands):
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Machinery and equipment....................................... $3,333 $3,454
Furniture and fixtures........................................ 171 325
Leasehold improvements........................................ 211 147
------ ------
3,715 3,926
Less accumulated depreciation and amortization................ 2,690 3,160
------ ------
Property and equipment, net................................... $1,025 $ 766
====== ======
</TABLE>
During 1998 the Company disposed of or retired $1,372,000 of fully
depreciated assets.
5. Income Taxes
The components of income (loss) from continuing operations before income
taxes for the years ended December 31, 1998, 1997 and 1996 respectively
consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Domestic............................................ $7,405 $(5,429) $(2,835)
Foreign............................................. 318 934 495
------ ------- -------
Total............................................. $7,723 $(4,495) $(2,340)
====== ======= =======
</TABLE>
37
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- -------
<S> <C> <C> <C>
Current:
Federal........................................... $ 187 $ -- $ --
State............................................. 63 -- --
Foreign........................................... 196 -- --
------- ----- -------
Total current................................... 446 -- --
Deferred............................................ 3,664 (699) (5,700)
Valuation allowance................................. (3,664) 699 5,700
------- ----- -------
Total........................................... $ 446 $ -- $ --
======= ===== =======
</TABLE>
The Company's effective income tax rate differs from the federal statutory
income tax rate applied to income (loss) from continuing operations before
provision for income taxes in 1998, 1997 and 1996, due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<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............. 1.1 (7.3) (7.4)
State taxes, net of
federal benefit........ 5.5 0.1 0.1
Research and development
tax credit............. 2.8 (3.4) (4.5)
Expiration of foreign
tax credits............ 2.9 7.2 --
Utilization of NOL's.... (37.6) -- --
Other................... 2.8 (0.2) 1.6
Valuation allowance..... (5.7) 37.6 44.2
----- ----- -----
Effective tax rate........ 5.8 % -- % -- %
===== ===== =====
</TABLE>
Current and noncurrent deferred income tax assets (liabilities) at December
31, 1998 and 1997 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current:
Accrued expenses....................................... $ 1,015 $ 1,514
-------- --------
Noncurrent:
Credit for research and development expenses........... 5,828 6,046
Credit for foreign taxes withheld...................... 260 484
Depreciation........................................... 408 323
Other.................................................. 220 233
Capitalized software................................... -- (109)
Net operating loss carryforwards....................... 13,949 16,853
-------- --------
20,665 23,830
-------- --------
Valuation allowance...................................... (21,680) (25,344)
-------- --------
Net deferred income tax assets........................... $ -- $ --
======== ========
</TABLE>
38
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's credits for research and development expenses, which may be
carried forward fifteen years, expire in 2005 through 2013; credits for
foreign taxes withheld, which may be carried forward five years, expire in
1999. The Company has net operating loss carryforwards for federal income tax
purposes of approximately $37,829,000, which expire in 2007 through 2012. The
Company also has net operating loss carryforwards for state purposes of
approximately $12,862,000 which expire in 1999 through 2002. The Company's
1998 tax provision was positively impacted by the utilization of $6,330,000 of
net operating losses carried forward from prior years.
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 with 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. The deferred
tax assets creditable directly to shareholders' equity upon realization
totaled approximately $4,000,000 as of December 31, 1998.
6. Commitments and Contingencies
The Company leases its facilities and certain equipment under noncancelable
operating leases. At December 31, 1998, future minimum rental payments, net of
applicable sublease income, under leases that have initial or remaining
noncancelable lease terms in excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 1,880
2000.............................................................. 1,256
2001.............................................................. 779
2002.............................................................. 54
2003.............................................................. 35
-------
Total operating lease commitments............................... 4,004
Less: sublease income............................................. (1,247)
-------
Total........................................................... $ 2,757
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1998,
1997 and 1996 was $941,000, $1,126,000, and $1,725,000, respectively.
The Company is subject to certain legal proceedings and claims which arise
in the conduct of its business. 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
On September 29, 1998, the Company sold 2,000,000 shares of common stock for
$1.50 per share ($2,971,000, net proceeds after expenses). The price per share
was determined as the greater of (a) the average closing price of the common
stock for the five days preceding the closing date and (b) $1.50. In
connection with the transaction, the Company agreed to file a registration
statement within 90 days of the closing date covering the shares issued and
agreed to bear all expenses in connection therewith. Of the total shares
issued, 1,000,000 shares were purchased by Sierra Ventures V, ("Sierra") a
venture capital firm. Jeffrey M. Drazan, a General Partner of Sierra Ventures,
is a member of the Company's Board of Directors.
39
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective January 30, 1996, Sierra 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.
In November 1998, the Company repurchased 1,586,250 shares of restricted
common stock from certain ex-officers and employees in exchange for the
cancellation of promissory notes originally issued in connection with the
issuance of the shares. The shares have been returned to the Company's
authorized pool of shares available for issuance. For purposes of computing
earnings per share prior to the fourth quarter of 1998, the common stock
issued subject to notes receivable were treated as options. These options were
excluded from the calculation of earnings per share prior to the third quarter
of 1998 because they were considered antidilutive.
In connection with the Company's 1997 restructuring (see Note 12), the
vesting of the restricted shares held by certain officers of the Company were
accelerated. 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 recorded a compensation charge of $317,000 in 1997 related
to the accelerated stock and options held by the officers and the director.
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 the Company'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 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, 1998, approximately 5,416,000 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 seven stock and
option plans that were in effect at December 31, 1998. However, the Company is
not currently granting options under 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,
but is granting options under the 1996 Directors' Stock Option Plan and the
1998 Employee Stock Option Plan. Under the foregoing option plans, options may
be granted at an exercise price not less than the average closing price of the
Company's shares on the Nasdaq National Market for the preceding five days
prior to 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 1998 Stock
Option Plan, or the 1995 Executive Stock Option Plan and the 1998 Employee
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 Plans 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.
40
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes activity in the option plans for the three years
ended December 31, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 297,301 $4.92 385,384 $4.73 3,324,366 $3.43
Granted............... 5,277,284 2.07 40,000 6.75 625,500 3.40
Exercised............. (394,277) 0.96 (35,985) 4.40 (2,461,241) 4.03
Canceled.............. (704,082) 2.71 (92,098) 5.10 (1,103,241) 3.40
--------- ------- ----------
Outstanding at year end. 4,476,226 $2.25 297,301 $4.92 385,384 $4.73
========= ======= ==========
</TABLE>
Included in options granted during 1998 were 4,127,752 options granted in
exchange for stock options of the Company's subsidiary (see "Subsidiary Stock
Option Plans" below). As of December 31, 1998, 1997 and 1996 options to
purchase 2,130,311 shares, 102,301 shares, and 173,884 shares, respectively,
were exercisable under all Company stock option plans. At December 31, 1998,
939,594 shares were available for future grants under all option plans.
Additional information regarding options outstanding as of December 31, 1998
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 (Yrs.) Exercise Price Exercisable Exercise Price
--------------- ----------- -------------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.79 1,072,195 7.24 $ 0.79 1,025,625 $0.79
1.45-1.98 1,362,418 9.18 1.66 235,521 1.98
2.00-2.53 919,508 7.75 2.29 387,619 2.21
3.41-3.97 977,608 8.09 3.87 426,433 3.91
4.00-4.88 69,400 8.45 4.65 10,016 4.00
5.00-15.50 75,097 5.95 10.12 45,097 12.36
--------- ---------
$0.79-15.50 4,476,226 8.12 $ 2.25 2,130,311 $2.06
========= =========
</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. Currently, the Company is not
operating its Employee Stock Purchase Plan.
Subsidiary Stock Option Plans
During 1998, the Company exchanged employee and director options in its sole
remaining operating subsidiary (the "Subsidiary Options"), for options to
purchase common stock in the Company (the "Company Options"). The Company
exchanged 1.26 Company Options for each Subsidiary Option outstanding. The
option exchange ratio was determined by an independent valuation. The Company
exchanged 3,275,994 Subsidiary Options at a weighted average exercise price of
$2.68 per share for 4,127,742 options to purchase the Company's common stock
at a weighted average exercise price of $2.13 per share. The vesting
provisions and option period of the original subsidiary option grant remained
the same under the terms of the new options to purchase the
41
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's common stock. The weighted average remaining contractual life of the
options was 8.61 years before and after the exchange. The Subsidiary Options
were cancelled as a result of the exchange. The exchange was structured in
accordance with the provisions of EITF Issue No. 90-9, "Changes to Fixed
Employee Stock Option Plans as a Result of Equity Restructuring," and as a
result, no compensation expense was recognized in connection with the
exchange.
Fair Value Information
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," 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 1998, 1997 and 1996, the income/(loss) from
continuing operations and income/(loss) per share would have been $4,647,000
and $0.20 ($0.19 diluted), respectively, for the year ended December 31, 1998,
$(6,964,000) and $(0.33), respectively, for the year ended December 31, 1997,
and $(3,624,000) and $(0.18), respectively, for the year ended December 31,
1996. The weighted average fair value of options granted during the years
ended December 31, 1998, 1997 and 1996 were $0.75, $4.59 and $2.32 per share,
respectively. Stock options issued during 1998, 1997 and 1996 were valued
using the Black-Scholes model using a risk-free interest rate of 4.7% in 1998,
5.4% in 1997 and 6.0% in 1996, an expected life of 36 months and expected
volatility of 54% in 1998, and 107% in 1997 and 1996, 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.
During 1998 the Company finalized the termination of a non-US pension plan,
which previously covered the Company's Irish employees. This action resulted
in a return of excess plan assets to the Company. The Company recorded
approximately $600,000 as other income upon final determination of the amount
of excess plan assets.
9. Other Income
In June 1998, the Company entered into a semi-exclusive royalty bearing
licensing contract with Symbol Software Limited ("Symbol"), a subsidiary of
Airtel ATN plc ("Airtel"), for Vertel's Aeronautical
42
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Telecommunications Network ("ATN") Router software as well as nonexclusive
royalty bearing licenses for various other TMN software products, for $1
million (the "ATN Licensing"). During July 1998, the Company sold
substantially all of the assets and assigned the liabilities of its Irish
operations to Symbol in exchange for 10% of Airtel's common stock (the "Airtel
Transaction"). The Airtel Transaction substantially liquidated the Company's
investment in its Irish operation.
The Company's 10% ownership interest in Airtel, valued at $437,000, reflects
certain restrictions including a requirement prohibiting the Company from
disposing of the Airtel shares until August 1999. The book value of the
software library and the net assets and liabilities assigned to Symbol
approximated zero and, as a result, the Company recognized a gain totaling
$437,000 related to the Airtel Transaction during 1998 which is reflected in
other income in the accompanying 1998 consolidated statement of operations. As
a result of the substantial liquidation of its Irish operations, the Company
recorded a charge of $436,000 to other income representing the realization of
foreign currency exchange losses previously included as cumulative translation
losses which is also a component of accumulated comprehensive loss. The
$436,000 charge recorded as a result of the liquidation represents other
comprehensive income and is classified as such according to the provisions of
SFAS No. 130 (See also Note 2).
In July 1998, the Company entered into agreements with AMP Incorporated
("AMP") whereby AMP agreed to purchase the Company's CDPD and pACT products
and technologies (the "Wireless Products") as well as other telecommunications
management software. The agreements consisted of a License and Purchase
Agreement (the "Sale Agreement") valued at $2.5 million for the sale of the
Wireless Products and a non-exclusive license to certain other related
technology sold in the ordinary course of business (the "Background
Technology"), and an agreement valued at $1.0 million primarily for the
assignment of certain contracts related to the Wireless Products.
Approximately $800,000 of the Sale Agreement, representing the value of the
Background Technology licensed to AMP, was accounted for as license revenue
and approximately $2.5 million (net of $200,000 of certain deferrals) was
included in other income in the accompanying 1998 consolidated statement of
operations.
In December 1998, the Company sold its holdings of Series B and Series C
preferred stock in Sonoma Systems ("Sonoma"), a former subsidiary of the
Company (see Note 12, Restructuring Expense). The sales price was $10.3
million in cash, and resulted in a gain of $7.6 million that is reflected in
other income in the accompanying 1998 consolidated statement of operations.
The gain is net of the recorded investment value of $2.4 million and certain
costs of the transaction. The Company's remaining investment in Sonoma
consists of 2,363,636 shares of non-convertible and non-voting Series A
redeemable preferred stock bearing dividends at 6% per annum that is valued at
$1 million and is included in investments in the accompanying consolidated
balance sheet (see Note 3).
43
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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,
------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net revenues
U.S. operations................................ $17,883 $17,722 $14,500
Foreign operations............................. 484 755 1,657
------- ------- -------
Consolidated................................... $18,367 $18,477 $16,157
======= ======= =======
Transfers between operations................... $ 2,654 $ 2,909 $ 1,066
======= ======= =======
Income (loss) from continuing operations
U.S. operations................................ $ 7,155 $(5,429) $(2,835)
Foreign operations............................. 122 934 495
------- ------- -------
Consolidated................................... $ 7,277 $(4,495) $(2,340)
======= ======= =======
Identifiable assets at end of period
U.S. operations................................ $27,937 $13,224 $23,370
Foreign operations............................. 380 226 252
------- ------- -------
Consolidated................................... $28,317 $13,450 $23,622
======= ======= =======
</TABLE>
Included in U.S. operations are export sales of $7,399,000, $6,687,000 and
$6,837,000 for the years ended 1998, 1997, and 1996, respectively.
11. 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,
------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Trade accounts receivable......................... $ 954 $ (710) $ (472)
Prepaid expenses and other current assets......... (209) (85) 396
Accounts payable.................................. (307) (331) 753
Accrued wages and related liabilities............. 691 (243) 523
Cash payments for restructuring expenses.......... (1,263) (200) (112)
Other accrued liabilities......................... 131 (459) 1,097
Accrued taxes payable............................. 310 (160) 254
Deferred revenue.................................. 584 (208) 32
------- ------- ------
$ 891 $(2,396) $2,471
======= ======= ======
</TABLE>
Cash paid (received) during the years for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997 1996
----- ---- -----
<S> <C> <C> <C>
Income taxes.............................................. $(384) $18 $(240)
</TABLE>
44
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Restructuring Expenses
As discussed in Note 13, 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. The majority of these costs were paid in 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. Subsequently, the Company recorded the
reversal of excess restructuring reserves totaling $303,000 and $197,000 for
the years ended December 31, 1997 and 1996, respectively.
Restructuring expenses and (benefit) for 1997 and 1996 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Restructuring Expenses
(Benefit)
----------------------
1997 1996
----------- -----------
<S> <C> <C>
Severance and related costs........................ $ 1,025 $ (59)
Stock option acceleration.......................... 317 --
Professional fees.................................. 176 --
Write down of fixed assets to be sold.............. -- (25)
Vacating costs of facilities....................... -- (98)
Other, net of reversal of $303,000 in 1997......... (5) (15)
----------- ----------
$1,513 $ (197)
=========== ==========
</TABLE>
With respect to the 1997 restructuring charge, substantially all of the
$119,000 reserves remaining as of December 31, 1998, are expected to be
utilized in 1999 via cash disbursements, and primarily comprise facility
related reserves. As of December 31, 1998, substantially all reserves related
to the 1995 restructuring charge had been utilized or reversed except for
$105,000 related to costs for final closures of certain non-operating foreign
subsidiaries.
13. Discontinued Operations
In December 1997, the Company's Board of Directors adopted a plan to
discontinue further investment in its subsidiary, Sonoma Systems. In early
1998, as the result of a series of financings by Sonoma, the Company's
ownership interest in Sonoma was reduced to that of a passive investor with no
significant influence over the former subsidiary's operations. Sonoma raised
an aggregate of approximately $9 million by issuing preferred stock to
unrelated investors, thereby reducing the Company's voting ownership in Sonoma
to 19.9%. As a result, the Company's financial statements and related notes to
financial statements for 1997 and prior years reflect the results of
operations and net liabilities of Sonoma as a discontinued operation.
Beginning in 1998, the Company began accounting for its remaining investment
in Sonoma using the cost method (see Note 3).
To reflect the effect of the Sonoma financings, the Company increased the
recorded value of its net investment in Sonoma to $3.4 million reflecting the
Company's proportionate share of Sonoma's post transaction equity with a
corresponding credit to additional paid-in capital. In addition, $1.4 million
of cumulative translation
45
<PAGE>
VERTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
loss related to a foreign subsidiary of Sonoma was charged to additional paid-
in capital. In December 1998, the Company sold the majority of its equity
stake in Sonoma (see Notes 3 and 9), resulting in a remaining investment value
of $1 million as of December 31, 1998.
Net liabilities and operating results from discontinued operations have been
segregated from the previously reported consolidated financial statements of
operations for the years ended December 31, 1997 and 1996 respectively and
consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net revenues............................................... $ 6,342 $14,958
Cost of revenues........................................... 3,094 7,148
Operating expenses......................................... 9,311 9,380
------- -------
Operating loss............................................. (6,063) (1,570)
Other income (expense)..................................... (252) 69
Provision for estimated losses during phase-out period..... (100) --
------- -------
Net loss................................................... $(6,415) $(1,501)
======= =======
Summarized balance sheet information for the discontinued operations as of
December 31, 1997 is as follows (in thousands):
<CAPTION>
1997
-------
<S> <C> <C>
Current assets............................................. $ 1,366
Total assets............................................... 1,908
Current liabilities........................................ (1,627)
Total liabilities.......................................... (1,627)
Net assets of discontinued operations...................... $ 281
</TABLE>
Operating losses of Sonoma during the phase out period did not differ
materially from the estimated amount of $100,000 provided for in the 1997
consolidated financial statements.
14. Related Party Transactions
During 1998, the Company recognized approximately $737,000 in license
revenue for certain software products licensed to Sonoma (see Note 13). Sonoma
paid this amount in full during 1998.
15. Subsequent Event
On March 18, 1999, the Company acquired Expersoft Corporation ("Expersoft"),
for a purchase price of $3 million in cash. Expersoft is a provider of
distributed object computing technologies and, through the Expersoft
acquisition, the Company is adding standards-based, high performance Common
Object Request Broker Architecture (CORBA) technology to its portfolio of
network management solutions for the telecommunications market. The
acquisition will be accounted for under the purchase method of accounting.
Accordingly, operating results of Expersoft will be included in the Company's
consolidated financial statements commencing from the date of acquisition.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VERTEL CORPORATION:
We have audited the accompanying consolidated balance sheets of Vertel
Corporation and its subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 Vertel Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 4, 1999, except for Note 15
as to which the date is March 18, 1999.
47
<PAGE>
Results of Operations--Unaudited Quarterly Financial Information
The following tables present unaudited quarterly financial information for
the two years ended December 31, 1998. 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>
1998 Quarters Ended
---------------------------------
June Sept.
March 28 27 26 Dec. 31
-------- ------ ------ -------
(in thousands, except per
share data)
<S> <C> <C> <C> <C>
Quarterly results of continuing operations:
Net revenues............................... $ 4,918 $5,003 $4,908 $ 3,538
Gross profit............................... 3,828 3,669 3,848 2,343
Operating income (loss) from continuing
operations................................ 11 (310) (453) (2,523)
Net income (loss) from continuing
operations................................ 340 (172) 973 6,136
Basic net income (loss) from continuing
operations per common share............... $ 0.02 $(0.01) $ 0.04 $ 0.25
======= ====== ====== =======
Diluted net income (loss) from continuing
operations per common share............... $ 0.02 $(0.01) $ 0.04 $ 0.24
======= ====== ====== =======
<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)
Basic and diluted net income (loss) from
continuing operations per common share.... $ (0.13) $ 0.02 $(0.04) $ (0.06)
======= ====== ====== =======
</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 Item 1:
Business; "Risk Factors".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<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 May 13, 1999, 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 Vertel Corporation is incorporated
by reference from the information under the caption "Election of Directors--
Nominees" in the Registrant's Proxy Statement.
Executive Officers of the Company
The principal executive officers of Vertel and their ages as of March 1,
1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Bruce W. Brown..................... 48 President and Chief Executive Officer
Gordon L. Almquist................. 49 Vice President, Finance and
Administration and Chief Financial
Officer
Ruth F. Cox........................ 46 Vice President, Marketing
Richard L. Hamilton................ 57 Vice President, Customer Services
Cyrus D. Irani..................... 40 Vice President, Professional Services
Fred D. Rampey..................... 44 Vice President, Engineering
</TABLE>
Mr. Brown was elected to the position of President and Chief Executive
Officer of Vertel in January 1998. Prior to that, Mr. Brown was President and
Chief Executive Officer of Vertel Corporation I, a position to which he was
elected in November 1995. Mr. Brown joined Vertel Corporation I in August 1995
and served as a director of Vertel Corporation I from October 1995. Mr. Brown
also served as Chief Financial Officer of Vertel Corporation I from October
1995 to December 1996. 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 UB Networks
(previously named Ungermann-Bass) an enterprise networking company, from
October 1990 until July 1993.
Mr. Almquist has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since September 1998. Prior to joining
Vertel, Mr. Almquist was with ChatCom, Inc., a manufacturer of application
servers for the LAN/WAN industry, where he served as Vice President, Finance
and Chief Financial Officer from November 1997 through August 1998 and Chief
Operating Officer from February 1998 through August 1998. From September 1991
through April 1997, Mr. Almquist was Vice President, Finance and Chief
Financial Officer of 3D Systems Corporation, a developer, manufacturer and
marketer of rapid prototyping systems to a broad range of global industries.
Mr. Almquist is a Certified Public Accountant.
Ms. Cox is currently Vice President, Marketing for Vertel, a position she
has held since January 1999. Prior to that, she served as Vice President,
Business Development, since joining Vertel in January 1998. Before joining the
Company, Ms. Cox served as a consultant to various telecommunications
companies from June 1997 to December 1997. From March 1996 to May 1997, Ms.
Cox served as Vice President, Marketing for Digital Sound Corporation where
she was responsible for marketing public voice mail software. From July 1995
to February 1996, she served as Vice President of Business Development and
Strategy for Ascom Timeplex. From November 1993 through June 1995, she was the
Director of Telecom Industry Solutions and Global Business Alliance Partners
for Oracle Corporation. From June 1992 to October 1993, she served as Director
49
<PAGE>
Marketing and European Telecom Operations for Hewlett Packard. From April 1990
to May 1992, she served as Vice President of Strategy for PTT Telecom
Netherlands.
Mr. Hamilton has served as Vice President, Customer Services, for Vertel
since January 1999. Prior to joining Vertel, Mr. Hamilton served as Principal
Consultant for Hamilton Associates, a service management and operations
consulting firm, from May 1998 to January 1999. Previously, he served as Vice
President, Support Services, from January 1995 to May 1998 for Xantel
Corporation, a developer of priority call management products in the computer
telephony integration industry. He also served as Director of Worldwide
Support Services from September 1992 to October 1994 at UB Networks. Prior to
his position with UB Networks, Mr. Hamilton held various senior level
management positions with companies in the IBM plug-compatible products
industry.
Mr. Irani has served as Vice President, Vertel Professional Services, since
January 1999. Prior to that, he served as Vice President, Marketing since
rejoining Vertel in February 1996. Prior to joining Vertel, 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.
Mr. Rampey has served as Vice President, Engineering since January 1999.
Prior to that, he served as Vice President, Professional Services since
joining Vertel in December 1997. Prior to joining Vertel, Mr. Rampey served
for twenty years in various management roles, including Operations Manager,
Business Team Manager, and R&D Manager, for Hewlett Packard's Communications
Division from 1978 to December 1997.
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.
50
<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>
<S> <C>
Consolidated Balance Sheets at December 31, 1997 and December 31, 1998...... 29
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1998............................................. 30
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended December 31, 1998...................................... 31
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998............................................. 32
Notes to Consolidated Financial Statements.................................. 33
Independent Auditors' Report................................................ 47
2. The supplementary financial information listed below are filed as part of
this annual report.
Unaudited Quarterly Financial Information................................... 48
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>
2.1 Share Purchase Agreement dated December 31, 1998 among the Registrant,
Newbridge (Barbados) Corporation and Sonoma Systems.(16)
2.2 Agreement and Plan of Merger and Reorganization between the Company,
Expersoft Acquisition Corporation and Expersoft Corporation dated
February 23, 1999 and Corresponding Amendment No. 1 dated March 12,
1999.(17)
3.3 Amended and Restated Articles of Incorporation of the Registrant.(5)
3.4 Bylaws of the Registrant, as amended to date.(13)
3.5 Certificate of amendment to Company's articles of incorporation, as
filed with the California Secretary of State on April 7, 1998,
changing the Company's name to Vertel Corporation.(14)
10.2 1988 Stock Option Plan and forms of option agreements thereunder.(6)
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)
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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)
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)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.57 Sale and License Agreement between the Company and AMP Incorporated,
dated July 27, 1998, and an Amendment dated October 9, 1998.(15)
10.58 Common Stock Purchase Agreement between the Company and Pequot Private
Equity Fund, L.P. and Pequot Offshore Private Equity Fund, Inc. and
Sierra Ventures V, L.P., dated September 29, 1998.(15)
10.59 Stock Repurchase Agreement between the Company and Joe Stephan dated
November 27, 1998.(17)
10.60 Stock Repurchase Agreement between the Company and Philip Mantle dated
November 27, 1998.(17)
10.61 Stock Repurchase Agreement between the Company and Steve Waszak dated
November 27, 1998.(17)
10.62 Consulting Agreement between the Company and Joe Stephan dated January
5, 1999.(17)
10.63 Notice of Stock Option Grant and Stock Option Agreement between the
Company and Joe Stephan dated January 5, 1999.(17)
10.64 Consulting Agreement between the Company and Philip Mantle dated
January 5, 1999.(17)
10.65 Notice of Stock Option Grant and Stock Option Agreement between the
Company and Philip Mantle dated January 5, 1999.(17)
10.66 Consulting Agreement between the Company and Steve Waszak dated January
5, 1999.(17)
10.67 Notice of Stock Option Grant and Stock Option Agreement between the
Company and Steve Waszak dated January 5, 1999.(17)
10.68 Form of Retention Agreement between the Company and each of its
officers.(17)
21.1 Subsidiaries of the Registrant.(17)
23.1 Independent Auditors' Consent.(17)
25.1 Power of Attorney (see page 55).(17)
27.1 Financial Data Schedule.
</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.
(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 S8 (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.
53
<PAGE>
(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) 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 27, 1997.
(14) Incorporated by reference from registrant's report on Form 8-K as filed
with the Securities and Exchange Commission on April 7, 1998.
(15) 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 26, 1998.
(16) Incorporated by reference from registrant's report on Form 8-K as filed
with the Securities and Exchange Commission on January 15, 1999.
(17) Filed herewith.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 15, 1999 with
regard to the sale of its investment in Sonoma Systems.
54
<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.
VERTEL CORPORATION
/s/ Gordon L. Almquist
Date: March 29, 1999 By: _________________________________
Gordon L. Almquist
Vice President, Finance and
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 Gordon L. Almquist, 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 March 29, 1999
____________________________________ Officer and Director
Bruce W. Brown (Principal Executive
Officer)
/s/ Gordon L. Almquist Vice President, Finance and March 29, 1999
____________________________________ Administration, and Chief
Gordon L. Almquist Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Jeffrey M. Drazan Director March 29, 1999
____________________________________
Jeffrey M. Drazan
/s/ Howard Oringer Director March 29, 1999
____________________________________
Howard Oringer
/s/ Craig W. Johnson Director March 29, 1999
____________________________________
Craig W. Johnson
/s/ Gilbert P. Williamson Director March 29, 1999
____________________________________
Gilbert P. Williamson
/s/ Ralph Ungermann Director March 29, 1999
____________________________________
Ralph Ungermann
</TABLE>
55
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VERTEL CORPORATION:
We have audited the consolidated financial statements of Vertel Corporation
and subsidiaries as of December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, and have issued our report
thereon dated February 4, 1999, except for Note 15, as to which the date is
March 18, 1999; such report is included elsewhere in this Form 10-K. Our
audits also included the financial statement schedule of Vertel Corporation
and subsidiaries, listed in Item 14. This financial statement schedule is the
responsibility of the Company'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
February 4, 1999
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Balance Additions
at -----------------------
Beginning Charged to Charges 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, 1998............. $452,000 $161,000 $ 57,000(a) $556,000
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
</TABLE>
- --------
(a) Write-off of uncollectible accounts, net of recoveries.
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
This Agreement and Plan of Merger and Reorganization ("Agreement") is
made and entered into as of February 23, 1999, by and among: Vertel Corporation,
a California corporation ("Parent"); Expersoft Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); and
Expersoft Corporation, a California corporation (the "Company"). Certain other
capitalized terms used in this Agreement are defined in Exhibit A.
Recitals
A. Parent, Merger Sub and the Company intend to effect a merger of
Merger Sub into the Company in accordance with this Agreement and the California
General Corporation Law (the "Merger"). Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly owned subsidiary
of Parent.
B. This Agreement has been approved by the respective boards of
directors of Parent, Merger Sub and the Company.
Agreement
The parties to this Agreement agree as follows:
SECTION 1. Description of Transaction.
1.1 Merger of Merger Sub Into the Company. Upon the terms and
subject to the conditions set forth in this Agreement, at the Effective Time (as
defined in Section 1.3), Merger Sub shall be merged with and into the Company,
and the separate existence of Merger Sub shall cease. The Company will continue
as the surviving corporation in the Merger (the "Surviving Corporation"). The
Company's outstanding shares of Common Stock, Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock as of immediately prior to the
Merger (collectively, "Company Stock") shall be converted into the right to
receive consideration or cancelled in exchange for no consideration, all as
provided herein.
1.2 Effect of the Merger. The Merger shall have the effects set
forth in this Agreement and in the applicable provisions of the California
General Corporation Law.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place on March 12,
1999 or at such other time as Parent and Company may designate. The "Scheduled
Closing Time" shall mean the time and date as of which the Closing is required
to take place pursuant to this paragraph at the offices of Mitchell, Silberberg
& Knupp LLP at 11377 West Olympic Boulevard, Los Angeles, California 90064. (The
date on which the Closing actually takes place is referred to in this Agreement
as the "Closing Date.") Contemporaneously with or as promptly as practicable
after the Closing, a properly executed agreement of merger conforming to the
requirements of Chapter 11 of the California General Corporation Law shall be
filed with the Secretary of State of the State of
<PAGE>
California. The Merger shall become effective at the time such agreement of
merger is filed with the Secretary of State of the State of California (the
"Effective Time").
1.4 Articles of Incorporation and Bylaws; Directors and Officers. Unless
otherwise determined by Parent and the Company prior to the Effective Time:
(a) the Articles of Incorporation of the Surviving Corporation shall be
the Articles of Incorporation of Merger Sub as in effect immediately prior
to the Effective Time;
(b) the Bylaws of the Surviving Corporation shall be the bylaws of
Merger Sub as in effect immediately prior to the Effective Time;
(c) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the individuals identified on Exhibit C;
and
(d) the name of the Surviving Corporation immediately after the
Effective Time shall remain "Expersoft Corporation."
1.5 Conversion of Shares.
(a) The aggregate consideration payable by the Parent (the "Total
Consideration") in exchange for all the capital stock of the Company and the
other obligations of the Company pursuant hereto shall be $3,000,000 cash
(subject to the terms of the Escrow Agreement). The parties hereby agree that
cash consisting of an aggregate of up to 34% of the Total Consideration (the
"Change of Control Distribution"), shall be distributed immediately following
the Closing by the Surviving Corporation under the terms of the Company's 1999
Change of Control Plan (the "Change of Control Plan"). The parties hereby agree
that no amounts allocable under the Change of Control Plan shall be paid to
Messrs. William Atkinson and Thomas Greene of the Company until the date which
is six (6) months following the Closing Date, at which time Parent shall cause
the Surviving Corporation to pay such amounts promptly in cash. An aggregate of
$600,000 of cash of the Total Consideration will be held in escrow as security
for the obligations of the Company hereunder pursuant to an Escrow and Indemnity
Agreement in the form attached hereto as Exhibit C ("Escrow Agreement"), to be
entered into by and among Parent, Andrew Chedrich, as a representative of the
shareholders of the Company (the "Shareholders"), and the escrow agent named
therein (the "Escrow Agent').
(b) Prior to the Closing, the Company's Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (collectively, the "Preferred
Stock") shall be converted into shares of the Company's Common Stock. Pursuant
to the written consent of the holders of shares constituting a majority of the
Preferred Stock in accordance with Section 4 of the Company's Amended and
Restated Articles of Incorporation (the "Restated Articles"), subject to
Sections 1.8 and 1.9 hereof, at the Effective Time, by virtue of the Merger and
without any further action on the part of Parent, Merger Sub, the Company or the
Shareholders, each share of the Company's Common Stock outstanding immediately
prior to the Closing, shall be converted into the right to receive in cash the
amount determined by dividing (a) the Total Consideration minus the Change of
Control Distribution by (b) the total number of shares of the Company's Common
Stock outstanding as of immediately prior to the Closing.
2.
<PAGE>
1.6 Stock Options and Other Rights to Acquire Securities. At the
Effective Time, each stock option that is then outstanding under the Company's
1998 Equity Incentive Plan and any other right to acquire the Company's equity
securities (including, without limitation, any warrants or convertible
securities), shall be terminated if not exercised at or prior to the Closing.
1.7 Closing of the Company's Transfer Books. At the Effective Time,
holders of certificates representing shares of the Company's capital stock that
were outstanding immediately prior to the Effective Time shall cease to have any
rights as shareholders of the Company, and the stock transfer books of the
Company shall be closed with respect to all shares of such capital stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of the Company's capital stock shall be made on such stock transfer
books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of the Company's capital
stock (a "Company Stock Certificate") is presented to the Surviving Corporation
or Parent, such Company Stock Certificate shall be canceled and shall be
exchanged to the extent provided in Section 1.8.
1.8 Surrender of Certificates.
(a) At or as soon as practicable after the Effective Time, Parent
will send to the holders of Company Stock Certificates entitled to a share of
the Total Consideration (i) a letter of transmittal in customary form and
containing such provisions as Parent may reasonably specify, and (ii)
instructions for use in effecting the surrender of Company Stock Certificates in
exchange for cash. Upon surrender of a Company Stock Certificate to Parent for
exchange, together with a duly executed letter of transmittal and such other
documents as may be reasonably required by Parent, the holder of such Company
Stock Certificate shall be entitled to receive in exchange therefor a check in
the amount of cash to which such holder is entitled; and the Company Stock
Certificate so surrendered shall be canceled. Until surrendered as contemplated
by this Section 1.8, each such Company Stock Certificate shall be deemed, from
and after the Effective Time, to represent only the right to receive cash upon
such surrender. If any such Company Stock Certificate shall have been lost,
stolen or destroyed, Parent may, in its discretion and as a condition precedent
to the payment of cash, require the owner of such lost, stolen or destroyed
Company Stock Certificate to provide an appropriate affidavit and to deliver a
bond (in such sum as Parent may reasonably direct) as indemnity against any
claim that may be made against Parent or the Surviving Corporation with respect
to such Company Stock Certificate.
(b) Parent and the Surviving Corporation shall be entitled to deduct
and withhold from any consideration payable or otherwise deliverable to any
holder or former holder of capital stock of the Company pursuant to this
Agreement such amounts as Parent or the Surviving Corporation may be required to
deduct or withhold therefrom under the Code or under any provision of state,
local or foreign tax law. To the extent such amounts are so deducted or
withheld, such amounts shall be treated for all purposes under this Agreement as
having been paid to the Person to whom such amounts would otherwise have been
paid.
(c) Neither Parent nor the Surviving Corporation shall be liable to
any holder or former holder of capital stock of the Company for any cash amounts
delivered to any public official pursuant to any applicable abandoned property,
escheat or similar law.
3.
<PAGE>
1.9 Dissenting Shares.
(a) Notwithstanding anything to the contrary contained in this
Agreement, any shares of capital stock of the Company that, as of the Effective
Time, are or may become "dissenting shares" within the meaning of Section
1300(b) of the California Corporations Code shall not be converted into or
represent the right to receive any of the Total Consideration in accordance with
Section 1.5, and the holder or holders of such shares shall be entitled only to
such rights as may be granted to such holder or holders in Chapter 13 of the
California General Corporation Law; provided, however, that if the status of any
such shares as "dissenting shares" shall not be perfected, or if any such shares
shall lose their status as "dissenting shares," then, as of the later of the
Effective Time or the time of the failure to perfect such status or the loss of
such status, such shares shall automatically be canceled and to the extent such
shares are entitled to consideration pursuant hereto they shall be converted
into and shall represent only the right to receive (upon the surrender of the
certificate or certificates representing such shares) such consideration in
accordance with Section 1.5.
(b) The Company shall give Parent (i) prompt notice of any written
demand received by the Company prior to the Effective Time to require the
Company to purchase shares of capital stock of the Company pursuant to Chapter
13 of the California General Corporation Law and of any other demand, notice or
instrument delivered to the Company prior to the Effective Time pursuant to the
California General Corporation Law, and (ii) the opportunity to participate in
all negotiations and proceedings with respect to any such demand, notice or
instrument. The Company shall not make any payment or settlement offer prior to
the Effective Time with respect to any such demand unless Parent shall have
consented in writing to such payment or settlement offer.
1.10 Accounting Treatment. For accounting purposes, the Merger is intended
to be treated as a "purchase."
1.11 Allocation of Total Consideration. The Total Consideration under this
Agreement shall be allocated to assets and otherwise in accordance with Exhibit
D to this Agreement. After the Closing, the parties shall make consistent use
of the allocation, fair market value and useful lives specified in Exhibit D for
all tax purposes and in any and all filings, declarations and reports with the
Internal Revenue Service in respect thereof, including the reports required to
be filed under Section 1060 of the Internal Revenue Code of 1986, as amended
(the "Code").
1.12 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or Parent with
full right, title and possession of and to all rights and property of Merger Sub
and the Company, the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in the name of the
Company and otherwise) to take such action.
4.
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SECTION 2. Representations and Warranties of the Company
The Company hereby represents and warrants to Parent and Merger Sub, except
as described in the Disclosure Schedule supplied by the Company to Parent (the
"Disclosure Schedule") and dated as of the date hereof, as follows:
2.1 Due Organization The Company is a corporation duly organized, validly
existing, and in good standing under the laws of California and has all
necessary corporate powers to own its properties and operate its business as now
owned and operated by it. Neither the ownership of its properties nor the nature
of its business requires the Company to be qualified in any jurisdiction other
than the state of its incorporation except where the failure to be so qualified
would not have a Material Adverse Effect on the Company.
2.2 Capitalization, Etc.
(a) Capital Stock. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, of which 1,061,054 are issued or
outstanding as of the date hereof and 9,193,740 shares of Preferred Stock; (i)
694,915 shares of which are designated Series A Preferred Stock, 694,912 of
which are issued and outstanding as of the date hereof, (ii) 398,825 shares of
which are designated Series B Preferred Stock, 398,823 of which are issued and
outstanding as of the date hereof, and (iii) 8,100,000 shares of which are
designated Series C Preferred Stock, 6,857,694 shares of which are issued and
outstanding as of the date hereof. All issued and outstanding shares of the
Company's capital stock have been duly authorized and validly issued, are fully
paid and nonassessable, are not subject to any right of rescission and have been
offered, issued, sold and delivered by the Company in compliance with all
registration or qualification requirements (or applicable exemptions therefrom)
of applicable federal and state securities laws.
(b) Options/Warrants/Rights. As of the date hereof, 26,730 shares of
the Company's Common Stock are subject to issued and outstanding warrants to
purchase shares of the Company's Common Stock and 150,712 shares of the
Company's Series C Preferred Stock are subject to issued and outstanding
warrants to purchase shares of the Company's Series C Preferred Stock. As of the
date hereof, an aggregate of 4,912,500 shares of the Company's Common Stock are
reserved and authorized for issuance pursuant to the Company's 1998 Equity
Incentive Plan, of which options to purchase 4,666,900 shares of the Company's
Common Stock are issued and outstanding. A list of all holders of the Company's
Stock and options or warrants to purchase the Company's Stock as of the date
hereof, and the number of shares, options and warrants held by such holders is
set forth in Section 2.2 of the Disclosure Schedule. Except as set forth in
Section 2.2 of the Disclosure Schedule, there are no options, warrants, calls,
commitments, conversion privileges or preemptive or other rights or agreements
outstanding to purchase any of the Company's authorized but unissued capital
stock or any securities convertible into or exchangeable for shares of the
Company's capital stock or obligating the Company to grant, extend, or enter
into any such option, warrant, call, right, commitment, conversion privilege or
other right or agreement, and there is no liability for dividends accrued but
unpaid. There are no outstanding subscriptions, rights, convertible securities,
or other agreements or commitments obligating the Company to issue or to
transfer from treasury any additional shares of its capital stock of any class.
Except as set forth in the Disclosure Schedule,
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there are no voting agreements, preemptive rights, rights of first refusal or
other restrictions (other than normal restrictions on transfer under applicable
federal and state securities laws) applicable to any of the Company outstanding
securities.
2.3 Financial Statements. Exhibit 2.3(a) to this Agreement sets forth
consolidated balance sheets of the Company as of September 30, 1996, and the
related consolidated statements of income and retained earnings for the three
years ending on that date, audited by the Company's independent public
accountants, whose opinions with respect to those financial statements appear in
Exhibit 2.3(a). Exhibit 2.3(b) to this Agreement sets forth unaudited
consolidated balance sheets of the Company as for the years ended September 30,
1997, September 30, 1998, and together with related unaudited consolidated
statements of income and retained earnings for the quarter ended December 31,
1998 certified by an officer of the Company as accurately reflecting the
financial condition of the Company for those periods and accurately reflecting
all information normally reported to the Company's independent public
accountants for the preparation of the Company's "financial statements." The
financial statements in Exhibits 2.3(a) and 2.3(b) are referred to hereafter as
the Financial Statements. The Financial Statements have been prepared in
accordance with generally accepted accounting principles, except as may be
indicated in the notes to such financial statements (except that the unaudited
financial statements referred to in this Section 2.3 do not contain footnotes
and are subject to normal and recurring year end audit adjustments, which will
not, individually or in the aggregate, be material in magnitude) consistently
followed by the Company throughout the periods indicated, and fairly present the
financial position of the Company on the respective dates of the balance sheets
included in the financial statements, and the results of its operations for the
respective periods indicated.
2.4 Absence of Changes. Except as set forth in Section 2.4 of the
Disclosure Schedule, between September 30, 1998 and the date of this Agreement
there has been no:
(a) Transaction by the Company except in the ordinary course of
business as conducted on that date;
(b) Capital expenditure by the Company exceeding $50,000;
(c) Material Adverse change in the financial condition, liabilities,
assets, business, or prospects of the Company;
(d) Destruction, damage to, or loss of any asset of the Company
(whether insured or uninsured) that materially and adversely affects the
financial condition, business, or prospects of the Company;
(e) Change in accounting methods or practices (including, without
limitation, any change in depreciation or amortization policies or rates) by the
Company;
(f) Revaluation by the Company of any of its assets as reflected on the
Financial Statements;
6.
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(g) Declaration, setting aside, or payment of a dividend or other
distribution in respect to the capital stock of the Company, or any direct or
indirect redemption, purchase, or other acquisition by the Company of any of its
shares of capital stock;
(h) Increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, or employees or
declaration, payment, or commitment or obligation of any kind or the payment, by
the Company, of a bonus or other additional salary or compensation to any such
person, except in each case for any of the foregoing that was consistent with
the Company's past practices;
(i) Sale or transfer of any asset of the Company, except in the ordinary
course of business;
(j) Amendment or termination of any contract, agreement, or license to
which the Company is a party, except in the ordinary course of business;
(k) Loan by the Company to any person or entity, or guaranty by the Company
of any loan;
(l) Mortgage, pledge, or other encumbrance of any asset of the Company;
(m) Waiver or release of any right or claim of the Company, except in the
ordinary course of business;
(n) Commencement, notice, or, to the knowledge of the Company, threat of
commencement of any civil litigation or governmental proceeding against the
Company or investigation of its affairs by either of them;
(o) Claim against the Company of wrongful discharge or other unlawful labor
practice or action;
(p) Issuance or sale by the Company of any shares of its capital stock of
any class or of any other of its securities other than to employees under the
Company's 1998 Equity Incentive Plan;
(q) Agreement by the Company to do any of the things described in the
preceding clauses (a) through (p); or
(r) Other event or condition of any character that had or could reasonably
be expected to have a Material Adverse Effect on the Company.
2.5 Liabilities. The Company has no debt, liability, or obligation of any
nature, whether accrued, absolute, contingent, or otherwise, and whether due or
to become due, that is not reflected or reserved against in the Company's
consolidated balance sheet as of December 31, 1998, included in the financial
statements or set forth in Section 2.5 of the Disclosure Schedule except for (1)
those that may have been incurred after the date of that consolidated balance
sheet and (2) those that are not required by generally accepted accounting
principles to be included in a balance sheet. All debts, liabilities, and
obligations incurred after that date were incurred in the
7.
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ordinary course of business and are usual and normal in amount both individually
and in the aggregate.
2.6 Tax Matters. Within the times and in the manner prescribed by law,
the Company has filed all federal, state, and local tax returns required by law
and have paid all taxes, assessments, and penalties due and payable. The
provisions for taxes reflected in the Company's consolidated balance sheet as of
December 31, 1998, are adequate for federal, state, county, and local taxes for
the period ending on the date of that balance sheet and for all prior periods,
whether disputed or undisputed. There are no present disputes about taxes of any
nature payable by the Company. To the Company's knowledge, payments pursuant to
the Company's 1999 Change of Control Plan will not result in the payment of any
"excess parachute payment" within the meaning of Section 280(G) of the Code.
2.7 Real Property. Section 2.7 of the Disclosure Schedule is a complete
and accurate list of all real property owned by or leased to the Company,
together with an accurate and brief description of each property and a list of
the policies of title insurance issued to the Company for these properties.
2.8 Books and Records. Section 2.8 of the Disclosure Schedule contains a
complete and accurate description and specification of, the location of all of
the Company's books of account, payroll records, income records, stock and other
records, information relating to customers and suppliers (including without
limitation a list of all the customers of the business during the last two
years), a list of purchasers to which outstanding quotations have been given and
a list of unfulfilled orders as at the Closing Date, relevant computer programs
and other books and documents which relate to the Business.
2.9 Capital Assets. Section 2.9 of the Disclosure Schedule contains a
complete and accurate schedule of all capital assets having a book or fair
market value in excess of $5,000, owned by, in the possession of, or used by the
Company in connection with its business, including work in process. All such
assets are in good condition and repair and are adequate for the conduct by the
Company in its business as now conducted.
2.10 Personal Property. Except as stated in Section 2.10 of the Disclosure
Schedule, no personal property used by the Company in connection with its
business is, subject to any Encumbrances, held under any lease, security
agreement, conditional sales contract, or other title retention or security
arrangement, or is located other than in the possession of the Company.
2.11 Accounts Receivable. All accounts receivable of the Company shown on
the consolidated balance sheet of the Company as of December 31, 1998, and all
accounts receivable of the Company created after that date arose from valid
sales or licensing agreements in the ordinary course of business. These accounts
have been collected in full since that date, or, to the knowledge of the
Company, are collectible at their full amounts, and are not subject to any
Encumbrances.
2.12 Commercial Information. Section 2.12 of the Disclosure Schedule
contains a complete and accurate schedule describing and specifying the
Company's confidential industrial, technical and commercial information and
techniques in any form (including paper, electronically stored data, magnetic
media, film and microfilm) including (without prejudice to
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<PAGE>
the generality thereof) source code listings, drawings, formulae, test
reports, project reports and testing procedures, shop practices, instruction and
training manuals, tables of operating conditions, market forecasts,
specifications, quotations, tables, lists and particulars of customers and
suppliers, marketing methods and procedures and advertising copy. Computer
programs identified in this schedule include that in object code and any current
developments thereof including any planned programs referred, and all (if any),
source code, functional specifications and other program development materials
associated therewith.
2.13 Trademarks and Copyrights. Section 2.13 of the Disclosure Schedule
contains a schedule of all trade names, trademarks, service marks, and
copyrights and their registrations, including applications therefor, owned by
the Company or in which it has any rights or licenses, together with a brief
description of each. The Company has no knowledge of any infringement or
alleged infringement by others of any trade name, trademark, service mark, or
copyright. To the knowledge of the Company, the Company has not infringed, and
is not now infringing on, and has not incurred any obligations, contractual or
otherwise, that would require infringement of any trade name, trademark, service
mark, or copyright belonging to any other person, firm, or corporation. Except
as set forth in Section 2.13 of the Disclosure Schedule, the Company is not a
party to any license, agreement, or arrangement, whether as licensor, licensee,
franchisor, franchisee, or otherwise, with respect to any trademarks, service
marks, trade names, or applications for them, or any copyrights other than as
licensee under licenses or as purchaser under agreements for the purchase of
"off the shelf" or standard products. The Company owns, or holds adequate
licenses or other rights to use, all trademarks, service marks, trade names, and
copyrights necessary for its business as now conducted by it (including without
limitation those listed in Section 2.13 of the Disclosure Schedule), and to the
knowledge of the Company, that use does not, and will not, conflict with,
infringe on, or otherwise violate any rights of others. The Company has the
right to sell or assign to Parent all owned trademarks, copyrights, trade names,
service marks, registrations and all such licenses and other rights. The
Company has not assigned, transferred, encumbered, liened, hypothecated or
otherwise burdened any of its tradenames, trademarks, servicemarks or
copyrights.
2.14 Patents. Section 2.14 of the Disclosure Schedule contains a complete
schedule of all patents, inventions, industrial models, processes, designs, and
applications for patents owned by the Company or in which they have any rights,
licenses, or immunities. The patents and applications for patents listed in
Section 2.14 of the Disclosure Schedule, are valid and in full force and effect
and are not subject to any taxes, maintenance fees, or actions falling due
within 30 days after the Closing Date except as set forth in the Disclosure
Schedule. To the Company's knowledge, there are no pending patent applications
that may support allowable claims that, if issued in a patent, may be infringed
by the Company's past or planned activities or products. Except as set forth in
the Disclosure Schedule there have been no claims, interference actions or other
judicial, arbitration, or other adversary proceedings pending or, to the
Company's knowledge, threatened concerning the patents or applications for
patents listed in the Disclosure Schedule. Each patent application is awaiting
action by the United States and respective foreign patent offices except as
otherwise indicated the Disclosure Schedule. Except as set forth in the
Disclosure Schedule, to the knowledge of the Company, the manufacture, use, or
sale of the inventions, models, designs, and systems covered by the patents and
applications for patents listed in Section 2.14 of the Disclosure Schedule do
not violate or infringe on any patent or any proprietary or personal right of
any person, firm, or corporation; and to the knowledge of the
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<PAGE>
Company, the Company has not infringed or is now infringing on any patent or
other right belonging to any person, firm, or corporation. Except as set forth
in the Disclosure Schedule, the Company is not a party to any license,
agreement, or arrangement, whether as licensee, licensor, or otherwise, (other
than any licenses or agreements for the purchase or sale of "off the shelf" or
standard products) with respect to any patent, application for patent,
invention, design, model, process, trade secret, or formula. The Company has the
right and authority to use and to transfer to Parent such patents, inventions,
trade secrets, processes, models, designs, and formulas as are necessary to
enable it to conduct and continue to conduct all phases of the Business in the
manner presently conducted by it, and, to the knowledge of the Company, that use
does not, and will not, conflict with, infringe on, or violate any patent or
other rights of others. The Company has not assigned, transferred, encumbered,
liened, hypothecated or otherwise burdened any of its patents.
2.15 Trade Secrets. Section 2.15 of the Disclosure Schedule contains a
complete list, without extensive or revealing descriptions, of the Company's
trade secrets, including, but not limited to all customer lists, processes, know
how, computer programs and routines, and other technical data. The specific
location of each trade secret's documentation, including its complete
description, specifications, charts, procedures, and other material relating to
it, is also set forth in that exhibit. Each trade secret's documentation is
current, accurate in all material respects, and sufficient in detail and content
to identify and explain it and to allow its full and proper use by Parent
without reliance on the special knowledge or memory of others.
(a) The Company is the sole owner of each of these trade secrets,
free and clear of any liens, encumbrances, restrictions, or legal or equitable
claims of others, except as specifically stated in the Disclosure Schedule. The
Company has taken all reasonable security measures to protect the secrecy,
confidentiality, and value of these trade secrets; any of its employees and any
other persons who, either alone or in concert with others, developed, invented,
discovered, derived, programmed, or designed these secrets, or who have
knowledge of or access to information relating to them, have been put on notice
and, if appropriate, has entered into agreements that these secrets are
proprietary to the Company and not to be divulged or misused.
(b) All these trade secrets are presently valid and are not, to the
knowledge of the Company, part of the public knowledge or literature; they have
not, to the Company's knowledge, been used, divulged, or appropriated for the
benefit of any past or present employees or other persons, or to the detriment
of the Company. The Company has not assigned, transferred, encumbered, liened,
hypothecated or otherwise burdened any of its trade secrets.
2.16 Good and Marketable Title. The Company has good and marketable title
to all its respective assets and interests in assets, whether real, personal,
mixed, tangible, or intangible, which constitute all the assets and interests in
assets that are used in the businesses of the Company. All these assets are free
and clear of restrictions on or conditions to transfer or assignment and free
and clear of mortgages, liens, pledges, charges, encumbrances, equities, claims,
easements, rights of way, covenants, conditions, or restrictions, except for (1)
those disclosed in the Company's consolidated balance sheet as of December 31,
1998, or in Exhibit(s) 2.3(a) or 2.3(b) to this Agreement; (2) the lien of
current taxes not yet due and payable; and (3) possible minor matters that, in
the aggregate, are not substantial in amount and
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<PAGE>
do not detract from or interfere with the present or intended use of any of
these assets or impair business operations.
2.17 Leases. The Company is not in default or in arrears under any lease.
All real property and tangible personal property of the Company that is
necessary to the operation of its businesses, is in good operating condition and
repair, ordinary wear and tear excepted. The Company is in possession of all
premises leased to it from others. Neither the Company's shareholders, nor any
officer, director, or employee of the Company; nor any spouse, child, or other
relative of any of these persons, owns, or has any interest, directly or
indirectly, in any of the real or personal property owned by or leased to the
Company or any copyrights, patents, trademarks, trade names, or trade secrets
licensed by the Company. To the knowledge of the Company, the Company does not
occupy any real property in violation of any law, regulation, or decree.
2.18 Insurance Policies. Section 2.18 of the Disclosure Schedule contains
a description of all insurance policies held by the Company concerning its
businesses and properties, and their respective principal amounts. The Company
has maintained and now maintains (1) insurance on all its assets and businesses
of a type customarily insured by businesses substantially similar to the
Company, covering property damage and loss of income by fire or other casualty,
and (2) adequate insurance protection against all liabilities, claims, and risks
against which it is customary to insure by businesses substantially similar to
the Company. The Company has not received any notices of cancellations or any
reservation of rights on any such claims. The Company is not in default with
respect to payment of premiums on any such policy. Except as set forth in
Section 2.18 of the Disclosure Schedule, no claim is pending under any such
policy.
2.19 Material Agreements. The Company is not a party to, nor is the
property of it bound by, any material agreement not entered into in the ordinary
course of business; any indenture, mortgage, deed of trust, or lease; or any
material agreement that is unusual in nature, duration, or amount (including any
agreement requiring the performance by the Company of any obligation for more
than ninety (90) days from closing date or calling for consideration of more
than $50,000); except the agreements listed in Section 2.19 of the Disclosure
Schedule, copies of which have been furnished or made available to Parent. To
the knowledge of the Company, there is no default or event that, with notice,
lapse of time, or both, would constitute a default by any party to any of these
agreements. The Company has not received notice that any party to any of these
agreements intends to cancel or terminate any of these agreements or to exercise
or not exercise any options under any of these agreements.
2.20 Governmental Authorizations. The Company has not received notice from
any government entity of any violation of any applicable federal, or local
statute, law, or regulation, and represents that the Company has complied with,
and to its knowledge, is not in violation of, any other applicable federal,
state, or local statute, law, or regulation (including any applicable building,
zoning, environmental protection or other law, ordinance, or regulation)
affecting its properties or the operation of its businesses; except as has not
had or which reasonably would not be expected to have a Material Adverse Effect
on the Company.
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2.21 Legal Proceedings. Except as set forth in Section 2.21 of the
Disclosure Schedule, there is no pending, or, to the best knowledge of the
Company, threatened, suit, action, arbitration, or legal, administrative, or
other proceeding, or governmental investigation against or affecting the
Company, or its business, assets, or financial condition. The Company is not in
default with respect to any order, writ, injunction, or decree of any federal,
state, local, or foreign court, department, agency, or instrumentality. Except
as set forth in Section 2.21 of the Disclosure Schedule, the Company, is not
presently engaged in any legal action to recover money due to it or damages
sustained by it.
2.22 Non-Contravention. The consummation of the transactions contemplated
by this Agreement will not result in or constitute any of the following: (1) a
default or an event that, with notice, lapse of time, or both, would be a
default, breach, or violation of the Company's Articles of Incorporation,
bylaws, or any lease, license, promissory note, conditional sales contract,
commitment, indenture, mortgage, deed of trust, or other agreement, instrument,
or arrangement to which a shareholder or the Company is a party or by which any
of them or the property of any of them is bound, and which would have a Material
Adverse Effect on the Company; (2) an event that would permit any party to
terminate any material agreement or to accelerate the maturity of any material
indebtedness or other material obligation of the Company; or (3) the creation or
imposition of any material lien, charge, or encumbrance on any of the properties
of the Company.
2.23 Consents. The Company has the right, power, legal capacity, and
authority to enter into and perform its respective obligations under this
Agreement; and except as set forth in Section 2.23 of the Disclosure Schedule,
no approvals or consents of any other persons or entities are necessary in
connection with it. The execution and delivery of this agreement by the Company
has been duly authorized by all necessary corporate action.
2.24 Officers and Directors. Section 2.24 of the Disclosure Schedule
contains a list of the names and business addresses of all officers, directors
and employees of the Company.
2.25 Employment Arrangements. Section 2.25 of the Disclosure Schedule
contains a list of all employment agreements, whether oral, written, express,
implied or otherwise and all collective bargaining agreements, and all hourly
wages or weekly salaries of all employees and all pension, bonus, profit-
sharing, stock option, or other agreements or arrangements providing for
employee remuneration or benefits to which the Company is a party or by which
the Company is bound. All these Agreements and arrangements are in full force
and effect, and neither the Company, nor any other party is in default under
them. There have been no claims of defaults and, to the best knowledge of the
Company, there are no facts or conditions that if continued, or upon notice,
will result in a claim of default. There is no pending or threatened labor
dispute, strike, or work stoppage affecting the Company's business. The Company
has complied with all applicable laws for each of its respective employee
benefit plans, including the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") if and to the extent applicable. There are no
pending claims by or on behalf of any such benefit plan, by or on behalf of any
employee covered under any such plan, or otherwise involving any such benefit
plan, that allege a breach of fiduciary duties or violation of any applicable
state or federal law; nor is there any basis for such a claim. Except as set
forth in Section 2.25 of the Disclosure Schedule the Company has not entered
into any severance or termination agreement or
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arrangement, or any change of control agreement or arrangement or similar
agreement or arrangement with any present or former employee that will result in
any obligation, absolute or contingent, of Parent or the Company to make any
payment to any present or former employee following termination of employment.
All of the Company's employees and consultants (including present or former) are
subject to valid and enforceable nondisclosure and inventions assignment
agreements.
2.26 Payments to Retirees. Except as described in Section 2.26 of the
Disclosure Schedule, the Company, is not obligated to make any payment to or
with respect to any former employee of the Company under any retiree medical
benefit or other welfare plan.
2.27 Brokers and Finders. The Company nor any of its officers, directors
or employees has employed any broker or finder or incurred liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted directly or indirectly for the Company in connection
with this Agreement or the transactions contemplated hereby.
2.28 Powers of Attorney. Section 2.28 of the Disclosure Schedule lists (1)
the names and addresses of all persons holding a power of attorney on behalf of
the Company and (2) the names and addresses of all banks or other financial
institutions in which the Company has an account, deposit, or safe deposit box,
with the names of all persons authorized to draw on these accounts or deposits
or to have access to these boxes.
2.29 Year 2000 Compliance.
(a) Products and Services.
(i) All of the Company's Products and Services are Year 2000
Compliant.
(ii) If the Company is obligated to repair or replace Products or
Services previously provided by the Company that are not Year 2000 Compliant in
order to meet the Company's contractual obligations, to avoid personal injury,
to avoid misrepresentation claims, or to satisfy any other contractual or legal
obligations or requirements, to the Company's knowledge it has repaired or
replaced those Products and Services to make them Year 2000 Compliant.
(iii) The Company has furnished Parent with true, correct and
complete copies of any customer agreements and other materials and
correspondence in which the Company has furnished (or could be deemed to have
furnished) assurances as to the performance and/or functionally of the Company's
products or Services on or after January 1, 2000, as a result of the occurrence
of such date.
(b) Internal MIS Systems and Facilities. All of Company's Internal
MIS Systems and Facilities are Year 2000 Complaint.
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(c) Suppliers. To the knowledge of the Company, all vendors of
products or services to the Company, and their respective products, services and
operations, are Year 2000 Compliant.
(d) Year 2000 Compliance Investigations and Reports. The Company has
furnished Parent with a true, correct and complete copy of any written internal
investigations, memoranda, budget plans, forecasts, or reports concerning the
Year 2000 Compliance of the products, services, operations, systems, supplies,
and facilities of the Company and the Company's vendors.
The terms as used within this Section 2.29 have the following definitions:
"Facilities" means any facilities or equipment used by the Company or its
subsidiaries in any location, including HVAC systems, mechanical systems,
elevators, security systems, fire suppression systems, telecommunications
systems, fax machines, copy machines, and equipment, whether or not owned by the
Company.
"Products" means any products offered or furnished by the Company or its
subsidiaries, or any predecessor in interest of the Company or its subsidiaries,
or any predecessor in interest of the Company, currently or at any time in the
past, including, without limitation, each item of hardware, software, or
firmware; any system, equipment, or products consisting of or containing one or
more thereof; and any and all enhancements, upgrades, customizations,
modifications, and maintenance thereto.
"Services" means any services offered or furnished by the Company or its
subsidiaries, or any predecessor in interest of the Company, currently or at any
time in the past.
"Internal MIS Systems" means any computer software and systems (including
hardware, firmware, operating systems software, utilities, and applications
software) used in the ordinary course of the Company's or its subsidiaries'
business by or on behalf of the Company or its subsidiaries, including payroll,
accounting, billing/receivables, inventory, asset tracing, customer services,
human resources, and e-mail systems.
"Year 2000 Compliant" means that (1) the products, services, or other
items) at issue accurately process, provide and/or receive all date/time data
(including calculating, comparing, sequencing, processing and outputting)
within, from, into, and between centuries (including the twentieth and twenty-
first centuries and the years 1999 and 2000), including leap year calculations,
and (2) neither the performance nor the functionality nor the Company's
provision of the products, services, and other item(s) at issue will be affected
by any dates/times prior to, on, after, or spanning January 1, 2000. The design
of the products, services, and other item(s) at issue to ensure compliance with
the foregoing warranties and representations includes proper date/time data
century recognition and recognition of 1999 and 2000, calculations that
accommodate single century and multi-century formulae and date/time values
before, on, after, and spanning January 1, 2000, and date/time data interface
values that reflect the century, 1999, and 2000. In particular, but without
limitation, (i) no value for current date/time will cause any error,
interruption, or decreased performance in or for such product(s), service(s),
and other item(s), (ii) all manipulations of date and time related data
(including calculating, comparing, sequencing, processing, and outputting) will
produce correct results for all valid dates and times
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when used independently or in combination with other product, services, and/or
items, (iii) date/time elements in interfaces and data storage will specify the
century to eliminate date ambiguity without human intervention, including leap
year calculations, (iv) where any date/time element is represented without a
century, the correct century will be unambiguous for all manipulations involving
that element, (v) authorization codes, passwords, and zaps (purge functions)
will function normally and in the same manner during, prior to, on and after
January 1, 2000, including the manner in which they function with respect to
expiration dates and CPU serial numbers, and (vi) the Company's or its
subsidiaries' supply of the product(s), service(s), and other item(s) will not
be interrupted, delayed, decreased, or otherwise affected by the advent of the
year 2000.
2.30 Disclosure. No representation by Company in this Agreement or in any
schedule or exhibit, or any statement, list or certificate furnished or to be
furnished by the Company pursuant to this Agreement, or in connection with these
transactions, contains or will contain any untrue statement of a material fact,
or omits or will omit to state a material fact required to be stated herein or
therein or necessary to make the statements contained herein or therein not
misleading.
SECTION 3. Representations and Warranties of Parent and Merger Sub.
Parent and Merger Sub jointly and severally represent and warrant to
the Company as follows:
3.1 Due Organization, Standing and Power. Parent and Merger Sub are
corporations duly organized, validly existing and in good standing under the
laws of the State of California. Each of Parent and Merger Sub has the
corporate power to own its properties and to carry on its business as now being
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Merger Sub to consummate the
transactions contemplated hereby.
3.2 Authority; Binding Nature of Agreement. Parent and Merger Sub have
the absolute and unrestricted right, power and authority to perform their
obligations under this Agreement; and the execution, delivery and performance by
Parent and Merger Sub of this Agreement have been duly authorized by all
necessary action on the part of Parent and Merger Sub and their respective
boards of directors. No vote of Parent's stockholders is needed to approve the
Merger. This Agreement constitutes the legal, valid and binding obligation of
Parent and Merger Sub, enforceable against them in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
3.3 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation pending, or as to which Parent has received any notice of
assertion against Parent which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated by this Agreement.
3.4 Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor
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(2) the consummation of the Merger or any of the other transactions contemplated
by this Agreement, will directly or indirectly (with or without notice or lapse
of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of Parent's Articles of Incorporation or bylaws, or (ii) any
resolution adopted by Parent's shareholders, Parent's board of directors or any
committee of Parent's board of directors;
(b) contravene, conflict with or result in a violation of any Legal
Requirement or any order, writ, injunction, judgment or decree to which Parent,
or any of the assets owned or used by Parent is subject; and
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of any Governmental Authorization that is held by Parent
or that otherwise relates to the business or to any of the assets owned or used
by Parent which, in any event, would have a Material Adverse Effect on Parent or
the ability to consummate the Merger or the other transactions contemplated
hereby; and
3.5 Brokers and Finders. Neither Parent nor Merger Sub nor any of their
respective officers, directors or employees has employed any broker or finder or
incurred liability for any financial advisory fees, brokerage fees, commissions
or finder's fees, and no broker or finder has acted directly or indirectly for
Parent or Merger Sub in connection with this Agreement or the transactions
contemplated hereby.
3.6 Disclosure. No representation by Parent nor Merger Sub in this
Agreement or in any schedule or exhibit, or any statement, list or certificate
furnished or to be furnished by Parent or Merger Sub pursuant to this Agreement,
or in connection with these transactions, contains or will contain any untrue
statement of a material fact, or omits or will omit to state a material fact
required to be stated herein or therein or necessary to make the statements
contained herein or therein not misleading.
3.7 Adequate Financial Resources. Parent and Merger Sub have the
necessary financial resources to consummate the Merger and the transactions
contemplated by this Agreement, and to pay the Total Consideration at the
Effective Time.
SECTION 4. Certain Covenants.
4.1 Access and Investigation. During the period from the date of this
Agreement and continuing until the earlier of (i) the termination of this
Agreement and (ii) the Effective Time (the "Pre-Closing Period"), the Company
shall, and shall cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
customers, suppliers, personnel and assets and to all existing books, records,
Tax Returns, work papers and other documents and information relating to the
Company; and (b) provide Parent and Parent's Representatives with copies of such
existing books, records, Tax Returns, work papers and other documents and
information relating to the Company, and with such additional financial,
operating and other data and information regarding the Company, as Parent may
reasonably request.
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4.2 Operation of the Company's Business. During the Pre-Closing Period,
except pursuant to written consent of Parent, which consent will not be
unreasonably withheld, the Company shall:
(a) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) use commercially reasonable efforts to preserve intact its cash
reserves, current business organization, keep available the services of its
current officers and employees and maintain its relations and good will with all
suppliers, customers, landlords, creditors, employees and other Persons having
business relationships with the Company;
(c) keep in full force all insurance policies identified in Section
2.18 of the Disclosure Schedule;
(d) not declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, and shall not
repurchase, redeem or otherwise reacquire any shares of capital stock or other
securities;
(e) not sell, issue or authorize the issuance of (i) any capital
stock or other security, (ii) any option or right to acquire any capital stock
or other security, or (iii) any instrument convertible into or exchangeable for
any capital stock or other security (except that the Company shall be permitted
(a) to issue Company Common Stock to employees upon the exercise of outstanding
Company Options, (b) to issue shares of Company Common Stock upon the conversion
of shares of its outstanding Preferred Stock), (c) to issue shares of Company
Common Stock upon the exercise of any outstanding warrants or other securities
convertible or exercisable into Company Common Stock) and (d) to amend and
otherwise adjust rights of participants thereto with respect to the Change of
Control Plan;
(f) except as contemplated herein, not amend or permit the adoption
of any amendment to the Company's articles of incorporation or bylaws, not
effect or permit the Company to become a party to any recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(g) not form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(h) not make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made on behalf of the Company
during the Pre-Closing Period, do not exceed $50,000 per month;
(i) not lend money to any Person, except for any loan not exceeding
$1,000 for any one year period to any Person in the ordinary course of business
consistent with past practices;
(j) not pay any bonus or make any profit-sharing payment, cash
incentive payment or similar payment to (except for payments under the 1999
Change of Control Bonus
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Plan as described in Section 1 or alterations thereto as permitted by subsection
(e) above), or increase the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to, any of its directors,
officers or employees, or (iii) hire any new employee whose aggregate annual
compensation is expected to exceed $150,000
(k) not change any of its methods of accounting or accounting
practices in any material respect;
(l) not make any Tax election;
(m) not commence or settle any material Legal Proceeding;
(n) not hire any new employees without the consent of Parent; and
(o) not agree or commit to take any of the actions described in
clauses "(d)" through "(n)" above.
4.3 Notification by Company; Updates to Disclosure Schedule.
(a) During the Pre-Closing Period, the Company shall promptly notify
Parent in writing of:
(i) the discovery by the Company of any event, condition, fact
or circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or
material breach of any representation or warranty made by the Company in
this Agreement;
(ii) any event, condition, fact or circumstance that occurs,
arises or exists after the date of this Agreement and that would cause or
constitute a material inaccuracy in or material breach of any
representation or warranty made by the Company in this Agreement if (A)
such representation or warranty had been made as of the time of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, or (B) such event, condition, fact or circumstance had
occurred, arisen or existed on or prior to the date of this Agreement;
(iii) any material breach of any covenant or obligation of the
Company;
(iv) the discovery by the Company of any event, condition, fact
or circumstance that would make the timely satisfaction of any of the
conditions set forth in Section 6 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Disclosure
Schedule, or if any such event, condition, fact or circumstance would require
such a change assuming the Disclosure Schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Parent an update to the
Disclosure Schedule specifying such change. No such update shall be deemed to
supplement or amend the Disclosure Schedule for the purpose of (i) determining
the accuracy of any of the
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representations and warranties made by the Company in this Agreement, or (ii)
determining whether any of the conditions set forth in Section 6 has been
satisfied.
4.4 Notification by Parent; Update to Schedules.
(a) During the Pre-Closing Period, Parent shall promptly notify the
Company in writing of:
(i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or
material breach of any representation or warranty made by Parent in this
Agreement;
(ii) any event, condition, fact or circumstance that occurs,
arises or exists after the date of this Agreement and that would cause or
constitute a material inaccuracy in or material breach of any
representation or warranty made by the Parent in this Agreement if (A) such
representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or
(B) such event, condition, fact or circumstance had occurred, arisen or
existed on or prior to the date of this Agreement;
(iii) any material breach of any covenant or obligation of
Parent;
(iv) the discovery by Parent of any event, condition, fact or
circumstance that would make the timely satisfaction of any of the
conditions set forth in Section 6 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.4(a) requires any change in any schedule
delivered by Parent, or if any such event, condition, fact or circumstance would
require such a change assuming such schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Parent an update to
such schedule specifying such change. No such update shall be deemed to
supplement or amend such schedule for the purpose of (i) determining the
accuracy of any of the representations and warranties made by Parent in this
Agreement, or (ii) determining whether any of the conditions set forth in
Section 7 has been satisfied.
4.5 Change of Control Payment. Parent shall pay Surviving Corporation the
Change of Control Distribution at the Closing, and immediately following the
Closing, Surviving Corporation shall, subject to the provisions set forth in
Section 1.5(a), pay the Change of Control Distribution to the persons entitled
to portions thereof under the terms of the 1999 Change of Control Plan.
SECTION 5. Additional Covenants of the Parties.
5.1 Filings and Consents. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other
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transactions contemplated by this Agreement, and (b) shall use all commercially
reasonable efforts to obtain all Consents (if any) required to be obtained
(pursuant to any applicable Legal Requirement or Contract, or otherwise) by such
party in connection with the Merger and the other transactions contemplated by
this Agreement. The Company shall (upon request) promptly deliver to Parent a
copy of each such filing made, each such notice given and each such Consent
obtained by the Company during the Pre-Closing Period.
5.2 Public Announcements. During the Pre-Closing Period, (a) except as
required by applicable law the Company shall not (and the Company shall not
permit any of its Representatives to) issue any press release or make any public
statement regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without Parent's prior written
consent (which consent shall not be unreasonably withheld), and (b) Parent will
use reasonable efforts to consult with the Company prior to issuing any press
release or making any public statement regarding the Merger.
5.3 Best Efforts. During the Pre-Closing Period, (a) the Company shall
use its best efforts to cause the conditions set forth in Section 6 to be
satisfied on a timely basis, and (b) Parent and Merger Sub shall use their best
efforts to cause the conditions set forth in Section 7 to be satisfied on a
timely basis.
5.4 FIRPTA Matters. At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the
United States Treasure Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section 1.897 - 2(h)(2)
of the United States Treasury Regulations.
5.5 Termination of Stock Options and Other Rights to Acquire Securities.
All stock options that are outstanding under the Company's 1998 Equity Incentive
Plan and the Company's 1993 Stock Option Plan and any other option agreement or
plan or other right to acquire the Company's securities (including, without
limitation, any warrant or convertible securities) will be terminated at or
prior to the Closing.
5.6 Termination of Agreements. Prior to the Closing, the Company shall
terminate that certain Fourth Amended and Restated Investors' Rights Agreement
to which the Company and certain of its shareholders are parties.
5.7 Parent Plans and Benefit Arrangements. The employee benefit plans and
benefit arrangements maintained by the Company that provide non-discretionary,
non-cash benefits to employees of the Company and that are substantially similar
to benefit plans and benefit arrangements currently maintained by Parent shall,
to the extent practicable, be maintained in effect by the Surviving Corporation
until the Continuing Employees (as defined in this Section 5.7) are allowed to
participate in such similar benefit plans or benefit arrangements maintained by
Parent (each, a "Plan"). Parent shall use reasonable efforts to attempt to
ensure that: (a) as soon as practicable after the Effective Time, the benefit
plans and benefit arrangements applicable to the Continuing Employees will
provide benefits to the Continuing Employees that in total are comparable to the
non-discretionary, non-cash benefits provided to similarly situated employees of
Parent; (b) to the extent practicable, any pre-existing condition
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limitations contained in such health plans and health benefit arrangements for
any Continuing Employee who would be deemed under such health plans and health
benefit arrangements to have a disqualifying pre-existing condition are waived,
to the extent such condition was covered by a Plan immediately prior to the
Effective Time (provided that, in the case of disability and life insurance
plans, such Continuing Employee is actively at work and is not hospitalized or
on disability leave as of the Effective Time); and (c) to the extent
practicable, such benefit plans and benefit arrangements give full credit to
each Continuing Employee for such Continuing Employee's period of service with
the Company prior to the Effective Time for all purposes for which such service
was recognized under the Plans and arrangements of the Company prior to the
Effective Time. For purposes of this Section 5.14, "Continuing Employee" shall
mean any employee of any of the Company who continues as an employee of the
Parent or the Surviving Corporation after the Effective Time.
SECTION 6. Conditions Precedent to Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to effect the Merger and
otherwise consummate the transactions contemplated by this Agreement are subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions:
6.1 Accuracy of Representations. Each of the representations and
warranties made by the Company in this Agreement shall have been accurate in all
material respects as of the date of this Agreement, and shall be accurate in all
material respects as of the Scheduled Closing Time as if made at the Scheduled
Closing Time.
6.2 Performance of Covenants. All of the covenants and obligations that
the Company is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all material respects.
6.3 Shareholder Approval. The terms of the Merger (including the Escrow
Agreement) shall have been duly approved by the legally requisite affirmative
vote of at least (a) majority of the Company Common Stock entitled to vote with
respect thereto, (b) a majority of the Company Series A Preferred Stock entitled
to vote with respect thereto, (c) a majority of the Company Series B Preferred
Stock entitled to vote with respect thereto, (d) a majority of the Company
Series C Preferred Stock entitled to vote with respect thereto, (e) sixty-two
percent (62%) of the Preferred Stock voting together as a single class, and (f)
ninety-five percent (95%) of the outstanding shares of capital stock of the
Company, on an as-converted basis.
6.4 Consents. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Section 2.23 of the Disclosure Schedule) shall have been
obtained and shall be in full force and effect.
6.5 Agreements and Documents. Parent and the Company shall have received
the following agreements and documents, each of which shall be in full force and
effect:
(a) a legal opinion of Cooley Godward llp, dated as of the Closing
Date, in a form reasonably acceptable to Parent;
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(b) the Escrow Agreement, which shall have been executed by the
Escrow Agent, the shareholder representative and Parent;
(c) written resignations of all directors of the Company, effective
as of the Effective Time; and
(d) customary closing certificates.
6.6 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
6.7 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding challenging or seeking the recovery of Damages or
injunctive or other equitable relief in connection with the Merger or seeking to
prohibit or limit the exercise by Parent of any right pertaining to its
ownership of stock of the Surviving Corporation.
6.8 Due Diligence Review. Parent and Merger sub shall have completed a
due diligence review investigation relating to the business of the Company,
which investigation shall not have resulted in the discovery by Parent of
circumstances or information which could, in Parent's reasonable opinion be
expected to have a Material Adverse Effect on the Company, its business assets,
condition, liabilities, operations, or financial performance.
6.9 Bank Accounts. The Company's bank accounts shall have positive
balances and sufficient funds to cover all outstanding checks as of the Closing
Date.
6.10 Compliance Certificate. The Company shall have delivered to Parent a
Compliance Certificate, executed by the Chief Executive Officer of the Company,
dated as of the Closing Date, to the effect that the representations and
warranties contained in Section 2 of this Agreement are true and correct in all
material respects as of the Closing Date and that all covenants and conditions
precedent have been performed and satisfied in all material respects.
6.11 Approval of 1999 Change of Control Plan. The Company's 1999 Change of
Control Plan shall have been approved by a majority of the disinterested
Company's shareholders, voting on an as-if-converted to Common Stock basis.
6.12 Releases by Significant Shareholders and Officers. The Company shall
have obtained releases in a form reasonably acceptable to both the Parent and
the Company from those individuals identified on Exhibit E.
6.13 Acknowledgement Letters. The Company shall have obtained an
acknowledgement letter from each of the Company's employees in a form reasonably
acceptable to the Parent and the Company, which letter shall contain an
acknowledgement from such employees of the "at-will" nature of their employment
with the Company.
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6.14 Balance Sheet Deficit. The Company's Retained Earnings as set forth
on its balance sheet as of December 31, 1998 will not be less than as of
February 28, 1998.
6.15 Tax Matters. Prior to the Closing Date, the Company shall have filed
its federal and state tax returns for the year ended September 30, 1998, and
shall have paid all taxes (together with any interest and any penalties or
additional amounts) that are due and payable.
6.16 OTLC Matters. Parent and Merger Sub, in their sole discretion, have
determined that the patent infringement claim asserted by OTLC against the
Company will not result in any monetary liability or injunctive or other
equitable remedy against the Company, Parent or the Surviving Corporation,
and/or have an adverse effect on the Company's business assets, condition,
liabilities, operations or financial performance.
SECTION 7. Conditions Precedent to Obligations of the Company.
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
7.1 Accuracy of Representations. Each of the representations and
warranties made by Parent and Merger Sub in this Agreement shall have been
accurate in all material respects as of the date of this Agreement and shall be
accurate in all material respects as of the Scheduled Closing Time as if made at
the Scheduled Closing Time.
7.2 Performance of Covenants. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all material
respects.
7.3 Documents. The Company shall have received the following documents:
(a) a legal opinion of Mitchell, Silberberg & Knupp LLP dated as of
the Closing Date, in a form reasonably acceptable to the Company;
(b) the Escrow Agreement shall have been executed by the Escrow
Agent and Parent; and
(c) customary closing documents.
7.4 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.5 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding challenging or seeking the recovery of Damages or
injunctive or other equitable relief in connection with the Merger or seeking to
prohibit or limit the exercise by Parent of any right pertaining to its
ownership of stock of the Surviving Corporation.
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7.6 Compliance Certificate. Parent shall have delivered to the Company a
Compliance Certificate, executed by the Chief Executive Officer of the Parent,
dated as of the Closing Date, to the effect that the representations and
warranties contained in Section 3 of this Agreement are true and correct in all
material respects as of the Closing Date.
7.7 Conversion of Shares. Immediately prior to the Closing, each share of
the Company's Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be converted into shares of the Company's Common Stock.
SECTION 8. Termination.
8.1 Termination Events. This Agreement may be terminated prior to the
Closing:
(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 6 will not occur (other
than as a result of any failure on the part of Parent or Merger Sub to
comply with or perform any covenant or obligation of Parent or Merger Sub
set forth in this Agreement);
(b) by the Company if the Company reasonably determines that the
timely satisfaction of any condition set forth in Section 7 will not occur
(other than as a result of any failure on the part of the Company to comply
with or perform any covenant or obligation set forth in this Agreement or
in any other agreement or instrument delivered to Parent);
(c) by Parent if the Closing has not taken place on or before April
30, 1999 (other than as a result of any failure on the part of Parent to
comply with or perform any covenant or obligation of Parent set forth in
this Agreement);
(d) by the Company if the Closing has not taken place on or before
April 30, 1999 (other than as a result of the failure on the part of the
Company to comply with or perform any covenant or obligation set forth in
this Agreement); or
(e) by the mutual consent of Parent and the Company.
8.2 Termination Procedures. If Parent wishes to terminate this Agreement
pursuant to Section 8.1(a) or Section 8.1(c) Parent shall deliver to the Company
a written notice stating that Parent is terminating this Agreement and setting
forth a brief description of the basis on which Parent is terminating this
Agreement. If the Company wishes to terminate this Agreement pursuant to
Section 8.1(b) or Section 8.1(d) the Company shall deliver to Parent a written
notice stating that the Company is terminating this Agreement and setting forth
a brief description of the basis on which the Company is terminating this
Agreement.
8.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 8.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither the Company nor Parent shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement; (b) the parties shall, in all events,
remain bound by and continue to be subject to the provisions set forth in
Section 9;
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and (c) the Company shall, in all events, remain bound by and continue to be
subject to Section 5.2.
SECTION 9. Miscellaneous Provisions.
9.1 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
9.2 Fees and Expenses. Except as set forth in the Escrow Agreement, each
party to this Agreement shall bear and pay all fees, costs and expenses
(including legal fees and accounting fees) that have been incurred or that are
incurred by such party in connection with the transactions contemplated by this
Agreement, including all fees, costs and expenses incurred by such party in
connection with or by virtue of (a) the investigation and review conducted by
Parent and its Representatives with respect to the Company's business (and the
furnishing of information to Parent and its Representatives in connection with
such investigation and review), (b) the negotiation, preparation and review of
this Agreement (including the Disclosure Schedule) and all agreements,
certificates, opinions and other instruments and documents delivered or to be
delivered in connection with the transactions contemplated by this Agreement,
(c) the preparation and submission of any filing or notice required to be made
or given in connection with any of the transactions contemplated by this
Agreement, and the obtaining of any Consent required to be obtained in
connection with any of such transactions, and (d) the consummation of the
Merger.
9.3 Attorneys' Fees. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
9.4 Notices. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent:
Vertel Corporation
Warner Corporate Center
21300 Victory Blvd., Suite 1200
Woodland Hills, CA 91367
Facsimile: (818) 598-0104
Attn: President
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With a copy to:
Mitchell Silberberg & Knupp LLP
11377 West Olympic Boulevard
Los Angeles, California 90064-1683
Facsimile: (310) 312-3798
Attn: David J. Katz, Esq.
if to the Company:
Expersoft Corporation
5825 Oberlin Drive
San Diego, CA 92121
Facsimile: (619) 824-4281
Attn: Chief Executive Officer
With a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Facsimile: (619) 453-3555
Attn: Christopher J. Kearns, Esq.
9.5 Time of the Essence. Time is of the essence of this Agreement.
9.6 Headings. The underlined headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
9.7 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
9.8 Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
9.9 Successors and Assigns. This Agreement shall be binding upon: the
Company and its successors and assigns (if any); Parent and its successors and
assigns (if any); and Merger Sub and its successors and assigns (if any).
9.10 Remedies Cumulative; Specific Performance. The rights and remedies of
the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the
26
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observance and performance of such covenant, obligation or other provision, and
(b) an injunction restraining such breach or threatened breach.
9.11 Waiver.
(a) No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this Agreement,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out
of this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such Person; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
9.12 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
9.13 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
9.14 Parties in Interest. None of the provisions of this Agreement is
intended to provide any rights or remedies to any Person other than the parties
hereto and their respective successors and assigns (if any).
9.15 Entire Agreement. This Agreement and the other agreements referred to
herein set forth the entire understanding of the parties hereto relating to the
subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof.
9.16 Construction.
(a) For purposes of this Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Agreement.
27
<PAGE>
(c) As used in this Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
28
<PAGE>
The parties hereto have caused this Agreement to be executed and delivered
as of February 23, 1999.
Vertel Corporation
a California corporation
By:__________________________________
Expersoft Acquisition Corp.,
a California corporation
By:__________________________________
Expersoft Corporation
a California corporation
By:----------------------------------
29
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Exhibit A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached (including the Disclosure
Schedule), as it may be amended from time to time.
Company Contract. "Company Contract" shall mean any Contract: (a) to
which the Company is a party; (b) by which the Company or any of its assets is
or may become bound or under which the Company has, or may become subject to,
any obligation; or (c) under which the Company has or may acquire any right or
interest.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
Damages. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation and litigation) or expense of any nature.
Disclosure Schedule. "Disclosure Schedule" shall mean the schedule (dated
as of the date of the Agreement) delivered to Parent on behalf of the Company.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
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Government Bid. "Government Bid" shall mean any quotation, bid or proposal
submitted to any Governmental Body or any proposed prime contractor or higher-
tier subcontractor of any Governmental Body.
Government Contract. "Government Contract" shall mean any prime contract,
subcontract, letter contract, purchase order or delivery order executed or
submitted to or on behalf of any Governmental Body or any prime contractor or
higher-tier subcontractor, or under which any Governmental Body or any such
prime contractor or subcontractor otherwise has or may acquire any right or
interest.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. A violation or other matter will be deemed to
have a "Material Adverse Effect" on the Company or Parent if such violation or
other matter would have a material adverse effect on the Company's or Parent's,
as applicable, business, condition, assets, liabilities, operations, financial
performance or prospects.
Person. "Person" shall mean any individual, Entity or Governmental Body.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
2
<PAGE>
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
3
<PAGE>
ESCROW AND INDEMNITY AGREEMENT
THIS ESCROW AND INDEMNITY AGREEMENT ("Escrow Agreement") is entered into as
of ___________, 1999, by and among VERTEL CORPORATION, a California corporation
("Parent"), and Andrew Chedrich (the "Shareholder Representative") as
representative of the shareholders (the "Shareholders") of EXPERSOFT
CORPORATION, a California corporation (the "Company") and the party identified
as the Escrow Agent on the signature page below (the "Escrow Agent").
Recitals
A. Parent, Expersoft Acquisition Corporation, a California corporation
and a wholly-owned subsidiary of Parent ("Merger Sub"), and the Company have
entered into an Agreement and Plan of Merger and Reorganization, dated as of
February 23, 1999 (the "Merger Agreement"), which provides, among other things,
that Merger Sub will be merged with and into the Company (the "Merger"), with
the Company being the surviving corporation, on the terms and conditions set
forth therein. As used herein "Indemnitees" shall mean the following Persons,
each of whom shall be entitled to indemnification as provided in this Agreement:
(a) Parent; (b) Parent's affiliates (including the Surviving Corporation); and
(c) the respective Representatives of the Persons referred to in clauses "(a)"
and "(b)" above. Capitalized terms used herein and not otherwise defined shall
have the meanings given them in the Merger Agreement.
B. The Merger Agreement contemplates that the Parent will have certain
rights to indemnification, and further contemplates the establishment of an
escrow arrangement to secure such indemnification rights.
Agreement
Now, therefore, in consideration of the foregoing premises and the mutual
covenants and conditions contained herein, the parties to this Escrow Agreement,
intending to be legally bound, agree as follows:
SECTION 10. Indemnification, Etc.
10.1 Indemnification.
(a) Indemnification Rights of Indemnitees. Notwithstanding any
investigation of the business, condition, assets, liabilities, operations or
prospects of the Company by or on behalf of Parent or Merger Sub, or any
knowledge acquired (or capable of being acquired) at any time, whether before or
after the execution and delivery of the Merger Agreement or the Closing Date,
subject to the terms of this Escrow Agreement, each of the Indemnitees shall be
indemnified, defended and held harmless pursuant to the terms hereof out of the
Escrow Fund (described in Section 2.1 below) from and against, and each
Indemnitee shall be compensated, reimbursed and paid out of the Escrow Fund on
demand, the full amount of any Damages suffered or incurred by any of the
Indemnitees or to which any of the Indemnitees may otherwise become subject
(regardless of whether or not such Damages relate to any third-party claim),
arising out of or relating to any of the following:
<PAGE>
(i) any inaccuracy in or breach of any representation or
warranty of the Company in the Merger Agreement, the Disclosure Schedule, or any
certificate or document delivered by or on behalf of the Company pursuant to the
Merger;
(ii) any breach or failure to perform any covenant or obligation
of the Company set forth in the Merger Agreement or the Disclosure Schedule, or
any certificate or document delivered by or on behalf of the Company pursuant to
the Merger;
(iii) any federal, state, local or other Tax obligation of the
Company of any nature arising out of any event or state of facts occurring or
existing at or prior to the Closing;
(iv) any claim, litigation or other action of any nature
asserted or brought by anyone other than Parent, arising out of any act
performed, transaction entered into or state of facts suffered to exist by the
Company prior to, or at, the Closing, or by the Shareholders prior to, at, or
subsequent to the Closing;
(v) without limiting the generality of the foregoing, any claim
of any employee of the Company, or of any other person, arising out of, or
relating to, any employee stock option, bonus, retirement, profit sharing,
pension or other similar plan of the Company or the operation prior to the
Closing Date or termination of any such plan;
(vi) any uncollectible accounts receivable not reserved against
on the Company's balance sheet as of February 28, 1999;
(vii) any payments, costs, expenses or fees related to any
"dissenting shares" within the meaning of Section 1300(b) of the California
Corporations Code;
(viii) any claims regarding any warrants or other derivative or
convertible securities or any other right to acquire the Company's equity
securities; and
(ix) any costs, expenses or fees reasonably incurred by Parent to
enforce any of its rights to the assets of the Surviving Corporation.
The Damages for which indemnity may be obtained pursuant to this Section
1.1 are hereinafter collectively referred to as the "Indemnitee Damages."
10.2 Limitations. The following limitations shall apply to the respective
indemnification obligations of the parties pursuant to Section 1.1:
(a) Cap on Company Indemnity. Following the Effective Time, the
Company's indemnity obligations under this Agreement shall not exceed in the
aggregate, $600,000.
(b) Exclusivity. Following the Effective Time, as set forth in this
Agreement, the Escrow Fund shall be the Indemnitees' sole recourse for
indemnification, payment of Damages or any other remedies against the Company or
the Shareholders under the Merger
<PAGE>
Agreement or with respect to the matters provided for under Section 1.1;
provided, however, that this limitation shall not apply relative to fraudulent
and willful activity of the Company, its officers or the Shareholders.
(c) Limitations on Liability. Notwithstanding anything to the
contrary contained in the Merger Agreement or this Escrow Agreement (or any
related agreement or instrument described above), upon the Effective Time and
thereafter, the Company shall have no liability thereunder or hereunder with
respect to any representation, warranty or covenant; provided, however, that
following the Effective Time the Escrow Fund shall remain liable for such
representations, warranties and covenants of the Company as provided herein. It
is acknowledged and agreed that, if the Surviving Corporation suffers or
otherwise becomes subject to any Indemnitee Damages, then (without limiting any
of the rights of the Surviving Corporation as an Indemnitee) Parent shall also
be deemed, by virtue of its ownership of the stock of the Surviving Corporation,
to have suffered Indemnitee Damages.
10.3 No Contribution; Etc. No party shall have or shall exercise or assert
(or attempt to exercise or assert), any right of contribution, right of
indemnity or other similar right or remedy against the Surviving Corporation in
connection with any actual or alleged inaccuracy in or breach of any
representation, warranty, covenant or obligation set forth in the Merger
Agreement or any related agreement or instrument (including without limitation
this Escrow Agreement).
10.4 Defense of Third Party Claims.
(a) Notice of Third Party Claim. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against the
Surviving Corporation, against Parent or against any other Person) with respect
to which any Indemnitee may have indemnification rights pursuant to Section
1.1(a), Parent shall promptly notify the Shareholder Representative thereof in
writing, but the failure to so notify the Shareholder Representative will not
limit any Indemnitee's rights to indemnification hereunder, except to the extent
the defense of such action is prejudiced by the failure to so give such notice.
(b) Procedure. Parent will have the right to defend against such
claim or Legal Proceeding, with counsel of its choice reasonably satisfactory to
the Shareholder Representative, and will conduct the defense of the claim or
Legal Proceeding actively and diligently and in a reasonable manner.
(c) Conduct by Parent. So long as the Parent is conducting the
defense of the claim or Legal Proceeding in accordance with Section 1.4(b), (A)
the Shareholder Representative may retain separate co-counsel at its sole cost
and expense and participate in the defense of the claim or Legal Proceeding, (B)
Parent will not consent to the entry of any judgment or enter into any
settlement with respect to the claim or Legal Proceeding without the prior
written consent of the Shareholder Representative (not to be withheld
unreasonably), and (C) the Shareholder Representative will not consent to the
entry of any judgment or enter into any settlement with respect to the claim or
Legal Proceeding without the prior written consent of Parent (not to be withheld
unreasonably). Notwithstanding the foregoing, if Parent determines in
<PAGE>
good faith that there is a reasonable probability that any claim or Legal
Proceeding will adversely affect it or any Indemnitee other than as a result of
monetary damages which would be indemnifiable under this Agreement, Parent may,
by notice to the Shareholder Representative, assume the exclusive right to
defend, compromise or settle such claim or Legal Proceeding and the provisions
of Sections 1.4(d)(B) and (C) shall apply, but the Parent will not consent to
the entry of any judgment or enter into any settlement with respect to such
claim or Legal Proceeding without the prior written consent of the Shareholder
Representative (not to be withheld unreasonably).
(d) Fees and Indemnification. The Escrow Fund will reimburse Parent
promptly and periodically for the costs of defending against the claim or Legal
Proceeding (including reasonable attorneys' fees and expenses), and (C) the
Escrow Fund will remain responsible for the claim or Legal Proceeding to the
fullest extent of the indemnification rights pursuant to this Section 1.
10.5 Exercise of Remedies by Indemnitees Other Than Parent. No Indemnitee
(other than Parent or any successor thereto or assign thereof) shall be
permitted to assert any indemnification claim or exercise any other remedy under
this Escrow Agreement unless Parent (or any successor thereto or assign thereof)
shall have consented to the assertion of such indemnification claim or the
exercise of such other remedy.
SECTION 11. Escrow.
11.1 Cash to be Placed in Escrow. On the Closing Date, Parent shall
deliver to the Escrow Agent $600,000 cash, to be held in escrow in accordance
with this Escrow Agreement. The value of the cash paid by Parent shall
constitute an indemnity fund (the "Escrow Fund"). The cash shall be held as a
trust fund and shall not be subject to any setoff, lien, attachment, trustee
process or any other judicial process or any creditor of any party hereto. The
Escrow Agent agrees to accept delivery of the cash and to hold the cash in
escrow (the "Escrow"), subject to and in accordance with the terms and
conditions of this Escrow Agreement.
11.2 Security for Indemnification. The Escrow Fund shall be security for
the Indemnitees' indemnity rights described above, subject to the limitations
and in the manner provided in this Escrow Agreement.
11.3 Transferability. The interests of the Shareholders in the Escrow and
in the Escrow Shares held in the Escrow shall not be assignable or transferable,
other than by operation of law. No transfer of any of such interests by
operation of law shall be recognized or given effect until Parent shall have
received written notice of such transfer.
11.4 Amounts Earned on Escrow. The Escrow Agent shall hold the Escrow Fund
in an interest-bearing account at Imperial Bank. The parties agree that as and
to the extent permitted by applicable law, earnings of the Escrow Fund, as
interest or otherwise, will be allocable for tax purposes to the Shareholders in
proportions to their entitlement to the Escrow Fund and Shareholders will have
responsibility to include all amounts earned on the Escrow Fund in their gross
income for federal, state and local income tax purposes and pay any income tax
resulting therefrom. Such amounts shall be released on the final Release Date
hereunder.
<PAGE>
SECTION 12. Claim Procedures.
12.1 Claim Notice. If Parent determines that it or any other Indemnitee is
entitled to indemnification hereunder, then Parent may, in its sole and absolute
discretion, without limitation of any other rights or remedies available at law
or in equity, deliver to the Shareholder Representative and the Escrow Agent a
written notice thereof (a "Claim Notice") setting forth (i) a brief description
of the circumstances supporting Parent's belief that such entitlement to
indemnification exists and (ii) to the extent possible, a non-binding,
preliminary estimate of the aggregate dollar amount of all Damages that have
arisen or may arise therefrom or are otherwise associated therewith (such
aggregate amount being referred to as the "Claim Amount").
12.2 Response Notice. Within ten (10) days after the delivery of a Claim
Notice to the Shareholder Representative, the Shareholder Representative shall
deliver to Parent, with a copy to the Escrow Agent, a written notice (the
"Response Notice") containing: (i) instructions to the effect that the cash
equal to the entire Claim Amount set forth in such Claim Notice is to be
released from the Escrow to Parent; or (ii) instructions to the effect that cash
having a value equal to a specified portion of the Claim Amount set forth in
such Claim Notice is to be released from the Escrow to Parent, together with a
statement that the remaining portion of such Claim Amount is being disputed; or
(iii) a statement that the entire Claim Amount set forth in such Claim Notice is
being disputed. The Shareholder Representative may contest the release of any
part of the Escrow Fund only based upon a good faith belief that such portion of
the Claim Amount does not constitute an amount for which any Indemnitee is
entitled to seek indemnification under this Agreement. If no Response Notice is
received by Parent from the Shareholder Representative within ten (10) days
after the delivery of a Claim Notice to the Shareholder Representative, then the
Shareholder Representative shall be deemed to have given instructions that cash
having a value equal to the entire Claim Amount set forth in such Claim Notice
is to be released to Parent from the Escrow.
12.3 Release of Cash to Parent.
(a) Agreed Claims. If the Shareholder Representative gives (or is
deemed to have given) instructions that cash having a value equal to the entire
Claim Amount set forth in a Claim Notice is to be released from the Escrow to
Parent, then the Escrow Agent shall promptly deliver to Parent cash having a
value which is equal to the Claim Amount (or such lesser amount of the Escrow
Fund as is then held in the Escrow).
(b) Partially Contested Claims. If a Response Notice delivered by
the Shareholder Representative in response to a Claim Notice contains
instructions to the effect that cash having a value equal to a specified portion
(but not the entire amount) of the Claim Amount set forth in such Claim Notice
is to be released from the Escrow to Parent, then (i) the Escrow Agent shall
promptly deliver to Parent cash having a value which is equal to such specified
portion of such Claim Amount, and (ii) the procedures set forth in Sections
3.3(c) and (d) of this Escrow Agreement, as applicable, shall be followed with
respect to the remaining portion of such Claim Amount.
<PAGE>
(c) Contested Amounts In the event that any Response Notice
indicates that there is a dispute as to all or any portion of a Claim Amount (a
"Contested Amount"), the Shareholder Representative and Parent shall for a
period of not more than thirty (30) days attempt in good faith to resolve such
Contested Amount.
(d) Arbitration. If no such resolution can be reached within such
thirty (30) day period, either Parent or the Shareholder Representative may
demand arbitration of the matter through binding and nonappealable arbitration
administered by the Judicial Arbitration & Mediation Services, Inc. ("JAMS") in
Los Angeles or San Diego County, California. Any such arbitration shall be
conducted before a single arbitrator to be appointed by the parties from JAMS'
roster. If the parties fail to agree as to the identity of the single
arbitrator, JAMS shall have the right to make such appointment. The conduct of
the arbitration hearing and discovery prior thereto shall be in accordance with
the California Code of Civil Procedure, California Rules of Court, and
California Rules of Evidence. There shall be limited discovery prior to the
arbitration hearing, subject to the discretion of the arbitrator, as follows:
(a) exchange of witness lists and copies of documentary evidence and documents
related to or arising out of the issues to be arbitrated, (b) depositions of all
party witnesses, and (c) such other depositions as may be allowed by the
arbitrator upon a showing of good cause. The Escrow Fund, and to the extent of
any shortfall in the Escrow Fund (or as otherwise determined by the arbitrator),
Parent shall bear the fees and expenses of the arbitrator. Notwithstanding the
foregoing, the Escrow Fund's obligations hereunder shall be subordinate to
claims of the Indemnitees for amounts payable out of the Escrow Fund pursuant
hereto, and therefore shall be paid out only at the time of the Subsequent
Release (or the resolution of any Claims not yet resolved at the time of the
Subsequent Release and subject to payment pursuant to the terms hereof). The
arbitrator shall decide the matter to be arbitrated pursuant hereto within sixty
(60) days after the appointment of the arbitrator.
The arbitrator's decision shall relate solely to whether Parent is entitled
to receive cash equal in value to the Contested Amount (or a portion thereof)
pursuant to the applicable terms of the Merger Agreement and this Agreement.
The final decision of the arbitrator shall be furnished to Parent and the
Shareholder Representative in writing and shall constitute a conclusive
determination of the issue in question, binding upon Parent, the Shareholders,
the Shareholder Representative and the Escrow Fund, and shall not be contested
by any of them. Such decision may be used in a court of law only for the
purpose of seeking enforcement of the arbitrator's award.
After delivery of a Response Notice that the Claim Amount is contested,
cash equal in value to the Contested Amount shall continue to be held in the
Escrow Fund, notwithstanding the occurrence of a Release Date (defined below),
until (i) delivery of a copy of a settlement agreement executed by Parent and
the Shareholder Representative setting forth instructions as to the release of
cash from the Escrow Fund, if any, that shall be made with respect to the
Contested Amount or (ii) delivery of a copy of the final award of the arbitrator
setting forth instructions as to the release of cash from the Escrow Account, if
any, that shall be made with respect to the Contested Amount.
SECTION 13. Shareholder Representative.
<PAGE>
13.1 Shareholder Representative.
(a) Initial Representative; Authority The Shareholders shall be
represented hereunder by Andrew Chedrich as the Shareholder Representative. The
Shareholder Representative is hereby empowered by each Shareholder to give and
receive notices and communications, to authorize delivery to Parent of cash
placed in Escrow in satisfaction of claims by any Indemnitee, to object to such
deliveries, to agree to, negotiate, enter into settlements and compromises of,
demand arbitration of and comply with awards of arbitrators with respect to such
claims and to take any and all actions necessary or appropriate in the judgment
of the Shareholder Representative for the accomplishment of the foregoing.
(b) Successor Representative. In the event the Shareholder
Representative shall die or resign or otherwise terminate its status as such,
the successor shall be the Shareholder who received the largest portion of the
Merger Consideration at the Closing (and if such Shareholder shall not accept
such appointment then the Shareholder who received the nearest amount of Merger
Consideration at the Closing that accepts such appointment). The Shareholder
Representative shall receive no compensation for its services.
(c) Limitation of Liability. The Shareholder Representative shall
not be liable to the Shareholders for any act done or omitted hereunder while
acting in good faith and in the exercise of reasonable judgment. The Escrow Fund
shall indemnify and hold the Shareholder Representative harmless against any
loss, liability, or expenses incurred by him in his capacity as such, except to
the extent such loss, liability or expense is due to bad faith or negligent
conduct. The Shareholder Representative shall be entitled to reimbursement by
the Escrow Fund, for attorneys fees and other out-of-pocket expenses incurred by
him in accordance with this Escrow Agreement.
(d) Reliance on Representative. A decision by the Shareholder
Representative shall constitute a decision of all of the Shareholders, and shall
be final, binding and conclusive upon each of them. Parent, Merger Sub, the
Company, any other Indemnitee and the Escrow Agent may rely upon any act,
decision, consent or instruction of the Shareholder Representative as being the
act, decision, consent or instruction of each and all of the Shareholders; and
Parent, Merger Sub, the Company, any other Indemnitee and the Escrow Agent are
hereby relieved from any liability to any Person for any acts done by them in
accordance with any act, decision, consent or instruction of the Shareholder
Representative.
SECTION 14. Release of Cash to Shareholders.
14.1 Cash to be Released.
(a) Initial Release. Subject to Section 3 of this Escrow Agreement,
on the date that is six (6) months following the Closing Date (the "Initial
Release Date"), $400,000 shall be released from Escrow and delivered by the
Escrow Agent to the Shareholders pursuant to Section 5.2. Any cash subject to
any Claim Notices prior to the Initial Release Date shall be promptly
distributed following satisfaction of any Claims specified therein to the extent
of the excess of the cash actually used in satisfaction of such Claims.
<PAGE>
(b) Subsequent Release. Subject to Section 3 of this Escrow
Agreement, on the date that is nine (9) months following the Closing Date (the
"Subsequent Release Date"), all cash then held in Escrow, less the cash subject
to any and all Claim Notices delivered to the Shareholder Representative prior
to the Subsequent Release Date, shall be released from Escrow and delivered by
the Escrow Agent to the Shareholders pursuant Section 5.2. The Initial Release
Date and the Subsequent Release Date are hereinafter referred to collectively as
the "Release Date." Any cash subject to any Claim Notices prior to the
Subsequent Release Date shall be promptly distributed following satisfaction of
any Claims specified therein to the extent of the excess of the cash actually
used in satisfaction of such Claims.
(c) Limitation. Notwithstanding any other provision of this Escrow
Agreement, the following shall apply:
(i) Except for claims pursuant to Section 1.1(a)(vii), in no
event may any claim for indemnification pursuant to this Agreement be made on or
after the Initial Release Date; and
(ii) In no event may any claim for indemnification pursuant to
Section 1.1(a)(vii) be made on or after the Subsequent Release Date.
14.2 Procedures for Releasing Cash. Any distribution of all or a portion of
the cash to the Shareholders shall be made in accordance with the terms of the
Merger Agreement and in proportion to the cash received by each Shareholder
pursuant to the Merger.
SECTION 15. Fees and Expenses.
15.1 Escrow Fees. The Escrow Agent will be entitled to reimbursement for
ordinary fees and expenses of the Escrow Agent, and for extraordinary expenses,
incurred in performance of its duties hereunder. Each of (i) Parent and (ii)
the Escrow Fund shall be liable for one-half (1/2) of such amounts; and Parent
may, and shall if requested by Escrow Agent, make all such payments in full and
shall be entitled to reimbursement from the Escrow Fund of one-half of all such
fees and expenses, to the extent the Escrow Fund's share is paid by Parent.
Notwithstanding the foregoing, the Escrow Fund's obligations hereunder shall be
subordinate to claims of the Indemnitees for amounts payable out of the Escrow
Fund pursuant hereto, and therefore shall be paid out only at the time of the
Subsequent Release (or the resolution of any Claims not yet resolved at the time
of the Subsequent Release and subject to payment pursuant to the terms hereof).
15.2 Other Fees. Except as may otherwise be provided herein, all expenses
(including attorneys' fees) incurred by any Shareholder in connection with this
Escrow Agreement shall be borne by such Shareholder.
15.3 Reimbursement of Certain Costs. Upon a notice in writing delivered to
the Escrow Agent by Parent in respect of Section 6.1 or Section 7.3, the Escrow
Agent shall transfer, deliver and assign to Parent, in reimbursement of fees and
expenses pursuant to the last sentence of Section 6.1 or the second sentence of
Section 7.3, cash held in the Escrow which has a value equal to the amount to be
reimbursed.
<PAGE>
SECTION 16. Duties of the Escrow Agent; Limitation of Escrow Agent's
Liability.
16.1 Duties. The sole duty of the Escrow Agent, other than as herein
specified, shall be to receive and hold the cash and Escrow Shares, subject to
disbursement in accordance with this Escrow Agreement, and the Escrow Agent
shall be under no duty to determine whether Parent or the Shareholder
Representative is complying with the requirements of this Escrow Agreement or
any other agreement. The Escrow Agent shall not be liable for losses due to
acts of God, war, loss of electrical power or the failure of communication
devices.
16.2 Limitation of Liability. The Escrow Agent shall incur no liability
with respect to any action taken or suffered by it in reliance upon any notice,
direction, instruction, consent, statement or other documents believed by it to
be genuine and duly authorized, nor for other action or inaction except its own
willful misconduct or negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Escrow Agreement. In all questions arising
under this Escrow Agreement, the Escrow Agent may rely on the advice of counsel,
and for anything done, omitted or suffered in good faith by the Escrow Agent
based on such advice the Escrow Agent shall not be liable to anyone. The Escrow
Agent shall not be required to take any action hereunder involving any expense
unless the payment of such expense is made or provided for in a manner
reasonably satisfactory to it.
16.3 Indemnity. Parent and the Escrow Fund, jointly and severally, shall
indemnify the Escrow Agent for, and hold it harmless against, any loss,
liability or expense incurred without negligence or willful misconduct on the
part of Escrow Agent, arising out of or in connection with its carrying out of
its duties hereunder. As among themselves, each of Parent and the Escrow Fund
shall be liable for one-half (1/2) of such amounts and Parent shall be entitled
to elect reimbursement from the Escrow Fund of all or part of the Escrow Fund's
share of any such loss, liability or expense, if any of such share (and all
amounts properly reimbursable hereunder as indemnification payments) is paid by
Parent. Notwithstanding the foregoing, the Escrow Fund's obligations hereunder
shall be subordinate to claims of the Indemnitees for amounts payable out of the
Escrow Fund pursuant hereto, and therefore shall be paid out only at the time of
the Subsequent Release (or the resolution of any Claims not yet resolved at the
time of the Subsequent Release and subject to payment pursuant to the terms
hereof).
SECTION 17. General.
17.1 Other Agreements. Nothing in this Escrow Agreement is intended to
limit any of Parent's or the Shareholders' rights under the Merger Agreement (or
any agreement entered into in connection with the transactions contemplated by
the Merger Agreement), except as expressly provided herein.
17.2 Governing Law. This Escrow Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the conflict of laws provisions thereunder.
17.3 Assignment; Binding Upon Successors and Assigns. None of the parties
hereto nor any beneficiary hereto may assign any of his, her or its rights or
obligations hereunder without the prior written consent of the Parent. This
Escrow Agreement will be binding upon
<PAGE>
and inure to the benefit of the parties hereto, the Shareholders and their
respective successors and permitted assigns.
17.4 Severability. If any provision of this Escrow Agreement, or the
application thereof, is for any reason and to any extent invalid or
unenforceable, the remainder of this Escrow Agreement and application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Escrow Agreement with a
valid and enforceable provision that will achieve, to the greatest extent
possible, the economic, business and other purposes of the void or unenforceable
provision.
17.5 Counterparts. This Escrow Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same instrument. This Escrow Agreement will become
binding when one or more counterparts hereof, individually or taken together,
bear the signatures of all the parties reflected hereon as signatories.
17.6 Amendment and Waivers. Any term or provision of this Escrow Agreement
may be amended, and the observance of any term of this Escrow Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby;
provided that this Escrow Agreement may be amended on behalf of all of the
Shareholders by either (i) the Shareholder Representative or (ii) a majority in
interest (determined based on the relative amounts of the Merger Consideration
received) of the Shareholders. Except as set forth in the previous sentence,
notwithstanding any rights that may be created in any third party under the
terms of this Escrow Agreement, no such amendment or waiver will require the
consent of such third party to be effective. The waiver by a party of any
breach hereof or default in the performance hereof will not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
17.7 Notices. All notices and other communications pursuant to this Escrow
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
<PAGE>
If to Parent to: Vertel Corporation
21300 Victory Blvd, Ste. 1200
Woodland Hills, CA 91367-2525
Attention: Gordon Almquist
Telephone: (818) 227-5751
Fax: (818) 598-0104
With a copy to: Mitchell Silberberg & Knupp LLP
Trident Center
11377 West Olympic Blvd.
Los Angeles, CA 90064-1683
Attention: David Katz, Esq.
Telephone: (310) 312-3267
Fax: (310) 312-3798
If to the Andrew Chedrich
Shareholder
Representative:
Telephone:
Fax:
If to Escrow
Agent to: BD Escrow
190 North Canon Drive, Ste. 400
Beverly Hills, CA 90210
Attn: Billie Davis, President
Telephone: (310) 273-9980
Fax: (310) 273-7665
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of a telecopy, when the party receiving such copy shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally-recognized overnight courier, on the business day following dispatch,
and (d) in the case of mailing, on the third business day following such
mailing.
17.8 Construction of Agreement. This Escrow Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
will not be construed for or against either party. A reference to a Section or
an attachment will mean a Section in, or attachment to, this Escrow Agreement
unless otherwise explicitly set forth. The titles and headings herein are for
reference purposes only and will not in any manner limit the construction of
this Escrow Agreement, which will be considered as a whole.
<PAGE>
17.9 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Escrow Agreement.
17.10 Entire Agreement.This Escrow Agreement and the Merger Agreement and
the attachments hereto and thereto constitute the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof and
supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto. The express terms hereof control and supersede any
course of performance or usage of the trade inconsistent with any of the terms
hereof.
17.11 Resignation or Replacement of Escrow Agent. Parent may substitute a
successor Escrow Agent which shall be a bank with assets at least as great as
the initial Escrow Agent or else shall be an institution approved by the
Shareholder Representative, such approval not to be unreasonably withheld, for
the Escrow Agent upon thirty (30) days advance written notice to the Shareholder
Representative and the Escrow Agent. Escrow Agent may resign upon thirty (30)
days advance written notice to Parent and the Shareholder Representative.
Within such thirty (30) day period, Parent shall appoint a successor Escrow
Agent in accordance with this Section 8.11. If Parent has not appointed a
successor Escrow Agent within such period, the Escrow Agent may petition any
court of competent jurisdiction to name a successor escrow agent.
<PAGE>
In Witness Whereof, the parties have executed this Escrow Agreement as
of ___________, 1999.
Vertel Corporation
a California corporation
By:___________________________________
Its:__________________________________
Andrew Chedrich
By:___________________________________
Print Name:___________________________
BD Escrow
By:___________________________________
Print Name____________________________
<PAGE>
Amendment No. 1
to
Agreement and Plan of Merger and Reorganization
This Amendment No. 1 ("Amendment No. 1") to that certain Agreement and Plan
of Merger and Reorganization ("Agreement") dated February 23, 1999, by and among
Vertel Corporation, a California corporation ("Parent"), Expersoft Acquisition
Corp., a California corporation and a wholly-owned subsidiary of Parent ("Merger
Sub"), and Expersoft Corporation, a California corporation (the "Company"), is
entered into as of this March 12, 1999.
RECITAL
A. The parties desire to amend and supplement certain terms of the
Agreement in this Amendment No. 1.
AGREEMENT
The parties to this Amendment No. 1 hereby amend and supplement the
Agreement as follows. All capitalized terms used herein that are not otherwise
defined herein shall have the meaning ascribed to them in the Agreement.
Exhibit D shall be amended as follows.
Exhibit D shall be deleted.
Section 1.11 shall be amended as follows:
"1.11 Intentionally omitted."
Section 2.3 shall be amended as follows:
"2.3 Financial Statements. Exhibit 2.3(a) to this Agreement sets forth
consolidated balance sheets of the Company as of September 30, 1996, and the
related consolidated statements of income and retained earnings for the three
years ending on that date, audited by the Company's independent public
accountants, whose opinions with respect to those financial statements appear in
Exhibit 2.3(a). Exhibit 2.3(b) to this Agreement sets forth unaudited
consolidated balance sheets of the Company as for the years ended September 30,
1997, September 30, 1998 and for the period ended February 28, 1999, and
together with related unaudited consolidated statements of income and retained
earnings for the quarter ended December 31, 1998 certified by an officer of the
Company as accurately reflecting the financial condition of the Company for
those periods and accurately reflecting all information normally reported to the
Company's independent public
<PAGE>
accountants for the preparation of the Company's "financial statements." The
financial statements in Exhibits 2.3(a) and 2.3(b) are referred to hereafter as
the Financial Statements. The Financial Statements have been prepared in
accordance with generally accepted accounting principles, except as may be
indicated in the notes to such financial statements (except that the unaudited
financial statements referred to in this Section 2.3 do not contain footnotes
and are subject to normal and recurring year end audit adjustments, which will
not, individually or in the aggregate, be material in magnitude) consistently
followed by the Company throughout the periods indicated, and fairly present the
financial position of the Company on the respective dates of the balance sheets
included in the financial statements, and the results of its operations for the
respective periods indicated."
Section 6.14 shall be amended as follows:
"6.14 Intentionally omitted."
Section 6.15 shall be amended as follows:
"6.15 Intentionally omitted."
Section 6.16 shall be amended as follows:
"6.16 Intentionally omitted."
The parties hereto have caused this Agreement to be executed and delivered
as of March 12, 1999.
All other terms and conditions of the Agreement not expressly amended
herein shall remain in full force and effect without any change.
[Remainder of page intentionally left blank. Signature page attached]
<PAGE>
The parties hereto have caused this Agreement to be executed and delivered as of
March 12, 1999.
Vertel Corporation
a California corporation
By:_____________________________________
Its: ___________________________________
Expersoft Acquisition Corp.,
a California corporation
By:_____________________________________
Its: ___________________________________
Expersoft Corporation
a California corporation
By:_____________________________________
Its:____________________________________
<PAGE>
EXHIBIT 10.59
VERTEL CORPORATION
STOCK REPURCHASE AGREEMENT
This Stock Repurchase Agreement (the "Agreement"), dated November 27, 1998,
is by and between Vertel Corporation, a California corporation (the "Company")
and M.Y. Stephan (the "Seller").
RECITALS
--------
WHEREAS, the Seller previously purchased from the Company an aggregate of
1,025,000 shares of its Common Stock (the "Shares") pursuant to certain Exercise
Notice and Stock Purchase Agreements (the "Agreements"). The purchase price for
the Shares was paid by the Seller with promissory notes, dated January 30, 1996
and March 18, 1996, in the aggregate amount of $2,069,625 (such notes or any
notes subsequently provided in lieu of such notes, the "Promissory Notes"). It
was anticipated at the time of such option exercises that it was appropriate and
necessary for the Seller to exercise his stock options so that he would be
eligible to receive a distribution of shares of what then constituted one of the
Company's subsidiaries (formerly named "Vertel Corporation" and currently named
"Vertel I") in connection with the Company's plans at that time for liquidity of
such subsidiary. While the distribution of shares of such subsidiary to the
Company's shareholders did not occur and instead the Company spun off its former
subsidiary Sonoma Systems, the Seller may claim to have relied detrimentally
with respect to the Company's plans concerning the proposed distribution. The
Company and the Seller desire to enter into this Agreement to provide for the
purchase by the Company of all of the Shares (the "Repurchased Shares") with
payment in full to be evidenced by cancellation of the Promissory Notes, to
avoid any dispute concerning the foregoing matters and to reach an amicable
resolution of the same.
NOW THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. Repurchase of Stock. The Seller hereby agrees to sell to the Company
-------------------
and the Company agrees to purchase from the Seller the Repurchased Shares. On
the Effective Date of this Agreement, the Company will cancel the Promissory
Notes and deliver them to the Seller against delivery to the Company by the
Seller of the stock certificate(s) representing the Repurchased Shares and an
executed Assignment Separate from Certificate in the form attached hereto as
Exhibit A, assigning the Repurchased Shares to the Company. As of the Effective
- ---------
Date, the Company shall be entitled to take all steps necessary to transfer the
Repurchased Shares to the Company, including without limitation cancellation of
the certificates representing the Repurchased Shares.
2. Representations by Seller. The Seller represents and warrants to the
-------------------------
Company that Seller has the absolute and unrestricted right, power and authority
to sell, transfer and assign the Repurchased Shares to the Company pursuant to
this Agreement, free and clear of any liens, claims, pledges or other
encumbrances. No consent, approval or authorization of or notice to any third
party is necessary in connection with the sale, purchase or delivery of the
Repurchased Shares.
<PAGE>
3. Release of Claims by Seller. In consideration for the repurchase of
---------------------------
the Shares under this Agreement, the Seller agrees to the following:
(a) General Release. The Seller, on behalf of himself and his past
---------------
and present heirs, executors, beneficiaries and assigns, hereby releases and
forever discharges the Company and its past and present officers, directors,
shareholders, employees, affiliates, agents, attorneys, accountants, and their
respective successors and assigns, from any and all claims, demands,
obligations, losses, causes of action, costs, expenses, attorneys' fees and
liabilities of any nature whatsoever, whether based on contract, tort, statutory
or other legal or equitable theory of recovery, including claims based on
federal and state securities laws, whether known or unknown, which the Seller
has, had or claims to have against either the Company, its past or present
officers, directors, employees, shareholders, affiliates, agents, accountants,
attorneys, subsidiaries, and their respective successors and assigns relating to
the Shares, the Promissory Notes and the Agreements.
(b) Waiver of California Civil Code (S) 1542. This Agreement is
----------------------------------------
intended to cover all claims or possible claims described in Section 3(a),
whether the same are known, unknown or hereafter discovered or ascertained, and
the provisions of Section 1542 of the California Civil Code are hereby knowingly
and voluntarily expressly waived. Said Section provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
The Seller expressly acknowledges that he has been advised of the contents and
effect of such section, and with such knowledge hereby expressly waives whatever
benefits he may have had pursuant to said section.
(c) Agreement Not an Admission of Liability. The parties hereto agree
---------------------------------------
and acknowledge that this Agreement is a compromise settlement and that the
release and covenants given in consideration of this Agreement shall not be
construed to be an admission of liability on the part of Seller or the Company
with respect to the matters set forth above.
4. Miscellaneous.
-------------
(a) This Agreement may be amended only by written agreement between
the Company and the Seller.
(b) This Agreement shall be governed by and construed under the laws
of the State of California.
(c) This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter herein and supersedes all prior
discussions between them. Except to the extent modified by this Agreement, the
terms of the Executive Separation
-2-
<PAGE>
Agreement entered into in January 1998 by the Company and the Seller remains in
full force and effect.
(d) This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their successors and assigns.
(e) This Agreement may be executed in counterparts, each of which
shall be deemed an original.
(f) Both parties agree to execute any additional documents necessary
to carry out the purposes of this Agreement.
(g) The parties agree that the Effective Date of this Agreement shall
be the date first set forth above, provided that as a condition to such
effectiveness each of the items specified for delivery in Section 1 shall have
been so delivered.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first set forth above.
VERTEL CORPORATION
By:______________________________ ____________________________
Bruce Brown, President and CEO M.Y. Stephan
-4-
<PAGE>
EXHIBIT A
---------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto Vertel Corporation 1,025,000 shares of the Common Stock of Vertel
Corporation standing in his name on the books of such corporation, represented
by Certificate(s) No. _____________ herewith, and does hereby irrevocably
constitute and appoint ChaseMellon Shareholder Services, the Company's transfer
agent, to transfer such stock on the books of such corporation with full power
of substitution in the premises.
Dated: November 27, 1998
_________________________________
M.Y. Stephan
This Assignment Separate from Certificate was executed in conjunction with
the terms of a Stock Repurchase Agreement by and between the above assignor and
Vertel Corporation dated November 27, 1998.
<PAGE>
EXHIBIT 10.60
VERTEL CORPORATION
STOCK REPURCHASE AGREEMENT
This Stock Repurchase Agreement (the "Agreement"), dated November 27, 1998,
is by and between Vertel Corporation, a California corporation (the "Company")
and Philip Mantle (the "Seller").
RECITALS
--------
WHEREAS, the Seller previously purchased from the Company an aggregate of
400,000 shares of its Common Stock (the "Shares") pursuant to certain Exercise
Notice and Stock Purchase Agreements (the "Agreements"). The purchase price for
the Shares was paid by the Seller with promissory notes, dated January 30, 1996
and March 18, 1996, in the aggregate amount of $1,040,000 (such notes or any
notes subsequently provided in lieu of such notes, the "Promissory Notes");
And, WHEREAS, subsequent to the issuance of such Shares and Promissory
Notes, the Seller sold a portion of the Shares totaling 70,000 shares and repaid
a portion of the Promissory Notes totaling $149,800;
And, WHEREAS, pursuant to the Executive Separation Agreement (the "ESA"),
dated January 1998, certain of the shares held by the Seller were canceled by
the Company totaling 78,125 Shares with a corresponding Promissory Note value of
$207,437.50,
And, WHEREAS, as of the date of this agreement and prior to its execution,
the Seller holds 251,875 Shares with corresponding Promissory Notes totaling
$682,762.50.
And, WHEREAS, it was anticipated at the time of such execution of Exercise
Notice and Stock Purchase Agreements that it was appropriate and necessary for
the Seller to exercise his stock options so that he would be eligible to receive
a distribution of shares of what then constituted one of the Company's
subsidiaries (formerly named "Vertel Corporation" and currently named "Vertel
I") in connection with the Company's plans at that time for liquidity of such
subsidiary. While the distribution of shares of such subsidiary to the
Company's shareholders did not occur and instead the Company spun off its former
subsidiary Sonoma Systems, the Seller may claim to have relied detrimentally
with respect to the Company's plans concerning the proposed distribution. The
Company and the Seller desire to enter into this Agreement to provide for the
purchase by the Company of all of the Shares (the "Repurchased Shares") with
payment in full to be evidenced by cancellation of the Promissory Notes, to
avoid any dispute concerning the foregoing matters and to reach an amicable
resolution of the same.
NOW THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. Repurchase of Stock. The Seller hereby agrees to sell to the Company
-------------------
and the Company agrees to purchase from the Seller the Repurchased Shares. On
the Effective Date of this Agreement, the Company will cancel the Promissory
Notes and deliver them to the Seller
<PAGE>
against delivery to the Company by the Seller of the stock certificate(s)
representing the Repurchased Shares and an executed Assignment Separate from
Certificate in the form attached hereto as Exhibit A, assigning the Repurchased
---------
Shares to the Company. As of the Effective Date, the Company shall be entitled
to take all steps necessary to transfer the Repurchased Shares to the Company,
including without limitation cancellation of the certificates representing the
Repurchased Shares.
2. Representations by Seller. The Seller represents and warrants to the
-------------------------
Company that Seller has the absolute and unrestricted right, power and authority
to sell, transfer and assign the Repurchased Shares to the Company pursuant to
this Agreement, free and clear of any liens, claims, pledges or other
encumbrances. No consent, approval or authorization of or notice to any third
party is necessary in connection with the sale, purchase or delivery of the
Repurchased Shares.
3. Release of Claims by Seller. In consideration for the repurchase of
---------------------------
the Shares under this Agreement, the Seller agrees to the following:
(a) General Release. The Seller, on behalf of himself and his past
---------------
and present heirs, executors, beneficiaries and assigns, hereby releases and
forever discharges the Company and its past and present officers, directors,
shareholders, employees, affiliates, agents, attorneys, accountants, and their
respective successors and assigns, from any and all claims, demands,
obligations, losses, causes of action, costs, expenses, attorneys' fees and
liabilities of any nature whatsoever, whether based on contract, tort, statutory
or other legal or equitable theory of recovery, including claims based on
federal and state securities laws, whether known or unknown, which the Seller
has, had or claims to have against either the Company, its past or present
officers, directors, employees, shareholders, affiliates, agents, accountants,
attorneys, subsidiaries, and their respective successors and assigns relating to
the Shares, the Promissory Notes and the Agreements.
(b) Waiver of California Civil Code (S) 1542. This Agreement is
----------------------------------------
intended to cover all claims or possible claims described in Section 3(a),
whether the same are known, unknown or hereafter discovered or ascertained, and
the provisions of Section 1542 of the California Civil Code are hereby knowingly
and voluntarily expressly waived. Said Section provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
The Seller expressly acknowledges that he has been advised of the contents and
effect of such section, and with such knowledge hereby expressly waives whatever
benefits he may have had pursuant to said section.
(c) Agreement Not an Admission of Liability. The parties hereto agree
---------------------------------------
and acknowledge that this Agreement is a compromise settlement and that the
release and covenants
-2-
<PAGE>
given in consideration of this Agreement shall not be construed to be an
admission of liability on the part of Seller or the Company with respect to the
matters set forth above.
4. Miscellaneous.
-------------
(a) This Agreement may be amended only by written agreement between
the Company and the Seller.
(b) This Agreement shall be governed by and construed under the laws
of the State of California.
(c) This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter herein and supersedes all prior
discussions between them. Except to the extent modified by this Agreement, the
terms of the Executive Separation Agreement entered into in January 1998 by the
Company and the Seller remains in full force and effect.
(d) This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their successors and assigns.
(e) This Agreement may be executed in counterparts, each of which
shall be deemed an original.
(f) Both parties agree to execute any additional documents necessary
to carry out the purposes of this Agreement.
(g) The parties agree that the Effective Date of this Agreement shall
be the date first set forth above, provided that as a condition to such
effectiveness each of the items specified for delivery in Section 1 shall have
been so delivered.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first set forth above.
VERTEL CORPORATION
BY:
--------------------------------- ----------------------------------
Bruce Brown, President and CEO Philip Mantle
-4-
<PAGE>
EXHIBIT A
---------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto Vertel Corporation 251,875 shares of the Common Stock of Vertel Corporation
standing in his name on the books of such corporation, represented by
Certificates No. 3917 and 3268 herewith, and does hereby irrevocably constitute
and appoint ChaseMellon Shareholder Services, the Company's transfer agent, to
transfer such stock on the books of such corporation with full power of
substitution in the premises.
Dated: November 27, 1998
_________________________________
Philip Mantle
This Assignment Separate from Certificate was executed in conjunction with
the terms of a Stock Repurchase Agreement by and between the above assignor and
Vertel Corporation dated November 27, 1998.
-5-
<PAGE>
EXHIBIT 10.61
VERTEL CORPORATION
STOCK REPURCHASE AGREEMENT
This Stock Repurchase Agreement (the "Agreement"), dated November 27, 1998,
is by and between Vertel Corporation, a California corporation (the "Company")
and Steve Waszak (the "Seller").
RECITALS
--------
WHEREAS, the Seller previously purchased from the Company an aggregate of
203,750 shares of its Common Stock (the "Shares") pursuant to certain Exercise
Notice and Stock Purchase Agreements (the "Agreements"). The purchase price for
the Shares was paid by the Seller with promissory notes, dated January 30, 1996
and March 18, 1996, in the aggregate amount of $673,750 (such notes or any notes
subsequently provided in lieu of such notes, the "Promissory Notes"). It was
anticipated at the time of such option exercises that it was appropriate and
necessary for the Seller to exercise his stock options so that he would be
eligible to receive a distribution of shares of what then constituted one of the
Company's subsidiaries (formerly named "Vertel Corporation" and currently named
"Vertel I") in connection with the Company's plans at that time for liquidity of
such subsidiary. While the distribution of shares of such subsidiary to the
Company's shareholders did not occur and instead the Company spun off its former
subsidiary Sonoma Systems, the Seller may claim to have relied detrimentally
with respect to the Company's plans concerning the proposed distribution. The
Company and the Seller desire to enter into this Agreement to provide for the
purchase by the Company of all of the Shares (the "Repurchased Shares") with
payment in full to be evidenced by cancellation of the Promissory Notes, to
avoid any dispute concerning the foregoing matters and to reach an amicable
resolution of the same.
NOW THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. Repurchase of Stock. The Seller hereby agrees to sell to the Company
-------------------
and the Company agrees to purchase from the Seller the Repurchased Shares. On
the Effective Date of this Agreement, the Company will cancel the Promissory
Notes and deliver them to the Seller against delivery to the Company by the
Seller of the stock certificate(s) representing the Repurchased Shares and an
executed Assignment Separate from Certificate in the form attached hereto as
Exhibit A, assigning the Repurchased Shares to the Company. As of the Effective
- ---------
Date, the Company shall be entitled to take all steps necessary to transfer the
Repurchased Shares to the Company, including without limitation cancellation of
the certificates representing the Repurchased Shares.
2. Representations by Seller. The Seller represents and warrants to the
-------------------------
Company that Seller has the absolute and unrestricted right, power and authority
to sell, transfer and assign the Repurchased Shares to the Company pursuant to
this Agreement, free and clear of any liens, claims, pledges or other
encumbrances. No consent, approval or authorization of or notice to any third
party is necessary in connection with the sale, purchase or delivery of the
Repurchased Shares.
<PAGE>
3. Release of Claims by Seller. In consideration for the repurchase of
---------------------------
the Shares under this Agreement, the Seller agrees to the following:
(a) General Release. The Seller, on behalf of himself and his past
---------------
and present heirs, executors, beneficiaries and assigns, hereby releases and
forever discharges the Company and its past and present officers, directors,
shareholders, employees, affiliates, agents, attorneys, accountants, and their
respective successors and assigns, from any and all claims, demands,
obligations, losses, causes of action, costs, expenses, attorneys' fees and
liabilities of any nature whatsoever, whether based on contract, tort, statutory
or other legal or equitable theory of recovery, including claims based on
federal and state securities laws, whether known or unknown, which the Seller
has, had or claims to have against either the Company, its past or present
officers, directors, employees, shareholders, affiliates, agents, accountants,
attorneys, subsidiaries, and their respective successors and assigns relating to
the Shares, the Promissory Notes and the Agreements.
(b) Waiver of California Civil Code (S) 1542. This Agreement is
----------------------------------------
intended to cover all claims or possible claims described in Section 3(a),
whether the same are known, unknown or hereafter discovered or ascertained, and
the provisions of Section 1542 of the California Civil Code are hereby knowingly
and voluntarily expressly waived. Said Section provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
The Seller expressly acknowledges that he has been advised of the contents and
effect of such section, and with such knowledge hereby expressly waives whatever
benefits he may have had pursuant to said section.
(c) Agreement Not an Admission of Liability. The parties hereto agree
---------------------------------------
and acknowledge that this Agreement is a compromise settlement and that the
release and covenants given in consideration of this Agreement shall not be
construed to be an admission of liability on the part of Seller or the Company
with respect to the matters set forth above.
4. Miscellaneous.
-------------
(a) This Agreement may be amended only by written agreement between
the Company and the Seller.
(b) This Agreement shall be governed by and construed under the laws
of the State of California.
(c) This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter herein and supersedes all prior
discussions between them. Except to the extent modified by this Agreement, the
terms of the Executive Separation
-2-
<PAGE>
Agreement entered into in January 1998 by the Company and the Seller remains in
full force and effect.
(d) This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their successors and assigns.
(e) This Agreement may be executed in counterparts, each of which
shall be deemed an original.
(f) Both parties agree to execute any additional documents necessary
to carry out the purposes of this Agreement.
(g) The parties agree that the Effective Date of this Agreement shall
be the date first set forth above, provided that as a condition to such
effectiveness each of the items specified for delivery in Section 1 shall have
been so delivered.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first set forth above.
VERTEL CORPORATION
By:____________________________________ ____________________________________
Bruce Brown, President and CEO Steve Waszak
-4-
<PAGE>
EXHIBIT A
---------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto Vertel Corporation 203,750 shares of the Common Stock of Vertel Corporation
standing in his name on the books of such corporation, represented by
Certificate(s) No. _____________ herewith, and does hereby irrevocably
constitute and appoint ChaseMellon Shareholder Services, the Company's transfer
agent, to transfer such stock on the books of such corporation with full power
of substitution in the premises.
Dated: November 27, 1998
_________________________________
Steve Waszak
This Assignment Separate from Certificate was executed in conjunction with
the terms of a Stock Repurchase Agreement by and between the above assignor and
Vertel Corporation dated November 27, 1998.
<PAGE>
EXHIBIT 10.62
VERTEL CORPORATION
CONSULTING AGREEMENT
--------------------
This Consulting Agreement ("Agreement") is made and entered into as of the 5th
day of January, 1999 by and between Vertel Corporation and its successors (the
"Company"), and M. Y. Stephan ("Consultant"). The Company desires to retain
Consultant as an independent contractor to perform consulting services for the
Company and Consultant is willing to perform such services, on terms set forth
more fully below. In consideration of the mutual promises contained herein, the
parties agree as follows:
1. SERVICES AND COMPENSATION
-------------------------
(a) Consultant agrees to be retained by the Company for consultation
services related to business strategy, market development and other areas of
knowledge and experience consistent with Consultant's prior work with the
Company (the "Services"). Consultant agrees to make himself reasonably
available to provide the Services as requested by the Company during the term of
this Agreement.
(b) The Company agrees that Consultant shall be compensated for such
services through the grant and continued exercisability of a fully vested
nonstatutory stock option to purchase 256,250 shares of the Company's Common
Stock (the "Option"). The terms and conditions of the Option are set forth in
the Nonstatutory Stock Option Agreement attached hereto as Exhibit A.
---------
2. CONFIDENTIALITY
---------------
(a) "Confidential Information" means any Company proprietary
information, technical data, trade secrets or know-how, including, but not
limited to research, product plans, products, services, customers, customer
lists, markets, software, developments, inventions, processes, formulas,
technology, designs, drawings, configuration information, marketing finances or
other business information disclosed by the Company either directly or
indirectly in writing, orally or by drawings or inspection of parts or
equipment.
(b) Consultant will not, during or subsequent to the termination of
this Agreement, use the Company's Confidential Information for any purpose
whatsoever other than the performance of the Services on behalf of the Company
or disclose the Company's Confidential Information to any third party, and it is
understood that said Confidential Information shall remain the sole property of
the Company. Consultant further agrees to take all reasonable precautions to
prevent any unauthorized disclosure of such Confidential Information including,
but not limited to, having each employee and/or subcontractor of Consultant, if
any, with access to any Confidential Information, execute a nondisclosure
agreement containing provisions in the Company's favor substantially similar to
Sections 2, 3 and 5 of this Agreement. Confidential Information does not
include information which (i) is known to Consultant at the time of disclosure
to Consultant by the Company as evidenced by written records of Consultant, (ii)
has become publicly known and made generally available through no wrongful act
of Consultant, or
<PAGE>
(iii) has been rightfully received by Consultant from a third party who is
authorized to make such disclosure. Without the Company's prior written
approval, Consultant will not directly or indirectly disclose to anyone the
existence of the Agreement or the fact that Consultant has this arrangement with
the Company which is described in this Agreement.
(c) Consultant agrees that Consultant will not, during the term of
this Agreement, improperly use or disclose any proprietary information or trade
secrets of any former or current employer or other person or entity with which
Consultant has an agreement or duty to keep in confidence information acquired
by Consultant in confidence, if any, and that Consultant will not bring onto the
premises of the Company any unpublished documents or proprietary information
belonging to such employer, person or entity unless previously consented to in
writing by such employer, person or entity. Consultant will indemnify the
Company and hold it harmless from and against all claims, liabilities, damages
and expenses, including reasonable attorneys fees and costs of suit, arising out
of or in connection with any violation or claimed violation of a third party's
rights resulting in whole or in part from the Company's use of the work product
of Consultant under this Agreement.
(d) Consultant recognizes that the Company has received and in the
future will receive from third parties their confidential or proprietary
information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Consultant agrees that Consultant owes the Company and such third
parties, during the term of this Agreement and thereafter, a duty to hold all
such confidential or proprietary information in the strictest confidence and not
to disclose it to any person, firm or corporation or to use it except as
necessary in carrying out the Services for the Company consistent with the
Company's agreement with such third party.
(e) During the course of Consultant's services hereunder, the Company
will use reasonable efforts to minimize Consultant's exposure to sensitive
information that would cause Consultant to be restricted in his ability to trade
the Company's securities.
(f) Upon the termination of this Agreement, or upon Company's earlier
request, Consultant will deliver to the Company all of the Company's property or
Confidential Information in tangible form that Consultant may have in
Consultant's possession or control.
3. OWNERSHIP
---------
(a) Consultant agrees that all copyrightable material, notes, records,
drawings, designs, inventions, improvements, developments, discoveries and trade
secrets (collectively, "Inventions") conceived, made or discovered by
Consultant, solely or in collaboration with others, during the period of this
Agreement which relate in any manner to the business of the Company that
Consultant may be directed to undertake, investigate or experiment with, or
which Consultant may become associated with in work, investigation or
experimentation in the line of business of Company in performing the Services
hereunder, are the sole property of the Company. In addition, any Inventions
which constitute copyrightable subject matter shall be considered "work made for
hire" as that term is defined in the United States Copyright Act. Consultant
further agrees to assign (or cause to be assigned) and does hereby assign to the
Company all rights, title
<PAGE>
and interest in all such Inventions and any copyrights, patents, mask work
rights or other intellectual property rights relating thereto.
(b) Consultant agrees to assist Company, or its designee, at the
Company's expense, in every proper way to secure the Company's rights in the
Inventions and any copyrights, patents, mask work rights or other intellectual
property rights relating thereto in any and all countries, including the
disclosure to the Company of all pertinent information and data with respect
thereto, promptly after the development of such Inventions and the execution of
all applications, specifications, oaths, assignments and all other instruments
which the Company shall deem necessary in order for the Company to apply for and
obtain such rights and in order for Consultant to assign and convey to the
Company, its successors, assigns and nominees the sole and exclusive rights,
title and interest in and to such Inventions, and any copyrights, patents, mask
work rights or other intellectual property rights relating thereto. Consultant
further agrees that Consultant's obligation to execute or cause to be executed,
when it is in Consultant's power to do so, any such instrument shall continue
after the termination of this Agreement.
(c) Consultant agrees that if in the course of performing the
Services, Consultant incorporates into any Invention developed hereunder any
invention, improvement, development concept, discovery or other proprietary
information, the Company is hereby granted and shall have a nonexclusive,
royalty-free, perpetual, irrevocable, worldwide license to make, have made,
modify, use and sell such item as part of or in connection with such Invention.
(d) Consultant agrees that if the Company is unable because of
Consultant's unavailability, dissolution, mental or physical incapacity, or for
any other reason, to secure Consultant's signature to apply for or to pursue any
application for any United States or foreign patents or mask work or copyright
registrations covering the Inventions assigned to the Company above, then
Consultant hereby irrevocably designates and appoints the Company and its duly
authorized officers and agents as Consultant's agent and attorneys in fact, to
act for and in Consultant's behalf and stead to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of patents, copyright and mask work registration
thereon or the securing or confirming of Company's fights hereunder with the
same legal force and effect as if executed by Consultant.
4. REPORTS
-------
Consultant agrees that he will from time to time during the term of
this Agreement or any extension thereof keep the Company advised as to
Consultant's progress in performing the Services, as set forth in Section 1, and
that Consultant will, as requested by the Company, prepare written reports with
respect thereto. It is understood that the time required in the preparation of
such written reports shall be considered time devoted to the performance of
Consultant's Services.
5. CONFLICTING OBLIGATIONS.
------------------------
Consultant certifies that Consultant has no outstanding agreement or
obligation that is conflict with any of the provisions of this Agreement, or
that would preclude Consultant
<PAGE>
from complying with the provisions hereof, and further certifies that Consultant
will not enter into any such conflicting agreement during the term of this
Agreement.
6. TERM
----
This Agreement will commence on the date first written above and will
continue until December 31, 2001. This Agreement may be terminated earlier by
the Company only in the event that Consultant breaches the terms of this
Agreement, the terms of the Executive Separation Agreement entered into by and
between the Company and Consultant in January 1998 or the terms of the Stock
Repurchase Agreement entered into by and between the Company and Consultant
dated November 27, 1998.
7. ASSIGNMENT
----------
Neither this Agreement nor any right hereunder or interest herein may
be assigned or transferred by Consultant without the express written consent of
the Company.
8. INDEPENDENT CONTRACTOR
----------------------
Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of the Company, but
Consultant shall perform the Services hereunder as an independent contractor.
Consultant agrees to furnish (or reimburse the Company for) all tools and
materials necessary to accomplish this contract, and shall incur all expenses
associated with performance, excluding travel expenses (if any), which if
approved in advance by the Company will be reimbursed by the Company.
Consultant acknowledges the obligation to pay all self-employment and other
taxes thereon. Consultant further agrees to indemnify the Company and hold it
harmless to the extent of any obligation imposed on Company (i) to pay any
withholding taxes or similar items or (ii) resulting from Consultant's being
determined not to be an independent contractor.
9. ARBITRATION AND EQUITABLE RELIEF
--------------------------------
(a) Except as provided in Section 9(b) below, the Company and
Consultant agree that any dispute or controversy arising out of or relating to
any interpretation, construction, performance or breach of this Agreement, shall
be settled by arbitration to be held in Los Angeles County, California, in
accordance with the rules then in effect of the American Arbitration
Association. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court of competent jurisdiction. The Company and
Consultant shall each pay one-half of the costs and expenses of such
arbitration, and each shall separately pay its respective counsel fees and
expenses.
(b) Consultant agrees that it would be impossible or inadequate to
measure and calculate the Company's damages from any breach of the covenants set
forth in Section 2 or 3 herein. Accordingly, Consultant agrees that if
Consultant breaches Section 2 or 3, the Company will have available, in addition
to any other right or remedy available, the right to obtain from any court of
competent jurisdiction an injunction restraining such breach or threatened
breach and specific performance of any such provision. Consultant further
agrees that no bond or other
<PAGE>
security shall be required in obtaining such equitable relief and Consultant
hereby consents to the issuance of such injunction and to the ordering of such
specific performance.
10. GOVERNING LAW
-------------
This Agreement shall be governed by the laws of the State of
California.
11. ENTIRE AGREEMENT
----------------
This Agreement, and the exhibit attached hereto, is the entire
agreement of the parties and supersedes any prior consulting agreements between
them.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CONSULTANT
--------------------------------------
By: M. Y. Stephan
Address: Street address
City, State, Zip Code
VERTEL CORPORATION
--------------------------------------
By: Bruce Brown, President and CEO
Address: 21300 Victory Blvd.
Suite 1200
Woodland Hills, CA 91367
<PAGE>
EXHIBIT 10.63
VERTEL CORPORATION
NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
M.Y. Stephan
Street address
City, State, Zip code
You have been granted an option to purchase Common Stock of Vertel
Corporation, (the "Company") as follows:
<TABLE>
<S> <C>
Board Approval Date: January 5, 1999
Date of Grant: January 5, 1999
Exercise Price Per Share: $1.50
Total Number of Shares Granted: 256,250
Total Price of Shares Granted: $384,375
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: December 31, 2001
Vesting Commencement Date: N/A
Vesting Schedule: Shares are fully vested
Termination Period: Option may be exercised for a period
of 30 days after termination of
consulting relationship between you
and the Company pursuant to the
Consulting Agreement dated January 5,
1999 ("the Consulting Agreement")
except as set out in Sections 7, 8 and
13 of the Stock Option Agreement (but
in no event later than the Expiration
Date).
</TABLE>
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree to the terms of the stock option grant.
OPTIONEE: VERTEL CORPORATION
____________________________ By:__________________________
M.Y. Stephan
Title: ______________________
-2-
<PAGE>
VERTEL CORPORATION
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. Vertel Corporation, a California corporation (the
---------------
"Company"), hereby grants to the Optionee named in the Notice of Stock Option
- --------
Grant attached to this Agreement ("Optionee"), an option (the "Option") to
-------- ------
purchase the total number of shares of Common Stock (the "Shares") set forth in
------
the Notice of Stock Option Grant, at the exercise price per share set forth in
the Notice of Stock Option Grant (the "Exercise Price").
--------------
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant, subject to the following:
(a) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of consulting relationship, the exercisability of the Option is
governed by Sections 6, 7 and 8 below, subject to the limitations contained in
paragraph (iii) below.
(iii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Stock Option
Grant.
(b) Method of Exercise.
------------------
(i) This Option shall be exercisable by delivering to the Company
a written notice of exercise (in the form attached as Exhibit A) which shall
---------
state the election to exercise the Option, the number of Shares in respect of
which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such Shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the Exercise Price. This Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
(ii) As a condition to the exercise of this Option, Optionee agrees
to make adequate provision for federal, state or other tax withholding
obligations, if any, which arise upon the exercise of the Option or disposition
of Shares, whether by withholding, direct payment to the Company, or otherwise.
(iii) No Shares will be issued pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes the
Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
<PAGE>
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
--------------
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request. The Company will
undertake to register promptly the Shares issuable upon exercise of this option
under the Securities Act.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; or (d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the issuance of such Shares upon such exercise or the method of payment
of consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
------------
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
6. Termination of Relationship. In the event of termination of Optionee
---------------------------
as a consultant under the Consulting Agreement, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period set out in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant, the
Option shall terminate.
7. Disability of Optionee. Notwithstanding the provisions of Section 6
----------------------
above, in the event of termination of Optionee as a consultant as a result of
total and permanent disability (as defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended (the "Code"), until the date of expiration of
the term of this Option as set forth in Section 10 below, Optionee may exercise
the Option to the extent otherwise so entitled at the date of such termination.
To the extent that Optionee was not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time specified in this Agreement, the Option
shall terminate.
-2-
<PAGE>
8. Death of Optionee. In the event of the death of Optionee:
-----------------
(a) during the term of this Option and while a consultant of the
Company, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by 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 Optionee continued living and remained as a consultant three (3)
months after the date of death; or
(b) within thirty (30) days after the termination of Optionee as a
consultant, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by 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.
9. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
10. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the terms of this Option.
11. Tax Consequences. Optionee acknowledges that he has read the brief
----------------
summary set forth below of certain federal tax consequences of exercise of this
Option and disposition of the Shares under the law in effect as of the date of
grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND
THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS
OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of Nonstatutory Stock Option. Optionee will incur regular
-------------------------------------
federal income tax liability upon the exercise of the Option. Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Shares on
the date of exercise over the Exercise Price.
(b) Disposition of Shares. This Option is a Nonstatutory Stock Option
---------------------
and the then gain realized on the disposition of Shares will be treated as long-
term or short-term capital gain depending on whether or not the disposition
occurs more than one year after the exercise date.
12. Tax Withholding.
---------------
-3-
<PAGE>
(a) General. To the extent required by applicable law, transactions
-------
pursuant or related to the Option shall be subject to tax withholding by the
Company, and the Company may condition the delivery of any Shares under the
Option on satisfaction of applicable withholding tax obligations. The Company,
in its discretion and subject to such requirements as it may impose prior to the
occurrence of such withholding, may permit tax withholding obligations under the
Option to be satisfied by one or some combination of the following methods: (i)
by cash or check payment, (ii) out of Optionee's current compensation, (iii) if
permitted by the Company, in its discretion, by surrendering to the Company
Shares that (A) in the case of Shares previously acquired from the Company, have
been owned by Optionee for more than six months on the date of surrender, and
(B) have a Fair Market Value determined as of the applicable Tax Date (as
defined in Section 12 (c) below) on the date of surrender equal to the amount
required to be withheld, or (iv) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value determined as of the applicable Tax Date equal to the amount
required to be withheld.
(b) Stock Withholding to Satisfy Withholding Tax Obligations. In the
--------------------------------------------------------
event the Company allows Optionee to satisfy his tax withholding obligations as
provided in Section 12(a)(iii) or (iv) above, such satisfaction must comply with
the requirements of this Section (12)(b) and applicable law. All elections by
Optionee to have Shares withheld to satisfy tax withholding obligations shall be
made in writing in a form acceptable to the Company and shall be subject to the
following restrictions:
(i) the election must be made on or prior to the applicable Tax
Date (as defined in Section 12(c) below);
(ii) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(iii) all elections shall be subject to the consent or
disapproval of the Company.
In the event the election to have Shares withheld is made by Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, Optionee shall receive the full number of
Shares with respect to which the Option is exercised but Optionee shall be
unconditionally obligated to tender back to the Company the proper number of
Shares on the Tax Date.
(c) Definitions. For purposes of this Section 12, the Fair Market
-----------
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined under the Applicable Laws (the
"Tax Date").
--------
13. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
-4-
<PAGE>
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by the
Option, as well as the Exercise Price, 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,
recapitalization 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 the Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify Optionee at
least 10 days prior to such proposed action. To the extent it has not been
previously exercised, the Option will terminate immediately prior to the
consummation of such proposed action.
(c) Change in Control.
-----------------
(i) In the event of a Change in Control (as defined below) in
which the Company's outstanding options are being assumed or equivalent options
or rights substituted by a successor corporation to the Company (or a parent or
subsidiary of such successor corporation), the Option shall be assumed or an
equivalent option or right shall be substituted. In the event of a Change in
Control in which the successor corporation does not agree to assume the
Company's outstanding options (including the Option) or to substitute equivalent
options or rights, the Option will terminate upon the consummation of the
transaction.
(ii) Definitions.
-----------
(A) "Change of Control" means a sale of all or
-----------------
substantially all of the Company's assets, or a merger, consolidation or other
capital reorganization of the Company with or into another corporation; provided
however that a merger, consolidation or other capital reorganization in which
the holders of more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction shall not constitute a Change in
Control.
(B) An option (including the Option) shall be considered
"assumed," without limitation, if, at the time of issuance of the stock or other
-------
consideration upon such Change in Control, each holder of an option would be
entitled to receive upon exercise of the option the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
-5-
<PAGE>
transaction if the holder had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the option at such
time (after giving effect to any adjustments in the number of shares covered by
an option as provided for in this Section 14); provided however that if such
consideration received in the Change in Control was not solely common stock of
the successor corporation (or its parent), the Board may, with the consent of
the successor corporation, provide for the consideration to be received upon
exercise of an option to be solely common stock of the successor corporation (or
its parent) equal to the fair market value of the per share consideration
received by holders of Common Stock in the transaction.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Board may, in its discretion, appropriately
adjust the Exercise Price of the Option to reflect the effect of such
distribution.
14. Miscellaneous.
-------------
(a) This Agreement may be amended only by written agreement
between the Company and the Optionee.
(b) This Agreement shall be governed by and construed under the
laws of the State of California.
(c) This Agreement and the Consulting Agreement set forth the
entire agreement and understanding of the parties relating to the subject matter
herein and supersede all prior discussions between them.
(d) This Agreement shall be binding upon and inure to the benefit
of the parties hereto, their successors and assigns.
(e) This Agreement may be executed in counterparts, each of which
shall be deemed an original.
(f) Both parties agree to execute any additional documents
necessary to carry out the purposes of this Agreement.
15. Signature. This Stock Option Agreement shall be deemed executed
---------
by Company and Optionee upon execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.
[Remainder of page left intentionally blank]
-6-
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
To: Vertel Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase________shares of Vertel Corporation
Common Stock, under and pursuant to the Stock Option Agreement dated January 5,
1999, as follows:
Grant Number: ____________________________
Date of Purchase: ____________________________
Number of Shares: ____________________________
Purchase Price: ____________________________
Method of Payment
of Purchase Price: ____________________________
Social Security No.: _________________________________
The shares should be issued as follows:
Name: _________________________________________
Address: _________________________________________
_________________________________________
_________________________________________
Signed: _________________________________________
Date: _________________________________________
<PAGE>
EXHIBIT 10.64
VERTEL CORPORATION
CONSULTING AGREEMENT
--------------------
This Consulting Agreement ("Agreement") is made and entered into as of the 5th
day of January, 1999 by and between Vertel Corporation and its successors (the
"Company"), and Philip Mantle ("Consultant"). The Company desires to retain
Consultant as an independent contractor to perform consulting services for the
Company and Consultant is willing to perform such services, on terms set forth
more fully below. In consideration of the mutual promises contained herein, the
parties agree as follows:
1. SERVICES AND COMPENSATION
-------------------------
(a) Consultant agrees to be retained by the Company for consultation
services related to business strategy, market development and other areas of
knowledge and experience consistent with Consultant's prior work with the
Company (the "Services"). Consultant agrees to make himself reasonably
available to provide the Services as requested by the Company during the term of
this Agreement.
(b) The Company agrees that Consultant shall be compensated for such
services through the grant and continued exercisability of a fully vested
nonstatutory stock option to purchase 62,969 shares of the Company's Common
Stock (the "Option"). The terms and conditions of the Option are set forth in
the Nonstatutory Stock Option Agreement attached hereto as Exhibit A.
---------
2. CONFIDENTIALITY
---------------
(a) "Confidential Information" means any Company proprietary
information, technical data, trade secrets or know-how, including, but not
limited to research, product plans, products, services, customers, customer
lists, markets, software, developments, inventions, processes, formulas,
technology, designs, drawings, configuration information, marketing finances or
other business information disclosed by the Company either directly or
indirectly in writing, orally or by drawings or inspection of parts or
equipment.
(b) Consultant will not, during or subsequent to the termination of
this Agreement, use the Company's Confidential Information for any purpose
whatsoever other than the performance of the Services on behalf of the Company
or disclose the Company's Confidential Information to any third party, and it is
understood that said Confidential Information shall remain the sole property of
the Company. Consultant further agrees to take all reasonable precautions to
prevent any unauthorized disclosure of such Confidential Information including,
but not limited to, having each employee and/or subcontractor of Consultant, if
any, with access to any Confidential Information, execute a nondisclosure
agreement containing provisions in the Company's favor substantially similar to
Sections 2, 3 and 5 of this Agreement. Confidential Information does not
include information which (i) is known to Consultant at the time of disclosure
to Consultant by the Company as evidenced by written records of Consultant, (ii)
has become publicly known and made generally available through no wrongful act
of
<PAGE>
Consultant, or (iii) has been rightfully received by Consultant from a third
party who is authorized to make such disclosure. Without the Company's prior
written approval, Consultant will not directly or indirectly disclose to anyone
the existence of the Agreement or the fact that Consultant has this arrangement
with the Company which is described in this Agreement.
(c) Consultant agrees that Consultant will not, during the term of
this Agreement, improperly use or disclose any proprietary information or trade
secrets of any former or current employer or other person or entity with which
Consultant has an agreement or duty to keep in confidence information acquired
by Consultant in confidence, if any, and that Consultant will not bring onto the
premises of the Company any unpublished documents or proprietary information
belonging to such employer, person or entity unless previously consented to in
writing by such employer, person or entity. Consultant will indemnify the
Company and hold it harmless from and against all claims, liabilities, damages
and expenses, including reasonable attorneys fees and costs of suit, arising out
of or in connection with any violation or claimed violation of a third party's
rights resulting in whole or in part from the Company's use of the work product
of Consultant under this Agreement.
(d) Consultant recognizes that the Company has received and in the
future will receive from third parties their confidential or proprietary
information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Consultant agrees that Consultant owes the Company and such third
parties, during the term of this Agreement and thereafter, a duty to hold all
such confidential or proprietary information in the strictest confidence and not
to disclose it to any person, firm or corporation or to use it except as
necessary in carrying out the Services for the Company consistent with the
Company's agreement with such third party.
(e) During the course of Consultant's services hereunder, the Company
will use reasonable efforts to minimize Consultant's exposure to sensitive
information that would cause Consultant to be restricted in his ability to trade
the Company's securities.
(f) Upon the termination of this Agreement, or upon Company's earlier
request, Consultant will deliver to the Company all of the Company's property or
Confidential Information in tangible form that Consultant may have in
Consultant's possession or control.
3. OWNERSHIP
---------
(a) Consultant agrees that all copyrightable material, notes, records,
drawings, designs, inventions, improvements, developments, discoveries and trade
secrets (collectively, "Inventions") conceived, made or discovered by
Consultant, solely or in collaboration with others, during the period of this
Agreement which relate in any manner to the business of the Company that
Consultant may be directed to undertake, investigate or experiment with, or
which Consultant may become associated with in work, investigation or
experimentation in the line of business of Company in performing the Services
hereunder, are the sole property of the Company. In addition, any Inventions
which constitute copyrightable subject matter shall be considered "work made for
hire" as that term is defined in the United States Copyright Act. Consultant
further agrees to assign (or cause to be assigned) and does hereby assign to the
<PAGE>
Company all rights, title and interest in all such Inventions and any
copyrights, patents, mask work rights or other intellectual property rights
relating thereto.
(b) Consultant agrees to assist Company, or its designee, at the
Company's expense, in every proper way to secure the Company's rights in the
Inventions and any copyrights, patents, mask work rights or other intellectual
property rights relating thereto in any and all countries, including the
disclosure to the Company of all pertinent information and data with respect
thereto, promptly after the development of such Inventions and the execution of
all applications, specifications, oaths, assignments and all other instruments
which the Company shall deem necessary in order for the Company to apply for and
obtain such rights and in order for Consultant to assign and convey to the
Company, its successors, assigns and nominees the sole and exclusive rights,
title and interest in and to such Inventions, and any copyrights, patents, mask
work rights or other intellectual property rights relating thereto. Consultant
further agrees that Consultant's obligation to execute or cause to be executed,
when it is in Consultant's power to do so, any such instrument shall continue
after the termination of this Agreement.
(c) Consultant agrees that if in the course of performing the
Services, Consultant incorporates into any Invention developed hereunder any
invention, improvement, development concept, discovery or other proprietary
information, the Company is hereby granted and shall have a nonexclusive,
royalty-free, perpetual, irrevocable, worldwide license to make, have made,
modify, use and sell such item as part of or in connection with such Invention.
(d) Consultant agrees that if the Company is unable because of
Consultant's unavailability, dissolution, mental or physical incapacity, or for
any other reason, to secure Consultant's signature to apply for or to pursue any
application for any United States or foreign patents or mask work or copyright
registrations covering the Inventions assigned to the Company above, then
Consultant hereby irrevocably designates and appoints the Company and its duly
authorized officers and agents as Consultant's agent and attorneys in fact, to
act for and in Consultant's behalf and stead to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of patents, copyright and mask work registration
thereon or the securing or confirming of Company's fights hereunder with the
same legal force and effect as if executed by Consultant.
4. REPORTS
-------
Consultant agrees that he will from time to time during the term of
this Agreement or any extension thereof keep the Company advised as to
Consultant's progress in performing the Services, as set forth in Section 1, and
that Consultant will, as requested by the Company, prepare written reports with
respect thereto. It is understood that the time required in the preparation of
such written reports shall be considered time devoted to the performance of
Consultant's Services.
5. CONFLICTING OBLIGATIONS.
------------------------
Consultant certifies that Consultant has no outstanding agreement or
obligation that is conflict with any of the provisions of this Agreement, or
that would preclude Consultant
<PAGE>
from complying with the provisions hereof, and further certifies that Consultant
will not enter into any such conflicting agreement during the term of this
Agreement.
6. TERM
----
This Agreement will commence on the date first written above and will
continue until July 15, 2001. This Agreement may be terminated earlier by the
Company only in the event that Consultant breaches the terms of this Agreement,
the terms of the Executive Separation Agreement entered into by and between the
Company and Consultant in January 1998 or the terms of the Stock Repurchase
Agreement entered into by and between the Company and Consultant dated November
27, 1998.
7. ASSIGNMENT
----------
Neither this Agreement nor any right hereunder or interest herein may
be assigned or transferred by Consultant without the express written consent of
the Company.
8. INDEPENDENT CONTRACTOR
----------------------
Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of the Company, but
Consultant shall perform the Services hereunder as an independent contractor.
Consultant agrees to furnish (or reimburse the Company for) all tools and
materials necessary to accomplish this contract, and shall incur all expenses
associated with performance, excluding travel expenses (if any), which if
approved in advance by the Company will be reimbursed by the Company.
Consultant acknowledges the obligation to pay all self-employment and other
taxes thereon. Consultant further agrees to indemnify the Company and hold it
harmless to the extent of any obligation imposed on Company (i) to pay any
withholding taxes or similar items or (ii) resulting from Consultant's being
determined not to be an independent contractor.
9. ARBITRATION AND EQUITABLE RELIEF
--------------------------------
(a) Except as provided in Section 9(b) below, the Company and
Consultant agree that any dispute or controversy arising out of or relating to
any interpretation, construction, performance or breach of this Agreement, shall
be settled by arbitration to be held in Los Angeles County, California, in
accordance with the rules then in effect of the American Arbitration
Association. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court of competent jurisdiction. The Company and
Consultant shall each pay one-half of the costs and expenses of such
arbitration, and each shall separately pay its respective counsel fees and
expenses.
(b) Consultant agrees that it would be impossible or inadequate to
measure and calculate the Company's damages from any breach of the covenants set
forth in Section 2 or 3 herein. Accordingly, Consultant agrees that if
Consultant breaches Section 2 or 3, the Company will have available, in addition
to any other right or remedy available, the right to
<PAGE>
obtain from any court of competent jurisdiction an injunction restraining such
breach or threatened breach and specific performance of any such provision.
Consultant further agrees that no bond or other security shall be required in
obtaining such equitable relief and Consultant hereby consents to the issuance
of such injunction and to the ordering of such specific performance.
10. GOVERNING LAW
-------------
This Agreement shall be governed by the laws of the State of
California.
11. ENTIRE AGREEMENT
----------------
This Agreement, and the exhibit attached hereto, is the entire
agreement of the parties and supersedes any prior consulting agreements between
them.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CONSULTANT
-------------------------------------
By: Philip Mantle
Address:
Street name
City, Zipcode
Country
VERTEL CORPORATION
--------------------------------------
By: Bruce Brown, President and CEO
Address: 21300 Victory Blvd.
Suite 1200
Woodland Hills, CA 91367
<PAGE>
EXHIBIT 10.65
VERTEL CORPORATION
NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
Philip Mantle
Street address
City, Zip Code
Country
You have been granted an option to purchase Common Stock of Vertel
Corporation, (the "Company") as follows:
Board Approval Date: January 5, 1999
Date of Grant: January 5, 1999
Exercise Price Per Share: $1.50
Total Number of Shares Granted 62,969
Total Price of Shares Granted: $94,453.50
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: July 15, 2001
Vesting Commencement date: N/A
Vesting Schedule: Shares are fully vested
Termination Period: Option may be exercised for a period of 30
days after termination of consulting
relationship between you and the Company
pursuant to the Counseling Agreement dated
January 5, 1999 ("the Consulting
Agreement") except as set out in Sections
7, 8 and 13 of the Stock Option
Agreement (but in no event later than the
Expiration Date).
<PAGE>
By your signature and the signature of the Company's Representative below,
you and the Company agree to the terms of the stock option grant.
OPTIONEE: VERTEL CORPORATION
- ------------------------------ BY:
PHILIP MANTLE --------------------------------
TITLE: PRESIDENT & CEO
---------------------------
-2-
<PAGE>
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
--------------
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request. The Company will
undertake to register promptly the Shares issuable upon exercise of this option
under the Securities Act.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; or (d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the issuance of such Shares upon such exercise or the method of payment
of consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
------------
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
6. Termination of Relationship. In the event of termination of Optionee
---------------------------
as a consultant under the Consulting Agreement, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period set out in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant, the
Option shall terminate.
7. Disability of Optionee. Notwithstanding the provisions of Section 6
----------------------
above, in the event of termination of Optionee as a consultant as a result of
total and permanent disability (as defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended (the "Code"), until the date of expiration of
the term of this Option as set forth in Section 10 below, Optionee may exercise
the Option to the extent otherwise so entitled at the date of such termination.
To the extent that Optionee was not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time specified in this Agreement, the Option
shall terminate.
-3-
<PAGE>
8. Death of Optionee. In the event of the death of Optionee:
-----------------
(a) during the term of this Option and while a consultant of the
Company, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by 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 Optionee continued living and remained as a consultant three (3)
months after the date of death; or
(b) within thirty (30) days after the termination of Optionee as a
consultant, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by 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.
9. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
10. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the terms of this Option.
11. Tax Consequences. Optionee acknowledges that he has read the brief
----------------
summary set forth below of certain federal tax consequences of exercise of this
Option and disposition of the Shares under the law in effect as of the date of
grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND
THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS
OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of Nonstatutory Stock Option. Optionee will incur regular
-------------------------------------
federal income tax liability upon the exercise of the Option. Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Shares on
the date of exercise over the Exercise Price.
(b) Disposition of Shares. This Option is a Nonstatutory Stock Option
---------------------
and the then gain realized on the disposition of Shares will be treated as long-
term or short-term capital gain depending on whether or not the disposition
occurs more than one year after the exercise date.
12. Tax Withholding.
---------------
-4-
<PAGE>
(a) General. To the extent required by applicable law, transactions
-------
pursuant or related to the Option shall be subject to tax withholding by the
Company, and the Company may condition the delivery of any Shares under the
Option on satisfaction of applicable withholding tax obligations. The Company,
in its discretion and subject to such requirements as it may impose prior to the
occurrence of such withholding, may permit tax withholding obligations under the
Option to be satisfied by one or some combination of the following methods: (i)
by cash or check payment, (ii) out of Optionee's current compensation, (iii) if
permitted by the Company, in its discretion, by surrendering to the Company
Shares that (A) in the case of Shares previously acquired from the Company, have
been owned by Optionee for more than six months on the date of surrender, and
(B) have a Fair Market Value determined as of the applicable Tax Date (as
defined in Section 12 (c) below) on the date of surrender equal to the amount
required to be withheld, or (iv) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value determined as of the applicable Tax Date equal to the amount
required to be withheld.
(b) Stock Withholding to Satisfy Withholding Tax Obligations. In the
--------------------------------------------------------
event the Company allows Optionee to satisfy his tax withholding obligations as
provided in Section 12(a)(iii) or (iv) above, such satisfaction must comply with
the requirements of this Section (12)(b) and applicable law. All elections by
Optionee to have Shares withheld to satisfy tax withholding obligations shall be
made in writing in a form acceptable to the Company and shall be subject to the
following restrictions:
(i) the election must be made on or prior to the applicable Tax
Date (as defined in Section 12(c) below);
(ii) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(iii) all elections shall be subject to the consent or
disapproval of the Company.
In the event the election to have Shares withheld is made by Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, Optionee shall receive the full number of
Shares with respect to which the Option is exercised but Optionee shall be
unconditionally obligated to tender back to the Company the proper number of
Shares on the Tax Date.
(c) Definitions. For purposes of this Section 12, the Fair Market
-----------
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined under the Applicable Laws (the
"Tax Date").
--------
13. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
-5-
<PAGE>
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by the
Option, as well as the Exercise Price, 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,
recapitalization 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 the Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify Optionee at
least 10 days prior to such proposed action. To the extent it has not been
previously exercised, the Option will terminate immediately prior to the
consummation of such proposed action.
(c) Change in Control.
-----------------
(i) In the event of a Change in Control (as defined below) in
which the Company's outstanding options are being assumed or equivalent options
or rights substituted by a successor corporation to the Company (or a parent or
subsidiary of such successor corporation), the Option shall be assumed or an
equivalent option or right shall be substituted. In the event of a Change in
Control in which the successor corporation does not agree to assume the
Company's outstanding options (including the Option) or to substitute equivalent
options or rights, the Option will terminate upon the consummation of the
transaction.
(ii) Definitions.
-----------
(A) "Change of Control" means a sale of all or
-----------------
substantially all of the Company's assets, or a merger, consolidation or other
capital reorganization of the Company with or into another corporation; provided
however that a merger, consolidation or other capital reorganization in which
the holders of more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction shall not constitute a Change in
Control.
(B) An option (including the Option) shall be considered
"assumed," without limitation, if, at the time of issuance of the stock or other
-------
consideration upon such Change in Control, each holder of an option would be
entitled to receive upon exercise of the option the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
-6-
<PAGE>
transaction if the holder had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the option at such
time (after giving effect to any adjustments in the number of shares covered by
an option as provided for in this Section 14); provided however that if such
consideration received in the Change in Control was not solely common stock of
the successor corporation (or its parent), the Board may, with the consent of
the successor corporation, provide for the consideration to be received upon
exercise of an option to be solely common stock of the successor corporation (or
its parent) equal to the fair market value of the per share consideration
received by holders of Common Stock in the transaction.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Board may, in its discretion, appropriately
adjust the Exercise Price of the Option to reflect the effect of such
distribution.
14. Miscellaneous.
-------------
(a) This Agreement may be amended only by written agreement between
the Company and the Optionee.
(b) This Agreement shall be governed by and construed under the laws
of the State of California.
(c) This Agreement and the Consulting Agreement set forth the entire
agreement and understanding of the parties relating to the subject matter herein
and supersede all prior discussions between them.
(d) This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their successors and assigns.
(e) This Agreement may be executed in counterparts, each of which
shall be deemed an original.
(f) Both parties agree to execute any additional documents necessary
to carry out the purposes of this Agreement.
15. Signature. This Stock Option Agreement shall be deemed executed by
---------
the Company and Optionee upon execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.
[Remainder of page left intentionally blank]
-7-
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
To: Vertel Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase shares of Vertel Corporation
----------
Common Stock, under and pursuant to the Stock Option Agreement dated January 5,
1999, as follows:
Grant Number:
--------------------------------
Date of Purchase:
--------------------------------
Number of Shares:
--------------------------------
Purchase Price:
--------------------------------
Method of Payment
of Purchase Price:
--------------------------------
Social Security No.:
-----------------------------
The shares should be issued as follows:
Name:
-----------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
Signed:
-----------------------------
Date:
-----------------------------
<PAGE>
EXHIBIT 10.66
VERTEL CORPORATION
CONSULTING AGREEMENT
--------------------
This Consulting Agreement ("Agreement") is made and entered into as of the 5th
day of January, 1999 by and between Vertel Corporation and its successors (the
"Company"), and Steve Waszak ("Consultant"). The Company desires to retain
Consultant as an independent contractor to perform consulting services for the
Company and Consultant is willing to perform such services, on terms set forth
more fully below. In consideration of the mutual promises contained herein, the
parties agree as follows:
1. SERVICES AND COMPENSATION
-------------------------
(a) Consultant agrees to be retained by the Company for consultation
services related to business strategy, market development and other areas of
knowledge and experience consistent with Consultant's prior work with the
Company (the "Services"). Consultant agrees to make himself reasonably
available to provide the Services as requested by the Company during the term of
this Agreement.
(b) The Company agrees that Consultant shall be compensated for such
services through the grant and continued exercisability of a fully vested
nonstatutory stock option to purchase 50,937 shares of the Company's Common
Stock (the "Option"). The terms and conditions of the Option are set forth in
the Nonstatutory Stock Option Agreement attached hereto as Exhibit A.
---------
2. CONFIDENTIALITY
---------------
(a) "Confidential Information" means any Company proprietary
information, technical data, trade secrets or know-how, including, but not
limited to research, product plans, products, services, customers, customer
lists, markets, software, developments, inventions, processes, formulas,
technology, designs, drawings, configuration information, marketing finances or
other business information disclosed by the Company either directly or
indirectly in writing, orally or by drawings or inspection of parts or
equipment.
(b) Consultant will not, during or subsequent to the termination of
this Agreement, use the Company's Confidential Information for any purpose
whatsoever other than the performance of the Services on behalf of the Company
or disclose the Company's Confidential Information to any third party, and it is
understood that said Confidential Information shall remain the sole property of
the Company. Consultant further agrees to take all reasonable precautions to
prevent any unauthorized disclosure of such Confidential Information including,
but not limited to, having each employee and/or subcontractor of Consultant, if
any, with access to any Confidential Information, execute a nondisclosure
agreement containing provisions in the Company's favor substantially similar to
Sections 2, 3 and 5 of this Agreement. Confidential Information does not
include information which (i) is known to Consultant at the time of disclosure
to Consultant by the Company as evidenced by written records of Consultant, (ii)
has become publicly known and made generally available through no wrongful act
of Consultant, or
<PAGE>
(iii) has been rightfully received by Consultant from a third party who is
authorized to make such disclosure. Without the Company's prior written
approval, Consultant will not directly or indirectly disclose to anyone the
existence of the Agreement or the fact that Consultant has this arrangement with
the Company which is described in this Agreement.
(c) Consultant agrees that Consultant will not, during the term of
this Agreement, improperly use or disclose any proprietary information or trade
secrets of any former or current employer or other person or entity with which
Consultant has an agreement or duty to keep in confidence information acquired
by Consultant in confidence, if any, and that Consultant will not bring onto the
premises of the Company any unpublished documents or proprietary information
belonging to such employer, person or entity unless previously consented to in
writing by such employer, person or entity. Consultant will indemnify the
Company and hold it harmless from and against all claims, liabilities, damages
and expenses, including reasonable attorneys fees and costs of suit, arising out
of or in connection with any violation or claimed violation of a third party's
rights resulting in whole or in part from the Company's use of the work product
of Consultant under this Agreement.
(d) Consultant recognizes that the Company has received and in the
future will receive from third parties their confidential or proprietary
information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Consultant agrees that Consultant owes the Company and such third
parties, during the term of this Agreement and thereafter, a duty to hold all
such confidential or proprietary information in the strictest confidence and not
to disclose it to any person, firm or corporation or to use it except as
necessary in carrying out the Services for the Company consistent with the
Company's agreement with such third party.
(e) During the course of Consultant's services hereunder, the Company
will use reasonable efforts to minimize Consultant's exposure to sensitive
information that would cause Consultant to be restricted in his ability to trade
the Company's securities.
(f) Upon the termination of this Agreement, or upon Company's earlier
request, Consultant will deliver to the Company all of the Company's property or
Confidential Information in tangible form that Consultant may have in
Consultant's possession or control.
3. OWNERSHIP
---------
(a) Consultant agrees that all copyrightable material, notes, records,
drawings, designs, inventions, improvements, developments, discoveries and trade
secrets (collectively, "Inventions") conceived, made or discovered by
Consultant, solely or in collaboration with others, during the period of this
Agreement which relate in any manner to the business of the Company that
Consultant may be directed to undertake, investigate or experiment with, or
which Consultant may become associated with in work, investigation or
experimentation in the line of business of Company in performing the Services
hereunder, are the sole property of the Company. In addition, any Inventions
which constitute copyrightable subject matter shall be considered "work made for
hire" as that term is defined in the United States Copyright Act. Consultant
further agrees to assign (or cause to be assigned) and does hereby assign to the
Company all rights, title
<PAGE>
and interest in all such Inventions and any copyrights, patents, mask work
rights or other intellectual property rights relating thereto.
(b) Consultant agrees to assist Company, or its designee, at the
Company's expense, in every proper way to secure the Company's rights in the
Inventions and any copyrights, patents, mask work rights or other intellectual
property rights relating thereto in any and all countries, including the
disclosure to the Company of all pertinent information and data with respect
thereto, promptly after the development of such Inventions and the execution of
all applications, specifications, oaths, assignments and all other instruments
which the Company shall deem necessary in order for the Company to apply for and
obtain such rights and in order for Consultant to assign and convey to the
Company, its successors, assigns and nominees the sole and exclusive rights,
title and interest in and to such Inventions, and any copyrights, patents, mask
work rights or other intellectual property rights relating thereto. Consultant
further agrees that Consultant's obligation to execute or cause to be executed,
when it is in Consultant's power to do so, any such instrument shall continue
after the termination of this Agreement.
(c) Consultant agrees that if in the course of performing the
Services, Consultant incorporates into any Invention developed hereunder any
invention, improvement, development concept, discovery or other proprietary
information, the Company is hereby granted and shall have a nonexclusive,
royalty-free, perpetual, irrevocable, worldwide license to make, have made,
modify, use and sell such item as part of or in connection with such Invention.
(d) Consultant agrees that if the Company is unable because of
Consultant's unavailability, dissolution, mental or physical incapacity, or for
any other reason, to secure Consultant's signature to apply for or to pursue any
application for any United States or foreign patents or mask work or copyright
registrations covering the Inventions assigned to the Company above, then
Consultant hereby irrevocably designates and appoints the Company and its duly
authorized officers and agents as Consultant's agent and attorneys in fact, to
act for and in Consultant's behalf and stead to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of patents, copyright and mask work registration
thereon or the securing or confirming of Company's fights hereunder with the
same legal force and effect as if executed by Consultant.
4. REPORTS
-------
Consultant agrees that he will from time to time during the term of
this Agreement or any extension thereof keep the Company advised as to
Consultant's progress in performing the Services, as set forth in Section 1, and
that Consultant will, as requested by the Company, prepare written reports with
respect thereto. It is understood that the time required in the preparation of
such written reports shall be considered time devoted to the performance of
Consultant's Services.
5. CONFLICTING OBLIGATIONS.
------------------------
Consultant certifies that Consultant has no outstanding agreement or
obligation that is conflict with any of the provisions of this Agreement, or
that would preclude Consultant
<PAGE>
from complying with the provisions hereof, and further certifies that Consultant
will not enter into any such conflicting agreement during the term of this
Agreement.
6. TERM
----
This Agreement will commence on the date first written above and will
continue until December 31, 1999. This Agreement may be terminated earlier by
the Company only in the event that Consultant breaches the terms of this
Agreement, the terms of the Executive Separation Agreement entered into by and
between the Company and Consultant in January 1998 or the terms of the Stock
Repurchase Agreement entered into by and between the Company and Consultant
dated November 27, 1998.
7. ASSIGNMENT
----------
Neither this Agreement nor any right hereunder or interest herein may
be assigned or transferred by Consultant without the express written consent of
the Company.
8. INDEPENDENT CONTRACTOR
----------------------
Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of the Company, but
Consultant shall perform the Services hereunder as an independent contractor.
Consultant agrees to furnish (or reimburse the Company for) all tools and
materials necessary to accomplish this contract, and shall incur all expenses
associated with performance, excluding travel expenses (if any), which if
approved in advance by the Company will be reimbursed by the Company.
Consultant acknowledges the obligation to pay all self-employment and other
taxes thereon. Consultant further agrees to indemnify the Company and hold it
harmless to the extent of any obligation imposed on Company (i) to pay any
withholding taxes or similar items or (ii) resulting from Consultant's being
determined not to be an independent contractor.
9. ARBITRATION AND EQUITABLE RELIEF
--------------------------------
(a) Except as provided in Section 9(b) below, the Company and
Consultant agree that any dispute or controversy arising out of or relating to
any interpretation, construction, performance or breach of this Agreement, shall
be settled by arbitration to be held in Los Angeles County, California, in
accordance with the rules then in effect of the American Arbitration
Association. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court of competent jurisdiction. The Company and
Consultant shall each pay one-half of the costs and expenses of such
arbitration, and each shall separately pay its respective counsel fees and
expenses.
(b) Consultant agrees that it would be impossible or inadequate to
measure and calculate the Company's damages from any breach of the covenants set
forth in Section 2 or 3 herein. Accordingly, Consultant agrees that if
Consultant breaches Section 2 or 3, the Company will have available, in addition
to any other right or remedy available, the right to obtain from any court of
competent jurisdiction an injunction restraining such breach or threatened
breach and specific performance of any such provision. Consultant further
agrees that no bond or other
<PAGE>
security shall be required in obtaining such equitable relief and Consultant
hereby consents to the issuance of such injunction and to the ordering of such
specific performance.
10. GOVERNING LAW
-------------
This Agreement shall be governed by the laws of the State of
California.
11. ENTIRE AGREEMENT
----------------
This Agreement, and the exhibit attached hereto, is the entire
agreement of the parties and supersedes any prior consulting agreements between
them.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CONSULTANT
--------------------------------------------
By: Steve Waszak
Address:
----------------------------------
VERTEL CORPORATION
--------------------------------------------
By: Bruce Brown, President and CEO
Address: 21300 Victory Blvd.
Suite 1200
Woodland Hills, CA 91367
<PAGE>
EXHIBIT 10.67
VERTEL CORPORATION
NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
Steve Waszak
Street address
City, State, Zip code
You have been granted an option to purchase Common Stock of Vertel
Corporation, (the "Company") as follows:
<TABLE>
<CAPTION>
<S> <C>
Board Approval Date: January 5, 1999
Date of Grant: January 5, 1999
Exercise Price Per Share: $1.50
Total Number of Shares Granted: 50,937
Total Price of Shares Granted: $76,406
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: December 31, 1999
Vesting Commencement Date: N/A
Vesting Schedule: Shares are fully vested
Termination Period: Option may be exercised for a period of 30
days after termination of consulting
relationship between you and the Company
pursuant to the Consulting Agreement dated
January 5, 1999 ("the Consulting
Agreement") except as set out in Sections
7, 8 and 13 of the Stock Option Agreement
(but in no event later than the Expiration
Date).
</TABLE>
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree to the terms of the stock option grant.
OPTIONEE: VERTEL CORPORATION
- ------------------------------ By: ----------------------------
Steve Waszak
Title:--------------------------
-2-
<PAGE>
VERTEL CORPORATION
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. Vertel Corporation, a California corporation (the
---------------
"Company"), hereby grants to the Optionee named in the Notice of Stock Option
- --------
Grant attached to this Agreement ("Optionee"), an option (the "Option") to
-------- ------
purchase the total number of shares of Common Stock (the "Shares") set forth in
------
the Notice of Stock Option Grant, at the exercise price per share set forth in
the Notice of Stock Option Grant (the "Exercise Price").
--------------
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant, subject to the following:
(a) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of consulting relationship, the exercisability of the Option is
governed by Sections 6, 7 and 8 below, subject to the limitations contained in
paragraph (iii) below.
(iii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Stock Option
Grant.
(b) Method of Exercise.
------------------
(i) This Option shall be exercisable by delivering to the
Company a written notice of exercise (in the form attached as Exhibit A) which
---------
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such Shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the Exercise Price. This Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
(ii) As a condition to the exercise of this Option, Optionee
agrees to make adequate provision for federal, state or other tax withholding
obligations, if any, which arise upon the exercise of the Option or disposition
of Shares, whether by withholding, direct payment to the Company, or otherwise.
(iii) No Shares will be issued pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes the
Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
<PAGE>
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
--------------
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request. The Company will
undertake to register promptly the Shares issuable upon exercise of this option
under the Securities Act.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; or (d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the issuance of such Shares upon such exercise or the method of payment
of consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
------------
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
6. Termination of Relationship. In the event of termination of Optionee
---------------------------
as a consultant under the Consulting Agreement, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period set out in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant, the
Option shall terminate.
7. Disability of Optionee. Notwithstanding the provisions of Section 6
----------------------
above, in the event of termination of Optionee as a consultant as a result of
total and permanent disability (as defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended (the "Code"), until the date of expiration of
the term of this Option as set forth in Section 10 below, Optionee may exercise
the Option to the extent otherwise so entitled at the date of such termination.
To the extent that Optionee was not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time specified in this Agreement, the Option
shall terminate.
-2-
<PAGE>
8. Death of Optionee. In the event of the death of Optionee:
-----------------
(a) during the term of this Option and while a consultant of the
Company, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by 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 Optionee continued living and remained as a consultant three (3)
months after the date of death; or
(b) within thirty (30) days after the termination of Optionee as a
consultant, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by 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.
9. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
10. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the terms of this Option.
11. Tax Consequences. Optionee acknowledges that he has read the brief
----------------
summary set forth below of certain federal tax consequences of exercise of this
Option and disposition of the Shares under the law in effect as of the date of
grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND
THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS
OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of Nonstatutory Stock Option. Optionee will incur regular
-------------------------------------
federal income tax liability upon the exercise of the Option. Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Shares on
the date of exercise over the Exercise Price.
(b) Disposition of Shares. This Option is a Nonstatutory Stock Option
---------------------
and the then gain realized on the disposition of Shares will be treated as long-
term or short-term capital gain depending on whether or not the disposition
occurs more than one year after the exercise date.
12. Tax Withholding.
---------------
-3-
<PAGE>
(a) General. To the extent required by applicable law, transactions
-------
pursuant or related to the Option shall be subject to tax withholding by the
Company, and the Company may condition the delivery of any Shares under the
Option on satisfaction of applicable withholding tax obligations. The Company,
in its discretion and subject to such requirements as it may impose prior to the
occurrence of such withholding, may permit tax withholding obligations under the
Option to be satisfied by one or some combination of the following methods: (i)
by cash or check payment, (ii) out of Optionee's current compensation, (iii) if
permitted by the Company, in its discretion, by surrendering to the Company
Shares that (A) in the case of Shares previously acquired from the Company, have
been owned by Optionee for more than six months on the date of surrender, and
(B) have a Fair Market Value determined as of the applicable Tax Date (as
defined in Section 12 (c) below) on the date of surrender equal to the amount
required to be withheld, or (iv) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value determined as of the applicable Tax Date equal to the amount
required to be withheld.
(b) Stock Withholding to Satisfy Withholding Tax Obligations. In the
--------------------------------------------------------
event the Company allows Optionee to satisfy his tax withholding obligations as
provided in Section 12(a)(iii) or (iv) above, such satisfaction must comply with
the requirements of this Section (12)(b) and applicable law. All elections by
Optionee to have Shares withheld to satisfy tax withholding obligations shall be
made in writing in a form acceptable to the Company and shall be subject to the
following restrictions:
(i) the election must be made on or prior to the applicable Tax
Date (as defined in Section 12(c) below);
(ii) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(iii) all elections shall be subject to the consent or
disapproval of the Company.
In the event the election to have Shares withheld is made by Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, Optionee shall receive the full number of
Shares with respect to which the Option is exercised but Optionee shall be
unconditionally obligated to tender back to the Company the proper number of
Shares on the Tax Date.
(c) Definitions. For purposes of this Section 12, the Fair Market
-----------
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined under the Applicable Laws (the
"Tax Date").
--------
-4-
<PAGE>
13. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by the
Option, as well as the Exercise Price, 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,
recapitalization 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 the Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify Optionee at
least 10 days prior to such proposed action. To the extent it has not been
previously exercised, the Option will terminate immediately prior to the
consummation of such proposed action.
(c) Change in Control.
-----------------
(i) In the event of a Change in Control (as defined below) in
which the Company's outstanding options are being assumed or equivalent options
or rights substituted by a successor corporation to the Company (or a parent or
subsidiary of such successor corporation), the Option shall be assumed or an
equivalent option or right shall be substituted. In the event of a Change in
Control in which the successor corporation does not agree to assume the
Company's outstanding options (including the Option) or to substitute equivalent
options or rights, the Option will terminate upon the consummation of the
transaction.
(ii) Definitions.
-----------
(A) "Change of Control" means a sale of all or
-----------------
substantially all of the Company's assets, or a merger, consolidation or other
capital reorganization of the Company with or into another corporation; provided
however that a merger, consolidation or other capital reorganization in which
the holders of more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction shall not constitute a Change in
Control.
(B) An option (including the Option) shall be considered
"assumed," without limitation, if, at the time of issuance of the stock
-------
or other consideration upon
-5-
<PAGE>
such Change in Control, each holder of an option would be entitled to receive
upon exercise of the option the same number and kind of shares of stock or the
same amount of property, cash or securities as such holder would have been
entitled to receive upon the occurrence of the transaction if the holder had
been, immediately prior to such transaction, the holder of the number of Shares
of Common Stock covered by the option at such time (after giving effect to any
adjustments in the number of shares covered by an option as provided for in this
Section 14); provided however that if such consideration received in the Change
in Control was not solely common stock of the successor corporation (or its
parent), the Board may, with the consent of the successor corporation, provide
for the consideration to be received upon exercise of an option to be solely
common stock of the successor corporation (or its parent) equal to the fair
market value of the per share consideration received by holders of Common Stock
in the transaction.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Board may, in its discretion, appropriately
adjust the Exercise Price of the Option to reflect the effect of such
distribution.
14. Miscellaneous.
-------------
(a) This Agreement may be amended only by written agreement between
the Company and the Optionee.
(b) This Agreement shall be governed by and construed under the laws
of the State of California.
(c) This Agreement and the Consulting Agreement set forth the entire
agreement and understanding of the parties relating to the subject matter herein
and supersede all prior discussions between them.
(d) This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their successors and assigns.
(e) This Agreement may be executed in counterparts, each of which
shall be deemed an original.
(f) Both parties agree to execute any additional documents necessary
to carry out the purposes of this Agreement.
15. Signature. This Stock Option Agreement shall be deemed executed by
---------
the Company and Optionee upon execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.
[Remainder of page left intentionally blank]
-6-
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
To: Vertel Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase __________ shares of Vertel Corporation
Common Stock, under and pursuant to the Stock Option Agreement dated January 5,
1999, as follows:
Grant Number: ___________________________________
Date of Purchase: _______________________________
Number of Shares: _______________________________
Purchase Price: _________________________________
Method of Payment
of Purchase Price: ______________________________
Social Security No.: _________________________________
The shares should be issued as follows:
Name: __________________________________________
Address:__________________________________________
__________________________________________
__________________________________________
Signed: __________________________________________
Date: __________________________________________
<PAGE>
EXHIBIT 10.68
FORM OF RETENTION AGREEMENT BETWEEN THE
COMPANY AND EACH OF ITS OFFICERS
This Retention Agreement is dated as of __________,1998 and is between
Vertel Corporation (the "Company"), a California corporation, and the
undersigned executive officer of the Company ("Executive").
Executive and the Company desire to set forth certain of the terms and
conditions governing Executive's employment by the Company following a Change of
Control (as defined below). Accordingly, Executive and the Company hereby agree
as follows:
1. Definitions. For purposes of this Agreement, the following terms shall
have the meanings set forth below:
(a) "Base Salary" shall mean Executive's annual base salary, exclusive
of any bonus or incentive compensation, benefits (whether standard or special),
automobile allowances, relocation or tax equalization payments, pension payments
or reimbursements for professional services. "Biweekly Base Salary" shall mean
one-twenty-sixth (1/26) of the Base Salary at the time in question.
(b) "Company" shall mean Vertel Corporation, a California corporation,
and each of its successor enterprises that result from any merger,
consolidation, reorganization, sale of assets or otherwise.
(c) A "Change of Control" shall have occurred if (i) any person,
corporation, partnership, trust, association, enterprise or group shall become
the beneficial owner, directly or indirectly, of outstanding capital stock of
the Company possessing at least 50% of the voting power of the outstanding
capital stock of the Company, (ii) there shall be a sale of all or substantially
all of the Company's assets or (iii) the Company shall merge or consolidate with
another corporation and the stockholders of the Company immediately prior to
such transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in the transaction (or of the parent
corporation of the purchasing or surviving corporation) possessing more than 50%
of the voting power of the outstanding capital stock of that corporation, which
ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the stockholders of the Company before
the transaction.
(d) "Covered Termination" shall mean any cessation of the Executive's
employment by the Company that occurs within one (1) year after a Change of
Control other than as a result of (i) Termination for Cause, (ii) Executive's
death or permanent disability, or (iii) Executive's resignation without Good
Reason (as hereinafter defined).
(e) A resignation by Executive shall be with "Good Reason" if after a
Change of Control (i) there has been a material reduction in Executive's job
responsibilities from those that existed immediately prior to the Change of
Control, it being understood that a mere change
<PAGE>
in title alone shall not constitute a material reduction in Executive's job
responsibilities, (ii) without Executive's prior written approval, the Company
requires Executive to be based anywhere other than the Executive's then current
location, it being understood that required travel on the Company's business to
an extent consistent with Executive's business travel obligation prior to the
Change of Control does not constitute "Good Reason", (iii) there is a reduction
in Executive's Base Salary from that in effect on the date hereof or as the same
may be increased from time to time, except that an across-the-board reduction in
the salary level of all of the Company's executive officers in the same
percentage amount as part of a general salary level reduction shall not
constitute "Good Reason," or (iv) a successor to all or substantially all of the
business and assets of the Company fails to furnish Executive with the
assumption agreement required by Section 7 hereof; provided, however, that if
following a Change of Control the Company elects to take one of the actions
described in the foregoing clauses (i), (ii), or (iii) in lieu of Termination of
the Executive for Cause, then if the Executive subsequently resigns as result of
such action being taken, such resignation shall not be for "Good Reason."
(f) "Termination for Cause" shall mean if the Company terminates
Executive's employment for any of the following reasons: the willful failure of
Executive substantially to perform his duties hereunder (other than any such
failure due to Executive's physical or mental illness), Executive's engaging in
willful and serious misconduct that has caused or is reasonably expected to
result in material injury to the Company or any of its affiliates, Executive's
conviction of or entering a plea of guilty or nolo contender to a crime that
constitutes a felony, or the willful breach by Executive of any of his
obligations hereunder or under any other written agreement or covenant with the
Company or any of its affiliates.
(g) "Benefit Period" shall mean a period of one (1) year commencing
with the day next following the effectiveness of a Covered Termination.
(h) "Expiration Date" shall mean the earlier of (i) the date on which
Executive ceases to be employed as an executive officer of the Company other
than as a result of an involuntary termination by the Company without cause;
(ii) the date that all obligations of the parties hereunder have been satisfied;
or (iii) one (1) year after a Change of Control. The expiration of the terms of
this Agreement pursuant to the preceding sentence shall be effective for all
purposes, except that such expiration shall not affect the payment or provision
of compensation or benefits on account of a Covered Termination occurring prior
to the expiration of the terms of this Agreement.
2. Executive's Commitment Upon A Change of Control. If a Covered
Termination shall occur on or before the Expiration Date, Executive agrees to
remain in the employ of the Company for a period of 180 days from the
effectiveness of the Change of Control. Subject to the express provisions of
this Agreement, the Company shall have no obligation to retain or continue
Executive as an employee and executive's employment status as an "at-will"
employee of Company is not affected by this Agreement.
3. Change of Control Covered Termination. If a Covered Termination shall
occur on or before the Expiration Date:
<PAGE>
(a) During the Benefit Period, the Company shall pay to Executive,
every two weeks in accordance with Company's standard payroll practices,
Executive's Biweekly Base Salary immediately prior to the effective date of such
Covered Termination. In the event that Executive dies during such Benefit
Period, Company agrees that it shall pay any payments remaining unpaid under
this Section 3(b) as a death benefit to Executive's estate on the same terms;
(b) The Company shall make a lump sum payment to Executive within two
weeks of the effective date of the Covered Termination equal to one-half (1/2)
times the average of the annual performance bonus received by the Executive over
the three year period preceding the effective date of the Covered Termination;
and
(c) The following modification shall apply to the vesting provisions
of all outstanding options to purchase the Company's Common Stock held by
Executive (the "Outstanding Options") as follows: 1) upon Executive completing
one year of service following a Change of Control, vesting of Outstanding
Options will accelerate by 12 months; and 2) should Executive's employment
terminate pursuant to a Covered Termination within 12 months following a Change
in Control, vesting of Executive's Outstanding Options will accelerate by two
years from the date of the Change in Control. Should Executive's employment
voluntarily terminate within one (1) year following a Change in Control, vesting
of Outstanding Options will be subject to no additional acceleration beyond
those terms contained in the Executive's option agreement,
4. Withholding. The Company shall deduct from all payments paid to
Executive under this Agreement any required amounts for social security, federal
and state income tax withholding, federal or state unemployment insurance
contributions and state disability insurance or any other required taxes;
provided, however, that the Company shall reimburse and pay to Executive an
amount equal to any excise taxes required to be paid by Executive under Section
4999 of the Internal Revenue Code of 1986, as amended on any amounts paid or
benefits provided to Executive hereunder.
5. Mitigation. Executive shall have no obligation to mitigate the amount
of any payment provided for in this Agreement by seeking employment or
otherwise, [unless the Company in its sole discretion determines that
Executive's choice of new employer following the Covered Termination is
detrimental to the Company, in which case all obligations of the Company to
compensate Executive hereunder shall terminate].
6. Executive's Obligations. In exchange for the Company providing the
above-described benefits to Executive, Executive agrees to the following:
(a) During the Benefit Period, Executive will not directly or
indirectly (a) engage in; (b) own or control any debt equity or other interest
in (except as a passive investor of less than 5% of the capital stock or
publicly traded notes or debentures of a publicly held company); or (c) (1) act
as director, officer, manager, employee, participant or consultant to or (2) be
obligated to or connected in any advisory business enterprise or ownership
capacity with any person whose business is competitive with that of the Company.
<PAGE>
(b) During the term of this Agreement, or if longer, the Benefit
Period, Executive will not, on behalf of any business enterprise other than the
Company and its subsidiaries, solicit the employment of any person that is or
was employed by the Company or any of its subsidiaries at any time on or after
January 1, 1998;
(c) Within two weeks of the effective date of a Covered Termination
and prior to receiving any severance compensation from the Company in respect of
such Covered Termination, whether under this Agreement or otherwise, Executive
will execute and deliver to the Company a Release and a Confidentiality
Agreement, in the form provided to Executive by the Company; and
(d) In the event of any breach by Executive of the restrictions
contained in this Agreement, the Company shall have no further obligation to
compensate Executive hereunder and Executive acknowledges that the harm to
Company cannot be reasonably or adequately compensated in damages in any action
at law. Accordingly, Executive agrees that, upon any violation of such
restrictions, Company shall be entitled to preliminary and permanent injunctive
relief in addition to any other remedy under applicable law, without the
necessity of proving actual damages.
7. Assumption Agreement. The Company will require any successor (whether
direct or indirect, by purchase, merger consolidation or otherwise) to all or
substantially all of the business and assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it whether or not such succession
had taken place.
8. Miscellaneous. This agreement shall be binding upon and inure to the
benefit of Company and Executive; provided that Executive shall not assign any
of Executive's rights or duties under this Agreement without the express prior
written consent of the Company. This Agreement sets forth the parties' entire
agreement with regard to the subject matter hereof. No other agreements,
representations or warranties have been made by either party to the other with
respect to the subject matter of this Agreement. This Agreement may be amended
only by a written Agreement signed by both parties. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as or be construed as a waiver of any subsequent
breach. If any legal action is necessary to enforce the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorney's fees
in addition to any other relief to which that party may be entitled.
This agreement shall continue in effect until the Expiration Date provided,
however, that if on the Expiration Date monies are then owed by the Company
hereunder, then this Agreement shall continue in effect until the Benefit Period
shall have expired.
<PAGE>
In witness thereof, the parties hereto have executed this Agreement, as of
the day and year first written above.
VERTEL CORPORATION "EXECUTIVE"
By:________________________ By:_______________________________
<PAGE>
EXHIBIT 21.1
VERTEL CORPORATION
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 I............. California Telaware, Telegenics, Vertel
Corporation
Vertel Pacific................... California Vertel Asia Pacific, Vertel
Korea, Vertel Japan
Vertel B.V. ..................... Netherlands Retix Ireland, Vertel Ireland,
Vertel France, Vertel Germany,
Vertel U.K. Retix B.V.
Retix Australia, Pty, Ltd. ...... Australia None
Vertel U.K. Ltd. ................ United Kingdom Retix Property Company, Ltd.
Retix Canada Inc. ............... Canada None
Vertel GmbH...................... Germany Retix (Deutschland) GmbH
Recodif Retix France (TM)........ France None
Retix Italia SARL................ Italy None
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements
filed on Forms S-8 in connection with Vertel Corporation'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, the 1996 Directors' Stock Option Plan, and the 1998 Stock Option
Plan of our report dated February 4, 1999, except for Note 15 as to which the
date is March 18, 1999, appearing in this Annual Report on Form 10-K of Vertel
Corporation for the year ended December 31, 1998.
Deloitte & Touche LLP
Los Angeles, California
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1998 10K
DATED DECEMBER 31, 1998 AND IS QUALIFIED INITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> DEC-31-1998
<CASH> 19,495
<SECURITIES> 978
<RECEIVABLES> 4,439
<ALLOWANCES> 556
<INVENTORY> 0
<CURRENT-ASSETS> 25,490
<PP&E> 1,025<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,317<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 249
<OTHER-SE> 21,923
<TOTAL-LIABILITY-AND-EQUITY> 28,317
<SALES> 18,367
<TOTAL-REVENUES> 18,367
<CGS> 4,679
<TOTAL-COSTS> 21,642
<OTHER-EXPENSES> (10,998)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 7,723
<INCOME-TAX> 446
<INCOME-CONTINUING> 7,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,277
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.29
<FN>
<F1>PP&E IS NET OF ACCUMULATED DEPRECIATION OF $2,690
<F2>TOTAL ASSETS INCLUDE $365 OF OTHER ASSETS AND INVESTMENTS OF 1,437
</FN>
</TABLE>
