<PAGE>
As filed with the Securities and Exchange Commission on November 19, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NETRIX CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 3576 54-1345159
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
13595 Dulles Technology Drive
Herndon, Virginia 20171
703-742-6000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
----------------
Steven T. Francesco
Chairman and Chief Executive Officer
Netrix Corporation
13595 Dulles Technology Drive
Herndon, Virginia 20171
703-742-6000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------
Copies of all communications to:
Jay R. Schifferli, Esq. Sean P. McGuinness, Esq.
Kelley Drye & Warren LLP Swidler Berlin Shereff Friedman, LLP
Two Stamford Plaza 3000 K. Street,
281 Tresser Boulevard N.W. Suite 300
Stamford, Connecticut 06901 Washington, DC 20007
(203) 324-1400 (202) 945-6979
----------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions under the Merger Agreement (described in the Joint Proxy
Statement/Prospectus herein) are satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Unit Offering Price Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, with par value of
$.05 per share............... 15,916,750 shares(1) $2.50(2) $39,791,875(2) $11,062.14(3)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The maximum number of shares of Netrix common stock issuable in connection
with the merger in exchange for shares of OpenROUTE common stock, based on
(i) the number of shares of OpenROUTE common stock outstanding on October
25, 1999 (15,916,750 shares) and (ii) the exchange ratio used in the merger
(one share of Netrix common stock for each share of OpenROUTE common
stock).
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) of the Securities Act, based on
the market value of the OpenROUTE shares to be acquired by Netrix in the
merger, as established by the average of the high and low sales prices of
OpenROUTE common stock on October 25, 1999, which was $2.50.
(3) The Registration fee has been calculated pursuant to Section 6(b) of the
Securities Act by multiplying the aggregate offering amount of $39,791,875
by 0.000278. The fee of $7,958.38 was paid on October 29, 1999 in
connection with the initial filing of the joint proxy statement included in
this registration statement. Pursuant to Rule 457(b) under the Securities
Act, the registration fee payable herewith has been reduced by $7,958.38,
the amount previously paid. Accordingly, an additional fee of $3,103.76 is
being paid herewith.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
[NETRIX Logo] [OPENROUTE Logo]
Your Vote on Our Proposed Merger is Very Important!
To the Stockholders of Netrix and OpenROUTE:
Netrix and OpenROUTE have agreed to combine in a merger. This merger will
create a stronger competitor in the rapidly changing networking industry.
Accordingly, we believe that this merger will benefit the stockholders of both
companies, and we ask for your support in voting for the merger proposals at
our meetings.
When the merger is completed, Netrix will issue approximately 15.9 million
shares of its common stock to OpenROUTE stockholders based on the number of
outstanding OpenROUTE shares on September 30, 1999 at an exchange ratio of one
Netrix share for every OpenROUTE share. These shares will represent
approximately 55% of the outstanding shares of Netrix common stock after the
merger assuming no OpenROUTE stock options are exercised in connection with the
merger. Netrix shares held by Netrix stockholders will represent approximately
45% of the outstanding Netrix shares after the merger, assuming no Netrix
warrants or stock options are exercised in connection with the merger. Netrix
and OpenROUTE common stock are listed on the Nasdaq National Market under the
symbols "NTRX" and "OPEN," respectively.
Information about the merger and the other items to be voted on at your
company's meeting is contained in this joint proxy statement and prospectus and
in the merger agreement attached as Annex A. We urge you to read this material,
including the section entitled "Risk Factors" beginning on page 9.
The boards of directors of both Netrix and OpenROUTE believe the merger is
advisable, fair and in the best interests of their respective stockholders,
have approved the merger and recommend that their respective stockholders vote
FOR the merger proposal as described in the attached materials. We cannot
complete the merger unless the stockholders of both companies approve the
respective proposals relating to the merger.
Your vote is important, regardless of the number of shares you own. Please
vote as soon as possible to make sure that your shares are represented at your
company's special meeting. To grant your proxy to vote your shares, complete
and return the enclosed proxy card. You may also cast your vote in person at
the meeting. If you do not vote, it will have the same effect as voting against
the merger.
Very truly yours,
/s/ Steven T. Francesco /s/ Bryan R. Holley
Steven T. Francesco Bryan R. Holley
Chief Executive Officer Chief Executive Officer
Netrix Corporation OpenROUTE Networks, Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
This joint proxy statement/prospectus is dated November 19, 1999, and is
first being mailed to stockholders on or about November 22, 1999.
<PAGE>
NETRIX CORPORATION
13595 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 20171
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 22, 1999
----------------
To the stockholders of Netrix Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of Netrix
Corporation will be held on Wednesday, December 22, 1999 at the Yale Club, 50
Vanderbilt Avenue, New York, New York, at 9:30 a.m., local time, for the
following purposes:
1. To consider and vote upon a proposal to approve the merger agreement
between Netrix and OpenROUTE. Pursuant to the merger agreement, Netrix will
be the surviving corporation. In the merger, Netrix will issue one share of
common stock for each share of OpenROUTE stock. The merger agreement
includes an amendment to our certificate of incorporation to increase the
number of authorized shares of common stock from 29 million to 55 million.
2. To transact such other business as may properly be presented at the
meeting and at any adjournments or postponements thereof.
The board of directors of Netrix has fixed the close of business on November
16, 1999 as the record date for the purpose of determining stockholders who are
entitled to notice of and to vote at the meeting and any adjournments or
postponements thereof. Only holders of Netrix common stock on that date will be
entitled to vote on the merger proposal. A list of such stockholders will be
available during regular business hours at the law offices of Kelley Drye &
Warren LLP, 101 Park Avenue, New York, New York 10178, during the ten days
prior to the meeting, for inspection by any stockholder for any purpose germane
to the special meeting. Holders of 8% Series A convertible preferred stock do
not have the right to vote on the merger proposal.
By order of the Netrix Board of
Directors,
/s/ Peter J. Kendrick
Peter J. Kendrick
Secretary
Herndon, Virginia
November 19, 1999
The board of directors of Netrix recommends that stockholders vote FOR
approval and adoption of the merger agreement.
Please complete, date and sign the enclosed proxy and return it promptly in
the envelope provided, whether or not you plan to attend the special meeting.
If you attend the meeting, you may vote your shares in person if you wish, even
if you previously returned or granted your proxy.
<PAGE>
OPENROUTE NETWORKS, INC.
Nine Technology Drive
Westborough, Massachusetts 01581
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 22, 1999
----------------
To the stockholders of OpenROUTE Networks, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
OpenROUTE Networks, Inc. will be held on Wednesday, December 22, 1999 at the
Yale Club, 50 Vanderbilt Avenue, New York, New York, at 11:00 a.m., local
time, for the following purposes:
1. To vote upon a proposal to approve the merger agreement between
OpenROUTE and Netrix Corporation. Pursuant to the merger agreement,
Netrix will be the surviving corporation. In the merger, Netrix will
issue one share of common stock for each share of OpenROUTE common
stock.
2. To transact such other business as may properly be presented at the
meeting and at any adjournments or postponements thereof.
The board of directors of OpenROUTE has fixed the close of business on
November 16, 1999 as the record date for the purpose of determining
stockholders who are entitled to notice of and to vote at the special meeting
and any adjournments or postponements thereof.
Approval of the merger agreement (Item 1 above) requires the affirmative
vote of the holders of a majority of the outstanding shares of OpenROUTE
common stock. As of the record date, there were 15,527,189 shares of OpenROUTE
common stock outstanding, each of which is entitled to one vote in person or
by proxy with respect to each matter to be voted on by holders of OpenROUTE
common stock at the special meeting.
At least a majority of the issued and outstanding shares of OpenROUTE common
stock must be represented in person or by proxy at the special meeting to
constitute a quorum at the special meeting.
If the merger is approved by the stockholders at the special meeting and
completed by OpenROUTE, stockholders may exercise their right to an appraisal
of their shares if they: (1) file with OpenROUTE before the taking of the vote
on the approval of the merger agreement a written objection to the proposed
merger stating that they intend to demand payment for their shares if the
merger is completed; and (2) do not vote in favor of the merger agreement.
These stockholders then have the right to demand from Netrix, within 20 days
after the date of mailing to the stockholder of written notice that the merger
has become effective, payment for the shares and an appraisal of the value of
their shares. Netrix and any such stockholder shall in such cases have the
rights and duties and shall follow the procedure set forth in sections 88 to
98, inclusive, of the Massachusetts Business Corporation Law. A copy of those
sections are attached as Annex D to the attached proxy statement.
The attached proxy statement provides you with detailed information about
the proposal to approve the merger agreement. Whether or not you plan to
attend the meeting, please take the time to vote by proxy.
By order of the Board of Directors,
/s/ HENRY BARBER
Henry Barber
Clerk
Westborough, Massachusetts
November 19, 1999
Your vote is important. Whether or not you plan to attend the meeting,
please promptly complete, date and return your proxy card in the enclosed
envelope. Should you have any questions regarding the special meeting or the
attached proxy statement, please call Henry Barber at (508) 898-2800.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I.THE MERGER
Questions and Answers About the Merger.................................. 1
Summary................................................................. 4
Risk Factors............................................................ 9
The Netrix Special Meeting.............................................. 15
The OpenROUTE Special Meeting........................................... 17
The Merger.............................................................. 19
Background of the Merger.............................................. 19
Netrix's Reasons for the Merger; Recommendation of the Netrix Board of
Directors............................................................ 21
OpenROUTE's Reasons for the Merger; Recommendation of the OpenROUTE
Board of Directors................................................... 23
Opinion of Financial Advisor to Netrix................................ 24
Opinion of Financial Advisor to OpenROUTE............................. 29
Material Federal Income Tax Consequences of the Merger................ 35
Credit Facilities..................................................... 36
Appraisal Rights...................................................... 36
Federal Securities Laws Consequences; Stock Transfer Restriction
Agreements........................................................... 38
Accounting Treatment.................................................. 38
Interests of Officers and Directors in the Merger....................... 39
Netrix................................................................ 39
OpenROUTE............................................................. 39
Indemnification; Directors' and Officers' Insurance................... 40
The Merger Agreement.................................................... 42
The Merger............................................................ 42
Timing of Closing..................................................... 42
Conversion of OpenROUTE Common Stock.................................. 42
Conversion of OpenROUTE Stock Options................................. 43
Representation on the Netrix Board.................................... 43
Representations and Warranties........................................ 43
Certain Covenants..................................................... 44
Conditions to the Completion of the Merger............................ 47
Termination of the Merger Agreement................................... 48
Other Expenses........................................................ 50
Amendments and Waivers................................................ 50
Voting Agreements..................................................... 50
II.FINANCIAL INFORMATION
Comparative Per Share Market Price and Dividend Information............. 51
Netrix Selected Financial Data.......................................... 52
OpenROUTE Selected Financial Data....................................... 53
Netrix Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 54
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
OpenROUTE Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 61
Comparative Per Share Data.............................................. 68
Netrix Unaudited Pro Forma Condensed Combined Financial Information..... 71
Netrix Business......................................................... 76
Netrix Management....................................................... 81
OpenROUTE Business...................................................... 87
OpenROUTE Management.................................................... 92
III.CERTAIN LEGAL INFORMATION
Comparison of OpenROUTE-Netrix Stockholder Rights
Summary of Material Differences Between Current Rights of OpenROUTE
and Netrix Stockholders and Those Rights OpenROUTE Stockholders Will
Have as Netrix Stockholders Following the Merger..................... 102
Description of Netrix Capital Stock..................................... 105
Description of OpenROUTE Capital Stock.................................. 107
Information Regarding Forward-Looking Statements........................ 109
Legal Matters........................................................... 109
Experts................................................................. 109
IV.ADDITIONAL INFORMATION FOR STOCKHOLDERS
Future Stockholder Proposals............................................ 110
Netrix................................................................ 110
OpenROUTE............................................................. 110
Where You Can Find More Information..................................... 111
Index to Netrix Financial Statements.................................... FN-1
Index to OpenROUTE Financial Statements................................. FO-1
Annexes
Annex A Agreement and Plan of Merger of Netrix Corporation and
OpenROUTE Networks, Inc. .................................... A-1
Annex B Fairness Opinion of Kaufman Bros., L.P. ...................... B-1
Annex C Fairness Opinion of Tucker Anthony Cleary Gull................ C-1
Annex D Sections 85 through 98 of the Massachusetts Business
Corporation Law............................................... D-1
</TABLE>
ii
<PAGE>
I. THE MERGER
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are Netrix and OpenROUTE proposing to merge?
A: The boards of Netrix and OpenROUTE believe that combining the two
companies' complementary businesses will result in a stronger and more
competitive company capable of achieving greater financial strength,
operational efficiencies, earnings power and growth potential than either
company would have on its own.
Q: Do the companies recommend voting in favor of the merger agreement?
A: Yes. The board of directors of Netrix recommends that its stockholders vote
in favor of the merger agreement. The board of directors of OpenROUTE
likewise recommends that its stockholders vote in favor of the merger
agreement.
Q: How will the merger be accomplished?
A: OpenROUTE will merge with and into Netrix, and Netrix will be the surviving
corporation in the merger.
Q: What will stockholders receive when the merger is completed?
A: For each share of OpenROUTE common stock you own, you will receive one
share of Netrix common stock. Once the merger is completed, shares of
OpenROUTE common stock will be de-listed and will no longer trade on the
Nasdaq National Market. If you own Netrix stock, your shares will remain
outstanding after the merger.
Q: When will the merger be completed?
A: Netrix and OpenROUTE are working to complete the merger by the end of 1999.
Because completion is subject to stockholder approval, however, we cannot
predict the exact time of completion.
Q: Why am I receiving this joint proxy statement/prospectus?
A: If you hold Netrix common stock, you are receiving this joint proxy
statement/prospectus because it describes a proposal to adopt the merger
agreement at a special meeting of Netrix stockholders. By adopting the
merger agreement, Netrix stockholders will also be approving an amendment
to the certificate of incorporation of Netrix to increase the number of
authorized shares of Netrix common stock from 29 million to 55 million.
If you hold OpenROUTE common stock, you are receiving this joint proxy
statement/prospectus because it describes a proposal to adopt the merger
agreement at a special meeting of stockholders of OpenROUTE.
Holders of OpenROUTE common stock are also receiving this joint proxy
statement/prospectus because they are entitled to appraisal rights in
connection with the merger. This joint proxy statement/prospectus
constitutes the notice required by Massachusetts law regarding their
appraisal rights.
This joint proxy statement/prospectus also gives stockholders information
on Netrix and OpenROUTE and other background information so that they can
make an informed decision with respect to the merger.
Q: What are the tax consequences of the merger for OpenROUTE stockholders?
A: The exchange of OpenROUTE common stock for Netrix common stock generally
will be a tax free event for U.S. holders.
Q: What are the Netrix and OpenROUTE special meetings and what is their
purpose?
A: The Netrix special meeting will be held at 9:30 a.m. local time, on
December 22, at the Yale Club, 50 Vanderbilt Avenue, New York, New York. At
the Netrix special meeting, record holders of Netrix common
1
<PAGE>
stock will be asked to consider and vote upon a proposal to adopt the
merger agreement and to increase the authorized common stock of Netrix from
29 million to 55 million shares.
The OpenROUTE special meeting will be held at 11:00 a.m. local time, on
December 22, at the Yale Club, 50 Vanderbilt Avenue, New York, New York. At
the OpenROUTE special meeting, record holders of OpenROUTE common stock
will be asked to consider and vote upon a proposal to adopt the merger
agreement.
Q: Who can vote?
A: All record holders of Netrix common stock at the close of business on
November 16, 1999 are entitled to vote at the Netrix special meeting.
Holders of Netrix preferred stock are not entitled to vote at the Netrix
special meeting.
All record holders of OpenROUTE common stock at the close of business on
November 16, 1999 are entitled to vote at the OpenROUTE special meeting.
Q: How do I vote?
A: You may cast your vote by mail or in person at the special meeting. To cast
your vote by mail, complete, date, sign and mail the enclosed proxy card in
the enclosed, postage pre-paid envelope. Votes cast by mail must be
received prior to the special meeting in order to be counted. When you cast
your vote using the proxy card, you also appoint members of your company's
management as your representatives, or proxies, at the special meeting.
They will vote your shares at the special meeting in accordance with your
instructions.
You may also vote in person at the special meeting. If you hold your shares
in street name, however, you must contact your stockbroker or other nominee
and request a legal proxy in order to vote in person at the special
meeting.
Q: What happens if I do not indicate my preference for or against adoption of
the merger agreement?
A: If you submit a proxy without specifying the manner in which you would like
your shares to be voted, your shares will be voted for adoption of the
merger agreement and, in the case of Netrix stockholders, the proposed
amendment to the Netrix certificate of incorporation.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them on
your merger proposal. Therefore, you should be sure to provide your broker
with instructions on how to vote your shares.
If you do not give voting instructions to your broker, you will, in effect,
be voting against your merger proposal unless you appear in person at your
stockholders meeting and vote in favor of the merger.
Q: What is I vote and then change my mind?
A: You can revoke your proxy by writing to your company, by submitting a new
proxy with a later date by mail or by attending the meeting and casting
your vote in person. Your last vote will be the vote that is counted.
Q: How many votes do you need to hold the meeting?
A: Your shares will be counted as present at your special meeting if you are a
record holder of the shares and you either:
(1) are present and vote in person at the special meeting, or
(2) have properly voted by submitting a proxy by mail.
2
<PAGE>
Shares representing at least a majority of the issued and outstanding
shares of common stock entitled to vote must be present at your company's
special meeting, either in person or by proxy, in order to conduct
business. This is called a quorum.
Q: What is the vote necessary to adopt the merger agreement?
A: In order for the Netrix stockholders to adopt the merger agreement, holders
of a majority of the outstanding Netrix common stock must vote in favor of
the proposal.
In order for the OpenROUTE stockholders to adopt the merger agreement,
holders of a majority of the outstanding OpenROUTE common stock must vote
in favor of the proposal.
Q: What does it mean if I get more than one proxy card?
A: It means you have multiple accounts at the transfer agent and/or with
stockbrokers. Please sign and return all the proxy cards that you receive
in order to ensure that all of your shares are voted.
Q: Should stock certificates be sent in with the enclosed voting form?
A: No. If the merger is completed, OpenROUTE stockholders will be sent
instructions for exchanging their OpenROUTE stock certificates for Netrix
stock certificates.
Q: Who can help answer other questions?
A: If you have additional questions about the merger, you should contact:
Netrix stockholders: OpenROUTE stockholders:
Peter J. Kendrick, Chief Financial Henry Barber, Chief Financial Officer
Officer OpenROUTE Networks, inc.
Netrix Corporation Nine Technology Drive
13595 Dulles Technology Drive Westborough, Massachusetts 01581
Herndon, Virginia 20171 (508) 898-2800
(703) 742-6000
3
<PAGE>
SUMMARY
This Summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read this document
carefully as well as the documents to which we refer you. See "Where You Can
Find More Information" on page 111. We have indicated page references
parenthetically to direct you to a more complete description of the topics in
this summary.
The Companies
Netrix Corporation
13595 Dulles Technology Drive
Herndon, Virginia 20171
(703) 742-6000
Netrix is a worldwide provider of voice and data networking products. Netrix
products are designed to deliver multi-service networks for the transport of
voice and data that enable Netrix customers to provide a wide variety of voice
and data services. Netrix combines patented, switched, compressed voice
technology and advanced networking capabilities to provide networking solutions
that improve network performance and deliver an array of tangible network
services. Netrix was incorporated in Virginia in 1985 and reincorporated in
Delaware in 1987.
OpenROUTE Networks, Inc.
Nine Technology Drive
Westborough, MA 01581
(508) 898-2800
OpenROUTE has distinguished itself as a pioneer in the data communications
industry and as a leader in networking and in networking connectivity solutions
that focus exclusively on the Internet's edge. OpenROUTE provides network
connectivity products and solutions that are designed to meet the needs of
Internet service providers and corporate enterprises. OpenROUTE's data
networking products and services combine cost effectiveness with ease of
operation, interoperability, network security, reliability and performance.
OpenROUTE provides solutions that complement and optimize the edge of a
business' network--the point at which the business connects to its telephone
company or Internet service provider. OpenROUTE is committed to providing
solutions that make the Internet a more cost-effective, secure and comfortable
place to grow a business. Its customers include Global 1000 multinational
corporations, ISPs and other enterprises looking to the Internet to grow their
businesses. Historically, OpenROUTE's local area networking products have
provided connectivity solutions in more than 70% of the Fortune 100 companies.
OpenROUTE was incorporated in Massachusetts in 1974 as Proteon Associates, Inc.
and changed its name to Proteon, Inc. in 1983 and to OpenROUTE Networks, Inc.
in 1998.
Recommendations of the Netrix board and the OpenROUTE board
The Netrix board believes that the merger is advisable, fair and in the best
interests of Netrix stockholders and recommends that Netrix stockholders vote
FOR adoption of the merger agreement and the merger and the amendment to the
Certificate of Incorporation of Netrix to increase its authorized capital
stock.
The OpenROUTE board believes that the merger is advisable, fair and in the
best interests of OpenROUTE stockholders and recommends that OpenROUTE
stockholders vote FOR adoption of the merger agreement.
The Merger (see page 19)
The merger agreement provides that OpenROUTE will merge with and into Netrix,
and the separate corporate existence of OpenROUTE will cease. As a result of
the merger, Netrix will issue one share of Netrix common stock for every share
of OpenROUTE common stock.
4
<PAGE>
The full text of the merger agreement is attached as Annex A to this joint
proxy statement/prospectus. We encourage you to read the merger agreement as it
is the legal document that governs the merger.
Opinions of Financial Advisors (see pages 24 and 29)
Advisor to Netrix
Kaufman Bros., L.P. acted as financial advisor to Netrix and has delivered to
the Netrix board of directors a written opinion to the effect that, as of
September 30, 1999, the one-for-one exchange ratio was fair from a financial
point of view to Netrix. The full text of the written opinion of Kaufman Bros.
is attached as Annex B. The opinion describes important exceptions, assumptions
and limitations and should be read carefully and in its entirety. Kaufman
Bros.'s opinion is directed to the board of directors of Netrix and is not a
recommendation as to how Netrix stockholders should vote on the merger.
Advisor to OpenROUTE
Tucker Anthony Cleary Gull ("Tucker Anthony") acted as financial advisor to
OpenROUTE and has delivered to the OpenROUTE board of directors a written
opinion to the effect that, as of September 30, 1999, the one-for-one exchange
ratio was fair from a financial point of view to OpenROUTE. The full text of
the written opinion of Tucker Anthony Cleary Gull is attached as Annex C. The
opinion describes important exceptions, assumptions and limitations and should
be read carefully and in its entirety. Tucker Anthony's opinion is directed to
the board of directors of OpenROUTE and is not a recommendation as to how
OpenROUTE stockholders should vote on the merger.
Interests of Officers and Directors in the Merger (see page 39)
When you consider our boards' recommendations that you vote in favor of the
merger, you should be aware that a number of our officers and directors have
interests in the merger that are in addition to the interests of stockholders.
The executive officers and directors of both Netrix and OpenROUTE will benefit
from the accelerated vesting of their stock options as a result of the merger
and some of the executive officers of both Netrix and OpenROUTE have change of
control provisions in their employment contracts that will be triggered by the
merger. Also, some of OpenROUTE's executive officers and directors will become
executive officers and directors of Netrix after the merger.
Conversion of OpenROUTE Stock Options (see page 43)
Stock options to acquire OpenROUTE stock will be automatically converted into
stock options to purchase Netrix common stock. Because the share exchange ratio
in the merger is one-for-one, no adjustment will be made to the number of
shares subject to these options or the exercise price.
Conditions to the Completion of the Merger (see page 47)
Netrix and OpenROUTE will not complete the merger unless a number of
conditions are satisfied or waived by them. These include:
. approvals by the Netrix and OpenROUTE stockholders,
. absence of any law or court order prohibiting the merger,
. exercise of appraisal rights by holders of not more than $2.5 million in
value of OpenROUTE common stock, and
. receipt of opinions of counsel to Netrix and OpenROUTE that the merger
will qualify as a tax-free reorganization.
Termination of the Merger Agreement (see page 48)
The merger agreement may be terminated by mutual written consent of Netrix
and OpenROUTE. The merger agreement may also be terminated by either Netrix or
OpenROUTE if:
5
<PAGE>
. the merger has not become effective by February 29, 2000, and the
failure to complete the merger by that date is not due to the action or
failure to act of the party seeking to terminate;
. a governmental authority takes a final and nonappealable action that
prohibits the merger or results in a condition to the closing
obligations of the terminating party becoming incapable of being
satisfied by February 29, 2000;
. a closing condition of the terminating party is not satisfied due to a
breach of any representation, warranty or covenant of the other party
and the breach is not cured within 30 days after notice is delivered by
the terminating party, except neither party may terminate the merger on
this basis if it is in material breach of any of its own
representations, warranties or covenants in the merger agreement;
. the Netrix stockholders or the OpenROUTE stockholders fail to give the
necessary approval of the merger or related transactions; or
. OpenROUTE stockholders exercise their appraisal rights with respect to
more than $2.5 million in value of OpenROUTE common stock.
The merger agreement may also be terminated by Netrix if:
. the OpenROUTE board enters into or publicly announces its intention to
enter into an alternative acquisition proposal;
. the OpenROUTE board withdraws its recommendations of the approval of the
merger; or
. the OpenROUTE board, after receiving an alternative acquisition
proposal, fails to confirm publicly its recommendation of the merger
within ten days after Netrix requests that a public confirmation be
made; or
. OpenROUTE or its representatives, except as explicitly permitted in the
merger agreement, solicit, negotiate or enter into an alternative
acquisition proposal.
The merger agreement may also be terminated by OpenROUTE if:
. the Netrix board enters into or publicly announces its intention to
enter into an acquisition transaction that is inconsistent with the
merger;
. the Netrix board withdraws its recommendations of the merger agreement
or the amendment to the Netrix certificate of incorporation to authorize
additional shares of common stock in connection with the merger;
. the Netrix board, after receiving an alternative acquisition proposal,
fails to confirm publicly its recommendation of the merger within ten
days after OpenROUTE requests that a public confirmation be made; or
. Netrix or its representatives, except as explicitly permitted in the
merger agreement, solicit, negotiate or enter into an acquisition
transaction that is inconsistent with the merger.
The boards of directors of Netrix and OpenROUTE each may withdraw its
recommendation of the merger in response to a superior acquisition proposal if
either board determines in good faith that the failure to withdraw the
recommendation would violate the board's fiduciary duty to its stockholders,
however, neither Netrix nor OpenROUTE is permitted to terminate the merger
agreement to accept a superior acquisition proposal made by a third party.
Accordingly, it is expected that the Netrix and OpenROUTE special meetings will
be held even if Netrix or OpenROUTE receives a superior acquisition proposal
from a third party.
Termination Fees (see page 49)
OpenROUTE has agreed to pay Netrix a termination fee of $1.0 million in cash
if:
. Netrix terminates the merger agreement because the OpenROUTE board:
--enters into or publicly announces its intention to enter into an
alternative acquisition proposal;
6
<PAGE>
--withdraws its recommendation of the approval of the merger; or
-- after receiving an alternative acquisition proposal, fails to
confirm publicly its recommendation of the merger within ten days
after Netrix requests that a public confirmation be made;
. Netrix terminates the merger agreement because OpenROUTE or its
representatives solicit, negotiate or enter into an alternative
acquisition proposal that is inconsistent with the merger agreement; or
. any person proposes an acquisition transaction that is inconsistent with
the merger and remains in effect on December 31, 1999, and the OpenROUTE
stockholders do not approve the merger prior to termination of the
merger agreement as a result of the failure to complete the merger by
February 29, 2000.
Netrix has agreed to pay OpenROUTE a termination fee of $1.0 million in cash
if:
. OpenROUTE terminates the merger agreement because the Netrix board:
-- enters into or publicly announces its intention to enter into an
acquisition transaction that is inconsistent with the merger,
--withdraws its recommendation of the approval of the merger, or
-- after receiving an alternative acquisition proposal, fails to
confirm publicly its recommendation of the merger within ten days
after OpenROUTE requests that a public confirmation be made.
. OpenROUTE terminates the merger agreement because Netrix or its
representatives solicit, negotiate or enter into an acquisition
transaction that is inconsistent with the merger agreement, or
. any person proposes an acquisition transaction that is inconsistent with
the merger and remains in effect on December 31, 1999, and the Netrix
stockholders do not approve the merger prior to termination of the
merger agreement as a result of the failure to complete the merger by
February 29, 2000.
Material Federal Income Tax Consequences of the Merger (see page 35)
An OpenROUTE stockholder's receipt of Netrix common stock in the merger
generally will be tax-free for United States federal income tax purposes. This
tax treatment may not apply to all OpenROUTE stockholders. You should consult
your own tax advisor for a full understanding of the tax consequences of the
merger.
Voting Agreements (see page 50)
Netrix has entered into a voting agreement with its Chairman of the Board of
Directors and Chief Executive Officer, Steven T. Francesco. Pursuant to the
agreement, Mr. Francesco has agreed to vote his shares of Netrix common stock
in favor of the merger and related transactions and against any proposal made
in opposition to consummation of the merger. Mr. Francesco has granted to
Netrix an irrevocable proxy to vote his shares in such manner. As of November
16, 1999 Mr. Francesco owned immediately exercisable options to acquire 400,000
shares of Netrix common stock, but he did not own any shares directly.
OpenROUTE has entered into voting agreements with its Chairman of the Board
of Directors, Howard Salwen, and its Chief Executive Officer, Bryan R. Holley.
Pursuant to their respective agreements, Mr. Salwen and Mr. Holley each have
agreed to vote their shares of OpenROUTE common stock, and any additional
shares they may acquire prior to the merger, in favor of the merger agreement,
the merger and related transactions and against any proposal made in opposition
to consummation of the merger. Each has granted to OpenROUTE an irrevocable
proxy to vote his shares in such manner. Mr. Salwen owns 1,001,264 shares of
OpenROUTE common stock and Mr. Holley owns 6,000 shares of OpenROUTE common
stock.
Comparative Per Share Market Price Information (see page 51)
Netrix common stock and OpenROUTE common stock are quoted on the Nasdaq
National Market. On August 26, 1999, the last full trading day before Netrix
and OpenROUTE first announced their intention to
7
<PAGE>
merge, Netrix common stock closed at $4 1/8 and OpenROUTE common stock closed
at $3 1/8. On September 29, 1999, the last full trading day before Netrix and
OpenROUTE publicly announced the signing of the merger agreement, Netrix common
stock closed at $2 1/2 and OpenROUTE common stock closed at $2 7/8. On November
17, 1999, the most recent practicable date before the date of this joint proxy
statement/prospectus, Netrix common stock closed at $6 5/16 and OpenROUTE
common stock closed at $6 1/8.
Listing of Netrix Common Stock
The shares of Netrix common stock to be issued in the merger will be quoted
on the Nasdaq National Market under the ticker symbol "NTRX."
Ownership of Netrix After the Merger
Netrix will issue approximately 15.9 million shares of its common stock to
OpenROUTE stockholders in the merger, based on the number of shares of
OpenROUTE common stock outstanding on September 30, 1999. These shares will
represent approximately 55% of the outstanding Netrix common stock after the
merger. This information is based on the number of Netrix and OpenROUTE shares
outstanding on November 16, 1999 plus one million shares of restricted stock
that will vest upon closing of the merger and does not take into account any
other warrants, stock options or other equity-based awards or other
transactions involving the issuance of stock, including conversion of Netrix's
8% Series A convertible preferred stock or acquisitions that may be consummated
after the date of this joint proxy statement/prospectus.
Stockholder Votes Required
A majority of the issued and outstanding shares of Netrix common stock must
vote in favor of the merger agreement in order for it to be adopted.
A majority of the issued and outstanding shares of OpenROUTE common stock
must vote in favor of the merger agreement in order for it to be adopted.
Appraisal Rights (see page 36)
Under Delaware law, the holders of Netrix common stock and preferred stock
are not entitled to exercise appraisal rights with respect to the merger.
Under Massachusetts law, holders of OpenROUTE common stock who do not vote in
favor of the merger and who fully comply with the requirements of Massachusetts
law will have the right to an appraisal of their OpenROUTE common stock and to
receive a cash payment for their shares instead of receiving Netrix common
stock.
Accounting Treatment (see page 38)
The merger will be accounted for using the purchase method of accounting.
8
<PAGE>
RISK FACTORS
Stockholders of Netrix and OpenROUTE should carefully consider the following
risks, which are not listed in order of priority, in addition to the other
information contained in this joint proxy statement/prospectus.
The exchange ratio will not be adjusted for changes in stock prices
Each share of OpenROUTE common stock will be converted in the merger into one
share of Netrix common stock. The market value of Netrix common stock and/or
OpenROUTE common stock at the effective time of the merger may vary
significantly from the price as of the date the merger agreement was executed,
the date of this joint proxy statement/prospectus or the dates on which Netrix
and OpenROUTE stockholders vote on the merger. These changes may result from a
number of factors, including:
. market perception of the synergies expected to be achieved by the
merger,
. changes in the business, operations or prospects of Netrix or OpenROUTE,
. market assessments of the likelihood that the merger will be completed
and the timing of the merger, and
. general market and economic conditions.
Because the exchange ratio will not be adjusted to reflect changes in the
market value of Netrix common stock or OpenROUTE common stock, the market value
of the Netrix common stock issued in the merger, and the market value of the
OpenROUTE common stock surrendered in the merger, may be higher or lower than
the value of these shares at the time the merger was approved by the Netrix
board and the OpenROUTE board. Neither Netrix nor OpenROUTE is permitted to
terminate the merger agreement or resolicit the vote of its stockholders solely
because of changes in the market price of Netrix common stock or OpenROUTE
common stock.
Netrix and OpenROUTE may encounter difficulties in combining operations and
realizing synergies
Netrix and OpenROUTE have entered into the merger agreement with the
expectation that the merger will result in certain benefits including operating
efficiencies, cost savings, synergies and other benefits. Achieving the
benefits of the merger will depend in part upon the integration of the
businesses of Netrix and OpenROUTE in an efficient manner, which Netrix
believes will require considerable effort. In addition, the consolidation of
operations will require substantial attention from management. The diversion of
management attention and any difficulties encountered in the transition and
integration process could have a material adverse effect on the combined
company. We cannot assure you that Netrix and OpenROUTE will succeed in
integrating their operations in a timely manner or that the expected
efficiencies, cost savings and synergies of the merger will be realized.
Failure to complete, or delays in completing, the merger could hurt Netrix's
and OpenROUTE's stock prices and future operations
If the merger is not completed for any reason, Netrix and OpenROUTE may be
subject to a number of material risks, including the following:
. Netrix and OpenROUTE may be required to pay the other a termination fee,
and
. the price of Netrix or OpenROUTE common stock may decline to the extent
that the current market price of the companies' common stock reflects a
market assumption that the merger will be completed.
In addition, in response to the announcement of the merger, Netrix's or
OpenROUTE's customers may delay or defer purchasing decisions. Any delay or
deferral of purchasing decisions by customers could have a material adverse
effect on the business of Netrix and OpenROUTE, regardless of whether the
merger is ultimately completed. Similarly, current and prospective employees of
Netrix and OpenROUTE may experience
9
<PAGE>
uncertainty about their future role with the companies until after the merger
is completed or if the merger is not completed. This may adversely affect the
ability of Netrix and OpenROUTE to attract and retain key management, sales,
marketing and technical personnel.
The combined company will incur significant merger-related charges
We estimate that, as a result of the merger, the combined company will incur
integration costs associated with:
. consolidating corporate headquarters and other administrative functions;
. terminating certain leases and severance and facility closing costs
associated with consolidating certain product lines; and
. merger-related costs such as financial advisory, legal and accounting
fees and financial printing and other related charges.
Officers and directors of Netrix and OpenROUTE may have potential conflicts of
interest
Certain directors and officers of both Netrix and OpenROUTE have interests in
the merger that are in addition to the interests of Netrix and OpenROUTE
stockholders. In particular, the vesting of stock options to purchase shares of
Netrix and OpenROUTE common stock held by certain directors and officers of
each company will be accelerated upon the closing of the merger. In addition,
certain officers of Netrix and OpenROUTE have employment agreements that
provide them with benefits in the event of a change of control which will be
triggered by the merger if it is completed. Furthermore, following the merger
Bryan R. Holley and three other OpenROUTE directors will become members of the
Netrix board of directors and it is expected that certain executive officers of
OpenROUTE will become executive officers of Netrix. See "Interests of Officers
and Directors in the Merger" beginning on page 39.
The merger may not be treated as a tax free reorganization
The merger is intended to be treated as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code and generally tax free to the
stockholders of OpenROUTE. It is a condition to the obligation of OpenROUTE to
consummate the merger that it receives an opinion from its counsel that the
merger will be treated as a tax-free reorganization. In rendering its opinion,
counsel to OpenROUTE will rely upon certain representations of OpenROUTE and
Netrix, made as of the closing date of the merger. If such representations are
untrue, incorrect or incomplete, the merger may not be treated as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, and the receipt in the merger by OpenROUTE stockholders of Netrix common
stock may be taxable.
Netrix and OpenROUTE must obtain consents and waivers under the terms of their
credit facilities
Netrix has a credit facility with Coast Business Credit, under which Netrix
had borrowed approximately $1.2 million as of September 30, 1999. OpenROUTE has
a credit facility with Silicon Valley Bank, under which OpenROUTE had no
borrowings as of September 30, 1999. Under each of these credit facilities, the
lender's consent is required to any change of control transaction or the
borrowed amounts must be repaid. The merger will be deemed a change in control
of each of Netrix and OpenROUTE for this purpose, and, therefore, before the
merger is completed each of Netrix and OpenROUTE will be required to obtain a
waiver from its lender or prepay the outstanding amounts owed together with
prepayment penalties. Neither Netrix nor OpenROUTE can provide any assurance
that its lender will grant a waiver. If the lender does not grant a waiver and
Netrix or OpenROUTE, as the case may be, does not prepay the amount owed, then
the credit facility could be accelerated and all amounts owed to the lender as
of that date would be due immediately.
To date, Netrix and OpenROUTE have incurred substantial net losses, and if this
continues the combined company will be unable to meet its working capital
requirements
For the years ended December 31, 1998 and 1997, respectively, Netrix incurred
net losses of approximately $6.3 million and $8.6 million and, on a pro forma
basis, after giving effect to the merger with
10
<PAGE>
OpenROUTE, Netrix would have a net loss of approximately $32.9 million for the
year ended December 31, 1998. Through September 30, 1999, Netrix has incurred
additional losses of approximately $5.9 and, on a pro forma basis, after giving
effect to the merger with OpenROUTE, Netrix would have had a net loss of
approximately $21.1 million in this period. These losses present a significant
risk to stockholders of the combined company. The combined company expects to
recognize efficiencies in the future and to benefit from better marketing
opportunities and product offerings as a result of the merger, however, we
cannot assure you that after the merger Netrix will achieve or sustain
profitability or positive cash flows from operating activities. If Netrix
cannot achieve profitability or positive cash flows from operating activities,
it may be unable to meet its working capital and future debt service
requirements, which would have a material adverse effect on its business,
financial condition and results of operation and the price of its common stock.
In addition, if Netrix cannot return to sustained profitability it will be
forced to sell all or part of its business, liquidate or seek to reorganize.
Netrix may require additional capital to fully implement its business plan, and
Netrix cannot be certain that the necessary funds will be available
Netrix's ability to return to profitability is largely dependent upon its
ability to introduce new products and technologies and expand its sales efforts
in new geographic and product markets. These activities require substantial
capital, and if Netrix does not have access to sufficient funds, either from
its own operations or through third party financing, its ability to make these
necessary expenditures will be limited. As described in the preceding
paragraph, there can be no assurance that Netrix will be able to obtain these
necessary funds from its own operations. If Netrix is required to seek third
party financing, Netrix cannot assure you that it will be able to obtain
financing on terms favorable to it, or at all. If Netrix obtains additional
funds by selling any of its equity securities, the percentage ownership of
Netrix stockholders will be reduced, stockholders may experience additional
dilution, or the equity securities may have rights, preferences or privileges
senior to the common stock. If adequate funds are not available to Netrix or
available to it on satisfactory terms, it may be required to limit its product
development activities or other operations, or otherwise modify its business
strategy. These actions, if taken, could increase the difficulties Netrix faces
in returning to sustained profitability.
The combined company's cash flow may not be sufficient to permit repayment of
its indebtedness when due
The combined company's ability to make payments on and to refinance its
indebtedness will depend on its ability to generate cash in the future. There
can be no assurance that the combined company's business will generate
sufficient cash flow from operations to meet its debt service requirements. The
combined company's cash flow from operations may be insufficient to repay its
indebtedness at scheduled maturity and some or all of such indebtedness may
have to be refinanced. If the combined company is unable to refinance its debt
or if additional financing is not available on acceptable terms, the combined
company could be forced to dispose of assets under circumstances that might not
be favorable to realizing the highest price for the assets or to default on its
obligations with respect to its indebtedness, either of which could have a
material adverse effect on the price of Netrix common stock after the merger.
The combined company's ability to use Netrix and OpenROUTE's net operating loss
carryforwards may be limited
As of December 31, 1998, Netrix had federal income tax net operating loss
carryforwards of $38.1 million which begin to expire in 2002. The combined
company's ability to use Netrix's net operating loss carryforwards to reduce
its future tax payments would be limited if, within three years of incurring
such loss, an ownership change of more than 50% were to occur. As a result of
the merger, Netrix's net operating loss carryforwards from before the date of
the merger will be subject to this limitation. In addition, as of December 31,
1998, OpenROUTE had federal income tax net operating loss carryforwards of
approximately $33.0 million that begin to expire in 2010. A tax asset related
to this loss carryforward does not appear on OpenROUTE's balance sheet because
it is unclear if OpenROUTE will generate taxable income prior to the
11
<PAGE>
expiration of the net operating loss carryforwards. The extent to which the
combined company may use OpenROUTE's net operating loss carryforwards to reduce
the combined company's future tax liability may be limited. As a result of
these limitations, the future tax liability of the combined company may be
greater than the combined tax liabilities of Netrix and OpenROUTE in the
absence of the merger.
Netrix relies to a large extent on independent distribution channels and the
loss of a significant number of distributors could adversely effect Netrix
Netrix relies on reseller channels, including distributors and systems
integrators, for a significant portion of Netrix revenues. In particular, in
foreign markets Netrix often has one distributor designated for an entire
country, and that distributor provides local support and service for Netrix
products. The loss of one or more significant resellers could adversely affect
Netrix's business in terms of:
. lost revenues;
. lost market presence; and
. the difficulties Netrix would encounter in servicing customers
introduced to it by Netrix resellers if Netrix does not have other
resellers in that geographic area.
Netrix is exposed to potential delays in product shipments because it contracts
out product manufacturing and some components for Netrix products are available
only from a single supplier or a limited number of suppliers
It is not economically feasible for Netrix to develop its own product
manufacturing capacity in the foreseeable future. Netrix relies on others to
manufacture its products and product components and this dependence exposes
Netrix to potential interruptions or delays in product delivery. An
interruption could have a short term effect on Netrix's revenues and a longer
term effect on its ability to market its products. Currently, Netrix relies on
a single contract manufacturer to assemble and test most of its products. Also,
some of the components Netrix uses in its products are available from only one
source or a limited number of suppliers. Although Netrix has been able to
obtain its products and these components to date, its inability to develop
alternative sources if and as required in the future, or to obtain sufficient
sole source or limited source components as required, could result in delays or
reductions in product shipments.
The combined company's business will suffer if it loses certain key personnel
or fails to attract and retain other qualified personnel
The success of the combined company's business will be dependent, to a
significant extent, upon the abilities and continued efforts of its management,
marketing, engineering and technical personnel, many of whom would be difficult
to replace. Netrix does not have employment contracts with all of its key
employees and it does not have "key man" life insurance on any of its officers
or directors.
The success of the combined company's business will also depend on its
ability to attract, retain and motivate qualified management, marketing,
technical and sales executives and other personnel who are in high demand and
who often have multiple employment options. In addition, as a result of the
changes to Netrix and OpenROUTE resulting from the merger, many employees that
Netrix would like to retain may decide to pursue other opportunities or Netrix
may be forced to increase their compensation to retain them. The loss of the
services of key personnel, or the inability to attract, retain and motivate
qualified personnel, could have a material adverse effect on the combined
company's business, financial condition, results of operations and the price of
Netrix common stock.
The combined company could experience system failures and service disruptions
as a result of the year 2000 issue
The combined company faces certain risks arising from the year 2000 issue
which could have a material adverse affect on the combined company's business,
financial condition, results of operations and the price of its common stock.
See "Netrix Management's Discussion and Analysis of Financial Condition and
Results of
12
<PAGE>
Operations-year 2000" and "OpenROUTE Management's Discussion and Analysis of
Financial Condition and Results of Operations-year 2000."
Netrix's intellectual property rights are an important protection for its
products, and Netrix could be adversely affected if its rights are challenged
or circumvented by competitors
Netrix's ability to compete successfully within its industry is dependent in
part upon:
. patents and nondisclosure agreements that Netrix has obtained;
. technical measures that Netrix takes to protect confidential
information; and
. trade secret, copyright and trademark laws that Netrix relies on to
establish and protect its proprietary rights.
If any of Netrix's proprietary rights are successfully challenged or
circumvented by competitors, or if other companies are able to market
functionally similar products, systems or processes without infringing Netrix's
proprietary rights, then Netrix's results of operations and the value of its
common stock could be materially and adversely affected.
The market price of Netrix's common stock is volatile
The market price of Netrix's common stock has been and can be expected to be
significantly affected by factors such as:
. quarterly variations in its results of operations;
. the announcement of new services or service enhancements by Netrix or
its competitors;
. technological innovations by Netrix or its competitors;
. changes in earnings estimates or buy/sell recommendations by analysts;
. the operating and stock price performance of other comparable companies;
and
. general market conditions or market conditions specific to particular
industries.
In particular, the stock prices for many companies in the telecommunications
equipment sector have experienced wide fluctuations that have often been
unrelated to the operating performance of such companies. Netrix has been, and
is likely to continue to be, subject to such fluctuations.
Netrix's certificate of incorporation and by-laws contain provisions that could
delay or prevent a change in control
Provisions of Netrix's certificate of incorporation and by-laws may have the
effect of discouraging, delaying or preventing a take-over attempt that could
be in the best interests of Netrix stockholders. These include provisions that:
. separate the Netrix board into three classes;
. limit the ability of Netrix's stockholders to call special stockholder
meetings;
. require advance notice of nominations for directors and stockholder
proposals to be considered at stockholder meetings; and
. require a vote greater than two-thirds to remove directors from office
or amend many of the provisions of Netrix's certificate of incorporation
and by-laws.
Netrix's board also has the right, without further action of the
stockholders, to issue and fix the terms of preferred stock, which could have
rights senior to the common stock. Netrix is also subject to the "business
combination" provisions of the Delaware General Corporate Law, which impose
procedures impeding business combinations with "interested stockholders" that
are not approved of by Netrix's board.
13
<PAGE>
Rapidly changing technology may make products of the combined company obsolete
or unmarketable
Netrix and OpenROUTE have focused their products on the edge of the Internet
and telephony. The markets for products in this market is characterized by
rapid technological change, frequent new product introduction and evolving
industry standards. The introduction of products embodying new technologies by
competitors of Netrix and OpenROUTE and the emergence of new industry standards
could render existing products of Netrix and OpenROUTE obsolete and could cause
new products to be unmarketable. Under these circumstances, the revenue of
Netrix and OpenROUTE would be adversely effected.
The success of the combined company will depend on the ability to address the
increasingly sophisticated needs of customers, to enhance existing products and
to develop and introduce, on a timely basis, new competitive products that keep
pace with technological development and emerging industry standards. If the
combined company cannot successfully identify, manage, develop manufacture or
market products enhancements or new products, its business will be materially
and adversely effected.
A portion of the combined company's revenues are derived from international
sales, which are subject to foreign regulatory standards and currency exchange
rate fluctuations
Netrix's international sales accounted for 53%, 62% and 63% of its total
revenues in 1998, 1997 and 1996, respectively. OpenROUTE's international sales
accounted for 30.9%, 35.4% and 38.3% of its total revenues in 1998, 1997 and
1996, respectively.
The conduct of international operations will subject the combined company to
certain risks. Netrix and OpenROUTE each expects that international sales will
continue to be a significant portion of its business. Foreign regulatory bodies
continue to establish standards different from those in the United States, and
the products of Netrix and OpenROUTE are designed generally to meet those
standards. The inability of the combined company to design products in
compliance with such foreign standards could have an adverse effect on its
operating results. Also, the combined company's international business may be
affected by changes in demand resulting from fluctuation in currency exchange
rates and tariffs and difficulties in obtaining export licenses. The combined
company does not expect that it will hedge against fluctuations in currency
exchange rates.
14
<PAGE>
THE NETRIX SPECIAL MEETING
Date, Time and Place
The Netrix special meeting will be held on Wednesday, December 22, 1999, at
9:30 a.m. local time, at the Yale Club, 50 Vanderbilt Avenue, New York, New
York.
Purpose of the Netrix Special Meeting
At the Netrix special meeting, Netrix stockholders will be asked to adopt the
merger agreement and to approve an increase in the number of authorized shares
of common stock of Netrix from 29 million shares to 55 million shares in
connection with the merger. The Netrix board has determined that the merger and
the increased authorized common stock is advisable, fair to and in the best
interests of Netrix stockholders, has unanimously approved the merger
agreement, the merger and the increase in the authorized capital stock, and
unanimously recommends that Netrix stockholders vote FOR adoption of the merger
proposal and the increase in the authorized capital stock.
Record Date; Stock Entitled to Vote; Quorum
Only holders of record of Netrix common stock at the close of business on
November 16, 1999, the record date, are entitled to notice of and to vote at
the Netrix special meeting. Holders of Netrix preferred stock are not entitled
to vote at the special meeting. On the record date, 11,976,821 shares of Netrix
stock were issued and outstanding held by 252 holders of record and
approximately 5,000 beneficial owners. A majority of the shares of Netrix stock
issued and outstanding and entitled to vote on the record date must be
represented in person or by proxy at the Netrix special meeting in order for a
quorum to be present for purposes of voting upon the proposal to adopt the
merger agreement and to increase the authorized common stock of Netrix.
Abstentions and broker "non-votes" count as present for establishing a quorum.
Holders of record of Netrix stock on the record date are entitled to one vote
per share held at the Netrix special meeting.
Votes Required
Approval of the merger agreement and the increase in Netrix's authorized
common stock requires the affirmative vote of a majority of the Netrix common
stock outstanding on the record date. If a Netrix stockholder abstains from
voting or does not vote (either in person or by proxy), it will have the same
effect as if that Netrix stockholder had voted against adoption of the merger
agreement and the increase in the authorized capital stock.
Voting by Netrix Directors and Executive Officers
Steven T. Francesco, the Chairman and Chief Executive Officer of Netrix,
entered into a voting agreement to vote any shares he acquires in favor of the
merger. On November 16, 1999, Mr. Francesco owned immediately exercisable
options to acquire 400,000 shares of Netrix common stock, but he did not own
any shares directly. At the close of business on the record date, directors and
executive officers of Netrix and their affiliates did not own any shares of
Netrix stock.
Voting of Proxies
All shares of Netrix stock represented by properly executed proxies received
in time for the Netrix special meeting will be voted at the Netrix special
meeting in the manner specified in the proxies. Properly executed proxies that
do not contain voting instructions will be voted for adoption of the merger
agreement and in favor of the increase in the authorized common stock of
Netrix.
15
<PAGE>
For voting purposes at the Netrix special meeting, only shares affirmatively
voted for adoption of the merger agreement and the increase in the authorized
common stock of Netrix (including properly executed proxies that do not contain
voting instructions) will be counted as favorable votes for those proposals. If
a Netrix stockholder abstains from voting or does not vote (either in person or
by proxy), it will have the same effect as if that Netrix stockholder had voted
against adoption of the merger agreement and the increase in the authorized
common stock of Netrix. Under the applicable rules of the Nasdaq National
Market, brokers who hold shares of Netrix stock in street name for customers
who are the beneficial owners of such shares are prohibited from giving a proxy
to vote those customers' shares with respect to the Netrix proposals in the
absence of specific instructions from those customers. These non-voted shares
are referred to as "broker non-votes" and have the same effect as votes against
the proposals.
Netrix does not expect that any matter other than the proposals to adopt the
merger agreement and increase the authorized common stock will be brought
before the Netrix special meeting. If, however, the Netrix board properly
presents other matters, the persons named as proxies will vote in accordance
with their judgment.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval
of the holders of shares representing a majority of the votes present in person
or by proxy at the meeting, whether or not a quorum exists, without further
notice other than by an announcement made at the meeting. Netrix does not
currently intend to seek an adjournment of the meeting.
How to Vote by Proxy
Complete, sign, date and return the enclosed proxy card in the enclosed
envelope. Proxies must be received by Netrix prior to the date of the special
meeting.
Revocability of Proxies
The grant of a proxy on the enclosed proxy card does not preclude a
stockholder from voting in person at the Netrix special meeting. A stockholder
may revoke a proxy at any time prior to the special meeting by filing with the
Secretary of Netrix a duly executed revocation of proxy, by submitting a new
duly executed proxy by mail or by appearing at the Netrix special meeting and
voting in person. Attendance at the Netrix special meeting will not, in and of
itself, constitute revocation of a proxy. A Netrix stockholder whose shares are
held in the name of its broker, bank, or other nominee must bring a legal proxy
from its broker, bank or other nominee to the meeting in order to vote in
person.
Deadline for Voting by Proxy
Votes cast by mail must be received prior to the special meeting in order to
be counted. Revocations must be received prior to the special meeting to be
effective.
Solicitation of Proxies
Netrix will bear the cost of the solicitation of proxies from its
stockholders. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of stock held of record by such persons, and
Netrix will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection therewith.
Corporate Investor Communications, Inc. will assist in the solicitation of
proxies by Netrix. Netrix will pay Corporate Investor Communications a fee of
$6,500 plus reimbursement of certain out-of-pocket expenses and will indemnify
Corporate Investor Communications against any losses arising out of its proxy
soliciting services on behalf of Netrix.
16
<PAGE>
THE OPENROUTE SPECIAL MEETING
Date, Time and Place
The OpenROUTE special meeting will be held on Wednesday, December 22, 1999,
at 11:00 a.m., at the Yale Club, 50 Vanderbilt Avenue, New York, New York.
Purpose of the OpenROUTE Special Meeting
At the OpenROUTE special meeting, OpenROUTE stockholders will be asked to
adopt the merger agreement. The OpenROUTE board has determined that the merger
is advisable, fair to and in the best interests of OpenROUTE stockholders, has
unanimously approved the merger agreement and unanimously recommends that
OpenROUTE stockholders vote FOR adoption of the merger agreement.
Record Date; Stock Entitled to Vote; Quorum
Only holders of record of OpenROUTE common stock at the close of business on
November 16, 1999, the record date, are entitled to notice of and to vote at
the OpenROUTE special meeting. On the record date, 15,527,189 shares of
OpenROUTE common stock were issued and outstanding and were held by 393
holders of record and approximately 9,000 beneficial owners. A majority of the
shares of OpenROUTE common stock issued and outstanding and entitled to vote
on the record date must be represented in person or by proxy at the OpenROUTE
special meeting in order for a quorum to be present for purposes of voting
upon the proposal to adopt the merger agreement. Abstentions and broker "non-
votes" count as present for establishing a quorum. Holders of record of
OpenROUTE common stock on the record date are entitled to one vote per share
at the OpenROUTE special meeting.
Votes Required
Adoption of the merger agreement requires the affirmative vote of a majority
of the OpenROUTE common stock outstanding on the record date. If an OpenROUTE
stockholder abstains from voting or does not vote (either in person or by
proxy), it will have the same effect as if that OpenROUTE stockholder had
voted against adoption of the merger agreement.
Voting by OpenROUTE Directors and Executive Officers
At the close of business on the record date, directors and executive
officers of OpenROUTE and their affiliates owned and were entitled to vote
1,141,611 shares of OpenROUTE common stock, which represented approximately
7.4% of the shares of OpenROUTE stock outstanding on that date. Bryan R.
Holley, OpenROUTE's Chief Executive Officer and holder of 6,000 shares of
OpenROUTE common stock, and Howard C. Salwen, OpenROUTE's Chairman of the
Board and holder of 1,001,264 shares of OpenROUTE common stock, have signed
agreements to vote their shares in favor of adoption of the merger agreement,
the merger and any matter that could reasonably be expected to facilitate the
merger, and to vote their shares against any proposal made in opposition to
consummation of the merger. Every director and executive officer of OpenROUTE
has indicated his present intention to vote, or cause to be voted, their
shares in favor of adoption of the merger agreement.
Voting of Proxies
All shares of OpenROUTE stock represented by properly executed proxies
received in time for the OpenROUTE special meeting will be voted at the
OpenROUTE special meeting in the manner specified in the proxies. Properly
executed proxies that do not contain voting instructions will be voted:
. for adoption of the merger agreement; and
. for giving discretion to the proxies to vote upon such other business as
may properly come before the meeting, including any adjournment or
postponement thereof.
17
<PAGE>
For voting purposes at the OpenROUTE special meeting, only shares
affirmatively voted for adoption of the merger agreement (including properly
executed proxies that do not contain voting instructions) will be counted as
favorable votes. If an OpenROUTE stockholder abstains from voting or does not
vote (either in person or by proxy), it will have the same effect as if that
OpenROUTE stockholder had voted against adoption of the merger agreement. Under
the applicable rules of the Nasdaq National Market, brokers who hold shares of
OpenROUTE stock in street name for customers who are the beneficial owners of
such shares are prohibited from giving a proxy to vote those customers' shares
with respect to the merger proposal in the absence of specific instructions
from those customers. These non-voted shares are referred to as "broker non-
votes" and have the same effect as votes against the proposals.
OpenROUTE does not expect that any matter other than the proposal to adopt
the merger agreement will be brought before the OpenROUTE special meeting. If,
however, the OpenROUTE board properly presents other matters, the persons named
as proxies will vote in accordance with their judgment.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval
of the holders of shares representing a majority of the votes present in person
or by proxy at the meeting, whether or not a quorum exists, without further
notice other than by an announcement made at the meeting. OpenROUTE does not
currently intend to seek an adjournment of the meeting.
How to Vote by Proxy
Complete, sign, date and return the enclosed proxy card in the enclosed
envelope. Proxies must be received by OpenROUTE prior to the date of the
special meeting.
Revocability of Proxies
The grant of a proxy on the enclosed form of proxy does not preclude a
stockholder from voting in person at the OpenROUTE special meeting. A
stockholder may revoke a proxy at any time prior to its exercise by filing with
the Clerk of OpenROUTE a duly executed revocation of proxy, by submitting a new
duly executed proxy by mail or by appearing at the OpenROUTE special meeting
and voting in person. Attendance at the OpenROUTE special meeting will not, in
and of itself, constitute revocation of a proxy. An OpenROUTE stockholder whose
shares are held in the name of its broker, bank or other nominee must bring a
legal proxy from its broker, bank or other nominee to the meeting in order to
vote in person.
Solicitation of Proxies
OpenROUTE will bear the cost of the solicitation of proxies from its
stockholders. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of stock held of record by such persons, and
OpenROUTE will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection therewith.
Corporate Investor Communications, Inc. will assist in the solicitation of
proxies by OpenROUTE. OpenROUTE will pay Corporate Investor Communications a
fee of $5,500 plus reimbursement of certain out-of-pocket expenses and will
indemnify Corporate Investor Communications against any losses arising out of
its proxy soliciting services on behalf of OpenROUTE.
18
<PAGE>
THE MERGER
Background of the Merger
From time to time Netrix has considered strategic alternatives in order to
obtain sufficient incremental growth to achieve sustained profitability. In the
course of evaluating one potential arrangement in early 1998, Lynn Chapman, the
Chief Operating Officer of Netrix, was introduced to James Norrod, who was then
Chief Executive Officer of ITK International, Inc. Subsequently, Mr. Norrod and
Bryan R. Holley, who was then Chief Executive Officer of ITK
Telecommunications, Inc., left ITK to join OpenROUTE.
On July 6, 1998, Bryan R. Holley was appointed President and Chief Executive
Officer of OpenROUTE. Prior to the appointment of Mr. Holley, the strategy
developed by senior management of OpenROUTE did not include the consideration
of opportunities for mergers or acquisitions. After gaining the agreement of
OpenROUTE's board and hiring a new senior management staff, Mr. Holley began
regularly to consider opportunities for acquisitions, joint ventures and other
strategic alliances in order to enhance stockholder value and access new
markets. Specifically, the new market Mr. Holley wanted to access was the
convergence market--the bringing together of voice, data and video over the
Internet.
In August 1998, Mr. Norrod introduced Lynn Chapman to Bryan Holley, and they
discussed informally the potential for a business combination between Netrix
and OpenROUTE. For reasons unrelated to the merits of a proposed transaction,
the discussions did not proceed.
On February 2, 1999, OpenROUTE hired the investment banking firm of Dain
Rauscher Wessels to evaluate opportunities that could result in technology
relationships involving OpenROUTE and other companies. Dain Rauscher Wessels
brought a number of companies to the attention of Mr. Holley. Based upon
further evaluation, OpenROUTE deemed the opportunities proposed by Dain
Rauscher Wessels for technology partnerships to be unsatisfactory.
On May 5, 1999, Netrix retained the investment banking firm of Kaufman Bros.,
L.P. to help identify and evaluate potential opportunities for business
combinations and capital raising.
From time to time, acting independently of their investment banks, each of
Mr. Holley and Mr. Chapman would receive or initiate requests to explore
opportunities with companies having complementary businesses or technologies.
On May 24, 1999, Mr. Chapman telephoned Mr. Holley requesting that Mr. Holley
telephone Steven T. Francesco, the Chairman and Chief Executive Officer of
Netrix, to explore a relationship between the two companies.
On May 25, 1999, Mr. Holley called Mr. Francesco and arranged a meeting to
begin to explore this opportunity.
On May 27, 1999, Mr. Holley, Mr. Francesco, Mr. Chapman and Mr. Norrod, who
had become a director of OpenROUTE, met in Boston. At this meeting, both
companies expressed an interest in pursuing merger discussions. Mr. Holley
presented an overview of OpenROUTE's products and business strategy to
facilitate Netrix's evaluation of a relationship with OpenROUTE. Over the
course of the next several weeks, Mr. Chapman and Mr. Holley exchanged messages
and spoke briefly in an attempt to arrange further meetings between technical,
marketing and management representatives of the two companies.
During July 1999, a series of meetings and discussions were held in person
and by telephone between the technical staffs of the two companies.
On July 27, 1999, at an informal meeting related to Netrix's annual meeting
of stockholders, Mr. Francesco apprised the Netrix board of his discussions
with OpenROUTE and discussed with them certain aspects of the proposed
OpenROUTE acquisition.
19
<PAGE>
On August 4, 1999, Mr. Holley, Mr. Norrod, Robert Koch, OpenROUTE's Vice
President of Engineering, Richard Sterry, OpenROUTE's Vice President of
Marketing, Bruce MacAloney, OpenROUTE's Vice President of Sales and Thomas
Aucella, OpenROUTE's Vice President of Asia Pacific Operations, visited Netrix
to meet with Mr. Francesco, Mr. Chapman and Peter J. Kendrick, Netrix's Chief
Financial Officer. At this meeting, the attendees discussed the technology
relationship between the two companies, including the value of entering the
convergence market as one company. The management teams of both companies
discussed the possibility of combining OpenROUTE's data technology with
Netrix's voice over Internet protocol technology in order to bring to market a
new business solution. The new business solution would make it possible for
people to make secure, toll quality telephone calls over less expensive data
lines. Within the industry, this new convergence product would be referred to
as secure VoIP (Voice Over Internet Protocol) through the use of VPNs (Virtual
Private Networks).
Based upon this meeting, the parties entered into a mutual nondisclosure
agreement on August 11, 1999 to allow them to conduct detailed investigations
of each other which, if satisfactory to both companies, would lead to further
negotiations.
On August 12, 1999, at a meeting of OpenROUTE's board, Mr. Holley presented
the potential of a business combination with Netrix. At the meeting, the
OpenROUTE board asked questions and discussed the transaction and the
implications of the proposed transaction on OpenROUTE's stockholder value.
Following a lengthy discussion and review, OpenROUTE's board authorized
management to continue its discussions regarding the proposed strategic
combination with Netrix.
On August 13, 1999, OpenROUTE met with Tucker Anthony to discuss retaining it
as its advisor in connection with the proposed relationship with Netrix.
On August 24, 1999, Tucker Anthony distributed to Netrix and its legal and
financial advisors a draft memorandum of understanding with respect to the
merger. Between August 24 and August 26, 1999, the attorneys and financial
advisors to Netrix and OpenROUTE discussed and negotiated the terms of the
memorandum of understanding.
On August 26, 1999, Netrix's board met to discuss the memorandum of
understanding and the proposed merger. The Netrix board unanimously approved
the memorandum of understanding and authorized Mr. Francesco to proceed with
negotiation of the merger terms.
On August 26, 1999, OpenROUTE's board met by teleconference to discuss the
memorandum of understanding regarding OpenROUTE's proposed relationship with
Netrix. The OpenROUTE board approved the memorandum of understanding.
On August 27, 1999, OpenROUTE and Netrix signed the memorandum of
understanding.
On August 27, 1999, OpenROUTE and Netrix announced that they signed a letter
of intent to merge. Under the terms of the letter of intent, Netrix
stockholders were to retain their shares and each share of OpenROUTE common
stock was to be exchanged for one share of Netrix common stock. OpenROUTE and
Netrix announced that they expected the merger to be consummated by year-end,
subject to certain conditions including the approval of each company's
stockholders and the fulfillment of other customary conditions.
On September 2, 1999, the first draft of the merger agreement was distributed
by Kelley Drye & Warren LLP, legal counsel to Netrix, to OpenROUTE and its
legal and financial advisors.
On September 2, 1999, Richard Sterry and Robert A. Koch of OpenROUTE met at
Netrix with Anthony Morris, Vice President of Marketing, to discuss how the
companies would work together towards a joint technology partnership.
Subsequent to this meeting, the parties held frequent discussions and status
meetings between their respective engineering and marketing organizations to
focus on the development of the objectives of the secure VoIP product.
20
<PAGE>
On September 9, 1999, Netrix's engineering staff met with members of
OpenROUTE's engineering staff at the offices of OpenROUTE to discuss the
timeline and other issues related to the development of the secure VoIP
product. Peter J. Kendrick also met with Henry Barber, OpenROUTE's Chief
Financial Officer, to discuss all financial issues related to the pending
merger and to begin due diligence.
Between September 9, 1999 and September 20, 1999 the attorneys for Netrix and
OpenROUTE negotiated the terms of the Merger Agreement.
On September 21, the executive management of Netrix and OpenROUTE convened a
meeting by telephone conference, together with their respective legal and
financial advisors to address business issues arising from negotiations of the
merger agreement by the companies' respective legal counsel.
On September 24, 1999, a meeting was convened by telephone conference to
address certain accounting issues related to the merger. The executive officers
of Netrix and OpenROUTE and their respective legal and financial advisors all
participated in this discussion.
Between September 27, 1999 and September 30, 1999, final negotiations were
conducted among the parties with respect to the merger agreement.
On September 30, 1999, the Netrix board met to consider approval of the
merger with OpenROUTE. In addition to the full board, Mr. Kendrick and
representatives of Kaufman, Kelley Drye and Arthur Andersen, LLP, Netrix's
independent public accountants, participated in the meeting. At the meeting,
Mr. Francesco and Mr. Kendrick provided an overview of the terms of the merger,
the anticipated impact on Netrix, and the results of their business due
diligence of OpenROUTE. Kelley Drye advised the board regarding the exercise of
fiduciary duties in connection with transactions such as the proposed merger
and also provided a summary of the legal due diligence review of OpenROUTE.
Kaufman advised the board as to the scope of its review, its financial analysis
of the merger and its opinion with respect to the fairness of the merger to
Netrix stockholders from a financial point of view. The board then discussed
various aspects of the proposed transaction and asked questions of management
and the other representatives. After a comprehensive discussion and the
proposed acquisition, the board approved the merger agreement and authorized
Mr. Francesco to execute the merger agreement. Steven Francesco executed the
merger agreement on behalf of Netrix.
On September 30, 1999, the OpenROUTE board met by teleconference to discuss
the potential merger with Netrix. Bryan Holley, Henry Barber, representatives
of Tucker Anthony, Swidler Berlin Shereff Friedman, LLP and representatives of
BDO Seidman LLP, OpenROUTE's independent accountants, attended the meeting. At
the meeting, representatives from OpenROUTE's management described the status
of the proposed transaction with Netrix and reviewed written documentation
containing analyses and related financial information that had been provided to
the OpenROUTE board prior to the meeting. The board's fiduciary duties in
pursuing an agreement with Netrix were discussed. OpenROUTE's board asked
questions and discussed the strategy underlying the proposed transaction, the
risks inherent in the proposed transaction and the implications of the proposed
transaction on OpenROUTE stockholder value. Following a lengthy and
comprehensive discussion and review of the potential merger, and the written
opinion of Tucker Anthony that the merger consideration to be received by
holders of OpenROUTE common stock would be fair, OpenROUTE's board of directors
approved a definitive merger agreement with Netrix. The OpenROUTE board
authorized Mr. Holley and Mr. Barber to execute the merger agreement on behalf
of OpenROUTE. Following the approval by the board of directors, Mr. Holley and
Mr. Barber executed the merger agreement on behalf of OpenROUTE.
On November 9, 1999 Netrix and OpenROUTE amended the merger agreement to
eliminate the obligation of each company to pay a $1.0 million break-up fee if
the merger agreement is not approved by that company's stockholders, unless a
competing transaction has been offered by a third party.
Netrix's Reasons for the Merger; Recommendations of Netrix's Board of Directors
In reaching its decision to approve the merger agreement and the merger and
to recommend adoption of the same to Netrix stockholders, the Netrix board
consulted with its management team and advisors and independently considered a
number of factors including the following:
21
<PAGE>
. The minimal overlap in technology between Netrix and OpenROUTE;
. The complementary nature of the two companies' product lines and the
potential for new marketing and sales opportunities resulting from the
ability to offer a solution for customer premise equipment in the
CLEC/ISP environment;
. The ability to combine Netrix's new expanded sales force with
OpenROUTE's product capabilities to win significant market share;
. The fact that Netrix's stockholders will have the opportunity to
participate in the potential for diversified and enhanced growth after
the merger;
. The operational and administrative cost savings that would result from
the merger with OpenROUTE;
. The fact that the merger will bring together the complementary assets,
resources and expertise of the two companies enabling the consolidated
company to effectively compete in the rapidly changing
telecommunications equipment markets;
. The strategic and financial alternatives available to OpenROUTE,
including remaining an independent public company;
. The written opinion of Kaufman Bros., L.P., dated September 30, 1999, a
copy of which is attached as Annex C to this joint proxy
statement/prospectus, that, subject to the assumptions and limitations
contained in that opinion, as of that date, the exchange ratio was fair,
from a financial point of view, to Netrix, and the financial
presentation made by Kaufman to the Netrix board in connection with
delivering that opinion;
. The terms and conditions of the merger agreement, including termination
fees and closing conditions;
. The qualification of the merger as a tax-free transaction for U.S.
federal income tax purposes (except for tax resulting from any cash
received by dissenting OpenROUTE stockholders).
In the course of its deliberations, the Netrix board reviewed with senior
management and outside legal and financial advisors a number of additional
factors relevant to the merger, including:
. Historical information concerning Netrix's and OpenROUTE's respective
businesses, financial performance and condition, operations, technology,
management and competitive position;
. Netrix's view as to the financial condition, results of operations and
businesses of Netrix and OpenROUTE before and after giving effect to the
merger based on management due diligence and publicly available
information;
. Reports from management and legal advisors as to the results of their
due diligence investigation of OpenROUTE and its operations; and
. Current financial market conditions and historical market prices and
trading information with regard to Netrix's common stock and OpenROUTE's
common stock.
The Netrix board also identified and considered the following potentially
negative factors in its deliberations concerning the merger:
. The risk that key benefits of each company's products cannot be
integrated into a unified product line delivering all the capabilities
of both companies;
. The risk that the integration of the two companies' respective
operations and employees might not occur in a timely manner and that the
operations of the two companies might not be successfully integrated;
. The risk that, despite the efforts of the combined company, key
technical and management personnel might not remain employed by the
combined company;
. The substantial charges to be incurred in connection with the merger,
including costs of integrating the businesses and transaction expenses
arising from the merger;
. The risk that potential benefits sought in the merger might not be fully
realized; and
22
<PAGE>
. The other risks described under the caption "Risk Factors" presented
earlier in this joint proxy statement/prospectus.
The foregoing discussion of the information and factors considered by the
Netrix board is not intended to be exhaustive but includes all material factors
considered by the Netrix board. In view of the variety of factors considered in
connection with its evaluation of the merger agreement and the merger, the
Netrix board did not find it practicable to and did not quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the Netrix board may have
given different weight to different factors.
After careful consideration, the Netrix board unanimously determined that the
terms of the merger agreement are fair to and in the best interests of Netrix
and its stockholders and has approved the merger agreement and the merger. The
Netrix board unanimously recommends that the stockholders of Netrix vote FOR
the adoption of the merger agreement.
OpenROUTE's Reasons for the Merger; Recommendations of OpenROUTE's Board of
Directors
In reaching its decision to approve the merger agreement and the merger and
to recommend adoption of the merger agreement to OpenROUTE stockholders, the
OpenROUTE board consulted with its management team and advisors and
independently considered the proposed merger agreement and the transactions
contemplated thereby. The following positive factors were considered by the
OpenROUTE board in making its decision:
. Economies of scale. Similarities in the manufacturing, administration
and product development functions of the two companies would allow
economies of scale and opportunities for consolidation.
. Management strength. The combined company would have a strong and deep
management team, at both the operating and corporate levels.
. Facilitate capital raising. The merger would facilitate the capital
raising activities of the combined company, which capital could be used
to fund the new company's launch, marketing and sales expansion and
cover consolidation expenses.
. Increased competitiveness. The combined company would have increased
ability to compete for world-class projects.
. Product Synergies:
-- The product lines of OpenROUTE and Netrix complement each other.
Netrix has strength in the telephony/voice networking market.
OpenROUTE has strength in the data networking market. Together, by
developing and implementing a combined strategy, a combined company
could compete much more effectively with the larger and better
established companies in the industry.
-- A combined product line provides a more complete range of products.
Netrix products are closer to the core of the network. OpenROUTE's
products are at the edge of the network. There is very little
overlap among the products currently sold by the two companies.
. Potential Product Development Opportunities:
-- Developing a VoIP module for OpenROUTE's GTX1000/1500 using Netrix
voice over IP technology. This is something that has been requested
by large ISPs and has been introduced by larger companies in this
market space.
-- Voice over VPN capabilities for the Netrix product line. OpenROUTE's
products can provide secure IP networking to introduce the first
secure VoIP capability.
-- Netrix network management could be used to create a seamless
management environment for a complete edge management solution.
-- Integrating selected code into Netrix's product could create an
extremely robust voice and data solution.
23
<PAGE>
. Sales/Marketing Synergies:
-- Leveraging existing ISP relationships.
-- Cross selling opportunities. The enterprise business is large for
both companies. OpenROUTE's enterprise customers are interested in
voice solutions and Netrix's customers are interested in data
solutions, creating significant cross selling opportunities.
-- Stronger sales force. A combined and complementary sales force would
strengthen the combined company's presence in Europe, where Netrix
is stronger in Denmark and Italy and OpenROUTE is stronger in the
United Kingdom and France.
. Move from development to marketing orientation. Both companies have a
development-oriented culture and history. Both companies believe that
they should shift their focus to become a marketing and sales oriented
company.
. Ease of expansion. Netrix is a distributed corporate structure.
Expanding to include one or two more locations will not be difficult.
. Establishment of a new identity. Both companies need to reposition
themselves by moving beyond identities forged with their legacy
products.
The OpenROUTE board also identified and considered the following potentially
negative factors in its deliberations concerning the merger:
. The potential benefits sought in the merger might not be realized fully,
or within the time frame contemplated;
. The possibility that the merger would not be consummated, and the
potentially negative effect of the public announcement on OpenROUTE's
sales and operating results;
. The risk that, despite the efforts of OpenROUTE and Netrix, key
technical, marketing and management personnel might choose not to remain
employed by Netrix after the merger;
. The substantial charges to be incurred in connection with the merger,
including the costs of integrating the two companies' businesses and the
transaction expenses arising from the merger; and
. The other risk factors associated with Netrix's business and the merger
described under "Risk Factors" herein.
The OpenROUTE board believed that certain of these risks are unlikely to
occur and that others may be avoided or mitigated by OpenROUTE and that,
overall, these risks are outweighed by the potential benefits of the merger.
The foregoing discussion of the information and factors considered by the
OpenROUTE board is not intended to be exhaustive but includes all material
factors considered by the OpenROUTE board. In view of the variety of factors
considered in connection with its evaluation of the merger agreement and the
merger, the OpenROUTE board did not find it practicable to and did not quantify
or otherwise assign relative weight to the specific factors considered in
reaching its determination. In addition, individual members of the OpenROUTE
board may have given different weight to different factors.
After careful consideration, the OpenROUTE board unanimously determined that
the terms of the merger agreement are fair to and in the best interests of
OpenROUTE and its stockholders and has approved the merger agreement and the
merger. The OpenROUTE board unanimously recommends that the stockholders of
OpenROUTE vote FOR the adoption of the merger agreement.
Opinion of Financial Advisor to Netrix
On September 30, 1999, Kaufman Bros., L.P. delivered its oral opinion to the
Netrix board of directors, that the exchange ratio of one share of Netrix
common stock for each share of OpenROUTE common stock in
24
<PAGE>
the merger was fair, from a financial point of view, to the stockholders of
Netrix. This opinion was subsequently confirmed in a written opinion dated
September 30, 1999. The Kaufman opinion is qualified by a number of
assumptions, matters considered and limits of review.
The following summary of the Kaufman opinion may not contain all of the
information important to you. A copy of the full text of the written opinion of
Kaufman, dated September 30, 1999, is attached to this joint proxy
statement/prospectus as Annex C. We urge you to read the Kaufman opinion for a
complete statement of the assumptions made by Kaufman, the matters considered
by Kaufman and the limitations on the review undertaken by Kaufman. The
engagement of Kaufman and its opinion are for the benefit of the Netrix board
of directors, and its opinion was rendered to the Netrix board of directors in
connection with its consideration of the merger. The Kaufman opinion is
directed only to the fairness of the exchange ratio of one Netrix share for
each OpenROUTE share in the merger from a financial point of view to holders of
Netrix common stock and does not address any other aspects of the merger. The
opinion is not intended to constitute, and does not constitute, a
recommendation to any holder of Netrix or OpenROUTE common stock with respect
to the merger.
No limitations were imposed by the Netrix board on the scope of Kaufmann's
investigation or the procedures to be followed by Kaufman in rendering its
opinion. In arriving at its opinion, Kaufman reviewed, among other things, the
following:
. a draft of the Agreement and Plan of Merger dated September 29, 1999, by
and between Netrix and OpenROUTE;
. certain documents and reports filed by Netrix with the SEC;
. certain internal information and documents relating to Netrix and
OpenROUTE provided to it by the respective managements of Netrix and
OpenROUTE, including historical financial information and financial
forecasts;
. the reported prices and trading activity of Netrix's and OpenROUTE's
common stock;
. the financial and business prospects for the merged entity and the
industry in which it competes;
. certain publicly available information concerning certain other
companies engaged in businesses which Kaufman believed to be reasonably
comparable to Netrix and OpenROUTE and the trading markets for such
other companies' securities; and
. information concerning certain other business transactions which Kaufman
believed to be reasonably comparable to the Merger.
Kaufman also performed various analyses, as Kaufman deemed appropriate, using
generally accepted analytical methodologies, including:
. the application to the financial results of Netrix and OpenROUTE of the
public trading multiples of companies which Kaufman deemed to be
reasonably comparable to Netrix and OpenROUTE;
. discounting the projected cash flows of OpenROUTE operations;
. the application to the financial results of Netrix and OpenROUTE of the
multiples reflected in recent merger and acquisition transactions
involving businesses which Kaufman deemed reasonably comparable to the
financial results of Netrix and OpenROUTE; and
. an analysis of premiums paid in public merger and acquisition
transactions.
Kaufman also held discussions with members of senior management of Netrix and
OpenROUTE to discuss the information reviewed by Kaufman including the
business, operations and prospects of the respective companies. Kaufman also
considered other information, financial studies, analyses, investigations and
financial, economic and market criteria it deemed relevant, including Kaufman's
assessment of general economic, monetary and market conditions.
25
<PAGE>
In preparing its opinion, Kaufman assumed and relied upon the accuracy and
completeness of all information supplied or otherwise made available to Kaufman
or otherwise publicly available, and did not independently verify any such
information. With respect to the financial forecast information made available
to Kaufman by Netrix and OpenROUTE, Kaufman assumed that the forecasts had been
reasonably prepared and reflected the best currently available estimates and
judgments of Netrix and OpenROUTE management as to the expected future
financial performance of Netrix and OpenROUTE. Kaufman expresses no opinion
with respect to such forecasts or the assumptions upon which they are based.
The matters considered by Kaufman in arriving at its opinion are necessarily
based upon financial, economic, market and other conditions as they existed and
could be evaluated by Kaufman on, and the information made available to it, as
of the date of its opinion. Kaufman has disclaimed any undertaking or
obligation to advise any person of any change in any fact or matter affecting
its opinion that is brought to its attention after the date of its opinion.
Although Kaufman evaluated the exchange ratio from a financial point of view,
Kaufman was not asked to and did not recommend the specific consideration
payable in the merger, which was determined through negotiations between Netrix
and OpenROUTE and was approved by Netrix's board of directors.
In preparing its opinion, Kaufman performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Kaufman's opinion or of the presentation by Kaufman to Netrix's
board of directors. The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Kaufman did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Kaufman believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying the
preparation of its opinion. In its analyses, Kaufman made numerous assumptions
with respect to Netrix and OpenROUTE, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Netrix and OpenROUTE. The estimates contained in such
analyses and the valuation ranges resulting from any particular analysis are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Kaufman's opinion
and analyses was only one of many factors considered by the Netrix board in its
evaluation of the merger and should not be viewed as determinative of the view
of the Netrix board or management of Netrix with respect to the exchange ratio
or the merger.
The following is a summary of certain financial and comparative analyses
performed by Kaufman in connection with its opinion.
Analysis of Comparable Publicly Traded Companies. Using publicly available
information, Kaufman compared selected historical and projected financial data
and selected stock market data of Netrix and OpenROUTE to the corresponding
data of the following eighteen publicly-traded companies that Kaufman deemed to
be reasonably comparable to Netrix and OpenROUTE (collectively the "Comparable
Companies"):
. ACT Networks, Inc.
. Arel Communication & Software, Ltd.
. Ariel Corporation
. Applied Innovation, Inc.
. Clarent Corporation
26
<PAGE>
. DIGI International, Inc.
. Digital Link Corporation
. Eltrax Systems, Inc.
. E-Net, Inc.
. Emulex Corporation
. Equinox Systems, Inc.
. Franklin Telecommunications
. Interphase Corporation
. Inter-Tel, Inc.
. LarsCom, Inc.
. NetSpeak Corporation
. Performance Technologies
. VocalTec Communications
Kaufman does not consider any of the Comparable Companies to be directly
comparable to Netrix or OpenROUTE.
Kaufman reviewed and analyzed (1) historical stock prices, (2) historical
price/earnings ratios, (3) historical annual growth in earnings per share, (4)
historical gross margins, (5) historical cash flows, (6) return on equity, (7)
return on assets, (8) market capitalization (defined as share price times total
shares outstanding), (9) enterprise values (defined as market capitalization
plus total debt, preferred stock and minority interest and capitalized leases,
less cash and cash equivalents), (10) enterprise values to latest twelve months
("LTM") revenues multiples, (11) enterprise values to book value multiples, and
(12) market capitalization to LTM revenues multiples for each of Netrix,
OpenROUTE and the selected Comparable Companies.
Based upon these analyses, Kaufman derived the median value of market
capitalization to LTM revenues, enterprise value to LTM revenues and enterprise
value to book value for all the Comparable Companies as of September 29, 1999
and compared them to multiples for OpenROUTE implied by the exchange ratio with
the following results:
<TABLE>
<CAPTION>
Median of
Multiples OpenROUTE Comparable Companies
--------- --------- --------------------
<S> <C> <C>
Market Capitalization/LTM Revenues............ 2.5x 3.2x
Enterprise Value/LTM Revenues................. 2.2x 4.3x
Enterprise Value/Book Value................... 2.2x 3.1x
</TABLE>
Discounted Cash Flow ("DCF") Analysis. Kaufman performed a DCF analysis using
financial forecasts supplied to Kaufman by management of OpenROUTE for the
fiscal year December 31, 1997 and 1998, and six months ended June 30, 1999 in
the context of OpenROUTE's historical operating performance. Kaufman used the
projections and assumptions provided by management, projecting for the years
ending December 31, 1999 through December 31, 2004. The DCF was calculated as
the sum of the present values, using a range of discount rates from 15% to 25%
of the projected free cash flows from fiscal years 1999-2004.
Comparable Transaction Analysis. Using publicly available information,
Kaufman analyzed certain financial and operating information relating to the
following thirteen selected merger and acquisition transactions in the
telecommunications equipment industry ("Comparable Transactions") each of which
were consummated after March 30, 1997 (the purchaser is listed first and is
followed by the acquired company):
Fiscal Year 1999
. Intel Corporation/Shiva Corporation
27
<PAGE>
. GEC/Fore Systems
. L-3 Communications/Audin Corporation
. InterVoice Inc./Brite Voice Systems
. ACT Manufacturing/CMC Industries
Fiscal Year 1998
. Lucent Technologies/Yurie Systems
. Lucent Technologies/JNA Telecommunications
. Digital Microwave Corporation/Innova Corporation
. Cisco Systems/Summa Four Inc.
. Reltec Corporation/Positron Fiber Systems
. ECI Telecom Ltd./Tadrian Telecommunications
. ADC Telecommunications/Teledata Communications
Fiscal Year 1997
. Ascend Communications/Cascade Communications
Kaufman does not consider any of the Comparable Transactions to be directly
comparable to the merger.
With respect to each of the transactions analyzed, Kaufman obtained the
acquisition value of each transaction from publicly available financial sources
and then computed (where applicable) acquisition value to LTM revenues of the
acquired target companies for period corresponding to the date the transaction
was completed. Based upon this analysis, Kaufman determined that the average
acquisition value of the Comparable Transactions was 3.3x LTM revenues, and
that the acquisition value of the merger was 3.7x OpenROUTE's LTM revenues.
Premium Analysis. For the Comparable Transactions, Kaufman analyzed the
premiums paid over the stock price of the acquired companies, based on stock
prices one day, one week, and four weeks prior to the announcement of the
respective transaction. This analysis demonstrated that, on average, the
acquired company received a 19.8%, 32.9% and 47.4% premium over its stock price
one day, one week and four weeks prior to the announcement of the transaction,
respectively. Kaufman noted that based on the announcement date of August 26,
1999, the value of Netrix shares to be paid to for each OpenROUTE share
determined by multiplying the Netrix closing stock price one day, one week, and
four weeks prior to the announcement of the Merger times the Exchange Ratio,
represents premiums of approximately 32.0%, 34.7% and 8.2%, respectively, above
the closing stock price of OpenROUTE on those days.
* * * * * * * *
Kaufman was engaged by Netrix on May 5, 1999 to provide certain investment
banking and financial advisory services. As part of that engagement, Netrix
paid Kaufman $15,000 and agreed to issue to Kaufman warrants to purchase
100,000 shares of common stock of Netrix (the "warrants") at an exercise price
equal to $3.00 per share. In addition, and pursuant to the terms of Kaufman's
engagement, Netrix has agreed, among other things, to pay Kaufman for its
services in connection with the merger a financial advisory fee of 2% of the
value of the consideration paid to OpenROUTE, a substantial portion of which is
contingent on consummation of the Merger. Kaufman was paid $100,000 of the
advisory fee upon rendering its fairness opinion. Netrix has also agreed to
reimburse Kaufman for reasonable out-of-pocket expenses incurred by Kaufman in
performing its services, including the reasonable fees and expenses of its
legal counsel, and to indemnify Kaufman and related persons against certain
liabilities relating to or arising out of its engagement, including certain
liabilities under the federal securities laws.
28
<PAGE>
Kaufman, as part of its investment banking business, is continually engaged
in the valuation of businesses or their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Kaufman was selected to act as investment bankers
to Netrix's board because of its expertise and its reputation in investment
banking and mergers and acquisitions.
Kaufman, in the normal course of its business, may trade in securities of
Netrix or OpenROUTE for its own account and for the accounts of its customers
and, accordingly, may hold a long or short position in such securities.
Opinion of Financial Advisor to OpenROUTE
OpenROUTE retained Tucker Anthony in a letter agreement dated August 13, 1999
as its exclusive financial advisor in connection with a possible merger with
Netrix. In addition, OpenROUTE requested that Tucker Anthony render its opinion
as to the fairness, from a financial point of view, of the exchange ratio to be
received by the stockholders of OpenROUTE through the exchange of shares of
common stock of OpenROUTE for shares of common stock of Netrix in the merger.
OpenROUTE selected Tucker Anthony for a number of reasons including its
familiarity with OpenROUTE. OpenROUTE also considered Tucker Anthony's
experience and reputation in the area of valuation and financial advisory work
generally, and in relation to transactions of the size and nature of the
proposed merger specifically. Tucker Anthony is a nationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, leveraged
buyouts, negotiated underwritings, private placements and valuations for
corporate and other purposes. From time to time, Tucker Anthony and its
affiliates may hold long or short positions in OpenROUTE and/or Netrix common
stock.
Tucker Anthony rendered its opinion orally to OpenROUTE's board of directors
on September 30, 1999 and subsequently confirmed in writing by an opinion dated
September 30, 1999, to the effect that, based upon and subject to the
considerations and limitations set forth in such opinion, as of September 30,
1999, the exchange ratio to be used with respect to the Netrix common stock in
the merger is fair, from a financial point of view, to the holders of OpenROUTE
common stock.
The following summary of Tucker Anthony's opinion may not include all of the
information important to you. The full text of the opinion letter delivered by
Tucker Anthony to the OpenROUTE board dated September 30, 1999, which sets
forth fully the assumptions made, general procedures followed, matters
considered and limits on the scope of review undertaken, is included as Annex C
to this prospectus/joint proxy statement. Holders of OpenROUTE common stock are
urged to read the Tucker Anthony opinion carefully and in its entirety. The
opinion is not intended to constitute, and does not constitute, a
recommendation by Tucker Anthony to any holder of Netrix or OpenROUTE common
stock with respect to the merger.
In conducting its investigation and analysis and in arriving at its opinion,
Tucker Anthony reviewed the information and took into account the financial and
economic factors that it deemed relevant and material under the circumstances.
The material actions Tucker Anthony undertook in its analysis were as follows:
. Reviewed internal financial information concerning the business and
operations of OpenROUTE and Netrix furnished to Tucker Anthony for
purposes of its analysis, as well as publicly available information
including but not limited to OpenROUTE's and Netrix's recent filings
with the SEC;
. Reviewed the merger agreement in the form presented to the OpenROUTE
board;
. Compared the historical market prices and trading activity of OpenROUTE
common stock and Netrix common stock with those of other publicly traded
companies that Tucker Anthony deemed relevant;
. Compared the financial position and operating results of OpenROUTE and
Netrix with those of other publicly traded companies Tucker Anthony
deemed relevant;
29
<PAGE>
. Compared the proposed financial terms of the merger with the financial
terms of other business combinations Tucker Anthony deemed relevant; and
. Held discussions with members of OpenROUTE's and Netrix's respective
senior management concerning OpenROUTE's and Netrix's historical and
current financial condition and operating results, as well as the future
prospects of OpenROUTE and Netrix.
Tucker Anthony also considered such other information, financial studies,
analyses, investigations and financial, economic, industry and market criteria
that it deemed relevant. OpenROUTE did not place any limitation upon Tucker
Anthony with respect to the procedures followed or factors considered by Tucker
Anthony in rendering its opinion.
In arriving at its opinion, Tucker Anthony assumed and relied upon the
accuracy and completeness of all of the financial and other information
provided to it or publicly available or provided to Tucker Anthony by or on
behalf of OpenROUTE and Netrix, and did not independently verify that
information. Tucker Anthony assumed, with OpenROUTE's consent, that
. All material assets and liabilities (contingent or otherwise, known or
unknown) of OpenROUTE and Netrix are as set forth in their respective
financial statements;
. Obtaining all regulatory and other approvals and third party consents
required for consummation of the merger would not have a material effect
on the anticipated benefits of the merger; and
. The merger would be consummated in accordance with the terms set forth
in the merger agreement, without any amendment thereto and without
waiver by OpenROUTE or Netrix of any of the conditions to their
respective obligations thereunder.
At OpenROUTE's and Netrix's direction, Tucker Anthony assumed that beginning
in 2001, the combined company would save approximately $13.4 million in annual
operating expenses resulting from the merger and the savings would grow to
$28.1 million in 2004 compared to an aggregation of the individual companies
projections on a standalone basis. Tucker Anthony also included estimated
transaction costs of the merger in its financial analysis. Tucker Anthony also
assumed that the financial forecasts examined by it were reasonably prepared
based upon the best available estimates and good faith judgments of OpenROUTE's
and Netrix's respective senior managements as to future performance of
OpenROUTE and Netrix. In conducting its review, Tucker Anthony did not obtain
an independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of OpenROUTE or Netrix. However, all financial
projections prepared by Netrix were reviewed by the senior management of
OpenROUTE. Tucker Anthony's opinion did not predict or take into account any
possible economic, monetary or other changes which may occur, or information
which may become available, after the date of the opinion. Furthermore, Tucker
Anthony expressed no opinion as to the price or trading range at which any of
OpenROUTE's or Netrix's securities (including OpenROUTE common stock and Netrix
common stock) will trade following the date of the opinion.
The following is a summary of the material financial analyses performed by
Tucker Anthony in connection with rendering its opinion.
Analysis of OpenROUTE's Valuation Premiums. Tucker Anthony calculated the
implied equity value per share reflected by the terms of the merger to be $4.13
for each share of OpenROUTE common stock reflecting the closing price per share
of Netrix on August 26, 1999. Tucker Anthony compared the premium to holders of
OpenROUTE common stock represented by the implied equity value per share of
$4.13 to the closing prices for OpenROUTE common stock on the dates four weeks
prior, one week prior and one day prior to the August 27, 1999 public
announcement of the transaction. Tucker Anthony calculated that the implied
equity value per share represented the following premiums or discounts to
holders of OpenROUTE common stock:
. a premium of 8.2% over the closing price of $3.81 for OpenROUTE common
stock on July 30, 1999, four weeks prior to the announcement of the
merger;
. a premium of 34.7% over the closing price of $3.06 for OpenROUTE common
stock on August 20, 1999, one week prior to the announcement of the
merger; and
30
<PAGE>
. a premium of 32.0% over the closing price of $3.13 for OpenROUTE common
stock on August 26, 1999, one day prior to the announcement of the
merger.
Analysis of OpenROUTE's Valuation Multiples. Tucker Anthony calculated the
implied enterprise value of OpenROUTE as a result of the merger to be $71.9
million based on the closing stock price of Netrix on August 26, 1999. The
implied enterprise value was obtained by multiplying the implied equity value
per share by the total number of outstanding shares of OpenROUTE common stock
on a fully diluted basis, adding OpenROUTE's outstanding total debt and
subtracting OpenROUTE's cash and cash equivalents balances (at June 26, 1999,
as set forth in the quarterly report on Form 10-Q that OpenROUTE filed with the
SEC). In performing its analysis, Tucker Anthony used, among other items,
operating statistics for OpenROUTE's latest twelve months ended June 26, 1999
("LTM") as reflected in OpenROUTE's SEC documents. Tucker Anthony calculated
multiples of OpenROUTE's implied enterprise value to its LTM Sales, operating
income before depreciation and amortization, interest and taxes ("EBITDA") and
its operating income ("EBIT"). The calculations resulted in the following:
. the multiple of OpenROUTE's implied enterprise value to its LTM Sales
was 5.6x;
. the multiple of OpenROUTE's implied enterprise value to its LTM EBITDA
was a negative number due to the loss realized by OpenROUTE during the
LTM period; and
. the multiple of OpenROUTE's implied enterprise value to its LTM EBIT was
a negative number due to the loss realized by OpenROUTE during the LTM
period.
Implied Historical Exchange Ratio Analysis. Tucker Anthony reviewed the daily
closing prices of OpenROUTE common stock and Netrix common stock for the period
from August 26, 1998 through August 26, 1999. The following chart presents
these historical share prices:
Historical Stock Prices of OpenROUTE and Netrix
[GRAPH]
31
<PAGE>
Tucker Anthony derived implied historical exchange ratios for the OpenROUTE
common stock and the Netrix common stock by dividing the closing price per
share of OpenROUTE common stock by the closing price per share of Netrix common
stock for each trading day in the calendar period from August 26, 1998 through
August 26, 1999. This analysis yielded an average implied historical exchange
ratio of 0.86-to-1.00, which is below the proposed exchange ratio of 1.00-to-
1.00. The following chart presents these historical ratios:
Implied Historical Ratio of Daily Share Prices
[GRAPH]
Analysis of Selected Publicly Traded Companies Comparable to OpenROUTE.
Tucker Anthony reviewed publicly available financial information as of the most
recently reported period and stock market information as of September 27, 1999
for nine publicly traded companies that Tucker Anthony deemed relevant. Tucker
Anthony compared OpenROUTE to the following computer networking and data
communication companies:
<TABLE>
<S> <C>
1) Netopia Inc. 6) Interphase Corporation
2) Efficient Networks, Inc. 7) Larscom Incorporated
3) Digi International 8) Performance Technologies
4) Digital Link Corporation 9) Ramp Networks, Inc.
5) Equinox Systems Inc.
</TABLE>
For each comparable company, Tucker Anthony calculated multiples of
enterprise value to LTM Sales, LTM EBITDA, LTM EBIT and book value based on
closing prices as of September 27, 1999. Tucker Anthony then compared these
multiples to the relevant OpenROUTE multiples based on the implied equity price
per share on a fully diluted basis as of September 27, 1999, as set forth
below:
. The multiple of implied enterprise value to LTM Sales in this
transaction is 4.3x. This compares to the median multiple for the
comparable public companies of 1.9x;
. The multiple of implied enterprise value to LTM EBITDA and to LTM EBIT
is a negative number due to OpenROUTE's losses realized during this LTM
period. The median multiples for the comparable public companies are
14.8x for LTM EBITDA and 16.2x for LTM EBIT;
. The multiple of book value in this transaction is 4.2x. This compares to
the median multiple for the comparable public companies of 1.7x.
32
<PAGE>
Analysis of Selected Comparable Acquisition Transactions. Tucker Anthony
reviewed 32 selected acquisition transactions which it deemed relevant. The
transactions were chosen based on a review of acquired companies that possessed
general business, operating and financial characteristics representative of
companies in the industry in which OpenROUTE operates. Tucker Anthony noted
that none of the selected transactions reviewed was identical to the merger and
that, accordingly, the analysis of comparable transactions necessarily involves
complex consideration and judgments concerning differences in financial and
operating characteristics of OpenROUTE and other factors that would affect the
acquisition value of comparable transactions including, among others, the
general market conditions prevailing in the equity capital markets at the time
of such transactions.
For each comparable transaction, Tucker Anthony calculated multiples of
enterprise value to LTM Sales, LTM EBITDA and LTM EBIT. Tucker Anthony also
calculated the premiums paid for the equity in these transactions over the
public market value of the equity at various times prior to the announcement of
such transactions. Tucker Anthony then compared those multiples and premiums to
the relevant OpenROUTE multiples (based on the closing stock price as of
September 27, 1999) and premiums.
. The multiple of implied enterprise value to LTM Sales in this
transaction is 4.3x. This compares to the median multiple for the
comparable merger and acquisition transactions of 1.6x;
. The multiples of implied enterprise value to LTM EBITDA and to LTM EBIT
are both negative numbers due to OpenROUTE's losses realized during the
LTM period. These median multiples for the comparable merger and
acquisition transactions are 14.9x for LTM EBITDA and 15.6x for LTM
EBIT;
. On July 30, 1999, OpenROUTE's closing stock price was $3.81 per share.
This date was four weeks prior to the public announcement of the merger.
The implied equity value of $4.13 per share represents an 8.2% premium
over this four-week-prior stock price. This compares to the median
premium over the four-week prior stock price of 45.5% in the comparable
merger and acquisition transactions with a high premium of 98.7% and a
low premium of 4.7%;
. On August 20, 1999, OpenROUTE's closing stock price was $3.06 per share.
This date was one week prior the public announcement of the merger. The
implied equity value of this transaction represents a 34.7% premium over
the one-week-prior stock price. This compares to the median premium over
the one-week prior stock price of 41.9% in the comparable merger and
acquisition transactions with a high premium of 111.9% and a low premium
of 3.0%; and
. On August 26, 1999, OpenROUTE's closing stock price was $3.13 per share.
The date was one day prior the public announcement. The one-day-prior
premium of this transaction is 32.0%. This compares to the median
premium over one day prior stock price of 31.7% in the comparable merger
and acquisition transactions with a high premium of 83.8% and a low
premium of 4.3%.
As mentioned earlier, the average implied exchange ratio based on the daily
closing prices per share of OpenROUTE common stock and Netrix common stock for
the period from August 26, 1998 to August 26, 1999 was 0.86-to-1.00, compared
to the proposed exchange ratio of 1.0-to-1.0.
Contribution Analysis. Tucker Anthony analyzed OpenROUTE's and Netrix's
relative contribution to the combined company with respect to certain
measurements, including net sales and EBIT. As a result of the merger, holders
of OpenROUTE's common stock will own approximately 50.7% of the pro forma fully
diluted Netrix shares (including the 1 million shares to be issued at the time
of the merger for executive compensation) on the basis of the exchange ratio of
1.00 to 1.00.
. OpenROUTE is anticipated to contribute (based on information and
projections provided to Tucker Anthony by OpenROUTE and Netrix) 32.9% of
the combined sales in calendar 1999 and 28.3% in 2000. Netrix's
contribution to combined sales in these periods would be 67.1% and
71.7%, respectively;
. OpenROUTE will be contributing an EBIT loss of approximately ($4.3
million) in 1999 compared to Netrix's EBIT loss of ($2.4 million) for
this period. It is anticipated that OpenROUTE would contribute
approximately 20.8% of combined EBIT in calendar 2000, and Netrix would
contribute approximately 79.2%.
33
<PAGE>
Discounted Cash Flow Analysis. Tucker Anthony performed a discounted cash
flow analysis of OpenROUTE on a stand-alone basis using OpenROUTE management's
projections through 2004. In such analysis, Tucker Anthony assumed terminal
value multiples of 12.0x to 14.0x EBITDA in the year 2004 and discount rates of
28% to 34%. Selection of an appropriate discount rate is an inherently
subjective process and is affected by numerous factors. The discount rates used
by Tucker Anthony were selected based upon OpenROUTE's recent historical
financial results, current financial condition and the risk associated with
OpenROUTE achieving its financial projections. This range of discount rates
also reflects an estimate of the cost of capital that OpenROUTE would incur
based upon the achievement of its financial projections and the current
valuation parameters for comparable public companies. Such analysis produced
present values of OpenROUTE common stock ranging from $3.51 to $4.63 per share.
Tucker Anthony compared the range of prices to the implied equity value per
share of the proposed merger of $4.13 as of August 26, 1999 and $3.19 as of
September 27, 1999.
In order to assess the relative public market valuation of Netrix common
stock to be used by Netrix in exchange for OpenROUTE common stock, Tucker
Anthony performed a discounted cash flow analysis of Netrix, on a stand-alone
basis based upon Netrix management's projections as adjusted and approved by
OpenROUTE management through 2004. In such analysis, Tucker Anthony assumed
terminal value multiples of 12.0x to 14.0x EBITDA in the year 2004 and discount
rates of 23% to 27%. This analysis produced present values per share for Netrix
common stock ranging from $10.06 to $13.19. Tucker Anthony then compared these
values to the implied equity value per share of the proposed merger of $4.13 as
of August 26, 1999 and $3.19 as of September 27, 1999.
Tucker Anthony also performed a discounted cash flow analysis of Netrix on a
pro forma combined basis with OpenROUTE and compared the resulting values to
those of the OpenROUTE standalone case. Beginning in 2001, expected synergies
in costs and operating expenses have been estimated by both OpenROUTE and
Netrix to reflect the benefits of economies of scale and cost reductions. These
synergies are reflected in the projections of the combined entity. In this
analysis, Tucker Anthony assumed terminal value multiples of 12.0x to 14.0x
combined EBITDA in year 2004 and discount rates of 23% to 27%. This analysis
produced present values per share for Netrix common stock on a pro forma
combined basis ranging from $10.24 to $13.41. In every case, based on the one-
for-one ratio, the combined present value is greater than the present value of
OpenROUTE on a standalone basis which ranged from $3.51 to $4.63. Furthermore,
the combined present value is modestly greater than Netrix's present value on a
standalone basis.
Analysis of Combined Companies. Tucker Anthony prepared pro forma combined
analyses of the financial impact of the merger. In conducting its analysis,
Tucker Anthony relied upon the assumptions described above and based this
analysis on projected earnings estimates for OpenROUTE (prepared by OpenROUTE
management) and Netrix (prepared by Netrix management and adjusted and approved
by OpenROUTE management). Tucker Anthony compared the earnings per share of
OpenROUTE common stock on a stand-alone basis, to the earnings per share of the
common stock of the combined company on a pro forma basis. The analysis
indicated that the proposed transaction, assuming it was consummated on
December 31, 1999, would be accredited to OpenROUTE's stockholders on the basis
of earnings per share in the year 2000 and beyond.
As of June 30, 1999, combined balance sheets (assuming no merger related
adjustments), the combined company would have had approximately $8.1 million of
cash and approximately 35.755 million common shares outstanding (including the
1 million shares to be issued at the time of the merger for executive
compensation). On a pro forma basis, giving effect to the merger, as of June
30, 1999, the combined company would have had $4.1 million of preferred stock
outstanding and $0.4 million of debt. Shareholders' equity would have been
approximately $25.3 million, or $0.71 per fully diluted share, compared to
OpenROUTE's book value of $13.0 million or $0.71 per fully diluted share as of
June 26, 1999.
As mentioned earlier, Tucker Anthony performed a discounted cash flow
analysis of Netrix on a stand-alone basis and pro forma combined giving effect
to the proposed merger with OpenROUTE. This analysis indicated that the present
value per share for Netrix common stock would increase from a range of $10.06
to $13.19 to a range of $10.24 to $13.41 as a result of the proposed
transaction.
34
<PAGE>
The foregoing summary does not purport to be a complete description of the
analyses performed by Tucker Anthony. The preparation of a fairness opinion is
a complex process and is not susceptible to partial analysis or summary
description. Tucker Anthony believes that its analyses must be considered as a
whole, and that selecting portions of such analyses without considering all
analyses and factors, would create an incomplete view of the processes
underlying its opinion. Tucker Anthony did not attempt to assign specific
weights to particular analyses. However, there were no specific factors
reviewed by Tucker Anthony that did not support its opinion. Any estimates
contained in Tucker Anthony's analyses are not necessarily indicative of actual
values, which may be significantly more or less favorable than as set forth
therein. Estimates of values of companies do not purport to be appraisals or
necessarily to reflect the prices at which companies may actually be sold.
Because such estimates are inherently subject to uncertainty, Tucker Anthony
does not assume responsibility for their accuracy.
Compensation. Pursuant to an engagement letter dated August 13, 1999 between
OpenROUTE and Tucker Anthony, OpenROUTE agreed to pay Tucker Anthony a retainer
fee of $25,000 and, upon the closing date, a transaction fee equal to the
greater of 1.0% of the transaction amount or $500,000. In addition, for
delivering its fairness opinion on September 30, 1999, Tucker Anthony received
a fee of $125,000, payable upon delivery of its opinion, regardless of the
conclusions reached by Tucker Anthony in such opinion. Tucker Anthony's
aggregate fee is estimated to be approximately $1,000,000. OpenROUTE has also
agreed to reimburse Tucker Anthony for its out-of-pocket expenses. OpenROUTE
has also agreed to indemnify Tucker Anthony, its affiliates and their
respective directors, officers, employees and agents and controlling persons
against certain liabilities relating to or arising out of its engagement
including liabilities under the federal securities laws. In the past, Tucker
Anthony has not performed investment banking services for OpenROUTE other than
as provided for in the engagement letter. During the past two years Tucker
Anthony had no prior relationship with OpenROUTE and has not received any
compensation from OpenROUTE.
Material Federal Income Tax Consequences of the Merger
The following discussion summarizes the material United States federal income
tax consequences of the merger. This discussion is based on the Internal
Revenue Code of 1986, as amended, applicable United States Treasury
Regulations, administrative interpretations and court decisions as in effect as
of the date of this joint proxy statement/prospectus, all of which may change,
possibly with retroactive effect.
This discussion does not address all aspects of federal income taxation that
may be important to an OpenROUTE stockholder in light of that stockholder's
particular circumstances or to an OpenROUTE stockholder subject to special
rules, such as:
. a stockholder who is a foreign person;
. a financial institution or insurance company;
. a tax-exempt organization;
. a dealer or broker in securities;
. a stockholder that holds its OpenROUTE common stock as part of a hedge,
appreciated financial position, straddle or conversion transaction;
. a stockholder who acquired its OpenROUTE common stock pursuant to the
exercise of employee stock options or otherwise as compensation; or
. stockholders that exercise their appraisal rights in connection with the
merger.
In addition, no information is provided in this joint proxy
statement/prospectus with respect to the tax consequences of the merger under
any non-income tax or under any applicable foreign, state or local laws.
OpenROUTE has received an opinion of Swidler Berlin Shereff Friedman, LLP, as
special tax counsel, dated as of the date of this joint proxy
statement/prospectus, that the merger will be treated for federal income
35
<PAGE>
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and that Netrix and OpenROUTE will each be a party to
that reorganization within the meaning of Section 368(b) of the Internal
Revenue Code. It is a condition to the obligation of OpenROUTE to complete the
merger that tax counsel confirm its opinion as of the closing date. OpenROUTE
does not intend to waive this condition.
In delivering its opinion, Swidler Berlin Shereff Friedman, LLP has relied,
and, in delivering its closing opinion, will rely, on (1) representations and
covenants made by Netrix and OpenROUTE, including those contained in
certificates of officers of Netrix and OpenROUTE, and (2) specified
assumptions, including an assumption regarding the completion of the merger in
the manner contemplated by the merger agreement. In addition, the opinion of
Swidler Berlin Shereff Friedman, LLP has assumed, and Swidler Berlin Shereff
Friedman, LLP's ability to provide the closing date opinion will depend on, the
absence of changes in existing facts or in applicable law between the date of
this joint proxy statement/prospectus and the closing date. If any of those
representations, covenants or assumptions is inaccurate, Swidler Berlin Shereff
Friedman, LLP may not be able to provide the required closing date opinion
and/or the tax consequences of the merger could differ from those described in
the opinion that Swidler Berlin Shereff Friedman, LLP has delivered. Swidler
Berlin Shereff Friedman, LLP's opinion neither binds the Internal Revenue
Service nor precludes it or the courts from adopting a contrary position.
Netrix and OpenROUTE do not intend to obtain a ruling from the Internal Revenue
Service on the tax consequences of the merger.
Based upon the opinion of Swidler Berlin Shereff Friedman, LLP, the following
will be the material United States federal income tax consequences of the
merger:
. no gain or loss will be recognized for federal income tax purposes by
Netrix or OpenROUTE as a result of the merger;
. a holder of OpenROUTE common stock will not recognize gain or loss on
the exchange of shares of OpenROUTE common stock for Netrix common stock
pursuant to the merger;
. the aggregate tax basis of the Netrix common stock received by a holder
will be the same as the aggregate tax basis of the OpenROUTE common
stock exchanged therefor; and
. the holding period of the Netrix common stock will include the holding
period of the OpenROUTE common stock surrendered therefor, provided that
the shares of OpenROUTE common stock are held as capital assets on the
closing date of the merger.
This discussion of material federal income tax consequences is intended to
provide only a general summary, and is not a complete analysis or description
of all potential federal income tax consequences of the merger. This discussion
does not address tax consequences that may vary with, or are contingent on,
individual circumstances. Accordingly, we strongly urge each OpenROUTE
stockholder to consult its own tax advisor to determine the particular United
States federal, state or local or foreign income or other tax consequences to
the stockholder of the merger.
Credit facilities
Under Netrix's credit facility with Coast Business Credit, Netrix is required
to either obtain Coast's consent prior to any change in control transaction or
prepay the borrowed amounts outstanding. Since the merger would be considered a
change in control, before completing the merger Netrix will be required to
either (i) obtain a definitive waiver from Coast or (ii) prepay the outstanding
amounts owed together with a prepayment penalty of not more than 3.0% of the
amount outstanding. As of September 30, 1999 the amount outstanding under this
credit facility was $1.2 million. Netrix expects to obtain such waiver on
acceptable terms or refinance this obligation.
Appraisal Rights
Holders of Netrix common stock and preferred stock do not have dissenters'
appraisal rights under Delaware law in connection with the merger.
36
<PAGE>
If the merger becomes effective, a holder of OpenROUTE common stock who does
not vote to adopt the merger agreement (if entitled to vote thereon) and who
follows the procedures prescribed under the Massachusetts Business Corporation
Law may require Netrix to pay the "fair value," determined as provided under
the Massachusetts Business Corporation Law, for the shares held by such
stockholder. The following is a summary of certain features of the relevant
sections of the Massachusetts Business Corporation Law, the provisions of which
are set forth in full in Annex D hereto. In order to exercise his statutory
appraisal rights, an OpenROUTE stockholder must strictly adhere to the
statutory provisions, and we urge each OpenROUTE stockholder who intends to
exercise appraisal rights to read carefully the provisions of the Massachusetts
Business Corporation Law set forth in Annex D.
A holder of OpenROUTE common stock who desires to pursue appraisal rights
must:
. file a written objection to the merger with OpenROUTE pursuant to
Section 86 of the Massachusetts Business Corporation Law before the
taking of the stockholder vote adopt the merger agreement. This
objection must state the intention of such stockholder to demand payment
for shares owned by such stockholder if the merger agreement is approved
and adopted and the merger is consummated;
. not vote in favor of the merger agreement; and
. make written demand to Netrix as the surviving corporation for payment
for the holder's shares within 20 days after the date Netrix mails a
notice to the holder that the merger has become effective. Netrix will
send this notice within ten days of the effective time of the merger. A
holder's written objection and written demand should be delivered to
Netrix Corporation, 13595 Dulles Technology Drive, Herndon, Virginia
20171, Attention: Peter J. Kendrick, Secretary. It is recommended that
the objection and demand be sent by registered or certified mail, return
receipt requested.
A stockholder who files the required written objection with OpenROUTE prior
to the stockholder vote need not vote against the merger agreement. A holder of
OpenROUTE common stock who votes in favor of the adoption of the merger
agreement will be deemed to have waived the right to exercise appraisal rights.
A vote against the merger agreement does not alone constitute a written
objection.
The value of the OpenROUTE common stock will be determined initially by
Netrix as the surviving corporation and the dissenting stockholder. If, during
the period of 30 days after the expiration of the period during which the
demand may be made, Netrix and the stockholder fail to agree on the value of
the Netrix common stock, either of them may file a bill in equity in the
Superior Court Department of Worcester County, Massachusetts, asking the court
to determine the value. The bill in equity must be filed within four months
after the date of expiration of the foregoing 30-day period. If the bill in
equity is timely filed, the court or an appointed special master will hold a
hearing. After the hearing, the court will enter a decree determining the fair
value of the OpenROUTE common stock and order Netrix to make payment of that
value, with interest, if any, from the date of the vote approving the merger
agreement to the stockholders entitled to said payment. This payment, however,
will be conditioned on transfer by them to Netrix of the certificates
representing their OpenROUTE common stock. The "fair value" of the OpenROUTE
common stock determined in accordance with the procedures described above could
be more than, the same as or less than the merger consideration.
For appraisal proceeding purposes, "fair value" is determined as of the day
before the approval of the merger agreement by stockholders, excluding any
element of value arising from the expectation or accomplishment of the merger.
The enforcement by a stockholder of his request to receive payment for shares
of OpenROUTE common stock, as provided under the applicable statutory
provisions, is an exclusive remedy except that such remedy does not exclude the
right of a stockholder to bring or maintain an appropriate proceeding to obtain
relief on the ground that said corporate action will be or is illegal or
fraudulent as to said stockholder. In Coggins v. New England Patriots Football
Club, Inc., 397 Mass. 525 (1986), however, the Massachusetts Supreme Judicial
Court held that dissenting stockholders are not limited to the statutory remedy
of judicial appraisal where violations of fiduciary duty exist.
37
<PAGE>
A final judgment by the court or a special master determining the fair value
of the OpenROUTE common stock would be binding on and enforceable by holders of
OpenROUTE common stock who have perfected their statutory appraisal rights. A
stockholder who perfects his rights as a dissenting stockholder will not, after
the effective time, be entitled to notices of meetings, to vote, or to receive
dividends.
Each share of OpenROUTE common stock held by stockholders who seek to
exercise appraisal rights and, after the effective time, fail to perfect or
lose any such right to appraisal, will be treated as a share that had been
converted as of the effective time of the merger into the right to receive the
merger consideration as provided in the merger agreement.
Federal Securities Laws Consequences; Stock Transfer Restriction Agreements
This joint proxy statement/prospectus does not cover any resales of the
Netrix common stock to be received by the stockholders of OpenROUTE upon
completion of the merger, and no person is authorized to make any use of this
joint proxy statement/prospectus in connection with any such resale.
All shares of Netrix common stock received by OpenROUTE stockholders in the
merger will be freely transferable, except that shares of Netrix common stock
received by persons who are deemed to be "affiliates" of OpenROUTE under the
Securities Act of 1933 at the time of the OpenROUTE meeting may be resold by
them only in transactions permitted by Rule 145 under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of OpenROUTE for such purposes generally include individuals or
entities that control, are controlled by or are under common control with
OpenROUTE and include directors and executive officers of OpenROUTE. The merger
agreement requires that OpenROUTE use reasonable efforts, prior to the merger,
to cause each of such affiliates to execute a written agreement to the effect
that such persons will not offer, sell or otherwise dispose of any of the
shares of Netrix common stock issued to them in the merger in violation of the
Securities Act or the related SEC rules.
Accounting Treatment
Netrix will account for the merger under the purchase method of accounting,
with Netrix being the acquiror for accounting purposes. Immediately following
the merger, Netrix shares held by Netrix stockholders will represent
approximately 45% of the outstanding shares of Netrix. The board of directors
of the combined companies will consist of five former Netrix directors and four
OpenROUTE directors with the Chief Executive Officer of Netrix, Steven T.
Francesco, serving as Chairman of the Board of the combined companies' board of
directors. Additionally, the members of the Nominating Committee of the Board
of Directors will be Steven T. Francesco, Bryan R. Holley, Chief Executive
Officer of OpenROUTE, and a current director of Netrix.
Under the purchase method of accounting, the assets and liabilities of Netrix
will be brought forward at their net book values, a new basis will be
established for OpenROUTE's assets and liabilities and any excess of the
consideration over the fair value of OpenROUTE's assets and liabilities will be
accounted for as goodwill. The revenues and expenses of Netrix and OpenROUTE
will be consolidated from the date of consummation of the merger.
38
<PAGE>
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendations of the Netrix board and the OpenROUTE
board with respect to the merger, stockholders of Netrix and OpenROUTE should
be aware that officers and directors of Netrix and OpenROUTE may have interests
in the merger that are different from, or in addition to, their interests as
stockholders of Netrix and OpenROUTE generally. The Netrix board and the
OpenROUTE board were aware of such interests and considered them, among other
matters, in approving the merger agreement and the transactions contemplated by
the merger agreement.
Netrix
Steven T. Francesco, Netrix's Chairman and Chief Executive Officer, and Peter
J. Kendrick, Netrix's Chief Financial Officer, have employment agreements with
Netrix that provide them with, among other things, benefits upon a change of
control of Netrix. In addition, the stock options granted to Mr. Francesco and
Mr. Kendrick have been granted under Netrix's 1999 Long Term Incentive Plan,
which provides for accelerated vesting of all options upon a change of control.
Mr. Francesco is a member of the Netrix board and voted in favor of the merger
when the Netrix board considered it.
Mr. Francesco, the Chairman and Chief Executive Officer of Netrix, entered
into an employment agreement effective as of March 22, 1999. The term of Mr.
Francesco's agreement is through March 21, 2002. Under the agreement, Mr.
Francesco is paid a base salary of $160,000 per annum, and he is eligible for
an annual bonus to be established in the sole discretion of the compensation
committee of the Netrix board. In addition, Mr. Francesco has been issued
options to purchase 1,600,000 shares of Netrix common stock. The first 400,000
options have an exercise price of $1.50 per share and vested upon grant. The
remaining 1,200,000 options are exercisable at $2.75 per share, and 400,000
vest on each anniversary of the agreement, subject to acceleration if certain
performance criteria are met. To date, no such criteria have been attained.
Pursuant to the stock option plan under which the options were granted, all of
Mr. Francesco's options vest immediately upon a change in control of Netrix.
The merger will be a change of control for this purpose, and all 1,200,000
options will vest immediately upon consummation of the merger. Mr. Francesco's
employment agreement also provides that, in the event of a change in control of
Netrix, Mr. Francesco will be issued 1,000,000 shares of Netrix common stock.
Mr. Kendrick, the Chief Financial Officer of Netrix, entered into an
employment agreement effective as of August 2, 1999. The term of Mr. Kendrick's
employment agreement extends until August 1, 2001. Under the agreement, Mr.
Kendrick is paid a base salary of $100,000 per annum, and he is eligible to
receive a bonus in an amount to be determined by the Netrix board. In addition,
Mr. Kendrick has been granted options to purchase 100,000 shares of Netrix
common stock at an exercise price of $2.50 per share. Half of these options
will vest on December 31, 1999, and half will vest on August 3, 2000. Pursuant
to the stock option plan under which the options were granted, all of Mr.
Kendrick's options vest immediately upon a change of control of Netrix. The
merger will be a change of control for this purpose, and all 100,000 options
will vest immediately upon consummation of the merger.
OpenROUTE
Board of Directors. In connection with their approval of the merger, the
board of directors of OpenROUTE accelerated the vesting of all stock options
held by OpenROUTE's directors effective as of the closing of the merger, and in
addition modified such options so that they will be exercisable for a two-year
period after their holder ceases to be a director or employee (provided that
the foregoing changes do not apply
39
<PAGE>
to an option to purchase 5,000 shares held by Dr. Robert M. Glorioso). The
vesting of options to purchase an aggregate of 150,625 shares of OpenROUTE
common stock held by OpenROUTE's directors will be accelerated as a result of
the merger. Such number excludes options to purchase 288,480 shares held by Mr.
Holley, whose vesting also will be accelerated by virtue of previously existing
contractual arrangements as described in the following paragraph.
Interests of OpenROUTE Management. OpenROUTE previously entered into
severance agreements with Bryan R. Holley, Thomas A. Aucella, Henry Barber,
Robert A. Koch, Bruce MacAloney and Richard E. Sterry, all of whom are
OpenROUTE executive officers. Pursuant to these agreements, upon a change of
control of OpenROUTE, all options held by the subject executive officers will
immediately vest in full, and upon the termination of their employment, each
could be paid severance payments. The closing of the merger with Netrix will
constitute a change of control for this purpose. Except for the identity of the
executives and the dates, the agreements are identical in all material
respects.
Pursuant to such agreements, as a result of the merger, the vesting of
options to purchase an aggregate of 766,980 shares of OpenROUTE common stock
held by Messrs. Holley, Aucella, Barber, Koch, MacAloney and Sterry will be
accelerated. In addition, upon the termination of the subject executive's
employment following the merger, and subject to the fulfillment of certain
conditions, each of the executives will receive a severance benefit equal to
one year's salary. Each of the agreements has a term from the date of the
agreement to the earliest to occur of:
. four years from the date of the agreement;
. termination of the executive's employment:
-- by death or disability;
--for cause;
-- by the executive, unless justified under the terms of the agreement
by actions of OpenROUTE subsequent to a change in control; or
. one year after the date of a change in control.
Each of the agreements also contains a 12-month noncompete provision in the
event severance payments are made pursuant to the agreements.
Because the acceleration of the options held by OpenROUTE's directors and
officers described above are modifications to the terms of the OpenROUTE stock
option plan, a compensation charge of approximately $5.2 million will be
incurred at the time of the merger (based on an assumed $7.00 per share market
price).
In December 1998, OpenROUTE loaned certain of its executive officers,
including Messrs. Aucella, Holley, Koch and Sterry $22,000, $27,500, $22,000
and $22,000, respectively, under a Stay Put Bonus Agreement. Each executive was
loaned the money for a period of one year at an annual percentage rate of 7%.
The interest accrues on the unpaid balance beginning on January 1, 1999, until
either forgiven or paid back. The loans will be forgiven at the rate of 1/12 of
the original balance for each calendar month the executive remains employed by
OpenROUTE. If the executive leaves OpenROUTE voluntarily and any balance of the
loan and accrued interest is still outstanding then the executive is obligated
to pay the balance of the loan and accrued interest back to the OpenROUTE. If
40% or more of the outstanding OpenROUTE common stock is acquired by an entity
or if OpenROUTE enters into a pooling of interest transaction, the balance of
the loan and accrued interest will be forgiven at the time of the respective
transaction. Closing of the merger prior to January 1, 2000 will result in
early forgiveness of the balance of these loans.
Indemnification; Directors' and Officers' Insurance
The merger agreement provides that Netrix, as the surviving corporation, must
purchase and maintain for a period of six years, directors' and officers'
liability insurance no less favorable in coverage and amount than that
maintained by OpenROUTE immediately prior to the merger. It also provides that
Netrix must refrain from taking any action to alter or impair any exculpatory
or indemnification provisions presently existing in the Netrix charter or by-
laws or in any agreements entered into by Netrix. In addition, to the extent
that the latter provisions fail to indemnify present or former directors and
officers of OpenROUTE or any of its subsidiaries
40
<PAGE>
prior to the merger, the merger agreement obligates Netrix, as the surviving
corporation, to indemnify such individuals with respect to events that occurred
prior to the completion of the merger or in relation to the merger itself and
the transactions related to it, with certain exceptions, for a period of six
years following the completion of the merger. See "The Merger Agreement--
Indemnification; Directors' and Officers' Insurance."
OpenROUTE entered into agreements with each director and executive officer of
OpenROUTE whereby OpenROUTE agreed to:
. indemnify, to the fullest extent permitted by law, the director or
officer for liabilities the director or officer incurs as a result of
him serving as a director, officer or employee of OpenROUTE; and
. advance to the director or officer expenses, including attorneys fees,
that the director or officer incurs in connection with defending or
participating in any lawsuit or proceeding as a result of serving as a
director, officer or employee of OpenROUTE.
As the surviving corporation of the merger, Netrix will have the same
obligations to indemnify and advance expenses to the directors and officers of
OpenROUTE as OpenROUTE's obligations prior to the merger.
Each agreement provides for indemnification to the fullest extent permitted
by law. The agreements provide indemnification rights to the directors and
officers that are in addition to, and not in lieu of, indemnification rights
otherwise provided by law, in OpenROUTE's by-laws or in OpenROUTE's certificate
of incorporation.
Directors and officers are not entitled to indemnification or advancement of
expenses for acts, omissions or transactions from which the director or officer
may not be relieved under applicable law.
41
<PAGE>
THE MERGER AGREEMENT
This section is a summary of the material terms of the merger agreement, a
copy of which is attached as Annex A to this document. The following
description does not purport to be complete and is qualified by reference to
the merger agreement. We encourage you should to read the full text of the
merger agreement for details of the merger and the terms and conditions of the
merger agreement.
The Merger
When the merger occurs, OpenROUTE will be merged with and into Netrix in
accordance with the Delaware General Corporation Law and the Massachusetts
Business Corporation Law. Netrix will be the surviving corporation in the
merger. Each share of OpenROUTE common stock outstanding immediately before the
merger, other than shares owned or held by Netrix, OpenROUTE or any dissenting
shareholder of OpenROUTE which will be canceled, will be converted into the
right to receive one share of Netrix common stock. See "The Merger--What
OpenROUTE Stockholders Will Receive in the Merger". Accordingly, at the
effective time of the merger, Netrix will issue approximately 15.6 million
shares of Netrix common stock to existing OpenROUTE stockholders in exchange
for their shares of OpenROUTE common stock, and OpenROUTE will become a wholly
owned subsidiary of Netrix. The shares of Netrix common stock issued to
OpenROUTE stockholders in the merger will constitute approximately 55% of the
outstanding Netrix common stock after the merger. Netrix common stock is
described beginning on page 105.
Under the terms of the merger agreement, at the effective time of the merger:
. the certificate of incorporation of the constituent corporation, Netrix,
will continue in effect as the certificate of incorporation of the
surviving corporation until thereafter amended in accordance with its
terms and applicable law, except that Article Fourth of the certificate
of incorporation will be amended immediately at the effective time of
the merger to provide that the total number of authorized shares of
capital stock that the corporation has the authority to issue will be
56,000,000 shares, consisting of: (i) 55,000,000 shares of common stock,
$0.05 par value per share; and (ii) 1,000,000 shares of preferred stock,
$0.05 par value per share.
. the by-laws of Netrix in effect immediately prior to the effective time
of the merger will be the by-laws of the surviving corporation, Netrix,
until thereafter amended in accordance with their terms and as provided
by law; and
. the officers of Netrix as of the effective time will be the officers of
the surviving corporation and the directors of Netrix as of the
effective time will be the directors of the surviving corporation.
Timing of Closing
The merger will become effective on the date we file a certificate of merger
with the Secretary of State of the State of Delaware or at such later time as
we may agree and specify in the certificate of merger. We plan to file the
certificate of merger as soon as practicable after the conditions set forth in
the merger agreement have been satisfied or waived.
Conversion of OpenROUTE Common Stock
At and as of the effective time of the merger, each outstanding share of
OpenROUTE common stock will be converted into the right to receive one share of
Netrix common stock. As of the effective time, OpenROUTE shares will be
canceled and will cease to exist and a holder of such shares will cease to have
any rights with respect to the shares except the right to receive an equivalent
number of shares of Netrix common stock.
Netrix will appoint an exchange agent to handle the exchange of OpenROUTE
stock in the merger for Netrix stock. Soon after the effective time of the
merger, the exchange agent will send to each holder of OpenROUTE common stock a
letter of transmittal for use in the exchange and instructions explaining how
to surrender OpenROUTE stock certificates to the exchange agent. Holders of
certificates representing shares of
42
<PAGE>
OpenROUTE common stock that surrender their certificates to the exchange agent,
together with a properly completed letter of transmittal, will receive the
appropriate number of shares of Netrix. Holders of unexchanged shares of
OpenROUTE common stock will not be entitled to receive any dividends or other
distributions payable by Netrix after the effective time of the merger until
their certificates are surrendered or, with respect to uncertificated shares,
until a properly completed letter of transmittal is delivered to the exchange
agent.
Conversion of OpenROUTE Stock Options
At the effective time of the merger, each outstanding option, warrant and
other right granted by OpenROUTE to acquire shares of OpenROUTE common stock
will be converted into an option, warrant or other right to acquire Netrix
common stock with the same terms and conditions that the OpenROUTE stock
option, warrant or right had before the effective time of the merger.
Representation on Netrix Board
Prior to the completion of the merger, Netrix will cause the number of
directors constituting its board of directors to be fixed at nine directors and
will elect the CEO of OpenROUTE and three independent directors designated by
OpenROUTE to the Netrix board. In addition, at the first annual meeting of the
stockholders of Netrix held after the merger, Netrix shall use all commercially
reasonable efforts to cause to be elected as a director:
. the President and Chief Executive Officer of OpenROUTE, to serve until
the annual meeting of the stockholders of Netrix in 2003;
. two independent directors designated by OpenROUTE's board, to serve
until the annual meeting of the stockholders of Netrix in 2002; and
. one independent director designated by OpenROUTE's board, to serve until
the annual meeting of the stockholders of Netrix in 2001.
Representations and Warranties
The merger agreement contains essentially reciprocal representations and
warranties made by each of Netrix and OpenROUTE to the other, including
representations and warranties relating to:
. organization, standing and power,
. capitalization,
. subsidiaries and ownership of subsidiary stock,
. the absence of voting agreements affecting the merger,
. power and authority to enter into and consummate the transactions under
the merger agreement,
. absence of conflicts between organizational documents, laws and
agreements and the transactions under the merger agreement,
. filings with the Securities and Exchange Commission,
. financial statements and incurrence of liabilities since January 1,
1999,
. conduct of business since January 1, 1999,
. compliance with applicable laws,
. brokers' and finders' fees with respect to the merger,
. litigation and liabilities,
. tax matters,
. receipt of fairness opinions,
. employee benefits,
. board of directors approval for purposes of Section 110C-110F of the
Massachusetts Business Corporation Law (OpenROUTE only),
43
<PAGE>
. year 2000 compliance,
. environmental matters,
. intellectual property,
. insurance,
. material contracts, and
. circumstances that would prevent the merger from qualifying as a tax
free reorganization.
All representations and warranties of Netrix and OpenROUTE expire at the
effective time of the merger.
Certain Covenants
Each of Netrix and OpenROUTE has undertaken certain covenants in the merger
agreement. The following summarizes the more significant of these covenants.
Cooperation Covenant. Netrix and OpenROUTE will cooperate with each other to
take all actions and do all things necessary or advisable under the merger
agreement and applicable laws to complete the merger and the other transactions
contemplated by the merger agreement.
Conduct of business of OpenROUTE pending the completion of the
merger. OpenROUTE is required to conduct its business in the ordinary course
consistent with past practice until the effective time of the merger. Without
limiting the generality of this obligation, OpenROUTE has agreed that, until
the completion of the merger, except as otherwise permitted by the merger
agreement or if Netrix consents in writing, it and its subsidiaries will not:
. amend its organizational documents;
. issue additional capital stock or securities convertible into or
exercisable for, or any rights, warrants or options to acquire any
capital stock, with specified permitted exceptions;
. sell or otherwise dispose of or encumber any assets, which individually
or in the aggregate are material to OpenROUTE and its subsidiaries taken
as a whole other than equipment sales from inventory arising in the
ordinary course of business consistent with past practice;
. declare, set aside or pay any dividends on its capital stock, except
that this does not apply to wholly owned subsidiaries;
. split, combine or reclassify its capital stock or redeem, repurchase or
otherwise acquire its capital stock;
. make any acquisitions, other than of assets used in the operation of
OpenROUTE's business acquired in the ordinary course of business
consistent with past practice;
. incur capital expenditures other than those incurred or committed to in
the ordinary course of business consistent with past practice and which,
together with all expenditures incurred or committed since January 1,
1999, are not in excess of previously budgeted amounts;
. except in the ordinary course of business consistent with past practice,
(1) make any loans, advances, capital contributions or investments, (2)
pay or discharge any claims or liabilities and (3) incur any
indebtedness except under existing facilities or refinancings of
existing facilities;
. increase the compensation of its directors, officers and employees,
except for (1) customary increases to employees who earn less than
$120,000 in annual cash compensation, (2) customary bonuses and (3)
immaterial changes to employee benefit plans;
. change its methods of accounting or income tax elections, except as
required by generally accepted accounting principles; or
. take specified other actions that could reasonably be expected to
prevent the satisfaction of any of the conditions to the merger.
44
<PAGE>
Conduct of business of Netrix pending completion of the merger. Netrix has
agreed that, until the completion of the merger or as provided below, except as
otherwise permitted by the merger agreement, it and its subsidiaries will not:
. amend its organizational documents in a manner that would have an
adverse effect on the merger and the transactions contemplated by the
merger agreement,
. issue additional capital stock or securities convertible into or
exercisable for, or any rights, warrants or options to acquire any
capital stock, with specified permitted exceptions,
. sell or otherwise dispose of or encumber any assets, which, individually
or in the aggregate, are material to Netrix and its subsidiaries taken
as a whole, other than equipment sales from inventory arising in the
ordinary course of business,
. declare, set aside or pay any dividends on its capital stock, except
this does not apply to wholly owned subsidiaries,
. split, combine or reclassify its capital stock or redeem, repurchase or
otherwise acquire its capital stock,
. increase the compensation of its directors, officers and employees,
except for (1) customary increases to employees who earn less than
$120,000 in annual cash compensation, (2) customary bonuses and (3)
immaterial changes to employee benefit plans,
. without consulting OpenROUTE in advance, make any acquisitions, other
than of assets used in the operation of Netrix's business acquired in
the ordinary course of business consistent with past practice,
. without consulting with OpenROUTE in advance, incur capital expenditures
other than those incurred or committed to in the ordinary course of
business consistent with past practice,
. without consulting with OpenROUTE in advance, (1) make any investments
except as contemplated by the preceding bullet point, (2) pay or
discharge any claims or liabilities other than those incurred or
committed to in the ordinary course of business consistent with past
practice and (3) incur any indebtedness except in connection with
actions under the preceding bullet point or under existing facilities or
refinancings of existing facilities,
. without consulting with OpenROUTE in advance, change its methods of
accounting or income tax elections, except as required by generally
accepted accounting principles, and
. take specified other actions that could reasonably be expected to
prevent the satisfaction of any of the conditions to the merger.
No Solicitation of Alternative Transactions by OpenROUTE. OpenROUTE and its
subsidiaries and their officers, directors, employees and advisors will not
take action to solicit or encourage an offer for an alternative acquisition
transaction involving OpenROUTE of a nature defined in the merger agreement.
Restricted actions include engaging in any discussions with or furnishing any
information to a potential bidder, or knowingly taking any other action
designed to facilitate an alternative transaction. OpenROUTE is permitted to
take these actions in response to an unsolicited offer, however, if the
unsolicited offer is made prior to the time that the OpenROUTE stockholder
approval is obtained and if prior to taking any of these actions:
. the OpenROUTE board determines in good faith, based on the advice of a
financial advisor of nationally recognized reputation, that taking any
of these actions is reasonably likely to result in a superior proposal,
. the OpenROUTE board determines in good faith, based on a written opinion
of outside legal counsel, that not taking any of these actions would
violate the OpenROUTE board's fiduciary duties to the OpenROUTE
stockholders, and
45
<PAGE>
. OpenROUTE receives from such person an executed confidentiality
agreement substantially similar to the existing confidentiality
agreement between OpenROUTE and Netrix.
OpenROUTE must provide Netrix with prior notice of any such action and must
keep Netrix reasonably informed of the status and details of any offer.
OpenROUTE Board's Covenant to Recommend. The OpenROUTE board has agreed to
recommend the approval and adoption of the merger agreement to OpenROUTE's
stockholders. However, the OpenROUTE board is permitted to withdraw or to
modify this recommendation in a manner adverse to Netrix if, prior to the time
OpenROUTE stockholder approval is obtained, (1) the OpenROUTE board determines
in good faith, based on the advice of a nationally recognized financial
advisor, that an unsolicited acquisition proposal is superior to the merger and
(2) the OpenROUTE board determines in good faith, based on a written opinion of
outside legal counsel, that not taking any of these actions would violate the
OpenROUTE board's fiduciary duties to the OpenROUTE stockholders.
No Solicitation of Conflicting Acquisition Transactions by Netrix. Netrix and
its subsidiaries and their officers, directors, employees and advisers will not
take action to solicit or encourage an offer for an acquisition transaction
involving Netrix that would:
. not be consistent with the merger agreement, the merger or the other
transactions contemplated by the merger agreement,
. result in a material delay of the merger, or
. materially and adversely impact the likelihood of obtaining any consent
which is necessary to satisfy the closing conditions under the merger
agreement.
These transactions are referred to as "conflicting acquisition transactions"
in the rest of this section.
Restricted actions include engaging in any discussions with or furnishing any
information to a potential bidder, or knowingly taking any other action
designed to facilitate a conflicting acquisition transaction. Netrix is
permitted to take these actions in response to an unsolicited offer, however,
if the unsolicited offer is made prior to the time that the Netrix stockholder
approval is obtained and if prior to taking any of these actions:
. the Netrix board determines in good faith, based on the advice of a
financial advisor of nationally recognized reputation, that taking any
of these actions is reasonably likely to result in a superior proposal,
. the Netrix board determines in good faith, based on a written opinion of
outside legal counsel, that not taking any of these actions would
violate the Netrix board's fiduciary duties to the Netrix stockholders,
and
. Netrix receives from such person an executed confidentiality agreement
substantially similar to the existing confidentiality agreement between
OpenROUTE and Netrix.
Netrix must keep OpenROUTE reasonably informed of the status and details of
any acquisition proposal it receives, regardless of whether the acquisition
proposal offer would be a conflicting acquisition transaction.
Netrix Board's Covenant to Recommend. The Netrix board has agreed to
recommend the approval of the merger agreement to Netrix's stockholders.
However, the Netrix board is permitted to withdraw or to modify in a manner
adverse to OpenROUTE this recommendation if (1) the Netrix board determines in
good faith, based in part on the advice of a nationally recognized financial
advisor, that an unsolicited acquisition proposal is superior to the merger
with OpenROUTE and (2) the Netrix board determines in good faith, based on a
written opinion of outside legal counsel, that not taking any of these actions
would violate the Netrix board's fiduciary duties to the Netrix stockholders.
Covenant to Hold Stockholder Meetings. Netrix and OpenROUTE have agreed to
submit their respective merger proposals to their stockholders at the special
meetings even if their boards of directors no longer recommend that their
stockholders approve such proposals.
46
<PAGE>
Indemnification and Insurance of OpenROUTE Directors and Officers. After the
merger, the surviving corporation will, for a period of six years after the
effective time of the merger:
. maintain the current provisions regarding elimination of liability of
directors and indemnification of officers, directors and employees
contained in the certificate of incorporation, by-laws or
indemnification or employment agreements of OpenROUTE; and
. provide directors' and officers' liability insurance for acts and
omissions occurring before the merger no less favorable in coverage or
amount than the insurance maintained by OpenROUTE prior to the merger,
provided, that if OpenROUTE's current liability insurance terminates for
any reason, the surviving corporation will use its reasonable best
efforts to obtain comparable insurance; and
. if the measures outlined above are insufficient to indemnify a director
or officer, Netrix will indemnify such director or officer to the
fullest extent permissible under applicable law.
Employee benefits. After the merger, Netrix will arrange for each OpenROUTE
employee participating in any of the OpenROUTE employee benefit plans to
participate in any counterpart Netrix benefit plan in accordance with Netrix's
eligibility criteria. In this regard, OpenROUTE participants will:
. receive full credit for years of service with OpenROUTE, to the extent
recognized for the purposes of OpenROUTE's plans, and
. participate in Netrix plans on terms no less favorable than those
offered by Netrix to its own similarly situated employees.
In addition, Netrix will give full credit under its employee welfare benefit
plans for all co-payments, deductibles and out-of-pocket maximums satisfied by
OpenROUTE employees and their dependents in the calendar year in which the
merger is consummated. Also, Netrix may cause the surviving corporation and its
subsidiaries to continue one or more of the OpenROUTE plans if those plans
provide benefits which are no less favorable than the benefits provided under
the counterpart plans of Netrix.
Certain Other Covenants. The merger agreement contains other mutual covenants
of the parties that are typical for a transaction similar to the merger.
Conditions to the Completion of the Merger
The obligations of Netrix to complete the merger are subject to the
satisfaction or waiver of all of the following conditions:
. approval of the merger by Netrix stockholders,
. approval of the amendment to Netrix's certificate of incorporation to
increase the authorized common stock,
. receipt by each party of consents or approvals from any person,
including any relevant regulatory bodies, required for completion of the
merger, except for those which the failure to obtain would not have a
material adverse effect on Netrix or OpenROUTE,
. accuracy, in all material respects, as of closing of the representations
and warranties made by OpenROUTE to the extent specified in the merger
agreement, except for representations and warranties which address
matters only as of a particular date,
. performance in all material respects by OpenROUTE of the obligations
required to be performed by it at or prior to closing,
. absence of a legal prohibition on completion of the merger,
. absence of an imposition by any regulatory authority of any condition,
requirement or restriction which:
-- prohibits Netrix's ownership or operation of, or which compels
Netrix to dispossess, all or any significant portion of OpenROUTE's
business as a result of the merger,
47
<PAGE>
-- imposes material limitations on the ability of Netrix to acquire or
hold or exercise effectively all rights with respect to the
OpenROUTE shares it acquires in the merger, or
-- imposes any limitation on the ability of Netrix effectively to
control in any material respect the business and operations of
OpenROUTE,
. receipt of an opinion from Kelley Drye & Warren, LLP that the merger
will qualify as a tax-free reorganization,
. approval for the listing on the Nasdaq National Market of the shares of
Netrix common stock to be issued in the merger, and
. absence of an order suspending the effectiveness of the registration
statement of which this document is a part and the absence of any SEC
proceedings, or threatened SEC proceedings, for that purpose.
The obligations of OpenROUTE to complete the merger are subject to the
satisfaction or waiver of all of the following conditions:
. approval of the merger by the OpenROUTE stockholders,
. receipt by each party of consents or approvals from any person,
including any relevant regulatory bodies, required for completion of the
merger, except for those that the failure to obtain would not have a
material adverse effect on Netrix or on Netrix and OpenROUTE as combined
after the merger,
. accuracy, in all material respects, as of closing of the representations
and warranties made by Netrix to the extent specified in the merger
agreement, except for those representations and warranties which address
matters only as of particular date,
. performance in all material respects by Netrix of the obligations
required to be performed by it at or prior to closing,
. absence of a legal prohibition on completion of the merger,
. absence of an imposition by any regulatory authority of any condition,
requirement or restriction which prohibits Netrix's ownership or
operation of, or which compels Netrix to dispossess, all or any
significant portion of its or OpenROUTE's business or assets as a result
of the merger or which makes the purchase of, or payment for,
OpenROUTE's shares illegal,
. receipt of an opinion from Swidler Berlin Shereff Friedman, LLP that the
merger will qualify as a tax-free reorganization,
. approval for the listing on the Nasdaq National Market of the shares of
Netrix common stock to be issued in the merger, and
. absence of an order suspending the effectiveness of the registration
statement of which this document is a part and the absence of any SEC
proceedings, or threatened SEC proceedings, for that purpose.
Termination of the Merger Agreement
Right to Terminate. The merger agreement may be terminated by mutual written
consent of Netrix and OpenROUTE at any time prior to its becoming effective. In
addition, either Netrix or OpenROUTE can terminate the merger agreement and
abandon the merger if any of the following occurs:
. the merger has not become effective by February 29, 2000 and the failure
to complete the merger by that date is not due to the action or failure
to act by the party seeking to terminate; or
. a governmental authority takes a final and nonappealable action that
prohibits the merger or results in a condition to the closing
obligations of the terminating party becoming incapable of being
satisfied by February 29, 2000; or
. in the event that the merger agreement, merger and related transactions
fail to receive the requisite stockholder approval at either the Netrix
or OpenROUTE special meeting; or
. OpenROUTE's stockholders exercise their appraisal rights with respect to
more than $2,500,000 in value of OpenROUTE common stock.
48
<PAGE>
In addition, Netrix may terminate the merger agreement and abandon the
merger if:
. the OpenROUTE board enters into or publicly announces its intention to
enter into an alternative acquisition proposal;
. the OpenROUTE board withdraws its recommendation to OpenROUTE
stockholders to approve the merger proposal;
. the OpenROUTE board, after receipt of an alternative acquisition
proposal, fails to confirm publicly, within ten days of a request by
Netrix for public confirmation, its recommendation to OpenROUTE
stockholders that they adopt and approve the merger agreement and
merger;
. OpenROUTE or any of its representatives, except as explicitly permitted
in the merger agreement, takes any of the actions proscribed in Section
5(h) of the merger agreement; or
. in the event that OpenROUTE breaches any of its representations,
warranties or covenants under the merger agreement and the breach
results in the failure of a condition under the merger agreement and the
breach cannot be or is not cured within thirty days after written notice
is given by Netrix to OpenROUTE of the breach, as long as Netrix is not
then in material breach of any representation, warranty or covenant
under the merger agreement.
Finally, OpenROUTE may terminate the merger agreement and abandon the merger
if:
. the Netrix board enters into or publicly announces its intention to
enter into an acquisition transaction that is inconsistent with the
merger;
. the Netrix board withdraws its recommendation to Netrix stockholders to
approve the merger proposal, including amendment of the Netrix charter
to authorize additional shares of capital stock or the issuance of
shares of Netrix common stock in connection with the merger;
. the Netrix board, after receipt of an alternative acquisition proposal,
fails to confirm publicly, within ten days of a request by Netrix for
public confirmation, its recommendation to OpenROUTE stockholders that
they adopt and approve the merger agreement and merger;
. in the event that Netrix breaches any of its representations, warranties
or covenants under the merger agreement and the breach results in the
failure of a condition under the merger agreement and the breach cannot
be or is not cured within thirty days after written notice is given by
OpenROUTE to Netrix of the breach, as long as OpenROUTE is not then in
material breach of any representation, warranty or covenant under the
merger agreement; or
. Netrix or any of its representatives, except as explicitly permitted in
the merger agreement, takes any of the actions prescribed in Section
5(i) of the merger agreement.
Although the Netrix and OpenROUTE boards may withdraw their recommendations
of the merger in response to a superior acquisition proposal, neither Netrix
nor OpenROUTE is permitted to terminate the merger agreement to accept a
superior acquisition proposal made by a third party. Accordingly, it is
expected that the Netrix and OpenROUTE special meetings will be held even if
Netrix or OpenROUTE receives a superior acquisition proposal from a third
party.
Termination Fees. OpenROUTE has agreed to pay Netrix a termination fee of $1
million in cash if:
. Netrix terminates the merger agreement because the OpenROUTE board:
-- enters into or publicly announces its intention to enter into an
alternative acquisition proposal,
-- withdraws its recommendation of the approval of the merger, or
-- after receiving an alternative acquisition proposal, fails to
publicly confirm its recommendation of the merger within ten days
after Netrix requests that a public confirmation be made.
. Netrix terminates the merger agreement because OpenROUTE or its
representatives solicit, negotiate or enter into an alternative
acquisition proposal; or
. any person proposes an alternative acquisition proposal that remains in
effect on December 31, 1999, and the OpenROUTE stockholders do not
approve the merger prior to termination of the merger agreement as a
result of the failure to complete the merger by February 29, 2000.
49
<PAGE>
Netrix has agreed to pay OpenROUTE a termination fee of $1 million in cash
if:
. OpenROUTE terminates the merger agreement because the Netrix board:
-- enters into or publicly announces its intention to enter into an
acquisition transaction that is inconsistent with the merger,
-- withdraws its recommendation of the approval of the merger, or
-- after receiving an alternative acquisition proposal, fails to
publicly confirm its recommendation of the merger within ten days
after OpenROUTE requests that a public confirmation be made,
. OpenROUTE terminates the merger agreement because Netrix or its
representatives solicit, negotiate or enter into an acquisition
transaction that is inconsistent with the merger agreement, or
. any person proposes an acquisition transaction that is inconsistent with
the merger and remains in effect on December 31, 1999, and the Netrix
stockholders do not approve the merger prior to termination of the
merger agreement as a result of the failure to complete the merger by
February 29, 2000.
Other Expenses
Expenses incurred by Netrix and OpenROUTE in connection with the merger
agreement and the transactions contemplated by the merger agreement will be
paid by the party incurring such expenses, except that expenses incurred in
connection with the printing of this joint proxy statement/prospectus and the
filing of the registration statement in which this joint proxy
statement/prospectus is included will be shared equally by Netrix and
OpenROUTE.
Amendments and Waivers
Amendments. Any provision of the merger agreement may be amended prior to the
effective time of the merger if the amendment is approved by the board of
directors of Netrix and OpenROUTE. After the approval of the merger agreement
by the stockholders of either Netrix or OpenROUTE, any amendment is subject to
the restrictions contained in the Massachusetts Business Corporation Law, and
the Delaware General Corporation Law. No amendment is valid unless such
amendment is in writing and is signed by Netrix and OpenROUTE.
Waiver. At any time before the effective time of the merger, by a waiver in
writing and signed by the party against whom the waiver is to be effective, any
party may waive compliance with any of the agreements or conditions contained
in the merger agreement provided, however, that no waiver of any default,
representation or breach of warranty or covenant under the merger agreement
should be deemed to extend to any part or subsequent default misrepresentation
or breach of warranty or covenant.
Voting Agreements
Netrix has entered into a voting agreement with its Chairman of the Board of
Directors and Chief Executive Officer, Steven T. Francesco. Pursuant to the
agreement, Mr. Francesco has agreed to vote his shares of Netrix common stock
in favor of approval of the merger agreement, the merger and related
transactions and against any proposal made in opposition to the merger and has
granted to Netrix an irrevocable proxy to vote any shares in such manner. At
November 16, 1999, Mr. Francesco owned immediately exercisable options to
acquire 400,000 shares of Netrix common stock but he did not own any shares
directly.
OpenROUTE has entered into voting agreements with its Chairman of the Board
of Directors, Howard Salwen, and its Chief Executive Officer, Bryan R. Holley.
Pursuant to these agreements, Mr. Salwen and Mr. Holley have agreed to vote all
of their respective shares of OpenROUTE common stock, and any additional shares
acquired by them prior to the merger, in favor of approval of the merger
agreement, the merger and related transactions and against any proposal made in
opposition to the merger. Each has granted to OpenROUTE an irrevocable proxy to
vote his shares in such manner. Currently, Mr. Salwen holds 1,001,264 shares of
OpenROUTE common stock and Mr. Holley holds 6,000 shares of OpenROUTE common
stock.
50
<PAGE>
II. FINANCIAL INFORMATION
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Netrix common stock and OpenROUTE common stock are each listed on The Nasdaq
National Market. Netrix's ticker symbol on The Nasdaq National Market is "NTRX"
and OpenROUTE's ticker symbol is "OPEN." The following table shows, for the
calendar quarters indicated, based on published financial sources (1) the high
and low last reported closing prices per share of Netrix common stock as
reported on NASDAQ Composite Tape and (2) the high and low last reported
closing prices per share of OpenROUTE common stock as reported on NASDAQ
Composite Tape. Netrix and OpenROUTE have not paid any cash dividends on their
common stock to date. The payment of dividends, if any, in the future is within
the discretion of the Netrix and OpenROUTE boards and will depend on each
company's earnings, capital requirements and financial condition, and may be
restricted by credit arrangements entered into by either company. It is the
present intentions of the Netrix board to retain all earnings, if any, for use
in business operations and accordingly, the Netrix board does not expect to
declare or pay any dividends in the foreseeable future.
<TABLE>
<CAPTION>
Netrix OpenROUTE
Common Stock Common Stock
------------------- -------------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
1997
First Quarter............ $ 7 $ 2 1/2 $ 3 11/16 $ 1 5/16
Second Quarter........... 3 1 7/16 2 15/16 1 7/16
Third Quarter............ 2 11/16 1 3/4 2 1/2 1 9/16
Fourth Quarter........... 2 11/16 5/8 3 1/2 1 1/32
1998
First Quarter............ 2 1/2 1 1 1/2 31/32
Second Quarter........... 3 1/2 2 2 1/8 1 1/32
Third Quarter............ 3 7/16 29/32 1 11/16 9/16
Fourth Quarter........... 2 7/8 1 2 5/16 9/16
1999
First Quarter............ 3 3/8 1 9/16 3 3/4 1 5/8
Second Quarter........... 4 3/8 2 1/4 5 5/16 2 1/8
Third Quarter............ 5 1/16 2 1/2 4 1/2 2 1/2
Fourth Quarter (through
November 16, 1999)...... 6 3/16 2 3/8 6 5/8 2 1/32
</TABLE>
On August 26, 1999, the last full trading day prior to the public
announcement by Netrix and OpenROUTE of their intention to merge, the last
reported closing prices per share of Netrix common stock and OpenROUTE common
stock were $4 1/8 and $3 1/8, respectively. On September 29, 1999, the last
full trading day prior to the announcement of the signing of the merger
agreement, the last reported closing prices per share of Netrix and OpenROUTE
stock were $2 1/2 and $2 7/8, respectively. On November 17, 1999, the most
recent practicable date prior to the mailing of this joint proxy
statement/prospectus, the last reported closing prices per share of Netrix and
OpenROUTE stock were $6 5/16 and $6 1/8, respectively. Stockholders are urged
to obtain current market quotations prior to making any decision with respect
to the merger.
51
<PAGE>
NETRIX SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Netrix's "Management's Discussion and Analysis of Financial
Condition and Results of Operations," its consolidated financial statements,
including the notes thereto, and the other financial data of Netrix included
elsewhere in this joint proxy statement/prospectus. The statement of operations
data and balance sheet data as of and for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 are derived from the consolidated financial
statements of Netrix and the notes related thereto, which were audited by
Arthur Andersen, LLP, independent certified public accountants. The
consolidated financial statements as of December 31, 1997 and 1998 and for each
of the years in the three-year period ended December 31, 1998, and the report
of Arthur Andersen, LLP thereon, are included elsewhere in this joint proxy
statement/prospectus. The selected consolidated statement of operations data
and balance sheet data as of and for the nine month periods ended September 30,
1998 and 1999 are derived from the unaudited consolidated financial statements
of Netrix included elsewhere in this joint proxy statement/prospectus, which,
in the opinion of management, include all adjustments necessary for a fair
presentation of the financial condition and results of operations of Netrix for
such periods. The results of operations for interim periods are not necessarily
indicative of a full year's operations. Net loss per share is computed on the
basis described in the notes to Netrix's consolidated financial statements.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------- ------------------
1994 1995 1996 1997 1998 1999 1998
------- ------- ------- ------- ------- -------- --------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Total revenues........ $53,021 $48,891 $43,635 $33,087 $31,482 $ 21,388 $ 23,383
Gross profit.......... 27,557 25,225 21,572 14,647 15,388 10,238 11,816
Operating expenses:
Sales and
marketing.......... 12,572 14,162 11,632 10,120 9,292 4,621 7,774
Research and
development........ 10,073 10,776 11,079 8,323 6,771 5,337 4,939
General and
administrative..... 4,982 4,787 4,266 4,002 4,324 3,683 3,080
Stock compensation
expense............ 763 --
Restructuring
charge............. 910 -- 900 875 -- 900 --
Bad debt expense.... -- -- -- 100 1,489 -- --
------- ------- ------- ------- ------- -------- --------
Loss from operations.. (980) (4,500) (6,305) (8,773) (6,488) (5,066) (3,977)
Comprehensive loss.... (579) (3,795) (5,968) (8,577) (6,517) (5,324) (4,167)
Basic and diluted net
loss per share....... (0.06) (0.40) (0.63) (0.89) (0.60) (0.51) (0.37)
Balance sheet data (end
of period):
Working capital....... 25,055 21,790 17,782 10,271 7,600 8,676 9,407
Total assets.......... 45,343 41,985 34,493 24,024 20,241 20,269 21,391
Total long-term
liabilities.......... 843 943 614 97 -- -- --
Stockholders' equity.. 33,632 30,396 24,847 16,480 12,117 12,170 14,495
</TABLE>
52
<PAGE>
OPENROUTE SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with OpenROUTE's "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," its consolidated financial statements,
including the notes thereto, and the other financial data of OpenROUTE included
elsewhere in this joint proxy statement/prospectus. The statement of operations
data and balance sheet data as of and for the years ended December 31, 1994,
1995, 1996 and 1997 are derived from the consolidated financial statements of
OpenROUTE and the notes related thereto, which were audited by
PricewaterhouseCoopers, LLP, independent certified public accountants. The
statement of operations data and balance sheet data as of and for the year
ended December 31, 1998 are derived from the consolidated financial statements
of OpenROUTE and the notes related thereto, which were audited by BDO Seidman,
LLP, independent public accountants. The consolidated financial statements as
of December 31, 1997 and 1998 and for each of the years in the three-year
period ended December 31, 1998, and the reports of BDO Seidman, LLP and
PricewaterhouseCoopers, LLP thereon, are included elsewhere in this joint proxy
statement/prospectus. The selected consolidated statement of operations data
and balance sheet data as of and for the nine-month periods ended September 26,
1998 and September 25, 1999 are derived from the unaudited consolidated
financial statements of OpenROUTE included elsewhere in this joint proxy
statement/prospectus, which, in the opinion of management, include all
adjustments necessary for a fair presentation of the financial condition and
results of operations of OpenROUTE for such periods. The results of operations
for interim periods are not necessarily indicative of a full year's operations.
Net loss per share is computed on the basis described in the notes to
OpenROUTE's consolidated financial statements.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 25, September 26,
-------------------------------------------- ------------- --------------
1994 1995 1996 1997 1998 1999 1998
------- ------- -------- ------- -------- ------------- --------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Total revenues........ $93,912 $75,323 $ 45,296 $26,944 $ 14,326 $10,611 $11,181
Gross profit.......... 45,764 38,659 19,626 11,604 5,730 4,366 4,448
Operating expenses:
Sales and
marketing.......... 23,955 17,903 15,486 10,703 8,018 3,181 6,653
Research and
development........ 11,162 8,802 9,353 5,987 4,610 2,935 3,532
General and
administrative..... 7,065 4,683 4,590 3,870 5,376 2,418 4,561
Restructuring
charge............. 6,330 -- 3,312 (241) -- 243 --
------- ------- -------- ------- -------- ------- -------
Income (loss) from
operations........... (2,748) 7,271 (13,115) (8,715) (12,274) (4,411) (10,298)
Comprehensive income
(loss)............... (1,177) 8,384 (11,955) (7,914) (11,858) (4,024) (9,985)
Basic and diluted net
income (loss) per
share................ (0.09) 0.52 (0.77) (0.51) (0.77) (0.28) (0.65)
Balance sheet data (end
of period):
Working capital....... 27,550 39,006 30,597 23,620 12,436 8,847 14,030
Total assets.......... 56,911 59,029 45,571 33,403 20,278 14,440 22,480
Total long-term
liabilities.......... -- -- -- -- -- -- --
Stockholders' equity.. 37,679 47,323 35,191 26,892 15,151 11,127 17,023
</TABLE>
53
<PAGE>
NETRIX MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements, the notes thereto and the other financial data included later in
this joint proxy statement/prospectus. The following discussion contains
certain forward-looking statements, or statements that are not statements of
historical fact. The words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. For a
discussion of important factors, including, but not limited to, the continued
development of our business, actions of regulatory authorities and competitors,
price declines and other factors that could cause actual results to differ
materially from the results referred to in the forward-looking statements, see
the section in this joint proxy statement/prospectus entitled "Risk Factors."
Recent Developments
In early 1999, Netrix initiated significant changes in its management and
business in an effort to return to sustained profitability. Steven J. Francesco
joined the company as Chairman and Chief Executive Officer, Peter J. Kendrick
joined the company as Chief Financial Officer and Sean Rooney joined the
company as Vice President--Sales. In addition, five new directors joined the
Netrix board of directors, leaving only one carry-over director from the board
at December 31, 1998.
In April 1999, the new management of Netrix implemented a restructuring of
operations to reduce and economize its work force. Restructuring charges of
approximately $0.9 million have been incurred through September 30, 1999,
resulting from approximately $0.8 million of approximately 36 employees across
all functional areas of Netrix, and approximately $57,000 of accrued facility
costs resulting from the consolidation of facilities and premature termination
of office leases. The reduction in force and payment of severance will continue
over approximately an additional six-month period. In addition to these
initiatives, Netrix subleased a substantial portion of its headquarters
facility, resulting in a reduction of approximately $50,000 of monthly expenses
and contracted out its manufacturing and inventory control functions.
With respect to revenues, Netrix has reinvigorated its sales and marketing
functions and is transitioning from the enterprise market to the carrier
market, to take advantage of perceived market opportunities. In addition,
Netrix is undertaking an evaluation of many business relationships, and it is
in the process of renegotiating or terminating certain low margin projects.
To help finance these activities and strengthen its balance sheet, in May
1999 Netrix completed a private placement of Series A convertible preferred
stock which provided approximately $4.0 million of net proceeds. In addition,
Netrix renegotiated the terms of the line of credit agreement with Coast
Business Credit. The new terms include a significantly lower quarterly tangible
net worth covenant and an extension through May 2001. Concurrently, the lending
institution granted Netrix a waiver of the past covenant violations and waived
its right to call the line of credit for these covenant violations.
During 1996 and 1997, Netrix implemented a restructuring of operations to
reduce and economize its work force in response to declining revenues and the
discontinuance of its micro.pop product. The restructuring resulted in an
overall reduction of personnel and related compensation and other associated
operating costs of Netrix for these years. The 1996 restructuring charges of
$0.9 million resulted from approximately $0.5 million of accrued severance and
outplacement costs associated with a reduction-in-force of approximately 41
employees across all functional areas of Netrix, and approximately $0.4 million
of accrued facility costs resulting from the consolidation of facilities and
premature termination of various office leases. The reduction-in-force occurred
over approximately a one-year period and severance payments were made in a lump
sum in April and June 1996, and February 1997. As a result of the 1996
restructuring, estimated cost savings of approximately $2.5 million annually
has been realized. The 1997 restructuring charges of $0.9 million resulted from
approximately $0.4 million of accrued severance and outplacement costs
associated with a reduction-in-force of approximately 37 employees across all
functional areas of Netrix, approximately $0.4 million of fixed-asset write-
offs and
54
<PAGE>
facility relocation charges for unrecoverable lease obligations associated with
the consolidation of the Longmont, Colorado, and Herndon, Virginia, operations
facilities into one facility leased in Charlotte, North Carolina, and other
associated costs of approximately $0.1 million. Severance payments were made in
April 1997. As a result of the 1997 restructuring, estimated cost savings of
approximately $2.5 million annually has been realized.
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Background. The results for the first nine months of 1999 reflect an overall
decrease in the revenues and increase in expenses of Netrix from the comparable
period in 1998. The increase in expenses is due primarily to an increase in
general and administrative expense for legal and accounting fees associated
with the changes in capital structure and management. During the first nine
months of 1999, Netrix continued to experience a decline in revenues in the
product line it acquired from Republic Telcom and a net increase in its new
product, the 2210, which combines the Republic technology with Netrix switching
capability. Geographically, during the first nine months of 1999, Netrix
continued to experience declining revenues from international customers, which
was partially offset by an increase in revenues from domestic customers.
In April 1999, Netrix implemented a restructuring of operations to reduce and
economize its work force as part of an overall plan to return to profitability.
The restructuring charges of $0.9 million resulted from approximately $0.8
million of accrued severance and benefit costs associated with a reduction-in-
force of approximately 36 employees across all functional areas of Netrix, and
approximately $57,000 of accrued facility costs resulting from the
consolidation of facilities and premature termination of various office leases.
The reduction-in-force and payment of severance will occur over approximately a
six-month period.
Revenues. For the nine months ended September 30, 1999, revenues decreased
$2.0 million, or 8.5%, to $21.4 million, from $23.4 million for the nine months
ended September 30, 1998. Product sales remained essentially the same compared
to the nine months ended September 30, 1998. Service revenues decreased $1.8
million or 25% to $5.3 million from $7.1 million for the nine months ended
September 30, 1998. The decrease is a result of cancellations and non-renewals
of maintenance contracts by various customers using legacy equipment.
Gross Profit. For the nine months ended September 30, 1999, gross profit for
product decreased $0.2 million or 2% to $8.5 million from $8.7 million for the
nine months ended September 30, 1998. Gross profit for service revenue
decreased $1.4 million or 58% to $1.3 million from $3.1 million for the nine
months ended September 30, 1998. Gross profit decreased $1.6 million or 13% to
$10.2 million from $11.8 million for the nine months ended September 30, 1998.
The nine month gross profit is primarily the combined result of a lower-margin
product mix, a greater proportion of sales made through distributors, which
generally have higher discounts than direct retail sales, and competitive
pricing pressures. The gross profit in any particular quarter is dependent upon
the mix of products sold and the channels of distribution. As a result, the
gross profit on a quarter to quarter basis can vary within a wide range. The
nine month decrease in service gross profit is primarily the result of lower
service revenues from cancellations and non-renewals of maintenance contracts
by various customers using legacy equipment.
Sales and Marketing. Sales and marketing expenses decreased $3.2 million, or
41%, to $4.6 million for the nine months ended September 30, 1999 from $7.8
million for the nine months ended September 30, 1998. The year over year
decrease is the result of a decrease in bad debt expense of $1.1 million, and
other reductions totaling $1.8 million in personnel, trade show initiatives,
and advertising and marketing materials.
55
<PAGE>
Research and Development. For the nine months ended September 30, 1999,
research and development expenses increased $0.3 million or 8% to $5.3 million
from $4.9 million for the nine months ended September 30, 1998. The year over
year increase in research and development expense is due primarily to an
increase in personnel costs of $0.1 million and an increase in consulting fees
of $0.3 million. All of Netrix's research and development costs were charged to
operations as incurred during the periods reported.
General and Administrative. For the nine months ended September 30, 1999
general and administrative expenses increased $0.6 million or 20% to $3.7
million from $3.1 million for the nine months ended September 30, 1998. The
increase in general and administrative was the result of higher accounting and
legal expenses associated with the restructuring of operations, changes in
Netrix's capital structure, the renegotiation of the line of credit and default
waiver with Netrix's lending institution, and costs associated with the renewal
of the headquarters office lease.
Stock Compensation. Netrix incurred stock compensation expense of
approximately $0.8 million associated with stock options issued to Mr. Steven
Francesco, Chairman and Chief Executive Officer in July of 1999.
Restructuring Reserve. In April 1999, Netrix implemented a restructuring of
operations to reduce and economize its work force as part of an overall plan to
return to profitability. The restructuring charges of $0.9 million resulted
from $0.8 million of accrued severance and benefit costs associated with a
reduction-in-force of approximately 36 employees across all functional areas of
the Company, and $57,000 of accrued facility costs resulting from the
consolidation of facilities and premature termination of various office leases.
The reduction-in-force and payment of severance will occur over a six-month
period.
Interest and Other Income, Net. For the nine months ended September 30, 1999,
net interest expense was $0.2 million, compared to $20,000 for the nine months
ended September 30, 1998. The year over year increase in net interest expense
is the combined result of a $97,000 charge related to the fair value of
warrants issued to Netrix's lending institution, $43,000 lower interest income
due to less cash available for overnight investments, and higher interest costs
resulting from higher rates and loan balances during 1999.
Foreign Exchange Gain or Losses. For the nine months ended September 30,
1999, Netrix had no foreign exchange gains or losses, compared to a foreign
exchange gain of $87,000 for the nine months ended September 30, 1998.
Net Loss Attributable to Common Stock. For the nine months ended September
30, 1999, Netrix had a net loss attributable to common stock of $5.8 million,
compared to $3.9 million for the nine months ended September 30, 1998. The
increase in net loss attributable to common stock is due primarily to an
increase in general and administrative costs associated with legal and
accounting expenses of $0.3 million, research and development cost of $0.3
million, stock compensation expense of $0.8 million and a dividend on preferred
stock of $0.5 million.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997; Year
Ended December 31, 1997 Compared to Year Ended December 31, 1996
Background. The results of operations for the year ended December 31, 1998
reflect a 5% decrease in revenues, a 13% decrease in cost of revenues, and a 7%
decrease in operating expenses from 1997. Netrix continued to experience a
decline in revenues in the product line it acquired from Republic Telcom during
1998, but experienced an increase in revenues from sales of the 2210, which
combines the Republic technology with Netrix switching capability, the 2550,
the Netrix enhanced switching platform and from sales of Netrix's new products.
Revenues. Total revenues decreased $1.6 million or 5% from 1997 to 1998 and
$10.5 million or 24% from 1996 to 1997. Product revenues in 1998 of $21.8
million decreased 3% from 1997 product revenues of $22.5 million, which
decreased $10.0 million or 31% from product revenues in 1996 of $32.4 million.
The
56
<PAGE>
decreased sales for both 1996 and 1997 were most prominent in the United States
which saw a decrease in product revenues of $3.7 million or 32% from 1996 to
1997. The International sales regions also experienced decreased sales to a
lesser extent from 1996 to 1997. The mix of products sold contributed
significantly to the decrease in revenues in 1998 and 1997. The Telecom
products acquired in the Republic Telcom acquisition saw a steady decrease of
57% from 1996 to 1997, and 42% from 1997 to 1998. Netrix Exchange products,
some of which still incorporate the Republic technology, utilize more current
technology and have been developed through significant investments in R&D.
Netrix Exchange products generated a revenue increase of 248% and 88%
respectively, over the same periods. This trend of declining sales of older
Telcom products and increasing sales of Netrix Exchange products is the result
of technological advances that offer improved performance and greater
functionality in the current generation of products, and thus enhanced value to
customers. Netrix Exchange product sales are generated by new customers as well
as existing customers who are upgrading their networks to modern technology.
Service revenues decreased $1.0 million or 9% from 1997 to 1998, and $0.6
million or 5% from 1996 to 1997. Service revenues are primarily the result of
the renewal of existing maintenance contracts as well as the negotiation of new
equipment service contracts. Overall, service revenues have decreased as a
result of the elimination of older product servicing which is partially offset
by new product and customer contracts.
Gross Profit. Total gross profit increased $0.7 million or 5% from 1997 to
1998, and decreased $6.9 million or 32% from 1996 to 1997. Gross profit as a
percentage of total revenues was 49% in 1998, 44% in 1997, and 49% in 1996. The
product gross margin decreased from 55% in 1996 to 49% in 1997 because of lower
introductory pricing offered on the new 2550 product and a greater proportion
of sales made through distributors, which generally have higher discounts, than
direct retail sales. Product margins increased by 1% in 1998 from 1997 as a
result of higher-margin product mix, and decreased 6% in 1997 from 1996.
The service gross margin was 34% in 1996 and 1997, and 47% in 1998. The
increase in the service margin from 1997 to 1998 was approximately 13%, or $1.5
million. This net margin improvement was the combined result of a decrease of
approximately $0.8 million in personnel and infrastructure costs resulting from
the 1997 restructuring and the elimination of approximately $1.0 million in
support service costs outsourced to contract maintenance organizations, which
was partially offset by a decrease in margin of approximately $0.3 million
resulting from the $1.0 million decrease in service revenue volume from 1997 to
1998.
Sales and Marketing. Sales and marketing expenses increased $0.6 million or
5% from 1997 to 1998, and decreased $1.4 million or 12% from 1996 to 1997. The
1998 increase of $0.6 million is the combined result of a net increase of
approximately $0.4 million of consignment inventory reserves for obsolete
equipment and $1.5 million of bad debt expense, which was partially offset by a
decrease of approximately $1.1 in personnel and infrastructure costs attributed
to the 1997 restructuring discussed above. The net decrease from 1996 to 1997
resulted primarily from a decrease of approximately $1.8 million in personnel
and infrastructure costs resulting from the restructuring in 1996 and 1997,
which was partially offset by an increase of approximately $0.4 million in
costs for marketing material and advertising initiatives. For the years 1998,
1997, and 1996, the increase in the provision for consignment equipment expense
was approximately $1.8 million, $1.5 million, and $0.3 million, respectively.
During 1998, 1997, and 1996, approximately $1.7 million, $0.6 million, and $0.2
million of consignment equipment was charged to the reserve account.
Research and Development. Research and development expenses decreased $1.5
million or 19% from 1997 to 1998, and $2.8 million or 25% from 1996 to 1997. As
a percentage of revenues, R&D expenses decreased from 25% of revenues in 1996
and 1997 to 22% of revenues in 1998. The decreases in R&D expenses for 1998 and
1997 were primarily the result of the restructurings discussed above. The 1998
decrease of $1.5 million was the result of decreases of approximately $0.9
million in personnel and infrastructure costs and approximately $0.6 million in
materials and contract engineering services due to fewer R&D projects. The 1997
decrease of $2.8 million was the result of decreases of approximately $1.9
million in personnel and infrastructure costs and approximately $0.9 million in
materials and contract engineering services due to fewer R&D projects.
57
<PAGE>
General and Administrative. General and administrative expenses increased
$0.3 million or 8% from 1997 to 1998, and decreased $0.2 million or 6% from
1996 to 1997. The 1998 increase was primarily the result of an increase in
professional fees of approximately $0.2 million, and increases of approximately
$0.1 million in other expenses. The 1997 decrease was the combined result of a
decrease of approximately $0.3 million of personnel costs due to the
restructuring discussed above, which was partially offset by an increase of
approximately $0.1 million in outside purchased services.
Provision for Bad Debts. For the years 1998, 1997, and 1996, the provision
for bad debts expense was approximately $1.5 million, $0.1 million, and $0,
respectively. As a percentage of revenues, the provision for bad debts was
approximately 5% in 1998, and negligible in 1997 and 1996. The increase of $1.4
million in the 1998 provision for bad debts was the result of writing off aged
accounts receivable that were previously deemed collectible, but which had
continued to age beyond a period deemed reasonable for realization.
Liquidity and Capital Resources
At September 30, 1999, Netrix had $4.7 million of cash and cash equivalents
and net working capital of $8.7 million, compared to $2.5 million of cash and
cash equivalents and net working capital of $7.6 million at December 31, 1998.
For the nine months ended September 30, 1999, total cash used by operations was
$0.5 million compared to $2.4 million, for the nine months ended September 30,
1998. The cash used by operations was primarily due to continued net losses
from operations. The decrease in cash used in operating activities during the
nine months ended September 30, 1999 was primarily the result of a decrease in
accounts receivable of $0.5 million compared to an increase in accounts
receivable of $1.2 million for the nine months ended September 30, 1998. During
the first nine months of 1999, Netrix used cash to pay-down the line of credit
by $1.0 million.
In May 1999, Netrix received net proceeds of $4.0 million from a private
placement of Series A Convertible Preferred Stock. In April 1998, Netrix
received net proceeds of $2.1 million through a private placement of Common
Stock.
Capital acquisitions during the nine months ended September 30, 1999 were
$0.4 million compared to $0.9 million in the nine months ended September 30,
1998. These acquisitions were primarily equipment used for research and
development purposes and computer and test equipment.
In November 1997, Netrix negotiated as $3.0 million line of credit agreement
with a lending institution to be used for working capital. This agreement
provided for interest at a per annum rate equal to the lender's prime rate plus
2%, subject to a minimum monthly interest based on 40% utilization of $3.0
million. In August 1998, as a result of concerns about the deterioration of
aged international accounts receivable, Netrix's lending institution eliminated
international receivables as qualified accounts receivable for borrowing base
collateral. The lending institution also increased the interest rate for
outstanding loan amounts to prime plus 3 1/2% from prime plus 2%. In October
1998, the lending institution reinstated a sub-line of credit up to an amount
of $0.6 million for selected foreign accounts receivable. Borrowings under the
line are based on qualified domestic accounts receivable and are collateralized
by Netrix assets. At September 30, 1999, Netrix had $4.7 million in cash and
cash equivalents with $1.2 million outstanding of the $1.5 million available
under the line of agreement. At December 31, 1998, Netrix had $2.4 million of
eligible borrowing availability and $2.2 million outstanding under the line of
credit. As of September 30, 1999, Netrix's domestic accounts receivable have
generated adequate borrowing for operations, and Netrix has not had to use the
foreign sub-line of credit.
As a result of the combination of the net loss for the quarter and the
proceeds of the private placement, Netrix's tangible net worth increased from
$10.0 million at March 31, 1999 to $11.8 million at September 30, 1999. The
line of credit agreement negotiated in November 1997 required Netrix to
maintain a tangible net worth of at least $13.5 million measured at the end of
each month. Since October 31, 1998 Netrix has been in violation of this
covenant. This covenant violation allowed Netrix's lending institution to call
for collection of
58
<PAGE>
the outstanding loan balance. On April 12, 1999 the lending institution granted
Netrix a waiver of past covenant violations and waived its right to call the
line of credit for these covenant violations. Concurrent with the April 1999
waiver of default, the lending institution extended the line of credit
agreement to May 31, 2001. The lending institution amended the line of credit
agreement to measure Netrix's tangible net worth on a quarterly basis effective
January 1999, and set the minimum tangible net worth covenant of $9.8 million
as of March 31, 1999 and $9.0 million for all subsequent quarters. As of
September 30, 1999, Netrix was in compliance with the new covenant, and
management believes that this new covenant will be adequate for Netrix to
operate under in the forseeable future. However, there can be no assurances
that Netrix will not violate the new covenant or that the outstanding loan
balance will not be called by the lending institution upon violation of the new
covenant.
The success of Netrix is dependent on its ability to generate adequate cash
for operations and capital needs. Its ability to generate adequate cash for
such needs is in part dependent on its success in increasing sales of its
products. Netrix's plan is to increase revenues through sales of its Network
Exchange product line; however, due to market conditions and other factors
beyond its control, there can be no assurance Netrix will be able to adequately
increase product sales. Therefore, Netrix may have to generate additional cash
through the sale of assets including technologies or the sale of debt or equity
securities. Although Netrix believes it has the ability to generate additional
cash through such sales, such sales may be dilutive and there can be no
assurances that adequate funds will be available or available on terms that are
reasonable or acceptable to Netrix. If Netrix is unable to generate adequate
cash, there could be a material and adverse effect on the business and
financial condition of Netrix. Netrix has implemented cost control measures and
is continually evaluating expense levels to mitigate its liquidity risk.
Year 2000
The year 2000 presents concerns for business and consumer computing. Netrix
has divided the year 2000 task into three areas of concern, Netrix product,
Netrix suppliers and Netrix internal systems. Netrix's core products have been
tested for year 2000 compliance and all required corrective measures to ensure
no year 2000 issues have been implemented. Netrix suppliers are being asked to
respond to the year 2000 issue. This will be an ongoing process and, given the
responses to date, is considered a low risk to Netrix. Netrix internal systems
have been audited and corrective measures have been taken to correct identified
year 2000 issues.
At the present time internal systems represent the largest area of concern
for Netrix. The Internal Systems category has been further broken down into
hardware and software areas, business/operations applications, engineering
applications, Unix based technologies and PC based technologies. Netrix has
identified all major hardware and software components that need to be assessed
and has updated its hardware in use and converted all software applications
that are known to have year 2000 issues.
Vendors or other third parties that could affect Netrix's operations include
suppliers of utility services, travel and hotel services, office supply
vendors, equipment and technology vendors, mail, telephone, Internet and other
communications services. Each of Netrix's departmental directors has
communicated with their major suppliers with respect to their year 2000
compliance status. All of Netrix's departments have been directed to make
arrangements with an alternative vendor if it appears that the current vendor
will not achieve compliance by the year 2000. There can be no guarantee,
however, that the systems of Netrix's major vendors, including providers of
public utilities, will be timely converted, or that a failure to convert by
another company or organization, or a conversion that is incompatible with
Netrix's systems, would not have an adverse effect on Netrix.
Although Netrix anticipates that minimal business disruptions will occur as a
result of year 2000 issues, possible consequences include loss of
communications with members, inability to conduct marketing efforts and on-site
seminars as a result of travel and communications disruptions, delay in the
production and distribution of studies and reports, inability to conduct
research and surveys, and disruption of similar normal business activities.
Netrix believes that the conversion and modification efforts by Netrix and its
vendors will
59
<PAGE>
mitigate the risks associated with year 2000 issues. If, however, Netrix or its
essential vendors do not complete the necessary modifications or conversions in
a timely manner or if such modifications or conversions fail to achieve the
proper results, Netrix's operations may be adversely effected.
Netrix does not intend to develop any contingency plans to address possible
failures by Netrix or its vendors to the year 2000 compliant with respect to
information technology systems. Netrix does not believe that such contingency
plans are required because it believes that Netrix and its information
technology suppliers will be year 2000 compliant before January 2000. Netrix
currently does not have any contingency plans to address possible failures by
its vendors to be year 2000 compliant with respect to non-information
technology systems. Management currently believes that any possible failures
will not have a material effect on the operations of Netrix.
While year 2000 issues present a potential risk to Netrix's internal systems,
distribution and supply chain, and facilities, Netrix is minimizing its risk
with a concentrated effort. Netrix has performed an extensive assessment and
has tested and continues to test mission critical components. Management
currently believes that all critical systems will be ready by January 1, 2000
and that the costs to address these issues will not exceed the budgeted
amounts. Management estimates the total cost during the year to address and
resolve year 2000 issues will approximate $0.5 million, and these costs have
been included in Netrix's operating activities for 1999. Expenses for the
fourth quarter of 1999 are expected to be minimal.
60
<PAGE>
OPENROUTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements, the notes thereto and the other financial
data included later in this joint proxy statement/prospectus. The following
discussion contains certain forward-looking statements, or statements that are
not statements of historical fact. The words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify forward-
looking statements. For a discussion of important factors, including, but not
limited to, the continued development of our business, actions of regulatory
authorities and competitors, price declines and other factors that could cause
actual results to differ materially from the results referred to in the
forward-looking statements, see the section in this joint proxy
statement/prospectus entitled "Risk Factors."
Recent Developments
On July 6, 1998, Bryan R. Holley was appointed President and Chief Executive
Officer of OpenROUTE. Mr. Holley brought a new focus to OpenROUTE and hired a
new management team to implement it. OpenROUTE focuses on providing small and
mid-size business customers with networking equipment. More specifically,
OpenROUTE develops and manufactures customer premise equipment (CPE) that is
installed on the "edge of the network"--the point at which businesses connect
to their Internet service provider (ISP) or telephone company. The growth of
the Internet as a business tool has led to the increased need for secure and
affordable network equipment, and OpenROUTE believes that it is positioned to
meet this need.
The Internet's growth and advances in network security have brought the
introduction of a new type of network called a Virtual Private Network (VPN).
OpenROUTE believes the emergence of the VPN will help its customers build cost-
effective networks that allow them to communicate with vendors and suppliers
over the Internet. In short, VPNs will increase the number of small and mid-
size businesses who use the Internet to grow their companies. In 1998,
OpenROUTE introduced the GT900 and GTX1500 Secure Internet products. Both of
these products include the security features, performance and the
interoperability that OpenROUTE believes businesses will need to establish
their VPNs. OpenROUTE believes that the GT900 and the GTX1500 will assist
OpenROUTE in positioning itself as a leader in facilitating the development of
VPNs.
Results of Operations
Nine Months Ended September 25, 1999 Compared to Nine Months Ended September
26, 1998
Revenues. Total revenues for the nine months ended September 25, 1999
decreased $0.6 million or 5.1%, to $10.6 million from total revenues of $11.2
million for the nine months ended September 26, 1998. This decrease resulted
primarily from the decrease in the software licensing revenue for the nine
months ended September 25, 1999 as compared to the same period in 1998.
Product sales for the nine months ended September 25, 1999 increased $0.7
million, or 8.9%, to $8.4 million from product sales of $7.7 million for the
nine months ended September 26, 1998.
Internet access product revenue increased by $2.3 million, or 42.7%, for the
nine months ended September 25, 1999 as compared with the nine months ended
September 26, 1998. Internet access product revenue contributed 89.8% of the
total product sales for the nine months ended September 25, 1999. This reflects
OpenROUTE's transition from LAN to Internet access products.
The total number units of Internet access products sold increased by 93.2%
for the nine months ended September 25, 1999 as compared to the nine months
ended September 26, 1998. This reflects OpenROUTE's strategy to focus its sales
efforts on the ISP and telephone company marketplace and the growth in demand
for Internet access products within this marketplace.
Software licensing revenue for the nine months ended September 25, 1999
decreased $0.9 million, or 52.8%, to $0.8 million from software licensing
revenue of $1.7 million for the nine months ended September 26,
61
<PAGE>
1998. OpenROUTE expects future software licensing revenue to be at varying and
uncertain levels. Software licensing revenue is an ancillary component of
OpenROUTE's core revenue stream, but is strategic in its promotion of the
OpenROUTE routing technology in its markets.
For the nine months ended September 25, 1999, service and other revenues
decreased $0.4 million, or 21.5%, to $1.4 million from service and other
revenues of $1.8 million for the nine months ended September 26, 1998. This
decrease was primarily due to the reduction in service contracts worldwide
resulting from OpenROUTE's decision to focus on Internet access products, which
require fewer support services.
Gross Profit. Total gross profit for the nine months ended September 25, 1999
decreased $0.1 million or 1.8%, to $4.4 million from gross profit of $4.5
million for the nine months ended September 26, 1998. Gross profit margin as a
percentage of net sales increased to 41.1% for the nine months ended September
25, 1999 from 39.8% for the same period in 1998. OpenROUTE's product gross
profit for the nine months ended September 25, 1999 was 40.0% compared with
31.7% for the nine months ended September 26, 1998. The margin improvement was
primarily due to the sale of certain higher margin products and purchasing
efficiencies.
Sales and Marketing. Sales and marketing expenses for the nine months ended
September 25, 1999 decreased $3.5 million, or 52.2%, to $3.2 million or 30.0%
of net sales for that period from $6.7 million or 59.5% of net sales for the
nine months ended September 26, 1998. This decrease was primarily due to lower
fixed personnel related costs in line with OpenROUTE's selling strategy.
Research and Development. Research and development expenses for the nine
months ended September 25, 1999 decreased $0.6 million, or 16.9%, to $2.9
million from $3.5 million for the nine months ended September 26, 1998.
Research and development expenses represented 27.7% of net sales for the nine
months ended September 25, 1999 compared with 31.6% of net sales for the nine
months ended September 26, 1998. The decrease was primarily due to a reduction
in depreciation and occupancy related costs. OpenROUTE considers investments in
research and development to be critical to future revenues and intends to focus
these expenditures on Internet access products.
General and Administrative. General and administrative expenses for the nine
months ended September 25, 1999 decreased $2.2 million, or 47.6%, to $2.4
million from $4.6 million for the nine months ended September 26, 1998. General
and administrative expenses were 22.8% of net sales for the nine months ended
September 25, 1999, compared with 40.8% of net sales for the nine months ended
September 26, 1998. The decrease was due primarily to cost containment measures
implemented and lower personnel related costs after restructuring in the same
period last year.
Provision for Bad Debt. Provision for bad debt decreased $0.3 million, or
55.3%, for the nine months ended September 25, 1999 to $0.2 million from $0.5
million for the nine months ended September 26, 1998.
Interest Income, Net. Interest income decreased $0.4 million, or 77.5%, for
the nine months ended September 25, 1999 to $0.1 million from $0.5 million for
the nine months ended September 26, 1998.
Provision for Income Taxes. Provision for income taxes decreased $0.2
million, or 93.8%, for the nine months ended September 25, 1999 to $10,000,
from $0.2 million for the nine months ended September 26, 1998. The nine months
ended September 26, 1999 represents an income tax adjustment in OpenROUTE's
foreign subsidiaries; whereas, the nine months ended September 26, 1998
represents the effect of foreign taxes withheld from software licensing fees
received from a foreign corporation.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997; Year
Ended December 31, 1997 Compared to Year Ended December 31, 1996
The results of operations for the year ended December 31, 1998 reflect a
46.8% decrease in revenues, a 44.0% decrease in cost of revenues, and a 11.4%
decrease in operating expenses, from 1997. LAN revenues
62
<PAGE>
declined from 32.4% of total revenue in 1997 to 19.9% of total revenue in 1998.
The number of LAN units shipped was reduced from 73% in 1997 to 31% in 1998 of
total units shipped. Internet access products grew from 50.2% of total revenue
in 1997 to 52.8% of total revenue in 1998 and reached 71% of OpenROUTE's total
revenue in the fourth quarter of 1998. Internet access product unit shipments
represented 27% of the total units shipped in 1997 and 68% in 1998, reflecting
the focus of OpenROUTE in the growing Internet access marketplace. Overall
Internet access product unit shipments increased by 12.7% in 1998 from 1997,
while LAN unit shipments declined by 80.9%.
OpenROUTE's management continually reviews methods to reduce its expense base
in response to decreased revenue streams. As a result, OpenROUTE has
implemented a series of restructurings, the most recent of which occurred in
1996. This restructuring of operations was necessary to reestablish the
strategic direction of OpenROUTE and better align its operating expenses with
anticipated revenues.
In the fourth quarter of 1996, OpenROUTE recorded a $3.3 million
restructuring charge in connection with its strategic redirection of its
business to the Internet access marketplace. This charge included $0.4 million
of severance costs, $0.8 million to reduce its occupancy requirements, $1.9
million associated with the disposal of fixed assets, and $0.2 million of other
costs. During 1996, the cash impact for restructuring was insignificant and as
of December 31, 1996 there was an accrual of $1.7 million relating to future
spending.
During 1997, OpenROUTE incurred cash expenditures in connection with the 1996
restructuring of $0.5 million for severance and payroll related costs, $0.7
million as a result of reducing its occupancy costs, and $0.3 million in other
restructuring related costs. Management has determined that all of OpenROUTE's
obligations from the 1996 restructuring and prior restructurings have been
settled. Accordingly, OpenROUTE reversed its remaining restructuring provision
of $0.2 million in the third quarter of 1997.
During 1998 OpenROUTE completed its corporate repositioning from the LAN
business environment to the Internet access marketplace.
Revenues. Total revenues decreased $12.6 million, or 46.8%, from 1997 to 1998
and $18.4 million, or 40.5%, from 1996 to 1997. Product revenues in 1998 of
$10.4 million decreased 53.2% from 1997 product revenues of $22.2 million,
which decreased from $32.2 million, or 30.9%, from product revenues in 1996.
These declines reflect the completion of OpenROUTE's planned corporate
repositioning from LAN products to Internet access products.
Although overall product revenue declined in 1998 compared with 1997,
Internet access product unit sales increased 12.7% from 1997. Internet access
product revenue declined by 44.7% in 1998, primarily due to a 75% drop in
average selling prices of certain older corporate Internet access products.
Average selling prices for OpenROUTE's GT Internet access products, although
declining 25% for the year, remained relatively stable after the first quarter
of 1998. LAN product revenue declined to $2.9 million in 1998, or by 67.2%,
from 1997 levels. Software licensing revenue in 1998 increased to $1.7 million
from $0.9 million in 1997, primarily reflecting the revenue produced from a
single software licensing agreement with a major international
telecommunications company. Service and other sales in 1998 decreased by 40.9%
to $2.2 million from $3.8 million in 1997. This decrease was primarily due to
the reduction in service contracts and upgrade revenue worldwide resulting from
OpenROUTE's transition to Internet access products which require fewer support
services.
Although overall product revenue declined in 1997 compared with 1996,
GlobeTrotter product revenue increased 76.5% from 1996 as a result of increased
unit sales. Corporate enterprise and LAN product revenue declined in 1997 by
43.3% from 1996 levels. Software licensing revenue in 1997 decreased by 88.1%
to $0.9 million from $7.5 million in 1996, reflecting the declining revenue
produced from the IBM and Digital Equipment software licensing agreements.
Service and other sales in 1997 decreased by 32.0% to $3.8 million from $5.6
million in 1996. This decrease was primarily due to the reduction in service
contracts and upgrade revenue worldwide resulting from OpenROUTE's transition
to Internet access products which require fewer support services.
63
<PAGE>
International sales accounted for approximately 30.9%, 35.4% and 38.3% of net
sales in 1998, 1997 and 1996, respectively. The decreases in the international
sales as a percentage of OpenROUTE's net sales were primarily the result of the
economic crisis in the Asia Pacific region. OpenROUTE expects that
international sales will continue to be a significant portion of its business.
Gross Profit. Total gross profit decreased $5.9 million, or 50.6%, from 1997
to 1998 and $8.0 million, or 40.9%, from 1996 to 1997. Total gross profit
margin decreased in 1998 to 40.0% from 43.1% in 1997 and from 43.3% in 1996.
Gross margin on product revenue decreased to 34.4% in 1998 from 42.8% in 1997
principally due to the drop in the average selling prices of OpenROUTE's
Internet access products and certain inventory write-downs. Gross margin on
product revenue improved significantly to 42.8% in 1997 from 35.3% in 1996
principally due to the expansion of the GT product line into a number of higher
margin models as well as to reductions in manufacturing overhead expenses.
Gross margin on service and other revenues declined to 21.7% in 1998 from 31.1%
in 1997, primarily due to a decline in service revenue. The decline in the
service margin was offset by high software licens-ing margins. Gross margin on
service and other revenues increased to 31.1% in 1997 from 23.0% in 1996,
primarily due to improved efficiencies in the customer service area. However,
these improvements were not sufficient to offset the substantial decline in the
highly profitable software licensing revenue.
Sales and Marketing. Sales and marketing expenses were $8.0 million or 56.0%,
$10.7 million or 39.7% and $15.5 million or 34.2% of net sales in 1998, 1997
and 1996, respectively. The decrease in expenses in 1998 from 1997 of $2.7
million was primarily the result of lower personnel and personnel-related
costs, including sales commis-sions due to the decline in revenues in 1998 from
1997. The selling and marketing cost reduction in 1998 as compared to 1997 is
also attributable to OpenROUTE's repositioning to focus mainly on the Internet
access products which resulted in the achieve-ment of marketing cost
efficiencies. In 1997, sales and marketing expenses decreased by $4.8 million
when compared to 1996. This decrease was due mainly to lower personnel and
personnel-related costs.
Research and Development. OpenROUTE considers product development
expenditures to be critical to future revenues. These activities are closely
related to product enhancement and new product development. OpenROUTE's
strategy also includes joint development partnerships to bring new technologies
and products to market. All of OpenROUTE's research and development costs to
date have been expensed as incurred.
Research and development expenses were $4.6 million or 32.2%, $6.0 million or
22.2%, and $9.4 million or 20.6% of net sales in 1998,1997 and 1996,
respectively. The decrease in research and development expenses of $1.4 million
in 1998 from 1997 was primarily due to lower personnel and personnel-related
costs. The decrease in research and development expenses of $3.4 million in
1997 from 1996 was also primarily due to lower personnel and personnel-related
costs as well as a more defined focus on the Internet access products only.
In 1998, OpenROUTE continued to focus its efforts on enhancement of existing
products and the development of new products.
Major efforts in 1997 included the continuing development of the GlobeTrotter
series of products with the introduction of several new models during the year.
General and Administrative. General and administrative expenses were $5.4
million, $3.9 million and $4.6 million in 1998, 1997 and 1996, respectively.
The increase in expenses of $1.5 million in 1998 from 1997 was primarily due to
severance payments and accruals that were made as a result of cost containment
measures imple-mented during the year. Also, additional legal expenses were
incurred during 1998 that resulted from an ongoing lawsuit, initiated by
OpenROUTE, against two companies and relating to the transfer of OpenROUTE
software licensing rights without OpenROUTE's required consent. The decrease in
expenses of $0.7 million in 1997 from 1996 was largely due to lower personnel
and personnel-related costs.
64
<PAGE>
Provision for Bad Debt. Provision for bad debt was $0.5 million, $0.4 million
and $0 for 1998, 1997 and 1996, respectively.
Interest Income, Net. Interest income, net was $0.6 million, $1.1 million and
$1.3 million for 1998, 1997 and 1996, respectively.
Provision for Income Taxes. In 1998, OpenROUTE recorded an income tax
provision of $0.1 million, primarily due to foreign taxes on income earned
outside the United States. The difference between the effective tax rate and
the statutory tax rate for 1998 is mainly due to net operating loss
carryforwards whose future realization is uncertain.
In 1997, OpenROUTE recorded an income tax provision of $0.2 million primarily
due to foreign taxes on income earned outside the United States. The difference
between the effective tax rate and the statutory tax rate for 1997 is mainly
due to net operating loss carryforwards whose future realization is uncertain.
In 1996, OpenROUTE recorded an income tax provision of $0.2 million,
primarily due to foreign taxes on income earned outside the United States. The
difference between the effective tax rate and the statutory tax rate for 1996
is also due primarily to net operating loss carry forwards whose future
realization is uncertain.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires companies to recognize all derivatives contracts
as either assets or liabilities on the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged assets or liability or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Historically, OpenROUTE has not
entered into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, OpenROUTE does not expect adoption of the
new standard to affect its financial statements.
Liquidity and Capital Resources
As of September 25, 1999, OpenROUTE's ratio of current assets to current
liabilities was 3.67:1, compared to 3.43:1 at December 31, 1998. As of
September 25, 1999, OpenROUTE's quick assets ratio of cash, cash equivalents,
marketable securities and accounts receivable to current liabilities was
1.89:1, compared to 1.66:1 at December 31, 1998. During the first nine months
of 1999, the net increase in cash and cash equivalents was $0.8 million, as
compared to a net decrease of $3.0 million for the same period in 1998.
During the first nine months of 1999, OpenROUTE used $2.5 million of cash for
operating activities as compared to $8.9 million used for the same period in
1998. This was due primarily in the net operating loss of $4.3 million and a
decrease in accounts payable and accrued expenses of $1.8 million, offset by a
decrease in inventories of $3.0 million and depreciation and amortization
charge of $0.6 million.
Investing activities for the first nine months of 1999 provided net proceeds
of $3.0 million principally from the sales of marketable securities. Net cash
provided by financing activities provided $0.3 million, all of which resulted
from the issuance of common stock.
As of September 25, 1999, OpenROUTE's principal sources of liquidity
consisted of $2.8 million of cash and cash equivalents, and a $5.0 million
working capital line of credit from Silicon Valley Bank. The $5.0 million
working capital line was established to provide short-term working capital
financing on an "as needed" basis and also to fund planned growth. Availability
under the working capital line is based on eligible accounts receivable. At
September 25, 1999, availability was approximately $1.2 million and there were
no outstanding borrowings.
65
<PAGE>
OpenROUTE's management believes that if it achieves its twelve month
operating plan, then OpenROUTE's current levels of cash, cash equivalents, and
marketable securities, as well as its borrowing capability, will be sufficient
to satisfy its expected working capital and capital expenditure requirements
through the next twelve months.
Year 2000
OpenROUTE has initiated a program to review the year 2000 readiness of its
internal systems, its product line and its third party suppliers and vendors.
The program consists of:
. inventory of products and suppliers to determine systems which may
encounter date processing problems;
. assessment of the year 2000 issues presented;
. remediation, if necessary, of products owned or manufactured by
OpenROUTE;
. testing of systems; and
. contingency plans.
In 1998, OpenROUTE conducted an inventory of its internal business systems to
determine whether any year 2000 processing problems existed in critical
equipment or systems. As a result, and as part of a corporate program intended
to reduce cycle time and improve efficiency, OpenROUTE purchased new business
operations systems that operate its financial, administrative, business,
manufacturing and customer service functions. The software vendor has indicated
these systems are year 2000 compliant. OpenROUTE completed the installation of
these systems in January 1999 and successfully closed the fiscal months January
and February 1999. OpenROUTE has a one year limited warranty on these systems
commencing from the date of delivery, which would expire before January 1,
2000.
OpenROUTE also has installed a new telephone system under a long-term lease
which it understands is year 2000 compliant. However, if testing demonstrates
unexpected year 2000 problems in these new systems, there would be no assurance
that the year 2000 problems would not have a material impact on OpenROUTE's
internal operations and would not materially impact its business, financial
conditions, or results of operations.
OpenROUTE spent $340,000 in year 2000 system costs in 1998. Some of these
costs have been capitalized under generally accepted accounting practices.
OpenROUTE has incurred approximately $72,000 in year 2000 system costs through
September 25, 1999 and expects to incur additional expenditures of $35,000 in
1999 related to year 2000 equipment purchases and leases, including consulting
fees, license agreements and lease payments.
OpenROUTE relies on third party suppliers, service providers and contractors
for critical services, including utility power and telephone, parts and
supplies. In addition, OpenROUTE sells its products to customers, including
Internet service providers and others, which customers are highly dependent on
computers, and which could be adversely affected by their own or their
suppliers' lack of year 2000 readiness. OpenROUTE has conducted an inventory of
its critical suppliers, service providers, and contractors to determine the
extent to which its operations could be affected by those third parties'
failure to remedy their own year 2000 issues. This exercise was substantially
completed in March 1999. Most of OpenROUTE's critical suppliers, service
providers, and contractors are also in the high technology field, which is
already focused on year 2000 compliance. OpenROUTE's major contract
manufacturer, U.S. Assemblies, has recently completed implementation of the
year 2000 compliant version of MAPICS for its material resource planning (MRP)
efforts.
Following completion of its inventory and assessment of third party
readiness, OpenROUTE will determine whether testing, verification, or
contingency plan procedures are necessary. The most reasonably likely worst-
case-scenario if suppliers or customers were not year 2000 compliant would be
interruption in OpenROUTE's ability to manufacture or deliver its products
through loss of power, supply shortages or
66
<PAGE>
disruption of delivery systems, or a material decrease in the sale of products
if customers lose substantial business or divert substantial resources to
uncorrected Internet year 2000 problems. The year 2000 readiness of outside
suppliers or customers is beyond OpenROUTE's control. There can be no assurance
that the failure of third party suppliers or OpenROUTE's customers to
effectively remedy year 2000 defects would not have a material adverse impact
on OpenROUTE's business, results of operations or financial condition.
OpenROUTE's main business since its formation has consisted primarily of the
manufacture and sale of: (i) Remote Access Routers used to access the Internet;
(ii) LAN equipment used to link together computers and peripheral devices; and
(iii) Network Interface Cards (NIC), which connect computer workstations to a
network. OpenROUTE has installed its own proprietary software in all of its
manufactured Remote Access Routers and LANs, and at times has licensed this
software to third parties. OpenROUTE's installed proprietary software and the
products manufactured and sold by it, now and in the past, do not track or
report dates, are not date dependent, and are year 2000 compliant. OpenROUTE's
manufactured NIC cards do not contain any date-dependent functions, and thus
also are year 2000 compliant. Therefore, OpenROUTE does not expect that year
2000 processing problems will occur in products sold by OpenROUTE, or that year
2000 product problems would have a material effect on OpenROUTE's business,
financial condition or the results of operations.
67
<PAGE>
COMPARATIVE PER SHARE DATA
Netrix Corporation Comparative Share Information
The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the estimated number of shares of
Netrix common stock to be issued in the merger were outstanding from the
beginning of the periods presented. Options and warrants to purchase shares of
common stock were excluded in computing pro forma diluted loss per common share
as this would have been antidilutive.
The historical loss per common share amounts of Netrix and OpenROUTE were
calculated by dividing income (loss) available to common stockholders by the
weighted average number of shares of common stock outstanding during the
period. These share amounts are based on the number of Netrix and OpenROUTE
shares outstanding on September 30, 1999. The book value per share amounts of
Netrix and OpenROUTE were calculated by dividing stockholders' equity (deficit)
by the number of common shares outstanding at the end of period. The common
stock outstanding used in calculating pro forma combined book value per share
are 11,609,217 of Netrix common stock outstanding at September 30, 1999 plus
15,916,000 shares representing the estimated number of common shares to be
issued in the merger. See Netrix's Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements.
OpenROUTE pro forma equivalent amounts are calculated by multiplying the
respective Netrix pro forma combined per share amounts by the exchange ratio of
one to one.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1999 December 31, 1998
--------------------- ---------------------
Historical Netrix OpenROUTE Netrix OpenROUTE
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Basic and diluted loss per common
share............................ $ (.51) $ (.28) $ (.60) $ (.77)
Cash dividend declared per common
share............................ $ -- $ -- $ -- $ --
Book value per common share at end
of period........................ $ 1.05 $ .70 $ 1.05 $ .96
</TABLE>
<TABLE>
<CAPTION>
Pro Forma and Pro Forma Equivalent per Netrix OpenROUTE
Share Data Pro Forma Combined Pro Forma Equivalent
- -------------------------------------- ------------------ --------------------
<S> <C> <C>
Basic and diluted loss per common
share:
Year ended December 31, 1998......... $(1.23) $(1.23)
Nine months ended September 30,
1999................................ $ (.77) $ (.77)
Cash dividends declared per common
share:
Year ended December 31, 1998......... $ -- $ --
Nine months ended September 30,
1999................................ $ -- $ --
</TABLE>
68
<PAGE>
Netrix Corporation Capitalization Table
The following table sets forth the capitalization of Netrix as of September
30, 1999 (i) as reported, and (ii) on a pro forma basis as adjusted to reflect
its merger with OpenROUTE. The table should be read in conjunction with the
consolidated financial statements of Netrix and OpenROUTE and the related notes
thereto included elsewhere in this joint proxy statement/prospectus and the
unaudited pro forma combined condensed financial information, which appears
elsewhere in the document.
<TABLE>
<CAPTION>
As of September 30, 1999
------------------------------------------
Netrix OpenROUTE Adjustments Pro Forma
-------- --------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents............ $ 4,698 $ 2,804 $ -- $ 7,502
-------- -------- ------- --------
Marketable securities................ $ -- $ -- -- $ --
-------- -------- ------- --------
Long-term liabilities, excluding
current installments................ $ -- $ -- $ -- $ --
-------- -------- ------- --------
Stockholders' equity
Preferred stock, $0.5 par value;
1,000,000 shares authorized,
298,187 issued and outstanding,
preference in liquidation......... 4,424 -- -- 4,424
Common stock, $.05 par value;
15,000,000 shares authorized;
11,609,217 shares issued and
outstanding, actual, 27,509,217
shares issued and outstanding, on
a pro forma basis................. 581 160 636 1,377
Warrants........................... 862 -- -- 862
Additional paid-in capital......... 59,231 49,689 18,227 127,147
Deferred compensation.............. (637) -- -- (637)
Accumulated other comprehensive
(loss) income..................... (160) 123 (123) (160)
Less treasury stock, at cost....... -- (1,010) 1,010 --
Accumulated deficit................ (52,131) (37,835) 37,835 (52,131)
-------- -------- ------- --------
Total stockholders' equity....... 12,170 11,127 57,585 80,882
-------- -------- ------- --------
Total capitalization........... $ 12,170 $ 11,127 $57,585 $ 80,882
======== ======== ======= ========
</TABLE>
Netrix Corporation Unaudited Pro Forma Condensed Consolidated Financial
Statements
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet of
Netrix as of September 30, 1999 and Unaudited Pro Forma Condensed Consolidated
Statement of Operations of Netrix for the nine months ended September 30, 1999
and the year ended December 31, 1998 illustrate the effect of the merger with
OpenROUTE. The Unaudited Pro Forma Condensed Consolidated Balance Sheet assumes
that the merger with OpenROUTE had been completed as of September 30, 1999 and
the Unaudited Pro Forma Condensed Consolidated Statements of Operations assume
that the merger with OpenROUTE was completed as of the beginning of the periods
presented. Certain reclassifications have been made to OpenROUTE's financial
statements to conform with Netrix's presentation.
Under the terms of the transaction, the holders of OpenROUTE common stock
will receive one share of Netrix common stock for each OpenROUTE share
converted.
Accounting Treatment
Netrix will account for the merger under the purchase method of accounting,
with Netrix being the acquiror for accounting purposes. Immediately following
the merger, Netrix shares held by Netrix stockholders
69
<PAGE>
will represent approximately 45% of the outstanding shares of Netrix. The board
of directors of the combined companies will consist of five former Netrix
directors and four OpenROUTE directors with the Chief Executive Officer of
Netrix, Steven T. Francesco, serving as Chairman of the Board of the combined
companies' board of directors. Additionally, the members of the Nominating
Committee of the Board of Directors will be Steven T. Francesco, Bryan R.
Holley, Chief Executive Officer of OpenROUTE, and a current director of Netrix.
Under the purchase method of accounting, the assets and liabilities of Netrix
will be brought forward at their net book values, a new basis will be
established for OpenROUTE's assets and liabilities and any excess of the
consideration over the fair value of OpenROUTE's assets and liabilities will be
accounted for as goodwill. The revenues and expenses of Netrix and OpenROUTE
will be consolidated from the date of consummation of the merger.
The pro forma adjustments are based upon currently available information and
assumptions that Netrix management believes are reasonable and certain
information provided by OpenROUTE management. Netrix will account for the
merger based upon the estimated fair market value of the net tangible assets,
intangible assets and liabilities acquired at the date of acquisition. The
adjustments included in the Unaudited Pro Forma Condensed Consolidated
Financial Statements represent the preliminary determination of these
adjustments based upon available information. Netrix cannot assure you that the
actual adjustments will not differ significantly from the pro forma adjustments
reflected in the Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are not
necessarily indicative of either future results of operations or results that
might have been achieved if the merger with OpenROUTE had been consummated as
of the indicated dates. The Unaudited Pro Forma Condensed Consolidated
Financial Statements should be read in conjunction with the historical
financial statements of Netrix and OpenROUTE, together with the related notes
thereto, which are included elsewhere in this joint proxy statement/prospectus.
70
<PAGE>
Netrix Corporation
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30,
1999
<TABLE>
<CAPTION>
Netrix Pro
Netrix OpenROUTE Pro Forma Forma
Historical(1) Historical(2) Adjustments Combined
------------- ------------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............ $ 4,698 $ 2,804 $ -- $ 7,502
Marketable securities... -- -- -- --
Accounts receivable,
net.................... 6,957 3,450 -- 10,407
Inventories............. 4,761 5,563 -- 10,324
Other current assets.... 359 343 -- 702
-------- -------- ------- --------
Total current assets.. 16,775 12,160 -- 28,935
-------- -------- ------- --------
Property and equipment,
net.................... 3,043 2,239 -- 5,282
Goodwill and
intangibles, net....... 330 -- 58,085 (3) 58,415
Other assets............ 121 41 -- 162
-------- -------- ------- --------
Total assets.......... $ 20,269 $ 14,440 $58,085 $ 92,794
======== ======== ======= ========
Liabilities and
Stockholders' Equity
Current liabilities:
Line of credit.......... $ 1,174 $ -- $ -- $ 1,174
Accounts payable........ 3,907 1,226 -- 5,133
Accrued expenses........ 3,018 2,087 500 (4) 5,605
-------- -------- ------- --------
Total current
liabilities.......... 8,099 3,313 500 11,912
-------- -------- ------- --------
Stockholders' equity:
Preferred stock......... 4,424 -- -- 4,424
Common stock............ 581 160 636 (5) 1,377
Additional paid-in
capital................ 59,231 49,689 18,227 (5) 127,147
Deferred compensation... (637) -- -- (637)
Accumulated deficit..... (52,131) (37,835) 37,835 (5) (52,131)
Warrants................ 862 -- -- 862
Less Treasury stock at
cost................... -- (1,010) 1,010 (5) --
Accumulated other
comprehensive (loss)
income................. (160) 123 (123)(5) (160)
-------- -------- ------- --------
Total stockholders'
equity............... 12,170 11,127 57,585 80,882
-------- -------- ------- --------
Total liabilities and
stockholders'
equity............... $ 20,269 $ 14,440 $58,085 $ 92,794
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
71
<PAGE>
Netrix Corporation
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 30, 1999
(1) Information obtained from the historical unaudited condensed consolidated
balance sheet of Netrix.
(2) Information obtained from the historical unaudited consolidated balance
sheet of OpenROUTE.
(3) Reflects goodwill resulting from the purchase of all of the outstanding
stock of OpenROUTE and the allocation of the purchase price using the
purchase method of accounting for the transaction after adjusting the
assets acquired and the liabilities assumed to their respective fair
values.
For illustrative purposes, Netrix has made a preliminary allocation of
excess cost over estimated net assets acquired to goodwill as OpenROUTE's
assets and liabilities are estimated to approximate fair value. The final
allocation of purchase price to assets and liabilities acquired will depend
upon the final purchase price and final estimates of fair values of assets
and liabilities of OpenROUTE at the closing date, Netrix will undertake a
study to determine the fair values of assets and liabilities acquired and
will allocate the purchase price accordingly. Netrix believes that the
carrying value of current assets and current liabilities approximates fair
value and that the excess of cost over historical net assets acquired will
be allocated to property and equipment, goodwill and other identifiable
intangibles. However, there can be no assurance that the actual allocation
will not differ significantly from the pro forma allocation.
(4) Reflects the transaction costs, primarily investment banking, legal and
accounting fees, directly incurred related to the acquisition and is shown
as a pro forma adjustment to accrued expenses and the purchase price.
(5) Eliminate the equity of OpenROUTE upon consolidation with Netrix; reflect
the issuance of 15.9 million shares of Netrix common stock using an
exchange ratio of one share of Netrix for each share of OpenROUTE common
stock; reflect the value of OpenROUTE stock options. Such value has been
determined using the Black-Scholes method assuming 98% volatility, a risk
free interest rate of 5.0% and an exercise period of three years.
72
<PAGE>
Netrix Corporation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Pro Forma Netrix Pro
Netrix OpenROUTE Merger Forma
Historical(1) Historical(2) Adjustments Combined
------------- ------------- ----------- ----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Revenues:
Product............... $16,079 $ 8,425 $ -- $ 24,504
Service and other..... 5,309 1,401 -- 6,710
Software licensing.... -- 785 -- 785
------- ------- -------- --------
Total revenues...... 21,388 10,661 -- 31,999
------- ------- -------- --------
Cost of revenues:
Product............... 7,512 5,058 -- 12,570
Service and other..... 3,638 1,187 -- 4,825
Software licensing.... -- -- -- --
------- ------- -------- --------
Total cost of
revenues........... 11,150 6,245 -- 17,395
------- ------- -------- --------
Gross profit...... 10,238 4,366 -- 14,604
------- ------- -------- --------
Operating expenses
Sales and marketing... 4,621 3,181 -- 7,802
General and
administrative....... 3,683 2,418 10,891 (5) 17,002
Research and
development.......... 5,337 2,935 -- 8,272
Stock compensation
expense.............. 763 -- -- 763
Restructuring
reserve.............. 900 243 -- 1,143
------- ------- -------- --------
Loss from
operations......... (5,066) (4,411) (10,891) (20,368)
Interest and other
income, net.......... (218) 112 -- (106)
------- ------- -------- --------
Loss before income
taxes.............. (5,284) (4,299) (10,891) (20,474)
Provision for income
taxes................ -- 10 -- 10
------- ------- -------- --------
Net loss............ (5,284) (4,309) (10,891) (20,484)
Dividends on preferred
stock................ (574) -- -- (574)
------- ------- -------- --------
Net loss attributable
to common
stockholders......... $(5,858) $(4,309) $(10,891) $(21,058)
======= ======= ======== ========
Basic and diluted loss
per common share..... $(0.51) $(0.28) $(0.77)(6)
======= ======= ========
Weighted average
common shares
outstanding, basic
and diluted.......... 11,513 15,461 27,413
======= ======= ========
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
73
<PAGE>
Netrix Corporation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma Netrix Pro
Netrix OpenROUTE Merger Forma
Historical(3) Historical(4) Adjustments Combined
------------- ------------- ----------- ----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Revenues:
Product............... $21,840 $ 10,416 $ -- $ 32,256
Service and other..... 9,642 2,247 -- 11,889
Software licensing.... -- 1,663 -- 1,663
------- -------- -------- --------
Total revenues...... 31,482 14,326 45,808
------- -------- -------- --------
Cost of revenues:
Product............... 10,939 6,836 -- 17,775
Service and other..... 5,155 1,760 -- 6,915
Software licensing.... -- -- -- --
------- -------- -------- --------
Total cost of
revenues........... 16,094 8,596 -- 24,690
------- -------- -------- --------
Gross profit...... 15,388 5,730 -- 21,118
Operating expenses
Sales and marketing... 10,781 8,018 -- 18,799
General and
administrative....... 4,324 5,376 14,521 (5) 24,221
Research and
development.......... 6,771 4,610 -- 11,381
Restructuring
reserve.............. -- -- -- --
------- -------- -------- --------
Loss from
operations......... (6,488) (12,274) (14,521) (33,283)
Interest and other
income, net.......... (29) 589 -- 560
------- -------- -------- --------
Loss before income
taxes.............. (6,517) (11,685) (14,521) (32,723)
Provision for income
taxes................ -- 175 -- 175
------- -------- -------- --------
Net loss............ (6,517) (11,860) (14,521) (32,898)
Dividends on preferred
stock................ -- -- -- --
------- -------- -------- --------
Net loss attributable
to common
stockholders......... $(6,517) $(11,860) $(14,521) $(32,898)
======= ======== ======== ========
Basic and diluted loss
per common share..... $(0.60) $(0.77) $(1.23)(6)
======= ======== ========
Weighted average
common shares
outstanding, basic
and diluted.......... 10,891 15,312 26,791
======= ======== ========
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated financial statement.
74
<PAGE>
Netrix Corporation
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1998 and the Nine Months Ended September 30,
1999
(1) Information obtained from the historical unaudited condensed consolidated
statement of operations of Netrix.
(2) Information obtained from the historical unaudited consolidated statement
of operations of OpenROUTE.
(3) Information obtained from the historical consolidated statement of
operations of Netrix.
(4) Information obtained from the historical statement of operations of
OpenROUTE.
(5) Reflects the amortization expense of the excess of cost over historical net
assets acquired in the merger by use of the straight-line method over 4
years.
(6) The average common shares outstanding used in calculating basic and diluted
pro forma loss per common share are calculated assuming that the estimated
number of shares of Netrix common stock to be issued in the merger were
outstanding from the beginning of the periods presented. Options and
warrants to purchase shares of common stock were not included in computing
pro forma diluted earnings per common share because their inclusion would
result in a smaller loss per common share.
75
<PAGE>
NETRIX BUSINESS
Netrix is a worldwide provider of voice and data networking products. Netrix
products are designed to deliver multi-service networks for the transport of
voice and data that enable Netrix customers to provide a wide variety of voice
and data services. Netrix combines patented, switched, compressed voice
technology and advanced networking capabilities to provide networking solutions
that improve network performance and deliver an array of tangible network
services. Netrix was incorporated in Virginia in 1985 and reincorporated in
Delaware in 1987. Netrix conducts operations in the United Kingdom and Hong
Kong through its wholly owned subsidiary, Netrix International Corporation (a
Delaware corporation), and in Germany and Italy through its wholly owned
subsidiaries Netrix GmbH and Netrix S.r.l., respectively.
Background
Recent trends in network equipment investment have shown that network
infrastructures have been consolidated, resulting in fewer networks and
protocols to support an increasing number of applications. The Internet
Protocol (IP) for the LAN, along with Frame Relay and Asynchronous Transfer
Mode (ATM) for the Wide Area (WAN) has displaced most of the previous
networking technologies in this market space. These technological trends,
combined with the proliferation of global trade, have created a growing
reliance on telecommunications to facilitate commerce. In an environment in
which wide area networking is critical to daily operations, voice and data
communications represent a significant and increasing component of operating
costs for enterprises. Netrix has re-focused its new products to support the
"voice over' needs of this new network model.
The varying traffic characteristics of different types of networking
applications, together with the need to transmit voice and image as well as
data, has created the need for vendors to supply multi-service platforms to
meet the user requirements within a single network fabric. Technologies in use
today include IP, Frame Relay, Integrated Services Digital Network (ISDN), and
ATM. Multi-service platforms, such as Netrix Network Exchange products, enable
Netrix's customers to support multiple applications across a single network,
thereby resulting in improved connectivity, reduced communications costs, and
improved network performance.
The increasing availability of IP and Frame Relay services on the public
networks has fueled a trend toward building corporate networks that access
these services on an as-needed basis. Netrix products can be used to implement
voice and data networks based upon private lines, public services, or a
combination of private and public services. Netrix believes that the trend
toward the use of services will continue to grow, especially with global
telecommunications deregulation. The use of the Internet will also expand voice
and fax applications.
In 1998, Netrix entered the voice/data/fax-over-IP gateway market with the
introduction of Vodex software for the Network Exchange 2210. Today, the
Network Exchange is still one of the industry's few voice gateways to
simultaneously deliver high quality voice over IP and voice over Frame Relay
with the ability to gateway between the two.
Also in 1998, Netrix introduced a low-end version of its Network Exchange
2210 gateway, the Network Exchange 2201. Designed for the remote/branch office
environment, the product gives customers a range of alternatives from which to
choose.
Netrix software, common to both platforms, positions Netrix firmly in the IP
telephony market space, which is emerging as the next wave of network
consolidation and which leverages the vast worldwide IP infrastructures being
deployed. It also positions the gateways for the emerging service provider
space by enabling them to offer low cost telephony while realizing a short-term
return on the equipment investment.
On March 19, 1999, Steven T. Francesco was appointed as Chairman of the Board
of Directors to reposition Netrix as an end to end solution provider for
internet-based networking of voice/data/fax for the service provider market.
Mr. Francesco has begun an in-depth reworking of Netrix's strategic objectives.
76
<PAGE>
Management believes that the international toll market, in particular,
represents a short-term opportunity to gain substantial service provider market
share. Management believes that Netrix's current product offering provides
several advantages over existing competing products in the areas of
scalability, flexibility, cost, channel capacity and band width efficiency.
Netrix has recently been able to offer carrier quality voice over packet switch
transmission to service providers over wide area networks at significant
reductions in per minute operating costs. Particularly with regard to bandwidth
allocation, Netrix's capability to bundle multiple voice samples from different
calls in a single packet allows exceptional transmission management over long
distances. Management believes Netrix is positioned to be among the leaders in
IP voice/data wide area networking equipment in 1999.
With the introduction and continued development of the Network Exchange 2200
range, Netrix is moving toward the ability to deliver voice and data
integration over almost any carrier infrastructure, with the goal of making the
products as easy to configure and provision as possible. In addition the
products ability shape traffic and prioritize applications (ATM, Frame Relay,
Ethernet etc.) and to customize bandwidth utilization on demand to suit end
users needs make the 2200 an ideal platform for service providers looking to
deliver next generation services with which to differentiate themselves.
Whether provisioning service or selling customer premise equipment (CPE) to end
users, the range of products will be well positioned for the service provider
market.
Netrix Products
Netrix currently offers products that focus on providing voice over packet
solutions, which leverage the emerging IP Telephony space as well as the Frame
Relay space. Netrix has two platforms which comprise the Network Exchange
product line, the 2200 and the 2500. The products scale from a gateway
consisting of as few as four voice ports to large central sites via the largest
Network Exchange switches--the 2500 family. This scaleable product offering
permits the customer to choose the most appropriate platform for each site
based upon functionality and performance requirements. All are designed to
enhance the efficiency and cost-effectiveness of the communications
infrastructure.
Network Exchange 2210. The Network Exchange 2210 is a voice gateway that
combines switched compressed voice and data switching in a single platform. The
2210 incorporates Netrix's Vodex voice gateway software, one of the industry's
first voice gateways to simultaneously deliver high quality voice over IP and
voice over Frame Relay with the ability to gateway between the two. This
scaleable product, designed to take advantage of available IP and frame relay
facilities/services, is based upon enhanced voice over frame capabilities
developed by Netrix. The 2210 has a complete set of features which support
switched compressed voice, LAN traffic as well as the traditional capabilities
found in typical access level products. The 2210 can process up to 180
simultaneous voice calls, which makes it one of the largest VoIP/VoFR gateways
currently on the market and can be interconnected to incrementally add to the
overall capacity at a given site. For a fully redundant large site, Network
Exchange 2210s can be augmented by Network Exchange 2550s.
Network Exchange 2201. Netrix Network Exchange 2201 was introduced mid-1998
as the entry-level product in the 2200 range. The 2201 is a voice over data
switching platform that delivers the benefits of Internet Telephony and Wide
Area Network switching together with multi-protocol data support. The 2201
offers a unique combination of switched compressed voice and data switching
support in a single compact platform. As a stand-alone voice and data access
switch, or in conjunction with the other Netrix Network Exchange 2000 series
products, it gives networks flexibility, scalability, and efficiency.
Network Exchange 2550. The 2550 performs as a central site voice/data switch
to provide a resilient fault-tolerant hub. The 2550 interworks with the 2210 to
provide complete multi-service networking support for compressed voice traffic
as well as all existing network technologies. With the 2550, networks can be
constructed to provide support for voice over IP, Frame Relay, and ATM using
narrowband or high speed broadband interfaces running at speeds up to DS3 (45
Mbps) and E3 (34 Mbps) rates.
77
<PAGE>
Network Exchange 2510. Netrix Network Exchange 2510 is the entry-level switch
in the Network Exchange 2500 series of high-performance, multi-service
switching platforms. It combines ATM, Frame Relay, X.25, TDM, and ISDN for
data, voice and image applications. Functioning as either an enterprise
backbone or a carrier edge switch, the 2510 provides cost-effective bandwidth
management of public, private, and hybrid networks, with extensive network
management and diagnostic capabilities.
Netrix Network Exchange products provide flexible and scaleable network
solutions for small to large voice/data networks. The products are used
together to provide coverage from the access level through to the network
backbone. Netrix products provide integrated voice and data network solutions
that use state of the art networking technology. In addition to the Network
Exchange product line, other Netrix products include the Series 10 (S10), the
Series 100 (S100), the Series 1000 (S1000), and Netrix Telecom Products.
(Telecom products consist of the RLX, RNET, RIO, and RDC).
Netrix Network Management System (NMS). Each of the products listed above is
managed by Netrix' Network Management System (NMS). The NMS provides a full
graphical user interface and remote diagnostics, allowing nodes at several
different locations to be viewed and managed by the network manager at one
central location. The NMS has the capability to monitor attached SNMP devices,
such as a router, and to participate in global network management architecture
with other SNMP managers. Built into the NMS is the capability to support
Virtual Private Networks, remote diagnostics, and extensive "gatekeeper"
functionality such as call detail records for accounting and performance
statistics for on-going capacity planning/tuning. The NMS provides extensive
capabilities to insure non-stop operation with the lowest personnel costs.
Netrix supplies network management software for operation with Windows 95 and
Sun Sparc platforms.
Marketing and Sales
Netrix's primary target customers are service providers (ISP's, CLECs and
emerging growth carriers). To address these markets throughout the world,
Netrix has established a multi-channel distribution and sales network. Netrix's
products are designed to provide voice/data solutions and are marketed through
a direct sales force or indirect channels via resellers. In November 1998,
Netrix gateways were certified to interoperate with NEC PBXs. The Network
Exchange 2210 is the first Internet telephony/gateway to be so certified by
NEC. As a result, NEC America has promoted the Network Exchange to NEC
resellers; Netrix continues to work with numerous sales opportunities provided
by NEC resellers who are in the process of becoming Netrix resellers.
Management is exploring the possibility of offering products for sale on the
internet as a way of achieving additional global distribution with no
incremental sales costs. Other companies in Netrix's market space have
successfully integrated e-commerce into their sales cycle.
Customer Support and Service
A significant element of Netrix's strategy has been to provide service,
repair, and technical support for its customers throughout the world. A
substantial portion of Netrix' service and support activities relates to
software and network configuration and is provided by 24-hour per day, 7 days
per week telephone support through the Netrix Technical Assistance Center
("TAC"). Netrix's products are designed to allow the TAC to be on line with any
Netrix network in the world to diagnose problems and to respond with solutions.
In addition, Netrix hardware is designed to facilitate replacement of failed
boards; in many cases, the customer's personnel can replace a board themselves
under the direction of the TAC. TAC service is provided directly to end users
and as a backup service to Netrix's international distributors.
Netrix personnel and third party providers perform most domestic hardware
maintenance and installation. For customers outside the United States, these
services are generally provided by Netrix's international Value
78
<PAGE>
Added Resellers (VARs). Netrix typically offers its customers a hardware
warranty ranging from 90 days to one year and offers an optional annually
renewable hardware maintenance and software support contract with the network.
Netrix's support contracts with its customers offer a variety of levels of
support, with each option being priced as a percentage of the purchase price of
the installed equipment. In addition, Netrix provides technical consulting and
training both to end-users and to distributors. Many of Netrix's customers
currently have support and maintenance contracts with Netrix. Customer service
as a percent of revenue was 24% for the nine-months ended September 30, 1999,
31% in 1998, 32% in 1997 and 26% in 1996.
Research and Development
Netrix believes its future success depends on its ability to continue to
enhance its products to improve performance and functionality and to develop
new products that address emerging networking market niches. Research and
development as a percent of revenue was 22% in 1998, and 25% in 1997 and 1996.
Manufacturing Outsourcing
Effective October 1, 1999, Netrix entered into an agreement with The SMT
Centre (SMTC) to outsource all manufacturing and test operations for current
products. SMTC is a contract manufacturer that offers a cost-effective, high
volume, manufacturing, distribution and repair capabilities worldwide.
Historically SMTC has produced various sub-assemblies for Netrix, but the new
agreement calls for them to manufacture, test and ship final products. Netrix
employees associated with manufacturing, distribution and repair operations
were transferred to SMTC effective October 1, 1999.
Competition
Netrix encounters substantial competition in the marketing of its products,
and many of its competitors have greater financial, marketing and technical
resources. Important competitive factors in Netrix's product markets are
established customer base, product performance and features, service and
support, as well as price. Netrix believes that it competes favorably with
respect to these factors. There can be no assurance that Netrix's products will
compete successfully with competitive products that may be offered in the
future or that aggressive pricing will not adversely impact the profitability
of Netrix.
Proprietary Rights
Netrix relies on a combination of patents, trade secret, copyright and
trademark law, non-disclosure agreements, and technical measures to establish
and protect their proprietary rights in their products. Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of Netrix's products or to obtain and use information that Netrix regards as
proprietary. The laws of some foreign countries in which Netrix sells or may
sell its products do not protect Netrix's proprietary rights to the same extent
as do the laws of the United States.
Netrix believes that because of the rapid pace of technological change in the
networking industry, patent and copyright protection, while important, are less
significant to Netrix's competitive position than factors such as the
knowledge, ability, and experience of Netrix's personnel, new product
development, market recognition, and ongoing product maintenance and support.
Netrix believes that its products and trademarks do not infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims in the future.
To protect Netrix's intellectual property rights in the "voice over" market
space, the prime patents held by Netrix in packetized compressed voice
networking have been brought to the attention of both the Voice over IP and
Frame Relay forum organizations.
Netrix also uses various licensed products of other companies in certain of
its products.
79
<PAGE>
Employees
Netrix had 129 employees at September 30, 1999. None of the employees are
represented by collective bargaining agreements. Netrix has never experienced
any work stoppage. Netrix believes that its employee relations are
satisfactory.
Properties
Netrix's principal administrative and research and development facility
consists of approximately 45,000 square feet located in Herndon, Virginia.
These premises are occupied under a lease agreement that was negotiated for an
additional ten-year term beginning May 1, 1999. In connection with its cost
savings initiatives, Netrix has subleased approximately 22,000 square feet of
the Herndon facility, thereby reducing rent expense by approximately $50,000
per month. A separate facility of 8,600 square feet is under lease in Longmont,
Colorado for product development operations. Additionally Netrix maintains an
international sales office in London. Netrix believes its facilities are in all
material respects suitable, adequate and well utilized.
Litigation
Netrix is periodically a party to disputes arising from normal business
activities. In the opinion of Netrix management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of Netrix, and adequate provision for any potential losses
has been made in the accompanying financial statements.
80
<PAGE>
NETRIX'S MANAGEMENT
Directors and Executive Officers
Set forth below are the names, ages, position and business experience of the
executive officers and directors of Netrix. Upon completion of the merger,
Bryan R. Holley will become a director of Netrix, together with three other
persons, not yet designated, who are currently directors of OpenROUTE. See
"OpenROUTE's Management."
<TABLE>
<CAPTION>
Age of
Name of Director or Director
Executive Officer or Officer Position of Director or Officer
- ------------------- ---------- -----------------------------------------------------
<S> <C> <C>
Steven T. Francesco..... 42 Director, Chairman of the Board of Directors
and Chief Executive Officer
John M. Faccibene (2)... 53 Director
Lynn C. Chapman......... 45 Director, President and Chief Operating Officer
Gregory C. McNulty...... 43 Director
Richard Yalen (1)....... 54 Director
Douglas J. Mello (2).... 56 Director
Peter J. Kendrick....... 45 Vice President, Chief Financial Officer and Secretary
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Nominating Committee of the Board of Directors.
Steven T. Francesco. Mr. Francesco has been a Director and Chairman of the
Board since March 1999. Mr. Francesco is founder and President of Darien
Corporation, and was founder and former President and COO of SmartServ Online,
Inc. From 1989 to 1991, he was Senior Vice President of Strategic Planning and
Operations for a division of Cantor-Fitzgerald Securities. Mr. Francesco has
served as a senior strategic advisor to GTE Advanced Network Services, KeyTrade
and e-Tel. Mr. Francesco has served as a consultant to numerous companies,
including AT&T, GTE, Citibank, Chemical Bank, Chase Manhattan Bank, J.J. Kenny,
ADP, Telerate, and the Chicago Mercantile Exchange. Mr. Francesco founded the
Market Technology Group, a computer and technology service company providing
financial systems and market data retrieval to the financial services industry.
John M. Faccibene. Mr. Faccibene has been a director of Netrix since March
1999. Since January 1999, Mr. Faccibene has been Managing Director, Americas,
for ixNet, a subsidiary of IPC Information Systems, Inc. From 1997 to 1998, he
was Executive Director of CIBC/Oppenheimer & Co. From 1973 to 1998, he was a
senior member of the Security Industry Association (SIA), and for two years
served as Chairman of the SIATechnology Management Committee. For 22 years, Mr.
Faccibene has been a senior member of the Wall Street Telecommunications
Association (WSTA) Executive Committee, and for three years served as President
of the WSTA. He has previously served as Chairman of the NYNEX Executive Forum,
Newbridge Worldwide User Group, Ascom/Timeplex User Group, and is a Director of
the New York Technical College. Mr. Faccibene also serves as a Director of
ADVESTA, a software company, Bridgewater Systems, a software company, and
Timestep, a software security company.
Lynn C. Chapman. Mr. Chapman joined Netrix in December 1992 and was named
Vice President in February 1993. During 1996 Mr. Chapman assumed additional
responsibility as Vice President--Network Products, and was named President and
CEO and a director of Netrix in February 1997. Prior to joining NETRIX, Mr.
Chapman served in various management positions at Data General Corporation from
1989 to November 1992.
Gregory C. McNulty. Mr. McNulty has been the Senior Group Manager, Business
Development at Microsoft Corporation since 1997. Mr. McNulty also served as
Major Accounts Executive for Microsoft. From 1996 to 1997, Mr. McNulty was Vice
President of Sales at CIDCO, Inc., a manufacturer of intelligent network
81
<PAGE>
terminal devices. From 1993 to 1996, Mr. McNulty served as Director of Major
Accounts for Wind River Systems, Inc., the leading supplier of real time
operating systems software and related software development tools. From 1992 to
1993, Mr. McNulty was cofounder of Rugged Digital Systems, Inc., the leading
manufacturer of military standard, ruggedized computer systems and served in
various high-level executive positions from 1982 to 1992. Prior to that, Mr.
McNulty was employed by ROLM Corporation and by FMC Corporation.
Richard Yalen. Mr. Yalen became a director of Netrix in April, 1999. Mr.
Yalen is the Chief Executive Officer of Dynamic Telcom Engineering LLC, a
telecommunications company. From 1992 to 1998, prior to joining Dynamic Telcom,
Mr. Yalen served in various positions at Cable & Wireless USA, including that
of Chief Executive Officer.
Douglas J. Mello. Mr. Mello became a director of Netrix in April, 1999. Mr.
Mello was employed by Bell Atlantic and its predecessor corporations from 1965
until March, 1999. From 1997 to 1999, he served as President, Large Business
Sales-North for Bell Atlantic. From 1996 to 1997, he was NYNEX Vice President-
Business Marketing and Amp Sales, responsible for all business customers in the
New York and New England areas. From 1994 to 1996, he served as Vice President-
Sales for NYNEX Corporation. Prior to 1994, Mr. Mello was the Group Vice
President-Manhattan Market Area for New York Telephone, where he was
responsible for the provisioning of telecommunications technology. From 1985 to
1991, he was President of Business Information Systems Corp. Mr. Mello is a
director of IXnet, Inc. and of Telexis Co.
Peter J. Kendrick. Mr. Kendrick joined the company in August, 1999 as Vice
President, Chief Financial Officer and Secretary. Prior to joining Netrix, he
served as Vice President and Chief Financial Officer of PACI, a Nasdaq listed
company. From 1991 to 1996, he was Vice President and Chief Financial Officer
of Capital-Carousel, Inc. Mr. Kendrick also served as Senior Vice President-
Corporate Finance for Johnston, Lemon and Company and Vice President and Chief
Financial Officer of VSC, Inc. In addition he has held senior executive roles
with C3, Inc., The Source and SCS.
82
<PAGE>
Executive Compensation
The Chief Executive Officer of Netrix at December 31, 1998, and the other
most highly compensated executive officers of Netrix who earned at least
$100,000 during the year ended December 31, 1998, were Messrs. Chapman, Wilson
and Finkelnburg. The following table summarizes all compensation awarded to,
earned by or paid to Messrs. Chapman, Wilson and Finkelnburg for the fiscal
years ended December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Name/Position Year Salary($) Bonus($) Other($)(1) Options(#)
------------- ---- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Lynn C. Chapman (2)............ 1998 160,000 6,593 2,400 100,000
President and Chief 1997 156,546 21,750 2,375 29,000
Executive Officer 1996 140,578 -- 1,125 75,000
G. Brent Wilson................ 1998 126,000 6,583 -- 45,000
Vice President, Engineering 1997 114,815 14,500 -- 12,000
Services 1996 109,701 -- -- 25,000
Karl W. Finkelnburg............ 1998 163,658 -- 900 10,000
Vice President, Sales 1997 197,230 -- 1,544 13,000
American Operations 1996 219,180 -- 750 13,000
</TABLE>
- --------
(1) Represents matching 401(k) plan contributions by Netrix.
(2) Mr. Chapman was appointed President and Chief Executive Officer of Netrix
in February 1997.
Option Grants
The following table summarizes option grants during 1998 to Messrs. Chapman,
Wilson and Finkelnburg:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent Potential Realizable
of Total Value at Assumed
Options Annual Rates of
Granted to Market Stock Price Appreciation
Options Employees Exercise Price for Option Term (C)
Granted In Fiscal Price ($/Share) Expiration ---------------------------
Name (#)(A) Year ($/Share) (B) Date 0%($) 5%($) 10%($)
---- --------- ---------- --------- --------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lynn C. Chapman......... 100,000(D) 15% $3.13 $3.13 5/07/08 -- 197,000 $ 499,000
G. Brent Wilson......... 45,000(D) 7 2.33 2.33 5/7/08 -- 66,000 167,000
Karl W. Finkelnburg..... 10,000(D) 2 3.13 3.13 3/12/07 -- 20,000 50,000
</TABLE>
- --------
(A) Under the terms of Netrix's incentive stock option plan, the board of
directors retains discretion, subject to plan limits, to modify the terms
of the outstanding options and to reprice the options. The options were
granted for a term of 10 years, subject to earlier termination in the event
of termination of employment. The options were granted with tandem tax
withholding rights.
(B) Equals fair market value of common stock on the date of grant.
(C) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 0%, 5% and 10%
compounded annually from the date of grant to their expiration date. Actual
gains, if any, on stock option exercises will depend upon the future
performance of Netrix's common stock and the date on which the options are
exercised.
(D) Identified options were granted May 8, 1998, and 20% of the options become
exercisable at the end of one year and the balance becomes exercisable in
equal monthly installments on the 30th day of each calendar month following
the date of grant, with full vesting occurring on the fourth anniversary
date.
83
<PAGE>
Option Exercises and Year-End Values
The following table summarizes option exercises during 1998 by Messrs.
Chapman, Wilson and Finkelnburg:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Value of Unexercised
Acquired Unexercised Options In-the-Money Options
On Value at Fiscal Year-End (#) at Fiscal Year-End ($)(A)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lynn C. Chapman......... -- -- 66,996 74,004 143,539 158,554
G. Brent Wilson......... -- -- 31,247 36,779 66,947 78,799
Karl W. Finkelnburg..... -- -- -- 20,908 23,282 55,783
</TABLE>
Compensation of Directors
In 1998 Netrix paid each non-employee member of the board a retainer of
$12,000 plus $250 for each day of attendance at a meeting of the full board or
any committee thereof other than the Executive Committee and $500 for each day
of attendance at meetings of the Executive Committee. In 1999, Netrix
eliminated the cash payments and instead provides equity compensation to its
non-employee directors. Given the reconstitution of the board in 1999, Netrix
made to each non-employee director a one-time grant of 50,000 options in 1999.
In 2000 and subsequent years Netrix expects to grant 25,000 options to each
director then serving. The exercise price for all of these options is and will
be equal to the fair market value of Netrix common stock on the grant date,
except that with respect to the initial grant of 50,000 options in 1999 the
exercise price was reset to $2.50 per share on September 30, 1999. In addition,
Netrix reimburses directors for all reasonable expenses incurred by them in
connection with their attendance at board or committee meetings.
Employment and Severance Arrangements
Steven T. Francesco, the Chairman and Chief Executive Officer of Netrix,
entered into an employment agreement effective as of March 22, 1999. The term
of Mr. Francesco's agreement is through March 21, 2002. Under the agreement,
Mr. Francesco is paid a base salary of $160,000 per annum, and he is eligible
for an annual bonus to be established in the sole discretion of the
compensation committee of the Netrix board. In addition, Mr. Francesco has been
issued options to purchase 1,600,000 shares of Netrix common stock. The first
400,000 options have an exercise price of $1.50 per share and vested upon
grant. The remaining 1,200,000 options are exercisable at $2.75 per share and
400,000 vest on each anniversary of the agreement, subject to acceleration if
certain performance criteria are met. To date, no such criteria have been
attained. Pursuant to the stock option plan under which the options were
granted, as more fully described below, all options vest immediately upon a
change in control of Netrix. The merger will be a change of control for this
purpose, and all 1,200,000 options will vest immediately upon consummation of
the merger. Mr. Francesco's employment agreement also provides that, in the
event of a change in control of Netrix, Mr. Francesco will be issued 1,000,000
shares of Netrix common stock. In the event Mr. Francesco's employment is
terminated by Netrix without cause or by Mr. Francesco for good reason, as
these terms are described in the employment agreement, he will be entitled to:
(1) receive an amount equal to three times his base salary, (2) accelerated
vesting of all of his stock options and (3) participation in Netrix benefit
plans for up to three years. Mr. Francesco's employment agreement also contains
non-compete provisions for between one and three years after termination of his
employment, that relate to the manner in which his employment is terminated;
provided, that if Mr. Francesco voluntarily resigns from Netrix, there will be
no non-compete covenant unless Netrix pays him an amount equal to one year's
salary, in which case the non-compete period will be one year. If the payment
to Mr. Francesco upon termination or a change of control results in the
imposition of an excise tax pursuant to Section 280G of the Internal Revenue
Code, Netrix will pay to Mr. Francesco a tax "gross-up" payment equal to the
amount of his resulting tax liability. No such payment will be made in
connection with the merger.
84
<PAGE>
Peter J. Kendrick, the Chief Financial Officer of Netrix, entered into an
employment agreement effective as of August 2, 1999. The term of Mr. Kendrick's
employment agreement extends until August 1, 2002. Under the agreement, Mr.
Kendrick is paid a base salary of $100,000 per annum, and he is eligible to
receive a bonus in an amount to be determined by the Netrix board. In addition,
Mr. Kendrick has been granted options to purchase 100,000 shares of Netrix
common stock at an exercise price of $2.50 per share. Half of these options
will vest on December 31, 1999, and half will vest on August 3, 2000. Pursuant
to the stock option plan under which the options were granted, as more fully
described below, all options vest immediately upon a change of control of
Netrix. The merger will be a change of control for this purpose, and all
100,000 options will vest immediately upon consummation of the merger. In the
event Mr. Kendrick's employment is terminated by Netrix without cause or by Mr.
Kendrick for good reason, as these terms are described in the employment
agreement, he will be entitled to: (1) receive an amount equal to one year of
his base salary, (2) accelerated vesting of all of his stock options and (3)
participation in Netrix benefit plans for up to one year. Mr. Kendrick's
employment agreement also contains non-compete provisions for one year after
his employment terminates; provided, that if Mr. Kendrick voluntarily resigns
from Netrix, there will be no non-compete covenant unless Netrix pays him an
amount equal to his base salary, in twelve monthly installments, in which case
the non-compete period will be one year.
Netrix entered into retention agreements on February 1, 1999 with each member
of its then senior management. Mr. Chapman is the only current executive
officer of Netrix who is a party to one of these agreements. The agreements
provide severance benefits if the employee's employment is terminated by Netrix
without cause or by the employee for good reason, as these terms are described
in the retention agreements. The severance benefits generally are either six or
twelve months of base salary, depending on the employee, plus continued
participation in Netrix's benefit plans during the period salary is paid. The
retention agreements also provide non-compete provisions which also correspond
to the period salary is paid. The term of the agreements is until December 31,
2000, and the agreements will automatically renew on that date and each
anniversary of that date for additional one-year periods unless notice of
termination is provided at least 90 days prior to the expiration of the term.
85
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of November 1, 1999,
with respect to the beneficial ownership of common stock by:
. each person known by Netrix to beneficially own more than 5% of the
outstanding shares of common stock;
. each director of Netrix;
. each executive officer of Netrix; and
. all directors and executive officers of Netrix as a group:
<TABLE>
<CAPTION>
Number of
Shares Percentage of
Beneficially Common Stock
Beneficial Owner Owned(1) Outstanding(2)
---------------- ------------ --------------
<S> <C> <C>
Special Situations Fund III, L.P.(3).............. 1,334,200 10.8
153 E. 53 St., 51st Floor
New York, NY 10022
Arthur J. Marks(4)................................ 803,039 6.7
c/o New Enterprise Associates IV, L.P.
1119 St. Paul Street
Baltimore, MD 21202
Steven T. Francesco(5)............................ 400,000 3.2
Lynn C. Chapman(5)................................ 172,596 1.4
Peter J. Kendrick*(5)............................. 50,000 *
John M Faccibene*(5).............................. 25,000 *
Gregory C. McNulty*(5)............................ 25,000 *
Richard Yalen*(5)................................. 25,000 *
Dougles J. Mello*(5).............................. 25,000 *
All directors and executive officers as a group (7
persons)(6)...................................... 722,596 6.0
</TABLE>
- --------
* Less than 1%.
(1) The number of shares of Netrix common stock beneficially owned by each
person is determined under the rules of the SEC, and the information is
not necessarily indicative of beneficial ownership for any other purpose.
Under such rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also
any shares of Netrix common stock which the individual has the right to
acquire within 60 days after November 1, 1999 through the exercise of any
stock option or other right. The inclusion herein of any shares of Netrix
common stock deemed beneficially owned does not constitute an admission of
beneficial ownership of those shares. Unless otherwise indicated, the
persons named in the table have sole voting and investment power with
respect to all shares of Netrix common stock shown as beneficially owned
by them.
(2) Number of shares deemed outstanding includes 11,976,821 shares outstanding
as of November 1, 1999 plus any shares subject to options held by the
person or entity in question that are currently exercisable or exercisable
within 60 days after November 1, 1999.
(3) This information is based on a Schedule 13G dated February 12, 1999.
Includes 40,000 shares of common stock underlying Series A 8% Convertible
Preferred Stock that is currently convertible.
(4) Includes 582,009 shares held by New Enterprise Associates IV, Limited
Partnership and 200,000 shares held by New Enterprise Associates V,
Limited Partnership. Mr. Marks is a general partner of the general
partners of New Enterprise Associates IV, LP and New Enterprise Associates
V, LAP, respectively. Mr. Marks disclaims beneficial ownership of such
shares.
(5) Represents shares underlying currently exercisable stock options or stock
options that will become exercisable within 60 days.
(6) All of these shares underlie currently exercisable stock options or stock
options that will become exercisable within 60 days.
86
<PAGE>
OPENROUTE BUSINESS
OpenROUTE develops, manufactures, markets and supports hardware and software
networking products that transport data over the Internet. OpenROUTE's routing
products are designed to make it safe, affordable and easy for people to access
information via corporate networks and the Internet. OpenROUTE was incorporated
in Massachusetts in 1974 as Proteon Associates, Inc. and changed its name to
Proteon, Inc. in 1983 and to OpenROUTE Networks, Inc. in 1998. OpenROUTE
conducts operations in the Americas, Europe and Asia.
OpenROUTE's operations are subject to certain risks and uncertainties
including, among others, rapidly changing technology and markets, current and
potential competitors with greater financial, technological, production and
marketing resources, reliance on certain sole source suppliers and third party
contract manufacturers, and dependence on key management personnel.
Background
For more than 18 years, OpenROUTE Networks has developed and shipped network
connectivity products. During this period, OpenROUTE co-authored both the
Simple Network Management Protocol network management standard and the Open
Shortest Path First internetwork routing standard. OpenROUTE also developed and
shipped the first router.
On July 6, 1998, OpenROUTE appointed Bryan R. Holley as its President and
Chief Executive Officer. Mr. Holley brought a new focus on small and mid-size
businesses to OpenROUTE and hired a new management team to implement this
focus.
OpenROUTE aims to provide small and mid-size business customers with
networking equipment. Specifically, OpenROUTE develops and manufactures
customer premise equipment that is installed on the "edge of the network"--the
point at which businesses connect to their telephone company or Internet
service provider. We refer to Internet service providers as ISPs. The growth of
the Internet as a business tool has led to the increased need for secure and
affordable network equipment. OpenROUTE is positioned to meet this need.
The Internet's growth and advances in network security have also brought the
introduction of a new type of network called a virtual private network, or VPN.
OpenROUTE believes the emergence of the VPN will help its customers build cost-
effective networks that allow them to communicate with vendors and suppliers
over the Internet. In short, the VPN will increase the number of small and mid-
size companies who use the Internet to grow their businesses. In 1998,
OpenROUTE introduced the GT900 and GTX1500 secure Internet products. Both of
these products will assist OpenROUTE in positioning itself as a leader in the
VPN marketplace. OpenROUTE's products include the security features,
performance and the interoperability that businesses will need to establish a
VPN.
OpenROUTE's internetworking software suite is the foundation of its
internetworking solutions. OpenROUTE ships all of its routing products with
this software technology. OpenROUTE has been developing this software suite for
more than 13 years. In the second half of 1994, OpenROUTE began licensing its
internetworking software. Since then, OpenROUTE has completed two significant
internetworking software-licensing agreements, with International Business
Machines and Digital Equipment Corporation. OpenROUTE has also licensed its
software to Motorola's Information Systems Group and TELDAT, S.A., a European
networking product vendor headquartered in Madrid, Spain. In late 1997,
OpenROUTE licensed a subset of its software to Ascend Communications, which is
now a part of Lucent Technologies.
In 1998, OpenROUTE continued its commitment to open, standards-based product
offerings. OpenROUTE believes that the way to develop products that will
operate with other products is to develop open networking standards. These
standards will continue to expand future market opportunities.
87
<PAGE>
OpenROUTE contributes significant technical expertise to the development and
adoption of key industry standards. OpenROUTE continues to be an active member
of the Open Shortest Path First Interoperability Group, an industry consortium
formed to ensure interoperability and further the acceptance of the Open
Shortest Path First standard. OpenROUTE has also continued to execute standards
activity as it has marketed its data link switching technology. Data link
switching technology, an industry standard, allows OpenROUTE's routers to
encapsulate system network architecture traffic in Internet protocol, thus
eliminating the need to have separate backbone networks for system network
architecture and local area network traffic.
OpenROUTE Products
GT & GTX Series. OpenROUTE's routers provide affordable, secure and fast
access to the Internet. The routers in the GT series are fixed while the
routers in the GTX series are modular.
During 1998, OpenROUTE introduced its GT 900 and GTX 1500 routers. In
addition, OpenROUTE introduced a number of enhancements across its entire GT
and GTX product lines. All of these enhancements increased the security of the
router and strengthened OpenROUTE's position in the VPN marketplace. A brief
description of these security enhancements appears below:
. Encryption and authentication for RSA Rivert Control Four (RC4);
. Simplified address management and translation with double network
address translation and dynamic host configuration protocol services;
and
. A security processor that speeds encryption capabilities.
OpenROUTE also introduced a number of wide area networking service interface
cards in 1998. These cards integrated services previously available only as
separate external devices. The interface cards included:
. Digital Data Services 56/64kb CSU/DSU;
. T1/E1 CSU/DSU with fractional services, 56k bps modem and multiple
10BaseT Ethernet interfaces; and
. 45mb High Speed Serial Interface (HSSI) router for high demand
applications.
OpenROUTE 3.1, OpenROUTE 3.2 Routing Software. During 1998, OpenROUTE
released two new versions of its routing software, OpenROUTE 3.1 and OpenROUTE
3.2:
OpenROUTE 3.1 enhancements included:
. A browser-based configuration that allows users to configure OpenROUTE's
routers via Netscape or Microsoft Explorer;
. Features designed to better manage wide area network connectivity and
increase traffic priority with Internet based networks; and
. The ability to service IBM SNA customers.
OpenROUTE 3.2 enhancements include all of the enhancements of the OpenROUTE
3.1 software as well as support for the GTX1500 hardware assisted encryption
router.
Marketing and Sales
OpenROUTE continues to focus its marketing and distribution efforts on
cultivating relationships with ISPs, value added resellers, or "VARs," and
original equipment manufacturers. OpenROUTE believes that the security,
performance, scalability and interoperability of its products will contribute
to continued success in these arenas. Specifically, its products combine
performance with the encryption, authentication and tunneling capabilities
needed to design a cost-effective VPN. OpenROUTE believes that it has the
expertise, products and pricing strategy needed for growth in the VPN
marketplace.
88
<PAGE>
OpenROUTE continues to focus on business partnerships with ISPs. OpenROUTE
believes that ISPs offer a solid path of wide-scale distribution for its GT and
GTX products. As ISPs have evolved, their equipment needs have changed as well.
In many cases where ISPs are connecting businesses to the Internet or Intranet,
the installation of an Internet access router is a necessity. By solidifying
its presence with ISPs on a global basis, OpenROUTE believes it can expand its
distribution and increase the potential to grow its business. During 1998,
OpenROUTE established a relationship with UUNET/Worldcom to provide its router
products and continued its relationship with PSINet. OpenROUTE's strategy is to
increase the number of ISPs that carry its products.
During 1998, OpenROUTE signed premier VAR agreements with Atrion
Communications Resources, Inc., Westron Communications and Synergy Networks,
each of whom actively markets GT and GTX products in their respective regions.
Through its VAR partners, OpenROUTE is targeting sales in markets such as
government, financial services, health care, education, publishing,
manufacturing, insurance, professional services, libraries and entertainment.
OpenROUTE's field sales force is primarily responsible for providing sales
support and training to OpenROUTE's systems integrators, original equipment
manufacturers, ISPs, VARs and telecommunications carriers. The field sales
force has a number of offices in the United States and international offices in
Lockington Derby, England, Toronto, Paris and Hong Kong. OpenROUTE also has
strong sales associations in Tokyo and Beijing.
OpenROUTE sells a large number of units through systems integrators and
original equipment manufacturers. These organizations typically have technical
expertise and an installed customer base in either telecommunications or
computer communications, and are experienced in the sale and support of complex
networking solutions. In 1998, OpenROUTE increased its shipments through
telecommunications providers who install customer premise equipment.
OpenROUTE also sells its complete product line through VARs, which include
premier access partners and smaller regional VARs in markets around the world.
OpenROUTE selects many of these VARs for their capability to sell to and to
service small to mid-size organizations, as well as for their expertise in
vertical industries or technologies. No VAR was responsible for more than 10%
of OpenROUTE's revenues in 1998.
OpenROUTE's products are currently marketed, sold and serviced
internationally by over 30 distributors, VARs and original equipment
manufacturers. These resellers have non-exclusive agreements that cover a
countrywide territory. International sales accounted for approximately 30.9% of
OpenROUTE's net sales in 1998.
Customer Support and Service
OpenROUTE's customer service organization provides service and support
programs for resellers and end-users. OpenROUTE provides end-users with
alternatives for acquiring services for their networking requirements. Users
can contact OpenROUTE directly for service. Additionally, OpenROUTE offers
multiple maintenance contract options designed to match the servicing
capabilities and needs of the customer. The service offerings consist of
technical support, both remote and on-site; maintenance contracts; hardware and
software upgrades; product exchange; spare parts; depot repair and professional
services.
OpenROUTE's customers include companies that provide various types of
telecommunications services to end-users, as well as the end-users themselves.
ISPs, such as UUNET/Worldcom and PSINet, and VARs, such as Atrion
Communications Resources, Inc., Westron Communications and Synergy Networks,
are several of the telecommunications service providers that purchase
OpenROUTE's products. Small and mid-size businesses are end users who use
OpenROUTE's networking equipment in their offices. Two customers accounted for
approximately 22% of OpenROUTE's revenues in 1998.
89
<PAGE>
Research and Development
OpenROUTE is developing new products to improve price/performance ratios,
enhance network management capabilities and security, simplify ease of use, and
ensure interoperability with other vendors' standards-based products. OpenROUTE
is also helping to define and support emerging industry standards that underlie
the use of new technological capabilities. OpenROUTE is currently participating
in a variety of Internet engineering task force working groups.
In 1998, 1997 and 1996, OpenROUTE's research and product development
expenditures were 32.2%, 22.2% and 20.6% of net sales, respectively. All of
OpenROUTE's expenditures for hardware and software research and development
costs have been expensed as incurred.
Business Partnering
During 1998 OpenROUTE entered into an agreement with Merlot Communications,
Inc. This technology transfer agreement allows for incorporation of both
OpenROUTE's hardware and software into Merlot's converged voice and data
solutions for small to mid-size businesses. The goal is to combine OpenROUTE's
expertise in secure Internet access with Merlot's innovative local area network
and voice technology, to assist competitive local exchange carriers to provide
completely integrated voice, video and data services from the edge of the
carrier's network to the desktop.
Manufacturing
OpenROUTE's manufacturing operations consist of systems level integration and
testing. OpenROUTE has strategic relationships with two companies that
manufacture, distribute and repair OpenROUTE products. OpenROUTE has
subcontracted much of its manufacturing operations to U.S. Assemblies of
Taunton, Massachusetts, a manufacturer with access to cost-effective, high
volume manufacturing, distribution and repair capability worldwide. U.S.
Assemblies manufactures OpenROUTE's board assemblies for its router, hub and
adapter card product lines and specific, turnkey manufacturing for a number of
OpenROUTE's products. OpenROUTE subcontracted with Venture Manufacturing Ltd.
of Singapore in October of 1998 to provide it with similar services. OpenROUTE
believes that in the event of an interruption in manufacturing by either of its
subcontractors, OpenROUTE will be able to shift its production needs to the
unaffected facility as necessary, and continue to meet its expected demand.
Both U.S. Assemblies and Venture Manufacturing operate a number of other plants
within the United States and Asia.
OpenROUTE performs some final assembly and testing of its routers at its
Westborough, Massachusetts facility. A repair depot and logistics operation is
also located at its Westborough facility, coordinating global service
requirements for all OpenROUTE products.
The reduced instruction set computer processor presently used in OpenROUTE's
CNX 600 and CNX 500 bridging routers is available solely from Advanced Micro
Devices, Inc. OpenROUTE believes, however, that other available reduced
instruction set computer processors for the Advanced Micro Devices chip would
suffice as substitutes, if necessary, with some product modifications. Certain
logic semiconductors, signal processors and subassembly components used in
OpenROUTE's products are also available only from limited sources. OpenROUTE
has not experienced any significant problems in obtaining required supplies of
such limited source components and believes that alternative sources could be
developed quickly if needed. However, such shortages could result in production
delays that might adversely affect OpenROUTE's business. The line of GTX and GT
Business Series products incorporates microprocessors supplied by Motorola.
OpenROUTE is not aware of any shortages of chips from Motorola, and believes
that supplies will be adequate through the foreseeable future.
Competition
OpenROUTE encounters substantial competition in the marketing of its
products, and many of its competitors have greater research and development
capability, marketing and financial resources, manufacturing
90
<PAGE>
capability, customer support organizations and name recognition than does
OpenROUTE. Important competitive factors in OpenROUTE's product markets are
established customer base, product performance and features, service and
supports, as well as price. There can be no assurance that OpenROUTE's products
will compete successfully with competitive products that may be offered in the
future or that aggressive pricing will not adversely impact the profitability
of OpenROUTE.
Proprietary Rights
OpenROUTE relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary rights in its products.
Despite these precautions, it may be possible for unauthorized third parties to
copy aspects of OpenROUTE's products or to obtain and use information that
OpenROUTE regards as proprietary.
OpenROUTE was granted a patent on February 18, 1992, for its Token Ring
synchronization technology, commonly referred to as JitterBuster. On July 21,
1992, OpenROUTE was granted a patent for its Token Ring Equalizer. Each of
these patents has a life of 17 years from the date of grant. In September 1997,
OpenROUTE applied for a U.S. patent for its GTX modular Internet access router.
Certain technology used in OpenROUTE's products is licensed by OpenROUTE from
third parties, generally on a non-exclusive basis. These license agreements
generally require OpenROUTE to pay royalties and to fulfill confidentiality
obligations in order to maintain the licenses. One of OpenROUTE's license
agreements is an exclusive license for a portion of the software incorporated
in OpenROUTE's routers. In order to maintain the exclusivity of this license,
OpenROUTE must make minimum annual royalty or other payments in addition to
those required to maintain the license. The sum of these payments for each year
is relatively insignificant to OpenROUTE. The maximum royalties payable under
this license are limited in accordance with a formula. Generally, if OpenROUTE
does not pay minimum royalties or make other minimum payments each year under
this license, the license may be terminated. Absent a breach of this license
agreement by OpenROUTE, the license may be continued indefinitely at
OpenROUTE's option. The termination of this license would have a material
adverse effect on its operations because the technology licensed under this
agreement is included in the software incorporated into OpenROUTE's router
products, which provide a significant portion of its revenues.
Employees
OpenROUTE had 81 employees at November 1, 1999, including 34 in sales,
marketing and customer support, 24 in engineering and product development, 9 in
manufacturing and 14 in finance and administration. OpenROUTE has never
experienced any work stoppages and believes its employee relations are
satisfactory.
Properties
OpenROUTE's principal administrative, marketing, manufacturing and product
development facilities are located in one building in Westborough,
Massachusetts and as of October 1, 1999, occupied a total of approximately
44,000 square feet. OpenROUTE occupies these facilities under a lease agreement
that expires in April 2002. OpenROUTE has the option to extend the term of the
lease for two five-year periods commencing on May 1, 2002 and May 1, 2007. In
addition, OpenROUTE leases four sales and support offices elsewhere in the
United States and abroad. OpenROUTE believes that its existing facilities are
adequate for its current needs.
Litigation
OpenROUTE periodically is a party to disputes arising from normal business
activities. In the opinion of OpenROUTE management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of OpenROUTE, and adequate provision for any potential losses
has been made in the accompanying financial statements.
91
<PAGE>
OPENROUTE MANAGEMENT
Directors and Executive Officers
Set forth below are the names, ages, position and business experience of the
directors and executive officers of OpenROUTE.
<TABLE>
<CAPTION>
Age of
Name of Director or Director or
Executive Officer Officer Position of Director or Officer
------------------- ----------- -----------------------------------------------
<S> <C> <C>
Bryan R. Holley......... 38 Director, Chief Executive Officer and President
Howard C. Salwen(1)(2).. 62 Director, Chairman of the Board of Directors
Dr. David Clark(1)...... 55 Director
Dr. Robert M. 59 Director
Glorioso(2)............
Thomas Liebermann....... 50 Director
James Norrod............ 51 Director, Vice President, Strategic Alliance
Thomas A. Aucella....... 48 Vice President, Asia Pacific
Henry Barber............ 44 Vice President, Finance, Chief Financial
Officer, Treasurer and Clerk
Robert A. Koch.......... 47 Vice President, Engineering Support
Bruce MacAloney......... 46 Vice President, Sales
Richard E. Sterry....... 48 Vice President, Marketing
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Bryan R. Holley. Mr. Holley joined OpenROUTE as Chief Executive Officer and
President on July 7, 1998. Mr. Holley also has served as a director of
OpenROUTE since July 1998. Prior to joining OpenROUTE, Mr. Holley was President
and Chief Executive Officer of ITK Telecommunications Inc. from 1997 to 1998.
Prior to his position to ITK, Mr. Holley held several executive positions,
including President of Riverbend Press from 1995 to 1997 and Senior Vice
President of Summagraphics Corporation from 1993 to 1995.
Howard C. Salwen. Mr. Salwen founded OpenROUTE as a partnership in 1972 and
served as its President until 1984. Since OpenROUTE's incorporation in 1974 he
has been Chairman of its Board of Directors. He served as OpenROUTE's Chief
Technical Officer from February 1984 to April 1991 and as its Clerk and
Treasurer from 1984 to April 1991. Mr. Salwen currently sits on the board of
directors of Marathon Technologies Corp., a company which designs and
manufactures fault-tolerant computers, and of the Mass Telecommunications
Council. Mr. Salwen is also an Overseer of the DeCordova Museum and the
Computer Museum.
Dr. David Clark. Dr. Clark has been a member of OpenROUTE's board of
directors since 1984. He has been employed since 1973 at Massachusetts
Institute of Technology Laboratory Computer Science, where he is a senior
research Scientist.
Dr. Robert M. Glorioso. Dr. Glorioso has been a member of OpenROUTE's board
of directors since March 1997. Since April 1993, Dr. Glorioso has held the
position of President and Chief Executive Officer of, and has served as a board
member of, Marathon Technologies Corp. From January 1976 to December 1992, Dr.
Glorioso held several senior executive positions at Digital Equipment
Corporation, including Vice President of Information Systems Business and Vice
President of Executive Consulting.
Thomas Liebermann. Mr. Liebermann has been a member of OpenROUTE's board of
directors since July 1998. Mr. Liebermann has been Chairman and Chief Executive
Officer of Advanced Frequency Products, LLC, which develops specialized
subsystems and components for the wireless communications and motion sensing
markets, since 1997. Prior to that Mr. Liebermann was President and Chief
Executive Officer of Kaye
92
<PAGE>
Instruments from 1989 until 1996. Mr. Liebermann serves as a director on
several boards of directors and holds a leadership role in the Young
President's Organization.
James Norrod. Mr. Norrod has been a member of OpenROUTE's board of directors
since December 1998. From 1998 to 1999 Mr. Norrod served as the Chief Executive
Officer of Biztravel.com. Prior to joining Biztravel.com, Mr. Norrod was Chief
Executive Officer of ITK International from 1997 to 1998 and of Telebit from
1993 to 1997. Mr. Norrod is also Chairman of the board of directors of Cignal
Global Communications, Inc.
Henry Barber. Mr. Barber has served as Vice President, Finance, Chief
Financial Officer, Treasurer and Clerk at OpenROUTE since June 1999. Prior to
joining OpenROUTE, Mr. Barber was Vice President, Finance & Administration of
LANart Corporation from 1996 to 1999. Beginning in 1993 until 1995, Mr. Barber
held the position of Controller/Treasurer of Ascent Pharmaceuticals, Inc.
Thomas A. Aucella. Mr. Aucella joined OpenROUTE in October 1998 as Vice
President, Asia Pacific Operations. Prior to joining OpenROUTE, Mr. Aucella
held the position of Vice President of Asia/Pacific Sales for Software.com from
1996 to 1998. Beginning in 1991 until 1996, Mr. Aucella directed international
business development for Bay Networks, Inc.
Robert A. Koch. Mr. Koch joined OpenROUTE in April 1993 as Product Marketing
Director and held that position until April 1997. In April 1997, Mr. Koch
became Vice president of Product Planning for OpenROUTE. Since September 1997,
Mr. Koch has held the position of Vice President, Engineering and Customer
Support.
Bruce G. MacAloney. Mr. MacAloney joined OpenROUTE in January 1999 as Vice
President, Sales. Prior to joining OpenROUTE, Mr. MacAloney served as Vice
President, Sales for GigaNet, Inc. beginning in 1996. He held a senior
executive position with Racor beginning in 1994 until 1996. Mr. MacAloney has
also held executive positions with Standard Microsystems, Artel Communications
and Interlan.
Richard E. Sterry. Mr. Sterry joined OpenROUTE in September 1998 as Vice
President, Marketing. Prior to joining OpenROUTE, Mr. Sterry held executive
marketing positions with networking and communications companies, including
Netaccess from 1996 to 1998, Computervision Corporation in 1995 and Sales &
Intelligence At Large in 1994. Mr. Sterry has also held executive positions at
Extension Technology, Avatar, Microcom and Prime Computer.
93
<PAGE>
Executive Compensation
The Chief Executive Officer of OpenROUTE and the four other most highly
compensated executive officers of OpenROUTE who earned at least $100,000 during
the year ended December 31, 1998, were Messrs. Holley, Koch, Capone, Shedd and
Hovaldt (the "Named OpenROUTE Executives"). The following table sets forth
information concerning the compensation and paid to the Named OpenROUTE
Officers for the fiscal years ended December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------- ------------
Name/Position Year Salary($) Bonus($) Other($)(1)) Options(#)
------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Bryan R. Holley(2)........... 1998 125,000 91,193 2,820 459,000
Chief Executive Officer and
President
Robert A. Koch............... 1998 145,289 44,664 0 130,000
Vice President, Engineering 1997 122,847 16,090 0 40,000
and
Customer Support
Daniel J. Capone, Jr.(4)..... 1998 286,154 0 3,200 473,000
Former President 1997 241,324 43,899 3,200 77,500
Chief Executive Officer 1996 241,405 39,719 3,000 120,555
Steven T. Shedd(3)........... 1998 150,385 44,892 3,008 90,000
Former Vice President,
Finance 1997 64,615 5,517 0 60,000
and Chief Financial Officer
Kenneth V. Hovaldt(5)........ 1998 174,577 0 1,257 0
Former Vice President, Sales 1997 26,507 2,299 0 90,000
</TABLE>
- --------
(1) Represents matching 401(k) plan contributions by OpenROUTE.
(2) Mr. Holley was appointed Chief Executive Officer and President of OpenROUTE
on July 7, 1998.
(3) Mr. Shedd's employment with OpenROUTE terminated on June 11, 1999.
(4) Mr. Capone's employment with OpenROUTE terminated on July 6, 1998.
(5) Mr. Hovaldt's employment with OpenROUTE terminated on November 7, 1998.
94
<PAGE>
Option Grants
The following table summarizes option grants during 1998 to the Named
OpenROUTE Officers:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent Potential Realizable
of Total Value at Assumed
Options Annual Rates of
Granted to Market Stock Price Appreciation
Options Employees Exercise Price for Option Term (C)
Granted In Fiscal Price ($/Share) Expiration --------------------------
Name (#)(A) Year ($/Share) (B) Date 0%($) 5%($) 10%($)
---- ------- ---------- --------- --------- ---------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bryan R. Holley......... 350,000(D) 14.51 1.13 1.13 7/6/08 -- 247,627 627,536
109,000(E) 4.52 0.81 .81 11/3/08 -- 55,731 141,233
Steven T. Shedd......... 50,000(F) 2.07 1.25 1.16 7/22/08 -- 31,650 87,418
40,000(G) 1.66 0.81 .81 11/3/08 -- 20,452 51,829
Robert A. Koch.......... 15,000(H) 0.62 1.90 1.31 2/11/08 -- 3,581 22,584
5,000(I) 0.21 1.90 1.31 2/11/08 -- 1,194 7,528
2,000(J) 0.08 1.90 1.31 2/11/08 -- 477 3,011
10,000(K) 0.41 1.90 1.31 2/11/08 -- 2,387 15,056
5,000(L) 0.21 1.90 1.31 2/11/08 -- 1,194 7,528
10,000(M) 0.41 1.90 1.31 2/11/08 -- 2,387 15,056
10,000(N) 0.41 1.90 1.31 2/11/08 -- 2,387 15,056
25,000(O) 1.04 1.25 1.16 7/22/08 -- 15,825 43,709
48,000(P) 1.99 0.81 .81 11/3/08 -- 24,542 62,191
Daniel J. Capone, Jr.... 18,837(Q) .7808 1.90 1.31 2/11/08 -- 4,497 28,361
34,986(R) 1.45 1.90 1.31 02/11/08 -- 8,353 52,674
21,163(S) .88 1.90 1.31 02/11/08 -- 5,052 31,863
315,250(T) 13.07 1.90 1.31 02/11/08 -- 75,262 474,635
15,250(U) .63 1.90 1.31 02/11/08 -- 3,641 22,960
15,014(V) .62 1.90 1.31 02/11/08 -- 3,584 22,605
13,275(W) .55 1.90 1.31 02/11/08 -- 3,169 19,987
8,600(X) .36 1.90 1.31 02/11/08 -- 2,053 12,948
2,500(Y) .10 1.90 1.31 02/11/08 -- 597 3,764
28,125(Z) 1.17 1.90 1.31 02/11/08 -- 6,715 42,345
Kenneth S. Hovaldt...... 0 0.00 0.00 -- -- -- 0 0
</TABLE>
- --------
(A) Under the terms of the OpenROUTE 1991 Restated Stock Option Plan, the board
of directors retains discretion, subject to plan limits to modify the terms
of the outstanding options and to reprice the options. The options were
granted for a term of ten years, subject to earlier termination in the
event of termination of employment.
(B) Equals fair market value of the OpenROUTE common stock on the date of
grant.
(C) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 0%, 5% and 10%
compounded annually from the date of grant to their expiration date. Actual
gains, if any, on stock option exercises will depend upon the future
performance of OpenROUTE common stock and the date on which the options are
exercised.
(D) All options are incentive stock options that were granted on July 6, 1998,
of which options to purchase 20,400 shares were exercisable on the grant
date and the balance become exercisable in 16 equal quarterly installments
commencing 90 days from the date of grant.
(E) All options are incentive stock options that were granted on November 3,
1998, of which options to purchase 66,266 shares were exercisable on the
grant date and the balance become exercisable in 16 quarterly installments
commencing 90 days from the date of grant.
95
<PAGE>
(F) All options are incentive stock options that were granted on July 22, 1998
and become exercisable in 16 equal quarterly installments commencing 90
days from the date of grant. Following the termination of Mr. Shedd's
employment on June 11, 1999, 40,625 of such options expired unexercised.
(G) All options are incentive stock options that were granted on November 3,
1998 and become exercisable in 16 equal quarterly installments commencing
90 days from the date of grant. Following the termination of Mr. Shedd's
employment on June 11, 1999, 35,000 of such options expired unexercised.
(H) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options were exercisable for 3,750
shares on the date of grant and for an additional 3,750 share each on
February 22, 1999; February 22, 2000 and February 22, 2001.
(I) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options were exercisable for 2,500
shares on the date of grant and for an additional 1,250 shares each on
August 7, 1999 and August 7, 2000.
(J) All options are non-qualified stock options that were granted on February
11, 1998 in exchange for cancellation of options with an exercise price
greater than $1.90 per share. These substitute options were fully
exercisable on the date of grant.
(K) All options are non-qualified stock options that were granted on February
11, 1998 in exchange for cancellation of options with an exercise price
greater than $1.90 per share. These substitute options were exercisable for
7,500 shares on the date of grant and become exercisable for an additional
2,500 shares on May 15, 1999.
(L) All options are non-qualified stock options that were granted on February
11, 1998 in exchange for cancellation of options with an exercise price
greater than $1.90 per share. These substitute options were exercisable for
2,500 shares on the grant date and become exercisable for an additional
1,250 shares each on April 25, 1999 and April 25, 2000.
(M) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options were exercisable for 2,500
shares on the grant date and become exercisable for an additional 2,500
shares each on July 3, 1999; July 3, 2000 and July 3, 2001.
(N) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options were exercisable for 2,500
shares on the grant date and become exercisable for an additional 2,500
shares each on August 10, 1999; August 10, 2000 and August 10, 2001.
(O) All options are incentive stock options that were granted on July 22, 1998.
All such options are exercisable at a rate of 25% per year commencing on
July 22, 1999.
(P) All options are incentive stock options that were granted on November 3,
1998. All such options are exercisable in 16 equal quarterly installments
commencing 90 days from the date of grant.
(Q) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options were exercisable for 1,337
shares on the grant date and would have become exercisable for an
additional 17,500 shares on January 24, 2001. Following the termination of
Mr. Capone's employment by OpenROUTE on July 6, 1998, 18,837 of such
options expired unexercised.
(R) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options were exercisable for 28,125
shares on the grant date and would have become exercisable for an
additional 3,125 shares on August 23, 1998; 3,125 shares on November 23,
1998 and 611 shares on February 23, 1999. Following the termination of Mr.
Capone's employment by OpenROUTE on July 6, 1998, 14,986 of such options
expired unexercised.
(S) All options are non-qualified stock options that were granted on February
11, 1998 in exchange for cancellation of options with an exercise price
greater than $1.90 per share. These substitute options were exercisable for
13,663 shares on the grant date and would have become exercisable for an
additional 2,500
96
<PAGE>
shares each on October 24, 1998; January 24, 1999 and April 24, 1999.
Following the termination of Mr. Capone's employment by OpenROUTE on July 6,
1998, 21,163 of such options expired unexercised.
(T) All options are non-qualified stock options that were granted on February
11, 1998 in exchange for cancellation of options with an exercise price
greater than $1.90 per share. These substitute options were exercisable in
full on the date of grant. Following the termination of Mr. Capone's
employment by OpenROUTE on July 6, 1998, 315,250 of such options expired
unexercised.
(U) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options were exercisable in full on
the date of grant. Following the termination of Mr. Capone's employment by
OpenROUTE on July 6, 1998, 250 of such options expired unexercised.
(V) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options would have become
exercisable for 2,514 shares on February 23, 1999 and 3,125 shares
quarterly commencing on May 23, 1999. Following the termination of Mr.
Capone's employment by OpenROUTE on July 6, 1998, 15,014 of such options
expired unexercised.
(W) All options are non-qualified stock options that were granted on February
11, 1998 in exchange for cancellation of options with an exercise price
greater than $1.90 per share. These substitute options were exercisable for
7,475 shares on the grant date and would have become exercisable for an
additional 2,675 shares on February 10, 1999 and 3,125 shares on May 10,
1999. Following the termination of Mr. Capone's employment by OpenROUTE on
July 6, 1998, 13,275 of such options expired unexercised.
(X) All options are non-qualified stock options that were granted on February
11, 1998 in exchange for cancellation of options with an exercise price
greater than $1.90 per share. These substitute options were exercisable for
5,025 shares on the grant date and would have become exercisable for an
additional 3,125 shares each on November 10, 1998 and 450 shares on
February 10, 1999. Following the termination of Mr. Capone's employment by
OpenROUTE on July 6, 1998, 8,600 of such options expired unexercised.
(Y) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options would have been exercisable
in four annual installments of 625 shares each commencing on April 22,
1999. Following the termination of Mr. Capone's employment by OpenROUTE on
July 6, 1998, 2,500 of such options expired unexercised.
(Z) All options are incentive stock options that were granted on February 11,
1998 in exchange for cancellation of options with an exercise price greater
than $1.90 per share. These substitute options would have become
exercisable quarterly commencing on August 10, 1999. Following the
termination of Mr. Capone's employment by OpenROUTE on July 6, 1998, 28,125
of such options expired unexercised
Option Exercises and Year-End Values
The following table summarizes option exercises during 1998 by the Named
OpenROUTE Officers and the value of the options held by such persons at the end
of 1998:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Value of Unexercised
Acquired Unexercised Options In-the-Money Options
On Value at Fiscal Year-End (#) at Fiscal Year-End ($)(A)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bryan R. Holley......... 0 0 107,266 351,734 84,391 222,263
Robert A. Koch.......... 0 0 28,250 121,750 0 55,213
Daniel J. Capone, Jr.... 4,687 966 386,125 0 0 0
Steven T. Shedd......... 0 0 18,125 131,875 1,466 58,224
Kenneth W. Hovaldt...... 0 0 0 0 0 0
</TABLE>
97
<PAGE>
Compensation of Directors
During 1998, OpenROUTE paid Dr. Clark and Dr. Glorioso, two of its
nonemployee directors, an annual fee of $10,000 for their services as
directors. OpenROUTE's current policy is to pay this fee, on an annual basis,
to all of its nonemployee directors. In addition, during 1998, Dr. Clark, Dr.
Glorioso, Mr. Liebermann and Mr. Salwen received, and it is OpenROUTE's current
policy that all of its nonemployee directors will receive, $1,000 for each
board of directors meeting attended and $1,000 for each Audit Committee and/or
Compensation Committee meeting attended if such committee meeting was not on
the same day as a board of directors meeting. During 1998, OpenROUTE also
reimbursed those directors who requested such reimbursement for the expense of
attending meetings, including airfare, hotel and auto/travel mileage.
Pursuant to the OpenROUTE 1991 Restated Stock Option Plan, all nonemployee
directors who first become directors on or after May 14, 1992 are entitled to
be granted an option to purchase 5,000 shares of OpenROUTE common stock at the
then calculated fair market value (a "Director Option"). Director Options
become exercisable over four years at the rate of 25% per year and terminate
ten years after the grant date, so long as the individual remains a director.
Director Options terminate 90 days after the individual ceases to be a
director, unless the directorship is terminated as a result of the director's
removal from the boards of directors for cause (as defined), in which event the
options terminate immediately. Pursuant to an amendment to the OpenROUTE 1991
Restated Stock Option Plan adopted in November 1998, directors may be granted
non-qualified Options pursuant to the OpenROUTE 1991 Restated Stock Option Plan
in addition to the Director Options.
Employment and Severance Arrangements
Bryan R. Holley was appointed President and Chief Executive Officer of
OpenROUTE on July 6, 1998. In accordance with Mr. Holley's employment contract,
Mr. Holley currently receives a base salary of $275,000 per year. Mr. Holley
was paid a base salary of $125,000 and received a bonus of $63,693 in fiscal
year 1998. In 1998, Mr. Holley was eligible to participate in OpenROUTE's
Incentive Bonus Plan, which provides for the payment of cash bonuses as a
function of achievement by OpenROUTE of goals developed by the board of
directors. Mr. Holley's participation in the Incentive Bonus Plan is at the 50%
level. The Incentive Bonus Plan also provides for higher or lower bonuses
corresponding to the extent to which OpenROUTE achieves more or less than 100%
of the goals established by the board of directors. During 1998, Mr. Holley was
also granted options to purchase a total of 459,000 shares of OpenROUTE common
stock pursuant to the OpenROUTE 1991 Restated Stock Option Plan. Stock options
were granted at fair market value on the date of grant. In the event Mr.
Holley's employment is terminated by OpenROUTE for any reason other than
"cause," he will be entitled to receive his then current base compensation for
an additional 12 months as well as the continuation of certain benefits for a
ten month period and certain placement services. Mr. Holley's employment
contract also contains a 12-month noncompete provision.
For additional information concerning the severance arrangements applicable
to OpenROUTE's directors and executive officers, see "The Merger-Interests of
Officers and Directors in the Merger-Interests of OpenROUTE Board" and
"Interests of OpenROUTE Management."
Option Repricing
As a result of the diminution of the market price of the OpenROUTE common
stock in 1997 and the resulting deep reduction in the perceived value of stock
options held by employees, the Compensation Committee of the Board of Directors
determined that many previously granted stock options had lost much of their
value motivating employees to remain with OpenROUTE and share in its overall
financial goals. Consequently, the Compensation Committee of the Board of
Directors, in February 1998, pursuant to the authority granted under the
OpenROUTE 1991 Restated Stock Option Plan, voted to allow OpenROUTE employees
holding options to purchase shares with an option exercise price greater than
$1.90 per share to exchange those options for substitute options having a
reduced exercise price. On February 11, 1998, options for a total of 799,575
shares were surrendered by employees and exchanged for new options at the new
option exercise price.
98
<PAGE>
The following table sets forth information regarding all repricings of
options held by the Named OpenROUTE Officers during the last ten fiscal years.
<TABLE>
<CAPTION>
Number Of Exercise Original
Securities Price Option
Underlying Market Price Of At Time Of Term
Options Stock At Time Repricing Or New Remaining
Repriced Or Of Repricing Or Amendment Exercise And Time Of
Name Date Amended (#) Amendment ($) ($) Price ($) Repricing
- ---- ------- ----------- --------------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Koch.......... 2/11/98 15,000 1.31 2.92 (1.90) 8 yrs. 6 mos.
2/11/98 5,000 1.31 3.63 (1.90) 8 yrs. 7 mos
2/11/98 10,000 1.31 2.66 (1.90) 8 yrs. 11 mos.
2/11/98 10,000 1.31 2.53 (1.90) 9 yrs.
2/11/98 5,000 1.31 3.63 (1.90) 8 yrs. 7 mos.
2/11/98 10,000 1.31 3.63 (1.90) 8 yrs. 7 mos.
2/11/98 2,000 1.31 3.63 (1.90) 8 yrs. 7 mos.
9/16/96 5,000 3.63 6.63 (3.63) 9 yrs. 5 mos.
9/16/96 2,000 3.63 6.21 (3.63) 8 yrs. 2 mos.
9/16/96 10,000 3.63 6.21 (3.63) 8 yrs. 2 mos.
9/16/96 5,000 3.63 8.69 (3.63) 9 yrs. 1 mo.
Daniel J. Capone, Jr.... 2/11/98 315,250 1.31 3.13 (1.90) 6 yrs. 5 mos.
2/11/98 18,837 1.31 2.99 (1.90) 8 yrs. 5 mos.
2/11/98 21,163 1.31 2.99 (1.90) 8 yrs. 5 mos.
2/11/98 15,250 1.31 3.63 (1.90) 8 yrs. 7 mos.
2/11/98 15,014 1.31 3.63 (1.90) 8 yrs. 7 mos.
2/11/98 34,986 1.31 3.63 (1.90) 8 yrs. 7 mos.
2/11/98 13,275 1.31 2.53 (1.90) 8 yrs. 11 mos.
2/11/98 8,600 1.31 2.53 (1.90) 8 yrs. 11 mos.
2/11/98 28,125 1.31 2.53 (1.90) 8 yrs. 11 mos.
2/11/98 2,500 1.31 2.56 (1.90) 9 yrs. 8 mos.
9/16/96 7,000 3.63 11.80 (3.63) 5 yrs. 10 mos.
9/16/96 3,500 3.63 10.16 (3.63) 6 yrs. 4 mos.
9/16/96 5,250 3.63 6.00 (3.63) 6 yrs. 10 mos.
9/16/96 5,099 3.63 6.00 (3.63) 6 yrs. 10 mos.
9/16/96 4,250 3.63 12.05 (3.63) 6 yrs. 10 mos.
9/16/96 4,901 3.63 6.00 (3.63) 4 yrs. 10 mos.
9/16/96 500 3.63 12.05 (3.63) 6 yrs. 10 mos.
9/16/96 15,014 3.63 6.65 (3.63) 8 yrs. 11 mos.
9/16/96 34,986 3.63 6.65 (3.63) 8 yrs. 11 mos.
7/28/93 5,250 3.88 12.05 (6.00) 8 yrs. 6 mos.
7/28/93 10,000 3.88 15.68 (6.00) 8 yrs. 6 mos.
</TABLE>
99
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of November 1, 1999,
with respect to the beneficial ownership of OpenROUTE common stock by:
. each person known by OpenROUTE to own beneficially more than 5% of the
outstanding shares of OpenROUTE common stock;
. each director of OpenROUTE;
. each executive officer of OpenROUTE; and
. all directors and executive officers of OpenROUTE as a group.
<TABLE>
<CAPTION>
Number of
Shares Percentage of
Beneficially Common Stock
Beneficial Owner (1) Owned (2) Outstanding (3)
-------------------- ------------ ---------------
<S> <C> <C>
Howard C. Salwen (4).......................... 1,011,264 6.5%
C/o OpenROUTE Networks, Inc.
9 Technology Drive
Westborough, MA 01581
Bryan R. Holley (5)........................... 206,520 1.3
Dr. David Clark (6)........................... 55,000 *
Dr. Robert M. Glorioso (7).................... 11,250 *
Thomas R. Liebermann (8)...................... 30,000 *
James Norrod (9).............................. 35,625 *
Thomas A. Aucella (10)........................ 28,500 *
Henry Barber (11)............................. 18,750 *
Robert A. Koch (12)........................... 77,222 *
Bruce McAloney (13)........................... 29,125 *
Richard E. Sterry (14)........................ 62,875 *
All current executive officers and directors
as a group
(11 persons) (15)............................ 1,566,131 9.8
</TABLE>
- --------
* Less than 1%
(1) Addresses are given only for beneficial owners of more than five percent
of the OpenROUTE common stock. The stock ownership information has been
furnished to OpenROUTE by the named persons. Share ownership includes
shares of OpenROUTE common stock issuable upon exercise of certain
outstanding options as described in the footnotes below.
(2) The number of shares of common stock beneficially owned by each person is
determined under the rules of the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual has sole or shared voting power or
investment power and also any shares of OpenROUTE common stock which the
individual has the right to acquire within 60 days after November 1, 1999
through the exercise of any stock option or other right. The inclusion
herein of any shares of OpenROUTE common stock deemed beneficially owned
does not constitute an admission of beneficial ownership of those shares.
Unless otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares of OpenROUTE common
stock shown as beneficially owned by them.
(3) The number of shares outstanding includes 15,526,939 shares outstanding as
of November 1, 1999, plus any shares subject to options held by the person
or entity in question that are currently exercisable or exercisable within
60 days after November 1, 1999.
(4) Includes 125,164 shares owned by trusts of which Mr. Salwen is a trustee
for the benefit of his adult children, David J. Salwen and Andrea G.
Salwen. Mr. Salwen disclaims beneficial ownership of the 125,164 shares
held in trust, as to which he has no investment power. Also includes
10,000 shares which Mr. Salwen, Chairman of the OpenROUTE's board of
directors, may acquire upon the exercise of options within 60 days after
November 1, 1999.
100
<PAGE>
(5) Includes 200,520 shares that Mr. Holley, OpenROUTE's President and Chief
Executive Officer, may acquire upon the exercise of options within 60 days
after November 1, 1999.
(6) Includes 30,000 shares that Dr. Clark, a director of OpenROUTE, may
acquire upon the exercise of options within 60 days after November 1,
1999.
(7) Includes 5,625 shares that Dr. Glorioso, a director of OpenROUTE, may
acquire upon the exercise of options within 60 days after November 1,
1999.
(8) Includes 10,000 shares that Mr. Liebermann, a director of OpenROUTE, may
acquire upon exercise of options within 60 days after November 1, 1999.
(9) Includes 15,625 shares that Mr. Norrod, a director of OpenROUTE, may
acquire upon the exercise of options within 60 days after November 1,
1999.
(10) Includes 12,500 shares that Mr. Aucella, OpenROUTE's Vice President, Asia
Pacific Operations, may acquire upon the exercise of options within 60
days after November 1, 1999.
(11) Includes 18,750 shares that Mr. Barber, OpenROUTE's Chief Financial
Officer, may acquire upon the exercise of options within 60 days after
November 1, 1999.
(12) Includes 65,250 shares that Mr. Koch, OpenROUTE's Vice President,
Engineering and Customer Support, may acquire upon the exercise of options
within 60 days after November 1, 1999.
(13) Includes 28,125 shares that Mr. MacAloney, OpenROUTE's Vice President,
Sales, may acquire upon the exercise of options within 60 days after
November 1, 1999.
(14) Includes 46,875 shares that Mr. Sterry, OpenROUTE's Vice President,
Marketing, may acquire upon the exercise of options within 60 days after
November 1, 1999.
(15) Includes an aggregate of 443,270 shares that may be acquired upon the
exercise of options within 60 days after November 1, 1999.
101
<PAGE>
III. CERTAIN LEGAL INFORMATION
COMPARISON OF OPENROUTE AND NETRIX STOCKHOLDER RIGHTS
Upon consummation of the Merger, the stockholders of OpenROUTE will become
stockholders of Netrix, a Delaware corporation, and their rights will be
governed by Netrix's charter and by-laws which differ in certain material
respects from OpenROUTE's charter and by-laws. As stockholders of Netrix, the
rights of the former stockholders of OpenROUTE will be governed by the Delaware
General Corporation Law. Copies of the OpenROUTE charter, the OpenROUTE by-
laws, the Netrix charter and Netrix by-laws, in each case as in effect on the
date of this joint proxy statement/prospectus, are incorporated by reference
and will be sent to holders of shares of Netrix and OpenROUTE common stock upon
request. See "Where You Can Find More Information." The summary contained in
the following chart is not intended to be complete and is qualified by
reference to Delaware law, the OpenROUTE charter, the OpenROUTE by-laws, the
Netrix charter and the Netrix by-laws, in each case as in effect on the date of
this joint proxy statement/prospectus.
Summary of Material Differences Between Current Rights of OpenROUTE and Netrix
Stockholders and the Rights OpenROUTE Stockholders Will Have as Netrix
Stockholders Following the Merger
<TABLE>
<CAPTION>
Netrix Stockholder Rights OpenROUTE Stockholder Rights
---------------------------- ----------------------------
<S> <C> <C>
Authorized Capital Stock: The authorized capital stock The authorized capital stock
of Netrix consists of of OpenROUTE consists of
29,000,000 shares of common 30,000,000 shares of common
stock and 15,249,599 shares stock and 7,500,000 shares
of preferred stock. If of preferred stock.
Netrix stockholders approve
the merger, the authorized
capital stock will be
increased to 55,000,000
shares of common stock.
Number of Directors: The Netrix board currently The OpenROUTE board
consists of six directors currently consists of six
serving staggered three-year directors serving one-year
terms. terms.
Classification of The Netrix board is divided OpenROUTE does not currently
Board of Directors: into three classes as nearly have a classified board. The
equal in number of directors OpenROUTE by-laws currently
as possible, with each class require that all directors
serving a staggered three- be elected at each annual
year term. meeting of stockholders for
a term of one year.
Removal of Directors: Netrix directors may be OpenROUTE directors may be
removed at any time, with or removed (i) for cause, on
without cause, on the vote the vote of at least 80% of
of at least 66 2/3% of the the outstanding capital
outstanding capital stock stock entitled to vote for
then entitled to vote for the election of directors,
the election of directors. or (ii) with or without
cause, on the vote of at
least all but one of the
directors then serving other
than the director who is the
subject of the removal
action.
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
Netrix Stockholder Rights OpenROUTE Stockholder Rights
---------------------------- ----------------------------
<S> <C> <C>
Calling of Special Meetings The Netrix by-laws provide The OpenROUTE by-laws
of Stockholders: that a special meeting of provide that a special
the Netrix stockholders may meeting of the OpenROUTE
be called by the President, stockholders may be called
the Chairman of the Board of by the President, the
Directors or a majority of Chairman of the Board of
the members of the board of Directors or a majority of
directors. the members of the board of
directors or by the Clerk
upon application by one or
more stockholders entitled
to vote for the election of
directors if such
stockholder(s) hold (i) at
least 10% of the capital
stock entitled to vote at
the meeting if OpenROUTE
does not have a class of
voting stock registered
under the Securities
Exchange Act of 1934, as
amended, or (ii) at least
40% of the capital stock
entitled to vote at the
meeting if OpenROUTE has a
class of voting stock
registered under the
Securities Exchange Act of
1934.
Amendment of Charter and The by-laws of Netrix may be The by-laws of OpenROUTE may
By-laws: amended by a majority of the be amended by the vote of a
Netrix stockholders entitled majority of the members of
to vote at any regular or the board of directors
special meeting or by a unless the charter, by-laws
majority of the Netrix or law requires action by
board. stockholders, and by a
majority of the stockholders
entitled to vote except that
amendment or repeal of the
provision pertaining to the
removal of directors
requires approval by three-
fourths of the directors
then serving.
Board Approval of Certain Netrix charter and by-laws The OpenROUTE charter
Transactions: do not require board requires board approval of a
approval of a vote by vote by stockholders to
stockholders to sell, lease sell, lease or exchange
or exchange substantially substantially all or all of
all or all of the OpenROUTE's property and
corporation's property and assets, or to merge or
assets or to merge or consolidate the corporation
consolidate Netrix or any or any subsidiary into
subsidiary into any other another corporation.
corporation.
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
Netrix Stockholder Rights OpenROUTE Stockholder Rights
---------------------------- ----------------------------
<S> <C> <C>
Higher Vote Required to The Netrix charter does not The OpenROUTE charter
Approve Certain Business require approval of business requires, under certain
Combinations: combinations to be by a circumstances, that approval
higher number of of business combinations
stockholders than other involving an Interested
matters submitted to Stockholder be by at least
stockholders for a vote. 80% of the outstanding
shares of capital stock
entitled to vote for the
election of directors unless
certain approval, price and
procedural requirements are
met.
Stockholder Action by The stockholders of Netrix The stockholders of
Written Consent: may not take any action by OpenROUTE may not take any
written consent in lieu of a action by written consent in
meeting of stockholders. lieu of a meeting of
stockholders.
</TABLE>
104
<PAGE>
DESCRIPTION OF NETRIX CAPITAL STOCK
The following summary of the terms of the capital stock of Netrix prior to
and after completion of the merger is not meant to be complete and is qualified
by reference to the Netrix charter and Netrix by-laws. Copies of the Netrix
charter and Netrix by-laws are incorporated by reference and will be sent to
holders of shares of Netrix common stock and OpenROUTE common stock upon
request. See "Where You Can Find More Information."
Authorized Capital Stock
Under the Netrix charter, Netrix's authorized capital stock consists of
29,000,000 shares of Netrix common stock, $0.05 par value, and 15,249,599
shares of preferred stock, $0.05 par value. In conjunction with the merger, the
number of shares of Netrix common stock will be increased to 55,000,000 shares
and the number of shares of preferred stock will be reduced to 1,000,000.
Netrix Common Stock
Netrix Common Stock Outstanding. The outstanding shares of Netrix common
stock are, and the shares of Netrix common stock issued pursuant to the mergers
will be, duly authorized, validly issued, fully paid and nonassessable. At
November 16, 1999, there were 11,976,821 shares of Netrix common stock
outstanding.
Voting Rights. Each holder of Netrix common stock is entitled to one vote for
each share of Netrix common stock held of record on the applicable record date
on all matters submitted to a vote of stockholders.
Dividend Rights; Rights Upon Liquidation. The holders of Netrix common stock
are entitled to receive, from funds legally available for the payment thereof,
dividends when and as declared by resolution of the Netrix board, subject to
any preferential dividend rights granted to the holders of any outstanding
Netrix preferred stock. In the event of liquidation, each share of Netrix
common stock is entitled to share pro rata in any distribution of Netrix's
assets after payment or providing for the payment of liabilities and the
liquidation preference of any outstanding Netrix preferred stock.
Preemptive Rights. Holders of Netrix common stock have no preemptive rights
to purchase, subscribe for or otherwise acquire any unissued or treasury shares
or other securities.
Netrix Preferred Stock
Of the 15,249,599 shares of authorized preferred stock, only 1,000,000 shares
may be issued. The remainder of the shares were previously outstanding shares
of preferred stock which, by their terms, may not be reissued. Of the 1,000,000
shares of preferred stock available for issuance, 225,459 were outstanding on
November 16, 1999.
Blank check Preferred Stock. The 1,000,000 shares of preferred stock
available for issuance may be issued from time to time by the Netrix board
without stockholder approval. The Netrix board has the authority to create one
or more classes or series within a class of preferred stock, to issue shares of
preferred stock in such class or series up to the maximum number of shares of
the relevant class or series of preferred stock authorized, and to determine
the preferences, rights, privileges and restrictions of any such class or
series, including the dividend rights, voting rights, the rights and terms of
redemption, the rights and terms of conversion, liquidation preferences, the
number of shares constituting any such class or series and the designation of
such class or series. Acting under this authority, the Netrix board could
create and issue a class or series of preferred stock with rights, privileges
or restrictions, and adopt a stockholder rights plan, having the effect of
discriminating against an existing or prospective holder of securities as a
result of such stockholder beneficially owning or commencing a tender offer for
a substantial amount of Netrix common stock. One of the effects of authorized
but unissued and unreserved shares of capital stock may be to render more
difficult or discourage an attempt by a potential acquiror to obtain control of
Netrix by means of a merger, tender offer,
105
<PAGE>
proxy contest or otherwise, and thereby protect the continuity of Netrix's
management. The issuance of such shares of capital stock may have the effect of
delaying, deferring or preventing a change in control of Netrix without any
further action by the stockholders of Netrix. Netrix has no present intention
to adopt a stockholder rights plan, but could do so without stockholder
approval at any future time.
The 225,459 shares of preferred stock outstanding have been designated as
Series A 8% convertible preferred stock. The preferred stock is convertible
into common stock at a conversion price of $2.75 per share. The conversion
price of the Series A preferred stock will be proportionately adjusted if
Netrix undertakes a stock split, stock consolidation or stock dividend with
respect to the Netrix common stock. Each share of Series A preferred stock has
a liquidation preference equal to its purchase price, plus accrued but unpaid
dividends. Dividends are cumulative from May 14, 1999 and are payable semi-
annually, in arrears, on April 30 and October 31 of each year. Dividends are
payable in cash or in shares of Netrix common stock at Netrix's election. The
Series A preferred stock is redeemable by Netrix at any time after the closing
bid price for the Netrix common stock on the Nasdaq stock market has equaled or
exceeded $6.00 per share for 10 consecutive trading days. The redemption price
is $17.50 per share plus accrued but unpaid dividends to the redemption date.
Except to the extent required by law, the preferred stock does not have voting
rights.
Transfer Agent and Registrar
Equiserve is the transfer agent and registrar for the Netrix common stock.
The Nasdaq National Market Listing; Delisting and Deregistration of OpenROUTE
Common Stock
It is a condition to the merger that the shares of Netrix common stock
issuable in the merger be approved for quotation on The Nasdaq National Market,
subject to official notice of issuance. If the merger is completed, OpenROUTE
common stock will cease to be listed on The Nasdaq National Market.
106
<PAGE>
DESCRIPTION OF OPENROUTE CAPITAL STOCK
The following summary of the terms of the capital stock of OpenROUTE prior to
completion of the merger is not meant to be complete and is qualified by
reference to the OpenROUTE charter and OpenROUTE by-laws. Copies of the
OpenROUTE charter and OpenROUTE by-laws are incorporated by reference and will
be sent to holders of shares of OpenROUTE common stock and Netrix common stock
upon request. See "Where You Can Find More Information."
Authorized Capital Stock
Under the OpenROUTE charter, OpenROUTE's authorized capital stock consists of
30,000,000 shares of common stock, $0.01 par value, and 7,500,000 shares of
preferred stock, $0.01 par value. If the merger is completed, the corporate
existence of OpenROUTE will terminate and it will cease to have any authorized
capital stock.
OpenROUTE Common Stock
OpenROUTE Common Stock Outstanding. As of November 16, 1999, 15,527,189
shares of OpenROUTE common stock were outstanding. The outstanding shares of
OpenROUTE common stock are duly authorized, validly issued, fully paid and
nonassessable.
Voting Rights. Each holder of OpenROUTE common stock is entitled to one vote
for each share of OpenROUTE common stock held of record on the applicable
record date on all matters submitted to a vote of stockholders.
Dividend Rights; Rights Upon Liquidation. The holders of OpenROUTE common
stock are entitled to receive, from funds legally available for the payment
thereof, dividends when and as declared by resolution of the OpenROUTE board,
subject to any preferential dividend rights granted to the holders of any
outstanding OpenROUTE preferred stock. In the event of liquidation, each share
of OpenROUTE common stock is entitled to share pro rata in any distribution of
OpenROUTE's assets after payment or providing for the payment of liabilities
and the liquidation preference of any outstanding OpenROUTE preferred stock.
Preemptive Rights. Holders of OpenROUTE common stock have no preemptive
rights to purchase, subscribe for or otherwise acquire any unissued or treasury
shares or other securities.
OpenROUTE Preferred Stock
OpenROUTE Preferred Stock Outstanding. As of November 16, 1999, no shares of
OpenROUTE preferred stock were issued and outstanding.
Blank Check Preferred Stock. Under the OpenROUTE charter, the OpenROUTE board
has the authority, without stockholder approval, to create one or more classes
or series within a class of preferred stock, to issue shares of preferred stock
in such class or series up to the maximum number of shares of the relevant
class or series of preferred stock authorized, and to determine the
preferences, rights, privileges and restrictions of any such class or series,
including the dividend rights, voting rights, the rights and terms of
redemption, the rights and terms of conversion, liquidation preferences, the
number of shares constituting any such class or series and the designation of
such class or series. Acting under this authority, the OpenROUTE board could
create and issue a class or series of preferred stock with rights, privileges
or restrictions, and adopt a stockholder rights plan, having the effect of
discriminating against an existing or prospective holder of securities as a
result of such stockholder beneficially owning or commencing a tender offer for
a substantial amount of OpenROUTE common stock. One of the effects of
authorized but unissued and unreserved shares of capital stock may be to render
more difficult or discourage an attempt by a potential acquiror to obtain
control of OpenROUTE by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of
107
<PAGE>
OpenROUTE's management. The issuance of such shares of capital stock may have
the effect of delaying, deferring or preventing a change in control of
OpenROUTE without any further action by the stockholders of OpenROUTE.
OpenROUTE has no present intention to adopt a stockholder rights plan, but
could do so without stockholder approval at any future time.
Transfer Agent and Registrar
Equiserve is the transfer agent and registrar for the OpenROUTE common stock.
The Nasdaq National Market Listing; Delisting of OpenROUTE Common Stock
The OpenROUTE common stock currently is listed on The Nasdaq National Market.
If the merger is completed, OpenROUTE common stock will cease to be listed on
The Nasdaq National Market.
108
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Joint Proxy Statement/Prospectus that are
not historical facts are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995), which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Management of Netrix and
OpenROUTE wish to caution the reader that the forward-looking statements
referred to above and contained in this Joint Proxy Statement/Prospectus
regarding matters that are not historical facts involve predictions. No
assurance can be given that the future results will be achieved as actual
events or results may differ materially as a result of risks facing Netrix and
OpenROUTE. Such risks include, but are not limited to, changes in business
conditions, changes in the telecommunications industry and the general economy,
competition, changes in service offerings and risks associated with Netrix's
and OpenROUTE's limited operating history as a combined company, entry into
developing markets (including that resulting from the merger), managing rapid
growth (including that resulting from the merger), international operations
(including that resulting from the merger), effects of natural disasters,
dependence on sole or limited source suppliers, dependence on effective
information systems and development networks, as well as regulatory
developments that could cause actual results to vary materially from the future
results indicated, expressed or implied in such forward-looking statements. See
"Risk Factors."
LEGAL MATTERS
The validity of the Netrix common stock to be issued to OpenROUTE
stockholders in the merger will be passed upon by Kelley Drye & Warren LLP,
counsel to Netrix. It is a condition to the completion of the merger that
Netrix and OpenROUTE each receive an opinion from its counsel that the merger
will qualify as a tax-free reorganization.
EXPERTS
The consolidated financial statements and schedule of Netrix and its
subsidiaries as of December 31, 1997 and 1998 and for each of the years in the
three year period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the report of Arthur Andersen, LLP,
independent certified public accountants appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing. The financial
statements as of December 31, 1997 and 1998, and for the three years ended
December 31, 1998, included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen, LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The consolidated financial statements of OpenROUTE and its subsidiaries as of
December 31, 1998 and for the year then ended, have been audited by and
included herein and elsewhere in the registration statement in reliance upon
the report of BDO Seidman, LLP, independent certified public accountants and
upon the authority of said firm as experts in accounting and auditing. The
report of BDO Seidman, LLP includes an explanatory paragraph discussing an
uncertainty as to the Company's ability to continue as a going concern.
The consolidated financial statements and schedule of OpenROUTE and its
subsidiaries as of December 31, 1996 and 1997, and for each year in the two
year period ended December 31, 1997, (except as to the segment information for
the years ended December 31, 1996 and 1997 presented in Note 8), have been
included herein and in the registration statement in reliance upon the report
of PricewaterhouseCoopers, LLP, independent certified public accountants
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing. The financial statements as of December 31, 1996 and
1997, and for the two years ended December 31, 1997, included in this
prospectus and elsewhere in the registration statement have been audited by
PricewaterhouseCoopers, LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
109
<PAGE>
IV. ADDITIONAL INFORMATION FOR STOCKHOLDERS
FUTURE STOCKHOLDER PROPOSALS
Netrix
Stockholder proposals submitted for inclusion in the proxy statement to be
issued in connection with Netrix's 2000 annual meeting of stockholders must be
mailed to the Secretary, Netrix Corporation, 13595 Dulles Technology Drive,
Herndon, Virginia 20171, and must be received by the Secretary on or before
March 29, 2000. In addition, stockholder proposals for presentation at the 2000
Annual Meeting must also be received on or before March 29, 2000.
Netrix's by-laws provide, in general, that if a stockholder intends to
propose business or make a nomination for the election of directors at an
annual meeting, Netrix must receive notice of that intention at least 120 days
prior to the first anniversary of the preceding year's annual meeting. If the
date of the meeting is changed more than 30 days from the prior anniversary
date, notice must be delivered ten days following the day on which notice of
the annual meeting is first mailed to stockholders. The notice must include all
information relating to the proposed nominee required by the SEC to be
disclosed in solicitations of proxies for election of directors or, in the case
of a proposal, a brief description of the proposal, and any material interest
of the stockholder in the proposal. The notice must include:
. the name and address of the stockholder giving the notice and any other
stockholders known by such stockholder to be supporting the nominees or
proposal, and
. the class and number of shares of Netrix that are owned beneficially by
the stockholder and by any other stockholders know by the stockholder to
be supporting such nominee or proposal.
The foregoing is only a summary of detailed provisions of Netrix's by-laws,
and if you are considering making a nomination or proposal to be presented at
the 2000 annual meeting, we urge you to review the Netrix bylaws in their
entirety.
OpenROUTE
OpenROUTE will hold an annual meeting in the year 2000 only if the merger has
not already been completed. If such meeting is held, the deadline for receipt
of a proposal to be considered for inclusion in OpenROUTE's proxy statement for
the 2000 annual meeting is December 20, 1999. Any such notice of a proposal
should be directed to the attention of the Clerk, OpenROUTE Networks, Inc.,
Nine Technology Drive, Westborough, Massachusetts 01581.
110
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Netrix and OpenROUTE file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information Netrix and OpenROUTE file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Netrix and OpenROUTE SEC filings are also available to
the public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
Netrix filed a registration statement on Form S-4 to register with the SEC
the Netrix common stock to be issued to OpenROUTE stockholders in the merger.
This joint proxy statement/prospectus is a part of that registration statement
and constitutes a prospectus of Netrix in addition to being a proxy statement
of Netrix and OpenROUTE for their respective meetings. As allowed by SEC rules,
this joint proxy statement/prospectus does not contain all the information you
can find in the registration statement or the exhibits to the registration
statement.
You may request a copy of Netrix's annual, quarterly and special reports,
proxy statements and other information, at no cost, by writing or telephoning
Netrix at the following address:
Netrix Corporation OpenROUTE Networks, Inc.
Attention: Investor Relations Attention: Investor Relations
13595 Dulles Technology Drive Nine Technology Drive
Herndon, VA 20171 Westborough, MA 01581
Telephone: (703) 742-6000 Telephone: (508) 898-2800
Netrix has supplied all information contained in this joint proxy
statement/prospectus relating to Netrix and OpenROUTE has supplied all such
information relating to OpenROUTE.
You should rely only on the information contained in this joint proxy
statement/prospectus to vote on the Netrix proposals and the OpenROUTE
proposal, as the case may be. Neither Netrix nor OpenROUTE has authorized
anyone to provide you with information that is different from what is contained
in this joint proxy statement/prospectus. This joint proxy statement/prospectus
is dated November 19, 1999. You should not assume that the information
contained in the joint proxy statement/prospectus is accurate as of any date
other than that date, and neither the mailing of this joint proxy
statement/prospectus to stockholders nor the issuance of Netrix common stock in
the merger shall create any implication to the contrary.
111
<PAGE>
INDEX TO NETRIX FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NETRIX AND SUBSIDIARIES
Independent Auditors' Report............................................ FN-2
Netrix Consolidated Balance Sheets as of December 31, 1998 and 1997..... FN-3
Netrix Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996....................................... FN-4
Netrix Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996....................... FN-5
Netrix Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................................... FN-6
Notes to Netrix Consolidated Financial Statements....................... FN-7
Netrix Condensed Consolidated Balance Sheets (Unaudited)................ FN-17
Netrix Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 1999 and September 30, 1998 (Unaudited)..... FN-18
Netrix Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and September 30, 1998 (Unaudited)..... FN-19
Notes to Netrix Condensed Consolidated Financial Statements
(Unaudited)............................................................ FN-20
</TABLE>
FN-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders of Netrix Corporation:
We have audited the accompanying consolidated balance sheets of Netrix
Corporation (a Delaware corporation) and subsidiaries (together the "Company")
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' 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 an 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Netrix Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, DC
April 14, 1999
FN-2
<PAGE>
NETRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In Thousands
Except Per Share
Amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,488 $ 2,758
Accounts receivable, net of allowance for doubtful
accounts of $796 and $1,505, respectively............... 7,499 6,212
Inventory................................................ 5,265 8,035
Other assets............................................. 472 713
-------- --------
Total current assets................................... 15,724 17,718
Property and equipment, net of accumulated depreciation and
amortization of $20,473 and $18,016, respectively......... 3,823 4,969
Deposits and other assets.................................. 165 543
Goodwill, net of accumulated amortization of $1,712 and
$1,447, respectively...................................... 529 794
-------- --------
$ 20,241 $ 24,024
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit........................................... $ 2,167 $ 1,147
Accounts payable......................................... 3,011 3,002
Accrued liabilities...................................... 2,946 3,298
-------- --------
Total current liabilities.............................. 8,124 7,447
Other liabilities.......................................... -- 97
-------- --------
Total liabilities...................................... 8,124 7,544
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $0.05 par value; 15,000,000 shares
authorized; 11,490,000 and 9,593,253 shares issued and
outstanding, respectively............................... 575 480
Warrants................................................. 257 --
Additional paid-in capital............................... 57,679 55,774
Accumulated comprehensive loss........................... (120) (17)
Accumulated deficit...................................... (46,274) (39,757)
-------- --------
Total stockholders' equity............................. 12,117 16,480
-------- --------
$ 20,241 $ 24,024
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FN-3
<PAGE>
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1998 1997 1996
------- ------- -------
(In Thousands, Except
Per Share Amounts)
<S> <C> <C> <C>
Revenues:
Product.......................................... $21,840 $22,474 $32,434
Service.......................................... 9,642 10,613 11,201
------- ------- -------
Total revenues................................. 31,482 33,087 43,635
------- ------- -------
Cost of revenues:
Product.......................................... 10,939 11,395 14,700
Service.......................................... 5,155 7,045 7,363
------- ------- -------
Total cost of revenues......................... 16,094 18,440 22,063
------- ------- -------
Gross profit................................... 15,388 14,647 21,572
------- ------- -------
Operating expenses:
Sales and marketing.............................. 9,292 10,120 11,632
Research and development......................... 6,771 8,323 11,079
General and administrative....................... 4,324 4,002 4,266
Restructuring charge............................. -- 875 900
Bad debt expense................................. 1,489 100 0
------- ------- -------
Loss from operations........................... (6,488) (8,773) (6,305)
Interest and other, net............................ (29) 196 403
------- ------- -------
Loss before income taxes....................... (6,517) (8,577) (5,902)
Provision for income taxes......................... -- -- (66)
------- ------- -------
Net loss........................................... $(6,517) $(8,577) $(5,968)
======= ======= =======
Other comprehensive gain (loss).................... (103) 35 (83)
------- ------- -------
Comprehensive Loss................................. $(6,620) $(8,542) $(6,051)
======= ======= =======
Basic and diluted net loss per share............... $ (0.60) $ (0.90) $ (0.63)
======= ======= =======
Basic and diluted weighted average shares
outstanding....................................... 10,891 9,553 9,468
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FN-4
<PAGE>
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Accumulated
Common Paid-in Comprehensive Accumulated
Stock Capital Warrants Loss Deficit Total
------ ---------- -------- ------------- ----------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... $472 $55,105 $-- $ 31 $(25,212) $30,396
---- ------- ---- ----- -------- -------
Stock options
exercised.............. 2 218 -- -- -- 220
Employee stock purchase
plan................... 2 144 -- -- -- 146
Retire escrow shares.... -- (36) -- -- -- (36)
Compensation element of
stock options.......... -- 172 -- -- -- 172
Net change in unrealized
investment holding
loss................... -- -- -- (49) -- (49)
Cumulative translation
adjustment............. -- -- -- (34) -- (34)
Net loss................ -- -- -- -- (5,968) (5,968)
---- ------- ---- ----- -------- -------
Balance, December 31,
1996................... 476 55,603 -- (52) (31,180) 24,847
---- ------- ---- ----- -------- -------
Stock options
exercised.............. 3 134 -- -- -- 137
Employee stock purchase
plan................... 1 37 -- -- -- 38
Net change in unrealized
investment holding
gain................... -- -- -- 7 -- 7
Cumulative translation
adjustment............. -- -- -- 28 -- 28
Net loss................ -- -- -- -- (8,577) (8,577)
---- ------- ---- ----- -------- -------
Balance, December 31,
1997................... 480 55,774 -- (17) (39,757) 16,480
---- ------- ---- ----- -------- -------
Stock options
exercised.............. 2 59 -- -- -- 61
Proceeds from private
placement, net......... 88 1,988 -- -- -- 2,076
Warrants issued in
connection with private
placement.............. -- (257) 257 -- -- --
Employee stock purchase
plan................... 5 115 -- -- -- 120
Cumulative translation
adjustment............. -- -- -- (103) -- (103)
Net loss................ -- -- -- -- (6,517) (6,517)
---- ------- ---- ----- -------- -------
Balance, December 31,
1998................... $575 $57,679 $257 $(120) $(46,274) $12,117
==== ======= ==== ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FN-5
<PAGE>
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(6,517) $(8,577) $(5,968)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 2,722 3,338 3,602
Stock compensation expense....................... -- -- 172
Changes in assets and liabilities
Accounts receivable............................ (1,287) 5,437 (597)
Inventories.................................... 2,770 82 505
Other current assets........................... 241 298 (49)
Deposits and other assets...................... 378 (299) 38
Accounts payable............................... 9 (457) (1,485)
Accrued liabilities............................ (352) (1,280) 224
Other liabilities.............................. (97) (278) (248)
------- ------- -------
Net cash used in operating activities........ (2,133) (1,736) (3,806)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.............. -- (2,473) (9,395)
Sales and maturities of short-term investments... -- 7,823 11,320
Purchases of property and equipment.............. (1,311) (1,665) (2,059)
------- ------- -------
Net cash provided by (used in) investing
activities.................................. (1,311) 3,685 (134)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under line of credit, net.............. 1,020 393 4
Principal payments of long-term debt............. -- (481) (80)
Proceeds from private placement.................. 2,076 -- --
Proceeds from exercise of stock options.......... 61 137 220
Proceeds from employee stock purchase plan....... 120 38 146
------- ------- -------
Net cash provided by financing activities.... 3,277 87 290
------- ------- -------
Effect of foreign currency exchange rate changes on
cash and cash equivalents......................... (103) 35 (33)
Net increase (decrease) in cash and cash
equivalents....................................... (270) 2,071 (3,683)
Cash and cash equivalents, beginning of period..... 2,758 687 4,370
------- ------- -------
Cash and cash equivalents, end of period........... $ 2,488 $ 2,758 $ 687
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........... $ 183 $ 117 $ 139
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FN-6
<PAGE>
NOTES TO NETRIX CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Netrix develops, manufactures, markets, and supports networking equipment for
voice, data, and image networks. Netrix's products are designed to transport
voice over data networks to enable its customers to realize cost savings.
Netrix was incorporated in 1985. Netrix conducts operations in the United
Kingdom and Hong Kong through its wholly owned subsidiary, Netrix International
Corporation (a Delaware corporation), and in Germany, and Italy through its
wholly owned subsidiaries Netrix GmbH and Netrix S.r.l., respectively.
These consolidated financial statements include the accounts of Netrix and
its subsidiaries. All significant intercompany transactions have been
eliminated.
Risks and Other Important Factors. For the years ended December 31, 1998 and
1997, Netrix experienced declining revenues and net losses of approximately
$6.5 million and $8.6 million respectively, due to declining sales of Netrix's
mature products which were partially offset by increases in sales of new
products, the Network Exchange product line. As a result, Netrix's tangible net
worth decreased from $15.7 million at December 31, 1997 to $11.2 million at
December 31, 1998. Netrix's line of credit agreement requires it to maintain a
tangible net worth of at least $13.5 million measured at the end of each month.
Since October 31, 1998 Netrix has been in violation of this covenant. This
covenant violation allows Netrix's lending institution to call for collection
of the outstanding loan balance. As of April 12, 1999 the lending institution
had not exercised this right. On April 12, 1999 the lending institution granted
Netrix a waiver of the current and past months' covenant violations and waived
its right to call the line of credit for these covenant violations. The lending
institution amended the line of credit agreement to measure Netrix's tangible
net worth on a quarterly basis and set the minimum tangible net worth covenant
at $9.8 million as of March 31, 1999 and $9.0 million for all subsequent
quarters. Management believes that this new covenant will be adequate for
Netrix to operate under in the foreseeable future. However, there can be no
assurances that Netrix will not violate the new covenant or that the
outstanding loan balance will not be called by the lending institution upon
violation of the new covenant. See Note 4.
The success and the future of Netrix is dependent on its ability to generate
net income or to increase its net worth by the sale of additional equity.
Netrix's ability to generate net income is in large part dependent on its
success at increasing sales of its new products and/or controlling costs.
Netrix's plan to increase revenues through sales of its Network Exchange
product line is continuing to evolve in order to exploit new marketing
channels; however, due to market conditions, competitive pressures, and other
factors beyond its control, Netrix has been unable to achieve sufficient
incremental growth in new product sales to replace the decline in mature
product sales and there can be no assurances that Netrix will be able to
adequately increase new product sales in the future.
For the years ended December 31, 1998 and 1997, Netrix's operating activities
used approximately $2.1 million and $1.7 million of cash, respectively. The
cash used by operations was primarily due to continued net losses from
operations. The success of Netrix is also dependent on its ability to generate
adequate cash for operations and capital needs. At December 31, 1998, Netrix
had approximately $2.5 million in cash and cash equivalents with approximately
$2.2 million outstanding of the $2.4 million available under the line of credit
agreement. Netrix is relying on future sales and the collection of the related
accounts receivable to meet its cash obligations. Netrix may be unable to meet
these obligations as they become due and may be required to curtail its
operations. If Netrix is required to curtail its operations there can be no
assurances that the carrying value of Netrix's assets will be fully realized.
Netrix may have to generate additional equity or cash through other means,
which may include the sale of assets, including intellectual property and
proprietary technology, the sale of equity, additional borrowings, the sale of
selected operations, or one or more strategic partnerships. Although Netrix
believes it has the ability to generate additional equity and cash through
sales, such sales may be dilutive and there can be no assurances that adequate
funds will be available, or available on terms that are reasonable or
acceptable to Netrix. If Netrix
FN-7
<PAGE>
is unable to generate additional equity and adequate cash, there will be a
material and adverse effect on the business and financial condition of Netrix,
to the extent that a sale, liquidation or restructuring of Netrix will be
required, in whole or in part.
Netrix's operations are subject to certain risks and uncertainties including,
among others, rapidly changing technology and markets, current and potential
competitors with greater financial, technological, production and marketing
resources, reliance on certain sole source suppliers and third party contract
manufacturers, and dependence on key management personnel.
Future operating results may be affected by a number of other factors
including the timing of new products in the market place, competitive pricing
pressures and global economic conditions. Because the market for Netrix's
products is characterized by rapidly changing technology, the development,
introduction, and evolution of competitive products may require a significant
investment of financial resources. Additionally, Netrix relies on reseller
channels that are not under its control for a significant portion of its
revenues, particularly in its international regions. Also, while Netrix has
generally been able to obtain adequate supplies of components to date, the
interruption or termination of Netrix's current manufacturing relationships
could have an adverse effect on Netrix's liquidity and operating results.
Cash Equivalents. Cash equivalents are primarily bank deposits, commercial
paper, and government agency securities with original maturities of three
months or less. These investments are carried at cost which approximates market
value.
Short Term Investments. Under Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," debt
securities that are classified as available-for-sale are reported at fair
value, with unrealized gains and losses reported as a component of
stockholders' equity. For the years ended December 31, 1998 there was no
unrealized holding gain/loss as Netrix did not have any short-term investments.
For the year ended December 31, 1997 Netrix had a short term investment gain of
$7,000 and for the year ended December 31, 1996 there was a short term
investment loss of approximately $49,000.
Fair Value of Financial Instruments. Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments"
("SFAS No. 107"), requires disclosures of fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from these disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of Netrix. The carrying amounts reported in the
balance sheet approximate the fair value for cash and cash equivalents,
accounts receivable, accounts payable and borrowings under the line of credit
agreement.
Inventories. Inventories are valued at the lower of cost or market, using the
first-in, first-out ("FIFO") method.
Property and Equipment. Property and equipment are recorded at cost and
depreciated on a straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Manufacturing and test
equipment................. 3-5 years
Office furniture and
equipment................. 5 years
Purchased software......... 3 years
Leasehold improvements..... shorter of useful life or remaining lease term
</TABLE>
Goodwill. Goodwill represents the excess purchase price of net assets
acquired and is amortized over a seven-year period.
Revenue Recognition. Netrix receives revenue both from sales of products and
from service contracts. Revenue from product sales is generally recognized upon
shipment. If payment is contingent upon acceptance,
FN-8
<PAGE>
revenue is recognized upon acceptance. If significant obligations or service
contingencies exist, revenue is recognized under the percentage of completion
method of accounting described below. Revenue from service contracts is
recognized ratably over the period covered by the contract. Product sales
accounted for 69% of total revenues in 1998, 68% of total revenues in 1997, and
74% of total revenues in 1996.
Revenue on long-term contracts, or from product sales where significant
obligations or service contingencies exist, are generally recognized under the
percentage of completion method of accounting based upon the ratio of the costs
incurred to total estimated costs. Estimates to complete are revised
periodically based on changes in facts. Any losses on contracts are recognized
in the period when the loss is estimated.
Warranty. Netrix generally warrants its products for periods ranging from 90
days to one year and sells an optional, annually renewable, maintenance
contract with most networks. Estimated future warranty obligations related to
certain products are provided by charges to operations in the period in which
the related revenue is recognized.
Foreign Exchange Gain/Loss. Assets and liabilities denominated in foreign
currencies are translated into US dollars at current exchange rates. Operating
results are translated into US dollars using the average rates of exchange
prevailing during the period. Gains or losses resulting from the translation of
assets and liabilities are included in the cumulative translation adjustment
account in stockholders' equity and other comprehensive income/loss on the
statement of operations except for the translation effect of intercompany
balances that are anticipated to be settled in the foreseeable future.
Earnings Per Share. Netrix implemented Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," at December 31, 1997. SFAS No.
128 replaces the presentation of primary and fully diluted earnings per share
with basic and diluted earnings per share and requires a reconciliation of the
numerator and denominator of basic earnings per share to fully diluted earnings
per share. Options to purchase approximately 1,372,000, 1,225,000, and
1,486,000 shares of common stock were excluded from the computation of diluted
loss per share in 1998, 1997 and 1996, respectively, and warrants to purchase
approximately 140,0900 shares of common stock were excluded from the
computation of diluted loss per share in 1998, because inclusion of these
options and warrants would have an anti-dilutive effect on loss per share. Loss
per share has been computed using the weighted-average number of common shares
outstanding.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications. Certain amounts have been reclassified in the prior year
financial statements to conform with current year presentation of these
amounts.
Long-Lived Assets. Netrix reviews its long-lived assets, including property
and equipment, identifiable intangibles and goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of its long-
lived assets, Netrix evaluates the future, undiscounted, net cash flows
compared to the carrying amount of the assets.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position. Netrix implemented SFAS No. 130 in 1998. SFAS No. 131
requires Netrix to report financial and descriptive information about its
reportable operating segments. Netrix has adopted SFAS No. 131 at its year-end
December 31, 1998.
FN-9
<PAGE>
2. Balance Sheet Details:
Inventories
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C> <C>
Raw materials........................................ $ 350 $ 462
Work in process...................................... 364 772
Finished goods....................................... 4,551 6,801
-------- --------
Total inventories.................................... $ 5,265 $ 8,035
======== ========
Property and Equipment
<CAPTION>
December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C> <C>
Manufacturing and test equipment..................... $ 14,634 $ 13,512
Office furniture and equipment....................... 6,667 6,708
Purchased software................................... 2,995 2,765
-------- --------
Total property and equipment....................... 24,296 22,985
Accumulated depreciation and amortization............ (20,473) (18,016)
-------- --------
Net.................................................. $ 3,823 $ 4,969
======== ========
Accrued Liabilities
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C> <C>
Deferred revenue..................................... $ -- $ 699
Payroll and related compensation..................... 627 1,207
Taxes................................................ 758 --
Other................................................ 1,561 1,392
-------- --------
$ 2,946 $ 3,298
======== ========
</TABLE>
3. Common Stock and Stock Plans:
Netrix maintains three plans which are described below, whereby employees and
directors of Netrix are granted the opportunity to acquire an equity interest
in Netrix. A total of 2,925,000 shares of Common Stock have been reserved for
issuance in aggregate under these plans. SFAS No. 123, "Accounting for Stock-
Based Compensation" defines a "fair value based method" of accounting for an
employee stock option or similar equity instrument. Under the fair value based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period. Netrix has historically
accounted for employee stock options or similar equity instruments under the
"intrinsic value method" as defined by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Under the intrinsic value method, compensation cost
is the excess, if any, of the quoted market price of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value method.
However, entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting had been applied. Netrix has elected to
apply APB Opinion No. 25 and the related interpretations in accounting for its
stock-based compensation. Had compensation cost for Netrix's three stock-based
compensation plans been determined based upon the fair value method at the
grant dates for award under those plans, Netrix's net loss and loss per share
would have been increased to the pro forma amounts indicated below.
FN-10
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C> <C>
Net loss............................. As reported $(6,517) $ (8,577) $(5,968)
Pro forma $(7,203) $(10,377) $(6,807)
Net loss per share................... As reported $ (0.60) $ (0.90) $ (0.63)
Pro forma $ (0.66) $ (1.08) $ (0.72)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1998, 1997 and 1996, respectively: no dividend yield; expected
volatility of 98 percent, 98 percent, and 70 percent; risk free interest rates
approximating 5.5 percent, 5.5 percent, and 5 percent; and an average expected
life of approximately 5 years. The per share weighted average fair value of the
options on the date of grant for shares issued in 1998, 1997 and 1996 was
approximately $2.96, $2.30 and $5.89, respectively. The weighted average
remaining contractual life for options outstanding as of December 31, 1998 is
8.5 years.
1996 Stock Option Plan. Under the terms of Netrix's 1996 Stock Option Plan,
either incentive stock options or nonstatutory options may be granted.
Generally, the purchase price of shares subject to any incentive option granted
will not be less than the fair market value at the date of grant. Stock options
granted expire five to ten years from the grant date and typically vest 20% to
25% per year. Compensation expense recorded for options granted at less than
the fair market value at the date of the grant is recognized on a straight-line
basis over the performance period. The expense approximated $172,000 in 1996
with no expense in 1997 and 1998. At December 31, 1998 there is no remaining
deferred compensation expense related to these grants.
1996 Stock Option Plan. The following table summarizes the option activity
under this plan:
<TABLE>
<CAPTION>
Weighted Average
Number Option Price Option Price
Of Shares Per Share Per Share
--------- -------------- ----------------
<S> <C> <C> <C>
Outstanding, January 1, 1996..... 849,706 $1.680-$17.250 $5.90
1996:
Granted...................... 820,055 $4.250-$ 9.625 $5.89
Exercised.................... (43,113) $1.680-$ 6.250 $5.12
Canceled..................... (140,500) $1.680-$ 7.875 $5.88
---------
Outstanding, December 31, 1996... 1,486,148 $1.680-$17.250 $5.92
1997:
Granted...................... 396,940 $1.250-$ 3.250 $2.30
Exercised.................... (63,077) $1.680-$ 6.250 $2.18
Canceled..................... (594,786) $1.680-$ 7.875 $5.57
---------
Outstanding, December 31, 1997... 1,225,225 $1.250-$ 8.690 $2.93
1998:
Granted...................... 659,200 $1.090-$ 3.130 $2.96
Exercised.................... (3,441) $3.000-$ 3.125 $2.85
Canceled..................... (508,937) $1.680-$ 7.875 $3.65
---------
Outstanding, December 31, 1998... 1,372,047 $1.250-$ 8.690 $2.92
=========
Exercisable, December 31, 1998... 599,418 $1.090-$ 8.690 $3.19
=========
</TABLE>
Employee Stock Purchase Plan. Under the 1992 Employee Stock Purchase Plan
(the "Plan"), Netrix is authorized to issue semi-annual offerings of up to
50,000 shares. The number of shares available for an offering may be increased
at the election of the board of directors by the number of shares of Common
Stock, if any, which were made available but not purchased during an earlier
offering. Each offering is six months in length and commences on each July 1
and January 1. Under the terms of the Plan, employees can choose prior to each
FN-11
<PAGE>
offering to have up to 10 percent of their annual base earnings withheld to
purchase Netrix's common stock. The purchase price of the stock is 85 percent
of the lower of its beginning-of-offering or end-of-offering market price.
Under the Plan, Netrix sold 90,932 shares, 20,067 shares, and 36,556 shares to
employees in 1998, 1997, and 1996, respectively.
Director Option Plan. Under the terms of the Director Option Plan, directors
of Netrix who are not officers or employees of Netrix each receive nonstatutory
options to purchase 9,000 shares of Common Stock of Netrix. In 1998, 1997, and
1996, independent members of the board of directors were granted options to
purchase a total of 9,000, 9,000, and 27,000, respectively, of common stock at
$2.75, $2.19, and $4.69 per share, respectively, under the Director Option Plan
Private Placement. In April 1998, Netrix completed a private placement by
issuing and selling 1,750,000 shares of common stock at a price of $1.25 per
share and by issuing warrants to purchase an additional 140,000 shares of
common stock at an exercise price of $1.75 per share. In connection with the
private placement, Netrix received net proceeds of approximately $2.1 million.
The shares issued in the private placement and issuable upon exercise of the
warrants were registered for resale pursuant to a registration statement
declared effective by the Securities and Exchange Commission on June 12, 1998.
The fair value of the warrants, $257,000, was estimated on the date of grant
using the Black-Scholes pricing model. The warrants were issued to the
underwriter of the private placement and are subject to adjustment under
antidilution provisions of the warrant agreement. The offering costs were
accounted for as a reduction to additional paid in capital in the accompanying
consolidated statements of changes in stockholders' equity.
4. Commitments and Contingencies:
Line of Credit. In November 1997, Netrix negotiated a $3 million line of
credit agreement with a lending institution to be used for working capital.
This agreement provided for interest at a per annum rate equal to the lender's
prime rate plus 2.0%. In August 1998, as a result of concerns about the
deterioration of aged international accounts receivable Netrix's lending
institution eliminated international receivables as qualified accounts
receivable for borrowing collateral. The lending institution also increased the
interest rate for outstanding loan amounts to prime plus 3 1/2% from prime plus
2%. In October 1998, the lending institution reinstated a sub-line of credit up
to an amount of $600,000 for selected foreign accounts receivable.
Netrix's line of credit agreement requires it to maintain a tangible net
worth covenant of at least $13.5 million measured at the end of each month.
Since October 31, 1998 Netrix has been in violation of this covenant. This
covenant violation allows Netrix's lending institution to call for collection
of the outstanding loan balance. As of April 12, 1999 the lending institution
had not exercised this right. On April 12, 1999 the lending institution granted
Netrix a waiver of past covenant violations and waived its right to call the
line of credit for these covenant violations. The lending institution amended
the line of credit agreement to measure Netrix's tangible net worth on a
quarterly basis and set the minimum tangible net worth covenant at $9.8 million
as of March 31, 1999 and $9.0 million for all subsequent quarters. Management
believes that this new covenant will be adequate for Netrix to operate under in
the foreseeable future. However, there can be no assurances that Netrix will
not violate the new covenant or that the outstanding loan balance will not be
called by Netrix's lending institution upon violation of the new covenant.
Concurrent with the April 1999 waiver of default, the lending institution
extended the line of credit agreement to May 31, 2001. In connection with the
waiver of default and extension of the line of credit agreement, Netrix granted
the lending institution 50,000 warrants at an exercise price of $2.00 per
share.
Borrowings under the line are based on qualified domestic accounts receivable
and are collateralized by Netrix's assets. At December 31, 1998, Netrix had
approximately $2.2 million outstanding of the $2.4 million available under the
line of credit agreement. At December 31, 1997, Netrix had approximately $1.1
million outstanding of the $2.0 million available under the line of credit.
Long-term Debt. In conjunction with the working capital line of credit
obtained in November 1997, Netrix repaid its equipment note payable in full. At
December 31, 1996, Netrix had approximately $481,000
FN-12
<PAGE>
outstanding under the equipment note payable. Interest expense related to the
above borrowings was approximately $117,000 and $125,000 for the years ended
December 31, 1997 and 1996, respectively.
Restructuring Charge. In both March of 1996 and April of 1997, Netrix
implemented a restructuring of operations to reduce and economize its work
force in response to declining revenues and the discontinuance of its micro.pop
product. The restructuring resulted in an overall reduction of personnel and
related compensation and other associated operating costs of the Netrix for
these years. The 1996 restructuring charges of $.9 million resulted from
approximately $.5 million of accrued severance and outplacement costs
associated with a reduction-in-force of approximately 41 employees across all
functional areas of the Netrix, and approximately $.4 million of accrued
facility costs resulting from the consolidation of facilities and premature
termination of various office leases. The reduction-in-force occurred over
approximately a one-year period and severance payments were made in a lump sum
in April and June 1996, and February 1997. As a result of the 1996
restructuring, estimated cost savings of approximately $2.5 million annually
has been realized. The 1997 restructuring charges of $.9 million resulted from
approximately $.4 million of accrued severance and outplacement costs
associated with a reduction-in-force of approximately 37 employees across all
functional areas of the Netrix, approximately $.4 million of fixed-asset write-
offs and facility relocation charges for unrecoverable lease obligations
associated with the consolidation of the Longmont, Colorado, and Herndon,
Virginia, operations facilities into one facility leased in Charlotte, North
Carolina, and other associated costs of approximately $.1 million. Severance
payments were made in April 1997. As a result of the 1997 restructuring,
estimated cost savings of approximately $2.5 million annually has been
realized. At December 31, 1998, approximately $100,000 of the accrual remains,
and will be used for severance payments in 1999.
Leases. The Netrix has existing lease agreements for office space and
equipment expiring through April 2009. The lease for the Netrix's headquarters
facility in Herndon, Virginia, includes annual escalations of a fixed amount
during each year of the lease. Additionally, the Netrix leases approximately
8,600 square feet in Longmont, Colorado, for the purpose of continuing certain
product development activities and approximately 8,000 square feet of space
from its main outsourcing manufacturer in Charlotte, North Carolina, for its
operations facilities. The Netrix was relieved of its lease commitment for
48,000 square feet of space in Boulder, Colorado, in August 1997. The Netrix
also leases space for sales offices in the US, the UK, Germany, Italy and Hong
Kong. Netrix recognizes rent expense, net of any sublease revenue, on a
straight-line basis. Net rent expense in 1998, 1997, and 1996 was approximately
$1,821,000, $1,643,000, and $2,475,000, respectively.
Through October 1998, Netrix subleased approximately 28,000 square feet in
Herndon, Virginia. Sublease revenue for 1998, 1997 and 1996 was approximately
$371,000, $223,000 and $380,000, respectively, and is presented as a reduction
of rent expense in the accompanying consolidated statements of operations.
Future minimum lease payments for office space and equipment under operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Net
Years Ending December 31, Payments
------------------------- --------
<S> <C>
1999................................................................ 1,536
2000................................................................ 1,098
2001................................................................ 1,126
2002................................................................ 1,169
2003 and thereafter................................................. 7,306
-------
Total............................................................. $12,235
=======
</TABLE>
Employee Benefit Plan. Netrix has a 401(k) savings plan ("401(k) plan")
covering all eligible employees. Netrix began contributing to the 401(k) plan
effective July 1, 1996. Netrix matches employee contributions up to the first
6% of eligible income at a rate of 25%. The matching funds are subject to 20%
vesting per year beginning with the employee's first day with Netrix;
therefore, certain employees were 100% vested in Netrix matching contributions
on July 1, 1996. In 1998, 1997 and 1996, Netrix contributed approximately
$18,000, $86,000 and $44,000, respectively, to the 401(k) plan.
FN-13
<PAGE>
Litigation. Netrix is periodically a party to disputes arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of Netrix, and adequate provision for any potential losses
has been made in the accompanying financial statements.
5. Segment Information:
For the year ended December 31, 1998, Netrix adopted the Statement on
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information". Netrix's two reportable segments are
products and services. Netrix evaluates the performance of its segments based
on gross profit. Under SFAS No. 131, Netrix is required to provide enterprise-
wide disclosures about revenues by product and service revenues, long-lived
assets by geographic area and revenues from major customers.
Revenues. Revenues consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
Product Group 1998 1997 1996
------------- ------- ------- -------
<S> <C> <C> <C>
2200................................................ $ 8,343 $ 3,759 $ 1,995
2500................................................ 7,210 4,492 375
S1000............................................... 1,076 1,976 4,261
S10................................................. 3,357 9,064 18,437
Telecom............................................. 1,854 3,183 7,366
------- ------- -------
Total product revenues.............................. 21,840 22,474 32,434
Service revenues.................................... 9,642 10,613 11,201
------- ------- -------
Total revenues...................................... $31,482 $33,087 $43,635
======= ======= =======
</TABLE>
Geographic Information. Netrix sells its products and services through its
foreign affiliates in the United Kingdom, Germany and Italy. Information
regarding revenues and long-lived assets attributable to the United States and
to all foreign countries is stated below. The geographic classification of
product and service revenues was based upon the location of the customer.
Netrix's product and service revenues for 1998, 1997 and 1996 were generated in
the following geographic regions (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
United States....................................... $14,933 $12,594 $16,115
Europe, Middle East and Africa...................... 13,149 14,753 17,871
Pacific Rim, Latin America and South America........ 3,400 5,740 9,649
------- ------- -------
Total............................................. $31,842 $33,087 $43,635
======= ======= =======
</TABLE>
Included in domestic product revenues are sales through systems integrators
and distributors to the Federal Government of approximately $486,000,
$1,110,000, and $4,384,000 in 1998, 1997, and 1996 respectively.
Netrix's long-lived assets were located as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
United States................................................. $4,055 $5,367
United Kingdom................................................ 247 287
Germany....................................................... -- 66
Italy......................................................... 50 43
------ ------
Total long-lived assets..................................... $4,352 $5,763
====== ======
</TABLE>
FN-14
<PAGE>
Significant Customers. Customers that accounted for greater than 10% of total
revenues in 1998, 1997, and 1996 are described below (in thousands).
<TABLE>
<CAPTION>
Years Ended December
31,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Distributor 1........................................... $2,849 $3,640 $5,837
Product............................................... 2,235 2,994 4,577
Service............................................... 614 646 1,260
Distributor 2........................................... 2,186 * *
Product............................................... 2,176 * *
Service............................................... 10 * *
</TABLE>
- --------
* Revenue accounted for less than 10% of total revenues for the period.
6. Income Taxes
The components of income tax expense consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current provision:
Federal........................................ $(1,982) $(2,105) $(1,534)
State.......................................... (287) (256) (185)
Foreign........................................ -- -- 66
Deferred (benefit) provision:
Federal........................................ -- -- --
State.......................................... -- -- --
Increase in valuation allowance................ 2,269 2,361 1,719
------- ------- -------
$ -- $ -- $ 66
======= ======= =======
</TABLE>
The provision for income taxes results in effective rates that differ from
the Federal statutory rate as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income
tax rate............... (35.0)% (35.0)% (35.0)%
Effect of graduated
rates.................. 1.0 1.0 1.0
State income taxes, net
of Federal tax
benefit................ (4.3) (4.3) (4.3)
Losses without current
tax benefit............ 38.3 38.3 38.3
Foreign income taxes.... -- -- 1.11
Effective rate.......... -- -- 1.1
</TABLE>
As of December 31, 1998, Netrix had net operating losses of approximately
$38.1 million available for carryforward to offset future income for Federal
income tax purposes. Netrix has additional net operating loss carryforwards of
$2.5 million as a result of the 1994 acquisition of Republic Telecom. Due to
Internal Revenue Service rules regarding change in ownership, the use of these
net operating losses is limited to $229,000 per year. These carryforwards
expire in years 2002 through 2012 as follows:
<TABLE>
<S> <C>
2002............................................................. $ 1,569,000
2003............................................................. 14,317,781
2004 and thereafter.............................................. 32,190,219
-----------
$38,077,000
===========
</TABLE>
FN-15
<PAGE>
These carryforwards are subject to limitation of the amount available to be
used in any given year due to significant changes in ownership interests. In
addition, Netrix has research and development tax credit carryforwards of
approximately $2.1 million which are available to offset future Federal income
taxes with certain limitations. Temporary differences between financial
reporting and income tax reporting result primarily from the treatment of
deferred rent, depreciation expense, and capitalization of certain inventory
costs for tax purposes.
The components of the net deferred tax asset were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Federal regular tax operating loss carryforwards......... $ 14,583 $ 13,111
Research and development tax credit carryforwards........ 2,125 2,048
Other.................................................... 3,639 2,593
-------- --------
$ 20,347 $ 17,752
Valuation allowance...................................... (20,347) (17,752)
-------- --------
Deferred tax asset....................................... $ -- $ --
======== ========
</TABLE>
FN-16
<PAGE>
NETRIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,645 $ 2,488
Restricted cash................................... 3,053 --
Accounts receivable, net of allowance for doubtful
accounts of $788 and $796, respectively.......... 6,957 7,499
Inventories, net.................................. 4,761 5,265
Other current assets.............................. 359 472
------- --------
Total current assets............................ 16,775 15,724
Property and equipment, net of accumulated
depreciation of $21,727 and $20,473, respectively.. 3,043 3,823
Deposits and other assets........................... 121 165
Goodwill, net of accumulated amortization of $1,911
and $1,712, respectively........................... 330 529
------- --------
TOTAL ASSETS........................................ $20,269 $ 20,241
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................... $ 1,174 $ 2,167
Accounts payable.................................. 3,907 3,011
Accrued liabilities............................... 3,018 2,946
------- --------
Total current liabilities....................... 8,099 8,124
Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares
authorized; 298,187 issued and outstanding,
preference in liquidation........................ 4,424 --
Common stock, $0.05 par value; 15,000,000 shares
authorized; 11,609,217 and 11,490,000 shares
issued and outstanding, respectively............. 581 575
Warrants.......................................... 862 257
Additional paid-in capital........................ 59,231 57,679
Deferred compensation............................. (637) --
Accumulated other comprehensive loss.............. (160) (120)
Accumulated deficit............................... (52,131) (46,274)
------- --------
Total stockholders' equity...................... 12,170 12,117
------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY............ $20,269 $ 20,241
======= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
FN-17
<PAGE>
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
----------------
1999 1998
------- -------
(Unaudited)
(In Thousands,
Except Per
Share Amounts)
<S> <C> <C>
Revenues:
Product..................................................... $16,079 $16,272
Service..................................................... 5,309 7,111
------- -------
Total revenues............................................ 21,388 23,383
Cost of revenues:
Product..................................................... 7,512 7,543
Service..................................................... 3,638 4,024
------- -------
Total cost of revenues.................................... 11,150 11,567
Gross profit.............................................. 10,238 11,816
Operating expenses:
Sales and marketing......................................... 4,621 7,774
Research and development.................................... 5,337 4,939
General and administrative.................................. 3,683 3,080
Stock compensation expense.................................. 763 --
Restructuring reserve....................................... 900 --
------- -------
Loss from operations...................................... (5,066) (3,977)
Interest and other income, net................................ (218) (20)
Foreign exchange gain (loss).................................. -- 87
------- -------
Net Loss...................................................... (5,284) (3,910)
Dividends on preferred stock.................................. (574) --
------- -------
Net loss attributable to common stock......................... (5,858) (3,910)
------- -------
</TABLE>
<TABLE>
<S> <C> <C>
Other comprehensive losses................................... (40) (257)
Comprehensive loss........................................... $(5,324) $(4,167)
------- -------
</TABLE>
<TABLE>
<S> <C> <C>
Basic and diluted loss per share............................... $(0.51) $(0.37)
====== ======
Shares used in per share calculation........................... 11,513 10,702
====== ======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
FN-18
<PAGE>
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
----------------
1999 1998
------- -------
(Unaudited)
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(5,284) $(3,910)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,453 1,876
Non-Cash Interest Expense................................. 179 --
Deferred Compensation Expense............................. 763 --
Changes in assets and liabilities -
Accounts receivable..................................... 542 (1,211)
Inventories............................................. 504 1,439
Other current assets.................................... 290 314
Deposits and other assets............................... 44 260
Accounts payable........................................ 896 (419)
Accrued liabilities..................................... 72 (684)
Other liabilities....................................... -- (97)
------- -------
Net cash used in operating activities................... (541) (2,432)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (474) (918)
------- -------
Net cash used in investing activities................... (474) (918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement........................... 4,100 2,076
Payments on line of credit, net........................... (993) 553
Proceeds from exercise of stock options................... 198 14
Proceeds from employee stock purchase plan................ 48 90
Payment of private placement costs........................ (88) --
------- -------
Net cash provided by financing activities................. 3,265 2,733
Effect of foreign currency exchange rate changes on cash and
cash equivalents........................................... (40) (256)
------- -------
2,210 (873)
Cash and cash equivalents, beginning of period.............. 2,488 2,758
------- -------
Cash and cash equivalents, end of period.................... $ 4,698 $ 1,885
======= =======
Supplemental disclosure of cash flow information............
Cash paid during the period for interest.................. $ 293 $ 136
Cash paid during the period for income taxes.............. -- --
</TABLE>
See notes to unaudited condensed consolidated financial statements.
FN-19
<PAGE>
NOTES TO NETRIX UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Netrix Corporation (Netrix or the "Company") is a worldwide provider of VoIP
and data networking products. Netrix develops, manufactures, markets, and
supports networking equipment for voice, data, and image networks. Netrix
products are designed to transport voice over data networks to enable its
customers to realize significant cost savings. Netrix was incorporated in 1985.
Netrix conducts operations in the United Kingdom and Hong Kong through its
wholly owned subsidiary, Netrix International Corporation (a Delaware
corporation), and in Germany and Italy through its wholly owned subsidiaries
Netrix GmbH and Netrix S.r.l., respectively. These condensed consolidated
financial statements include the accounts of Netrix and its subsidiaries. All
significant intercompany transactions have been eliminated.
Netrix's operations are subject to certain risks and uncertainties including,
among others, rapidly changing technology and markets, current and potential
competitors with greater financial, technological, production and marketing
resources, reliance on certain sole source suppliers and third party contract
manufacturers, and dependence on key management personnel.
The unaudited condensed financial statements included herein have been
prepared by Netrix, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and include, in the opinion of management,
all adjustments, consisting of normal, recurring adjustments, necessary for a
fair presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Netrix believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results for such interim periods are not necessarily indicative of results to
be expected for the full year.
Proposed Merger
On September 30, 1999, Nextrix signed a definitive merger agreement with
OpenROUTE Networks, Inc. (OpenROUTE) whereby OpenROUTE will merge with and into
Netrix and Netrix will be the surviving corporation. As consideration for the
merger, each holder of OpenROUTE common stock will receive one share of Netrix
common stock for each share of OpenROUTE common stock that it holds. The
agreement has been approved by the boards of directors of both companies and is
subject to the approval of the stockholders of each company.
Risks and Other Important Factors
For the nine months ended September 30, 1999, revenues were $21.4 million and
the net loss was $5.8 million, compared to revenues of $23.4 million and a net
loss of $3.9 million for the nine months ended September 30, 1998.
On May 14, 1999, Netrix completed a private placement by selling and issuing
298,187 shares of Series A 8% Convertible Preferred Stock, par value $.05 per
share, at a price of $13.75 per share, and by issuing warrants to purchase an
additional 49,818 share of common stock at an exercise price of $2.75 per
share. Each share of preferred stock has a liquidation preference equal to its
purchase price, plus accrued and unpaid dividends. Dividends are cumulative
from May 14, 1999, and are payable semi-annually, in arrears, on April 30 and
October 31 of each year, commencing October 31, 1999. Dividends are payable in
cash or shares of common stock, at Netrix's election. The preferred stock is
convertible at any time prior to redemption, at the option of the holder, into
common stock at a conversion rate equal to five shares of common stock for each
share of preferred stock, subject to adjustment in certain circumstances. The
fair value of the preferred stock's beneficial conversion feature, reflective
of the difference between the conversion price of the preferred stock and the
market value of the underlying common stock on the date of issue, constitutes,
for accounting purposes, a dividend by Netrix. The beneficial conversion
feature is approximately $1.2 million and Netrix will reflect the
FN-20
<PAGE>
dividend as a non-cash charge to earnings in its consolidated statement of
operations in connection with the lapse of the transfer restrictions on the
underlying common stock. The transfer restrictions lapse in May 2000 or in 25
percent installments when the average closing price for the common stock over a
period of 10 consecutive trading days is at least 125 percent, 156 percent, 195
percent and 244 percent of the initial conversion price of the Preferred Stock,
$2.75 per share. The preferred stock is redeemable at the option of the Company
at any time after the closing bid price for the common stock on the NASDAQ
Stock Market has equaled or exceeded $6.00 for 10 consecutive trading days. The
redemption price is $17.50 per share plus accrued but unpaid dividends to the
date of repurchase.
In connection with the private placement, Netrix received net proceeds of
$4.0 million which use is restricted for severance and other restructuring
activities, and marketing and sales initiatives. On June 15, 1999, Netrix filed
with the Securities and Exchange Commission (SEC) a registration statement
covering the resale of the common stock underlying the preferred stock. Netrix
is to undertake all reasonable efforts to cause the registration statement to
be declared effective by the SEC.
As a result of the combination of the net loss for the quarter and the
proceeds of the private placement, Netrix's tangible net worth increased from
$10.0 million at March 31, 1999 to $11.5 million at September 30, 1999.
Netrix's initial line of credit agreement, negotiated in November 1997,
required it to maintain a tangible net worth of at least $13.5 million measured
at the end of each month. Between October 31, 1998 and March 31, 1999, Netrix
was in violation of this covenant. This covenant violation allowed Netrix's
lending institution to call for collection of the outstanding loan balance. On
April 12, 1999 the lending institution granted Netrix a waiver of past covenant
violations and waived its right to call the line of credit for these covenant
violations. The lending institution amended the line of credit agreement to
measure Netrix's tangible net worth on a quarterly basis effective January 1,
1999, and set the minimum tangible net worth covenant at $9.8 million as of
March 31, 1999 and $9.0 million for all subsequent quarters. At March 31, 1999,
June 30, 1999 and September 30,1999, Netrix was in compliance with the new
covenant, and management believes that this new covenant will be adequate for
Netrix to operate under in the foreseeable future. However, there can be no
assurances that Netrix will not violate the new covenant or that the
outstanding loan balance will not be called by the lending institution upon
violation of the new covenant.
The success and the future of Netrix is dependent on its ability to generate
net income or to increase its net worth by the sale of additional equity.
Netrix's ability to generate net income is in large part dependent on its
success at increasing sales of its new products and/or controlling costs.
Netrix's plan to increase revenues through sales of its Network Exchange
product line is continuing to evolve in order to exploit new marketing
channels; however, due to market conditions, competitive pressures, and other
factors beyond its control, Netrix has been unable to achieve sufficient
incremental growth in new product sales to generate net income and there can be
no assurances that Netrix will be able to adequately increase new product sales
and generate net income in the future.
The success of Netrix is also dependent on its ability to generate adequate
cash for operations and capital needs. Its ability to generate adequate cash
for such needs is in part dependent on its success at increasing sales of its
products. Netrix's plan is to increase revenues through sales of its Network
Exchange product line; however, due to market conditions and other factors
beyond its control, there can be no assurance that Netrix will be able to
adequately increase product sales. Therefore, Netrix may have to generate
additional cash through the sale of assets, including technologies or the sale
of debt or equity securities. Although Netrix believes it has the ability to
generate additional cash through such sales, such sales may be dilutive and
there can be no assurances that adequate funds will be available or available
on terms that are reasonable or acceptable to Netrix. If Netrix is unable to
generate adequate cash, there could be a material and adverse effect on the
business and financial condition of Netrix. Netrix has implemented cost control
measures and is continually evaluating expense levels to mitigate its liquidity
risk.
FN-21
<PAGE>
For the nine months ended September 30, 1999, Netrix's operating activities
used $541,000 and $2.4 million of cash, respectively. The cash used by
operations was primarily due to continued net losses from operations. At
September 30, 1999, Netrix had $4.7 million in cash and cash equivalents with
$1.2 million outstanding of the $1.5 million available under the line of credit
agreement. Netrix is relying on future sales and the collection of the related
accounts receivable to meet its cash obligations. Netrix may be unable to meet
these obligations as they become due and may be required to curtail its
operations. If Netrix is required to curtail its operations there can be no
assurances that the carrying value of Netrix's assets will be fully realized.
Netrix may have to generate additional equity or cash through other means,
which may include the sale of assets, including intellectual property and
proprietary technology, the sale of equity, additional borrowings, the sale of
selected operations, or one or more strategic partnerships. Although Netrix
believes it has the ability to generate additional equity and cash through such
sales, such sales may be dilutive and there can be no assurances that adequate
funds will be available, or available on terms that are reasonable or
acceptable to Netrix. If Netrix is unable to generate additional equity and
adequate cash, there will be a material and adverse effect on the business and
financial condition of Netrix, to the extent that a sale, liquidation or
restructuring of Netrix will be required, in whole or in part.
Future operating results may be affected by a number of other factors
including the timing of new products in the market place, competitive pricing
pressures and economic conditions. As the market for Netrix's products is
characterized by rapidly changing technology, the development, introduction and
evolution of competitive products may require a significant investment of
financial resources. Additionally, Netrix relies on reseller channels that are
not under its control for a significant portion of its revenues, particularly
in its international regions. Also, while Netrix has generally been able to
obtain adequate supplies of components to date, the interruption or termination
of Netrix's current manufacturing relationships could have an adverse effect on
Netrix's operating results.
2. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in
a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital in the equity section of a statement of financial position. Netrix
implemented SFAS No. 130 in the first quarter of 1998, and it did not have a
material impact on the financial statements. SFAS No. 131 requires Netrix to
report financial and descriptive information about its reportable operating
segments. Netrix adopted SFAS No. 131 for the year ended December 31, 1998.
3. Cash Equivalents
Cash equivalents are primarily bank deposits, commercial paper, and
government agency securities with original maturities of three months or less.
These investments are carried at cost which approximates market value.
4. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Raw materials..................................... $ 305 $ 350
Work in process................................... 1,016 364
Finished goods.................................... 3,440 4,551
------ ------
Total Inventories............................... $4,761 $5,265
====== ======
</TABLE>
FN-22
<PAGE>
5. Commitments and Contingencies
Line of Credit. In November 1997, Netrix negotiated a $3.0 million line of
credit agreement with a lending institution to be used for working capital.
This agreement provided for interest at a per annum rate equal to the lender's
prime rate plus 2%, subject to a minimum monthly interest based on 40%
utilization of $3.0 million. In August 1998, as a result of concerns about the
deterioration of aged international accounts receivable, Netrix's lending
institution eliminated international receivables as qualified accounts
receivable for borrowing collateral. The lending institution also increased the
interest rate for outstanding loan amounts to prime plus 3 1/2% from prime plus
2%. In October 1998, the lending institution reinstated a sub-line of credit up
to an amount of $600,000 for selected foreign accounts receivable.
Netrix's initial line of credit agreement negotiated in November 1997
required it to maintain a tangible net worth covenant of at least $13.5 million
measured at the end of each month. Between October 31, 1998 and March 31, 1999
Netrix was in violation of this covenant. This covenant violation allowed
Netrix's lending institution to call for collection of the outstanding loan
balance. On April 12, 1999 the lending institution granted Netrix a waiver of
past covenant violations and waived its right to call the line of credit for
these covenant violations. The lending institution amended the line of credit
agreement to measure Netrix's tangible net worth on a quarterly basis effective
January 1, 1999, and set the minimum tangible net worth covenant at $9.8
million as of March 31, 1999 and $9.0 million for all subsequent quarters. At
September 30, 1999, Netrix was in compliance with the new covenant, and
management believes that this new covenant will be adequate for Netrix to
operate under in the foreseeable future. However, there can be no assurances
that Netrix will not violate the new covenant or that the outstanding loan
balance will not be called by Netrix's lending institution upon violation of
the new covenant. Concurrent with the April 1999 waiver of default, the lending
institution extended the line of credit agreement to May 31, 2001. In
connection with the waiver of default and extension of the line of credit
agreement, Netrix granted the lending institution 50,000 warrants to purchase
Common Stock at an exercise price of $2.00 per share. During the quarter ended
March 31, 1999, Netrix recognized additional interest charges of $97,000 in
relation to the fair value of these warrants.
Borrowings under the line are based on qualified domestic accounts receivable
and are collateralized by Netrix's assets. At September 30, 1999, Netrix had
approximately $1.2 million outstanding of the approximately $1.5 million
available under the line of credit agreement. At December 31, 1998, Netrix had
approximately $2.2 million outstanding of the approximately $2.4 million
available under the line of credit.
6. Segment Information
For the year ended December 31, 1998, Netrix adopted the Statement on
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information". Netrix's two reportable segments are
products and services. Netrix evaluates the performance of its segments based
on gross profit. Under SFAS No. 131, Netrix is required to provide enterprise-
wide disclosures about revenues by segment, long-lived assets by geographic
area and revenues from major customers.
Revenues consisted of the following:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
---------------
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Product group:
2200...................................................... $ 8,780 $ 5,453
2500...................................................... 5,250 5,939
S1000..................................................... 664 633
S10....................................................... 1,173 3,221
Telecom................................................... 212 1,026
------- -------
Total product revenues.................................. 16,079 16,272
Service revenues............................................ 5,309 7,111
------- -------
Total revenues.......................................... $21,388 $23,383
======= =======
</TABLE>
FN-23
<PAGE>
Geographic Information
Netrix sells its products and services through its foreign affiliates in the
United Kingdom, Germany and Italy. Information regarding revenues and long-
lived assets attributable to the United States and to all foreign countries is
stated below. The geographic classification of product and service revenues is
based upon the location of the customer.
Netrix's product and service revenues for 1999 and 1998 were generated in the
following geographic regions (in thousands):
<TABLE>
<CAPTION>
Nine Months
Ended September
30,
---------------
1999 1998
------- -------
<S> <C> <C>
United States............................................... $12,745 $12,384
Europe, Middle East and Africa.............................. 6,371 7,713
Pacific Rim and Other....................................... 2,272 3,286
------- -------
Total..................................................... $21,388 $23,383
======= =======
</TABLE>
Included in domestic product and service revenues are sales through systems
integrators and distributors to the Federal Government of approximately
$214,000 and $342,000 for the nine months ended September 30, 1999 and 1998,
respectively.
Netrix's long-lived assets were located as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
-------------
1999 1998
------ ------
<S> <C> <C>
United States................................................. $3,135 $4,475
United Kingdom................................................ 205 268
Germany....................................................... 15 5
Italy......................................................... 18 68
------ ------
Total long-lived assets..................................... $3,373 $4,805
====== ======
</TABLE>
Significant Customers.
There were no customers that accounted for greater than 10% of total revenues
for the nine months ended September 30, 1999 and 1998.
7. Restructuring Charge
In April 1999, Netrix implemented a restructuring of operations to reduce and
economize its work force as part of an overall plan to return to profitability.
The restructuring charges of $900,000 resulted from approximately $843,000 of
accrued severance and benefit costs associated with a reduction-in-force of 36
employees across all functional areas of Netrix, and approximately $57,000 of
accrued facility costs resulting from the consolidation of facilities and
premature termination of various office leases. As of September 30, 1999,
severance of approximately $602,000 and lease termination costs of
approximately $57,000 have been paid, and the remaining severance payments of
approximately $241,000 will occur over approximately a six month period. Netrix
also paid approximately $100,000 of final severance payments to certain
international employees that resulted from an April 1997 restructuring of
operations.
8. Foreign Currency Exchange Gain
Generally, assets and liabilities denominated in foreign currencies are
translated into US dollars at current exchange rates. Operating results are
translated into US dollars using the average rates of exchange prevailing
during the period. Gains or losses resulting from translation of assets and
liabilities are included in the cumulative translation adjustment account in
stockholders' equity, except for the translation effect of intercompany
balances that are anticipated to be settled in the foreseeable future. Netrix
had no foreign exchange gains or losses for the nine months ended September 30,
1999, and had a net foreign exchange gain of approximately $87,000 for the nine
months ended September 30, 1998.
FN-24
<PAGE>
9. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share amounts are computed using the weighted
average number of common shares. Diluted earnings (loss) per share amounts are
computed using the weighted average number of common shares and common
equivalent shares having a dilutive effect during the periods; however, for the
three and nine months ended September 30, 1999 and 1998, the effect of common
stock equivalents has not been considered as they would have been antidilutive.
10. Stockholders' Equity
On May 14, 1999 the Company completed a private placement by selling and
issuing 298,187 shares of Series A 8% Convertible Preferred Stock, par value
$0.05 per share, at a price of $13.75 per share, and by issuing warrants to
purchase an additional 49,818 shares of Common Stock at an exercise price of
$2.75 per share. Each share of Preferred Stock has a liquidation preference
equal to its purchase price, plus accrued and unpaid dividends. Dividends are
cumulative from May 14, 1999, and are payable semi-annually, in arrears, on
April 30 and October 31 of each year, commencing October 31, 1999. Dividends
are payable in cash or shares of Common Stock at the Company's election. The
Preferred Stock is a convertible at any time prior to redemption, at the option
of the holder, into Common Stock at a conversion rate equal to five shares of
Common Stock for each share of Preferred Stock, subject to adjustment in
certain circumstances. The fair value of the Preferred Stock's beneficial
conversion feature, reflective of the difference between the conversion price
of the Preferred Stock and the market value of the underlying Common Stock on
the date of issue, constitutes, for accounting purposes, a dividend by the
Company. The beneficial conversion feature is approximately $1.2 million and
the Company will reflect the dividend as a non-cash charge to earnings in its
consolidated statement of operations in connection with the lapse of the
transfer restrictions on the underlying Common Stock. The transfer restrictions
lapse in May 2000 or in 25 percent installments when the average closing price
for the common stock over a period of 10 consecutive trading days is at least
125 percent, 156 percent, 195 percent and 24 percent of the initial conversion
price of the Preferred Stock, $2.75 per share. The Preferred Stock is
redeemable at the option of the Company at any time after the closing bid price
for the Common Stock on the NASDAQ Stock market has equaled or exceeded $6.00
for 10 consecutive trading days. The redemption price is $17.50 per share plus
accrued but unpaid dividends to the date of repurchase. In connection with the
private placement, the Company received net proceeds of $4.0 million, which use
is restricted for severance and other restructuring activities, and marketing
and sales initiatives. On June 15, 1999 the Company filed with the Securities
and Exchange Commission (SEC) a registration statement covering the resale of
the Common Stock underlying the Preferred Stock. The Company is to undertake
all reasonable efforts to cause the registration statement to be declared
effective by the SEC.
FN-25
<PAGE>
INDEX TO OPENROUTE FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of BDO Seidman, LLP, Independent Certified Public Accountants..... FO-2
Report of PricewaterhouseCoopers, LLP, Independent Accountants........... FO-3
OpenROUTE Consolidated Balance Sheets as of December 31, 1997 and 1998... FO-4
OpenROUTE Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998........................................ FO-5
OpenROUTE Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998.................................. FO-6
OpenROUTE Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998........................................ FO-7
Notes to OpenROUTE Consolidated Financial Statements..................... FO-8
OpenROUTE Consolidated Balance Sheets as of December 31, 1998 (derived
from audited financial statements) and September 25, 1999 (Unaudited)... FO-17
OpenROUTE Condensed Consolidated Statements of Operations for the Nine
Months Ended September 26, 1998 and September 25, 1999 (Unaudited)...... FO-18
OpenROUTE Consolidated Statement of Stockholders' Equity for the Nine
Months Ended September 25, 1999 (Unaudited)............................. FO-19
OpenROUTE Consolidated Statements of Cash Flows for the Nine Months Ended
September 26, 1998 and September 25, 1999 (Unaudited)................... FO-20
Notes to OpenROUTE Condensed Consolidated Financial Statements
(Unaudited)............................................................. FO-21
</TABLE>
FO-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of OpenROUTE Networks, Inc.
Westborough, Massachusetts
We have audited the accompanying consolidated balance sheet of OpenROUTE
Networks, Inc. (formerly Proteon, Inc.) and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of OpenROUTE's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OpenROUTE
Networks, Inc. and subsidiaries at December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying 1998 consolidated financial statements have been prepared
assuming that OpenROUTE will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, OpenROUTE has incurred significant
losses during each of the three years ended December 31, 1998. OpenROUTE's
current business strategy is focused on the emerging Internet access market. As
such, success of future operations is subject to a number of risks. Principal
among these risks are the successful marketing of its Internet access products,
rapidly changing technology, reliance on significant customers, intense
competition from substitute products and significantly larger companies, and
the ability to obtain financing to fund future operations. These factors raise
substantial doubt about OpenROUTE's ability to continue as a going concern
until OpenROUTE successfully obtains additional funding or establishes
strategic relationships and achieves projected operating results. Management's
plans are also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO SEIDMAN, LLP
Boston, Massachusetts February 12, 1999
FO-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of OpenROUTE Networks, Inc.:
We have audited the accompanying consolidated balance sheet of OpenROUTE
Networks, Inc. as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the years ended December
31, 1997 and 1996. These financial statements are the responsibility of
OpenROUTE'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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of OpenRoute
Networks, Inc. as of December 31, 1997, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles,
PricewaterhouseCoopers L.L.P.
Boston, Massachusetts
February 11, 1998, except as to the segment
information for the years ended December 31,
1997 and 1996 presented in Note 8, for which
the date is March 26, 1999.
FO-3
<PAGE>
OPENROUTE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents................................ $ 2,024 $ 5,317
Marketable securities (Note 3)........................... 3,128 12,443
Accounts receivable less reserve for doubtful accounts of
$1,424,000 and $927,000 at December 31, 1998 and 1997,
respectively............................................ 3,356 6,224
Inventories (Note 4)..................................... 8,546 5,710
Deposits and other assets................................ 509 437
-------- --------
Total current assets................................... 17,563 30,131
Property and equipment, net (Note 5)....................... 2,715 3,272
-------- --------
Total assets........................................... $ 20,278 $ 33,403
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................... $ 1,449 $ 2,292
Accrued compensation..................................... 353 765
Accrued expenses......................................... 2,743 2,779
Accrued warranty......................................... 582 675
-------- --------
Total current liabilities.............................. 5,127 6,511
-------- --------
Commitments and contingencies (Notes 6,7 and 11)
Stockholders' equity: (Note 7)
Preferred stock, par value $.01 per share, authorized
7,500,000 shares, none issued........................... -- --
Common stock, par value $.01 per share, authorized
30,000,000 shares, issued 15,740,305 and 15,669,524
shares at December 31, 1998 and 1997, respectively..... 157 157
Capital in excess of par value........................... 49,418 49,347
Accumulated deficit...................................... (33,526) (21,666)
Accumulated other comprehensive income................... 112 110
Less treasury stock, at cost, 390,769 and 407,435 shares
at December 31, 1998 and 1997, respectively............. (1,010) (1,056)
-------- --------
Total stockholders' equity............................. 15,151 26,892
-------- --------
Total liabilities and stockholders' equity............. $ 20,278 $ 33,403
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FO-4
<PAGE>
OPENROUTE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
-------- ------- --------
(In Thousands, Except Per
Share Amounts)
<S> <C> <C> <C>
Sales:
Product........................................ $ 10,416 $22,248 $ 32,175
Service and other.............................. 2,247 3,801 5,591
Software licensing............................. 1,663 895 7,530
-------- ------- --------
Net sales.................................... 14,326 26,944 45,296
-------- ------- --------
Cost of sales:
Product........................................ 6,836 12,722 20,825
Service and other.............................. 1,760 2,618 4,307
Software licensing............................. -- -- 538
-------- ------- --------
Cost of sales................................ 8,596 15,340 25,670
-------- ------- --------
Gross profit..................................... 5,730 11,604 19,626
-------- ------- --------
Operating expenses:
Research and development....................... 4,610 5,987 9,353
Selling and marketing.......................... 8,018 10,703 15,486
General and administrative..................... 5,376 3,870 4,590
Restructure costs (Note 9)..................... -- (241) 3,312
-------- ------- --------
Total operating expenses..................... 18,004 20,319 32,741
-------- ------- --------
Loss from operations............................. (12,274) (8,715) (13,115)
Interest income, net of interest expense of
$10,000 in 1996................................. 589 1,052 1,261
-------- ------- --------
Loss before provision for income taxes........... (11,685) (7,663) (11,854)
Provision for income taxes (Note 10)............. 175 184 160
-------- ------- --------
Net loss......................................... $(11,860) $(7,847) $(12,014)
-------- ------- --------
Net loss per share of Common Stock--basic and
diluted......................................... $ (.77) $ (.51) $ (.77)
-------- ------- --------
Weighted average number of common shares
outstanding--basic and diluted.................. 15,312 15,301 15,630
-------- ------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FO-5
<PAGE>
OPENROUTE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accum-
Capital ulated
In Other Total
Common Stock Excess Accum- Compre- Treasury Stock Stock-
------------- of Par ulated hensive -------------- holders'
Shares Amount Value Deficit Income Shares Amount Equity
------ ------ ------- ------- ------- ------ ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 15,589 $156 $49,141 $ (1,805) $118 81 $ (287) $47,323
Issuance of Common
Stock................. 48 -- 151 -- -- -- -- 151
Repurchase of stock as
treasury stock........ -- -- -- -- -- 130 (328) (328)
Comprehensive income
(loss):
Foreign currency
translation........... -- -- -- -- 59 -- -- 59
Net loss............... -- -- -- (12,014) -- -- -- (12,014)
------ ---- ------- -------- ---- --- ------- --------
Total comprehensive
loss................. -- -- -- -- -- -- -- (11,955)
------ ---- ------- -------- ---- --- ------- --------
Balance, December 31,
1996................... 15,637 156 49,292 (13,819) 177 211 (615) 35,191
Issuance of Common
Stock................. 33 1 55 -- -- -- -- 56
Repurchase of stock as
treasury stock........ -- -- -- -- -- 196 (441) (441)
Comprehensive loss:
Foreign currency
translation........... -- -- -- -- (67) -- -- (67)
Net loss............... -- -- -- (7,847) -- -- -- (7,847)
------ ---- ------- -------- ---- --- ------- --------
Total comprehensive
loss................. -- -- -- -- -- -- -- (7,914)
------ ---- ------- -------- ---- --- ------- --------
Balance, December 31,
1997................... 15,670 157 49,347 (21,666) 110 407 (1,056) 26,892
Issuance of Common
Stock................. 70 -- 71 -- -- -- -- 71
Issuance of treasury
stock................. -- -- -- -- -- (17) 46 46
Comprehensive income
(loss):
Foreign currency
translation........... -- -- -- -- 2 -- -- 2
Net loss............... -- -- -- (11,860) -- -- -- (11,860)
------ ---- ------- -------- ---- --- ------- --------
Total comprehensive
loss................. -- -- -- -- -- -- -- (11,858)
------ ---- ------- -------- ---- --- ------- --------
Balance, December 31,
1998................... 15,740 $157 $49,418 $(33,526) $112 390 $(1,010) $ 15,151
====== ==== ======= ======== ==== === ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FO-6
<PAGE>
OPENROUTE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net loss......................................... $(11,860) $ (7,847) $(12,014)
Adjustments to reconcile net loss to net cash
used by operating activities:
Bad debt provision............................. 545 439 --
Inventory provision............................ -- -- 2,374
Depreciation and amortization.................. 1,191 1,550 3,401
Restructuring cost............................. -- -- 1,922
Loss (gain) on disposition of fixed assets..... 53 198 (117)
Changes in operating assets and liabilities:
Accounts receivable.......................... 2,323 962 4,513
Inventories.................................. (2,836) 3,027 (6,686)
Deposits and other assets.................... (72) 768 372
Accounts payable and accrued expenses........ (1,384) (3,869) (1,326)
-------- -------- --------
Net cash used by operating activities...... (12,040) (4,772) (7,561)
-------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of fixed assets......... 23 182 117
Capital expenditures........................... (710) (728) (1,600)
Marketable securities sales and maturities..... 16,980 19,428 15,456
Purchase of marketable securities.............. (7,665) (24,953) (15,511)
-------- -------- --------
Net cash provided (used) by investing
activities................................ 8,628 (6,071) (1,538)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of Common Stock..... 71 56 151
Proceeds from issuance of treasury stock....... 46 -- --
Purchase of treasury stock..................... -- (441) (328)
-------- -------- --------
Net cash provided (used) by financing
activities................................ 117 (385) (177)
-------- -------- --------
Effect of exchange rate changes on cash.......... 2 (67) 59
-------- -------- --------
Net decrease in cash and cash equivalents........ (3,293) (11,295) (9,217)
Cash and cash equivalents, at beginning of year.. 5,317 16,612 25,829
-------- -------- --------
Cash and cash equivalents, at end of year........ $ 2,024 $ 5,317 $ 16,612
======== ======== ========
Supplemental cash flow information:
Cash paid for:
Income taxes................................. $ 69 $ 230 $ 321
Interest..................................... $ -- $ -- $ 10
Non-cash financing activities:
Note receivable on sale of fixed assets...... $ 15 $ 120 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FO-7
<PAGE>
NOTES TO OPENROUTE CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Management's Plans
OpenROUTE Networks, Inc. (formerly Proteon, Inc.) and its subsidiaries
("OpenROUTE") develop, market, and support a wide range of networking products.
OpenROUTE is engaged principally in one business segment in the computer
networking industry having two lines of business; (i) Internet access and (ii)
local area network access. OpenROUTE is positioned to focus on the Internet
access market. OpenROUTE's principal geographic markets include the Americas,
Europe and the Far East.
OpenROUTE's consolidated financial statements have been prepared on the basis
that it will continue as a going concern. OpenROUTE has incurred net losses of
approximately $11,860,000, $7,847,000 and $12,014,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. OpenROUTE's current business
strategy is focused on the emerging Internet access market. As such, success of
future operations is subject to a number of risks. Principal among these risks
are the successful marketing of its products, rapidly changing technology,
reliance on significant customers, intense competition from substitute products
and significantly larger companies, and the ability to obtain financing to fund
future operations. The above factors raise substantial doubt about OpenROUTE's
ability to continue as a going concern.
Management's plans include a continued effort to gain market share and
increase its Internet access product revenues. OpenROUTE has also continued to
monitor cost containment and has a plan to implement further operating expense
reductions as it deems necessary. Additionally, OpenROUTE is pursuing working
capital financing to fund future operating activities. OpenROUTE's ability to
continue as a going concern depends on the success of management's plans,
including obtaining additional funding or establishing strategic relationships
and achieving projected operating results. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of OpenROUTE Networks, Inc. and its subsidiaries. Proteon, Inc.
changed its name to OpenROUTE Networks, Inc. on June 10, 1998. OpenROUTE
Networks, Inc. was previously the name of a wholly-owned subsidiary of Proteon,
Inc. All intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In particular, OpenROUTE records reserves for
estimated product returns, collectability of accounts receivable, estimated
inventory obsolescence and estimated warranty obligations. All estimates are
based upon experience and actual results could differ from the estimates and
assumptions used by management.
Revenue Recognition. OpenROUTE recognizes revenue from product sales upon
shipment of the product. Revenue from service agreements is recognized ratably
over the term of the agreement. Revenue from software licensing is recognized
upon performance of milestones when collectability is reasonably assured.
Translation of Foreign Currencies. OpenROUTE has designated the local
currency as the functional currency for all foreign locations. Accordingly,
assets and liabilities of all foreign subsidiaries are translated at year-end
rates of exchange, and income statement accounts are translated at the average
rates of exchange during the year. The resulting translation adjustments are
excluded from net earnings, and accumulated as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in results of operations in the periods in which they occur, and are
immaterial for all periods presented.
Hedging Activities. In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 requires
FO-8
<PAGE>
companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged assets or liability or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Historically, OpenROUTE has not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, OpenROUTE does not expect adoption of the new standard to affect
its financial statements.
Comprehensive Income (Loss). In 1998, OpenROUTE adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income". SFAS No. 130 established rules for the reporting of comprehensive
income (loss) and its components. Comprehensive income (loss) consists of net
income (loss) and foreign currency translation adjustments and is presented in
the accompanying consolidated statements of stockholders' equity. The adoption
of SFAS no. 130 had no impact on total stockholders' equity. Prior year
financial statements have been reclassified to conform to the SFAS No. 130
requirements.
Cash Equivalents and Marketable Securities. OpenROUTE considers all highly
liquid instruments purchased with a maturity of three months or less to be cash
equivalents. Marketable securities consist of highly liquid investments with
maturities of more than three months when purchased. Investments are stated at
cost, plus accrued interest, which approximates fair market value. In addition,
OpenROUTE classified all investments as available-for-sale securities. Realized
gains and losses are determined on the specific identification method. The
marketable securities portfolio at December 31, 1998 matures at various dates
through September 8, 1999.
Inventories. Inventories are stated at the lower of cost or market, with cost
determined under the first-in, first-out method.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization of property and equipment are computed
principally using the straight-line method over the estimated useful lives of
the assets as follows:
<TABLE>
<CAPTION>
Category Years
-------- -----
<S> <C>
Machinery and equipment 3-5
Furniture and fixtures 7
Leasehold improvements shorter of lease term or
estimated useful life
</TABLE>
Maintenance and repairs are charged to expense as incurred. Upon retirement
or sale, the cost of the disposed assets and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recorded in the consolidated statements of operations.
Income Taxes. Deferred tax assets and liabilities reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
A valuation allowance is provided for the net deferred tax assets if it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Accrued Warranty. OpenROUTE records a liability for future warranty costs
based upon the relationship of prior years' sales to actual warranty costs
which approximates expected future warranty costs.
Research and Development. Costs incurred in the research and development of
software products are expensed as incurred until the technological feasibility
of the product has been established. After technological feasibility is
established, any additional costs would be capitalized. OpenROUTE believes the
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility. Accordingly, no software
development costs have been capitalized to date.
FO-9
<PAGE>
Concentrations of Credit Risk. Financial instruments, which potentially
subject OpenROUTE to concentration of credit risk, are principally cash and
cash equivalents, marketable securities and accounts receivable. OpenROUTE
places its investments in highly rated financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
Concentration of credit risk with respect to accounts receivable is limited
to certain customers with whom OpenROUTE makes substantial sales. Four
customers accounted for approximately 35% of OpenROUTE's outstanding accounts
receivable at December 31, 1998 and two customers accounted for approximately
28% of OpenROUTE's outstanding accounts receivable at December 31, 1997. To
reduce credit risk, OpenROUTE performs ongoing credit evaluation, account
monitoring procedures and maintains reserves for potential losses. These losses
have been within management's expectations.
Net Loss Per Share. OpenROUTE follows SFAS No. 128 "Earnings per Share".
Under SFAS No. 128, Basic Earnings Per Share (EPS) excludes the effect of any
dilutive options, warrants or convertible securities and is computed by
dividing the net income (loss) available to Common Stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue Common Stock were exercised. Diluted EPS is computed by
dividing the net income (loss) available to Common Stockholders by the sum of
the weighted average number of common shares and common share equivalents
computed using the average market price for the period under the treasury stock
method.
The following table presents the numerator and the denominator of the basic
and diluted EPS computations shown on the consolidated statements of
operations:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
-------- ------- --------
(In Thousands, Except Per
Share Amounts)
<S> <C> <C> <C>
Basic and diluted EPS computation:
Numerator:
Net loss.................................. $(11,860) $(7,847) $(12,014)
Denominator:
Weighted average common shares
outstanding.............................. 15,312 15,301 15,630
Basic and diluted EPS......................... $ (.77) $ (.51) $ (.77)
</TABLE>
Outstanding stock options of 2,269,463, 1,758,605 and 1,272,009 as of
December 31, 1998, 1997 and 1996, respectively, were not included in the
diluted EPS computation because their effect would be antidilutive.
Segment Information. In 1998, OpenROUTE adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information". SFAS No. 131
established standards for disclosures regarding products and services,
geographic areas and major customers. Information for 1997 and 1996 has been
restated to conform with the 1998 presentation (see Note 8).
3. Marketable Securities
Marketable securities consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1997
------ -------
(In Thousands)
<S> <C> <C>
Fixed income securities...................................... $3,128 $ 7,074
Repurchase agreements........................................ -- 263
Certificates of deposit...................................... -- 1,291
Commercial paper............................................. -- 2,557
U.S. Government securities................................... -- 1,258
------ -------
$3,128 $12,443
====== =======
</TABLE>
FO-10
<PAGE>
4. Inventories
Inventories consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
(In
Thousands)
<S> <C> <C>
Raw Materials.................................................. $2,270 $1,043
Work in process................................................ 15 373
Finished goods................................................. 6,261 4,294
------ ------
$8,546 $5,710
====== ======
</TABLE>
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Machinery and equipment..................................... $11,791 $11,492
Furniture and fixtures...................................... 593 554
Leasehold improvements...................................... 884 1,188
------- -------
13,268 13,234
Less accumulated depreciation and amortization.............. 10,553 9,962
------- -------
Property and equipment, net................................. $ 2,715 $ 3,272
======= =======
</TABLE>
6. Commitments and Contingencies
Letter of Credit. OpenROUTE has an outstanding letter of credit of
approximately $288,000 at December 31, 1998, 1997 and 1996. This letter of
credit which matures on April 30, 2002, automatically renews annually on
December 31. This letter of credit collateralized OpenROUTE's obligation to a
third party for a certain lease transaction.
Operating Leases. OpenROUTE leases its office and manufacturing facilities
under operating leases expiring at various dates through 2002. Under certain
leases OpenROUTE is obligated to pay taxes, repairs, and other operating costs.
OpenROUTE has the option to extend the term of the lease of its primary office
and manufacturing facility for two five-year periods commencing on May 1, 2002
and May 1, 2007. Rental expense amounted to approximately $1,119,000,
$1,128,000, $1,556,000 in 1998, 1997 and 1996, respectively. At December 31,
1998, future rental commitments are approximately as follows:
<TABLE>
<CAPTION>
Years ended December 31, Amount
------------------------ ----------
<S> <C>
1999............................................................ $ 584,100
2000............................................................ 547,700
2001............................................................ 511,100
2002............................................................ 162,200
----------
$1,805,100
==========
</TABLE>
7. Capital Stock
Common Stock. OpenROUTE has an Employee Stock Purchase Plan (the "Purchase
Plan") available to most full time employees. Under this plan, 300,000 shares
of common stock were reserved for issuance. Eligible employees may designate
not more than 5% of their cash compensation to be deducted each pay period for
the purchase of common stock under the Purchase Plan. The purchase price of the
shares under the plan is
FO-11
<PAGE>
equal to the lower of 85% of the fair market value per share of the stock on
the grant date (first day of the exercise period) or 85% of the fair market
value on the exercise date (the last day of the exercise period). The fair
market value as of a given date is determined by averaging the last sales price
of the stock for the ten trading days immediately proceeding the given date.
OpenROUTE sold 66,084, 32,667 and 41,628 shares of common stock to employees
in 1998, 1997 and 1996, respectively, under the Purchase Plan. At December 31,
1998, 186,316 shares remained unissued under the Purchase Plan. No compensation
cost has been recognized for shares issued under the Purchase Plan in 1998,
1997 and 1996 since the amount was determined not to be material.
Preferred Stock. In 1991, the shareholders approved the authorization of
7,500,000 shares of preferred stock. The board of directors is authorized,
subject to any limitations prescribed by law, to issue from time to time such
shares of preferred stock in one or more series. Each such series of preferred
stock will have such number of shares, designations, preferences, voting power,
qualifications, and special or private rights or privileges as shall be
determined by the board of directors, which may include, among others, dividend
rights, voting rights, preemptive and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights. No such shares have been
issued to date.
Stock Options. OpenROUTE's stock option plans generally provide for the
granting to employees of incentive stock options to purchase shares of common
stock at the fair market value as defined by the plan on the date of grant and
of non-qualified stock options at no less than 50% of the fair market value as
defined by the plan on the date of the grant. To date, OpenROUTE has never
issued non-qualified stock options at an exercise price less than the fair
market value on the date of the grant.
Generally, options become exercisable at the rate of 25% at the end of each
of the first four anniversaries of the grant. Options generally expire ten
years from the date of grant, or ninety days from the date of termination of
employment. At December 31, 1998, 2,545,083 shares of common stock were
reserved under the plans and 275,620 shares were available for grant.
In 1998 and 1996, the Compensation Committee of the Board of Directors,
pursuant to the authority granted under OpenROUTE's 1991 Restated Stock Option
Plan, voted to allow employees of OpenROUTE holding options with exercise
prices greater than $1.90 and $3.625 per share in 1998 and 1996, respectively,
to exchange those options for substitute options having an option exercise
price of $1.90 and $3.625 per share in 1998 and 1996, respectively.
In February 1998 and in 1996, 799,575 and 707,154 options, respectively, were
surrendered by employees and exchanged for new options at the new option
exercise price and vesting schedule. A summary of the status of OpenROUTE's
stock plans as of December 31, 1998, 1997 and 1996, and changes during the
years then ended is presented below:
<TABLE>
<CAPTION>
1998: 1997: 1996:
--------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Average Number Average Average
Number Exercise of Exercise Number Exercise
of Options Price Options Price of Options Price
---------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, at the be-
ginning of year........ 1,758,605 $2.70 1,272,009 $3.34 1,237,649 $5.52
Granted............... 2,412,501 1.31 1,007,805 2.02 1,245,726 4.11
Exercised............. (4,687) 1.70 -- -- (6,712) 4.01
Cancelled............... (1,896,956) 2.51 (521,209) 3.18 (1,204,654) 6.23
Outstanding, at the end
of year................ 2,269,463 $1.38 1,758,605 $2.70 1,272,009 $3.34
---------- ----- --------- ----- ---------- -----
Options exercisable at
year end............... 687,978 $1.87 685,270 $3.41 522,064 $3.41
========== ===== ========= ===== ========== =====
Weighted average fair
value of options
granted during the
year................... 2,412,501 $ .51 1,007,805 $1.34 1,245,726 $2.78
========== ===== ========= ===== ========== =====
</TABLE>
FO-12
<PAGE>
The following tables summarize information concerning outstanding and
exercisable options at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted-
Average Weighted-
Remaining Average
Number of Contractual Exercise
Range of Exercise Prices Outstanding Life Price
------------------------ ----------- ----------- --------
<S> <C> <C> <C>
$.81--$1.17............................... 1,264,926 9.5 $0.95
$1.23--$1.68.............................. 238,700 9.2 1.34
$1.70--$2.10.............................. 709,526 9.3 1.91
$2.56--$3.63.............................. 36,311 7.8 2.98
$6.00--$7.50.............................. 20,000 2.4 7.50
--------- --- -----
2,269,463 9.3 $1.38
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------
Weighted-
Average Weighted-
Remaining Average
Number of Contractual Exercise
Range of Exercise Prices Exercisable Life Price
------------------------ ----------- ----------- --------
<S> <C> <C> <C>
$.81--$1.17............................... 137,890 9.5 $ .93
$1.23--$1.68.............................. 25,075 8.7 1.43
$1.70--$2.10.............................. 494,826 9.4 1.90
$2.56--$3.63.............................. 10,187 7.5 3.12
$6.00--$7.50.............................. 20,000 2.4 7.50
------- --- -----
687,978 9.2 $1.87
</TABLE>
SFAS No. 123 "Accounting for Stock-Based Compensation" requires that
companies either recognize compensation expense for grants of stock, stock
options, and other equity instruments based on fair value, or provide pro forma
disclosure of net income (loss) and net income (loss) per share in the notes to
the financial statements. The Netrix adopted the disclosure provisions of SFAS
No. 123 and has applied APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock-based plans in 1998, 1997 and 1996.
OpenROUTE's net loss and net loss per share for the years ended December 31,
1998, 1997 and 1996 would have increased to the pro forma amounts indicated
below, if compensation cost for stock-based plans were recorded based on the
fair value at grant dates.
<TABLE>
<CAPTION>
1998: 1997: 1996:
--------------- -------------- ---------------
Loss Loss Loss
Net Per Net Per Net Per
Loss Share Loss Share Loss Share
-------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
As reported................ $(11,860) $(.77) $(7,847) $(.51) $(12,014) $(.77)
Pro forma.................. $(12,007) $(.78) $(8,140) $(.53) $(12,627) $(.81)
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of six years, expected volatility of 46% in 1998,
75% in 1997 and 65% in 1996, and no dividends assumed. The weighted average
assumptions for the risk-free interest rates for 1998, 1997 and 1996 were
5.52%, 6.11% and 6.32%, respectively.
The effects of applying SFAS No. 123 in the above pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards prior
to 1995, and additional awards in the future years are anticipated.
FO-13
<PAGE>
8. Segment Information and Significant Customers
OpenROUTE is engaged principally in one business segment having two lines of
business: (i) Internet access and (ii) local area network access. In 1998, 1997
and 1996, net sales to one customer accounted for approximately 12%, 11% and
14% of OpenROUTE's total net sales, respectively. A second significant customer
accounted for approximately 10%, 8% and 14% of total net sales in 1998, 1997
and 1996, respectively.
The geographic distribution of OpenROUTE's operating data is therefore
summarized as follows:
<TABLE>
<CAPTION>
United Asia
States Pacific Europe Total
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Net sales................................ $ 9,894 $2,065 $ 2,367 $14,326
Loss from operations..................... (10,914) (896) (464) (12,274)
Loss before income taxes................ (10,325) (896) (464) (11,685)
Total assets............................. 19,698 827 203 20,278
Capital expenditures..................... 673 26 11 710
Depreciation and amortization............ 1,104 66 21 1,191
Year ended December 31, 1997:
Net sales................................ $17,403 $4,182 $ 5,359 $26,944
Income (loss) from operations............ (9,472) (942) 1,699 (8,715)
Income (loss) before income taxes....... (8,420) (942) 1,699 (7,663)
Total assets............................. 31,101 1,301 1,001 33,403
Capital expenditures..................... 570 144 14 728
Depreciation and amortization............ 1,343 49 158 1,550
Year ended December 31, 1996:
Net sales................................ $27,941 $7,195 $10,160 $45,296
Income (loss) from operations............ (13,958) 757 86 (13,115)
Income (loss before income taxes)....... (12,697) 757 86 (11,854)
Total assets............................. 41,420 2,386 1,765 45,571
Capital expenditures..................... 1,387 137 76 1,600
Depreciation and amortization............ 2,853 141 407 3,401
</TABLE>
9. Restructuring of Operations.
During the fourth quarter of 1996, OpenROUTE's management announced a
restructuring plan for the strategic redirection of OpenROUTE. The
restructuring principally addressed the move toward the rapidly growing
Internet/Intranet connectivity marketplace.
As a result of the restructuring, OpenROUTE recorded a $3,312,000 charge in
the fourth quarter of 1996. This included a reduction in OpenROUTE's work force
of forty-two employees, or approximately 22%, accounting for approximately
$410,000 of severance costs. OpenROUTE incurred a charge of approximately
$785,000 in connection with the substantial reduction in its occupancy
requirements. In addition, the charge included approximately $1,922,000 for
disposal of fixed assets and approximately $195,000 of other costs.
During 1997, OpenROUTE incurred cash expenditures relating to the 1996
restructuring of approximately $495,000 for severance and payroll related
costs, approximately $672,000 as a result of reducing its occupancy costs and
$253,000 in other restructuring related costs. Management has determined that
all of OpenROUTE's obligations from the 1996 and prior restructurings have been
settled. Accordingly, OpenROUTE reversed its remaining restructuring provision
of $241,000 against operating expenses in the third quarter of 1997.
FO-14
<PAGE>
10. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Foreign........................................ $ 175 $ 156 $ 215
Federal........................................ -- -- (65)
State.......................................... -- 28 10
-------- -------- --------
$ 175 $ 184 $ 160
</TABLE>
A reconciliation between OpenROUTE's effective tax rate and the U.S.
statutory rate is as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
U.S. statutory rate..... (34.0)% (34.0)% (34.0)%
Foreign tax rate differ-
ential................. 1.5 2.4 0.1
Change in valuation al-
lowance................ 34.0 34.0 35.2
----- ----- -----
Effective tax rate...... 1.5% 2.4% 1.3%
</TABLE>
A valuation allowance of $17,841,000 and $13,210,000 at December 31, 1998 and
1997, respectively has been recorded to offset the related net deferred tax
assets due to the uncertainty of realizing the benefit of these assets.
The following is a summary of the significant components of OpenROUTE's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Bad debt reserve..................................... $ 580 $ 360
Inventory reserves................................... 678 533
Product warranty..................................... 270 262
Federal tax benefit of net operating loss
carryforwards....................................... 11,256 7,889
State tax benefit of net operating loss
carryforwards....................................... 2,301 1,827
Tax credit carryforwards............................. 1,298 912
Alternative minimum tax credit....................... 699 699
Depreciation......................................... 76 144
Other items.......................................... 683 584
-------- --------
Total deferred tax assets.............................. 17,841 13,210
Valuation allowance for deferred tax assets............ (17,841) (13,210)
-------- --------
Net deferred tax assets................................ $ -- $ --
-------- --------
</TABLE>
As of December 31, 1998, OpenROUTE had net operating loss carryforwards,
subject to review by the Internal Revenue Service and state taxing authorities
of approximately $33,000,000 and $48,000,000 for federal and state income tax
purposes, respectively. The federal net operating losses begin to expire in
2010 and the state net operating losses began to expire in 1998. Similarly,
research and development credit carryforwards of approximately $1,298,000 were
available on December 31, 1998, expiring at various dates through 2005.
FO-15
<PAGE>
11. Retirement Savings Plan
Eligible employees are permitted to contribute to the 401(k) Plan through
payroll deductions within statutory limitations and subject to any limitations
included in the 401(k) Plan. The Plan provides for the matching contribution by
OpenROUTE in an annual amount not to exceed 2% of a participant's compensation.
OpenROUTE contributed approximately $116,000, $128,000 and $185,000 to the plan
in 1998, 1997 and 1996, respectively.
12. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the years ended December 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
Basic
and
Net Gross Diluted Net Loss
Year ended December 31, 1998 Sales Profit Net Loss Per Share
---------------------------- ------- ------ -------- ---------
(In Thousands, Except Per Share
Amounts)
<S> <C> <C> <C> <C>
First Quarter............................. $ 4,188 $1,615 $ (2,513) $(.17)
Second Quarter............................ 4,825 2,093 (3,876) (.25)
Third Quarter............................. 2,168 740 (3,573) (.23)
Fourth Quarter............................ 3,145 1,282 (1,898) (.12)
------- ------ -------- -----
$14,326 $5,730 $(11,860) $(.77)
</TABLE>
<TABLE>
<CAPTION>
Basic and
Net Gross Diluted Net Loss
Year ended December 31, 1997 Sales Profit Net Loss Per Share
---------------------------- ------- ------- --------- ---------
(In Thousands, Except Per Share
Amounts)
<S> <C> <C> <C> <C>
First Quarter............................ $ 9,125 $ 4,256 $ (313) $(.02)
Second Quarter........................... 7,748 3,748 (1,133) (.07)
Third Quarter............................ 5,006 1,754 (2,894) (.19)
Fourth Quarter........................... 5,065 1,846 (3,507) (.23)
------- ------- ------- -----
$26,944 $11,604 $(7,847) $(.51)
</TABLE>
The 1997 fourth quarter operating loss reflects approximately $880,000 or
$.06 per share of certain adjustments and accruals relating to business
operations in the Asia Pacific region, as well as certain employee incentive
programs.
13. Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance
at Provision Write-Offs Balance at
Beginning for Accounts End of
Allowance for Doubtful Accounts of Period Bad Debt Written Off Period
------------------------------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998.... $926,608 $496,909 $ 0 $1,423,517
Year ended December 31, 1997.... $671,755 $346,833 $ (91,980) $ 926,608
Year ended December 31, 1996.... $889,276 -- $(217,521) $ 671,755
</TABLE>
FO-16
<PAGE>
OPENROUTE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 25, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 2,804 $ 2,024
Marketable securities.............................. 0 3,128
Accounts receivable, net........................... 3,450 3,356
Inventories........................................ 5,563 8,546
Prepaids and other assets.......................... 343 509
-------- --------
Total current assets........................... 12,160 17,563
Trademarks, licenses................................. 41 0
Property and equipment, net.......................... 2,239 2,715
-------- --------
Total assets................................... $ 14,440 $ 20,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 1,226 $ 1,449
Accrued compensation............................... 88 353
Accrued expenses................................... 1,417 2,743
Accrued warranty................................... 582 582
-------- --------
Total current liabilities........................ 3,313 5,127
-------- --------
Stockholders' equity
Preferred stock.................................... -- --
Common stock....................................... 160 157
Capital in excess of par value..................... 49,689 49,418
Accumulated deficit................................ (37,835) (33,526)
Cumulative translation adjustments................. 123 112
Less Treasury stock, at cost....................... (1,010) (1,010)
-------- --------
Total stockholders' equity....................... 11,127 15,151
-------- --------
Total liabilities and stockholders' equity..... $ 14,440 $ 20,278
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FO-17
<PAGE>
OPENROUTE NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------
September 25, September 26,
1999 1998
--------------- ----------------
(Unaudited)
<S> <C> <C>
Sales:
Product............................. $ 8,425 $ 7,733
Software licensing.................. 785 1,663
Service and other................... 1,401 1,785
--------------- ----------------
Net sales......................... 10,611 11,181
Cost of sales:
Product............................. 5,058 5,281
Software licensing.................. -- --
Service and other................... 1,187 1,452
--------------- ----------------
Cost of sales..................... 6,245 6,733
--------------- ----------------
Gross profit........................ 4,366 4,448
--------------- ----------------
Operating expenses:
Research and development............ 2,935 3,532
Selling and marketing............... 3,181 6,653
General and administrative.......... 2,418 4,561
Restructure Costs................... 243 --
--------------- ----------------
Total operating expenses.......... 8,777 14,746
--------------- ----------------
Loss from operations.................. (4,411) (10,298)
Interest income, net.................. 112 498
--------------- ----------------
Loss before income taxes.............. (4,299) (9,800)
Provision for income taxes............ 10 162
--------------- ----------------
Net loss.............................. $ (4,309) $ (9,962)
=============== ================
Loss per share--Basic and Diluted..... $ (0.28) $ (0.65)
=============== ================
Weighted average number of common
shares outstanding--Basic and
Diluted.............................. 15,461 15,302
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FO-18
<PAGE>
OPENROUTE NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other
------------- Excess of Accumulated Comprehensive
Shares Amount Par Value Deficit Income
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998.. 15,740 $157 $49,418 $(33,526) $112
Issuance of common stock.. 176 3 271 -- --
Comprehensive income
(loss)
Foreign currency
translation............ -- -- -- -- 11
Net loss................ -- -- -- (4,309)
------ ---- ------- -------- ----
Total comprehensive
loss................. -- -- -- --
------ ---- ------- -------- ----
BALANCE, September 25,
1999....................... 15,916 $160 $49,689 $(37,835) $123
------ ---- ------- -------- ----
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Total
-------------- Stockholders'
Shares Amount Equity
------ ------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1998........................ 390 $(1,010) $15,151
Issuance of common stock........................ -- -- 274
Comprehensive income (loss)
Foreign currency translation.................. -- -- 11
Net loss...................................... -- -- (4,309)
--- ------- -------
Total comprehensive loss.................... (4,024)
--- ------- -------
BALANCE, September 25, 1999....................... 390 $(1,010) $11,127
--- ------- -------
</TABLE>
FO-19
<PAGE>
OPENROUTE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(Unaudited)
<TABLE>
<CAPTION>
September 25, September 26,
1999 1998
------------- -------------
(In Thousands)
<S> <C> <C>
Cash flows provided by operating activities:
Net loss........................................... $(4,309) $(9,962)
Adjustments to reconcile net loss to cash flows
used by operating activities:
Bad debt provision............................. 210 470
Depreciation and amortization.................. 565 890
Loss on disposition of fixed assets............ 8 4
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable..... (304) 3,511
(Increase) decrease in inventories............. 2,983 (2,795)
Decrease in deposits and other assets.......... 125 6
Decrease in accounts payable and accrued
expenses...................................... (1,814) (1,054)
------- -------
Net cash used by operating activities........ (2,536) (8,930)
------- -------
Cash flows provided by investing activities:
Sale of equipment and fixed asset proceeds....... 153 1
Capital expenditures............................. (250) (616)
Marketable securities sales and maturities....... 3,128 14,070
Marketable securities purchases.................. -- (7,640)
------- -------
Net cash provided by investing activities.... 3,031 5,815
------- -------
Cash flows provided by financing activities:
Proceeds from the issuance of common stock....... 274 70
------- -------
Net cash provided by financing activities.... 274 70
------- -------
Effect of exchange rate changes on cash............ 11 23
------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 780 (3,022)
Cash and cash equivalents at beginning of period... 2,024 5,317
------- -------
Cash and cash equivalents at end of period......... $ 2,804 $ 2,295
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FO-20
<PAGE>
OPENROUTE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
OpenROUTE Network, Inc. and its subsidiaries (collectively, "OpenROUTE"). The
consolidated financial statements for OpenROUTE for the interim periods ended
September 25, 1999 and September 26, 1998 have been prepared without an audit
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC").
Certain information and footnote disclosures normally included in OpenROUTE's
annual financial statements have been condensed or omitted. The interim
financial statements, in the opinion of management, reflect all adjustments
(including normal recurring accruals) necessary for a fair statement of the
results for the interim periods ended September 25, 1999 and September 26,
1998. Operating results for the interim periods ended September 25, 1999 are
not necessarily indicative of the results that may be expected for the full
year ending December 31, 1999.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1998, which are
contained in OpenROUTE's 1998 Annual Report to its shareholders and in its Form
10-K filed with the SEC.
Management's Estimates and Assumptions
The accompanying financial statements were prepared by OpenROUTE in
conformity with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reported period. OpenROUTE reviews all significant
estimates affecting the financial statements on a recurring basis and records
the effect of any necessary adjustments prior to their issuance. Actual results
could differ from those estimates. The Articles of Organization of OpenROUTE
were amended on June 10, 1998 to change OpenROUTE's name to OpenROUTE Networks,
Inc. from its former name of Proteon, Inc.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
<TABLE>
<CAPTION>
September 25, December 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Raw Materials..................................... $1,056 $2,270
Work In Process................................... 27 15
Finished goods.................................... 4,480 6,261
------ ------
Total Inventories................................. $5,563 $8,546
====== ======
</TABLE>
Net Loss Per Common and Common Equivalent Share
OpenROUTE follows SFAS No. 128 "Earnings per Share". Under SFAS No. 128,
Basic Earnings Per Share ("EPS") excludes the effect of any dilutive options,
warrants or convertible securities and is computed by dividing the net income
(loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised. Diluted EPS is computed by dividing the net income (loss)
available to common stockholders by the sum of the weighted average number of
common shares and common share equivalents computed using the average market
price for the period under the treasury stock method.
FO-21
<PAGE>
The following table presents the numerator and the denominator of the basic
and diluted EPS computations shown on the consolidated statements of
operations:
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 25, September 26,
1999 1998
------------- -------------
(In Thousands, Except Per
Share Amounts)
<S> <C> <C>
Basic and diluted EPS Computation:
Numerator: Net loss.......................... $(4,309) $(9,962)
Denominator: Weighted average common shares
outstanding................................. 15,461 15,302
------- -------
Basic and diluted EPS.......................... $ (0.28) $ (0.65)
======= =======
</TABLE>
Outstanding stock options of 2,185,776 with an average exercise price of
$1.69 as of September 25, 1999 and outstanding stock options of 2,078,263 with
an average exercise price of $1.72 as of September 26, 1998 were not included
in the diluted EPS computation because their effect would be anti-dilutive.
Comprehensive Income
OpenROUTE has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a financial statement displayed
with the same prominence as other financial statements. OpenROUTE has elected
to disclose this information in its statement of stockholders' equity.
Newly Issued Accounting Standards
The FASB issued Statement No. 131 ("SFAS 131"),"Disclosures about Segments of
an Enterprise and Related Information". This Statement, which supersedes
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise,"
changes the way public companies report information about segments. SFAS 131,
which is based on the management approach to segment reporting, includes
requirements to report segment information quarterly and entity-wide
disclosures about products and services, major customers and the material
countries in which the entity holds assets and reports revenues.
OpenROUTE is engaged principally in one business segment having two lines of
business: (i) Internet Access and (ii) local area network access. During the
nine months ended September 25, 1999 and September 26, 1998, net sales to one
customer accounted for approximately 10% and 13% of OpenROUTE's total net
sales, respectively. A second significant customer accounted for approximately
9% of total net sales during the nine months ended September 25, 1999 and
September 26, 1998. The geographic distribution of OpenROUTE's operating data
is summarized as follows:
<TABLE>
<CAPTION>
United States Asia Pacific Europe & Other Total
------------- ------------ -------------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Nine Months ended Sep-
tember 25, 1999
Net sales............. $ 7,728 $ 656 $2,227 $ 10,611
Loss from operations.. (3,275) (561) (575) (4,411)
Long-lived assets..... 2,212 10 17 2,239
Capital expenditures.. 250 0 0 250
Depreciation and
amortization......... 543 14 8 565
Nine Months ended Sep-
tember 26, 1998
Net sales............. $ 8,544 $1,039 $1,598 $ 11,181
Loss from operations.. (9,082) (693) (523) (10,298)
Long-lived assets..... 2,859 105 29 2,993
Capital expenditures.. 604 2 10 616
Depreciation and
amortization......... 837 34 19 890
</TABLE>
FO-22
<PAGE>
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BETWEEN
OPENROUTE NETWORKS, INC.
AND
NETRIX CORPORATION
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1.DEFINITIONS............................................................... 4
2.THE TRANSACTION........................................................... 8
(a)The Merger............................................................. 8
(b)The Closing............................................................ 8
(c)Actions at the Closing................................................. 9
(d)Effect of Merger....................................................... 9
(e)Procedure for Exchange................................................. 12
(f)Closing of Transfer Records............................................ 13
3.REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................. 13
(a)Organization, Qualification and Corporate Power........................ 13
(b)Capitalization......................................................... 13
(c)Subsidiaries........................................................... 14
(d)Voting Arrangements.................................................... 14
(e)Authorization of Transaction........................................... 14
(f)Noncontravention....................................................... 14
(g)Filings with the SEC................................................... 15
(h)Financial Statements................................................... 15
(i)Events Subsequent to January 1, 1999................................... 15
(j)Compliance............................................................. 16
(k)Brokers' and Other Fees................................................ 16
(l)Litigation and Liabilities............................................. 16
(m)Taxes.................................................................. 16
(n)Fairness Opinion....................................................... 17
(o)Employee Benefits...................................................... 17
(p)Massachusetts Business Corporation Law................................. 17
(q)Year 2000.............................................................. 17
(r)Environmental Matters.................................................. 18
(s)Intellectual Property.................................................. 18
(t)Insurance.............................................................. 19
(u)Certain Contracts...................................................... 19
(v)Accounting and Tax Matters............................................. 19
4.REPRESENTATIONS AND WARRANTIES OF ACQUIROR................................ 19
(a)Organization, Qualification and Corporate Power........................ 19
(b)Capitalization......................................................... 19
(c)Subsidiaries........................................................... 20
(d)Voting Arrangements.................................................... 20
(e)Authorization of Transaction........................................... 20
(f)Noncontravention....................................................... 20
(g)Filings with the SEC................................................... 21
(h)Financial Statements................................................... 21
(i)Events Subsequent to January 1, 1999................................... 21
(j)Compliance............................................................. 22
(k)Brokers' and Other Fees................................................ 22
(l)Litigation and Liabilities............................................. 22
(m)Taxes.................................................................. 22
(n)Fairness Opinion....................................................... 23
(o)Employee Benefits...................................................... 23
(p)Year 2000.............................................................. 23
(q)Environmental Matters.................................................. 24
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
(r)Intellectual Property.................................................. 24
(s)Insurance.............................................................. 24
(t)Certain Contracts...................................................... 24
(u)Accounting and Tax Matters............................................. 25
5.COVENANTS................................................................. 25
(a)General................................................................ 25
(b)Notices and Consents................................................... 25
(c)Regulatory Matters and Approvals....................................... 25
(d)Operation of the Company's Business.................................... 27
(e)Operation of Acquiror's Business....................................... 28
(f)Access................................................................. 30
(g)Notice of Developments................................................. 30
(h)Company Exclusivity.................................................... 30
(i)Acquiror Exclusivity................................................... 31
(j)Insurance and Indemnification.......................................... 33
(k)Financial Statements................................................... 34
(l)Continuity of Business Enterprise...................................... 35
(m)Acquiror Board of Directors............................................ 35
(n)Rule 145 Affiliates.................................................... 35
(o)Nasdaq Listing......................................................... 35
(p)Tax Free Treatment..................................................... 35
(q)Company Employee Plans................................................. 35
(r)Letter of the Company's Accountants.................................... 36
(s)Letter of Acquiror's Accountants....................................... 36
6.CONDITIONS TO OBLIGATION TO CLOSE......................................... 36
(a)Conditions to Obligation of Acquiror................................... 36
(b)Conditions to Obligation of the Company................................ 37
7.TERMINATION............................................................... 38
(a)Termination of Agreement............................................... 38
(b)Effect of Termination.................................................. 39
8.MISCELLANEOUS............................................................. 39
(a)Survival............................................................... 39
(b)Press Releases and Public Announcements................................ 39
(c)No Third-Party Beneficiaries........................................... 40
(d)Entire Agreement....................................................... 40
(e)Binding Effect; Assignment............................................. 40
(f)Counterparts........................................................... 40
(g)Headings............................................................... 40
(h)Notices................................................................ 40
(i)Governing Law.......................................................... 41
(j)Amendments and Waivers................................................. 41
(k)Severability........................................................... 41
(l)Expenses............................................................... 41
(m)Construction........................................................... 41
(n)Incorporation of Exhibits.............................................. 41
(o)Definition of Knowledge................................................ 42
(p)Waiver of Jury Trial................................................... 42
</TABLE>
Exhibit A--Form of Affiliate Letter
A-3
<PAGE>
AMENDED & RESTATED
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of September 30, 1999
and as amended on November , 1999 by and between NETRIX CORPORATION, a
Delaware corporation ("Acquiror"), and OPENROUTE NETWORKS, INC., a
Massachusetts corporation (the "Company"). Acquiror and the Company are
referred to collectively herein as the "Parties."
WITNESSETH:
WHEREAS, this Agreement contemplates a transaction in which Acquiror will
acquire all of the outstanding capital stock of the Company through a merger of
the Company with and into Acquiror (the "Merger");
WHEREAS, the Board of Directors of each of Acquiror and the Company has
approved the acquisition of the Company by Acquiror, including the Merger, upon
the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company has determined that the Merger
is advisable and is fair to and in the best interests of the holders of the
Company's common stock, par value $.01 per share (the "Company Shares"), and
has resolved to recommend the approval of the Merger and the adoption of this
Agreement by the Company Stockholders (as defined in (S)1 below);
WHEREAS, the Board of Directors of Acquiror has determined that the Merger is
advisable and is fair to and in the best interests of the holders of Acquiror's
common stock, par value $0.01 per share (the "Acquiror Shares"), and has
resolved to recommend the approval of the Merger and the adoption of this
Agreement by the Acquiror Stockholders (as defined in (S)1 below);
WHEREAS, the Acquiror Shares are listed for trading on the Nasdaq National
Market ("Nasdaq") and the Board of Directors of Acquiror has resolved to
recommend the approval by the Acquiror Stockholders of (i) the issuance of
Acquiror Shares in connection with the Merger as provided in this Agreement as
required by the Rules of Nasdaq and (ii) an amendment to the certificate of
incorporation of Acquiror to increase the authorized number of Acquiror Shares;
and
WHEREAS, this Agreement contemplates that for U.S. Federal income tax
purposes the Merger will qualify as a reorganization within the meaning of Code
(S)368(a).
NOW, THEREFORE, in consideration of the premises and the mutual promises set
forth herein, and in consideration of the representations, warranties and
covenants set forth herein, the Parties agree as follows:
1. Definitions.
"Acquiror" has the meaning set forth in the preambles.
"Acquiror 10-K" has the meaning set forth in (S)4(h) below.
"Acquiror 10-Q" has the meaning set forth in (S)4(h) below.
"Acquiror Acquisition Proposal" means any proposal or offer (including,
without limitation, any proposal or offer to Acquiror Stockholders) with
respect to a merger, acquisition, consolidation, recapitalization,
reorganization, liquidation, tender offer or exchange offer or similar
transaction involving, or any purchase of 25% or more of the consolidated
assets of, or any equity interest representing 25% or more of the outstanding
shares of capital stock in, Acquiror.
"Acquiror Benefit Plan" and "Acquiror Benefit Plans" have the respective
meanings set forth in (S)4(o)(i) below.
"Acquiror Board" means the board of directors of Acquiror.
A-4
<PAGE>
"Acquiror Contracts" has the meaning set forth in (S)4(t) below.
"Acquiror Disclosure Letter" has the meaning set forth in (S)4(a) below.
"Acquiror Employees" has the meaning set forth in (S)4(o)(i) below.
"Acquiror ERISA Affiliate" has the meaning set forth in (S)4(o)(iii) below.
"Acquiror Fairness Opinion" means an opinion of Kaufman Brothers, L.P.,
addressed to the Acquiror Board, as to the fairness of the Merger to Acquiror
from a financial point of view.
"Acquiror Intellectual Property" has the meaning set forth in (S)4(r) below.
"Acquiror Material Adverse Effect" has the meaning set forth in (S)4(a)
below.
"Acquiror Pension Plan" has the meaning set forth in (S)4(o)(ii) below.
"Acquiror Reports" has the meaning set forth in(S)4(g) below.
"Acquiror Shares" has the meaning set forth in the preambles.
"Acquiror Special Meeting" has the meaning set forth in (S)5(c)(ii) below.
"Acquiror Stockholder" means any Person who or which holds any Acquiror
Shares.
"Acquiror Superior Proposal" has the meaning set forth in (S)5(i)(ii) below.
"Acquiror Third Party" means any Person (or group of Persons) other than the
Company or its respective Affiliates.
"Acquisition Proposal" means any proposal or offer (including, without
limitation, any proposal or offer to the Company Stockholders) with respect to
a merger, acquisition, consolidation, recapitalization, reorganization,
liquidation, tender offer or exchange offer or similar transaction involving,
or any purchase of 25% or more of the consolidated assets of, or any equity
interest representing 25% or more of the outstanding shares of capital stock
in, the Company.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Agreement" has the meaning set forth in the preambles.
"Blue Sky Filings" has the meaning set forth in(S)5(c)(i) below.
"Certificate of Merger" has the meaning set forth in (S)2(c) below.
"Closing" has the meaning set forth in (S)2(b) below.
"Closing Date" has the meaning set forth in (S)2(b) below.
"Closing Sales Price" means with respect to an Acquiror Share or Company
Share, as the case may be, on any day, the average of the last reported sale
price of one such share on the Nasdaq Stock Market for each of the ten trading
days immediately preceding such day.
"Code" has the meaning set forth in (S)3(o)(ii) below.
"Company" has the meaning set forth in the preambles.
A-5
<PAGE>
"Company 10-K" has the meaning set forth in (S)3(h) below.
"Company 10-Q" has the meaning set forth in (S)3(h) below.
"Company Benefit Plan" and "Company Benefit Plans" have the meanings set
forth in (S)3(o)(i) below.
"Company Board" means the board of directors of the Company.
"Company Contracts" has the meaning set forth in (S)3(u) below.
"Company Disclosure Letter" has the meaning set forth in (S)3(a) below.
"Company Employees" has the meaning set forth in (S)3(o)(i) below.
"Company ERISA Affiliate" has the meaning set forth in (S)3(o)(iii) below.
"Company Fairness Opinion" means an opinion of Tucker Anthony Cleary Gull,
addressed to the Company Board, as to the fairness of the Per Share Merger
Consideration to the Company Stockholders (other than Acquiror) from a
financial point of view.
"Company Intellectual Property" has the meaning set forth in (S)3(s) below.
"Company Material Adverse Effect" has the meaning set forth in (S)3(a) below.
"Company Pension Plan" has the meaning set forth in (S)3(o)(ii) below.
"Company Reports" has the meaning set forth in (S)3(g) below.
"Company Shares" has the meaning set forth in the preambles.
"Company Special Meeting" has the meaning set forth in (S)5(c)(ii) below.
"Company Stockholder" means any Person who or which holds any Company Shares.
"Confidentiality Agreement" means the Mutual Non-Disclosure Agreement dated
August 11, 1999 between Acquiror and the Company, providing that, among other
things, each Party would maintain confidential certain information of the other
Party.
"Confidential Information" means Information, as defined in the
Confidentiality Agreement.
"Delaware General Corporation Law" means Title 8, Chapter 1 of the Delaware
Code, as amended.
"Dissenting Holder" has the meaning set forth in (S)2(d)(viii) below.
"Effective Time" has the meaning set forth in (S)2(d)(i) below.
"Environmental Law" has the meaning set forth in (S)3(r) below.
"ERISA" has the meaning set forth in (S)3(o)(i) below.
"Exchange Agent" has the meaning set forth in (S)2(e)(i) below.
"Exchange Fund" has the meaning set forth in (S)2(e)(i) below.
"Foreign Competition Laws" means foreign statutes, rules, regulations,
orders, decrees and administrative and judicial directives that are designed or
intended to prohibit, restrict or regulate actions having the purpose or effect
of monopolization, lessening of competition or restraint of trade.
A-6
<PAGE>
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Government Entity" has the meaning set forth in (S)3(f) below.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Hazardous Substance" has the meaning set forth in (S)3(r) below.
"Indemnified Party" has the meaning set forth in (S)5(j)(ii) below.
"Joint Proxy Statement/Prospectus" has the meaning set forth in (S)5(c)(i)
below.
"Massachusetts Business Corporation Law" means Chapter 156B of the General
Laws of the Commonwealth of Massachusetts.
"Merger" has the meaning set forth in the preambles.
"Merger Consideration" has the meaning set forth in (S)5(d)(v) below.
"Nasdaq" has the meaning set forth in the preambles.
"Order" has the meaning set forth in (S)6(a)(v) below.
"Outside Date" has the meaning set forth in (S)7(a)(ii) below.
"Party" has the meaning set forth in the preambles.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or a governmental entity (or any
department, agency or political subdivision thereof).
"Per Share Merger Consideration" has the meaning set forth in (S)2(d)(v)
below.
"Prior Consultation" means oral or written notice to the chief executive
officer of the Company at least two (2) business days prior to the earlier of
(x) taking the action or (y) committing to take the action with respect to
which Prior Consultation is necessary pursuant to (S)5(e) below and subsequent
to such notice making the chief executive officer of Acquiror reasonably
available to the chief executive officer of the Company to discuss such action
prior to taking such action.
"Prohibited Acquiror Acquisition Proposal" has the meaning set forth in
(S)5(i)(i) below.
"Representatives" has the meaning set forth in (S)5(h)(i) below.
"Registration Statement" has the meaning set forth in (S)5(c)(i) below.
"Required Acquiror Consent" has the meaning set forth in (S)4(f) below.
"Required Company Consent" has the meaning set forth in (S)3(f) below.
"Requisite Stockholder Approval" means, with respect to the Company, the
affirmative vote of a majority of the holders of the outstanding Company Shares
in favor of the adoption of this Agreement in accordance with the Massachusetts
Business Corporation Law or, with respect to Acquiror, the affirmative vote of
a majority of the holders of the outstanding Acquiror Shares in favor of (a)
approval of the issuance of Acquiror Shares in connection with the Merger as
provided in this Agreement in accordance with the rules of Nasdaq and (b) an
amendment to Acquiror's certificate of incorporation to increase the authorized
capital stock of Acquiror in accordance with the Delaware General Corporation
Law.
A-7
<PAGE>
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge or
other security interest, other than (a) mechanic's, materialman's and similar
liens; (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings; (c)
purchase money liens and liens securing rental payments under capital lease
arrangements; and (d) other liens arising in the ordinary course of business
and not incurred in connection with the borrowing of money.
"Stock Rights" means each option, warrant, purchase right, subscription
right, conversion right, exchange right or other contract, commitment or
security providing for the issuance or sale of any capital stock, or otherwise
causing to become outstanding any capital stock.
"Stockholder" has the meaning set forth in the preambles.
"Subsidiary" of a specified Person means any corporation, limited liability
company, partnership, joint venture or other legal entity of which the
specified Person (either alone or together with any other Subsidiary of the
specified Person) owns, directly or indirectly, more than 50% of the stock or
other equity, partnership, limited liability company or equivalent interests,
the holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other legal
entity, or otherwise has the power to vote or direct the voting of sufficient
securities to elect a majority of such board of directors or other governing
body.
"Superior Proposal" has the meaning set forth in (S)5(h)(ii) below.
"Surviving Corporation" has the meaning set forth in (S)2(a) below.
"Tax Return" means any report, return, declaration or other information
required to be supplied to a taxing authority in connection with Taxes.
"Taxes" means all taxes or other like assessments including, without
limitation, income, withholding, gross receipts, excise, ad valorem, real or
personal property, asset, sales, use, license, payroll, transaction, capital,
net worth and franchise taxes imposed by or payable to any federal, state,
county, local or foreign government, taxing authority, subdivision or agency
thereof, including interest, penalties, additions to tax or additional amounts
thereto.
"Third Party" means any Person (or group of Persons) other than Acquiror or
its respective Affiliates.
"Year 2000 Compliant" has the meaning set forth in (S)3(q) below.
2. The Transaction.
(a) The Merger. On and subject to the terms and conditions of this Agreement,
the Company will merge with and into Acquiror at the Effective Time. Acquiror
shall be the corporation surviving the Merger (the "Surviving Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Kelley Drye &
Warren LLP, 101 Park Avenue, New York, New York, commencing at 9:00 a.m. local
time on the third business day following the satisfaction or waiver of all
conditions to the obligations of the Parties to consummate the transactions
contemplated hereby (other than conditions with
A-8
<PAGE>
respect to actions the respective Parties will take at the Closing itself) or
such other date as the Parties may mutually determine (the "Closing Date").
(c) Actions at the Closing. At the Closing, (i) the Company will deliver to
Acquiror the various certificates, instruments and documents referred to in
(S)6(a) below; (ii) Acquiror will deliver to the Company the various
certificates, instruments and documents referred to in (S)6(b) below; (iii) the
Company and Acquiror will file with the Secretary of State of the State of
Delaware a Certificate of Merger in such form as required by and executed in
accordance with the relevant provisions of the Delaware General Corporation Law
(the "Certificate of Merger"); (iv) the Company and Acquiror will file with the
Secretary of State of the Commonwealth of Massachusetts Articles of Merger in
such form as required by and executed in accordance with the relevant
provisions of the Massachusetts Business Corporation (the "Articles of Merger")
and (v) Acquiror will deliver or cause to be delivered the Exchange Fund to the
Exchange Agent in the manner provided below in this (S)2.
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
"Effective Time") the Company and Acquiror file the Certificate of Merger
with the Secretary of State of the State of Delaware or at such later time
as the Parties may agree and specify in the Certificate of Merger. The
Merger shall have the effects set forth in the Delaware General Corporation
Law and the Massachusetts Business Corporation Law. The Surviving
Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on behalf
of either the Company or Acquiror in order to carry out and effectuate the
transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. The certificate of incorporation of
Acquiror shall continue as the certificate of incorporation of the
Surviving Corporation until thereafter amended in accordance with its terms
and as provided by law, except that Article Fourth thereof shall be amended
to read in its entirety as follows:
FOURTH: I. The total number of shares of all classes of stock which
the Corporation shall have authority to issue is 56,000,000 shares,
consisting of (i) 55,000,000 shares of Common Stock, $.05 par value
(the "Common Stock") and (ii) 1,000,000 shares of Preferred Stock, $.05
par value ("Preferred Stock").
II. The designations, powers, preferences and relative,
participating, optional or other special rights of, and the
qualifications, limitations or restrictions upon, each class or series
of the Corporation's capital stock shall be as follows:
A. Common Stock.
1. General. The voting, dividend and liquidation rights of the holders of the
Common Stock are subject to and qualified by the rights of the holders of the
Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote for each
share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of the State of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock from
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
A-9
<PAGE>
B. Preferred Stock.
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of
shares for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time to
time to issue the Preferred Stock in one or more series, and in connection with
the creation of any such series, by resolution or resolutions providing for the
issue of the shares thereof, to determine and fix such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including without limitation thereof,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated and expressed in such resolutions, all to the
full extent now or hereafter permitted by the General Corporation Law of the
State of Delaware. Without limiting the generality of the foregoing, the
resolutions providing for issuance of any series of Preferred Stock may provide
that such series shall be superior or rank equally or be junior to the
Preferred Stock of any other series to the extent permitted by law. Except as
otherwise provided in this Restated Certificate of Incorporation, no vote of
the holders of the Preferred Stock or Common Stock shall be a prerequisite to
the designation or issuance of any shares of any series of the Preferred Stock
authorized by and complying with the conditions of this Restated Certificate of
Incorporation, the right to have such vote being expressly waived by all
present and future holders of the capital stock of the Corporation.
(iii) By-laws. The by-laws of Acquiror in effect immediately prior to the
Effective Time shall be the By-laws of the Surviving Corporation until
thereafter amended in accordance with their terms and as provided by law.
(iv) Directors and Officers. Except as provided in (S)6(m) with respect
to the directors of the Surviving Corporation, the directors and officers
of Acquiror immediately prior to the Effective Time shall be the directors
and officers of the Surviving Corporation at and as of the Effective Time
(retaining their respective positions and terms of office), until the
earlier of their respective resignation, removal or otherwise ceasing to be
a director or officer, respectively, or until their respective successors
are duly elected and qualified, as the case may be.
(v) Conversion of Company Shares. At and as of the Effective Time, (A)
each issued and outstanding Company Share (other than any Company Shares
owned by Acquiror, the Company or any Dissenting Holder) shall be converted
into the right to receive one Acquiror Share (the "Per Share Merger
Consideration"), and all such Company Shares shall no longer be
outstanding, shall be canceled and shall cease to exist, and each holder of
a certificate representing any such Company Shares shall thereafter cease
to have any rights with respect to such Company Shares, except the right to
receive the Per Share Merger Consideration for each such Company Share and
any unpaid dividends and distributions, if any, to which the holder of such
Company Shares is entitled pursuant to (S)2(e) upon the surrender of such
certificate in accordance with (S)2(e) below (collectively, the "Merger
Consideration"), provided, however, that the Per Share Merger Consideration
shall be subject to proportionate adjustment in the event of any stock
split, stock dividend or reverse stock split, and (B) each Company Share
owned by Acquiror or the Company shall be canceled without payment
therefor. No Company Share shall be deemed to be outstanding or to have any
rights other than those set forth above in this (S)2(d)(v) after the
Effective Time. Notwithstanding anything to the contrary in this
(S)2(d)(v), no fractional Acquiror Shares shall be issued to then former
holders of Company Shares. In lieu thereof, each then former holder of a
Company Share who would otherwise have been entitled to receive a fraction
of a Acquiror Share (after taking into account all certificates delivered
by such then former holder at any one time) shall receive an amount in cash
equal to such fraction of a Acquiror Share multiplied by the Closing Sales
Price per Acquiror Share on the date of the Effective Time.
A-10
<PAGE>
(vi) Conversion of Stock Rights. Each of the Parties shall take all such
action as may be necessary to cause, at the Effective Time, each Stock
Right granted by the Company to purchase Company Shares which is
outstanding and unexercised immediately prior thereto (whether or not
vested or exercisable), to be converted automatically into an equivalent
Stock Right to purchase Acquiror Shares in an amount and at an exercise
price determined as follows:
(x) The number of Acquiror Shares to be subject to the new Stock
Right shall be equal to the number of Company Shares subject to the
original Stock Right; and
(y) The exercise price per Acquiror Share under the new Stock Right
shall be equal to the exercise price per Company Share under the
original Stock Right.
The adjustments provided herein with respect to any original Stock Rights
which are "incentive stock options" (as defined in Section 422 of the Code)
shall be and are intended to be effected in a manner which is consistent with
Section 424(a) of the Code. The option plan of the Company under which the
original Stock Rights were issued shall be assumed by Acquiror, and the
duration and other terms of the new Stock Rights shall be the same as the
original Stock Rights, except that all references to the Company shall be
deemed to be references to Acquiror. At the Effective Time, Acquiror shall
deliver to then former holders of original Stock Rights appropriate agreements
representing the right to acquire Acquiror Shares on the terms and conditions
set forth in this (S) 2(d)(vi).
Acquiror shall take all corporate action necessary to reserve for issuance a
sufficient number of Acquiror Shares for delivery upon exercise of the new
Stock Rights in accordance with this (S) 2(d)(vi). Acquiror shall file a
registration statement on Form S-8 (or any successor form) or another
appropriate form, and use its reasonable best efforts to cause such Form S-8 to
become effective at or as soon as practicable after the Effective Time, with
respect to Acquiror Shares subject to new employee stock options included in
the Stock Rights and shall use reasonable efforts to maintain the effectiveness
of such registration statement or registration statements (and maintain the
current status of the prospectus or prospectuses contained therein) for so long
as such options remain outstanding. Acquiror shall promptly take any action
required to be taken under state securities or Blue Sky laws in connection with
the issuance of Acquiror Shares in connection with new employee options
included in the Stock Rights. With respect to those individuals who subsequent
to the Merger will be subject to the reporting requirements under Section 16(a)
of the Securities Exchange Act, Acquiror shall administer the option plans
assumed pursuant to this (S) 2(d)(vi) in a manner that complies with Rule 16b-3
promulgated under the Securities Exchange Act to the extent the Company option
plan complied with such rule prior to the Merger.
(vii) No Effect on Capital Stock of Acquiror. Each share of the
outstanding capital stock of Acquiror issued and outstanding immediately
prior to the Effective Time shall remain outstanding and shall be unchanged
after the Merger.
(viii) Dissenter's' Rights.
(A) No conversion under (S)2(d)(v) hereof shall be made with respect
to the Company Shares held by a Dissenting Holder; provided, however,
that each Company Share outstanding immediately prior to the Effective
Time and held by a Dissenting Holder who shall, after the Effective
Time, withdraw his demand for appraisal or lose his right of appraisal,
in either case pursuant to the applicable provisions of the
Massachusetts Business Corporation Law, shall be deemed to be
converted, as of the Effective Time, into the Merger Consideration as
set forth in (S)2(d)(v) hereof. The term "Dissenting Holder" shall mean
a holder of Company Shares who has demanded appraisal rights in
compliance with the applicable provisions of the Massachusetts Business
Corporation Law concerning the right of such holder to dissent from the
Merger and demand appraisal of such holder's Company Shares.
(B) Any Dissenting Holder (x) who files with the Company a written
objection to the Merger before the taking of the votes to approve this
Agreement by the Company Stockholders and who states in such objection
that he intends to demand payment for his Company Shares if the Merger
is
A-11
<PAGE>
concluded and (y) whose Company Shares are not voted in favor of the
Merger shall be entitled to demand payment from the Company for his
Company Shares and an appraisal of the value thereof, in accordance
with the provisions of Sections 86 through 98 of the Massachusetts
Business Corporation Law.
(e) Procedure for Exchange.
(ix) At or prior to the Effective Time, (A) Acquiror will furnish to
Equiserve, its transfer agent, or such other bank or trust company
reasonably acceptable to the Company, to act as exchange agent (the
"Exchange Agent") a corpus (the "Exchange Fund") consisting of Acquiror
Shares and cash sufficient to permit the Exchange Agent to make full
payment of the Merger Consideration to the holders of all of the issued and
outstanding Company Shares (other than any Company Shares owned by Acquiror
or the Company), and (B) Acquiror will cause the Exchange Agent to mail a
letter of transmittal (with instructions for its use) in a form to be
mutually agreed upon by the Company and Acquiror prior to Closing to each
holder of issued and outstanding Company Shares (other than any Company
Shares owned by Acquiror or the Company) for the holder to use in
surrendering the certificates which, immediately prior to the Effective
Time, represented his or its Company Shares against payment of the Merger
Consideration to which such holder is entitled pursuant to (S)2(d)(v). Upon
surrender to the Exchange Agent of such certificates, together with such
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, Acquiror shall promptly cause to be issued a
certificate representing that number of whole Acquiror Shares and a check
representing the amount of cash in lieu of any fractional shares and unpaid
dividends and distributions, if any, to which such Persons are entitled,
after giving effect to any required tax withholdings. No interest will be
paid or accrued on the cash in lieu of fractional shares and unpaid
dividends and distributions, if any, payable to recipients of Acquiror
Shares. If payment is to be made to a Person other than the registered
holder of the certificate surrendered, it shall be a condition of such
payment that the certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the Person requesting such
payment shall pay any transfer or other taxes required by reason of the
payment to a Person other than the registered holder of the certificate
surrendered or establish to the reasonable satisfaction of the Surviving
Corporation or the Exchange Agent that such tax has been paid or is not
applicable. In the event any certificate representing Company Shares shall
have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such certificate to be lost, stolen or
destroyed, the Exchange Agent will issue in exchange for such lost, stolen
or destroyed certificate the Merger Consideration deliverable in respect
thereof; provided, however, the Person to whom such Merger Consideration is
paid shall, as a condition precedent to the payment thereof, give the
Surviving Corporation a bond in such sum as it may direct or otherwise
indemnify the Surviving Corporation in a manner reasonably satisfactory to
it against any claim that may be made against the Surviving Corporation
with respect to the certificate alleged to have been lost, stolen or
destroyed. No dividends or other distributions declared after the Effective
Time with respect to Acquiror Shares and payable to the holders of record
thereof shall be paid to the holder of any unsurrendered certificate until
the holder thereof shall surrender such certificate in accordance with this
(S)2(e). After the surrender of a certificate in accordance with this
(S)2(e), the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to the Acquiror Shares
represented by such certificate. No holder of an unsurrendered certificate
shall be entitled, until the surrender of such certificate, to vote the
Acquiror Shares into which his or its Company Shares shall have been
converted into the right to receive.
(x) The Company will cause its transfer agent to furnish promptly to
Acquiror a list, as of a recent date, of the record holders of Company
Shares and their addresses, as well as mailing labels containing the names
and addresses of all record holders of Company Shares and lists of security
positions of Company Shares held in stock depositories. The Company will
furnish Acquiror with such additional information (including, but not
limited to, updated lists of holders of Company Shares and their addresses,
mailing labels and lists of security positions) and such other assistance
as Acquiror or its agents may reasonably request.
A-12
<PAGE>
(xi) Acquiror may cause the Exchange Agent to invest the cash included in
the Exchange Fund in one or more investments selected by Acquiror;
provided, however, that the terms and conditions of the investments shall
be such as to permit the Exchange Agent to make prompt payment of the
Merger Consideration as necessary. Acquiror may cause the Exchange Agent to
pay over to the Surviving Corporation any net earnings with respect to the
investments, and Acquiror will replace promptly any portion of the Exchange
Fund which the Exchange Agent loses through investments.
(xii) Acquiror may cause the Exchange Agent to pay over to the Surviving
Corporation any portion of the Exchange Fund (including any earnings
thereon) remaining 180 days after the Effective Time, and thereafter all
former stockholders of the Company shall be entitled to look to the
Surviving Corporation (subject to abandoned property, escheat and other
similar laws) as general creditors thereof with respect to the Merger
Consideration and any cash payable upon surrender of their certificates.
(xiii) Acquiror shall pay, or shall cause the Surviving Corporation to
pay, all charges and expenses of the Exchange Agent.
(f) Closing of Transfer Records. After the Effective Time, no transfer of
Company Shares outstanding prior to the Effective Time shall be made on the
stock transfer books of the Surviving Corporation. If, after the Effective
Time, certificates representing such shares are presented for transfer to the
Exchange Agent, they shall be canceled and exchanged for certificates
representing Acquiror Shares, cash in lieu of fractional shares, if any, and
unpaid dividends and distributions, if any, as provided in (S)2(e).
3. Representations and Warranties of the Company. The Company represents and
warrants to Acquiror:
(a) Organization, Qualification and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of Massachusetts. If applicable to such country, each of the Company's
Subsidiaries operating in such country has been duly incorporated or
otherwise organized and is validly existing. Each of the Company and its
Subsidiaries is duly authorized to conduct business and, if applicable to
such country, is in good standing under the laws of each jurisdiction where
such qualification is required, except where the lack of such qualification
or failure to be in good standing would not reasonably be expected to have
a material adverse effect on the business, financial condition or results
of operations of the Company and its Subsidiaries taken as a whole or on
the ability of the Company to consummate the transactions contemplated by
this Agreement (a "Company Material Adverse Effect"). Each of the Company
and its Subsidiaries has full corporate power and corporate authority, and
all foreign, federal, state and local governmental permits, licenses and
consents, required to carry on the businesses in which it is engaged and to
own and use the properties owned and used by it, except for such permits,
licenses and consents the failure of which to have would not reasonably be
expected to have a Company Material Adverse Effect. The Company does not
own any equity interest in any corporation, partnership, limited liability
company, joint venture or other legal entity other than the Subsidiaries
listed in (S)3(a) of the Company Disclosure Letter accompanying this
Agreement (the "Company Disclosure Letter"). The Company has delivered to
the Acquiror a true, complete and correct copy of the articles of
incorporation (or comparable charter document) and by-laws, each as amended
to date, of Company and all of its Subsidiaries. Neither Company nor any of
its Subsidiaries is in violation of any provision of its articles of
incorporation (or comparable charter document) or by-laws.
(b) Capitalization. The entire authorized capital stock of the Company
consists of 7,500,000 shares of preferred stock, $.01 par value per share,
none of which are issued and outstanding as of September 25, 1999,
30,000,000 Shares, of which 15,916,570 Shares were issued and outstanding
as of September 25, 1999 and 390,769 Shares were held in treasury as of
September 25, 1999. All of the issued and outstanding Company Shares have
been duly authorized and are validly issued, fully paid and nonassessable,
and none have been issued in violation of any preemptive or similar right.
As of September 25, 1999, no warrants of the Company were outstanding. As
of September 25, 1999, 2,185,776 Shares were subject to issuance pursuant
to employee stock options issued under Company Benefit Plans. Except as set
forth above or in (S)3(b) of the Company Disclosure Letter, neither the
Company nor any of its Subsidiaries has any outstanding or authorized Stock
Rights. Except for stock appreciation rights
A-13
<PAGE>
authorized under Company Benefit Plans, of which none are outstanding,
there are no outstanding or authorized stock appreciation, phantom stock,
profit participation or similar rights with respect to the Company or any
of its Subsidiaries. Except as set forth in (S)3(b) of the Company
Disclosure Letter, there are no rights, contracts, commitments or
arrangements obligating the Company to redeem, purchase or acquire, or
offer to purchase, redeem or acquire, any outstanding shares of, or any
outstanding options, warrants or rights of any kind to acquire any shares
of, or any outstanding securities that are convertible into or exchangeable
for any shares of, capital stock of the Company.
(c) Subsidiaries. Except as set forth in (S)3(c) of the Company
Disclosure Letter, the Company owns, directly or indirectly, 100% of the
outstanding shares of capital stock of each of its Subsidiaries free and
clear of any Security Interest and each such share of capital stock has
been duly authorized and is validly issued, fully paid and nonassessable,
and none of such shares of capital stock has been issued in violation of
any preemptive or similar right. No shares of capital stock of, or other
equity interests in, any Subsidiary of the Company are reserved for
issuance, and there are no contracts, agreements, commitments or
arrangements obligating the Company or any of its Subsidiaries (i) to
offer, sell, issue, grant, pledge, dispose of or encumber any shares of
capital stock of, or other equity interests in, or any options, warrants or
rights of any kind to acquire any shares of capital stock of, or other
equity interests in, any of the Subsidiaries of the Company or (ii) to
redeem, purchase or acquire, or offer to purchase or acquire, any
outstanding shares of capital stock of, or other equity interests in, or
any outstanding options, warrants or rights of any kind to acquire any
shares of capital stock of, or other equity interest in, or any outstanding
securities that are convertible into or exchangeable for, any shares of
capital stock of, or other equity interests in, any of the Subsidiaries of
the Company.
(d) Voting Arrangements. Except as set forth in (S)3(d) of the Company
Disclosure Letter or in Company Reports filed prior to the date hereof,
there are no voting trusts, proxies or other similar agreements or
understandings to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound with respect to
the voting of any shares of capital stock of the Company or any of its
Subsidiaries or with respect to the registration of the offering, sale or
delivery of any shares of capital stock of the Company or any of its
Subsidiaries under the Securities Act. There are no issued or outstanding
bonds, debentures, notes or other indebtedness of the Company having the
right to vote on any matters on which stockholders of the Company may vote.
(e) Authorization of Transaction. The Company has full power and
authority (including full corporate power and corporate authority), and has
taken all required action, necessary to properly execute and deliver this
Agreement and to perform its obligations hereunder, and this Agreement
constitutes the valid and legally binding obligation of the Company,
enforceable in accordance with its terms and conditions, except as limited
by (i) applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors'
rights generally and (ii) general principles of equity, regardless of
whether asserted in a proceeding in equity or at law; provided, however,
that the Company cannot consummate the Merger unless and until it receives
the Requisite Stockholder Approval of the Company Stockholders.
(f) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree or other restriction of any government,
governmental agency or court of competent jurisdiction (a "Government
Entity") to which the Company or any of its Subsidiaries is subject or any
provision of the charter or by-laws of the Company or any of its
Subsidiaries or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right
to accelerate, terminate, modify or cancel or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to
which the Company or any of its Subsidiaries is a party or by which it is
bound or to which any of its assets is subject, except where the violation,
conflict, breach, default, acceleration, termination, modification,
cancellation, or failure to give notice would not reasonably be expected to
have a Company Material Adverse Effect or except as set forth in (S)3(f) of
the Company Disclosure Letter. Other than as required under the provisions
of the Hart-Scott-Rodino Act, Foreign Competition Laws, the Massachusetts
Business Corporation Law, the Delaware
A-14
<PAGE>
General Corporation Law, Nasdaq, the Securities Exchange Act, the
Securities Act and state securities laws, neither the Company nor any of
its Subsidiaries needs to give any notice to, make any filing with or
obtain any authorization, consent or approval of any Government Entity in
order for the Parties to consummate the transactions contemplated by this
Agreement, except where the failure to give notice, to file or to obtain
any authorization, consent or approval would not reasonably be expected to
have a Company Material Adverse Effect or except as set forth in (S)3(f) of
the Company Disclosure Letter. "Required Company Consents" means any
authorization, consent or approval of a Government Entity or other Third
Party required to be obtained pursuant to any Foreign Competition Laws or
state securities laws or so that a matter set forth in (S)3(f) of the
Company Disclosure Letter would not be reasonably expected to have a
Company Material Adverse Effect for purposes of this (S)3(f).
(g) Filings with the SEC. The Company has made all filings with the SEC
that it has been required to make under the Securities Act and the
Securities Exchange Act (collectively, the "Company Reports"). Each of the
Company Reports has complied with the Securities Act and the Securities
Exchange Act in all material respects. None of the Company Reports, as of
their respective dates, contained any untrue statement of a material fact
or omitted to state a material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading.
(h) Financial Statements.
(i) The Company has filed an Annual Report on Form 10-K (the "Company
10-K") for the fiscal year ended December 31, 1998 and a Quarterly
Report on Form 10-Q (the "Company 10-Q") for the fiscal quarter ended
June 26, 1999. The financial statements included in the Company 10-K
and the Company 10-Q (including the related notes and schedules) have
been prepared from the books and records of the Company and its
Subsidiaries in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby, and present fairly in all
material respects the financial condition of the Company and its
Subsidiaries as of the indicated dates and the results of operations
and cash flows of the Company and its Subsidiaries for the periods set
forth therein (subject in the case of quarterly financial statements to
the absence of complete footnotes and subject to normal year-end audit
adjustments).
(ii) From January 1, 1999 until the date of this Agreement, the
Company and its Subsidiaries have not incurred any liabilities that are
of a nature that would be required to be disclosed on a balance sheet
of the Company and its Subsidiaries or the footnotes thereto prepared
in conformity with GAAP, other than (A) liabilities incurred in the
ordinary course of business that would not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse
Effect or (B) liabilities disclosed in (S)3(h) of the Company
Disclosure Letter or in Company Reports filed prior to the date hereof.
(i) Events Subsequent to January 1, 1999. From January 1, 1999 to the
date of this Agreement, except as disclosed in the Company Reports filed
prior to the date hereof or except as set forth in (S)3(i) of the Company
Disclosure Letter, (i) the Company and its Subsidiaries have conducted
their respective businesses only in, and have not engaged in any
transaction other than according to, the ordinary and usual course of such
businesses, and (ii) there has not been (A) any change in the financial
condition, business or results of operations of the Company or any of its
Subsidiaries, or any development or combination of developments relating to
the Company or any of its Subsidiaries of which management of the Company
has knowledge, and which would reasonably be expected to have a Company
Material Adverse Effect; (B) any declaration, setting aside or payment of
any dividend or other distribution with respect to the capital stock of the
Company, or any redemption, repurchase or other reacquisition of any of the
capital stock of the Company; (C) any change by the Company in accounting
principles, practices or methods materially affecting the reported
consolidated assets, liabilities or results of operations of the Company;
(D) any increase in the compensation of any officer of the Company or any
of its Subsidiaries or grant of any general salary or benefits increase to
the employees of the Company or any of its Subsidiaries other than in the
ordinary course of business consistent with past practices; (E) any
issuance or sale of any capital stock or other securities (including any
Stock Rights) by the Company or any of its Subsidiaries of any
A-15
<PAGE>
kind, other than upon exercise of Stock Rights issued by or binding upon
the Company; (F) any modification, amendment or change to the terms or
conditions of any Stock Right; or (G) any split, combination,
reclassification, redemption, repurchase or other reacquisition of any
capital stock or other securities of the Company or any of its
Subsidiaries.
(j) Compliance. Except as set forth in (S)3(j) of the Company Disclosure
Letter or in Company Reports filed prior to the date hereof, the Company
and its Subsidiaries are in compliance with all applicable foreign,
federal, state and local laws, rules and regulations and all court orders,
judgments and decrees to which any of them is a party, except where the
failure to be in compliance would not reasonably be expected to have a
Company Material Adverse Effect.
(k) Brokers' and Other Fees. Except as set forth in (S)3(k) of the
Company Disclosure Letter, none of the Company and its Subsidiaries has any
liability or obligation to pay any fees or commissions to any broker,
finder or agent with respect to the transactions contemplated by this
Agreement.
(l) Litigation and Liabilities. Except as disclosed in (S)3(l) of the
Company Disclosure Letter or in Company Reports filed prior to the date
hereof, there are (i) no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against the Company or any of its
Subsidiaries, or any facts or circumstances known to the Company which may
give rise to an action, suit or proceeding against the Company or any of
its Subsidiaries, which would reasonably be expected to have a Company
Material Adverse Effect, and (ii) no obligations or liabilities of the
Company or any of its Subsidiaries, whether accrued, contingent or
otherwise, known to the Company which would reasonably be expected to have
a Company Material Adverse Effect.
(m) Taxes. Except as set forth in (S)3(m) of the Company Disclosure
Letter or in Company Reports filed prior to the date hereof, the Company
and each of its Subsidiaries have duly filed or caused to be duly filed on
their behalf all federal, state, local and foreign Tax Returns required to
be filed by them, and have duly paid, caused to be paid or made adequate
provision for the payment of all Taxes required to be paid in respect of
the periods covered by such Tax Returns, except where the failure to file
such Tax Returns or to pay such Taxes would not reasonably be expected to
have a Company Material Adverse Effect. Except as set forth in (S)3(m) of
the Company Disclosure Letter, no claims for Taxes have been asserted
against the Company or any of its Subsidiaries and no material deficiency
for any Taxes has been proposed, asserted or assessed which has not been
resolved or paid in full. To the knowledge of the Company, no Tax Return or
taxable period of the Company or any of its Subsidiaries is under
examination by any taxing authority, and neither the Company nor any of its
Subsidiaries has received written notice of any pending audit by any taxing
authority. There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any Tax Return for any period
of the Company or any or its Subsidiaries. Except as set forth in (S)3(m)
of the Company Disclosure Letter, there are no tax liens other than liens
for Taxes not yet due and payable relating to the Company or any of its
Subsidiaries. The Company has no reason to believe that any conditions
exist that could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code. Except as provided in (S)3(m) of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries is a party to any agreement
or contract which would result in payment of any "excess parachute payment"
within the meaning of Section 280G of the Code as of the date of this
Agreement. Neither the Company nor any of its Subsidiaries has filed any
consent pursuant to Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
owned by the Company or any of its Subsidiaries. The Company has not been
and is not a United Stated real property holding company (as defined in
Section 897(c)(2) of the Code) during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code. None of the Company or its
Subsidiaries (x) has been a member of an "affiliated group," within the
meaning of Section 1504(a) of the Code, other than a group the common
acquiror of which was the Company or (y) has any liability for the Taxes of
any person, other than any of the Company or its Subsidiaries under
Treasury Regulation (S)1.1502-6 (or any similar provision of state, local
or foreign law) as a transferee, successor, by contract or otherwise.
A-16
<PAGE>
(n) Fairness Opinion. Tucker Anthony Cleary Gull has delivered the
Company Fairness Opinion to the Company Board, and a true and complete copy
thereof has been furnished to Acquiror.
(o) Employee Benefits.
(i) All material pension, profit-sharing, deferred compensation,
savings, stock bonus and stock option plans, and all employee benefit
plans, whether or not covered by the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), which are sponsored by the
Company, any Subsidiary of the Company or any Company ERISA Affiliate
(as defined below) of the Company or to which the Company, any
Subsidiary of the Company or any Company ERISA Affiliate of the Company
makes contributions, and which cover employees of the Company or any
Subsidiary (the "Company Employees") or former employees of the Company
or any Subsidiary, all employment or severance contracts with employees
of the Company or its Subsidiaries, and any applicable "change of
control" or similar provisions in any plan, contract or arrangement
that cover Company Employees (collectively, "Company Benefit Plans" and
individually a "Company Benefit Plan") are accurately and completely
listed in (S)3(o) of the Company Disclosure Letter. No Company Benefit
Plan is a multi-employer plan, money purchase plan, defined benefit
plan, multiple employer plan or multiple employer welfare arrangement
and no Company Benefit Plan is covered by Title IV of ERISA. True and
complete copies of all Company Benefit Plans have been provided to
Acquiror.
(ii) All Company Benefit Plans to the extent subject to ERISA, are in
compliance in all material respects with ERISA and the rules and
regulations promulgated thereunder. Each Company Benefit Plan which is
an "employee pension benefit plan" within the meaning of Section 3(2)
of ERISA ("Company Pension Plan") and which is intended to be qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), has received a favorable determination letter from the
Internal Revenue Service, which determination letter is currently in
effect, and there are no proceedings pending or, to the knowledge of
the Company, threatened, or any facts or circumstances known to the
Company, which are reasonably likely to result in revocation of any
such favorable determination letter. There is no pending or, to the
knowledge of the Company, threatened litigation relating to the Company
Benefit Plans. Neither the Company nor any of its Subsidiaries has
engaged in a transaction with respect to any Company Benefit Plan that,
assuming the taxable period of such transaction expired as of the date
hereof, is reasonably likely to subject the Company or any of its
Subsidiaries to a tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA.
(iii) No liability under Title IV of ERISA has been or is reasonably
likely to be incurred by the Company or any of its Subsidiaries with
respect to any ongoing, frozen or terminated Company Benefit Plan that
is a "single-employer plan", within the meaning of Section 4001(a)(15)
of ERISA, currently or formerly maintained by any of them, or the
single-employer plan of any entity which is considered a predecessor of
the Company or one employer with the Company under Section 4001 of
ERISA (a "Company ERISA Affiliate"). All contributions required to be
made under the terms of any Company Benefit Plan have been timely made
or reserves therefor on the balance sheet of the Company have been
established, which reserves are adequate. Except as required by Part 6
of Title I of ERISA, the Company does not have any unfunded obligations
for retiree health and life benefits under any Company Benefit Plan.
(p) Massachusetts Business Corporation Law. The execution and delivery of
this Agreement and consummation of transactions contemplated hereby will
not be subject to Sections 110C-110F of the Massachusetts General Laws in
the consummation of the Merger or this Agreement or the transactions
contemplated by either thereof.
(q) Year 2000. Except as disclosed in the previously filed Company
Reports, the Company's products and information systems are Year 2000
Compliant except to the extent that their failure to be Year 2000 Compliant
would not, individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect. For purposes of this Agreement, "Year
2000 Compliant" shall mean
A-17
<PAGE>
that a Person's products and information systems accurately process
date/time data (including, but not limited to, calculating, comparing and
sequencing) from, into and between the twentieth and twenty-first
centuries, and the years 1999 and 2000 and leap year calculations.
(r) Environmental Matters. Except for such matters that, individually or
in the aggregate, would not reasonably be expected to have a Company
Material Adverse Effect or would not otherwise require disclosure pursuant
to the Securities Exchange Act, or are listed in (S)3(r) of the Company
Disclosure Letter or described in Company Reports filed prior to the date
hereof, (i) each of the Company and its Subsidiaries has complied and is in
compliance with all applicable Environmental Laws (as defined below); (ii)
the properties currently owned or operated by the Company or any of its
Subsidiaries (including soils, groundwater, surface water, buildings or
other structures) are not contaminated with Hazardous Substances (as
defined below); (iii) neither the Company nor any of its Subsidiaries is
subject to liability for any Hazardous Substance disposal or contamination
on any third party property; (iv) neither the Company nor any or its
Subsidiaries has had any release or threat of release of any Hazardous
Substance; (v) neither the Company nor any of its Subsidiaries has received
any notice, demand, threat, letter, claim or request for information
alleging that it or any of its Subsidiaries may be in violation of or
liable under any Environmental Law (including any claims relating to
electromagnetic fields or microwave transmissions); (vi) neither the
Company nor any of its Subsidiaries is subject to any orders, decrees,
injunctions or other arrangements with any governmental or regulatory
authority of competent jurisdiction or is subject to any indemnity or other
agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances; and (vii) there are
no circumstances or conditions involving the Company or any of its
Subsidiaries that would reasonably be expected to result in any claims,
liabilities, investigations, costs or restrictions on the ownership, use or
transfer of any of its properties pursuant to any Environmental Law.
As used herein, the term "Environmental Law" means any federal, state, local,
foreign or other law (including common law), statutes, ordinances or codes
relating to: (i) the protection, investigation or restoration of the
environment, health, safety or natural resources, (ii) the handling, use,
presence, disposal, release or threatened release of any Hazardous Substance,
or (iii) noise, odor, wetlands, pollution, contamination or any injury or
threat of injury to person or property in connection with any Hazardous
Substance.
As used herein, the term "Hazardous Substances" means any substance that is
listed, classified or regulated pursuant to any Environmental Law, including
any petroleum product or by-product, asbestos-containing material, lead-
containing paint or plumbing, polychlorinated biphenyls, radioactive materials
or radon.
(s) Intellectual Property. Except as disclosed in (S)3(s) of the Company
Disclosure Letter or in the Company Reports filed prior to the date hereof,
the Company and its Subsidiaries have all right, title and interest in, or
a valid and binding license to use, all Company Intellectual Property (as
defined below). Except as disclosed in (S)3(s) of the Company Disclosure
Letter or in the Company Reports filed prior to the date hereof, the
Company and its Subsidiaries (i) have not defaulted in any material respect
under any license to use any Company Intellectual Property, (ii) are not
the subject of any proceeding or litigation for infringement of any third
party intellectual property, (iii) have no knowledge of circumstances that
would be reasonably expected to give rise to any such proceeding or
litigation and (iv) have no knowledge of circumstances that are causing or
would be reasonably expected to cause the loss or impairment of any Company
Intellectual Property, other than a default, proceeding, litigation, loss
or impairment that is not having or would not be reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
For purposes of this Agreement, "Company Intellectual Property" means patents
and patent rights, trademarks and trademark rights, trade names and trade name
rights, service marks and service mark rights, copyrights and copyright rights,
trade secret and trade secret rights, and other intellectual property rights,
and all pending applications for and registrations of any of the foregoing that
are individually or in the aggregate material to the conduct of the business of
the Company and its Subsidiaries taken as a whole.
A-18
<PAGE>
(t) Insurance. Except as set forth in (S)3(t) of the Company Disclosure
Letter, each of the Company and its Subsidiaries is insured with
financially responsible insurers in such amounts and against such risks and
losses as are customary for companies conducting the business as conducted
by the Company and its Subsidiaries.
(u) Certain Contracts. Except as set forth in (S)3(u) of the Company
Disclosure Letter, all material contracts to which the Company or any of
its Subsidiaries is a party or may be bound that are required by Item
610(b)(10) of Regulation S-K to be filed as exhibits to, or incorporated by
reference in, the Company 10-K or the Company 10-Q have been so filed or
incorporated by reference. All material contracts to which the Company or
any of its Subsidiaries is a party or may be bound that have been entered
into as of the date hereof and will be required by Item 610(b)(10) of
Regulation S-K to be filed or incorporated by reference into the Company's
Quarterly Report on Form 10-Q for the period ending September 30, 1999, but
which have not previously been filed or incorporated by reference into any
Company Report, are set forth in (S)3(u) of the Company Disclosure Letter.
All contracts, licenses, consents, royalty or other agreements which are
material to the Company and its Subsidiaries, taken as a whole, to which
the Company or any of its Subsidiaries is a party (the "Company Contracts")
are valid and in full force and effect on the date hereof except to the
extent they have previously expired in accordance with their terms or, to
the extent such invalidity would not reasonably be expected to have a
Company Material Adverse Effect and, to the Company's knowledge, neither
the Company nor any of its Subsidiaries has violated any provision of, or
committed or failed to perform any act which with or without notice, lapse
of time or both would constitute a default under the provisions of, any
Company Contract, except for defaults which individually and in the
aggregate would not reasonably be expected to result in a Company Material
Adverse Effect.
(v) Accounting and Tax Matters. To the Company's knowledge, neither the
Company nor any of its Affiliates has taken or agreed to take any action,
or knows of any circumstances, that (without regard to any action taken or
agreed to be taken or agreed to be taken by Acquiror or any of its
Affiliates) would prevent the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code.
4. Representations and Warranties of Acquiror. Acquiror represents and
warrants to the Company:
(a) Organization, Qualification and Corporate Power. Acquiror has been
duly organized, validly existing and in good standing under the laws of the
State of Delaware. If applicable to such country, each of Acquiror's
Subsidiaries operating in such country has been duly incorporated or
otherwise organized and is validly existing. Each of Acquiror and its
Subsidiaries is duly authorized to conduct business and, if applicable to
such country, is in good standing under the laws of each jurisdiction where
such qualification is required, except where the lack of such qualification
or failure to be in good standing would not reasonably be expected to have
a material adverse effect on the business, financial condition or results
of operations of Acquiror and its Subsidiaries taken as a whole or on the
ability of Acquiror to consummate the transactions contemplated by this
Agreement (an "Acquiror Material Adverse Effect"). Each of Acquiror and its
Subsidiaries has full corporate power and corporate authority, and all
foreign, federal, state and local governmental permits, licenses and
consents, required to carry on the businesses in which it is engaged and to
own and use the properties owned and used by it, except for such permits,
licenses and consents the failure of which to have would not reasonably be
expected to have a Acquiror Material Adverse Effect. Acquiror does not own
any equity interest in any corporation, partnership, limited liability
company, joint venture or other entity other than the Subsidiaries listed
in (S)4(a) of Acquiror's disclosure letter accompanying this Agreement (the
"Acquiror Disclosure Letter"). Acquiror has delivered to the Company a
true, complete and correct copy of its certificate of incorporation and by-
laws, each as amended to date. Neither Acquiror nor any of its Subsidiaries
is in violation of any provision of its certificate of incorporation (or
comparable charter document) or by-laws.
(b) Capitalization. The entire authorized capital stock of Acquiror
consists of 15,249,599 shares of preferred stock, $.01 par value per share,
of which 298,187 shares are issued and outstanding as of September 1, 1999
and no shares of Acquiror preferred stock were held in Treasury as of
September 1, 1999, and 29,000,000 Acquiror Shares, of which 11,562,906
Acquiror Shares were issued and outstanding as of September 1, 1999 and no
Acquiror Shares were held in treasury on September 1, 1999. All of the
A-19
<PAGE>
issued and outstanding Acquiror Shares have been duly authorized and are
validly issued, fully paid and nonassessable, and none have been issued in
violation of any preemptive or similar right. Except as set forth in
(S)4(b) of the Acquiror Disclosure Letter, neither Acquiror nor any of its
Subsidiaries has any outstanding or authorized Stock Rights. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation or similar rights with respect to Acquiror or any of its
Subsidiaries. There are no rights, contracts, commitments or arrangements
obligating Acquiror or any of its Subsidiaries to redeem, purchase or
acquire, or offer to purchase, redeem or acquire, any outstanding shares
of, or any outstanding options, warrants or rights of any kind to acquire
any shares of, or any outstanding securities that are convertible into or
exchangeable for any shares of, capital stock of Acquiror. The Acquiror
Shares to be issued in connection with the Merger (including the Acquiror
Shares to be issued to the holders of Company Shares and the Acquiror
Shares to be issued to holders of Stock Rights to purchase or otherwise
acquire Company Shares upon the exercise and according to the terms of such
Stock Rights) have been duly authorized by all necessary corporate action,
and when issued in accordance with the terms of this Agreement, will be
validly issued, full paid and nonassessable and not subject to any
preemptive rights, and will be issued in compliance with the requirements
of the Securities Act and applicable state securities or Blue Sky laws.
(c) Subsidiaries. Except as set forth in (S)4(a) of the Acquiror
Disclosure Letter, Acquiror, directly or indirectly, owns 100% of the
outstanding shares of capital stock of each of its Subsidiaries free and
clear of any Security Interest and each such share of capital stock has
been duly authorized and is validly issued, fully paid and nonassessable,
and none of such shares of capital stock has been issued in violation of
any preemptive or similar right. No shares of capital stock of, or other
equity interests in, any Subsidiary of Acquiror are reserved for issuance,
and there are no contracts, agreements, commitments or arrangements
obligating Acquiror or any of its Subsidiaries (i) to offer, sell, issue,
grant, pledge, dispose of or encumber any shares of capital stock of, or
other equity interests in, or any options, warrants or rights of any kind
to acquire any shares of capital stock of, or other equity interests in,
any of the Subsidiaries of Acquiror or (ii) to redeem, purchase or acquire,
or offer to purchase or acquire, any outstanding shares of capital stock
of, or other equity interests in, or any outstanding options, warrants or
rights of any kind to acquire any shares of capital stock of, or other
equity interest in, or any outstanding securities that are convertible into
or exchangeable for, any shares of capital stock of, or other equity
interests in, any of the Subsidiaries of Acquiror.
(d) Voting Arrangements. There are no voting trusts, proxies or other
similar agreements or understandings to which Acquiror or any of its
Subsidiaries is a party or by which Acquiror or any of its Subsidiaries is
bound with respect to the voting of any shares of capital stock of Acquiror
or any of its Subsidiaries. There are no issued or outstanding bonds,
debentures, notes or other indebtedness of Acquiror having the right to
vote on any matters on which stockholders of Acquiror may vote.
(e) Authorization of Transaction. Acquiror has full power and authority
(including full corporate power and corporate authority), and has taken all
required action, necessary to properly execute and deliver this Agreement
and to perform its obligations hereunder, and this Agreement constitutes
the valid and legally binding obligation of Acquiror, enforceable in
accordance with its terms and conditions, except as limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditors' rights
generally and (ii) general principles of equity, regardless of whether
asserted in a proceeding in equity or at law; provided, however, that
Acquiror cannot consummate the Merger unless and until it receives the
Requisite Stockholder Approval of the Acquiror Stockholders.
(f) Noncontravention. Except as disclosed in (S)4(h) of the Acquiror
Disclosure Letter, neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree or other restriction of any Government Entity to
which Acquiror or any of its Subsidiaries is subject or any provision of
the charter or by-laws of Acquiror or any of its Subsidiaries or (ii)
conflict with, result in a breach of, constitute a default under, result in
the acceleration of, create in any party the right to
A-20
<PAGE>
accelerate, terminate, modify or cancel or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to
which either Acquiror or any of its Subsidiaries is a party or by which it
is bound or to which any of its assets is subject, except in the case of
clause (ii) where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation or failure to give notice would not
reasonably be expected to have a Acquiror Material Adverse Effect. Other
than as required under the provisions of the Hart-Scott-Rodino Act, Foreign
Competition Laws, Nasdaq, the Securities Exchange Act, the Securities Act
and state securities laws neither Acquiror nor any of its Subsidiaries
needs to give any notice to, make any filing with or obtain any
authorization, consent or approval of any Government Entity in order for
the Parties to consummate the transactions contemplated by this Agreement,
except where the failure to give notice, to file or to obtain any
authorization, consent or approval would not reasonably be expected to have
a Acquiror Material Adverse Effect or except as set forth in (S)4(f) of the
Acquiror Disclosure Letter. "Required Acquiror Consents" means any
authorization, consent or approval of a Government Entity or other Third
Party required to be obtained pursuant to any Foreign Competition Laws or
state securities laws or so that a matter set forth in (S) 4(f) of the
Acquiror Disclosure Letter would not be reasonably expected to have a
Acquiror Material Adverse Effect for purposes of this (S)4(f).
(g) Filings with the SEC. Acquiror has made all filings with the SEC that
it has been required to make under the Securities Act and the Securities
Exchange Act (collectively, the "Acquiror Reports"). Each of the Acquiror
Reports has complied with the Securities Act and the Securities Exchange
Act in all material respects. None of the Acquiror Reports, as of their
respective dates, contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
(h) Financial Statements.
(i) Acquiror has filed an Annual Report on Form 10-K (the "Acquiror
10-K") for the fiscal year ended December 31, 1998 and a Quarterly
Report on Form 10-Q (the "Acquiror 10-Q") for the fiscal quarter ended
June 30, 1999. The financial statements included in the Acquiror 10-K
and the Acquiror 10-Q (including the related notes and schedules) have
been prepared from the books and records of Acquiror and its
Subsidiaries in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby, and present fairly in all
material respects the financial condition of Acquiror and its
Subsidiaries as of the indicated dates and the results of operations
and cash flows of Acquiror and its Subsidiaries for the periods set
forth therein (subject in the case of quarterly financial statements to
the absence of complete footnotes and subject to normal year-end audit
adjustments).
(ii) From January 1, 1999 until the date of this Agreement, Acquiror
and its Subsidiaries have not incurred any liabilities that are of a
nature that would be required to be disclosed on a balance sheet of
Acquiror and its Subsidiaries or the footnotes thereto prepared in
conformity with GAAP, other than (A) liabilities incurred in the
ordinary course of business that would not, individually or in the
aggregate, reasonably be expected to have a Acquiror Material Adverse
Effect or (B) liabilities disclosed in (S)4(h) of the Acquiror
Disclosure Letter or in Acquiror Reports filed prior to the date
hereof.
(i) Events Subsequent to January 1, 1999. From January 1, 1999 to the
date of this Agreement, except as disclosed in the Acquiror Reports filed
prior to the date hereof or except as set forth in (S) 4(i) of the Acquiror
Disclosure Letter, (i) Acquiror and its Subsidiaries have conducted their
respective businesses only in, and have not engaged in any transaction
other than according to, the ordinary and usual course of such businesses,
and (ii) there has not been (A) any change in the financial condition,
business or results of operations of Acquiror or any of its Subsidiaries,
or any development or combination of developments relating to Acquiror or
any of its Subsidiaries of which management of Acquiror has knowledge, and
which would reasonably be expected to have an Acquiror Material Adverse
Effect; (B) any declaration, setting aside or payment of any dividend or
other distribution with respect to the capital stock of Acquiror, or any
redemption, repurchase or other reacquisition of any of the capital stock
of Acquiror; (C) any
A-21
<PAGE>
change by Acquiror in accounting principles, practices or methods; (D) any
increase in the compensation of any officer of Acquiror or any of its
Subsidiaries or grant of any general salary or benefits increase to the
employees of Acquiror or any of its Subsidiaries other than in the ordinary
course of business consistent with past practices; (E) any issuance or sale
of any capital stock or other securities (including any Stock Rights) by
Acquiror or any of its Subsidiaries of any kind, other than upon exercise
of Stock Rights issued by or binding upon Acquiror; (F) any modification,
amendment or change to the terms or conditions of any Stock Right; or (G)
any split, combination, reclassification, redemption, repurchase or other
reacquisition of any capital stock or other securities of Acquiror or any
of its Subsidiaries.
(j) Compliance. Except as set forth in (S)4(j) of the Acquiror Disclosure
Letter or in Acquiror Reports filed prior to the date hereof, Acquiror and
its Subsidiaries are in compliance with all applicable foreign, federal,
state and local laws, rules and regulations and all court orders, judgments
and decrees to which any of them is a party except where the failure to be
in compliance would not reasonably be expected to have a Acquiror Material
Adverse Effect.
(k) Brokers' and Other Fees. Except as set forth in (S)4(k) of the
Acquiror Disclosure Letter, none of Acquiror and its Subsidiaries has any
liability or obligation to pay any fees or commissions to any broker,
finder or agent with respect to the transactions contemplated by this
Agreement.
(l) Litigation and Liabilities. Except as disclosed in (S)4(l) of the
Acquiror Disclosure Letter or in Acquiror Reports filed prior to the date
hereof, there are (i) no actions, suits or proceedings pending or, to the
knowledge of Acquiror, threatened against Acquiror or any of its
Subsidiaries, or any facts or circumstances known to Acquiror which may
give rise to an action, suit or proceeding against Acquiror or any of its
Subsidiaries, which would reasonably be expected to have a Acquiror
Material Adverse Effect and (ii) no obligations or liabilities of Acquiror
or any of its Subsidiaries, whether accrued, contingent or otherwise, to
Acquiror which would reasonably be expected to have an Acquiror Material
Adverse Effect.
(m) Taxes. Except as set forth in (S)4(m) of the Acquiror Disclosure
Letter or in Acquiror Reports filed prior to the date hereof, Acquiror and
each of its Subsidiaries have duly filed or caused to be duly filed on
their behalf all federal, state, local and foreign Tax Returns required to
be filed by them, and have duly paid, caused to be paid or made adequate
provision for the payment of all Taxes required to be paid in respect of
the periods covered by such Tax Returns, except where the failure to file
such Tax Returns or pay such Taxes would not reasonably be expected to have
an Acquiror Material Adverse Effect. Except as set forth in (S)4(m) of the
Acquiror Disclosure Letter, no claims for Taxes have been asserted against
Acquiror or any of its Subsidiaries and no material deficiency for any
Taxes has been proposed, asserted or assessed which has not been resolved
or paid in full. To the knowledge of Acquiror, no Tax Return or taxable
period of Acquiror or any of its Subsidiaries is under examination by any
taxing authority, and neither Acquiror nor any of its Subsidiaries has
received written notice of any pending audit by any taxing authority. There
are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any Tax Return for any period of Acquiror or any
or its Subsidiaries. Except as set forth in (S)4(m) of the Acquiror
Disclosure Letter, there are no tax liens other than liens for Taxes not
yet due and payable relating to Acquiror or any of its Subsidiaries.
Acquiror has no reason to believe that any conditions exist that could
reasonably be expected to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code. Neither
Acquiror nor any of its Subsidiaries is a party to any agreement or
contract which would result in payment of any "excess parachute payment"
within the meaning of Section 280G of the Code as a result of the
transactions contemplated hereby. Neither Acquiror nor any of its
Subsidiaries has filed any consent pursuant to Section 341(f) of the Code
or agreed to have Section 341(f)(2) of the Code apply to any disposition of
a subsection (f) asset owned by Acquiror or any of its Subsidiaries.
Acquiror has not been and is not a United States real property holding
company (as defined in Section 897(c)(2) of the Code) during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code. None of Acquiror
or its Subsidiaries (x) has been a member of an "affiliated group," within
the meaning of Section 1504(a) of the Code, other than a group the common
acquiror of which was the Acquiror or (y) has any liability for the Taxes
of any person, other than any of Acquiror or its Subsidiaries under
Treasury Regulation (S)1.1502-6 (or any similar provision of state, local
or foreign law) as a transferee, successor, by contract or otherwise.
A-22
<PAGE>
(n) Fairness Opinion. Kaufman Brothers, L.P. has delivered the Acquiror
Fairness Opinion to the Acquiror Board, and a true and complete copy
thereof has been furnished to the Company.
(o) Employee Benefits.
(i) All pension, profit-sharing, deferred compensation, savings,
stock bonus and stock option plans, and all employee benefit plans,
whether or not covered by ERISA which are sponsored by Acquiror, any
Subsidiary of Acquiror or any Acquiror ERISA Affiliate (as defined
below) of Acquiror or to which Acquiror, any Subsidiary of Acquiror or
any Acquiror ERISA Affiliate of Acquiror makes contributions, and which
cover employees of Acquiror or any Subsidiary of Acquiror (the
"Acquiror Employees") or former employees of Acquiror or any Subsidiary
of Acquiror, all employment or severance contracts with employees of
Acquiror or any Subsidiary of Acquiror, and any applicable "change of
control" or similar provisions in any plan, contract or arrangement
that cover Acquiror Employees (collectively, "Acquiror Benefit Plans"
and individually an "Acquiror Benefit Plan") are accurately and
completely listed in (S)4(o) of the Acquiror Disclosure Letter. No
Acquiror Benefit Plan is a multi-employer plan, money purchase plan,
defined benefit plan, multiple employer plan or multiple employer
welfare arrangement and no Acquiror Benefit Plan is covered by Title IV
of ERISA. True and complete copies of all Acquiror Benefit Plans (other
than medical and other similar welfare plans made generally available
to all Acquiror Employees) have been made available to the Company.
(ii) All Acquiror Benefit Plans to the extent subject to ERISA, are
in compliance in all material respects with ERISA and the rules and
regulations promulgated thereunder. Each Acquiror Benefit Plan which is
an "employee pension benefit plan" within the meaning of Section 3(2)
of ERISA ("Acquiror Pension Plan") and which is intended to be
qualified under Section 401(a) of the Code, has received a favorable
determination letter from the Internal Revenue Service, which
determination letter is currently in effect, and there are no
proceedings pending or, to the knowledge of Acquiror, threatened, or
any facts or circumstances known to Acquiror, which are reasonably
likely to result in revocation of any such favorable determination
letter. There is no pending or, to the knowledge of Acquiror,
threatened litigation relating to the Acquiror Benefit Plans. Neither
Acquiror nor any of its Subsidiaries has engaged in a transaction with
respect to any Acquiror Benefit Plan that, assuming the taxable period
of such transaction expired as of the date hereof, is reasonably likely
to subject Acquiror or any of its Subsidiaries to a tax or penalty
imposed by either Section 4975 of the Code or Section 502(i) of ERISA.
(iii) No liability under Title IV of ERISA has been or is reasonably
likely to be incurred by Acquiror or any of its Subsidiaries with
respect to any ongoing, frozen or terminated Acquiror Benefit Plan that
is a "single-employer plan", within the meaning of Section 4001(a)(15)
of ERISA, currently or formerly maintained by any of them, or the
single-employer plan of any entity which is considered a predecessor of
Acquiror or one employer with Acquiror under Section 4001 of ERISA (an
"Acquiror ERISA Affiliate"). All contributions required to be made
under the terms of any Acquiror Benefit Plan have been timely made or
reserves therefor on the balance sheet of Acquiror have been
established, which reserves are adequate. Except as required by Part 6
of Title I of ERISA, Acquiror does not have any unfunded obligations
for retiree health and life benefits under any Acquiror Benefit Plan.
(iv) Acquiror and its Subsidiaries have not incurred any liability
under, and have complied in all material respects with, the WARN Act,
and no fact or event exists that could give rise to liability under
such act.
(p) Year 2000. Except as disclosed in the previously filed Acquiror
Reports, Acquiror's products and information systems are Year 2000
Compliant except to the extent that their failure to be Year 2000 Compliant
would not, individually or in the aggregate, reasonably be expected to have
an Acquiror Material Adverse Effect.
A-23
<PAGE>
(q) Environmental Matters. Except for such matters that, individually or
in the aggregate, would not reasonably be expected to have an Acquiror
Material Adverse Effect or would not otherwise require disclosure pursuant
to the Securities Exchange Act, or are listed in (S)4(q) of the Acquiror
Disclosure Letter or described in Acquiror Reports filed prior to the date
hereof, (i) each of Acquiror and its Subsidiaries has complied and is in
compliance with all applicable Environmental Laws; (ii) the properties
currently owned or operated by Acquiror or any of its Subsidiaries
(including soils, groundwater, surface water, buildings or other
structures) are not contaminated with Hazardous Substances (as defined
below); (iii) neither Acquiror nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any
third party property; (iv) neither Acquiror nor any or its Subsidiaries has
had any release or threat of release of any Hazardous Substance; (v)
neither Acquiror nor any of its Subsidiaries has received any notice,
demand, threat, letter, claim or request for information alleging that it
or any of its Subsidiaries may be in violation of or liable under any
Environmental Law (including any claims relating to electromagnetic fields
or microwave transmissions); (vi) neither Acquiror nor any of its
Subsidiaries is subject to any orders, decrees, injunctions or other
arrangements with any governmental or regulatory authority of competent
jurisdiction or is subject to any indemnity or other agreement with any
third party relating to liability under any Environmental Law or relating
to Hazardous Substances; and (vii) there are no circumstances or conditions
involving Acquiror or any of its Subsidiaries that would reasonably be
expected to result in any claims, liabilities, investigations, costs or
restrictions on the ownership, use or transfer of any of its properties
pursuant to any Environmental Law.
(r) Intellectual Property. Except as disclosed in (S)4(r) of the Acquiror
Disclosure Letter or in the Acquiror Reports filed prior to the date
hereof, Acquiror and its Subsidiaries have all right, title and interest
in, or a valid and binding license to use, all Acquiror Intellectual
Property (as defined below). Except as disclosed in (S)4(r) of the Acquiror
Disclosure Letter or in the Acquiror Reports filed prior to the date
hereof, Acquiror and its Subsidiaries (i) have not defaulted in any
material respect under any license to use any Acquiror Intellectual
Property, (ii) are not the subject of any proceeding or litigation for
infringement of any third party intellectual property, (iii) have no
knowledge of circumstances that would be reasonably expected to give rise
to any such proceeding or litigation and (iv) have no knowledge of
circumstances that are causing or would be reasonably expected to cause the
loss or impairment of any Acquiror Intellectual Property, other than a
default, proceeding, litigation, loss or impairment that is not having or
would not be reasonably expected to have, individually or in the aggregate,
an Acquiror Material Adverse Effect.
For purposes of this Agreement, "Acquiror Intellectual Property" means
patents and patent rights, trademarks and trademark rights, trade names and
trade name rights, service marks and service mark rights, copyrights and
copyright rights, trade secret and trade secret rights, and other
intellectual property rights, and all pending applications for and
registrations of any of the foregoing that are individually or in the
aggregate material to the conduct of the business of Acquiror and its
Subsidiaries taken as a whole.
(s) Insurance. Except as set forth in (S)4(s) of the Acquiror Disclosure
Letter, each of Acquiror and its Subsidiaries is insured with financially
responsible insurers in such amounts and against such risks and losses as
are customary for companies conducting the business as conducted by
Acquiror and its Subsidiaries.
(t) Certain Contracts. Except as set forth in (S)4(t) of the Acquiror
Disclosure Letter, all material to which Acquiror or any of its
Subsidiaries is a party or may be bound that are required by Item
610(b)(10) of Regulation S-K to be filed as exhibits to, or incorporated by
reference in, the Acquiror 10-K or the Acquiror 10-Q have been so filed or
incorporated by reference. All material contracts to which Acquiror or any
of its Subsidiaries is a party or may be bound that have been entered into
as of the date hereof and will be required by Item 610(b)(10) of Regulation
S-K to be filed or incorporated by reference into Acquiror's Quarterly
Report on Form 10-Q for the period ending September 30, 1999, but which
have not previously been filed or incorporated by reference into any
Acquiror Reports, are set forth in (S)4(t) of the Acquiror Disclosure
Letter. All contracts, licenses, consents, royalty or other agreements
which are material to Acquiror and its Subsidiaries, taken as a whole, to
which Acquiror or any of its Subsidiaries is
A-24
<PAGE>
a party (the "Acquiror Contracts") are valid and in full force and effect
on the date hereof except to the extent they have previously expired in
accordance with their terms or, to the extent such invalidity would not
reasonably be expected to have an Acquiror Material Adverse Effect and, to
Acquiror's knowledge, neither Acquiror nor any of its Subsidiaries has
violated any provision of, or committed or failed to perform any act which
with or without notice, lapse of time or both would constitute a default
under the provisions of, any Acquiror Contract, except for defaults which
individually and in the aggregate would not reasonably be expected to
result in an Acquiror Material Adverse Effect.
Accounting and Tax Matters. To Acquiror's knowledge, neither Acquiror nor
any of its Affiliates has taken or agreed to take any action, or knows of
any circumstances, that (without regard to any action taken or agreed to be
taken or agreed to be taken by the Company or any of its Affiliates) would
prevent the Merger from qualifying as a reorganization within the meaning
of Section 368(a) of the Code.
5. Covenants. The Parties agree as follows with respect to the period from
and after the execution of this Agreement through and including the Effective
Time (except for (S)5(j), (S)5(l) and (S)5(q), which will apply from and after
the Effective Time in accordance with their respective terms and (S)5(p) which
will apply from the date hereof and shall survive after the Closing).
(a) General. Each of the Parties will use all reasonable efforts to take
all actions and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set forth in (S)6
below).
(b) Notices and Consents. The Company and Acquiror will give any notices
(and will cause each of their respective Subsidiaries to give any notices)
to third parties, and will use all reasonable efforts to obtain (and will
cause each of their respective Subsidiaries to use all reasonable efforts
to obtain) any third-party consents, that may be required in connection
with the matters referred to in (S)3(f) and (S)4(f) above (regardless of
whether the failure to give such notice or obtain such consent would result
in a Company Material Adverse Effect or a Acquiror Material Adverse
Effect).
(c) Regulatory Matters and Approvals. Each of the Parties, promptly after
the date hereof, will (and the Company, promptly after the date hereof,
will cause each of its Subsidiaries to) give any notices to, make any
filings with and use all reasonable efforts to obtain any authorizations,
consents and approvals of Government Entities in connection with the
matters referred to in (S)3(f) and (S)4(f) above. Without limiting the
generality of the foregoing:
(i) Federal Securities Laws. As promptly as practicable following the
date hereof, Acquiror shall, in cooperation with the Company, prepare
and file with the SEC preliminary proxy materials which shall
constitute the Joint Proxy Statement/Prospectus (such proxy
statement/prospectus, and any amendments or supplements thereto, the
"Joint Proxy Statement/Prospectus") and a registration statement on
Form S-4 with respect to the issuance of Acquiror Shares in connection
with the Merger (such registration statement, and any amendments or
supplements thereto, the "Registration Statement"), and file with state
securities administrators such registration statements or other
documents as may be required under applicable blue sky laws to qualify
or register such Acquiror Shares in such states as are designated by
the Company (the "Blue Sky Filings"). The Joint Proxy
Statement/Prospectus will be included in the Registration Statement as
Acquiror's prospectus. The Registration Statement and the Joint Proxy
Statement/Prospectus shall comply as to form in all material respects
with the applicable provisions of the Securities Act and the Exchange
Act and the rules and regulations thereunder. Acquiror shall use all
reasonable efforts to have the Registration Statement declared
effective by the SEC as promptly as practicable after filing with the
SEC and to keep the Registration Statement effective as long as is
necessary to consummate the Merger. Acquiror agrees that none of the
information supplied or to be supplied by Acquiror for inclusion or
incorporation by reference in the Registration Statement and/or the
Joint Proxy Statement/Prospectus and each amendment or supplement
thereto, at the time of mailing thereof and at the time of the Company
Special Meeting or the Acquiror Special Meeting, will contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the
A-25
<PAGE>
statements therein, in light of the circumstances under which they were
made, not misleading. The Company agrees that none of the information
supplied or to be supplied by the Company for inclusion or
incorporation by reference in the Joint Proxy Statement/Prospectus and
each amendment or supplement thereto, at the time of mailing thereof
and at the time of the Company Special Meeting or the Acquiror Special
Meeting, will contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. For purposes of the foregoing, it is
understood and agreed that information concerning or related to
Acquiror and the Acquiror Special Meeting will be deemed to have been
supplied by Acquiror, and information concerning or related to the
Company and the Company Special Meeting shall be deemed to have been
supplied by the Company. Acquiror will provide the Company with a
reasonable opportunity to review and comment on the Joint Proxy
Statement/Prospectus and any amendment or supplement thereto prior to
filing such with the SEC, will provide the Company with a copy of all
such filings concurrent with their filing with the SEC and will notify
the Company as promptly as practicable after the receipt of any
comments from the SEC or its staff or from any state securities
administrators and of any request by the SEC or its staff or by any
state securities administrators for amendments or supplements to the
Registration Statement or any Blue Sky Filings or for additional
information, and will supply the Company and its legal counsel with
copies of all correspondence between Acquiror or any of its
representatives, on the one hand, and the SEC, its staff or any state
securities administrators, on the other hand, with respect to the
Registration Statement. No change, amendment or supplement to the
information supplied by the Company for inclusion in the Joint Proxy
Statement/Prospectus shall be made without the approval of the Company,
which approval shall not be unreasonably withheld or delayed. If, at
any time prior to the Effective Time, any event relating to the Company
or Acquiror or any of their respective Affiliates, officers or
directors is discovered by the Company or Acquiror, as the case may be,
that is required by the Securities Act or the Securities Exchange Act
to be set forth in an amendment to the Registration Statement or a
supplement to the Joint Proxy Statement/Prospectus, the Company or
Acquiror, as the case may be, will as promptly as practicable inform
the other, and such amendment or supplement will be promptly filed with
the SEC and disseminated to the stockholders of the Company and
Acquiror, to the extent required by applicable securities laws. All
documents which the Company or Acquiror files or is responsible for
filing with the SEC and any other regulatory agency in connection with
the Merger (including, without limitation, the Registration Statement
and the Joint Proxy Statement/Prospectus) will comply as to form and
content in all material respects with the provisions of applicable law.
Notwithstanding the foregoing, the Company, on the one hand, and
Acquiror, on the other hand, make no representations or warranties with
respect to any information that has been supplied in writing by the
other, or the other's auditors, attorneys or financial advisors,
specifically for use in the Registration Statement or the Joint Proxy
Statement/Prospectus, or in any other documents to be filed with the
SEC or any other regulatory agency expressly for use in connection with
the transactions contemplated hereby.
(ii) State Corporation Law. The Company will take all action, to the
extent necessary in accordance with applicable law, its certificate of
incorporation and by-laws to convene a special meeting of its
stockholders (the "Company Special Meeting"), as soon as reasonably
practicable in order that its stockholders may consider and vote upon
the adoption of this Agreement and the approval of the Merger in
accordance with the Massachusetts Business Corporation Law. Acquiror
will take all action, to the extent necessary in accordance with
applicable law, its certificate of incorporation and by-laws to convene
a special meeting of its stockholders (the "Acquiror Special Meeting"),
as soon as reasonably practicable in order that its stockholders may
consider and vote upon the adoption of this Agreement and the approval
of the Merger in accordance with the Delaware Business Corporation Law,
the issuance of Acquiror Shares in connection with the Merger as
provided in this Agreement as required by the rules of Nasdaq and an
amendment to the certificate of incorporation of Acquiror to increase
the number of authorized Acquiror Shares. The Company and Acquiror
shall mail the Joint Proxy Statement/Prospectus to their respective
stockholders
A-26
<PAGE>
simultaneously and as soon as reasonably practicable. Subject to
(S)5(h)(iv) and (S)5(i)(iv) below, the Joint Proxy Statement/Prospectus
shall contain the affirmative unanimous recommendations of the Company
Board in favor of the adoption of this Agreement and the approval of
the Merger and of the Acquiror Board in favor of issuance of Acquiror
Shares in connection with the Merger as provided in the Agreement as
required by the rules of Nasdaq and the increase in the number of
authorized Acquiror Shares in accordance with the Delaware General
Corporation Law.
(iii) Periodic Reports. Each of the Parties and its counsel shall be
given an opportunity to review each Form 10-K and Form 10-Q (and any
amendments thereto) to be filed by the other Party under the Securities
Exchange Act prior to their being filed with the SEC and Nasdaq, and
shall be provided with final copies thereof concurrently with their
filing with the SEC.
(d) Operation of the Company's Business. Except as set forth in (S)5(d)
of the Company Disclosure Letter or as otherwise expressly contemplated by
this Agreement, the Company will not (and will not cause or permit any of
its Subsidiaries to), without the written consent of Acquiror, take any
action or enter into any transaction other than in the ordinary course of
business consistent with past practice. Without limiting the generality of
the foregoing, except as expressly provided in this Agreement or (S)5(d) of
the Company Disclosure Letter, without the written consent of Acquiror:
(i) none of the Company and its Subsidiaries will authorize or effect
any change in its charter or by-laws or comparable organizational
document;
(ii) none of the Company and its Subsidiaries will grant any Stock
Rights or issue, sell, authorize or otherwise dispose of any of its
capital stock, (x) except upon the conversion or exercise of Stock
Rights outstanding as of the date of this Agreement and (y) except for
stock options issued to employees of the Company and its Subsidiaries
in a manner consistent with past practice which (I) do not provide for
the issuance of more than 200,000 Company Shares in any calendar
quarter, (II) are issued only to new employees and employees promoted
after the date hereof, (III) are issued at not less than the market
price of the Company Stock on the date of grant, (IV) are not issued to
any executive officer or director of the Company and (V) do not provide
for accelerated vesting as a result of the Merger;
(iii) none of the Company and its Subsidiaries will sell, lease,
encumber or otherwise dispose of, or otherwise agree to sell, lease,
encumber or otherwise dispose of, any of its assets which are material,
individually or in the aggregate, to the Company and its Subsidiaries
taken as a whole, other than equipment sales from inventory arising in
the ordinary course of business consistent with past practice;
(iv) none of the Company and its Subsidiaries (other than wholly-
owned Subsidiaries) will declare, set aside or pay any dividend or
distribution with respect to its capital stock (whether in cash or in
kind);
(v) none of the Company and its Subsidiaries will split, combine or
reclassify any of its capital stock or redeem, repurchase or otherwise
acquire any of its capital stock;
(vi) none of the Company and its Subsidiaries will acquire or agree
to acquire by merger or consolidation with, or by purchasing a
substantial equity interest in or a substantial portion of the assets
of, or by any other manner, any business of any Person or division
thereof or otherwise acquire or agree to acquire any assets (other than
assets used in the operation of the business of the Company and its
Subsidiaries in the ordinary course consistent with past practice);
(vii) none of Company or its Subsidiaries will incur or commit to any
capital expenditures other than capital expenditures incurred or
committed to in the ordinary course of business consistent with past
practice and which, together with all such expenditures incurred or
committed since January 1, 1999, are not in excess of the respective
amounts by category or in the aggregate set forth in the Company's
capital expenditure budget, as previously disclosed to Acquiror or, if
the Closing Date has not occurred prior to December 31, 1999, such
additional amounts for any subsequent period as may be consented to by
Acquiror, such consent not to be unreasonably withheld, or, if Acquiror
shall not
A-27
<PAGE>
have so consented, an amount not greater than an amount equal to a pro
rata portion of the Company's 1999 capital expenditure budget;
(viii) none of the Company or its Subsidiaries will (x) other than in
connection with actions permitted by (S)5(d)(vi), make any loans,
advances or capital contributions to, or investments in, any other
Person, other than by the Company or a Subsidiary of the Company to or
in the Company or any Subsidiary of the Company, (y) pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than payments,
discharges or satisfactions incurred or committed to in the ordinary
course of business consistent with past practice or (z) other than in
connection with actions permitted by (S)5(d)(vi), create, incur, assume
or suffer to exist any indebtedness, issuances of debt securities,
guarantees, Security Interests, loans or advances not in existence as
of the date of this Agreement except pursuant to the credit facilities,
indentures and other arrangements in existence on the date of this
Agreement and incurred in the ordinary course of business consistent
with past practice, and any other indebtedness existing on the date of
this Agreement, in each case as such credit facilities, indentures,
other arrangements and other existing indebtedness may be amended,
extended, modified, refunded, renewed or refinanced after the date of
this Agreement, but only if the aggregate principal amount thereof is
not increased thereby, the term thereof is not extended thereby and the
other terms and conditions thereof, taken as a whole, are not less
advantageous to the Company and its Subsidiaries than those in
existence as of the date of this Agreement;
(ix) none of the Company and its Subsidiaries will make any change in
employment terms for any of its directors, officers and employees other
than (A) customary increases to employees whose total annual cash
compensation is less than $120,000 awarded in the ordinary course of
business consistent with past practices, and (B) customary employee
bonuses (including to employees who are officers) approved by the
Company Board and paid in the ordinary course of business consistent
with past practices and (C) immaterial changes to Company Benefit
Plans;
(x) except as disclosed in the Company Reports filed prior to the
date of this Agreement, the Company will not change its methods of
accounting in effect at December 31, 1998 in a manner materially
affecting the consolidated assets, liabilities or results of operations
of the Company, except as required by changes in GAAP as concurred in
by the Company's independent auditors, and the Company will not (i)
change its fiscal year or (ii) make any material tax election, other
than in the ordinary course of business consistent with past practice;
and
(xi) none of the Company and its Subsidiaries will resolve or commit
to any of the foregoing.
In the event the Company shall request Acquiror to consent in writing to
an action otherwise prohibited by this (S)5(d), Acquiror shall use
reasonable efforts to respond in a prompt and timely fashion (but in no
event later than ten (10) business days following such request), but may
otherwise respond affirmatively or negatively in its sole discretion.
(e) Operation of Acquiror's Business. Except as set forth in (S)5(e) of
the Acquiror Disclosure Letter or as otherwise contemplated by this
Agreement:
(i) none of Acquiror and its Subsidiaries will authorize or effect
any change in its charter or by-laws or comparable organizational
document except for such amendments to its charter, by-laws or other
comparable charter or organizational documents that do not have an
adverse affect on the Merger and the other transactions contemplated
hereby;
(ii) none of Acquiror and its Subsidiaries will grant any Stock
Rights or issue, sell, authorize or otherwise dispose of any of its
capital stock, except (x) upon the conversion or exercise of Stock
Rights outstanding as of the date of this Agreement or issued pursuant
to the following clauses (y) and (z); (y) stock options issued to
employees of the Acquiror and its Subsidiaries in a manner consistent
with past practice which (I) do not provide for the issuance of more
than 200,000 Acquiror Shares in any calendar quarter, (II) are issued
only to new employees and employees promoted after the date hereof,
(III) are issued at not less than the market price of the Acquiror
Stock on the date of
A-28
<PAGE>
grant, (IV) are not issued to any executive officer or director of the
Acquiror and (V) do not provide for accelerated vesting as a result of
the Merger; and (z) Stock Rights and capital stock issued as
consideration for acquisitions as permitted by (S)5(e)(vi);
(iii) none of Acquiror and its Subsidiaries will sell, lease,
encumber or otherwise dispose of, or otherwise agree to sell or
otherwise dispose of, any of its assets which are material,
individually or in the aggregate, to Acquiror and its Subsidiaries
taken as a whole, other than equipment sales from inventory arising in
the ordinary course of business consistent with past practice;
(iv) none of Acquiror and its Subsidiaries (other than wholly owned
Subsidiaries) will declare, set aside or pay any dividend or
distribution with respect to its capital stock (whether in cash or in
kind);
(v) none of Acquiror and its Subsidiaries will split, combine or
reclassify any of its capital stock or redeem, repurchase or otherwise
acquire any of its capital stock;
(vi) without Prior Consultation, none of Acquiror and its
Subsidiaries will acquire or agree to acquire by merger or
consolidation with, or by purchasing a substantial equity interest in
or a substantial portion of the assets of, or by any other manner, any
business of any Person or division thereof or otherwise acquire or
agree to acquire any substantial assets in a single transaction or
series of related transactions;
(vii) without Prior Consultation, none of Acquiror or its
Subsidiaries will incur or commit to any capital expenditures other
than capital expenditures incurred or committed to in the ordinary
course of business consistent with past practice;
(viii) without Prior Consultation, none of Acquiror or its
Subsidiaries will (A) other than in connection with actions permitted
by (S)5(e)(vii), make any loans, advances or capital contributions to,
or investments in, any other Person, other than by Acquiror or a
Subsidiary of Acquiror to or in Acquiror or any Subsidiary of Acquiror,
(B) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than loans, advances, capital contributions, investments,
payments, discharges or satisfactions incurred or committed to in the
ordinary course of business consistent with past practice or (C) other
than in connection with actions permitted by (S)5(e)(vii), create,
incur, assume or suffer to exist any indebtedness, issuances of debt
securities, guarantees, Security Interests, loans or advances not in
existence as of the date of this Agreement except pursuant to the
credit facilities, indentures and other arrangements in existence on
the date of this Agreement and incurred in the ordinary course of
business consistent with past practice, and any other indebtedness
existing on the date of this Agreement, in each case as such credit
facilities, indentures, other arrangements and other existing
indebtedness may be amended, extended, exchanged, modified, refunded,
renewed or refinanced after the date of this Agreement, but only if the
aggregate principal amount thereof is not increased thereby, the term
thereof is not extended thereby and the other terms and conditions
thereof, taken as a whole, are not less advantageous to Acquiror and
its Subsidiaries than those in existence as of the date of this
Agreement;
(ix) none of the Acquiror and its Subsidiaries will make any change
in employment terms for any of its directors, officers and employees
other than (A) customary increases to employees whose total annual cash
compensation is less than $120,000 awarded in the ordinary course of
business consistent with past practices, and (B) customary employee
bonuses (including to employees who are officers) approved by the
Acquiror Board and paid in the ordinary course of business consistent
with past practices and (C) immaterial changes to Acquiror Benefit
Plans;
(x) Acquiror will not change its methods of accounting in effect at
December 31, 1998 in a manner materially affecting the consolidated
assets, liabilities or operating results of Acquiror, except as
required by changes in GAAP as concurred in by Acquiror's independent
auditors, and Acquiror will not (i) change its fiscal year or (ii) make
any material tax election, other than in the ordinary course of
business consistent with past practice; and
A-29
<PAGE>
(xi) none of Acquiror and its Subsidiaries will resolve or commit to
any of the foregoing (A) which requires the Company's consent unless it
has obtained such consent or (B) which requires Prior Consultation
unless it has afforded Prior Consultation.
In the event Acquiror shall request the Company to consent in writing to an
action otherwise prohibited by this (S) 5(e), the Company shall use reasonable
efforts to respond in a prompt and timely fashion (but in no event later than
ten (10) business days following such request), but may otherwise respond
affirmatively or negatively in its sole discretion.
(f) Access. Each Party will (and will cause each of its Subsidiaries to)
permit representatives of the other Party to have access at all reasonable
times and in a manner so as not to materially interfere with the normal
business operations of the Company and its Subsidiaries, or Acquiror and
its Subsidiaries, as applicable, to all premises, properties, personnel,
books, records (including without limitation tax and financial records),
contracts and documents of or pertaining to such Party. Each Party and all
of its respective representatives will treat and hold as such any
Confidential Information it receives from the other Party or any of its
representatives in accordance with the Confidentiality Agreement.
(g) Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of
its own representations and warranties in (S)3 and (S)4 above. No
disclosure by any Party pursuant to this (S)5(g), however, shall be deemed
to amend or supplement the Company Disclosure Letter or Acquiror Disclosure
Letter or to prevent or cure any misrepresentation, breach of warranty or
breach of covenant.
(h) Company Exclusivity.
(i) The Company shall, and shall cause its Subsidiaries and
Representatives to, immediately cease and terminate any existing
solicitation, initiation, encouragement, activity, discussion or
negotiation with any Persons conducted heretofore by the Company, its
Subsidiaries or any of their respective Affiliates, officers,
directors, employees, financial advisors, agents or representatives
(each a "Representative") with respect to any proposed, potential or
contemplated Acquisition Proposal.
(ii) From and after the date hereof, without the prior written
consent of Acquiror, the Company will not authorize or permit any of
its Subsidiaries to, and shall cause any and all of its Representatives
not to, directly or indirectly, (A) solicit, initiate, or encourage any
inquiries or proposals that constitute, or could reasonably be expected
to lead to, an Acquisition Proposal, or (B) engage in negotiations or
discussions with any Third Party concerning, or provide any non-public
information to any person or entity relating to, an Acquisition
Proposal, or (C) enter into any letter of intent, agreement in
principle or any acquisition agreement or other similar agreement with
respect to any Acquisition Proposal; provided, however, that nothing
contained in this (S)5(h)(ii) shall prevent the Company or the Company
Board prior to receipt of the Requisite Stockholder Approval of the
Company Stockholders, from furnishing non-public information to, or
entering into discussions or negotiations with, any Third Party in
connection with an unsolicited, bona fide written proposal for an
Acquisition Proposal by such Third Party, if and only to the extent
that (1) such Third Party has made a written proposal to the Company
Board to consummate an Acquisition Proposal, (2) the Company Board
determines in good faith, based upon the advice of a financial advisor
of nationally recognized reputation, that such Acquisition Proposal is
reasonably capable of being completed on substantially the terms
proposed, and would, if consummated, result in a transaction that would
provide greater value to the holders of the Company Shares than the
transaction contemplated by this Agreement (a "Superior Proposal"), (3)
the failure to take such action would, in the reasonable good faith
judgment of the Company Board, based upon a written opinion of Company
outside legal counsel, be a violation of its fiduciary duties to the
Company's stockholders under applicable law, and (4) prior to
furnishing such non-public information to, or entering into discussions
or negotiations with, such Person, the Company Board receives from such
Person an executed confidentiality agreement with material terms no
less favorable to the Company than those contained in the
Confidentiality Agreement and provides prior notice of its decision to
take such action to Acquiror. The Company agrees not to release any
Third Party from, or waive any provision of, any standstill agreement
to
A-30
<PAGE>
which it is a party or any confidentiality agreement between it and
another Person who has made, or who may reasonably be considered likely
to make, an Acquisition Proposal, unless the failure to take such
action would, in the reasonable good faith judgment of the Company
Board, based upon written opinion of Company outside legal counsel, be
a violation of its fiduciary duties to the Company Stockholders under
applicable law and such action is taken prior to receipt of the
Requisite Stockholder Approval of the Company Stockholders. Without
limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding sentence by any Representative
of the Company or any of its Subsidiaries shall be deemed to be a
breach of this (S)5(h) by the Company.
(iii) The Company shall notify Acquiror promptly after receipt by the
Company or the Company's knowledge of the receipt by any of its
Representatives of any Acquisition Proposal or any request for non-
public information in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company by any Person
that informs such party that it is considering making or has made an
Acquisition Proposal. Such notice shall be made orally and in writing
and shall indicate the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. The Company shall keep
Acquiror informed of the status (including any change to the material
terms) of any such Acquisition Proposal or request for non-public
information.
(iv) The Company Board may not withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Acquiror, the approval or
recommendation by the Company Board of this Agreement or the Merger
unless, following the receipt of a Superior Proposal but prior to
receipt of the Requisite Stockholder Approval of the Company
Stockholders, in the reasonable good faith judgment of the Company
Board, based upon the written opinion of Company's outside legal
counsel, the failure to do so would be a violation of the Company
Board's fiduciary duties to the Company's stockholders under applicable
law; provided, however, that, the Company Board shall submit this
Agreement and the Merger to the Company's stockholders for adoption and
approval, whether or not the Company Board at any time subsequent to
the date hereof determines that this Agreement is no longer advisable
or recommends that the stockholders of the Company reject it or
otherwise modifies or withdraws its recommendation. Unless the Company
Board has withdrawn its recommendation of this Agreement in compliance
herewith, the Company shall use its best efforts to solicit from the
Company's stockholders proxies in favor of the adoption and approval of
this Agreement and the Merger and to secure the vote or consent of the
Company's stockholders required by the Massachusetts Business
Corporation Law and its articles of incorporation and by-laws to adopt
and approve this Agreement and the Merger.
(i) Acquiror Exclusivity.
(i) Acquiror shall, and shall cause its Subsidiaries and
Representatives to, immediately cease and terminate any existing
solicitation, initiation, encouragement, activity, discussion or
negotiation with any Persons conducted heretofore by Acquiror, its
Subsidiaries or any of its Representatives with respect to any
proposed, potential or contemplated Acquiror Acquisition Proposal the
consummation of which would be reasonably expected to (x) result in a
material delay in the Effective Time or (y) materially and adversely
impact the likelihood of obtaining any Required Company Consent or
Required Acquiror Consent other than those the failures to obtain would
not result in either a Company Material Adverse Effect or a Acquiror
Material Adverse Effect (a "Prohibited Acquiror Acquisition Proposal").
(ii) From and after the date hereof, Acquiror will notify the Company
of any Acquiror Acquisition Proposal of which notice is given to the
Acquiror Board. Such notice to the Company will be made promptly after
such notice to the Acquiror Board, but will be conditional upon an
appropriate confidentiality Agreement. Without the prior written
consent of the Company, Acquiror will not authorize or permit any of
its Subsidiaries to, and shall cause any and all of its Representatives
not to, directly or indirectly, (A) solicit, initiate, or encourage any
inquiries or proposals that constitute, or could reasonably be expected
to lead to, a Prohibited Acquiror Acquisition Proposal, or (B) engage
in negotiations or discussions with any Acquiror Third Party
A-31
<PAGE>
concerning, or provide any nonpublic information to any person or
entity relating to, a Prohibited Acquiror Acquisition Proposal, or (C)
enter into any letter of intent, agreement in principle or any
acquisition agreement or other similar agreement with respect to any
Prohibited Acquiror Acquisition Proposal; provided, however, that
nothing contained in this (S)5(i)(ii) shall prevent Acquiror or the
Acquiror Board from, prior to receipt of the Requisite Stockholder
Approval of the Acquiror Stockholders, furnishing nonpublic information
to, or entering into discussions or negotiations with, any Acquiror
Third Party in connection with an unsolicited, bona fide written
proposal for a Prohibited Acquiror Acquisition Proposal by such
Acquiror Third Party, if and only to the extent that (1) such Acquiror
Third Party has made a written proposal to the Acquiror Board to
consummate a Prohibited Acquiror Acquisition Proposal, (2) the Acquiror
Board determines in good faith, based upon the advice of a financial
advisor of nationally recognized reputation, that such Prohibited
Acquiror Acquisition Proposal is reasonably capable of being completed
on substantially the terms proposed, and would, if consummated, result
in a transaction that would provide greater value to the holders of the
Acquiror Shares than the transaction contemplated by this Agreement (an
"Acquiror Superior Proposal"), (3) the failure to take such action
would, in the reasonable good faith judgment of the Acquiror Board,
based upon a written opinion of Acquiror's outside legal counsel, be a
violation of its fiduciary duties to the Acquiror's stockholders under
applicable law, and (4) prior to furnishing such nonpublic information
to, or entering into discussions or negotiations with, such Person, the
Acquiror Board receives from such Person an executed confidentiality
agreement with material terms no less favorable to Acquiror than those
contained in the Confidentiality Agreement. Acquiror agrees not to
release any Acquiror Third Party from, or waive any provision of, any
standstill agreement to which it is a party or any confidentiality
agreement between it and another Person who has made, or who may
reasonably be considered likely to make, a Prohibited Acquiror
Acquisition Proposal, unless the failure to take such action would, in
the reasonable good faith judgment of the Acquiror Board, based upon
the written opinion of Acquiror's outside legal counsel, be a violation
of its fiduciary duties to the Acquiror's stockholders under applicable
law and such action is taken prior to receipt of the Requisite
Stockholder Approval of the Acquiror Stockholders. Without limiting the
foregoing, it is understood that any violation of the restrictions set
forth in the preceding sentence by any director or officer of Acquiror
or any of its Subsidiaries or any investment bank, financial advisor,
attorney, accountant or other representative of Acquiror or any of its
Subsidiaries shall be deemed to be a breach of this (S)5(i)(ii) by
Acquiror. A Acquiror Acquisition Proposal shall be deemed a Prohibited
Acquiror Acquisition Proposal at the time (and not before) the Acquiror
Board is first notified of such Acquiror Acquisition Proposal, and at
any time that the Acquiror Board is notified of a significant
development with respect to such Acquiror Acquisition Proposal, unless
the Acquiror Board in good faith determines that such Acquiror
Acquisition Proposal is not, and is not reasonably likely to become, a
Prohibited Parent Acquisition Proposal.
(iii) Acquiror shall notify the Company promptly after receipt by
Acquiror or Acquiror's knowledge of the receipt by any of its
Representatives of any Prohibited Acquiror Acquisition Proposal or any
request for non-public information in connection with a Prohibited
Acquiror Acquisition Proposal or for access to the properties, books or
records of Acquiror by any Person that informs such party that it is
considering making or has made a Prohibited Acquiror Acquisition
Proposal. Such notice shall be made orally and in writing and shall
indicate the identity of the offeror and the terms and conditions of
such proposal, inquiry or contact. Acquiror shall keep the Company
informed of the status (including any change to the material terms) of
any such Prohibited Acquiror Acquisition Proposal or request for
nonpublic information.
(iv) The Acquiror Board may not withdraw or modify, or propose to
withdraw or modify, in a manner adverse to the Company, the approval or
recommendation by the Acquiror Board of this Agreement or the Merger
unless, following the receipt of a Acquiror Superior Proposal but prior
to receipt of the Requisite Stockholder Approval of the Acquiror
stockholders, in the reasonable good faith judgment of the Acquiror
Board, based upon the written opinion of Acquiror's outside legal
counsel, the failure to do so would be a violation of the Acquiror
Board's fiduciary duties to the
A-32
<PAGE>
Acquiror's stockholders under applicable law; provided, however, that
the Acquiror Board shall submit the Merger to the Acquiror stockholders
for adoption and approval, whether or not the Acquiror Board at any
time subsequent to the date hereof determines that this Agreement is no
longer advisable or recommends that the stockholders of the Acquiror
reject the Merger or otherwise modifies or withdraws its
recommendation. Unless the Acquiror Board has withdrawn its
recommendation of the Merger in compliance herewith, Acquiror shall use
its best efforts to solicit from the Acquiror stockholders proxies in
favor of the adoption and approval of the Merger and to secure the vote
or consent of the Acquiror's stockholders required by Nasdaq and the
Delaware General Corporation Law.
(v) Prior to taking any action with respect to a Acquiror Acquisition
Proposal which is not a Prohibited Acquiror Acquisition Proposal
equivalent to those permitted by clauses (A), (B) or (C) of
(S)5(i)(ii), Acquiror shall notify each Acquiror Third Party which is
the object of or a party to such action of the limitation on Prohibited
Acquiror Acquisition Proposals set forth in this (S)5(i), and Acquiror
shall not enter into any letter of intent, agreement in principle or
any acquisition agreement or other similar agreement with respect to
any Acquiror Acquisition Proposal unless such letter or agreement
includes a covenant of the applicable Acquiror Third Party not to take
any action which would cause such Acquiror Acquisition Proposal to
become a Prohibited Acquiror Acquisition Proposal.
(j) Insurance and Indemnification.
(i) Surviving Corporation will provide each individual who served as
a director or officer of the Company at any time prior to the Effective
Time with liability insurance for a period of six years after the
Effective Time no less favorable in coverage and amount than any
applicable insurance of the Company in effect immediately prior to the
Effective Time; provided, however, that if the existing liability
insurance expires, or is terminated or canceled by the insurance
carrier during such six-year period, the Surviving Corporation will use
its reasonable best efforts to obtain comparable insurance for the
remainder of such period on a commercially reasonable basis; provided
further, however, that in the event any claim or claims are asserted
within such period, all rights to indemnification in respect of such
claim or claims shall continue until the final disposition thereof;
(ii) After the Effective Time, Surviving Corporation (A) will not
take or permit to be taken any action to alter or impair any
exculpatory or indemnification provisions now existing in the
certificate of incorporation, by-laws or indemnification and employment
agreements of the Company or any of its Subsidiaries for the benefit of
any individual who served as a director or officer of the Company or
any of its Subsidiaries (an "Indemnified Party") at any time prior to
the Effective Time (except as may be required by applicable law), and
(B) shall cause the Surviving Corporation to honor and fulfill such
provisions until the date which is six years from the Effective Time
(except as may be required by applicable law); provided, however, that
in the event any claim or claims are asserted within such period, all
rights to indemnification in respect of such claim or claims shall
continue until the final disposition thereof.
(iii) To the extent clauses (i) and (ii) above shall not serve to
indemnify and hold harmless an Indemnified Party, Surviving
Corporation, subject to the terms and conditions of this clause (iii),
will indemnify, for a period of six years from the Effective Time, to
the fullest extent permitted under applicable law, each Indemnified
Party from and against any and all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, liabilities,
obligations, taxes, liens, losses, expenses and fees, including all
court costs and reasonable attorneys' fees and expenses, resulting
from, arising out of, relating to or caused by this Agreement or any of
the transactions contemplated herein; provided, however, that in the
event any claim or claims are asserted or threatened within such six-
year period, all rights to indemnification in respect of any such claim
or claims shall continue until final disposition of any and all such
claims. Any Indemnified Party wishing to claim indemnification under
this clause (iii), notwithstanding anything to the
A-33
<PAGE>
contrary in the provisions set forth in the Company's or the Surviving
Corporation's certificate of incorporation, by-laws or other agreements
respecting indemnification of directors or officers, upon learning of
any such claim, action, suit, proceeding or investigation, shall
promptly notify Surviving Corporation thereof, but the failure to so
notify shall not relieve Surviving Corporation of any liability it may
have to such Indemnified Party if such failure does not materially
prejudice Surviving Corporation. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or
after the Effective Time), (A) Acquiror or the Surviving Corporation
shall have the right following the Effective Time to assume the defense
thereof and Surviving Corporation shall not be liable to such
Indemnified Parties for any legal expenses of other counsel or any
other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if Acquiror or the
Surviving Corporation fails to assume such defense or counsel for the
Indemnified Party advises that there are issues which raise conflicts
of interest between Acquiror or the Surviving Corporation, on the one
hand, and the Indemnified Parties, on the other hand, the Indemnified
Parties may retain counsel satisfactory to them, and the Company,
Surviving Corporation shall pay all reasonable fees and expenses of
such counsel for the Indemnified Parties promptly as statements
therefor are received; provided, however, that Surviving Corporation
shall be obligated to pay for only one firm of counsel for all
Indemnified Parties in any jurisdiction unless the use of one counsel
for such Indemnified Parties would present such counsel with a conflict
of interest, in which case Surviving Corporation need only pay for
separate counsel to the extent necessary to resolve such conflict; (B)
the Indemnified Parties will reasonably cooperate in the defense of any
such matter; and (C) Surviving Corporation shall not be liable for any
settlement effectuated without its prior written consent, which consent
shall not be unreasonably withheld or delayed. Surviving Corporation
shall not settle any action or claim identified in this (S)5(j)(iii) in
any manner that would impose any liability or penalty on an Indemnified
Party not paid by Acquiror or the Surviving Corporation without such
Indemnified Party's prior written consent, which consent shall not be
unreasonably withheld or delayed.
(iv) Notwithstanding anything contained in clause (iii) above,
Surviving Corporation shall not have any obligation hereunder to any
Indemnified Party (A) if the indemnification of such Indemnified Party
by Surviving Corporation in the manner contemplated hereby is
prohibited by applicable law, (B) the conduct of the Indemnified Party
relating to the matter for which indemnification is sought involved bad
faith or willful misconduct of such Indemnified Party, or (C) with
respect to actions taken by any such Indemnified Party in his or its
individual capacity, including, without limitations, with respect to
any matters relating, directly or indirectly, to the purchase, sale or
trading of securities issued by the Company other than a tender or sale
pursuant to a stock tender agreement or (D) if such Indemnified Party
shall have breached its obligation to cooperate with Surviving
Corporation in the defense of any claim in respect of which
indemnification is sought and such breach (x) materially and adversely
affects Surviving Corporation's defense of such claim or (y) will
materially and adversely affect Surviving Corporation's defense of such
claim if such breach is not cured within ten days after notice of such
breach is delivered to the Indemnified Party and such breach is not
cured during such period.
(k) Financial Statements.
(i) As soon as they are made available to and reviewed by senior
management of the Company, the Company shall make available to Acquiror
the internally generated monthly, quarterly (including quarterly
statements for the three-month period ended September 25, 1999) and
annual financial statements of the Company, consisting of consolidated
balance sheets, and consolidated statements of income and of cash
flows.
(ii) As soon as they are made available to and reviewed by senior
management of Acquiror, Acquiror shall make available to the Company
the internally generated monthly, quarterly (including, quarterly
statements for the three-month period ended September 30, 1999) and
annual financial statements, consisting of consolidated balance sheets,
and consolidated statements of income and of cash flows.
A-34
<PAGE>
(l) Continuity of Business Enterprise. Acquiror, Surviving Corporation or
any other member of the qualified group (as defined in Treasury Regulation
(S)1.368-1(d)) shall, for the foreseeable future, continue at least one
significant historic business line of the Company or use at least a
significant portion of the Company's historic business assets in a
business, in each case within the meaning of Treasury Regulation (S)1.368-
1(d).
(m) Acquiror Board of Directors. At or before the Effective Time, the
Board of Directors of Acquiror will take all action necessary to cause the
number of directors constituting the Acquiror Board of Directors to be
fixed at nine directors and to elect the Chief Executive Officer of the
Company and three independent directors (as defined in National Association
of Securities Dealers Rule 4200(a)(13)) designated by the Company Board to
the Acquiror Board. In addition, at the next annual meeting of Acquiror's
stockholders held after the Effective Time, Acquiror shall cause to be
nominated, and Acquiror shall undertake its commercially reasonable efforts
to cause to be elected:
(i) the Chief Executive Officer of the Company as a Class II
director, to serve until the annual meeting of the Acquiror
Stockholders in 2003;
(ii) two of such independent directors designated by the Company
Board, as Class I directors, to serve until the annual meeting of the
Acquiror's Stockholders in 2002; and
(iii) the other such independent director designated by the Company
Board as a Class III director, to serve until the annual meeting of the
Acquiror Stockholders in 2001.
(n) Rule 145 Affiliates. Prior to the Closing Date, the Company shall
deliver to Acquiror a letter identifying all persons who were, at the date
of the Company Special Meeting, "affiliates" of the Company for purposes of
Rule 145 under the Securities Act. The Company shall use its reasonable
efforts to cause each such person to deliver to Acquiror on or prior to the
Closing Date a written agreement substantially in the form attached as
Exhibit A.
(o) Nasdaq Listing. Acquiror shall use all reasonable efforts to cause
the Acquiror Shares to be issued in connection with the Merger and under
the Company Benefit Plans to be approved for listing on Nasdaq, subject to
official notice of issuance, prior to the Closing Date.
(p) Tax Free Treatment. The Parties intend the Merger to qualify as a
reorganization under Section 368(a) of the Code. Each Party shall use
reasonable efforts, and shall undertake reasonable efforts to cause its
Affiliates to use reasonable efforts, to cause the Merger to so qualify and
to obtain the opinions referred to in (S) 6(a)(ix) and (S) 6(b)(vii). For
purposes of the tax opinions described in (S) 6(a)(ix) and (S) 6(b)(vii),
counsel may receive and rely upon representations, including those
contained in this Agreement or in separate certificates, of the parties
hereto and others. Acquiror and the Company and each of their respective
Affiliates shall not take any action and shall not fail to take any action
or suffer to exist any condition which action or failure to act or
condition would prevent, or would be reasonably likely to prevent, the
Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
(q) Company Employee Plans. After the Effective Time, Surviving
Corporation shall arrange for each employee participating in any of the
Company Benefits Plans to participate in any counterpart benefit plans of
Acquiror or its Subsidiaries (as appropriate) in accordance with the
eligibility criteria thereof, provided that (i) such participants shall
receive full credit for years of service with the Company or any of its
Subsidiaries prior to the Effective Time for all purposes for which such
service was recognized under the Company Benefit Plans and (ii) such
participants shall participate in the Acquiror Benefit Plans on terms no
less favorable than those offered by Acquiror to similarly situated
employees of Acquiror or its Subsidiaries. Surviving Corporation shall give
credit under its applicable employee welfare benefit plans for all
copayments, deductibles and out-of-pocket maximums satisfied by employees
(and their eligible dependents) of the Company (and its Subsidiaries), in
respect of the calendar year in which the Closing Date occurs. Surviving
Corporation shall waive all pre-existing conditions (to the extent waived
under the applicable employee welfare benefit plans of the Company and its
Subsidiaries) otherwise applicable to employees of the Company and its
Subsidiaries under Acquiror's employee welfare benefit plans in which
employees of the Company (and its Subsidiaries) become eligible to
participate on or following the
A-35
<PAGE>
Closing. Notwithstanding the foregoing, Surviving Corporation may continue
(or cause the Surviving Corporation to continue) one or more of the Company
Benefit Plans, in which case Surviving Corporation shall have satisfied its
obligations hereunder with respect to the benefits so provided if the terms
of the Company Benefit Plans which are continued are no less favorable, as
a whole, than the terms of the counterpart plans of Acquiror and its
Subsidiaries (as applicable).
(r) Letter of the Company's Accountants. The Company shall use all
reasonable efforts to cause to be delivered to Acquiror a letter of BDO
Seidman LLP, the Company's independent auditors, dated a date within two
business days before the date on which the Registration Statement shall
become effective and addressed to Acquiror, in form reasonably satisfactory
to Acquiror and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
(s) Letter of Acquiror's Accountants. Acquiror shall use all reasonable
efforts to cause to be delivered to the Company a letter of Arthur Andersen
LLP, Acquiror's independent auditors, dated a date within two business days
before the date on which the Registration Statement shall become effective
and addressed to the Company, in form reasonably satisfactory to the
Company and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of Acquiror. The obligation of Acquiror to
consummate the Merger is subject to satisfaction or waiver by Acquiror of
the following conditions at or prior to the Closing Date:
(i) this Agreement and the Merger shall have received the Requisite
Stockholder Approvals;
(ii) the Company and its Subsidiaries shall have obtained the
Required Company Consents, other than those Required Company Consents
the failure of which to obtain would not reasonably be expected to have
a Company Material Adverse Effect and Acquiror shall have obtained the
Required Acquiror Consents, other than those Required Acquiror Consents
the failure of which to obtain would not reasonably be expected to have
an Acquiror Material Adverse Effect;
(iii) the representations and warranties set forth in (S)3 above
shall be true and correct in all material respects at and as of the
Closing Date, except for those representations and warranties which
address matters only as of a particular date (which shall have been
true and correct as of such date);
(iv) the Company shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(v) neither any statute, rule, regulation, order, stipulation or
injunction (each an "Order") shall be enacted, promulgated, entered,
enforced or deemed applicable to the Merger nor any other action shall
have been taken by any Government Entity (A) which prohibits the
consummation of the transactions contemplated by the Merger; (B) which
prohibits Acquiror's ownership or operation of all or any material
portion of their or the Company's business or assets, or which compels
Acquiror to dispose of or hold separate all or any material portion of
Acquiror's or the Company's business or assets as a result of the
transactions contemplated by the Merger; (C) which makes the Merger
illegal; (D) which imposes material limitations on the ability of
Acquiror to consummate the Merger; or (E) which imposes any limitations
on the ability of Acquiror or any of its Subsidiaries effectively to
control in any material respect the business or operations of the
Company or any of its Subsidiaries;
(vi) the Company shall have delivered to Acquiror a certificate to
the effect that each of the conditions specified above in (S)6(a)(i)-
(S)6(a)(iv) is satisfied in all respects; provided, however, with
respect to (S)6(a)(i), the Company shall only be required to certify
that this Agreement and the Merger received the Requisite Stockholder
Approval of the Company Stockholders;
(vii) the Acquiror Shares to be issued in connection with the Merger
shall have been approved upon official notice of issuance for quotation
on Nasdaq, subject to official notice of issuance;
A-36
<PAGE>
(viii) the Registration Statement shall have been declared effective
by the SEC under the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by
the SEC and no proceedings for that purpose shall have been initiated
or threatened by the SEC;
(ix) Acquiror shall have received a written opinion, dated as of the
Closing Date, from Kelley, Drye & Warren LLP, counsel to Acquiror, to
the effect that the Merger will be treated for U.S. federal income tax
purposes as a reorganization within the meaning of Section 368(a) of
the Code, and that Acquiror and the Company will each be a party to
that reorganization within the meaning of Section 368(b) of the Code;
such counsel shall be entitled to rely upon customary representations
provided by the Parties; and
(x) holders of not more than $2,500,000 in value of Company Shares
(calculated based upon the Closing Price per Company Share as of the
date preceding the scheduled Closing Date) shall have exercised and not
withdrawn dissenters' rights with respect to their shares.
Subject to the provisions of applicable law, Acquiror may waive, in whole or
in part, any condition specified in this (S)6(a) if they execute a writing so
stating at or prior to the Closing.
(b) Conditions to Obligation of the Company. The obligation of the
Company to consummate the Merger is subject to satisfaction or waiver by
the Company of the following conditions at or prior to the Closing Date:
(i) this Agreement and the Merger shall have received the Requisite
Stockholder Approvals;
(ii) Acquiror and its Subsidiaries shall have obtained the Required
Acquiror Consents, other than those Required Acquiror Consents the
failure of which to obtain would not reasonably be expected to have a
Acquiror Material Adverse Effect, and the Company and its Subsidiaries
shall have obtained the Required Company Consents other than those
Required Company Consents the failure of which to obtain would not
reasonably be expected to have a material adverse effect on the
business, financial condition or results of operations of Acquiror, the
Surviving Corporation and their Affiliates taken as a whole;
(iii) the representations and warranties set forth in (S)4 above
shall be true and correct in all material respects at and as of the
Closing Date, except for those representations and warranties which
address matters only as of a particular date (which shall have been
true and correct as of such date);
(iv) Acquiror shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(v) neither any Order shall be enacted, promulgated, entered,
enforced or deemed applicable to the Merger nor any other action shall
have been taken by any Government Entity (A) which prohibits the
consummation of the transactions contemplated by the Merger; (B) which
prohibits Acquiror's ownership or operation of all or any material
portion of their or the Company's business or assets, or which compels
Acquiror to dispose of or hold separate all or any material portion of
Acquiror's or the Company's business or assets as a result of the
transactions contemplated by the Merger; or (C) which makes the Merger
illegal;
(vi) Acquiror shall have delivered to the Company a certificate to
the effect that each of the conditions specified above in (S)6(b)(i)-
(iv) is satisfied in all respects; provided, however, with respect to
(S)6(b)(i), Acquiror shall only be required to certify that this
Agreement and the Merger received the Requisite Stockholder Approval of
the Acquiror Stockholders;
(vii) the Company shall have received a written opinion, dated as of
the Closing Date, from Swidler Berlin Shereff Friedman LLP, counsel to
the Company, to the effect that the Merger will be treated for U.S.
Federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code and as to such other matters as are
customary for transactions such as the Merger, and that Acquiror and
the Company will each be a party to that reorganization within the
meaning of Section 368(b) of the Code; it being understood that in
rendering such opinion, such tax counsel shall be entitled to rely upon
customary representations provided by the Parties;
A-37
<PAGE>
(viii) the Acquiror Shares to be issued in connection with the Merger
shall have been approved upon official notice of issuance for quotation
on Nasdaq, subject to official notice of issuance;
(ix) the Registration Statement shall have been declared effective by
the SEC under the Securities Act, no stop order suspending the
effectiveness of the Registration Statement shall have been issued by
the SEC and no proceedings for that purpose shall have been initiated
or threatened by the SEC; and
(x) holders of not more than $2,500,000 in value of Company Shares
(calculated based upon the Closing Price per Company Share as of the
date preceding the scheduled Closing Date) shall have exercised and not
withdrawn dissenters' rights with respect to their shares.
Subject to the provisions of applicable law, the Company may waive, in whole
or in part, any condition specified in this(S)6(b) if it executes a writing so
stating at or prior to the Closing.
7. Termination.
(a) Termination of Agreement. The Parties may terminate this Agreement
with the prior authorization of their respective board of directors as
provided below:
(i) The Parties may terminate this Agreement, and the Merger may be
abandoned, by mutual written consent at any time prior to the Effective
Time before or after the approval by the Company Stockholders or the
Acquiror Stockholders;
(ii) This Agreement may be terminated and the Merger may be abandoned
by action of the Board of Directors of either Acquiror or the Company,
before or after the approval by the Company Stockholders or the
Acquiror Stockholders, (A) if the Effective Time shall not have
occurred by February 29, 2000 (the "Outside Date") (unless the failure
to consummate the Merger by such date is due to the action or failure
to act of the Party seeking to terminate) or (B) if any condition to
the obligation of the terminating Party to consummate the Merger shall
have become incapable of being satisfied prior to the Outside Date as
of a result of an Order that is final and non-appealable;
(iii) This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or after the
approval by the Company Stockholders or the Acquiror Stockholders, by
action of the Company Board, in the event that Acquiror shall have
breached any of its representations, warranties or covenants under this
Agreement which breach (A) would give rise to the failure of a
condition set forth in (S)6(b) above, and (B) cannot be or has not been
cured within 30 days after the giving of written notice by the Company
to Acquiror of such breach (provided that the Company is not then in
material breach of any representation, warranty or covenant contained
in this Agreement);
(iv) This Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, before or after the approval
by the Company Stockholders or the Acquiror Stockholders, by action of
the Acquiror Board, in the event that the Company shall have breached
any of its representations, warranties or covenants under this
Agreement which breach (A) would give rise to the failure of a
condition set forth in (S)6(a) above, and (B) cannot be or has not been
cured within 30 days after the giving of written notice by Acquiror to
the Company of such breach (provided that Acquiror is not then in
material breach of any representation, warranty or covenant contained
in this Agreement);
(v) This Agreement may be terminated by Acquiror, and the Merger may
be abandoned, (A) if the Company Board (i) enters into or publicly
announces its intention to enter into an agreement or agreement in
principle with respect to an Acquisition Proposal, (ii) withdraws its
recommendation to the Company Stockholders of this Agreement or the
Merger or (iii) after the receipt of an Acquisition Proposal, fails to
confirm publicly, within ten days after the request of Acquiror, its
recommendation to the Company Stockholders that the Company
Stockholders adopt and approve this Agreement and the Merger or (B) if
the Company or any of its Representatives takes any of the actions that
would be
A-38
<PAGE>
proscribed by (S)5(h) above, but for the exceptions therein allowing
certain actions to be taken pursuant to the proviso in the first
sentence of (S)5(h)(ii) above;
(vi) This Agreement may be terminated by the Company, and the Merger
may be abandoned, (A) if the Acquiror Board (i) enters into or publicly
announces its intention to enter into an agreement or agreement in
principle with respect to a Prohibited Acquiror Acquisition Proposal,
(ii) withdraws its recommendation to the Acquiror Stockholders that the
Acquiror Stockholders approve the issuance of Acquiror Shares in
connection with the Merger as provided by the Agreement or, if
necessary, that the Acquiror Stockholders approve an amendment to the
certificate of incorporation of Acquiror to increase the authorized
number of Acquiror Shares or (iii) after receipt of a Acquiror
Acquisition Proposal, fails to publicly confirm, within ten days after
the request of the Company, its recommendation to the Acquiror
Stockholders described in the foregoing clause (ii) or (B) if Acquiror
or any of its Representatives takes any of the actions that would be
proscribed by (S)5(i) but for the exceptions therein allowing certain
actions to be taken pursuant to the proviso in the first sentence of
(S)5(i)(ii);
(vii) Either Party may terminate this Agreement, and the Merger may
be abandoned, by giving written notice to the other Party at any time
after the Company Special Meeting in the event that (1) this Agreement
and the Merger fail to receive the Requisite Stockholder Approval by
the Company Stockholders or (2) or dissenters rights are exercised by
the holders of Company Shares having an aggregate value (based upon the
Closing Sales Price per Company Share on the date immediately prior to
the scheduled Closing Date) in excess of $2,500,000; and
(viii) Either Party may terminate this Agreement, and the Merger may
be abandoned, by giving written notice to the other Party at any time
after the Acquiror Special Meeting in the event that this Agreement and
the Merger fail to receive the Requisite Stockholder Approval by the
Acquiror Stockholders.
(b) Effect of Termination.
(i) Except as provided in clauses (ii) or (iii) of this (S)7(b), if
any Party terminates this Agreement pursuant to (S)7(a) above, all
rights and obligations of the Parties hereunder shall terminate without
any liability of either Party to the other Party (except for any
liability of any Party then in breach); provided, however, that the
provisions of the Confidentiality Agreement, this (S)7(b) and (S)8
below, shall survive any such termination.
(ii) If (A) this Agreement is terminated by Acquiror pursuant to
(S)7(a)(v), or (B) any Person makes an Acquisition Proposal that
remains in effect on the date 60 days prior to the Outside Date and the
Requisite Stockholder Approval of the Company Stockholders is not
obtained prior to termination of this Agreement pursuant to (S)7(a)(ii)
or (S)7(a)(vii), then, within 60 days after such termination, the
Company shall pay Acquiror the sum of $1,000,000 in immediately
available funds.
(iii) If (A) this Agreement is terminated by the Company pursuant to
(S)7(a)(vi), or (B) any person makes a Prohibited Acquiror Acquisition
Proposal that remains in effect on the date 60 days prior to the
Outside Date and the Requisite Stockholder Approval of the Acquiror
Stockholders is not obtained prior to termination of this Agreement
pursuant to (S)7(a)(ii) or (S)7(a)(vii), then, within 60 days after
such termination, Acquiror shall pay the Company the sum of $1,000,000
in immediately available funds.
8. Miscellaneous.
(a) Survival. None of the representations, warranties and covenants of
the Parties (other than the provisions in (S)2 concerning payment of the
Merger Consideration, the provisions in (S)5(j), (S)5(l), (S)5(m), (S)5(p)
and (S)5(q) shall survive the Effective Time.
(b) Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject
matter of this Agreement without the prior written approval of the other
Parties; provided, however, that any Party may make any public disclosure
it believes in good
A-39
<PAGE>
faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing
Party will use all reasonable efforts to advise the other Parties prior to
making the disclosure).
(c) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns; provided, however, that (i)
the provisions in (S)2 above (A) concerning payment of the Merger
Consideration are intended for the benefit of the Company Stockholders and
(B) concerning the conversion of the stock options are intended for the
benefit of the holders of such stock options, (ii) the provisions in
(S)5(j) above concerning insurance and indemnification are intended for the
benefit of the individuals specified therein and their respective legal
representatives and (iii) the provisions of (S)5(l), (S)5(m) and (S)5(p)
are intended for the benefit of the Company Stockholders.
(d) Entire Agreement. This Agreement (including the Confidentiality
Agreement and the other documents referred to herein) constitutes the
entire agreement among the Parties and supersedes any prior understandings,
agreements or representations by or among the Parties, written or oral, to
the extent they related in any way to the subject matter hereof.
(e) Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors and
permitted assigns. No Party may assign or delegate either this Agreement or
any of its rights, interests or obligations hereunder, by operation of law
or otherwise, without the prior written approval of the other Parties. Any
purported assignment or delegation without such approval shall be void and
of no effect.
(f) Counterparts. This Agreement may be executed (including by facsimile)
in one or more counterparts, each of which shall be deemed an original but
all of which together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning
or interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request, demand,
claim or other communication hereunder shall be deemed duly given if (and
then two business days after) it is sent by registered or certified mail,
return receipt requested, postage prepaid and addressed to the intended
recipient as set forth below:
If to the Company: OpenROUTE Networks, Inc.
Nine Technology Drive
Westborough, Massachusetts 01581
Attention: President
Telephone: (508) 898-2121
Facsimile: (508) 836-5396
with a copy to: Swidler Berlin Shereff Friedman, LLP
3000 K. Street, N.W., Suite 300
Washington, D.C. 20007
Attention: Sean P. McGuinness, Esq.
Telephone: (202) 945-6979
Facsimile: (202) 424-7643
If to Acquiror: Netrix Corporation
13595 Dulles Technology Drive
Herndon, Virginia 20171
Attention: Chairman
Telephone: (703) 742-6000
Facsimile: (703) 793-2060
A-40
<PAGE>
with a copy to: Kelley Drye & Warren LLP
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901
Attention: Jay R. Schifferli
Telephone: (203) 351-8023
Facsimile: (203) 327-2669
Either Party may send any notice, request, demand, claim or other
communication hereunder to the intended recipient at the address set forth
above using personal delivery, expedited courier, messenger service, telecopy
or ordinary mail, but no such notice, request, demand, claim or other
communication shall be deemed to have been duly given unless and until it
actually is received by the intended recipient. Either Party may change the
address to which notices, requests, demands, claims and other communications
hereunder are to be delivered by giving the other Party notice in the manner
set forth in this (S)8(h), provided that no such change of address shall be
effective until it actually is received by the intended recipient.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE
APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW
YORK.
(j) Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however,
that any amendment effected subsequent to Requisite Stockholder Approval
will be subject to the restrictions contained in the Massachusetts Business
Corporation Law and the Delaware General Corporation Law, to the extent
applicable. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No
waiver by any Party of any default, misrepresentation or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.
(k) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any
other situation or in any other jurisdiction.
(l) Expenses. Except as expressly set forth elsewhere in this Agreement,
each of the Parties will bear its own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby.
(m) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the Parties and no presumption or burden
of proof shall arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to any
federal, state, local or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the
context otherwise requires. The word "including" shall mean including
without limitation. The phrase "business day" shall mean any day other than
a day on which banks in the State of New York are required or authorized to
be closed. Disclosure of any matter in the Company Disclosure Letter or the
Acquiror Disclosure Letter shall not be deemed an admission that such
matter is material.
(n) Incorporation of Exhibits. The Exhibits identified in this Agreement
are incorporated herein by reference and made a part hereof.
A-41
<PAGE>
(o) Definition of Knowledge. As used herein, the words "knowledge" or
"known" shall, (i) with respect to the Company, mean the actual knowledge
of the corporate executive officers of the Company, in each case after such
individuals have made due and diligent inquiry as to the matters which are
the subject of the statements which are "known" by the Company or made to
the "knowledge" of the Company, and (ii) with respect to Acquiror, mean the
actual knowledge of the corporate executive officers of Acquiror, in each
case after such individuals have made due and diligent inquiry as to the
matters which are the subject of the statements which are "known" by
Acquiror or made to the "knowledge" of Acquiror.
(p) WAIVER OF JURY TRIAL. EACH OF ACQUIROR AND THE COMPANY, AND EACH
INDEMNIFIED PARTY, HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREBY.
In Witness Whereof, the Parties hereto have executed this Agreement as of the
date first above written.
Openroute Networks, Inc.
/s/ Bryan R. Holley
By: _________________________________
Name: Bryan R. Holley
Title:Chief Executive Officer and
President
/s/ Henry Barber
By: _________________________________
Name: Henry Barber
Title:Vice President--Finance and
Administration,
Chief Financial Officer, Treasurer
and Clerk
Netrix Corporation
/s/ Steven T. Francesco
By: _________________________________
Name: Steven T. Francesco
Title:Chairman and Chief Executive
Officer
A-42
<PAGE>
ANNEX B
September 30, 1999
To the Board of Directors of
Netrix Corporation
13595 Dulles Technology Drive
Herndon, VA 20171-3424
Gentlemen:
We understand that Netrix Corporation (the "Company") and OpenROUTE
Networks, Inc. ("OpenROUTE") propose to enter into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which OpenROUTE will merge with
and into Company (the "Merger") with the Company as the surviving corporation.
The Merger Agreement provides, among other things, that upon the closing of
the Merger (the "Closing"), each outstanding share of OpenROUTE common stock,
other than shares held in Treasury, will be converted into one share of
Company common stock (the "Exchange Ratio"). In addition, all employee options
to purchase OpenROUTE common stock that are granted and outstanding at the
Closing (less any options that have expired or will expire as a result of a
reorganization due to the Merger) will be converted into options to purchase
the same number of shares of Company common stock, on comparable terms and
with comparable vesting schedules. It is also contemplated that all other
options, warrants or other rights or securities exercisable, convertible or
exchangeable for OpenROUTE stock outstanding at the Closing (other than such
options, warrants or other rights or securities which would, under their
terms, expire upon consummation of the Merger) will be converted into
substantially equivalent options, warrants or rights or securities
exercisable, convertible or exchangeable for shares of Company common stock.
The parties expect that the Merger will meet all necessary conditions in order
to be accounted for as a tax free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended. The Merger is subject to, among
other things, the approval of the shareholders of the Company.
In connection with your review and analysis of the Merger, you have
requested our opinion, as investment bankers, as to the fairness, from a
financial point of view, of the Exchange Ratio to the shareholders of the
Company.
Kaufman Bros., L.P., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements of public and private
companies and valuations for corporate and other purposes.
In conducting our analysis and arriving at our opinion as expressed herein,
we have reviewed, among other things, the following:
. A draft of the Agreement and Plan of Merger dated September 29, 1999, by
and between the Company and OpenROUTE;
. certain documents and reports filed by the Company with the Securities
and Exchange Commission;
. certain internal information and documents relating to the Company and
OpenROUTE provided to us by their respective managements, including
historical financial information and financial forecasts;
. the reported prices and trading activity of the Company's and
OpenROUTE's common stock;
. the financial and business prospects for the merged entity and the
industry in which it competes;
. certain publicly available information concerning certain other
companies engaged in businesses which we believe to be reasonably
comparable to the Company and OpenROUTE and the trading markets for such
other companies' securities; and
. information concerning certain other business transactions which we
believe to be relevant to the Merger.
B-1
<PAGE>
We have also met with or spoken to certain officers and employees of the
Company and OpenROUTE concerning their respective businesses and operations,
assets, present condition and future prospects, and performed such analyses as
we deemed appropriate.
In arriving at our opinion, we have visited certain of the properties and
facilities of the Company and OpenROUTE but have not conducted a physical
inspection of such properties and facilities, nor have we made, obtained or
been provided any independent evaluation or appraisal of such properties and
facilities or of any the assets or liabilities of the Company or OpenROUTE
(contingent or otherwise). We have assumed and relied upon the accuracy and
completeness of the financial and other information used by us in arriving at
our opinion, and upon the assurances of the respective managements of the
Company and OpenROUTE that they are not aware of any information that would
make the information provided to us incomplete or misleading, and have not
attempted to independently verify such information. With respect to financial
forecasts, we were advised by the respective managements of the Company and
OpenROUTE, and we assumed without independent investigation, that they were
reasonably prepared and reflected, as of the times they were delivered to us,
the best currently available estimates and judgment as to the expected future
financial performance of the Company or OpenROUTE, as the case may be.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist, and the information available to us, as of the date
hereof. We disclaim any undertakings or obligation to advise any person of any
change in any fact or matter affecting this opinion which may come or be
brought to our attention after the date hereof.
In the ordinary course of our business, we may hold and actively trade
securities of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion does not constitute a recommendation as to any action the Board
of Directors or any shareholder of the Company should take in connection with
the Merger or any aspect thereof and is not a recommendation to any person on
how such person should vote in the consideration of the Merger. This opinion
relates solely to the fairness to the shareholders of the Company, as of the
date hereof, from a financial point of view, of the Exchange Ratio to the
shareholders of the Company. We express no opinion herein as to the structure,
terms or effect of any other aspect of the Merger or as to the merits of the
underlying decision of the Company to enter into the Merger. Without limiting
the foregoing, we express no opinion as to the financial treatment, audit
procedures or other financial aspects of the Merger or as to any aspect of any
arrangements agreed to between the Company and its officers, directors or
shareholders prior to or concurrent with the Merger.
This opinion has been prepared at the request of, and for the information of,
the Board of Directors of the Company solely for its use in evaluating the
fairness, from a financial point of view, of the Exchange Ratio to the
shareholders of the Company. It may not be used for any other purpose,
published, reproduced, summarized, described or referred to or given to any
other person or otherwise made public without our prior written consent.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the shareholders of the Company.
Very truly yours,
KAUFMAN BROS., L.P.
B-2
<PAGE>
ANNEX C
September 30, 1999
Board of Directors
OpenROUTE Networks, Inc.
Nine Technology Drive
Westborough, MA 01581-1799
Gentlemen:
You have requested our opinion (the "Opinion") as investment bankers as to
the fairness, from a financial point of view, to OpenROUTE Networks, Inc.
("OpenROUTE") of the Exchange Ratio (as defined below) in connection with the
proposed merger (the "Proposed Merger") of OpenROUTE with and into Netrix
Corporation ("Netrix"), pursuant to the draft form of Agreement and Plan of
Merger (the "Agreement") dated as of September 30, 1999, between OpenROUTE and
Netrix.
Pursuant to the Agreement, and subject to the terms and conditions thereof,
each share of common stock, $0.01 par value per share of OpenROUTE ("OpenROUTE
Common Stock") shall be converted into and exchanged for the right to receive
1.00 share (the "Exchange Ratio") share of common stock, par value $0.05 per
share, of Netrix ("Netrix Common Stock"). Additionally, options to purchase
shares of OpenROUTE Common Stock shall be exchanged for options to purchase a
like number of shares of Netrix Common Stock. We understand and have assumed
that the Proposed Merger will constitute a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
Tucker Anthony Cleary Gull ("Tucker Anthony"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for corporate and other
purposes. In the ordinary course of our business, we may trade the securities
of either of OpenROUTE or Netrix for our own account or for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities. Tucker Anthony has acted as OpenROUTE's financial advisor in
connection with, and has participated in the negotiations leading to, the
Proposed Merger. Tucker Anthony will receive fees for rendering this opinion
and for acting as financial advisor, a substantial portion of such advisory fee
is contingent upon the closing of the Proposed Merger. Tucker Anthony has not
provided investment banking services to Netrix.
In arriving at the Opinion, we have, among other things, reviewed and
analyzed the following: (i) the most recent available draft form of the
Agreement; (ii) certain publicly available information concerning OpenROUTE,
including the annual reports on form 10-K of OpenROUTE for the three years
ending December 31, 1998 and the Quarterly Report on Forms 10-Q for the
quarterly periods ending March 27, 1999 and June 26, 1999; (iii) certain other
internal information, primarily financial in nature, including projections and
assumptions related thereto, concerning the business, assets and operations of
OpenROUTE, furnished to us by OpenROUTE for purposes of our analysis; (iv)
certain publicly available information concerning the trading of, and the
trading market for OpenROUTE Common Stock; (v) certain publicly available
information concerning Netrix, including the annual reports on form 10-K of
Netrix for the three years ending December 31, 1998 and the Quarterly Report on
Form 10-Q for the quarterly periods ending March 31, 1999 and June 30, 1999;
(vi) certain other internal information, primarily financial in nature,
including projections and assumptions related thereto, concerning the business,
assets and operations of Netrix, furnished to us by Netrix for purposes of our
analysis; (vii) certain publicly available information concerning the trading
of, and the trading market for the Netrix Common Stock; (viii) certain publicly
available information with respect to certain other companies that we believe
to be comparable to OpenROUTE and to Netrix and the trading markets for certain
of such other companies' securities; and (ix) certain publicly available
information concerning the nature and terms of certain other transactions that
we consider relevant to the Proposed Merger and our analysis. We have
considered such other information, financial studies, analyses, investigations
and financial, economic and market conditions and
C-1
<PAGE>
criteria that we deemed relevant. We also met with the management of OpenROUTE
and Netrix to discuss the foregoing, as well as other matters we believe
relevant to OpenROUTE and Netrix.
In our review and analysis and in arriving at the Opinion, we have assumed
and relied upon the accuracy and completeness of all the financial and other
information provided to us by OpenROUTE and Netrix or that is publicly
available, and have not attempted to verify any of such information. We have
assumed (i) the financial projections of OpenROUTE and Netrix have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of OpenROUTE's and Netrix's management as to future
financial performance, (ii) that such projections will be realized in the
amounts and time periods currently estimated by the respective managements and
(iii) that obtaining all regulatory and other approvals and third party
consents required for consummation of the Proposed Merger will not have an
adverse impact on OpenROUTE or Netrix or on the anticipated benefits of the
Merger. We did not make or obtain any independent evaluation or appraisals of
any assets or liabilities of OpenROUTE or Netrix.
For the purposes of the Opinion, we have not been asked to consider, and our
opinion does not address, the relative merits of the Proposed Merger as
compared to any alternative business strategy that might exist for OpenROUTE.
The Opinion is necessarily based upon prevailing market conditions and other
circumstances and conditions as they exist and can be evaluated as of the date
hereof. The Opinion does not represent an opinion as to what the actual value
of the OpenROUTE Common Stock or Netrix Common Stock will be after the date
hereof. Nor does our opinion constitute an opinion or imply any conclusion as
to the likely trading range for OpenROUTE Common Stock following consummation
of the Proposed Merger. This opinion does not constitute a recommendation of
the Proposed Merger to OpenROUTE or a recommendation to any holder of OpenROUTE
Common Stock as to how such holder should vote with respect to the Proposed
Merger. Our opinion is, in any event, limited to the fairness, from a financial
point of view, of the Exchange Ratio to OpenROUTE. We disclaim any undertakings
or obligations to advise any person of any change in any fact or matter
affecting the Opinion which may come or be brought to our attention after the
date of the Opinion.
This opinion is being furnished for the use and benefit of OpenROUTE's Board
of Directors in evaluating the fairness, from a financial point of view, of the
Exchange Ratio in connection with the Proposed Merger and may not be quoted or
referred to in whole or in part, nor used for any other purpose without the
prior written consent of Tucker Anthony, provided however, that this letter may
be reproduced in full, with appropriate references made thereto, in the proxy
or registration statement filed in connection with the Proposed Merger. The
Opinion rendered herein is given as of the date hereof, and is limited in scope
and subject matter as set forth herein. No other opinions should be inferred
beyond the opinion expressly stated herein.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to OpenROUTE.
Very truly yours,
TUCKER ANTHONY CLEARY GULL
C-2
<PAGE>
ANNEX D
APPRAISAL RIGHTS STATUTE
Sections 85 Through 98
Inclusive
of the
Business Corporation Law
of the
Commonwealth of Massachusetts
----------------
SECTION 85. Payment for Stock of Dissenting Stockholder
A stockholder in any corporation organized under the laws of Massachusetts
which shall have duly voted to consolidate or merge with another corporation or
corporations under the provisions of sections seventy-eight or seventy-nine who
objects to such consolidation or merger may demand payment for his stock from
the resulting or surviving corporation and an appraisal in accordance with the
provisions of sections eighty-six to ninety-eight, inclusive, and such
stockholder and the resulting or surviving corporation shall have the rights
and duties and follow the procedure set forth in those sections. This section
shall not apply to the holders of any shares of stock of a constituent
corporation surviving a merger if, as permitted by subsection (c) of section
seventy-eight, the merger did not require for its approval a vote of the
stockholders of the surviving corporation.
SECTION 86. Right of Appraisal
If a corporation proposes to take a corporate action as to which any section
of this chapter provides that a stockholder who objects to such action shall
have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty-three, no stockholder shall have
such right unless (1) he files with the corporation before the taking of the
vote of the stockholders on such corporate action, written objection to the
proposed action stating that he intends to demand payment for his shares if the
action is taken and (2) his shares are not voted in favor of the proposed
action.
SECTION 87. Notice of Stockholders Meeting to Contain Statement as to Appraisal
Rights
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand payment for his
stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of
notice shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting
and effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in
writing from the corporation (or, in the case of a consolidation or merger,
the name or the resulting or surviving corporation shall be inserted),
within twenty days after the date of mailing to him of notice in writing
that the corporate action has become effective, payment for his shares and
an appraisal of the value thereof. Such corporation and any such
stockholder shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of
the General Laws of Massachusetts."
D-1
<PAGE>
SECTION 88. Notice to Objecting Stockholder that corporate Action has Become
Effective
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified
mail, addressed to the stockholder at his last known address as it appears in
the records of the corporation.
SECTION 89. Demand for Payment by Objecting Stockholder
If within twenty days after the date of mailing of a notice under subsection
(e) of section eighty-two, subsection (f) of section eighty-three, or section
eighty-eight, any stockholder to whom the corporation was required to give such
notice shall demand in writing from the corporation taking such action, or in
the case of a consolidation or merger from the resulting or surviving
corporation, payment for his stock, the corporation upon which such demand is
made shall pay to him the fair value of his stock within thirty days after the
expiration of the period during which such demand may be made.
SECTION 90. Determination of Value of Stock by Superior Court
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county
where the corporation in which such objecting stockholder held stock had or has
its principal office in the commonwealth.
SECTION 91. Bill in Equity to Determine Value of Stock of Objecting
Stockholders on Failure to Agree on Value Thereof etc; Parties to
Bill etc; Service of Bill on Corporation; Notice to Stockholder
Parties etc.
If the bill is filed by the corporation, it shall name as parties respondent
all stockholders who have demanded payment for their shares and with whom the
corporation has not reached agreement as to the value thereof. If the bill is
filed by a stockholder, he shall bring the bill in his own behalf and in behalf
of all other stockholders who have demanded payment for their shares and with
whom the corporation has not reached agreement as to the value thereof, and
service of the bill shall be made upon the corporation by subpoena with a copy
of the bill annexed. The corporation shall file with its answer a duly verified
list of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to
each stockholder party to the bill by registered or certified mail, addressed
to the last known address of such stockholder as shown in the records of the
corporation, and the court may order such additional notice by publication or
otherwise as it deems advisable. Each stockholder who makes demand as provided
in section eighty-nine shall be deemed to have consented to the provisions of
this section relating to notice, and the giving of notice by the corporation to
any such stockholder in compliance with the order of the court shall be a
sufficient service of process on him. Failure to give notice to any stockholder
making demand shall not invalidate the proceedings as to other stockholders to
whom notice was properly given, and the court may at any time before the entry
of a final decree make supplementary orders of notice.
SECTION 92. Bill in Equity to Determine Value of Stock of Objecting
Stockholders on Failure to Agree on Value Thereof, etc; Entry of
Decree Determining Value of Stock; Date on which Value is to be
Determined
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of
and payment for their shares, and shall order the corporation to
D-2
<PAGE>
make payment of such value, together with interest, if any, as hereinafter
provided, to the stockholders entitled thereto upon the transfer by them to the
corporation of the certificates representing such stock if certificated or, if
uncertificated, upon receipt of an instruction transferring such stock to the
corporation. For this purpose, the value of the shares shall be determined as
of the day preceding the date of the vote approving the proposed corporate
action and shall be exclusive of any element of value arising from the
expectation or accomplishment of the proposed corporate action.
SECTION 93. Bill in Equity to Determine Value of Stock of Objecting
Stockholders on Failure to Agree on Value Thereof, etc.; Court may
Refer Bill, etc., to Special Master to Hear Parties, etc.
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report
the same to the court, all in accordance with the usual practice in suits in
equity in the superior court.
SECTION 94. Bill in Equity to Determine Value of Stock of Objecting
Stockholders on Failure to Agree on Value Thereof, etc.;
Stockholder Parties may be Required to Submit their Stock
Certificates for Notation Thereon of Pendency of Bill, etc.
On motion the court may order stockholder parties to the bill to submit their
certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in its
records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
SECTION 95. Bill in Equity to Determine Value of Stock of Objecting
Stockholders on Failure to Agree on Value Thereof, etc.; Taxation
of Costs, etc.; Interest on Award, etc.
The costs of the bill, including the reasonable compensation and expenses of
any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided
in this chapter shall be paid by the corporation. Interest shall be paid upon
any award from the date of the vote approving the proposed corporate action,
and the court may on application of any interested party determine the amount
of interest to be paid in the case of any stockholder.
SECTION 96. Stockholder Demanding Payment for Stock not Entitled to Notice of
Stockholders' Meetings or to Vote Stock or to Receive Dividends,
etc.; Exceptions
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends
or other distributions payable to stockholders of record at a date which is
prior to the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
SECTION 97. Certain Shares Paid for by Corporation to have Status of Treasury
Stock, etc.
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock or in the
case of a consolidation or merger the shares or the securities of the
D-3
<PAGE>
resulting or surviving corporation into which the shares of such objecting
stockholder would have been converted had he not objected to such
consolidation or merger shall have the status of treasury stock or securities.
SECTION 98. Enforcement by Stockholder of Right to Receive Payment for his
Shares to be Exclusive Remedy; Exception
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground
that such corporate action will be or is illegal or fraudulent as to him.
D-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the General Corporations Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (a "proceeding") (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A Delaware corporation
may indemnify any person under such Section in connection with a proceeding by
or in the right of the corporation to procure judgment in its favor, as
provided in the preceding sentence, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action, except that no indemnification shall be made with
respect thereto unless, and then only to the extent that, a court of competent
jurisdiction shall determine upon application that such person is fairly and
reasonably entitled to indemnity for such expenses as the court shall deem
proper. A Delaware corporation must indemnify present or former directors and
officers who are successful on the merits or otherwise in defense of any
action, suit or proceeding or in defense of any claim, issue or matter in any
proceeding, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith. A Delaware corporation may
pay for the expenses (including attorneys' fees) incurred by an officer or
director in defending a proceeding in advance of the final disposition upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation. Article Seventh of Netrix's amended and
restated certificate of incorporation provides for indemnification of directors
and officers to the fullest extent permitted by Section 145 of the DGCL.
Section 145 of the DGCL permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other employee against any liability
asserted against such person and incurred by such person in such capacity, or
arising out of their status as such, whether or not the corporation would have
the power to indemnify directors and officers against such liability. Netrix
has obtained officers' and directors' liability insurance of $ million for
members of its board of directors and executive officers. In addition, Netrix
has entered into agreements to indemnify its directors and officers from and
against any Expenses (as defined in the indemnity agreement) incurred by such
person in connection with investigating, defending, serving as a witness in,
participating in, (including on appeal) or preparing for any of the foregoing
in any threatened, pending or contemplated action, suit or proceeding
(including an action by or in the right of the registrant), or any inquiry,
hearing or investigation, to the fullest extent permitted by law, as such law
may be amended or interpreted (but only to the extent that such amendment or
interpretation provides for broader indemnification rights). The indemnity
agreement contains certain provisions to ensure that the indemnitee receives
the benefits contemplated by the agreement in the event of a "change in
control" (as defined in the indemnity agreement) such as the establishment and
funding of a trust in an amount sufficient to satisfy any and all expenses
reasonably anticipated to be incurred by the indemnitee in connection with
investigating, preparing for, participating in and/or defending a proceeding.
The merger agreement provides that for six years after completion of the
merger Netrix will provide each individual who served as a director or officer
of OpenROUTE prior to the merger with officers' and directors'
II-1
<PAGE>
liability insurance no less favorable in coverage and amount than any
applicable OpenROUTE insurance in effect immediately prior to the merger. If
the existing liability insurance expires or is terminated during the six year
period, then Netrix will use its reasonable best efforts to obtain comparable
insurance for the remainder of the six year period on a commercially reasonable
basis.
Netrix shall also honor for a period of six years from the completion of the
merger (and shall not alter or impair) any exculpatory or indemnification
provisions in OpenROUTE's certificate of incorporation, by-laws or
indemnification and employment agreements, except as may be required by law.
Any rights to indemnification in respect to claims asserted within the six year
period shall continue until final disposition of such claims.
Netrix will also indemnify for a period of six years from the completion of
the merger, to the fullest extent permitted by law, each director and officer
of OpenROUTE from any claims relating to the merger. Such indemnification is
not required, however, for actions of any director or officer of OpenROUTE that
were made in bad faith or constitute willful misconduct, taken in the
individual capacity of such director or officer, or such director or officer
breached its obligation to cooperate in the defense of the claim for which
indemnification is sought and such breach had or will have (if not cured within
10 days) a material adverse effect on Netrix's defense of the claim.
At present, there is no pending litigation or other proceeding involving a
director or officer of Netrix as to which indemnification is being sought, nor
is Netrix aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
Item 21. Exhibits and Financial Statement Schedules.
(a) List of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated September 30, 1999, between Netrix
Corporation and OpenROUTE Networks, Inc. (incorporated by reference to
Exhibit 4.2 to Netrix's quarterly report on Form 10-Q filed on August
16, 1999, Commission file no. 0-50464).
2.2 Amendment to Agreement and Plan of Merger between Netrix Corporation
and OpenROUTE Networks, Inc., dated November 9, 1999.
3.1 Amended and Restated Certificate of Incorporation of Netrix
Corporation (incorporated by reference to Exhibit 3.1 to Netrix's
registration of Form S-1 filed on September 18, 1992, as amended, File
No. 33-50464 (the "1992 S-1")).
3.2 Amendment to Certificate of Incorporation of Netrix Corporation dated
August 26, 1999 (incorporated by reference to Exhibit 4.8 to Netrix's
registration statement on Form S-3, filed on June 18, 1999, as
amended, File No. 333-81109 (the "1999 S-3")).
3.3 Amended and Restated By-laws of Netrix Corporation (incorporated into
this registration statement by reference to Exhibit 3.2 of Netrix's
1992 S-1).
3.4 Restated Articles of Organization of OpenROUTE Networks, Inc., as
amended (filed as Exhibit 3.1 to OpenROUTE's Annual Report on Form 10-
K for the year ended December 31, 1991)
3.5 Articles of Amendment to the Articles of Organization of OpenROUTE
Networks, Inc., dated June 12, 1998 on the change of name of the
corporation to OpenROUTE Networks, Inc., from Proteon, Inc. (filed as
Exhibit 3.2 to OpenROUTE's annual report on Form 10-K for the year
ended December 31, 1998)
3.6 By-laws of OpenROUTE Networks, Inc., as amended and restated (filed as
Exhibit 3.3 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.1 Specimen certificate of common stock of Netrix Corporation
(incorporated by reference to Exhibit 4.2 to Netrix's 1992 S-1).
4.2 Certificate of designations for the form of Series A 8% convertible
preferred stock of Netrix Corporation (incorporated by reference to
Exhibit 4.4 to Netrix's 1999 S-3).
4.3 Supplemental certificate of designations for the form of Series A 8%
convertible preferred stock of Netrix Corporation (incorporated by
reference to Exhibit 4.2 to Netrix's quarterly report on Form 10-Q
filed on August 16, 1999, Commission File No. 0-50464).
4.4 Form of Warrant issued to Renwick Securities, Inc. by Netrix
Corporation (incorporated by reference to Exhibit 10.3 to Netrix's
quarterly report on Form 10-Q filed on August 16, 1999, Commission
File No. 0-50464).
4.5 Form of Warrant issued to Coast Business Credit by Netrix Corporation
(incorporated by reference to Exhibit 10.2 to Netrix's quarterly
report on Form 10-Q filed on August 16, 1999, Commission File No. 0-
50464).
4.6 Form of Warrant issued to Kaufman Bros., L.P. (incorporated by
reference to Exhibit 4.6 of Netrix's quarterly report on Form 10-Q,
filed November 15, 1999, Commission File No. 000-20512).
4.7 Form of Common Stock Certificate of OpenROUTE Networks, Inc. (filed as
Exhibit 4.2 to Amendment No. 1 on Form 8 to OpenROUTE's registration
statement on Form 8-A, Commission File No. 0-19175).
5.1 Opinion of Kelley Drye & Warren LLP regarding the validity of the
securities being registered.
8.1 Opinion of Swidler Berlin Shereff Friedman, LLP regarding material
federal income tax consequences relating to the merger.
10.1 Loan and Security Agreement, dated November 18, 1997, by and between
Netrix Corporation and Coast Business Credit, a division of Southern
Pacific Bank (incorporated by reference to Exhibit 4.2 to Netrix's
quarterly report on Form 10-Q filed on August 16, 1999, Commission
File No. 0-50464).
10.2 Amendment to Loan and Security Agreement, dated April 19, 1999, by and
between Netrix Corporation and Coast Business Credit, a division of
Southern Pacific Bank (incorporated by reference to Exhibit 4.2 to
Netrix's quarterly report on Form 10-Q filed on August 16, 1999,
Commission File No. 0-50464).
10.3 Employment Agreement between Netrix Corporation and Steven T.
Francesco, dated March 22, 1999 (incorporated by reference to Exhibit
10.5 to Netrix's quarterly report on Form 10-Q, filed on November 15,
1999, Commission File No. 000-20512).
10.4 Employment Agreement between Netrix Corporation and Peter J. Kendrick,
dated August 2, 1999 (incorporated by reference to Exhibit 10.6 to
Netrix's quarterly report on Form 10-Q, filed on November 15, 1999,
Commission File No. 000-20512).
10.5 Form of Retention Agreement with Executive Officers of Netrix
Corporation (incorporated by reference to Exhibit 10.7 to Netrix's
quarterly report on Form 10-Q, as amended, filed on November 15, 1999,
Commission File No. 000-20512).
10.6+ Manufacturing Agreement, dated September, 1999, by and between Netrix
Corporation and SMT Centre S.E. Inc. (incorporated by reference to
Exhibit 10.8 to Netrix's quarterly report on Form 10-Q, as amended,
filed on November 15, 1999, Commission File No. 000-20512).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.7 1999 Long Term Incentive Plan of Netrix Corporation, as amended
(incorporated by reference to Exhibit 10.9 to Netrix's quarterly
report on Form 10-Q filed on November 15, 1999, Commission File No.
000-20512).
10.8 Amended and Restated Incentive Stock Option Plan of Netrix
Corporation, as amended (incorporated by reference to Exhibit 10.1 of
the Annual Report of Form 10-K for the fiscal year ended December 31,
1995).
10.9 1992 Employee Stock Purchase Plan of Netrix Corporation (incorporated
by reference to Exhibit 10.2 of Netrix's 1995 10-K).
10.10 1992 Directors Stock Option Plan of Netrix Corporation (incorporated
by reference to Exhibit 10.3 of Netrix's 1995 10-K).
10.11 1996 Stock Option Plan of Netrix Corporation (incorporated by
reference to Exhibit 10.4 of Netrix's 1995 10-K).
10.12 Office lease, dated December 9, 1988, as amended, by and between
Netrix Corporation and Dulles Technology Center Venture, for Netrix's
principal executive offices at 13595 Dulles Technology Drive, Herndon,
Virginia (incorporated by reference to Exhibit 10.6 of Netrix's 1992
S-1).
10.13 Office Sublease, dated September 30, 1999, by and between Netrix
Corporation and Scoreboard, Inc. (incorporated by reference to Exhibit
10.14 to Netrix's quarterly report on Form 10-Q, filed on November 15,
1999, Commission File No. 000-20512)
10.14 Manufacturing Services Agreement, dated August 1, 1989, by and between
OpenROUTE Networks, Inc., and Texas Instruments, Inc. (filed as
Exhibit 10.3 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073).
10.15 Purchase Agreement, dated December 1, 1990, by and between OpenROUTE
Networks, Inc., and Texas Instruments, Inc. (filed as Exhibit 10.4 to
OpenROUTE's registration statement on Form S-1, Commission File No.
33-40073).
10.16+ Software License Agreement, dated January 1, 1990, by and between
OpenROUTE Networks, Inc. and Noel Chiappa (filed as Exhibit 10.5 to
OpenROUTE's registration statement on Form S-1, Commission File No.
33-40073).
10.17 1991 Restated Stock Option Plan of OpenROUTE Networks, Inc. (filed as
Exhibit 19.1 to OpenROUTE's quarterly report on Form 10-Q for the
quarter ended June 27, 1992)
10.18 1988 Nonqualified Stock Option Plan of OpenROUTE Networks, Inc. (filed
as Exhibit 10.7 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073).
10.19 Restated Employee Stock Award Plan of OpenROUTE Networks, Inc. (filed
as Exhibit 10.8 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073).
10.20 Consulting Agreement, dated August 31, 1989, by and between OpenROUTE
Networks, Inc. and David Clark (filed as Exhibit 10.11 to OpenROUTE's
registration statement on Form S-1, Commission File No. 33-40073).
10.21 Form of Indemnification Agreement. An Indemnification Agreement was
entered into by and between OpenROUTE Networks, Inc. and each of:
David Allen, Steven J. Bielagus, Daniel Capone, Jr., David Clark;
Howard C. Salwen and certain other former directors and executives.
Although the agreements were executed on various dates, each is the
same as the Form of Indemnification Agreement in all material respects
and details, and therefore the individual agreements are not filed
herewith. (filed as Exhibit 10.17 to OpenROUTE's registration
statement on Form S-1, Commission File No. 33-40073).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.22 Executive Compensation Arrangement Not Set Forth in a Formal Document
of V OpenROUTE Networks, Inc. (filed as Exhibit 10.26 to OpenROUTE's
annual report on Form 10-K for the fiscal year ended December 31,
1992).
10.23 Consulting Agreement, dated August 25, 1993, by and between OpenROUTE
Networks, Inc. and Howard Salwen (filed as Exhibit 10.1 to OpenROUTE's
quarterly report on Form 10-Q for the quarter ended October 2, 1993).
10.24 Employment Agreement, dated March 18, 1994, by and between OpenROUTE
Networks, Inc. and Steven J. Bielagus (filed as Exhibit 10.3 to
OpenROUTE's quarterly report on Form 10-Q for the quarter ended April
2, 1994).
10.25 Employment Agreement, dated June 27, 1994, by and between OpenROUTE
Networks, Inc. and Daniel J. Capone, Jr. (filed as Exhibit 10.4 to
OpenROUTE's quarterly report on Form 10-Q for the quarter ended July
2, 1994).
10.26 Lease Agreement, dated December 19, 1994, by and between OpenROUTE
Networks, Inc. and WCB Twenty Limited Partnership (filed as Exhibit
10.31 to OpenROUTE's annual report on Form 10-K for the year ended
December 31, 1994).
10.27 Severance Compensation Agreement, dated March 11, 1996, by and between
OpenROUTE Networks, Inc. and William T. Greer (filed as Exhibit 10.28
to OpenROUTE's annual report on Form 10-K for the year ended December
31, 1996).
10.28 Employment Agreement, dated October 16, 1996, by and between OpenROUTE
Networks, Inc. and Robert J. Connaughton, Jr. (filed as Exhibit 10.29
to OpenROUTE's annual report on Form 10-K for the fiscal year ended
December 31, 1996).
10.29 Severance Compensation Agreement, dated October 21, 1996, by and
between OpenROUTE Networks, Inc. and Robert J. Connaughton, Jr. (filed
as Exhibit 10.30 to OpenROUTE's annual report on Form 10-K for the
fiscal year ended December 31, 1996).
10.30 Form of Severance Compensation Agreement. A Severance Compensation
Agreement was entered into by and between OpenROUTE Networks, Inc. and
each of: Robert Koch, Steven T. Shedd, Richard J. Arena, Eugene Y.
Chang, Daniel J. Capone, Jr., Steven J. Bielagus, Kenneth Holvaldt and
Jack A. Ritter. Although the agreements were executed on various
dates, each is the same as the Form of Severance Compensation
Agreement in all material respects and details, and therefore the
individual agreements are not filed herewith. (filed as Exhibit 10.17
to OpenROUTE's annual report on Form 10-K for the fiscal year ended
December 31, 1997).
10.31 Amendment to Lease Agreement, dated December 19, 1994, by and between
OpenROUTE Networks, Inc. and WCB Twenty Limited Partnership, dated May
23, 1997 (filed as Exhibit 10.18 to OpenROUTE's annual report on Form
10-K for the fiscal year ended December 31, 1997).
10.32 Form of Severance Compensation Agreement. A Severance Compensation
Agreement was entered into by and between the Registrant and each of:
Richard E. Sterry and Bryan Holley. Although the agreements were
executed September 16, 1998 and July 6, 1998 respectively, each is the
same as the Form of Severance Compensation Agreement in all material
respects and details, and therefore the individual agreements are not
filed herewith (filed as Exhibit 10.19 to OpenROUTE's annual report on
Form 10-K for the year ended December 31, 1998).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of BDO Seidman, LLP.
23.3 Consent of PricewaterhouseCoopers, LLP.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.4 Consent of Kelley Drye & Warren LLP (included in the opinion filed as
Exhibit 5.1 to this registration statement).
23.5 Consent of Swidler Berlin Shereft Friedman, LLP (included in the
opinion filed as Exhibit 8.1 to this registration statement).
23.6 Consent of Kaufman Bros., L.P. (included in the opinion filed as Annex
B to the Joint Proxy Statement/Prospectus contained in this
registration statement).
23.7 Consent of Tucker Anthony Cleary Gull (included in the opinion filed
as Annex C to the Joint Proxy Statement/Prospectus contained in this
registration statement).
24 Power of Attorney (included in signature page).
99.1 Form of Netrix Proxy Card.
99.2 Form of OpenROUTE Proxy Card.
</TABLE>
- --------
+ Portions of exhibits marked with a (+) have been omitted subject to the
grant of confidential treatment or a pending confidential treatment
request.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
II-6
<PAGE>
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the Joint Proxy Statement/Prospectus pursuant to Item 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Herndon, Virginia on
this 19th day of November, 1999.
Netrix Corporation
/s/ Steven T. Francesco
By: _________________________________
Steven T. Francesco
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Steven T. Francesco and Peter J. Kendrick and
each of them as his true and lawful attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place and
stead of the undersigned to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, (i) any and all pre-
effective and post-effective amendments to this registration statement, (ii)
any exhibits to any pre-effective or post-effective amendments, (iii) any and
all applications and other documents in connection with any such pre-effective
or post-effective amendments, and (iv) generally to do all things and perform
any and all acts and things whatsoever requisite and necessary or desirable to
enable the Registrant to comply with the provisions of the Securities Act of
1933, as amended, and all requirements of the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on November 19, 1999.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Steven T. Francesco Chairman of the Board and November 19, 1999
______________________________________ Chief Executive Officer
Steven T. Francesco (Principal Executive
Officer)
/s/ Peter J. Kendrick Chief Financial Officer November 19, 1999
______________________________________ (Principal Financial and
Peter J. Kendrick Accounting Officer)
/s/ Lynn C. Chapman Director November 19, 1999
______________________________________
Lynn C. Chapman
/s/ John M. Faccibene Director November 19, 1999
______________________________________
John M. Faccibene
/s/ Gregory C. McNulty Director November 19, 1999
______________________________________
Gregory C. McNulty
/s/ Richard Yalen Director November 19, 1999
______________________________________
Richard Yalen
/s/ Douglas J. Mello Director November 19, 1999
______________________________________
Douglas J. Mello
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated September 30, 1999, between Netrix
Corporation and OpenROUTE Networks, Inc. (incorporated by reference to
Exhibit 4.2 to Netrix's quarterly report on Form 10-Q filed on August
16, 1999, Commission file no. 0-50464).
2.2 Amendment to Agreement and Plan of Merger between Netrix Corporation
and OpenROUTE Networks, Inc., dated November 9, 1999.
3.1 Amended and Restated Certificate of Incorporation of Netrix
Corporation (incorporated by reference to Exhibit 3.1 to Netrix's
registration of Form S-1 filed on September 18, 1992, as amended, File
No. 33-50464 (the "1992 S-1")).
3.2 Amendment to Certificate of Incorporation of Netrix Corporation dated
August 26, 1999 (incorporated by reference to Exhibit 4.8 to Netrix's
registration statement on Form S-3, filed on June 18, 1999, as
amended, File No. 333-81109 (the "1999 S-3")).
3.3 Amended and Restated By-laws of Netrix Corporation (incorporated into
this registration statement by reference to Exhibit 3.2 of Netrix's
1992 S-1).
3.4 Restated Articles of Organization of OpenROUTE Networks, Inc., as
amended (filed as Exhibit 3.1 to OpenROUTE's Annual Report on Form 10-
K for the year ended December 31, 1991)
3.5 Articles of Amendment to the Articles of Organization of OpenROUTE
Networks, Inc., dated June 12, 1998 on the change of name of the
corporation to OpenROUTE Networks, Inc., from Proteon, Inc. (filed as
Exhibit 3.2 to OpenROUTE's annual report on Form 10-K for the year
ended December 31, 1998)
3.6 By-laws of OpenROUTE Networks, Inc., as amended and restated (filed as
Exhibit 3.3 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073)
4.1 Specimen certificate of common stock of Netrix Corporation
(incorporated by reference to Exhibit 4.2 to Netrix's 1992 S-1).
4.2 Certificate of designations for the form of Series A 8% convertible
preferred stock of Netrix Corporation (incorporated by reference to
Exhibit 4.4 to Netrix's 1999 S-3).
4.3 Supplemental certificate of designations for the form of Series A 8%
convertible preferred stock of Netrix Corporation (incorporated by
reference to Exhibit 4.2 to Netrix's quarterly report on Form 10-Q
filed on August 16, 1999, Commission File No. 0-50464).
4.4 Form of Warrant issued to Renwick Securities, Inc. by Netrix
Corporation (incorporated by reference to Exhibit 10.3 to Netrix's
quarterly report on Form 10-Q filed on August 16, 1999, Commission
File No. 0-50464).
4.5 Form of Warrant issued to Coast Business Credit by Netrix Corporation
(incorporated by reference to Exhibit 10.2 to Netrix's quarterly
report on Form 10-Q filed on August 16, 1999, Commission File No. 0-
50464).
4.6 Form of Warrant issued to Kaufman Bros., L.P. (incorporated by
reference to Exhibit 4.6 of Netrix's quarterly report on Form 10-Q,
filed November 15, 1999, Commission File No. 000-20512).
4.7 Form of Common Stock Certificate of OpenROUTE Networks, Inc. (filed as
Exhibit 4.2 to Amendment No. 1 on Form 8 to OpenROUTE's registration
statement on Form 8-A, Commission File No. 0-19175).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
5.1 Opinion of Kelley Drye & Warren LLP regarding the validity of the
securities being registered.
8.1 Opinion of Swidler Berlin Shereff Friedman, LLP regarding material
federal income tax consequences relating to the merger.
10.1 Loan and Security Agreement, dated November 18, 1997, by and between
Netrix Corporation and Coast Business Credit, a division of Southern
Pacific Bank (incorporated by reference to Exhibit 4.2 to Netrix's
quarterly report on Form 10-Q filed on August 16, 1999, Commission
File No. 0-50464).
10.2 Amendment to Loan and Security Agreement, dated April 19, 1999, by and
between Netrix Corporation and Coast Business Credit, a division of
Southern Pacific Bank (incorporated by reference to Exhibit 4.2 to
Netrix's quarterly report on Form 10-Q filed on August 16, 1999,
Commission File No. 0-50464).
10.3 Employment Agreement between Netrix Corporation and Steven T.
Francesco, dated March 22, 1999 (incorporated by reference to Exhibit
10.5 to Netrix's quarterly report on Form 10-Q, filed on November 15,
1999, Commission File No. 000-20512).
10.4 Employment Agreement between Netrix Corporation and Peter J. Kendrick,
dated August 2, 1999 (incorporated by reference to Exhibit 10.6 to
Netrix's quarterly report on Form 10-Q, filed on November 15, 1999,
Commission File No. 000-20512).
10.5 Form of Retention Agreement with Executive Officers of Netrix
Corporation (incorporated by reference to Exhibit 10.7 to Netrix's
quarterly report on Form 10-Q, as amended, filed on November 15, 1999,
Commission File No. 000-20512).
10.6+ Manufacturing Agreement, dated September, 1999, by and between Netrix
Corporation and SMT Centre S.E. Inc. (incorporated by reference to
Exhibit 10.8 to Netrix's quarterly report on Form 10-Q, as amended,
filed on November 15, 1999, Commission File No. 000-20512).
10.7 1999 Long Term Incentive Plan of Netrix Corporation, as amended
(incorporated by reference to Exhibit 10.9 to Netrix's quarterly
report on Form 10-Q filed on November 15, 1999, Commission File No.
000-20512).
10.8 Amended and Restated Incentive Stock Option Plan of Netrix
Corporation, as amended (incorporated by reference to Exhibit 10.1 of
the Annual Report of Form 10-K for the fiscal year ended December 31,
1995).
10.9 1992 Employee Stock Purchase Plan of Netrix Corporation (incorporated
by reference to Exhibit 10.2 of Netrix's 1995 10-K).
10.10 1992 Directors Stock Option Plan of Netrix Corporation (incorporated
by reference to Exhibit 10.3 of Netrix's 1995 10-K).
10.11 1996 Stock Option Plan of Netrix Corporation (incorporated by
reference to Exhibit 10.4 of Netrix's 1995 10-K).
10.12 Office lease, dated December 9, 1988, as amended, by and between
Netrix Corporation and Dulles Technology Center Venture, for Netrix's
principal executive offices at 13595 Dulles Technology Drive, Herndon,
Virginia (incorporated by reference to Exhibit 10.6 of Netrix's 1992
S-1).
10.13 Office Sublease, dated September 30, 1999, by and between Netrix
Corporation and Scoreboard, Inc. (incorporated by reference to Exhibit
10.14 to Netrix's quarterly report on Form 10-Q, filed on November 15,
1999, Commission File No. 000-20512)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.14 Manufacturing Services Agreement, dated August 1, 1989, by and between
OpenROUTE Networks, Inc., and Texas Instruments, Inc. (filed as
Exhibit 10.3 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073).
10.15 Purchase Agreement, dated December 1, 1990, by and between OpenROUTE
Networks, Inc., and Texas Instruments, Inc. (filed as Exhibit 10.4 to
OpenROUTE's registration statement on Form S-1, Commission File No.
33-40073).
10.16+ Software License Agreement, dated January 1, 1990, by and between
OpenROUTE Networks, Inc. and Noel Chiappa (filed as Exhibit 10.5 to
OpenROUTE's registration statement on Form S-1, Commission File No.
33-40073).
10.17 1991 Restated Stock Option Plan of OpenROUTE Networks, Inc. (filed as
Exhibit 19.1 to OpenROUTE's quarterly report on Form 10-Q for the
quarter ended June 27, 1992)
10.18 1988 Nonqualified Stock Option Plan of OpenROUTE Networks, Inc. (filed
as Exhibit 10.7 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073).
10.19 Restated Employee Stock Award Plan of OpenROUTE Networks, Inc. (filed
as Exhibit 10.8 to OpenROUTE's registration statement on Form S-1,
Commission File No. 33-40073).
10.20 Consulting Agreement, dated August 31, 1989, by and between OpenROUTE
Networks, Inc. and David Clark (filed as Exhibit 10.11 to OpenROUTE's
registration statement on Form S-1, Commission File No. 33-40073).
10.21 Form of Indemnification Agreement. An Indemnification Agreement was
entered into by and between OpenROUTE Networks, Inc. and each of:
David Allen, Steven J. Bielagus, Daniel Capone, Jr., David Clark;
Howard C. Salwen and certain other former directors and executives.
Although the agreements were executed on various dates, each is the
same as the Form of Indemnification Agreement in all material respects
and details, and therefore the individual agreements are not filed
herewith. (filed as Exhibit 10.17 to OpenROUTE's registration
statement on Form S-1, Commission File No. 33-40073).
10.22 Executive Compensation Arrangement Not Set Forth in a Formal Document
of V OpenROUTE Networks, Inc. (filed as Exhibit 10.26 to OpenROUTE's
annual report on Form 10-K for the fiscal year ended December 31,
1992).
10.23 Consulting Agreement, dated August 25, 1993, by and between OpenROUTE
Networks, Inc. and Howard Salwen (filed as Exhibit 10.1 to OpenROUTE's
quarterly report on Form 10-Q for the quarter ended October 2, 1993).
10.24 Employment Agreement, dated March 18, 1994, by and between OpenROUTE
Networks, Inc. and Steven J. Bielagus (filed as Exhibit 10.3 to
OpenROUTE's quarterly report on Form 10-Q for the quarter ended April
2, 1994).
10.25 Employment Agreement, dated June 27, 1994, by and between OpenROUTE
Networks, Inc. and Daniel J. Capone, Jr. (filed as Exhibit 10.4 to
OpenROUTE's quarterly report on Form 10-Q for the quarter ended July
2, 1994).
10.26 Lease Agreement, dated December 19, 1994, by and between OpenROUTE
Networks, Inc. and WCB Twenty Limited Partnership (filed as Exhibit
10.31 to OpenROUTE's annual report on Form 10-K for the year ended
December 31, 1994).
10.27 Severance Compensation Agreement, dated March 11, 1996, by and between
OpenROUTE Networks, Inc. and William T. Greer (filed as Exhibit 10.28
to OpenROUTE's annual report on Form 10-K for the year ended December
31, 1996).
10.28 Employment Agreement, dated October 16, 1996, by and between OpenROUTE
Networks, Inc. and Robert J. Connaughton, Jr. (filed as Exhibit 10.29
to OpenROUTE's annual report on Form 10-K for the fiscal year ended
December 31, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.29 Severance Compensation Agreement, dated October 21, 1996, by and
between OpenROUTE Networks, Inc. and Robert J. Connaughton, Jr. (filed
as Exhibit 10.30 to OpenROUTE's annual report on Form 10-K for the
fiscal year ended December 31, 1996).
10.30 Form of Severance Compensation Agreement. A Severance Compensation
Agreement was entered into by and between OpenROUTE Networks, Inc. and
each of: Robert Koch, Steven T. Shedd, Richard J. Arena, Eugene Y.
Chang, Daniel J. Capone, Jr., Steven J. Bielagus, Kenneth Holvaldt and
Jack A. Ritter. Although the agreements were executed on various
dates, each is the same as the Form of Severance Compensation
Agreement in all material respects and details, and therefore the
individual agreements are not filed herewith. (filed as Exhibit 10.17
to OpenROUTE's annual report on Form 10-K for the fiscal year ended
December 31, 1997).
10.31 Amendment to Lease Agreement, dated December 19, 1994, by and between
OpenROUTE Networks, Inc. and WCB Twenty Limited Partnership, dated May
23, 1997 (filed as Exhibit 10.18 to OpenROUTE's annual report on Form
10-K for the fiscal year ended December 31, 1997).
10.32 Form of Severance Compensation Agreement. A Severance Compensation
Agreement was entered into by and between the Registrant and each of:
Richard E. Sterry and Bryan Holley. Although the agreements were
executed September 16, 1998 and July 6, 1998 respectively, each is the
same as the Form of Severance Compensation Agreement in all material
respects and details, and therefore the individual agreements are not
filed herewith (filed as Exhibit 10.19 to OpenROUTE's annual report on
Form 10-K for the year ended December 31, 1998).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of BDO Seidman, LLP.
23.3 Consent of PricewaterhouseCoopers, LLP.
23.4 Consent of Kelley Drye & Warren LLP (included in the opinion filed as
Exhibit 5.1 to this registration statement).
23.5 Consent of Swidler Berlin Shereft Friedman, LLP (included in the
opinion filed as Exhibit 8.1 to this registration statement).
23.6 Consent of Kaufman Bros., L.P. (included in the opinion filed as Annex
B to the Joint Proxy Statement/Prospectus contained in this
registration statement).
23.7 Consent of Tucker Anthony Cleary Gull (included in the opinion filed
as Annex C to the Joint Proxy Statement/Prospectus contained in this
registration statement).
24 Power of Attorney (included in signature page).
99.1 Form of Netrix Proxy Card.
99.2 Form of OpenROUTE Proxy Card.
</TABLE>
- --------
+ Portions of exhibits marked with a (+) have been omitted subject to the
grant of confidential treatment or a pending confidential treatment
request.
<PAGE>
EXHIBIT 5.1
[Letterhead of Kelley Drye & Warren, LLP]
November 16, 1999
Netrix Corporation
13595 Dulles Technology Drive
Herndon, VA 20171
Ladies and Gentlemen:
We have acted as counsel to Netrix Corporation, a Delaware corporation
("Netrix"), in connection with the preparation and filing of a registration
statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Act of 1933,
as amended (the "Securities Act"), relating to the registration by Netrix of
shares of its common stock to be issued (the "Shares") in connection with the
merger of OpenROUTE Networks, Inc., a Massachusetts corporation ("OpenROUTE"),
with and into Netrix, pursuant to the terms of the Agreement and Plan of Merger,
dated as of September 30, 1999, by and between Netrix and OpenROUTE, as amended
to date (the "Merger Agreement").
In connection with this opinion, we have examined and relied upon
copies certified or otherwise identified to our satisfaction of: (i) the
Registration Statement, together with the exhibits and schedules thereto, in the
form filed with the Commission; (ii) Netrix's certificate of incorporation and
bylaws, each as amended to date; and (iii) the minute books and other records of
corporate proceedings of Netrix through the date hereof, as made available to us
by officers of Netrix. In addition, we have conducted such other investigation
and have reviewed such matters of law and fact as we have deemed necessary or
appropriate for the purpose of rendering this opinion.
In rendering this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to originals of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of all documents submitted to us as copies. We
have also assumed the legal capacity of all natural persons, the genuineness of
all signatures on all documents examined by us, the authority of such persons
signing on behalf of parties thereto other than Netrix, as the case may be, and
the due authorization, execution and delivery of all documents by the parties
thereto other than Netrix. As to certain factual matters material to the
opinion expressed herein, we have relied, to the extent we deemed proper, upon
<PAGE>
Netrix Corporation
November 16, 1999
Page 2
representations, warranties and statements as to factual matters of officers and
other representatives of Netrix. In addition, in rendering this opinion we have
assumed that at the time of issuance of any of the Shares: (i) the Registration
Statement, as then amended, will be effective under the Securities Act; (ii) the
common stockholders of OpenROUTE will have approved and adopted the Merger
Agreement; (iii) the common stockholders of Netrix will have approved and
adopted the Merger Agreement, including the increase in of Netrix's authorized
common stock as contemplated in the Merger Agreement; and (iv) the transactions
contemplated by the Merger Agreement are consummated in accordance with the
terms of the Merger Agreement.
Our opinion expressed below is subject to the qualification that we
express no opinion as to any law of any jurisdiction other than the law of the
State of Connecticut, the corporate law of the State of Delaware and the federal
laws of the United States of America. Without limiting the foregoing, we
express no opinion with respect to the applicability thereto or effect of
municipal laws or the rules, regulations or orders of any municipal agencies
within any such state.
Based upon and subject to the foregoing qualifications, assumption and
limitations and the further limitations set forth below, it is our opinion that
the Shares have been duly authorized and, when issued and delivered in
accordance with the terms of the Merger Agreement, will be validly issued, fully
paid and non-assessable.
This opinion is limited to the specific issues addressed herein, and
no opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of Connecticut, the corporate law of the State of Delaware or
the federal laws of the United States of America be changed by legislative
action, judicial decision or otherwise.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to our firm in the joint proxy
statement/prospectus included therein under the caption "Legal Matters." In
giving such consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission promulgated thereunder.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
/s/ KELLEY DRYE & WARREN LLP
KELLEY DRYE & WARREN LLP
<PAGE>
Exhibit 8.1
November 18, 1999
OpenROUTE Networks, Inc.
Nine Technology Drive
Westborough, MA 01581
Ladies and Gentlemen:
We refer to the Agreement and Plan of Merger, as amended (the "Agreement"),
dated as of September 30, 1999 and amended as of November 9, 1999, between
Netrix Corporation, a Delaware corporation ("Netrix"), and OpenROUTE Networks,
Inc., a Massachusetts corporation ("OpenROUTE"), which provides for the merger
(the "Merger") of OpenROUTE with and into Netrix, with Netrix as the surviving
corporation (the "Surviving Corporation"), and the common stockholders of
OpenROUTE becoming stockholders of Netrix, all on the terms and conditions
therein set forth, the time at which the Merger becomes effective being
hereinafter referred to as the "Effective Time." Capitalized terms used but not
defined herein have the meanings specified in the Agreement.
As special tax counsel to OpenROUTE with respect to the Merger, we have
been asked to provide our opinions with respect to certain tax aspects of the
Merger described in Section 6(b)(vii) of the Agreement, the receipt of which
opinions is a condition of OpenROUTE's obligation to consummate the Merger.
As provided in the Agreement, at the Effective Time, by reason of the
Merger: (i) each issued and outstanding share of common stock, par value $.01
per share, of OpenROUTE ("OpenROUTE Common Stock") shall be converted solely
into one validly issued, fully paid and nonassessable share of common stock, par
value $.05 per share, of Netrix ("Netrix Common Stock"), with cash paid in lieu
of fractional shares of Netrix Common Stock, and (ii) each share of OpenROUTE
Common Stock that is owned by OpenROUTE as treasury stock shall be canceled and
no Netrix Common Stock or other consideration shall be delivered in exchange
therefor. All such shares of OpenROUTE Common Stock, when so converted, shall
no longer be outstanding and shall automatically be canceled and retired, and
each holder of a certificate representing any such shares shall cease to have
any rights with respect thereto, except the right to receive (i) certificates
representing the number of whole shares of Netrix Common Stock into
<PAGE>
which such shares have been converted and (ii) cash in lieu of a fractional
share of Netrix Common Stock.
The Merger and the Agreement are more fully described in the Registration
Statement on Form S-4 (the "Registration Statement") relating to the
registration of shares of Netrix Common Stock, which has been filed by Netrix
with the Securities and Exchange Commission ("Commission") pursuant to the
Securities act of 1933, as amended ("Securities Act"). The Registration
Statement includes the Joint Proxy Statement/Prospectus (the "Prospectus") of
Netrix and OpenROUTE.
In rendering the opinions expressed below, we have relied upon the accuracy
and completeness of the facts, information and representations and the covenants
contained in the Agreement, the Registration Statement, the Prospectus and such
other documents as we have deemed relevant and necessary (including, without
limitation, those described above). Such opinions are conditioned, among other
things, not only upon such accuracy and completeness as of the date hereof, but
also the continuing accuracy and completeness thereof as of the Effective Time.
Moreover, we have assumed the absence of any change to any of such instruments
between the date thereof and the Effective Time.
We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of all natural
persons and the conformity with original documents of all copies submitted to us
for our examination. We have further assumed that: (i) the transactions related
to the Merger or contemplated by the Agreement will be consummated (A) in
accordance with the Agreement and (B) as described in the Prospectus; (ii) the
Merger will qualify as a statutory merger under the corporation laws of the
Commonwealth of Massachusetts and the State of Delaware; and (iii) as of the
date hereof, and as of the Effective Time (as if made as of the Effective Time),
the written statements made by executives of Netrix and OpenROUTE contained in
the Netrix Tax Certificate and OpenROUTE Tax Certificate, respectively, each
dated on or about the date hereof, are and will be accurate in all respects, and
neither Netrix nor OpenROUTE will have provided written notification prior to
the Effective Time that a statement made in the Netrix Tax Certificate or
OpenROUTE Tax Certificate, respectively, is no longer true.
Our opinions are based on current provisions of the Internal Revenue Code
of 1986, as amended (the "Code'), the Treasury Regulations promulgated
thereunder, published pronouncements of the Internal Revenue Service and case
law, all to the date hereof, any of which may be changed at any time with
retroactive effect. Any change in applicable laws or facts and circumstances
surrounding the Merger, or any inaccuracy in the statements, facts, assumptions
and representations on which we have relied, may affect, the continuing validity
of the opinions set forth herein. We assume no responsibility to inform you of
any such change or inaccuracy that may occur or come to our attention.
Furthermore, the opinions expressed below may not be applicable to OpenROUTE
shareholders who or which, for United States federal income tax purposes, are
nonresident alien individuals, foreign corporations, foreign partnerships,
foreign trusts or foreign estates, who acquired their OpenROUTE Common Stock
<PAGE>
Open Route Networks, Inc.
November 18, 1999
Page 3
pursuant to the exercise of employee stock options or otherwise as compensation
or who are subject to special or differing treatment under the Code because of
the shareholder's tax status, individual circumstances or other factors
unrelated to the Merger.
Based upon and subject to the foregoing, we are of the opinion that, for
federal income tax purposes:
(1) the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and Netrix and OpenROUTE will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by Netrix or OpenROUTE as a
result of the Merger;
(3) no gain or loss will be recognized by the shareholders of OpenROUTE
on the receipt in the Merger of Netrix Common Stock (except for any income, gain
or loss attributable to cash, if any, received in lieu of fractional shares)
solely in exchange for OpenROUTE Common Stock;
(4) the adjusted tax basis of the Netrix Common Stock to be received by
the OpenROUTE shareholders in the Merger will be the same as the adjusted tax
basis of the OpenROUTE Common Stock surrendered in exchange therefor, except for
any portion of the basis in the OpenROUTE Common Stock that is allocable to any
fractional shares for which cash is received; and
(5) the holding period for shares of Netrix Common Stock received in
exchange for shares of OpenROUTE Common Stock pursuant to the Merger will
include the holder's holding period for such shares of OpenROUTE Common Stock,
provided such shares of OpenROUTE Common Stock were held as capital assets by
the holder at the Effective Time.
In addition, reference is made to the statements in the Prospectus under
the caption "The Merger -- Material Federal Income Tax Consequences of the
Merger," which have been prepared or reviewed by us. It is our opinion that
such statements, to the extent constituting a discussion of matters of federal
income tax law or legal conclusions with respect thereto, are true and correct
in all material respects.
Except as expressly set forth above, you have not requested, and we do not
herein express, any opinion concerning the tax consequences of, or any other
matters related to, the Merger.
<PAGE>
Open Route Networks, Inc.
November 18, 1999
Page 4
This opinion is provided to, and may be relied upon by, you only. Without
our prior consent, it may not be relied upon, used, circulated, quoted or
otherwise referred to in any manner by any other person, firm, governmental
authority or entity whatsoever. We consent to the use of this opinion as an
exhibit to the Registration Statement and to the use of our name in the
Prospectus, which is a part of the Registration Statement. In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated April 14, 1999
included (or incorporated by reference) in Netrix Corporation's Form 10-K/A for
the year ended December 31, 1998 and to all references to our Firm included in
this registration statement.
ARTHUR ANDERSEN LLP
Vienna, Virginia
November 18, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Certified Public Accountants
OpenROUTE Networks, Inc.
Westborough, Massachusetts
We hereby consent to the inclusion in this Proxy Statement/Form S-4 of Netrix
Corporation of our report dated February 12, 1999 on the consolidated balance
sheet of OpenROUTE Networks, Inc. and subsidiaries as of December 31, 1998 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. We also consent to the reference to our firm
under the caption "Experts".
BDO Seidman, LLP
Boston, Massachusetts
November 19, 1999
<PAGE>
Exhibit 23.3
Consent of Independent Accountants
We consent to the incorporation by reference in this Proxy Statement/Form S-4 of
Netrix Corporation of our report dated February 11, 1998, except as to the
segment information for the years ended December 31, 1997 and 1996 presented in
Note 8, for which the date is March 26, 1999, on our audits of the consolidated
financial statements of OpenROUTE Networks, Inc. as of December 31, 1997 and
1996, and for the two years ended December 31, 1997. We also consent to the
reference to our firm under the caption "Experts".
Pricewaterhouse Coopers, LLP
Boston, Massachusetts
November 19, 1999
<PAGE>
Exhibit 99.1
PROXY CARD FOR COMMON STOCK
SOLICITED BY BOARD OF DIRECTORS
NETRIX CORPORATION
PROXY FOR SPECIAL MEETING
The undersigned hereby appoints Steven T. Francesco and Peter J. Kendrick and
each of them, as attorneys of the undersigned, with full power of substitution,
to vote all shares of Netrix common stock that the undersigned is entitled to
vote at the Special Meeting of Stockholders of Netrix Corporation to be held on
Wednesday, December 22, 1999, at 9:30 a.m. at the Yale Club, 50 Vanderbilt
Avenue, New York, New York, and at any adjournment or postponement thereof, upon
the applicable matters set forth in the Proxy Statement/Prospectus for such
Special Meeting. The foregoing attorneys are authorized to vote, in their
discretion, upon such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
To vote for a proposal, mark the "FOR" box relating to the proposal. To vote
against a proposal, mark the "AGAINST" box relating to the proposal. To abstain
from voting for a proposal, mark the "ABSTAIN" box relating to the proposal. To
vote in accordance with the board's recommendation, just sign and return this
Proxy. No boxes need to be checked.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSALS:
1. To approve and adopt the Agreement and Plan of Merger dated as of
September 30, 1999, between OpenROUTE Networks, Inc. and Netrix
Corporation and to amend the Certificate of Incorporation of Netrix
Corporation to increase the number of authorized shares of Netrix
common stock from 29 million to 55 million.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In the discretion of the proxies, to vote upon such other business as
may properly come before the meeting, including any adjournment or
postponement thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Mark here if you plan to attend the Special Meeting [ ]
When shares are held by joint tenant, both should sign. When signing as
attorney, executor, administrator, trustee, guardian, corporate officer or
partner, please give full title as such. If a corporation, please sign in
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person. This Proxy votes all
shares held in all capacities.
Please be sure to sign and date this Proxy.
Signature: Signature:
- ------------------------------ --------------------------------
Print Name Print Name
Date , 1999
-----------
<PAGE>
Exhibit 99.2
PROXY CARD FOR COMMON STOCK
SOLICITED BY BOARD OF DIRECTORS
OPENROUTE NETWORKS, INC.
PROXY FOR SPECIAL MEETING
The undersigned hereby appoints Bryan R. Holley and Henry Barber and each of
them, as attorneys of the undersigned, with full power of substitution, to vote
all shares of OpenROUTE common stock that the undersigned is entitled to vote at
the Special Meeting of Stockholders of OpenROUTE Networks, Inc. to be held on
Wednesday, December 22, 1999, at 11:00 a.m. at the Yale Club, 50 Vanderbilt
Avenue, New York, New York, and at any adjournment or postponement thereof, upon
the applicable matters set forth in the Proxy Statement/Prospectus for such
Special Meeting. The foregoing attorneys are authorized to vote, in their
discretion, upon such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
To vote for a proposal, mark the "FOR" box relating to the proposal. To vote
against a proposal, mark the "AGAINST" box relating to the proposal. To abstain
from voting for a proposal, mark the "ABSTAIN" box relating to the proposal. To
vote in accordance with the board's recommendation, just sign and return this
Proxy. No boxes need to be checked.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSALS:
1. To approve and adopt the Agreement and Plan of Merger dated as of
September 30, 1999, between OpenROUTE Networks, Inc. and Netrix
Corporation.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In the discretion of the proxies, to vote upon such other business as
may properly come before the meeting, including any adjournment or
postponement thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Mark here if you plan to attend the Special Meeting [ ]
When shares are held by joint tenant, both should sign. When signing as
attorney, executor, administrator, trustee, guardian, corporate officer or
partner, please give full title as such. If a corporation, please sign in
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person. This Proxy votes all
shares held in all capacities.
Please be sure to sign and date this Proxy.
Signature: Signature:
- ------------------------------ --------------------------------
Print Name Print Name
Date , 1999
-----------
