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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-50464
NETRIX CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 54-1345159
(State of Incorporation) (IRS Employer Identification No.)
13595 DULLES TECHNOLOGY DRIVE, 20171
HERNDON, VIRGINIA (Zip Code)
(Address of principal executive offices)
(703) 742-6000
(Registrant's telephone number, including area code)
Indicate by check number whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X__ No__________
At August 9, 1999 there were 11,562,906 shares of the registrant's
Common Stock, $.05 par value per share, outstanding.
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NETRIX CORPORATION
FORM 10-Q
JUNE 30, 1999
INDEX
PAGE NO.
PART I -- FINANCIAL INFORMATION (UNAUDITED)
<S> <C>
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the six
and three months ended June 30, 1999 and 1998 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II -- OTHER INFORMATION
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six Months Ended Three Months Ended
June 30 June 30
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product............................................. $9,932 $10,422 $4,503 $5,427
Service............................................. 3,395 4,649 1,508 2,403
------------ ------------ ------------ ------------
Total revenues................................ 13,327 15,071 6,011 7,830
Cost of revenues:
Product............................................. 4,880 4,696 2,212 2,586
Service............................................. 2,508 2,759 1,057 1,345
------------ ------------ ------------ ------------
Total cost of revenues........................ 7,388 7,455 3,269 3,931
Gross profit............................ 5,939 7,616 2,742 3,899
Operating expenses:
Sales and marketing................................. 3,032 5,986 1,407 3,938
Research and development............................ 3,358 3,243 1,713 1,674
General and administrative.......................... 2,317 2,168 1,218 1,074
Restructuring reserve............................... 900 --- 900 ---
------------ ------------ ------------ ------------
Loss from operations........................... (3,668) (3,781) (2,496) (2,787)
Interest and other income, net............................ (173) (36) (33) (24)
Foreign exchange gain (loss).............................. -- 47 -- (6)
------------ ------------ ------------ ------------
Net Loss................................................. (3,841) (3,770) (2,529) (2,817)
Dividends on preferred stock............................ (40) --- (40) ---
------------ ------------ ------------ ------------
Net loss attributable to common stock................... (3,881) (3,770) (2,569) (2,817)
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive losses.............................. (101) (56) (73) (19)
Comprehensive loss...................................... ($3,942) ($3,826) ($2,602) ($2,836)
============ ============ ============ ============
- --------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share......................... ($0.34) ($0.37) ($0.22) ($0.26)
============ ============ ============ ============
Shares used in per share calculation..................... 11,493 10,322 11,496 10,993
============ ============ ============ ============
See notes to unaudited condensed consolidated financial statements
2
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NETRIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30, December 31,
1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $3,878 $2,488
Accounts receivable, net of allowance for doubtful
accounts of $675 and $794, respectively............... 5,928 7,499
Inventories, net............................................ 4,712 5,265
Other current assets........................................ 276 472
------------------ ------------------
Total Current assets: 14,794 15,724
Property and equipment, net of accumulated depreciation
of $21,257 and $20,473, respectively......................... 3,159 3,823
Deposits and other assets......................................... 219 165
Goodwill, net of accumulated amortization of $1,844
and $1,712, respectively.................................... 397 529
================== ==================
TOTAL ASSETS $18,569 $20,241
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.............................................. $428 $2,167
Accounts payable............................................ 2,556 3,011
Accrued liabilities......................................... 3,249 2,946
------------------ ------------------
Total current liabilities................................. 6,233 8,124
Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares
authorized; 298,187 issued and outstanding, preference
in liquidation......................................... 4,140 ---
Common stock, $0.05 par value; 15,000,000
shares authorized; 11,532,028 and 11,490,000
shares issued and outstanding, respectively............ 577 575
Warrants.................................................... 412 257
Additional paid-in capital.................................. 57,583 57,679
Accumulated other comprehensive loss........................ (221) (120)
Accumulated deficit......................................... (50,155) (46,274)
------------------ ------------------
Total stockholders' equity................................. 12,336 12,117
------------------ ------------------
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $18,569 $20,241
================== ==================
3
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NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Six Months Ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
------------ ---------
<S> <C> <C>
Net loss................................................... ($3,841) ($3,770)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization......................... 917 1,248
Non-Cash Interest Expense............................. 97 ---
Changes in assets and liabilities -
Accounts receivable............................. 1,571 (1,229)
Inventories..................................... 553 368
Other current assets............................ 196 389
Deposits and other assets....................... (54) 195
Accounts payable................................ (455) (369)
Accrued liabilities............................. 303 (383)
Other liabilities............................... --- (97)
------------ ---------
Net cash used in operating activities........... (712) (3,551)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... (121) (666)
------------ ---------
Net cash (used in) provided by investing activities... (121) (666)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement......................... 4,100 2,076
Payments on line of credit, net........................ (1,739) (52)
Proceeds from exercise of stock options................. 4 14
Proceeds from employee stock purchase plan.............. 48 90
Payment of Private Placement Costs...................... (88) ---
------------ ---------
Net cash provided by (used in) financing activities..... 2,325 2,128
Effect of foreign currency exchange rate changes on
cash and cash equivalents............................... (101) (56)
------------ ---------
1,391 (2,145)
Cash and cash equivalents, beginning of period........................... 2,488 2,758
============ =========
Cash and cash equivalents, end of period................................. $3,879 $613
============ =========
Supplemental disclosure of cash flow information
Cash paid during the period for interes $204 $88
Cash paid during the period for income taxes......... --- ---
See notes to unaudited condensed consolidated financial statements.
4
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NETRIX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Netrix Corporation ("Netrix" or the "Company") is a worldwide provider
of voice 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.
The Company 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 the Company and its subsidiaries.
All significant intercompany transactions have been eliminated.
The Company'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 the Company, 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. The Company 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.
RISKS AND OTHER IMPORTANT FACTORS
For the three months ended June 30, 1999, the Company reported revenues
of approximately $6.0 million and a net loss of approximately $2.5 million,
compared to revenues of approximately $7.8 million and a net loss of
approximately $2.8 million for the three months ended June 30, 1998. For the six
months ended June 30, 1999, revenues were approximately $13.3 million and the
net loss was approximately $3.8 million, compared to revenues of approximately
$15.1 million and a net loss of approximately $3.8 million for the six months
ended June 30, 1998.
On May 14,1999 the Company completed a private placement by selling
approximately 298,187 shares of Series A 8% Convertible Preferred Stock, par
value $.05 per share, at a price of $13.75 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 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. We estimate the dividend to be $1.2 million. We will
reflect the dividend as a non-cash charge to earnings in our consolidated
statements of earnings in connection with the lapse of the transfer restrictions
on the underlying Common Stock, beginning in August 1999 and through May 2000
when all restrictions lapse . 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 approximately $4.0 million to be used to fund operations, 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
5
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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 within 90 days after
filing.
As a result of the combination of the net loss for the quarter and the
proceeds of the private placement, the Company's tangible net worth increased
from $9.9 million at March 31, 1999 to $11.6 million at June 30, 1999. The
Company'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 the Company was
in violation of this covenant. This covenant violation allowed the Company's
lending institution to call for collection of the outstanding loan balance. On
April 12, 1999 the lending institution granted the Company 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 the Company'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 and June 30, 1999, the Company was in compliance with the new
covenant, and management believes that this new covenant will be adequate for
the Company to operate under in the foreseeable future. However, there can be no
assurances that the Company 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 the Company is dependent on its ability
to generate net income or to increase its net worth by the sale of additional
equity. The Company'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.
The Company'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, the Company has been unable to achieve sufficient
incremental growth in new product sales to generate net income and there can be
no assurances that the Company will be able to adequately increase new product
sales and generate net income in the future.
The success of the Company 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 at increasing sales of
its products. The Company'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 the Company will be able
to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sale of assets, including technologies or
the sale of debt or equity securities. Although the Company 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 the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company. The
Company has implemented cost control measures and is continually evaluating
expense levels to mitigate its liquidity risk.
For the six months ended June 30, 1999 and June 30, 1998, the Company's
operating activities used approximately $713,000 and $3.6 million of cash,
respectively. The cash used by operations was primarily due to continued net
losses from operations. The success of the Company is also dependent on its
ability to generate adequate cash for operations and capital needs. At June 30,
1999, the Company had approximately $3.9 million in cash and cash equivalents
with approximately $428,000 outstanding of the approximately $1.4 million
available under the line of credit agreement. The Company is relying on future
sales and the collection of the related accounts receivable to meet its cash
obligations. The Company may be unable to meet these obligations as they become
due and may be required to curtail its operations. If the Company is required to
curtail its operations there can be no assurances that the carrying value of the
Company's assets will be fully realized.
The Company 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
the Company 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
6
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that adequate funds will be available, or available on terms that are reasonable
or acceptable to the Company. If the Company is unable to generate additional
equity and adequate cash, there will be a material and adverse effect on the
business and financial condition of the Company, to the extent that a sale,
liquidation or restructuring of the Company 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 the Company'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, the Company relies on reseller channels that
are not under its control for a significant portion of its revenues,
particularly in its international regions. Also, while the Company has generally
been able to obtain adequate supplies of components to date, the interruption or
termination of the Company's current manufacturing relationships could have an
adverse effect on the Company'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.
The Company 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
the Company to report financial and descriptive information about its reportable
operating segments. The Company 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 (in thousands):
Inventories consisted of the following (in thousands):
June 30, 1999 December 31, 1998
------------- ---------------
Raw materials $290 $350
Work in process 1,607 364
Finished goods 2,815 4,551
============= ===============
Total inventories $4,712 $5,265
============= ===============
5. COMMITMENTS AND CONTINGENCIES:
LINE OF CREDIT
In November 1997, the Company 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, the Company'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.
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The Company'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 the Company was in violation of this covenant. This covenant violation
allowed the Company's lending institution to call for collection of the
outstanding loan balance. On April 12, 1999 the lending institution granted the
Company 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 the Company'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 June 30, 1999, the Company was in compliance with the
new covenant, and management believes that this new covenant will be adequate
for the Company to operate under in the foreseeable future. However, there can
be no assurances that the Company will not violate the new covenant or that the
outstanding loan balance will not be called by the Company'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, the Company 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, the Company 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 the Company's assets. At June 30, 1999, the
Company had approximately $428,000 outstanding of the approximately $1.4 million
available under the line of credit agreement. At December 31, 1998, the Company
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, the Company adopted the Statement
on Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The Company's two reportable segments
are products and services. The Company evaluates the performance of its segments
based on gross profit. Under SFAS No. 131, the Company 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 (in thousands):
Revenues consisted of the following (in thousands):
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Six Months Ended June 30, Three Months Ended June 30,
-------------------------- -----------------------------
Product Group 1999 1998 1999 1998
<S> <C> <C> <C> <C>
2200 $4,821 $3,744 $2,030 $2,580
2500 3,413 1,927 1,781 901
S1000 641 1,482 257 550
S10 829 2,621 387 1,112
Telecom 229 648 48 284
---------- ---------- ---------- -----------
Total product revenues 9,932 10,422 4,503 5,427
Service revenues 3,395 4,649 1,508 2,403
========== ========== ========== ===========
Total revenues $13,327 $15,071 $6,011 $7,830
========== ========== ========== ===========
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GEOGRAPHIC INFORMATION
The Company 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.
The Company's product and service revenues for 1999 and 1998 were
generated in the following geographic regions (in thousands):
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Six Months Ended June 30, Three Months Ended June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
United States $6,891 $6,067 $3,308 $3,086
Europe, Middle East 4,544 6,294 2,005 3,054
and Africa
Pacific Rim and Other 1,892 2,710 698 1,690
========== ========= ========== ==========
Total $13,327 $15,071 $6,011 $7,830
========== ========= ========== ==========
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Included in domestic product and service revenues are sales through systems
integrators and distributors to the Federal Government of approximately $188,000
and $183,000 for the six months ended JUNE 30 1999 and 1998, respectively. For
the three months ended June 30, 1999 and 1998 these sales were approximately
$11,000 and $94,000, respectively.
The Company's long-lived assets were located as follows:
Six Months Ended June 30,
-------------------------
1999 1998
United States $3,304 $4,808
United Kingdom 210 272
Germany 14 25
Italy 28 76
========== ==========
Total long-lived assets $3,556 $5,181
========== ==========
SIGNIFICANT CUSTOMERS
Customers that accounted for greater than 10% of total revenues in 1999
and 1998 are described below (in thousands).
Six Months Ended June 30,
-------------------------
1999 1998
Distributor 1
Product $1,897 *
Service * *
---------- ----------
Subtotal 1,897 *
Distributor 2
Product * $1,378
Service * *
---------- ----------
Subtotal * $1,378
========== ==========
Total 1,897 1,378
========== ==========
7. RESTRUCTURING CHARGE:
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In April 1999, the Company 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 approximately 36 employees across all functional areas of
the Company, and approximately $57,000 of accrued facility costs resulting from
the consolidation of facilities and premature termination of various office
leases. As of June 30, 1999, severance of approximately $493,000 and lease
termination costs of approximately $57,000 have been paid, and the remaining
severance payments of approximately $350,000 will occur over approximately a six
month period. The Company 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. The Company had no foreign
exchange gains or losses for the first half of 1999, and had a net translation
gain of approximately $47,000 for the first half of 1998.
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 six months ended June 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 approximately 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 the Company'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 the Company.
We estimate the dividend to be $1.2 million. We will reflect the dividend as a
non-cash charge to earnings in our consolidated statements of earnings in
connection with the lapse of the transfer restrictions on the underlying Common
Stock, beginning in August 1999 and through May 2000 when all restrictions
lapse. 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 approximately $4.0 million to be used to fund operations, 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 within 90 days after
filing.
10
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NETRIX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below under the caption "Certain Factors That May Affect Future Results".
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS. The company announced on April 21, 1999 the
appointment of two senior telecommunications executives to its board of
directors. The additions of Douglas J. Mello and Richard Yalen, formerly of The
Bell Atlantic Corporation (NYSE: BEL) and Cable and Wireless, USA (NYSE: CWP),
respectively, expands the Netrix board from 4 to 6 members. The appointments
reflect a recruitment strategy adopted by the Company's new Chairman, Steven T.
Francesco, to attract to the Board of Directors senior executives with
significant telecommunications industry experience and contacts. Both Mello and
Yalen have led telecommunications service providers that are deploying voice and
data networks based on ATM, frame relay and voice over Internet protocol.
The board also formed two new oversight committees. Board members
Richard Yalen and William T. Rooker, Jr. will head the audit committee, and
John Faccibene and Douglas Mello will direct the company's compensation
committee.
The Company announced on April 26, 1999 that its newly elected Board of
Directors is overseeing an immediate operational restructuring as part of an
overall plan to return to profitability. The effort is focusing on a reduction
of fixed costs, outsourcing non-critical manufacturing and services, and an
accelerated phase-out of older/low margin products. In addition, Netrix is
aggressively expanding its direct sales force and focusing on service providers
such as ISP's, CLEC's and telecommunication carriers. In connection with the
operational restructuring, the Company has implemented a reduction-in-force
that, when combined with previous actions, has reduced headcount approximately
25% across all functional areas since the beginning of 1999.
The Company announced on May 11, 1999, that Stephen T. Francesco,
Chairman, was appointed CEO, and that Lynn C. Chapman will maintain his position
as President and assume the role of COO.
On May 14,1999 the Company completed a private placement by selling
approximately 298,187 shares of Series A 8% Convertible Preferred Stock, par
value $.05 per share, at a price of $13.75 per share. In connection with the
private placement, the Company received net proceeds of approximately $4.0
million to be used to fund operations, severance and other restructuring
activities, and marketing and sales initiatives.
On June 16, 1999, the Company announced the appointment of a senior
Microsoft executive to the board. Mr. Greg McNulty has over 23 years of
experience in the high technology sales and marketing environment, and is Senior
Group Manager of Business Development for Microsoft-Web TV Network Services
managing Web TV's relationships with RBOC's, ILEC's, CLEC's, and ISP's.
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On July12, 1999, the Company issued a joint press release with Sonus
Communications, Inc. announcing a significant milestone in the development of
the Voice Over Internet Protocol (VoIP) telephony market. The VoIP services that
Sonus Communications provides for telecommunications carriers to China using
Netrix' 2210 Series Gateways is now comparable in terms of voice quality,
connect rates and dial tone delay with direct service from China Telecom, at an
average 30 percent lower base cost to carriers.
On July 27, 1999, the Company announced the appointment of Sean Rooney
as Senior Vice President of Sales. Rooney, formerly General manager of
Diversified markets for Sony Electronics, Inc., will lead a staff of 20
salespeople including 15 newly-acquired professionals from industry competitors.
On August 5, 1999, the Company announced the appointment of Peter J.
Kendrick as Vice president and Chief Financial Officer, replacing Norman Welsch
in his day to day activities. Mr. Kendrick joins the Company with 16 years
experience as a CFO and former investment banker with a background in financial
operations, initial public offerings and mergers and acquisitions.
BACKGROUND. The results for second quarter and first half of 1999
reflect an overall decrease in the revenues and expenses of the Company from the
comparable period in 1998. During the first half 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 products, the 2210, which combines the
Republic technology with Netrix switching capability, and the 2550, Netrix
enhanced switching platform. Geographically, during the first half of 1999, the
Company continued to experience declining revenues from International customers,
which was partially offset by an increase in revenues from Domestic customers.
In April 1999, the Company 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 thousand of accrued severance and benefit costs associated with a
reduction-in-force of approximately 36 employees across all functional areas of
the Company, 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 three months ended June 30, 1999, revenues were
approximately $6.0 million, a decrease of approximately $1.8 million, or 23%,
compared to revenues of approximately $7.8 million for the three months ended
June 30, 1998. The quarterly decrease in revenues was due to a combined decrease
in product revenues of approximately $924,000, or 17%, to $4.5 million, and a
decrease in service revenues of approximately $895,000, or 37%, to $1.5 million.
For the six months ended June 30, 1999, revenues were approximately $13.3
million, a decrease of approximately $1.7 million, or 12%, compared to revenues
of approximately $15.1 million for the six months ended June 30, 1998. The
decrease in product revenues for the three and six month periods is the net
result of a decrease in revenues from older products, which was partially offset
by higher revenues from the 2210 and 2550 series products. The decrease in
service revenues is the result of cancellations and non-renewals of maintenance
contracts by various customers using legacy equipment.
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GROSS PROFIT. For the three months ended June 30, 1999, gross profit
decreased by approximately $1.2 million, or 30%, to approximately $2.7 million,
down from approximately $3.9 million in the year earlier quarter. As a
percentage of revenues, gross profit was approximately 46% and 50% for the
quarters ended June 30, 1999 and 1998, respectively, an overall decrease of
approximately 4% of revenues. Product gross profit decreased from approximately
52% in the second quarter of 1998 to approximately 51% in the second quarter of
1999. The gross profit for service revenues decreased from approximately 44% in
the second quarter of 1998 to approximately 30% in the second quarter of 1999.
For the six months ended June 30, 1999, gross profit decreased by approximately
$1.7 million, or 22%, to approximately $5.9 million, down from approximately
$7.6 million in the year earlier period. As a percentage of revenues, gross
profit was approximately 45% and 51% for the six months ended June 30 1999 and
1998, respectively, an overall decrease of approximately 6% of revenues. Product
gross profit decreased from approximately 55% in the first half of 1998 to
approximately 51% in the first half of 1999. The three and six month decrease in
product gross profit is primarily the combined result of a lower-margin product
mix of shipments, 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
gross profit for service revenues decreased from approximately 41% in the first
half of 1998 to approximately 26% in the first half of 1999. The three and six
month decrease in service gross profit is primarily the result of lower service
revenues that were partially offset by a reduction in service costs.
SALES AND MARKETING. Sales and marketing expenses decreased by
approximately $2.5 million, or 64%, to approximately $1.4 million for the second
quarter of 1999, down from approximately $3.9 million for the second quarter of
1998. The quarterly decrease is the result of reduced bad debt expenses of
approximately $1.1 million, reduced personnel costs of approximately $625,000,
reduced marketing materials expenditures of approximately $300,000, reduced
travel costs of approximately $160,000, lower consigned equipment obsolescence
write-offs of approximately $200,000, and other cost reductions of approximately
$150,000. For the first half of 1999, sales and marketing expenses were
approximately $3.0 million, a decrease of approximately $3.0 million, or 50%,
when compared to the six month period a year earlier. The quarter and year over
year decreases are the result of a decrease in sales and marketing personnel in
international and domestic operations, and curtailment of trade show
initiatives, advertising and marketing collateral, combined with higher expenses
in 1998 associated with new product rollouts.
RESEARCH AND DEVELOPMENT. For the three months ended June 30, 1999,
research and development expenses were approximately $1.7 million, equivalent to
the three months ended June 30, 1998. For the six months ended June 30, 1999,
research and development expenses were approximately $3.4 million, up
approximately $115,000, or 4%, from the year earlier period. The year over year
increase in research and development expenses is due primarily to an increase in
personnel costs of approximately $100,000. All of the Company's research and
development costs were charged to operations as incurred during the periods
reported.
GENERAL AND ADMINISTRATIVE. General and administrative (G&A) expenses
for the three and six months ended June 30, 1999 were approximately $1.2 million
and $2.3 million, respectively, compared to approximately $1.1 million and $2.2
million in the corresponding year earlier periods. The increase in G&A was the
result of higher accounting and legal expenses associated with the restructuring
of operations and the renegotiation of the line of credit and default waiver
with the Company's lending institution, and costs associated with the renewal of
the headquarters office lease.
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RESTRUCTURING RESERVE. In April 1999, the Company 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 approximately 36 employees across all
functional areas of the Company, 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.
INTEREST AND OTHER INCOME, NET. The Company had net interest expenses
of approximately $33,000 in the second quarter of 1999 compared to approximately
$24,000 in the same period in 1998. The quarter over quarter increase was
primarily the result of lower interest income due to less cash available for
overnight investments. For the first half of 1999, net interest expense was
approximately $173,000, compared to approximately $36,000 for the first half of
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 the
Company's lending institution, approximately $26,000 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. The Company had no foreign exchange
gains for the first quarter of 1999, compared to a $6,000 foreign exchange loss
in the year earlier quarter. For the six months ended June 30, 1999, the Company
had no foreign exchange gains or losses, compared to a foreign exchange gain of
approximately $47,000 for the six months ended June 30, 1998.
NET LOSS. For the second quarter of 1999, the Company had a net loss of
approximately $2.5 million, compared to a net loss of approximately $2.8 million
in second quarter of 1998. For the first half of 1999, the Company had a net
loss of approximately $3.8, equivalent to the net loss for the first half of
1998. The three and six month changes in net loss were the combined result of
all of the above factors.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had approximately $3.9 million of cash
and cash equivalents and net working capital of $8.6 million, compared to
approximately $2.5 million of cash and cash equivalents and net working capital
of $7.6 million at December 31, 1998. For the six months ended June 30, 1999 and
1998, total cash used by operations was approximately $713,000 and $3.6 million,
respectively. The cash used by operations was primarily due to continued net
losses from operations. The decrease in cash used in operating activities during
the first half of 1999, when compared to the same period in 1998, was primarily
the result of a decrease in accounts receivable of approximately $1.6 million in
1999 compared to an increase in accounts receivable of approximately $1.2
million for the first half of 1998. During the first half of 1999, the Company
used cash to pay-down the line of credit by approximately $1.7 million.
In May 1999, the Company received net proceeds of approximately $4.0
million from a private placement of Series A Convertible Preferred Stock. In
April 1998, the Company received net proceeds of approximately $2.1 million
through a private placement of Common Stock.
Capital acquisitions during the first half of 1999 were approximately
$121,000 compared to $666,000 in the first half of 1998. These acquisitions were
primarily equipment used for research and development purposes and computer and
test equipment.
In November 1997, the Company 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, the Company'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
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1998, the lending institution reinstated a sub-line of credit up to an amount of
$600,000 for selected foreign accounts receivable. Borrowings under the line are
based on qualified domestic accounts receivable and are collateralized by the
Company's assets. At June 30, 1999, the Company had approximately $3.9 million
in cash and cash equivalents with approximately $428,000 outstanding of the
approximately $1.4 million available under the line of credit agreement. At
December 31, 1998, the Company had approximately $2.4 million of eligible
borrowing availability and approximately $2.2 million outstanding under the line
of credit. As of June 30, 1999, the Company's domestic accounts receivable have
generated adequate borrowing for operations, and the Company 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, the Company's tangible net worth increased
from $9.9 million at March 31, 1999 to $11.6 million at June 30, 1999. The line
of credit agreement negotiated in November 1997 required the Company to maintain
a tangible net worth of at least $13.5 million measured at the end of each
month. Since October 31, 1998 the Company has been in violation of this
covenant. This covenant violation allows the Company's lending institution to
call for collection of the outstanding loan balance. On April 12, 1999 the
lending institution granted the Company 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 the Company'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. As of June 30, 1999, the Company was in compliance with the
new covenant, and management believes that this new covenant will be adequate
for the Company to operate under in the foreseeable future. However, there can
be no assurances that the Company 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 the Company 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. The Company'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 the Company will be able
to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sale of assets including technologies or
the sale of debt or equity securities. Although the Company 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 the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company. The
Company 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.
Aside from the well-known problems with the use of certain 2-digit date formats
as the year changes from 1999 to 2000, the Year 2000 is a special case leap
year, and dates such as 9/9/99 were used by certain organizations for special
functions. The problem exists for many kinds of software and hardware, including
mainframes, mini-computers, PCs, and embedded systems.
Netrix Corp has divided the year 2000 task into three areas of concern,
Netrix Product, Netrix Suppliers, and Netrix Internal Systems. The Company's
core products have been reviewed, tested and if required, corrective measures
have been implemented to ensure no year 2000 issues. This task is complete with
information regarding the Netrix Products available via Internet access and
software release notes. NETRIX suppliers are being asked to respond to the year
2000 issue. This will be an ongoing process and is considered a low risk to the
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Company. Netrix has audited its Internal Systems and corrective measures are
being taken to correct identified year 2000 issues.
Internal Systems represent the largest area of concern for the Company.
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. The Company has identified
all major hardware and software components that need to be assessed and has
performed an assessment of all hardware and software identified.
The Company has updated a majority of hardware in use and is in the
process of converting all software applications that are known to have year 2000
issues. In August 1999, NETRIX successfully completed the Y2K software
conversion upgrade for the Company's primary business / operations application
for live production use in the third quarter of 1999.
Vendors or other third parties that could affect the Company'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 the Company's departmental
directors has been instructed to communicate with their major suppliers with
respect to such vendors' year 2000 compliance status. All of the Company'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 the Company'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 the Company's systems, would not have an
adverse effect on the Company.
Although the Company 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. The
Company believes that the conversion and modification efforts by the Company and
its vendors will mitigate the risks associated with year 2000 issues. If,
however, the Company 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, the Company's operations may be
adversely effected.
The Company does not intend to develop any contingency plans to address
possible failures by the Company or its vendors to the year 2000 compliant with
respect to information technology systems. The Company does not believe that
such contingency plans are required because it believes that the Company and its
information technology suppliers will be year 2000 compliant before January
2000. The Company 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, but expects to develop such plans by
September 1999.
While Year 2000 issues present a potential risk to the Company's
internal systems, distribution and supply chain, and facilities, the Company is
minimizing its risk with a concentrated effort. The Company is performing an
extensive assessment and is in the process of testing and remediating mission
critical components. The Company has already identified and resolved a majority
of these components, and expects that all components will be resolved by the
fourth quarter. 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 cost to address and
resolve Year 2000 issues will approximate $500,000, and these costs have been
included in the Company's operating plan for 1999.
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PART II -- OTHER INFORMATION
ITEM 1. NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the period ended June 30, 1999, we raised funds through an
offering of convertible preferred stock. We also compensated certain persons for
services they provided to us by issuing warrants to them.
We offered and sold 298,187 shares of Series A 8% convertible preferred
stock in a private offering exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act. We did not use an underwriter in
the offering, although we did compensate certain persons who introduced us to
investors, as described below. We sold the preferred stock at $13.75 per share,
which represented five times the price of our common stock at the time the
shares were issued. Each share of preferred stock is convertible into shares of
our common stock at a conversion price of $2.75 per share (representing five
shares of common stock for every share of preferred stock). We have filed a
registration statement related to the resale of the common stock underlying the
preferred stock, however, most of this common stock is subject to limitations on
transfer until May 2000. The resale limitations will be lifted prior to May 2000
as follows:
o if the average closing bid price for our stock price is at least
$3.43 for 10 consecutive trading days, 25% of the common stock
may be sold;
o if the average closing bid price for our stock price is at least
$4.29 for 10 consecutive trading days, an additional 25% of the
common stock may be sold;
o if the average closing bid price for our stock price is at least
$5.36 for 10 consecutive trading days, an additional 25% of the
common stock may be sold; and
o if the average closing bid price for our stock price is at least
$6.71 for 10 consecutive trading days, all remaining shares will
may be sold.
In April 1999, in connection with obtaining an amendment and waiver of
certain covenants contained in our credit agreement, we issued to Coast Business
Credit, a division of Southern Pacific Bank, warrants to acquire 50,000 shares
of common stock. The warrants are exercisable at $2.00 per share, and are
exercisable until June 2004. In issuing these warrants, we relied upon the
exemption from registration under the Securities Act provided by Section 4(2) of
the Securities Act.
In May 1999 we issued 25,000 warrants to Renwick Securities, Inc. as
compensation for financial consulting services they provided to us. 10,000 of
the warrants are exercisable at $3.00 per share, 7,500 are exercisable at $5.00
per share and 7,500 are exercisable at $7.00 per share. All of these warrants
expire on March 30, 2004. In issuing these warrants, we relied upon the
exemption from registration under the Securities Act provided by Section 4(2) of
the Securities Act.
In June 1999, we issued warrants to a consultant who is providing
advice to us related to reducing costs associated with certain of our
operations. As consideration, we issued 7,500 warrants to the consultant,
exercisable through June 2004 at $3.00 per share. In issuing these warrants, we
relied upon the exemption from registration under the Securities Act provided by
Section 4(2) of the Securities Act.
In connection with the offering of the Series A preferred stock, we
agreed to pay compensation to certain persons who introduced investors to us. We
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offered these persons the right to receive payment either (1) in cash or (2) in
warrants to acquire common stock, and each of such persons requested payment in
warrants. Accordingly, in June 1999 we issued 17,818 warrants exercisable at
$3.50 per share and 32,000 warrants exercisable at $2.75 per share to these
persons. Each warrant expires in 2004. In issuing these warrants, we relied upon
the exemption from registration under the Securities Act provided by Section
4(2) of the Securities Act.
ITEMS 3 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 Certificate of Designations for the Series A preferred stock.
4.2. Supplemental Certificate of Designations for the Series A preferred
stock.
10.1. Subscription Agreement for the Series A preferred stock.
10.2 Warrant Agreement with Coast Business Credit.
10.3 Form of Stock Purchase Warrant issued to consultants and to persons who
introduced investors in the Series A 8%
convertible preferred stock.
10.3 Amendment to Loan and Security Agreement with Coast Business Credit, a
division of Southern Pacific Bank, dated as of April 19, 1999.
(b) Reports on form 8-k
No report on Form 8-K was filed during the quarter ended June 30, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NETRIX CORPORATION
Date: August 16, 1999
By:/s/ LYNN C. CHAPMAN
_________________________________________
LYNN C. CHAPMAN
PRESIDENT AND CHIEF OPERATING OFFICER
By:/s/ PETER J. KENDRICK
_________________________________________
PETER J. KENDRICK
VICE PRESIDENT FINANCE AND
ADMINISTRATION AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL OFFICER)
By: /s/ NORMAN F. WELSCH
_________________________________________
NORMAN F. WELSCH
PRINCIPAL ACCOUNTING OFFICER)
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EXHIBIT INDEX
CERTIFICATE OF DESIGNATIONS
OF
PREFERRED STOCK
OF
NETRIX CORPORATION
TO BE DESIGNATED
SERIES A 8% CONVERTIBLE PREFERRED STOCK
------------------------
PURSUANT TO SECTION 151(G) OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
------------------------
The undersigned DO HEREBY CERTIFY that the following resolution was duly
adopted by the Board of Directors of Netrix Corporation, a Delaware corporation
(the "Corporation"), at a meeting duly convened and held, at which a quorum was
present and acting throughout:
"RESOLVED, that pursuant to the authority conferred on the Board of
Directors of the Corporation (the "Board of Directors") by the Corporation's
Certificate of Incorporation, the issuance of a series of preferred stock,
$.05 par value per share, of the Corporation which shall consist of 290,925
shares of preferred stock be, and the same hereby is, authorized; and the
President and Secretary or Assistant Secretary of the Corporation be, and
they hereby are, authorized and directed to execute and file with the
Secretary of State of the State of Delaware the Certificate of Designations
of Preferred Stock of the Corporation fixing the designations, powers,
preferences and rights of the shares of such series, and the qualifications,
limitations or restrictions thereof (in addition to the designations, powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, set forth in the Certificate of Incorporation which may be
applicable to the Corporation's preferred stock), as follows:
1. NUMBER OF SHARES; DESIGNATION. A total of 290,925 shares of preferred
stock, par value $.05 per share, of the Corporation are hereby designated as
Series A 8% Convertible Preferred Stock (the "Series"). The number of
authorized shares of the Series may be reduced by the Board of Directors by
the filing of a certificate pursuant to the provisions of the General
Corporation Law of the State of Delaware (the "GCL") stating that the
reduction has been so authorized.
2. RANK. The Series shall, with respect to payment of dividends,
redemption payments and rights upon liquidation, dissolution or winding
up of the affairs of the Corporation, rank:
(i)senior and prior to the Common Stock, par value $.05 per share, of the
Corporation (the "Common Stock"), and any additional series of
preferred stock which may in the future be issued by the Corporation
<PAGE>
and are designated in the amendment to the Certificate of Incorporation
or the certificate of designations establishing such additional
preferred stock as ranking junior to the shares of the Series. Any
shares of the Corporation's capital stock which are junior to the
shares of the Series with respect to the payment of dividends are
hereinafter referred to as "Junior Dividend Shares" and any shares
which are junior to the shares of the Series with respect to
redemption, payment and rights upon liquidation, dissolution or winding
up of the affairs of the Corporation are hereinafter referred to as
"Junior Liquidation Shares."
(ii) PARRI PASSU with any additional series of preferred stock which may
in the future be issued by the Corporation and are designated in the
amendment to the Certificate of Incorporation or the certificate of
designations establishing such additional preferred stock as ranking
equal to the shares of the Series or which do not state they are Junior
Dividend Shares or Senior Dividend Shares (as defined below). Any
shares of the Corporation's capital stock which are equal to the shares
of the Series with respect to the payment of dividends are hereinafter
referred to as "Parity Dividend Shares" and any shares which are equal
to the shares of the Series with respect to redemption, payment and
rights upon liquidation, dissolution or winding up of the affairs of
the Corporation are hereinafter referred to as "Parity Liquidation
Shares."
(iii) Senior to any additional series of preferred stock which may in the
future be issued by the Corporation and are designated in the amendment
to the Certificate of Incorporation or the certificate of designations
establishing such additional preferred stock as ranking senior to the
shares of the Series. Any shares of the Corporation's capital stock
which are senior to the shares of the Series with respect to the
payment of dividends are hereinafter referred to as "Senior Dividend
Shares" and any shares which are senior to the shares of the Series
with respect to redemption, payment and rights upon liquidation,
dissolution or winding up of the affairs of the Corporation are
hereinafter referred to as "Senior Liquidation Shares."
The Corporation may issue additional shares of capital stock without the
consent of the holders of the Series.
3. DIVIDENDS. (a) The dividend rate on shares of the Series shall be $1.10
per share per annum. Dividends on shares of the Series shall be fully
cumulative, accruing, without interest, from the date of original issuance of
the Series through the date of redemption or conversion thereof, and shall be
payable in arrears, when, as and if declared by the Board of Directors out of
funds legally available for the payment of dividends, on April 30 and October
31 of each year, commencing October 31, 1999, except that if such date is not
a business day then the dividend shall be payable on the first immediately
succeeding business day (as used herein, the term "business day" shall mean
any day except a Saturday, Sunday or day on which banking institutions are
legally authorized to close in Herndon, Virginia) (each such period being
hereinafter referred to as a "Dividend Period"). Dividends shall be payable
in cash or Common Stock, at the discretion of the Company. The means of
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payment (cash or Common Stock) of each dividend shall be designated by the
Board of Directors at the time it fixes the record date for determining
holders of shares of the Series entitled to receive such dividend payment.
Each dividend shall be paid to the holders of record of shares of the Series
as they appear on the stock register of the Corporation on the record date,
not less than 10 nor more than 60 days preceding the payment date thereof, as
shall be fixed by the Board of Directors. If any dividend is designated as
being payable in Common Stock, the amount of Common Stock issued in
satisfaction of such dividend shall be determined by dividing the amount of
the dividend payable with respect to each share of the Series by the Current
Market Price (as defined in Section 10) for the Common Stock as of the close
of business on the business day the Board of Directors fixes the record date
for determining the holders entitled to receive such dividend. Dividends
payable for each Dividend Period shall be computed on the basis of a 360-day
year of twelve 30-day months and rounded to the nearest cent. No fractional
share of Common Stock shall be issued with respect to any dividend paid in
Common Stock. The aggregate number of shares issuable to each holder of
shares of the Series will be calculated, and in lieu of issuing a fractional
share the Corporation shall pay the cash value of such fractional share as
determined by reference to the Current Market Price used for purposes of
calculating the number of shares of Common Stock to be issued in such
dividend. Dividends on account of arrearages for any past Dividend Period may
be declared and paid at any time, without reference to any regular dividend
payment date, to holders of record on such date, not exceeding 45 days
preceding the payment date thereof, as may be fixed by the Board of Directors
of the Corporation. Dividends shall accrue regardless of whether the
Corporation has earnings, whether there are funds legally available therefor
and whether declared. No interest shall be payable with respect to any
dividend payment that may be in arrears. Holders of Shares of the Series
called for redemption between the close of business on a dividend payment
record date and the close of business on the corresponding dividend payment
date shall, in lieu of receiving such dividend on the dividend payment date
fixed therefor, receive such dividend payment on the date fixed for
redemption together with all other accrued and unpaid dividends to the date
fixed for redemption. The holders of shares of the Series shall be not be
entitled to any dividends other than the cash dividends provided for in this
paragraph 3.
(b) No dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on any Parity Dividend
Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and set aside for payment
for all accrued dividends with respect to the Series through the most recent
Dividend Period ending on or prior to the date of payment, or setting apart
for payment, of such dividends on such Parity Dividend Shares. Unless
dividends accrued and payable but unpaid on shares of the Series and any
Parity Dividend Shares at the time outstanding have been paid in full, all
dividends declared by the Corporation upon shares of the Series or Parity
Dividend Shares shall be declared PRO RATA with respect to all such shares,
so that the amounts of any dividends declared on shares of the Series and the
Parity Dividend Shares shall in all cases bear to each other the same ratio
that, at the time of the declaration, all accrued but unpaid dividends on
shares of the Series and the other Parity Dividend Shares, respectively, bear
to each other.
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(c) If at any time the Corporation has failed to pay or set apart for
payment all accrued dividends on any shares of the Series through the then
most recent Dividend Period, the Corporation shall not, and shall not permit
any corporation or other entity directly or indirectly controlled by the
Corporation to:
(i) declare or pay or set aside for payment any dividend or other
distribution on or with respect to the Junior Dividend Shares,
whether in cash, securities, obligations or otherwise (other than
dividends or distributions paid in shares of capital stock of the
Corporation ranking junior to shares of the Series both as to the
payment of dividends and as to rights in liquidation, dissolution or
winding up of the affairs of the Corporation ("Junior Stock"), or
options, warrants or rights to subscribe for or purchase shares of
Junior Stock); or
(ii) redeem, purchase or otherwise acquire, or pay into, set apart
money or make available for a sinking or other analogous fund for
the redemption, purchase or other acquisition of, any shares of the
Series (unless all of the shares of the Series are concurrently
redeemed), Parity Dividend Shares, Parity Liquidation Shares or
Shares of Junior Stock for any consideration (except by conversion
into or exchange for Junior Stock),
unless, in each such case, all dividends accrued on shares of the Series
through the most recent Dividend Period and on any Parity Dividend Shares
have been or contemporaneously are declared and paid in full.
(c) Any reference to "distribution" contained in this paragraph 3 shall
not be deemed to include any distribution made in connection with any
liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary.
4. LIQUIDATION. (a) The liquidation value per share of shares of the
Series, in case of the voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of the Corporation, shall be $13.75 per share, plus
an amount equal to the cash value of dividends accrued and unpaid thereon,
whether or not declared, to the payment date (such aggregate amount being
hereinafter referred to as the "Liquidation Amount").
(b) In the event of any voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, the holders of shares of the Series (i)
shall not be entitled to receive the liquidation value of the shares held by
them until the liquidation value of all Senior Liquidation Shares shall have
been paid in full and (ii) shall be entitled to receive the liquidation value
of such shares held by them in preference to and in priority over any
distributions upon the Junior Liquidation Shares. Upon payment in full of the
liquidation value to which the holders of shares of the Series are entitled,
the holders of shares of the Series will not be entitled to any further
participation in any distribution of assets by the Corporation. If the assets
of the Corporation are not sufficient to pay in full the liquidation value
payable to the holders of shares of the Series and the liquidation value
payable to the holders of any Parity Liquidation Shares, the holders of all
such shares shall share ratably in such distribution of assets in accordance
with the amounts that would be payable on the distribution if the amounts to
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which the holders of shares of the Series and the holders of Parity
Liquidation Shares are entitled were paid in full.
(c) Neither a consolidation or merger of the Corporation with or into any
other entity, nor a merger of any other entity with or into the Corporation,
nor a sale or transfer of all or any part of the Corporation's assets for
cash or securities or other property shall be considered a liquidation,
dissolution or winding-up of the Corporation within the meaning of this
paragraph 4.
(d) Written notice of any liquidation, dissolution or winding up of the
Corporation, stating the payment date or dates when and the place or places
where the amounts distributable in such circumstances shall be payable, shall
be given by first class mail, postage prepaid, not less than 30 days prior to
any payment date stated therein, to the holders of record of shares of the
Series at their respective addresses as the same shall appear on the books of
the transfer agent with respect to the Series.
5. OPTIONAL REDEMPTION. (a) Shares of the Series will be redeemable at the
option of the Corporation, in whole or in part, from and after the time that
the Current Market Price for the Common Stock for a period of 10 consecutive
trading days equals or exceeds $6.00 per share. The redemption price will be
payable in cash and equal $17.50, together with an amount equal to the
dividends accrued and unpaid thereon, whether or not declared, to the
redemption date. The aggregate payment to each holder of shares of the Series
to be redeemed will be rounded to the nearest cent. Notwithstanding the
foregoing, if the date fixed for redemption occurs after a record date for a
dividend and prior to the corresponding payment date, such dividend shall be
paid, on the payment date and the amount payable with respect to each share
of the Series redeemed shall not include the amount of the dividend to be so
paid.
(b) Not less than 30 nor more than 60 days prior to the date fixed for any
redemption of shares of the Series pursuant to this paragraph 5, a notice of
redemption shall be mailed by first class mail, postage prepaid, to each
holder of shares of the Series to be redeemed at such holder's last address
as it appears on the books of the transfer agent for the Series. Such notice
shall state: (i) that the Corporation has elected to redeem all or a portion
of the shares of the Series, as specified in such notice, (ii) the redemption
price, (iii) the redemption date, (iv) that, unless the Corporation defaults
in the payment of the redemption price, all shares of the Series called for
redemption shall cease to accrue dividends after the redemption date and
shall cease to be outstanding after such date and (v) any other information
required by applicable law to be included therein and any other procedures
that a holder of shares of the Series must follow to receive payment for
their redeemed shares. Neither failure to mail such notice, nor any defect
therein or in the mailing thereof, to any particular holder shall affect the
sufficiency of the notice or the validity of the proceedings for redemption
with respect to any other holder. Any notice mailed in the manner herein
provided shall be conclusively presumed to have been duly given whether or
not the holder receives the notice. On or after the redemption date, each
holder of shares of the Series to be redeemed shall present and surrender
such holder's certificate or certificates for such shares to the Corporation
at the place designated in the redemption notice and thereupon the redemption
price of the shares shall be paid to or on the order of the person whose name
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appears on such certificate or certificates as the owner thereof, and each
surrendered certificate shall be canceled. In case less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued to the holder representing the unredeemed shares of the Series.
(c) If a notice of redemption has been given pursuant to this paragraph 5
and if, on or before the date fixed for redemption, the funds necessary for
such redemption shall have been set aside by the Corporation, separate and
apart from its other funds, in trust for the PRO RATA benefit of the holders
of the shares of the Series so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for
cancellation, on the redemption date dividends shall cease to accrue on the
shares of the Series to be redeemed, and at the close of business on the
redemption date the holders of such shares shall cease to be stockholders
with respect to those shares, shall have no interest in or claims against the
Corporation by virtue thereof and shall have no voting or other rights with
respect thereto, except the right to receive the moneys payable upon such
redemption, without interest thereon, upon surrender (and endorsement, if
required by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding. Subject to applicable escheat laws,
any moneys so set aside by the Corporation and unclaimed at the end of two
years from the redemption date shall revert to the Corporation, after which
reversion the holders of such shares so called for redemption shall look only
to the Corporation for the payment of the redemption price. Any interest
accrued on funds so deposited shall be paid to the Corporation from time to
time.
(d) If a notice of redemption has been given pursuant to this paragraph 5,
and any holder of shares of the Series shall, prior to the close of business
on the date fixed for redemption, give written notice to the Corporation
pursuant to paragraph 7 below of the conversion of any or all of the shares
to be redeemed held by the holder, then such redemption shall not become
effective as to such shares to be converted and such conversion shall become
effective as provided in paragraph 7 below, whereupon any funds deposited by
the Corporation, or on its behalf, with a payment agent or segregated and
held in trust by the Corporation for the redemption of such shares shall
(subject to any right of the holder of such shares to receive the dividend
payable thereon as provided in paragraph 7 below) immediately upon such
conversion be returned to the Corporation or, if then held in trust by the
Corporation, shall be discharged from the trust.
(e) In every case of redemption of less than all of the outstanding shares
of the Series pursuant to this paragraph 5, the shares to be redeemed shall
be selected PRO RATA or by lot or in such other manner as the Board of
Directors may determine, as may be prescribed by resolution of the Board of
Directors of the Corporation, provided that only whole shares shall be
selected for redemption. Notwithstanding the foregoing, the Corporation shall
not redeem any of the shares of the Series at any time outstanding until all
dividends accrued and in arrears upon all shares of the Series then
outstanding shall have been paid for all past dividend periods.
6. MANDATORY REDEMPTION. The shares of the Series are not subject
to mandatory redemption or sinking fund requirements.
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7. CONVERSION. (a) Holders of shares of the Series will have the right,
exercisable at any time prior to redemption of such shares (as described in
paragraph 5), to convert shares of the Series into shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) at the
conversion price of $2.75, subject to adjustment as described below (the
"Conversion Price"). The number of shares of Common Stock into which each
share of the Series shall be convertible shall be determined by dividing
$13.75, subject to proportional adjustment to reflect any split or
consolidation of the Common Stock or any dividend payable on the Common Stock
in additional shares of Common Stock (the "Conversion Amount"), by the
Conversion Price then in effect. In the case of shares of the Series called
for redemption, conversion rights will expire at the close of business on the
business day next preceding the redemption date. Except as expressly provided
herein, no payment or adjustment for accrued dividends on the shares of the
Series is to be made on conversion, but holders of record of shares of the
Series on a record date fixed for the payment of a dividend on such shares
shall be entitled to receive the dividend notwithstanding the conversion of
the shares prior to the dividend payment date. A share of the Series may not
be converted in part.
(b) In order to exercise the conversion right, the holder of each share of
the Series to be converted shall surrender the certificate representing such
share, duly endorsed or assigned to the Corporation or in blank, at the
office of the Corporation in Herndon, Virginia (or such other address as the
Corporation may designate) and shall give written notice to the Corporation
in the form set forth on the reverse of the stock certificates for the shares
of the Series that such holder elects to convert the shares represented by
such certificate or a portion thereof. Such notice shall also state the name
or names (with address) in which the certificate or certificates for the
shares of Common Stock which shall be issuable upon such conversion shall be
issued, and shall be accompanied by funds in an amount sufficient to pay any
transfer or similar tax required by the provisions of paragraph 7(e) below.
Each share surrendered for conversion shall, unless the shares issuable on
conversion are to be issued in the same name as the name in which such share
of the Series is registered, be duly endorsed by, or be accompanied by
instruments of transfer (in each case, in form reasonably satisfactory to the
Corporation), duly executed by the holder or such holder's duly authorized
attorney-in-fact.
(c) As promptly as practicable after the surrender of certificates for
shares of the Series for conversion and the receipt of such notice and funds,
if any, as aforesaid, the Corporation shall issue and shall deliver to such
holder, or on such holder's written order, a certificate or certificates for
the number of shares of Common Stock issuable upon the conversion of such
shares of the Series in accordance with the provisions of this paragraph 7,
and a check or cash in respect of any fractional interest in respect of a
share of Common Stock arising upon such conversion, as provided in paragraph
7(d) below. Each conversion with respect to any shares of the Series shall be
deemed to have been effected immediately prior to the close of business on
the date on which the certificates for shares of the Series shall have been
surrendered (accompanied by the funds, if any, required by paragraph 7(e)
below) and such notice and assignment, if any, shall have been received by
the Corporation as aforesaid, and the person or persons entitled to receive
the Common Stock issuable upon such conversion shall be deemed for all
purposes to be the record holder or holders of such Common Stock upon that
date.
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(d) No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of shares of the Series. If more than
one share of the Series shall be surrendered for conversion at one time by
the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of the Series so surrendered. Instead of any fractional share of
Common Stock otherwise issuable upon conversion of any shares of the Series,
the Corporation shall pay a cash adjustment in respect to such fraction in an
amount equal to the same fraction of the Current Market Price of the Common
Stock at the close of business on the day of conversion.
(e) If a holder converts shares of the Series, the Corporation shall pay
any and all documentary, stamp or similar issue or transfer tax payable in
respect of the issue or delivery of the shares of the Series (or any other
securities issued on account thereof pursuant hereto) or Common Stock upon
the conversion; PROVIDED, HOWEVER, the Corporation shall not be required to
pay any such tax that may be payable because any such shares are issued in a
name other than the name of the holder.
(f) The Corporation shall reserve out of its authorized but unissued
Common Stock or its Common Stock held in treasury sufficient shares of Common
Stock to permit the conversion of all of the outstanding shares of the
Series. The Corporation shall from time to time, in accordance with the GCL,
increase the authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all shares of the Series at the time
outstanding. If any shares of Common Stock required to be reserved for
issuance upon conversion of shares of the Series hereunder require
registration with or approval of any governmental authority under any federal
or state law before the shares may be issued upon conversion, the Corporation
shall in good faith and as expeditiously as possible endeavor to cause the
shares to be so registered or approved. All shares of Common Stock delivered
upon conversion of the shares of the Series will, upon delivery, be duly
authorized and validly issued, fully paid and nonassessable, free from all
taxes, liens and charges with respect to the issue thereof.
(g) The Conversion Price shall be subject to adjustment from time to time
as follows:
(i) In the event that the Corporation shall (A) pay a dividend or make
a distribution, in shares of Common Stock, on any class of Capital
Stock of the Corporation or any subsidiary which is not directly or
indirectly wholly owned by the Corporation, (B) split or subdivide
its outstanding Common Stock into a greater number of shares or (C)
combine its outstanding Common Stock into a smaller number of
shares, then in each such case the Conversion Price in effect
immediately prior thereto shall be adjusted so that the holder of
each share of the Series thereafter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock that
such holder would have owned or have been entitled to receive after
the occurrence of any of the events described above had such share
of the Series been converted immediately prior to the occurrence of
such event. An adjustment made pursuant to this paragraph 7(g)(i)
shall become effective immediately after the close of business on
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the record date in the case of a dividend or distribution (except as
provided in paragraph 7(k) below) and shall become effective
immediately after the close of business on the effective date in the
case of such subdivision, split or combination, as the case may be.
Any shares of Common Stock issuable in payment of a dividend shall
be deemed to have been issued immediately prior to the close of
business on the record date for such dividend for purposes of
calculating the number of outstanding shares of Common Stock under
clauses (ii) and (iii) below.
(ii) In the event that the Corporation shall commit to issue or
distribute Common Stock or issue rights, warrants, options or
convertible or exchangeable securities entitling the holder thereof
to subscribe for or purchase, convert into or exchange for Common
Stock, in any such case at a price per share less than the Current
Market Price per share on the earliest of (i) the date the
Corporation shall enter into a firm contract for such issuance or
distribution, (ii) the record date for the determination of
stockholders entitled to receive any such rights, warrants, options
or convertible or exchangeable securities, if applicable, or (iii)
the date of actual issuance or distribution of any such Common Stock
or rights, warrants, options or convertible or exchangeable
securities (provided that the issuance of Common Stock upon the
exercise of rights, warrants, options or convertible or exchangeable
securities will not cause an adjustment in the Conversion Price if
no such adjustment would have been required at the time such right,
warrant, option or convertible or exchangeable security was issued),
then the Conversion Price in effect immediately prior to such
earliest date shall be adjusted so that the Conversion Price shall
equal the price determined by multiplying the Conversion Price in
effect immediately prior to such earliest date by the fraction:
(x)whose numerator shall be the number of shares of Common Stock
outstanding on such date plus the number of shares which the
aggregate offering price of the total number of shares so offered
would purchase at such Current Market Price (such amount, with
respect to any such rights, warrants, options or convertible or
exchangeable securities, determined by multiplying the total
number of shares subject thereto by the exercise price of such
rights, warrants, options or convertible or exchangeable
securities and dividing the product so obtained by the Current
Market Price), and
(y)whose denominator shall be the number of shares of Common Stock
outstanding on such date plus the number of additional shares of
Common Stock to be issued or distributed or receivable upon
exercise of any such right, warrant, option or convertible or
exchangeable security.
Such adjustment shall be made successively whenever any such Common
Stock, rights, warrants, options or convertible or exchangeable
securities are issued or distributed. In determining whether any
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rights, warrants or options entitle the holders to subscribe for or
purchase shares of Common Stock at less than such Current Market
Price, and in determining the aggregate offering price of shares of
Common Stock so issued or distributed, there shall be taken into
account any consideration received by the Corporation for such
Common Stock, rights, warrants, options, or convertible or
exchangeable securities, the value of such consideration, if other
than cash, to be determined by the Board of Directors, whose
determination shall be conclusive and described in a certificate
filed with the records of corporate proceedings of the Corporation.
If any right, warrant, option or convertible or exchangeable
security to purchase or acquire Common Stock, the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this
subsection (b) shall expire and shall not have been exercised, the
Conversion Price shall immediately upon such expiration be
recomputed to the Conversion Price which would have been in effect
had the adjustment of the Conversion Price made upon the issuance of
such right, warrant, option or convertible or exchangeable security
been made on the basis of offering for subscription, purchase or
issuance, as the case may be, only of that number of shares of
Common Stock actually purchased or issued upon the actual exercise
of such right, warrant, option or convertible or exchangeable
securities.
(iii) No adjustment in the Conversion Price shall be required unless
the adjustment would require an increase or decrease of at least 1%
in the Conversion Price then in effect; PROVIDED, HOWEVER, that any
adjustments that by reason of this paragraph 7(g)(i) are not
required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations under this paragraph
7(g)(i) shall be made to the nearest cent or nearest 1/100th of a
share.
(iv) Notwithstanding anything to the contrary set forth in this
paragraph 7(g), no adjustment shall be made to the Conversion Price
upon (A) the issuance of shares of Common Stock pursuant to any
compensation or incentive plan for officers, directors, employees or
consultants of the Corporation which plan has been approved by the
Compensation Committee of the Board of Directors (or if there is no
such committee then serving, by the majority vote of the Directors
then serving who are not employees or officers of the Corporation, a
5% or greater stockholder of the Corporation or an officer, employee
or Affiliate or Associate (as defined in paragraph 10 below) of any
such 5% or greater stockholder) and, if required by law, the
requisite vote of the stockholders of the Corporation (unless the
exercise price thereof is changed after the date hereof other than
solely by operation of the anti-dilution provisions thereof or by
the Compensation Committee of the Board of Directors or, if
applicable, the Board of Directors and, if required by law, the
stockholders of the Corporation as provided in this clause (A)) or
(B) the issuance of Common Stock upon the conversion or exercise of
the options or warrants of the Corporation outstanding on April 22,
1999, unless the conversion or exercise price thereof is changed
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after April 22, 1999 (other than solely by operation of the
anti-dilution provisions thereof).
(v) The Corporation from time to time may reduce the Conversion Price
by any amount for any period of time in the discretion of the Board
of Directors. A voluntary reduction of the Conversion Price does not
change or adjust the conversion price otherwise in effect for
purposes of this paragraph 7(g).
(vii) In the event that, at any time as a result of an adjustment made
pursuant to paragraph 7(g)(i) through 7(g)(iii) above, the holder of
any share of the Series thereafter surrendered for conversion shall
become entitled to receive any shares of the Corporation other than
shares of the Common Stock, thereafter the number of such other
shares so receivable upon conversion of any share of the Series
shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in paragraphs 7(g)(i) through
7(g)(vi) above, and the other provisions of this paragraph 7(g)(vii)
with respect to the Common Stock shall apply on like terms to any
such other shares.
(h) In case of any reclassification of the Common Stock (other than in a
transaction to which paragraph 7(g)(i) applies), any consolidation of the
Corporation with, or merger of the Corporation into, any other entity, any
merger of another entity into the Corporation (other than a merger that does
not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Corporation), any sale or transfer
of all or substantially all of the assets of the Corporation or any
compulsory share exchange, pursuant to which share exchange the Common Stock
is converted into other securities, cash or other property, then lawful
provision shall be made as part of the terms of such transaction whereby the
holder of each share of the Series then outstanding shall have the right
thereafter, during the period such share shall be convertible, to convert
such share only into the kind and amount of securities, cash and other
property receivable upon the reclassification, consolidation, merger, sale,
transfer or share exchange by a holder of the number of shares of Common
Stock of the Corporation into which a share of the Series might have been
converted immediately prior to the reclassification, consolidation, merger,
sale, transfer or share exchange assuming that such holder of Common Stock
failed to exercise rights of election, if any, as to the kind or amount of
securities, cash or other property receivable upon consummation of such
transaction subject to adjustment as provided in paragraph 7(g) above
following the date of consummation of such transaction. As a condition to any
such transaction, the Corporation or the person formed by the consolidation
or resulting from the merger or which acquires such assets or which acquires
the Corporation's shares, as the case may be, shall make provisions in its
certificate or articles of incorporation or other constituent document to
establish such right. The certificate or articles of incorporation or other
constituent document shall provide for adjustments which, for events
subsequent to the effective date of the certificate or articles of
incorporation or other constituent document, shall be as nearly equivalent as
may be practicable to the adjustments provided for in this paragraph 7. The
provisions of this paragraph 7(h) shall similarly apply to successive
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reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(i) If:
(i) the Corporation shall take any action which would require an
adjustment in the Conversion Price pursuant to Section 7(g);
or
(ii) the Corporation shall authorize the granting to the holders of its
Common Stock generally of rights or warrants to subscribe for or
purchase any shares of any class or any other rights or warrants; or
(iii) there shall be any reclassification or change of the Common Stock
(other than a subdivision or combination of its outstanding Common
Stock or a change in par value) or any consolidation, merger or
statutory share exchange to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required,
or the sale or transfer of all or substantially all of the assets of
the Corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, the Corporation shall cause to be filed with the transfer agent for the
Series and shall cause to be mailed to the holders of shares of the Series at
their addresses as shown on the books of the transfer agent for the Series,
as promptly as possible, but at least 30 days prior to the applicable date
hereinafter specified, a notice stating (A) the date on which a record is to
be taken for the purpose of such dividend, distribution or granting of rights
or warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distribution or rights or warrants are to be determined or (B) the date on
which such reclassification, change, consolidation, merger, statutory share
exchange, sale, transfer, dissolution, liquidation or winding up is expected
to become effective or occur, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares
of Common Stock for securities or other property deliverable upon such
reclassification, change, consolidation, merger, statutory share exchange,
sale, transfer, dissolution, liquidation or winding up. Failure to give such
notice or any defect therein shall not affect the legality or validity of the
proceedings described in this paragraph 7(i).
(j) Whenever the Conversion Price is adjusted as herein provided, the
Corporation shall promptly file with the transfer agent for the Series a
certificate of an officer of the Corporation setting forth the Conversion
Price after the adjustment and setting forth a brief statement of the facts
requiring such adjustment and a computation thereof. The Corporation shall
promptly cause a notice of the adjusted Conversion Price to be mailed to each
registered holder of shares of the Series.
(k) In any case in which paragraph 7(g) provides that an adjustment shall
become effective immediately after a record date for an event and the date
fixed for such adjustment pursuant to paragraph 7(g) occurs after such record
date but before the occurrence of such event, the Corporation may defer until
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<PAGE>
the actual occurrence of such event (i) issuing to the holder of any shares
of the Series converted after such record date and before the occurrence of
such event the additional shares of Common Stock issuable upon such
conversion by reason of the adjustment required by such event over and above
the Common Stock issuable upon such conversion before giving effect to such
adjustment and (ii) paying to such holder any amount in cash in lieu of any
fraction pursuant to paragraph 7(d).
(l) In case the Corporation shall take any action affecting the Common
Stock, other than actions described in this paragraph 7, which in the opinion
of the Board of Directors would materially adversely affect the conversion
right of the holders of the shares of the Series, the Conversion Price may be
adjusted, to the extent permitted by law, in such manner, if any, and at such
time, as the Board of Directors may determine to be equitable in the
circumstances; PROVIDED, HOWEVER, that in no event shall the Board of
Directors be required to take any such action.
(m) The Corporation will endeavor to list the shares of Common Stock
required to be delivered upon conversion of shares of the Series, prior to
delivery, upon each national securities exchange, the Nasdaq Stock Market or
any similar system of automated dissemination of securities prices, if any,
upon which the Common Stock is listed at the time of delivery.
8. STATUS OF SHARES. All shares of the Series that are at any time
redeemed or converted pursuant to paragraph 5 above, and all shares of the
Series that are otherwise reacquired by the Corporation and subsequently
canceled by the Board of Directors, shall have the status of authorized but
unissued shares of preferred stock, without designation as to series, subject
to reissuance by the Board of Directors as shares of any one or more other
series.
9. VOTING RIGHTS. Except as otherwise required by law, holders of shares
of the Series shall have no vote with respect to any matter submitted to the
stockholders of the Corporation for vote or consent. In connection with any
right to vote or give consent provided by law, each holder of shares of the
Series will have one vote for each share held.
10. CERTAIN DEFINITIONS. As used in this Certificate, the
following terms shall have the following respective meanings:
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under common control with such
specified person. For purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of
voting securities or otherwise; and the term "controlling" and "controlled"
having meanings correlative to the foregoing.
An "ASSOCIATE" of a person means (A) any corporation or organization,
other than the Corporation or any subsidiary of the Corporation, of which the
person is an officer or partner or is, directly or indirectly, the beneficial
13
<PAGE>
owner of 10% or more of any class of equity securities; (B) any trust or
estate in which the person has a substantial beneficial interest or as to
which the person serves as trustee or in a similar fiduciary capacity; and
(C) any relative or spouse of the person, or any relative of the spouse, who
has the same home as the person or who is a director or officer of the person
or any of its parents or subsidiaries.
"CAPITAL STOCK" of any person or entity means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in the common stock or preferred stock of such
person or entity, including, without limitation, partnership and membership
interests.
"CURRENT MARKET PRICE" means, when used with respect to any security as of
any date, the last bid price regular way of such security as reported on the
Nasdaq National Market for such date, or, if such security is not listed or
admitted to trading on the Nasdaq National Market, as reported on the Nasdaq
SmallCap Market for such date, or, in case such security is listed on a
national securities exchange other than Nasdaq, the last sales price of such
security on such date as reported for consolidated transactions with respect
to securities listed on the principal national securities exchange on which
such security is listed or admitted to trading or, if such security is not
listed or admitted to trading on the Nasdaq Stock Market or any national
securities exchange, the average of the high bid and low asked prices of such
security on such date in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System
or such other system then in use or, if such security is not quoted by any
such organization, the average of the closing bid and asked prices of such
security as of such date furnished by a New York Stock Exchange member firm
selected by the Corporation, or if such security is not quoted by any such
organization and no such New York Stock Exchange member firm is able to
provide such prices, such price as is determined by the Independent Directors
in good faith.
"INDEPENDENT DIRECTORS" means directors that (i) are not 5% or greater
stockholders of the Corporation or the designee of any such stockholder; (ii)
are not officers or employees of the Corporation, any of its subsidiaries or
of a stockholder referred to above in clause (i); (iii) are not Related
Persons; and (iv) do not have relationships that, in the opinion of the Board
of Directors, would interfere with their exercise of independent judgment in
carrying out the responsibilities of the directors.
"RELATED PERSON" means an individual related to an officer, director or
employee of the Corporation or any of its Affiliates which relation is by
blood, marriage or adoption and not more remote than first cousin.
14
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed on its behalf by its undersigned President and attested to by its
Secretary this 30th day of April, 1999.
Corporate Seal /s/ Lynn Chapman
----------------------------
Lynn Chapman
President
ATTEST:
/s/ Norman Welsch
-----------------------------
Norman Welsch
Secretary
SECOND CERTIFICATE OF DESIGNATIONS
PREFERRED STOCK OF NETRIX CORPORATION
DESIGNATED AS
SERIES A 8% CONVERTIBLE PREFERRED STOCK
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted by the Board of Directors of Netrix Corporation, a Delaware
corporation (the "Corporation"), at a meeting duly convened and held, at which a
quorum was present and acting throughout:
"RESOLVED, that pursuant to the authority conferred on the Board of
Directors of the Corporation (the "Board of Directors") by the
Corporation's Certificate of Incorporation, an increase in the total number
of shares of preferred stock of the Corporation designated as Series A 8%
Convertible Preferred Stock, par value $.05 per share, is hereby authorized
and an additional 7273 shares of the Corporation's preferred stock are
hereby designated as Series A 8% Convertible Preferred Stock resulting in a
total of 298,198 shares of the Corporation's preferred stock being
designated as Series A 8% Convertible Preferred Stock. Accordingly, the
President and Secretary or Assistant Secretary of the Corporation are
hereby authorized and directed to execute and file with the Secretary of
State of Delaware a certificate pursuant to the provisions of the General
Corporation Law of the State of Delaware (the "GCL") stating that the
increase in the number of shares has been duly authorized. The additional
shares hereby designated as Series A 8% Convertible Preferred Stock shall
in all respects be identical to the 290,925 shares previously designated as
Series A 8% Convertible Preferred Stock, bearing the same designations,
powers, preferences and rights of the shares of such series and the
qualifications, limitations and restrictions thereof, (in addition to the
designations, powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation that may be applicable to the Corporation's preferred stock),
as specified in the Resolutions of the Board of Directors attested to in
the Certificate of Designations filed with the Secretary of State of
Delaware on May 11, 1999.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
duly executed on its behalf by its undersigned President and attested to by its
Secretary this 25th day of May, 1999.
Corporate Seal ----------------------------------
Lynn Chapman
President
ATTEST:
----------------------------------
Norman Welsch
Secretary
-2-
NETRIX CORPORATION
13595 Dulles Technology Drive
Herndon, Virginia 20171
----------------------------
SUBSCRIPTION AGREEMENT
----------------------------
Re: $4,000,000 OF SERIES A 8% CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------
Dear Purchaser:
Netrix Corporation, a Delaware corporation (the "Company"), is
offering to sell up to $4,000,000 of Series A 8% Convertible Preferred Stock of
the Company (the "Preferred Stock") to certain "accredited investors" (as
defined under the Securities Act of 1933 (the "Securities Act")). The terms of
this offering (the "Offering") are set forth in a Confidential Private Placement
Memorandum dated April 22, 1999, as the same may be amended or supplemented (the
"Offering Memorandum"). The purchase price per share of Preferred Stock is the
greater of $13.75 or five times the closing bid price for the Company's Common
Stock (the "Common Stock") on the Nasdaq National Market for the 10 trading day
period immediately preceding the first closing in the Offering. The Preferred
Stock is being offered by the Company pursuant to Section 4(2) of the Securities
Act and/or Rule 506 of Regulation D promulgated thereunder. The Offering will be
made by the Company on an "all or none" basis as to the first $2,000,000 of
Preferred Stock and a "best efforts" basis as to the remaining $2,000,000 of
Preferred Stock. The minimum subscription is $100,000, subject to waiver to the
discretion of the Company.
The Preferred Stock is subject to the benefits of a Registration
Rights Agreement, a form of which is available upon request from the Company
(the "Registration Rights Agreement") providing for registration of the Common
Stock issuable upon conversion of the Preferred Stock and any Common Stock
issuable as a dividend on the Preferred Stock. The designations, powers,
preferences and rights of the Preferred Stock and the qualifications,
limitations and restrictions of the Preferred Stock are set forth in a
Certificate of Designations, the form of which is available upon request from
the Company (the "Certificate of Designations"). The Certificate of Designations
will be filed with the Secretary of State of the State of Delaware immediately
prior to the initial closing in the Offering.
Subscriptions shall be paid by check or wire transfer and deposited
in an escrow account maintained by Republic National Bank of New York, New York,
New York (the "Escrow Agent") until accepted by the Company. This subscription
may be accepted by the Company at any time after receipt of subscriptions for at
least $2,000,000 of Preferred Stock and prior to the end of the Offering Period
(as defined in Section 1(c)). If your subscription is not accepted, your
subscription payment will be immediately returned to you. At the time the
Company accepts subscriptions, certificates representing the Preferred Stock
will be issued by the Company to the investors.
1
<PAGE>
1. SUBSCRIPTION; THE OFFERING.
(a) By your execution of this Subscription Agreement and delivery of the
subscription amount to the Company, you hereby irrevocably subscribe to purchase
the amount of Preferred Stock set forth on the signature page of this Agreement.
(b) Subscription payments by check should be made payable to "Republic
National Bank of New York, as The Escrow Agent for Netrix Corporation" and
should be delivered, together with two fully executed and completed copies of
this Subscription Agreement to:
Mr. James McCullough
Renwick Corporate Finance, Inc.
50 East 42nd Street, Suite 1306
New York, New York 10017
Telephone: (212) 490-2387
If you prefer to wire your subscription payment directly to the Escrow Agent,
please contact Mr. McCullough at the above address and phone number to obtain
wiring instructions.
(c) The Offering will expire on May 15, 1999, subject to extension by the
Company at its discretion (the "Offering Period"). Any subscriptions received
after the end of the Offering Period or received but not accepted prior to the
end of the Offering Period will be returned in full.
(d) This subscription is subject to the terms and conditions of the
Offering which are described herein and in the Offering Memorandum. Upon
acceptance by the Company of this subscription, and following clearance of
funds, the Company will deliver to you a Preferred Stock certificate in the
amount subscribed for and a signed Subscription Agreement and Registration
Rights Agreement.
2. ACCEPTANCE OR REJECTION OF SUBSCRIPTIONS. You agree that all
subscriptions for Preferred Stock (including this subscription) are made subject
to the following terms and conditions (as well as the terms and conditions set
forth in the Offering Memorandum):
(a) All subscriptions payments will be held in an escrow account maintained
at the Escrow Agent until accepted or rejected by the Company.
(b) The Company may accept subscriptions received by it in such order and
at such time, prior to termination of the Offering, as the Company may, in its
sole discretion, determine, provided that no subscription may be accepted until
at least $2,000,000 of Preferred Stock is subscribed for.
(c) The Company shall have the right, in its sole discretion, to reject any
subscription in whole or in part for any reason.
(d) Any subscription received but not accepted by the Company prior to the
end of the Offering Period or received by the Company after the end of the
Offering Period will be rejected by the Company.
2
<PAGE>
(e) If your subscription is rejected by the Company for any reason, the
Escrow Agent shall promptly return (subject to delay as necessary to permit
funds deposited to clear) to you your executed Subscription Agreements together
with all funds paid by you, without deduction and without interest.
(f) If your subscription is accepted only in part, then the Escrow Agent
shall promptly return (subject to delay as necessary to permit funds deposited
to clear) to you that part of all funds paid by you relating to that part of
your subscription which is not accepted, without deduction and without interest.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. You hereby represent and
warrant to, and agree with, the Company as follows:
(a) You are an "Accredited Investor" as that term is defined in Section
501(a) of Regulation D promulgated under the Securities Act. Specifically you
are (EACH INVESTOR MUST CHECK APPROPRIATE ITEM(S)):
|_|(i) A bank as defined in Section 3(a)(2) of the Securities Act, or a
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act, whether acting in its individual or
fiduciary capacity; a broker or dealer registered pursuant to Section
15 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); an insurance company as defined in Section 2(13) of the
Securities Act; an investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; a small business investment company
licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Investment Act of 1958; a plan established
and maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for the
benefit of its employees, if such plan has total assets in excess of
$5,000,000; an employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974, if the investment decision is
made by a plan fiduciary, as defined in Section 3(21) of such Act,
which is either a bank, savings and loan association, insurance
company, or registered investment advisor, or if the employee benefit
plan has total assets in excess of $5,000,000 or, if a self-directed
plan, with investment decisions made solely by persons that are
accredited investors;
|_|(ii) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
|_|(iii) An organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
|_| (iv) A director or executive officer of the Company;
3
<PAGE>
|_|(v) A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his or her purchase exceeds
$1,000,000;
|_|(vi) A natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year;
|_|(vii) A trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Rule
506(b) (2) (ii); or
|_|(viii) An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, you must identify each
equity owner and provide statements signed by each demonstrating how
each qualifies as an accredited investor.)
(b) If you are a natural person, you are: a bona fide resident of the state
contained in your address set forth on the signature page of this Agreement as
your home address; at least 21 years of age; and legally competent to execute
this Agreement. If you are an entity, you are duly authorized to execute this
Agreement and this Agreement, when executed and delivered by you, will
constitute your legal, valid and binding obligation enforceable against you in
accordance with its terms.
(c) You have received, read carefully and are familiar with this Agreement,
the Offering Memorandum, the Certificate of Designations and the Registration
Rights Agreement. Respecting the Company, its business, plans and financial
condition, the terms of the Offering, the Preferred Stock and any other matters
relating to the Offering: you have received and reviewed the Offering Memorandum
and all other materials which have been requested by you; and the Company has
answered all inquiries that you or your representatives have put to it. You have
had access to all additional information necessary to verify the accuracy of the
information set forth in this Agreement, the Offering Memorandum and any other
materials furnished herewith, and you have taken all the steps necessary to
evaluate the merits and risks of an investment as proposed hereunder.
(d) You or your purchaser representative have such knowledge and experience
in finance, securities, investments and other business matters so as to be able
to protect your interests in connection with this transaction, and your
investment in the Company hereunder is not material when compared to your total
financial capacity.
(e) You understand the various risks of an investment in the Company as
proposed herein and can afford to bear such risks, including, but not limited
to, the risks of losing your entire investment.
(f) You will acquire the Preferred Stock for your own account (or for the
joint account of you and your spouse either in joint tenancy, tenancy by the
entirety or tenancy in common) for investment and not with a view to the sale or
distribution thereof or the granting of any participation therein, and that you
have no present intention of distribution or selling to others any of such
interest or granting any participation therein.
4
<PAGE>
(g) Without limiting any of your other representations and warranties
hereunder, you acknowledge that you have reviewed and are aware of the Risk
Factors set forth in the Offering Memorandum.
4. TRANSFER RESTRICTIONS.
(a) You agree not to sell any Common Stock acquired upon conversion of
Preferred Stock prior to May 15, 2000, unless (and to the extent) such shares
have been released from this obligation in accordance with the following
provisions of this Section 4(a).
(i) If the average closing bid price for the Common Stock on the Nasdaq
National Market over a period of 10 consecutive trading days is at
least 125% of the initial conversion price of the Preferred Stock set
forth in the Certificate of Designations, then 25% of your Common
Stock will be released from the sales restriction effective at that
time.
(ii) If the average closing bid price for the Common Stock on the Nasdaq
National Market over a period of 10 consecutive trading days is at
least 156% of the initial conversion price of the Preferred Stock set
forth in the Certificate of Designations, then an additional 25% of
your Common Stock (50% total) will be released from the sales
restriction effective at that time.
(iii)If the average closing bid price for the Common Stock on the Nasdaq
National Market over a period of 10 consecutive trading days is at
least 195% of the initial conversion price of the Preferred Stock set
forth in the Certificate of Designations, then an additional 25% of
your Common Stock (75% total) will be released from the sales
restriction effective at that time.
(iv) If the average closing bid price for the Common Stock on the Nasdaq
National Market over a period of 10 consecutive trading days is at
least 244% of the initial conversion price of the Preferred Stock set
forth in the Certificate of Designations, then all remaining Common
Stock will be released from the sales restriction effective at that
time.
(b) You have been advised by the Company that the Preferred Stock and the
Common Stock issuable upon conversion of the Preferred Stock or as dividends
thereon (collectively, the "Securities") have not been registered under the
Securities Act, that the Securities will be issued on the basis of the exemption
provided by Section 4(2) of the Securities Act and/or Rule 506 of Regulation D
promulgated thereunder relating to transactions by an issuer not involving any
public offering and under similar exemptions under certain state securities
laws; that this transaction has not been reviewed by, passed on or submitted to
any Federal or state agency or self-regulatory organization where an exemption
is being relied upon, and that the Company's reliance thereon is based in part
upon the representations made by you in this Agreement. You acknowledge that you
have been informed by the Company of, or are otherwise familiar with, the nature
of the limitations imposed by the Securities Act and the rules and regulations
thereunder on the transfer of securities. In particular, you agree that no sale,
assignment or transfer of the Securities shall be valid or effective, and the
Company shall not be required to give any effect to any such sale, assignment or
transfer, unless (i) the sale, assignment or transfer of the Securities is
5
<PAGE>
registered under the Securities Act, it being understood that the Securities are
not currently registered for sale and that the Company has no obligation or
intention to so register the Securities except as contemplated by the
Registration Rights Agreement, or (ii) the Securities are sold, assigned or
transferred in accordance with all the requirements and limitations of Rule 144
under the Securities Act, it being understood that Rule 144 is not available at
the present time for the sale of the Securities, or (iii) such sale, assignment,
or transfer is otherwise exempt from registration under the Securities Act. You
acknowledge that the Securities shall be subject to a stop transfer order and
the certificate or certificates evidencing any Securities shall bear the
following or a substantially similar legend and such other legends as may be
required by state blue sky laws:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED FOR
INVESTMENT ONLY AND NOT FOR RESALE. THEY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS FIRST
REGISTERED UNDER SUCH LAWS, OR UNLESS THE COMPANY HAS RECEIVED
EVIDENCE REASONABLY SATISFACTORY TO IT THAT REGISTRATION UNDER
SUCH LAWS IS NOT REQUIRED."
5. INDEMNIFICATION. You acknowledge that you understand the meaning and
legal consequences of the representations and warranties contained in Section 3
hereof and the agreement contained in Section 4 hereof, and you hereby agree to
indemnify and hold harmless the Company and each officer, director, employee,
agent and controlling person thereof from and against any and all loss, damage
or disability due to or arising out of a breach of any such representation or
warranty.
6. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the Company and you, and our respective successors and assigns.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim, in equity or at law, or to impose upon
any other person any duty, liability or obligation.
7. MISCELLANEOUS.
(a) All notices and other communications provided for hereunder shall be in
writing, and, if to you, shall be delivered or mailed by registered mail
addressed to you at your address as set forth below, or to such other address as
you may designate to the Company in writing, and if to the Company, shall be
delivered or mailed by registered mail to the Company at 13595 Dulles Technology
Drive, Herndon, Virginia 20171, Attention: President, or to such other address
as the Company may designate to you in writing, with a copy to Kelley Drye &
Warren LLP, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut
06901, Attention: Jay R. Schifferli. All such notices shall be effective one day
after delivery or three days after mailing.
(b) This Agreement shall be construed in accordance with and governed by
the internal laws of the State of Virginia without reference to that State's
conflicts of laws provisions.
6
<PAGE>
(c) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all parties hereto.
(d) This Agreement may be executed in one or more counterparts
representing, however, one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year this subscription has been accepted by the Company as set
forth below.
Very truly yours,
NETRIX CORPORATION
By: _________________________________
Name:
Title:
7
<PAGE>
SIGNATURE PAGE FOR SUBSCRIPTION BY INDIVIDUALS
(NOT APPLICABLE TO SUBSCRIPTIONS BY ENTITIES, INDIVIDUALS
RETIREMENT ACCOUNT, KEOGH PLANS OR ERISA PLAN)
TOTAL SUBSCRIPTION AMOUNT $ ____________________. [THIS MUST BE COMPLETED.]
- --------------------------------------------------------------------------------
Check One:
|_| INDIVIDUAL OWNER |_| CUSTODIAN UNDER
(One signature required below) UNIFORM GIFTS TO MINORS ACT
|_| JOINT TENANTS WITH RIGHT
OF SURVIVORSHIP _____________________________________
(All tenants must sign below) (Insert applicable state)
(Custodian must sign below)
|_| TENANTS IN COMMON |_| COMMUNITY PROPERTY
(All tenants must sign below) (Both spouses in community
property states must sign below)
- --------------------------------------------------------------------------------
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
- ---------------------------------------- --------------------------------------
(Name of or Subscriber) (Social Security or Taxpayer ID No.)
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
(Home Address) (Home Telephone)
- ----------------------------------------
- ---------------------------------------- --------------------------------------
(Business Address) (Business Telephone)
- --------------------------------------------------------------------------------
- ---------------------------------------- --------------------------------------
(Name of Co-Subscriber) (Social Security or Taxpayer ID No.)
- ----------------------------------------
- ---------------------------------------- --------------------------------------
(Home Address) (Home Telephone)
- ----------------------------------------
- ---------------------------------------- --------------------------------------
(Business Address) (Business Telephone)
- --------------------------------------------------------------------------------
SIGNATURE(S)
Dated:-------------------------------
(1) By:--------------------------------- (2) By:-------------------------------
Signature of Authorized Signatory Signature or Authorized
Co-Signatory
- ---------------------------------------- --------------------------------------
Print Name of Signatory and Title, Print Name of Co-Signatory and Title,
if applicable if applicable
================================================================================
ACCEPTED AND AGREED:
NETRIX CORPORATION
By:----------------------------------- Dated:--------------------------------
<PAGE>
SIGNATURE PAGE FOR SUBSCRIPTION BY ENTITIES
TOTAL SUBSCRIPTION AMOUNT $___________________. [THIS MUST BE COMPLETED.]
- --------------------------------------------------------------------------------
Check one:
|_| EMPLOYEE BENEFIT PLAN OR TRUST (including pension plan, profit sharing
plan, other defined contribution plan and SEP)
|_| IRA, IRA ROLLOVER OR KEOGH PLAN
|_| TRUST (other than employee benefit trust)
|_| CORPORATION (Please include certified corporate resolution
authorizing signature)
|_| PARTNERSHIP
|_| OTHER -----------------------------------------------------------------
- --------------------------------------------------------------------------------
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
- ---------------------------------------- --------------------------------
(Name of Subscriber) (Taxpayer ID No.)
- ---------------------------------------- --------------------------------
(Plan number, if applicable)
- ---------------------------------------- --------------------------------
(Address) (Telephone Number)
- --------------------------------------------------------------------------------
Name and Taxpayer ID number of sponsor, if applicable
The undersigned trustee, partner, corporate officer or fiduciary
certificates that he or she has full power and authority from all beneficiaries,
partners or shareholders of the entity named above to execute this Subscription
Agreement on behalf of the entity and to make the representations, warranties
and agreements made herein on their behalf and that investment in the Securities
has been affirmatively authorized by the governing board or body of such entity
and is not prohibited by law or the governing documents of the entity.
SIGNATURES
Dated:---------------------------------
By:------------------------------------ By:-----------------------------------
Signature of Authorized Signatory Signature of Authorized Co-Signatory
------------------------------------ ------------------------------------
Print Name of Signatory Print Name of Required Co-Signatory
------------------------------------ ------------------------------------
Print Title of Signatory Print Title of Required Co-Signatory
ACCEPTED AND AGREED:
NETRIX CORPORATION
By:------------------------------------ Dated:-----------------------------
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE LAWS OF ANY STATE. THE TRANSFER OF THIS WARRANT IS SUBJECT
TO THE RESTRICTIONS SET FORTH IN SECTION 3 HEREOF, AND NO TRANSFER OF THIS
WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL THE TERMS AND
CONDITIONS OF SECTION 3 HEREOF HAVE BEEN COMPLIED WITH.
Coast Warrant No. 1
WARRANT
To Purchase Common Stock of
NETRIX CORPORATION
Expiring June ___, 2004
This is to certify that, for value received, COAST BUSINESS CREDIT, a
division of Southern Pacific Bank ("Coast"), or registered assigns, is entitled
to purchase from Netrix Corporation, a Delaware corporation (the "Company"),
50,000 duly authorized, validly issued, fully paid and nonassessable shares of
Common Stock of the Company (the "Warrant Shares"), at the initial purchase
price per share of $2.00, as may be adjusted from time to time in the manner
hereinafter provided ("Current Warrant Price"), exercisable at any time and from
time to time during the period commencing on the date hereof and ending on June
___, 2004 (the "Exercise Period"), all further subject to the terms, conditions
and adjustments herein set forth. This Warrant may be assigned by the holder
subject to SECTION 3 below.
This Warrant is issued in connection with a Loan and Security Agreement,
dated as of November 18, 1997 by and between the Company and Coast and any and
all amendments, replacements, supplements and modifications thereto
(collectively, the "Credit Agreement"). Certain terms used in this Warrant are
defined in Section 5 hereof. Capitalized terms used herein and not otherwise
defined herein shall have the meaning assigned thereto in the Credit Agreement.
SECTION 1. EXERCISE OF WARRANTS.
SEC 1.1 CASH EXERCISE. This Warrant may be exercised by the Warrantholder by
(i) the surrender of this Warrant to the Company at the Warrant
Office described in Section 2.1 with a duly executed Exercise Form
specifying the number of Warrant Shares to be purchased, during
normal business hours on any Business Day during the Exercise Period
and (ii) the delivery of payment to the Company, for the account of
the Company, by cash, wire transfer of immediately available funds
to a bank account specified by the Company, or by certified or bank
cashier's check, of the Current Warrant Price for the number of
Warrant Shares specified in the Exercise Form in lawful money of the
United States of America. The Company agrees that such Warrant
Shares shall be deemed to be issued to the Warrantholder as the
<PAGE>
record holder of such Warrant Shares as of the close of business on
the date on which this Warrant has been surrendered and payment has
been made for such Warrant Shares in accordance with this Agreement.
A stock certificate or certificates for the Warrant Shares specified
in the Exercise Form shall be delivered to the Warrantholder as
promptly as practicable, and in any event within seven (7) Business
Days, thereafter. The stock certificate(s) so delivered shall be in
any such denominations as may be reasonably specified by the
Warrantholder in the Exercise Form.
SEC 1.2 NET ISSUE EXERCISE. In lieu of exercise pursuant to Section
1.1, this Warrant may be exercised by the Warrantholder by the
surrender of this Warrant to the Company, with a duly executed
Exercise Form marked to reflect net issue exercise and specifying
the number of Warrant Shares to be purchased, during normal business
hours on any Business Day during the Exercise Period. The Company
agrees that such Warrant Shares shall be deemed to be issued to the
Warrantholder as the record holder of such Warrant Shares as of the
close of business on the date on which this Warrant shall have been
surrendered. Upon such exercise, the Warrantholder shall be entitled
to receive a number shares equal to the value of this Warrant (or
the portion thereof being canceled) computed as of the date of
surrender hereof to the Company using the following formula:
X = Y(A-B)
------
A
Where:
X = the number of shares of Common Stock to be issued to
Warrantholder under this SECTION 1.2;
Y = the number of shares of Common Stock otherwise purchasable
under this Warrant (at the date of such calculation);
A = the Current Market Price of shares of Common Stock to be
issued to the Warrantholder (at the date of such
calculation);
B = the Current Warrant Price
SEC 1.3 CURRENT MARKET PRICE. For purposes of Section 1.2, current
market price of one share of the Company's Common Stock (the
"Current Market Price") shall mean (per share of Common Stock at any
date): the per share fair market value of the Common Stock (i)
determined by the average of the daily "market prices" over a period
of 10 consecutive Business Days before such date or (ii) if and so
long as there is no exchange or over-the-counter market for the
Common Stock of the Company, the price per share which the Company
could obtain from a willing buyer for the shares sold by the Company
from authorized but unissued shares, as such price shall be
determined in good faith by the Board of Directors of the Company
and the Warrantholder, PROVIDED, HOWEVER, if the Company and the
Warrantholder can not agree on a value, the Company and the
holder(s) of the majority of the Warrants shall retain an
independent investment banking firm to determine the per share fair
market value of the Common Stock, with the expense of such firm to
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be shared equally by the Company and the Warrantholder(s). The
market price referred to in clause (i) above for each such Business
Day shall be: (A) the last sale price on such day on the principal
securities exchange on which the Common Stock is then listed or
admitted to trading (or, if no sale takes place on such day on any
such exchange, the average of the closing bid and asked prices on
such day as officially quoted on any such exchange), or (B) if the
Common Stock is not then listed or admitted on any stock exchange,
the market price for each such business day shall be the last sale
price on such day (or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day in the
over-the-counter market), in either case as reported through NASDAQ,
(or, if such prices are not at the time so reported, as furnished by
any member of the National Association of Securities Dealers, Inc.
selected by the Company).
SEC 1.4 WARRANT SHARES TO BE FULLY PAID AND NONASSESSABLE. All shares
of Common Stock issued upon the exercise of this Warrant shall be
validly issued, fully paid and nonassessable and, if the Common
Stock is then listed on a securities exchange, shall be duly listed
thereon.
SEC 1.5 PARTIAL EXERCISE; FRACTIONAL SHARES. If this Warrant shall
have been exercised only in part, the Company shall, at the time of
delivery of the stock certificate(s), deliver to the Warrantholder a
new Warrant evidencing the rights to purchase the remaining Warrant
Shares, which new Warrant shall in all other respects be identical
with this Warrant. The Company shall not be required upon any
exercise of this Warrant to issue a certificate representing any
fraction of a share of Common Stock, but, in lieu thereof, shall pay
to the holder of this Warrant cash in an amount equal to a
corresponding fraction (calculated to the nearest 1/100 of a share)
of the Current Market Price of one share of Common Stock as of the
date of receipt by the Company of notice of exercise of this
Warrant.
SEC 1.6 LEGEND ON WARRANT SHARES. Each certificate for Warrant Shares
initially issued upon exercise of this Warrant, unless at the time
of exercise such Warrant Shares are registered under the Act, shall
bear the following legend (and any additional legend required by any
securities exchange upon which such Warrant Shares may, at the time
of such exercise, be listed) on the face thereof:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or the laws
of any state."
Any certificate issued at any time in exchange or substitution for
any certificate bearing such legend (except a new certificate issued
upon completion of (i) a public distribution pursuant to a
registration statement or (ii) an exempt sale pursuant to Rule 144
or Rule 144A under the Act of the securities represented thereby)
shall also bear such legend unless, in the opinion of Orrick,
Herrington & Sutcliffe LLP or such other counsel for the holder
thereof as shall be reasonably acceptable to the Company, the
securities represented thereby need no longer be subject to the
restrictions contained in said Section 3. The provisions of said
Section 3 shall be binding upon all subsequent holders of this
Warrant.
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SEC 1.7 ACKNOWLEDGMENT OF CONTINUING OBLIGATION. The Company will, at the
time of any exercise of this Warrant in whole or in part, upon
request of the holder hereof, acknowledge in writing its then
continuing obligation to such holder in respect of any rights
pursuant to this Warrant (including, without limitation, any
right to registration, if any, of the shares of Common Stock
issued upon such exercise) to which such holder shall continue to
be entitled after such exercise in accordance with this Warrant;
PROVIDED, HOWEVER, that the failure of such holder to make any
such request shall not affect the continuing obligation of the
Company to such holder in respect of such rights.
SECTION 2. WARRANT OFFICE; TRANSFER, DIVISION OR COMBINATION OF WARRANTS.
SEC. 2.1 WARRANT OFFICE. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall
initially be the Company's office at 13595 Dulles Technology Drive,
Herndon, Virginia 22071, and may subsequently be such other office
of the Company or of any transfer agent of the Common Stock in the
continental United States as to which written notice has previously
been given to all of the Warrantholders.
SEC. 2.2 OWNERSHIP OF WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and
owner hereof (notwithstanding any notations of ownership or writing
hereon made by anyone other than the Company) for all purposes and
shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer as
provided in this Section 2.
SEC. 2.3 TRANSFER OF WARRANTS. The Company agrees to maintain at the
Warrant Office books for the registration and registration of
transfer of the Warrants, and, subject to the provisions of Section
3 hereof, this Warrant and all rights hereunder are transferable, in
whole or in part, on said books at said office, upon surrender of
this Warrant at said office, together with a written assignment of
this Warrant duly executed by the holder hereof or his duly
authorized agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such
surrender and payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in
the denominations specified in such instrument of assignment, and
this Warrant shall promptly be cancelled. A Warrant may be exercised
by a new holder for the purchase of shares of Common Stock without
having a new Warrant issued.
SEC. 2.4 DIVISION OR COMBINATION OF WARRANTS. This Warrant may be
divided or combined with other Warrants upon presentation hereof and
of any Warrant or Warrants with which this Warrant is to be combined
at the Warrant Office, together with a written notice specifying the
names and denominations in which new Warrants are to be issued,
signed by the holders hereof and thereof or their respective
duly-authorized agents or attorneys. Subject to compliance with
Section 2.3 hereof as to any transfer which may be involved in such
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<PAGE>
division or combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be
divided or combined in accordance with such notice; PROVIDED, that
no holder of this Warrant may divide the Warrant into a Warrant
exercisable into less than 1,000 shares of Common Stock.
SEC. 2.5 EXPENSES OF DELIVERY OF WARRANTS. The Company shall pay all
expenses, taxes and other charges payable in connection with the
preparation, issuance and delivery of any Warrant hereunder;
PROVIDED, HOWEVER, that the Warrantholder shall be required to pay
any and all taxes which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name
other than that of the Warrantholder as then reflected upon the
books of the Company.
SECTION 3. RESTRICTIONS ON EXERCISE AND TRANSFER; REGISTRATION RIGHTS.
SEC. 3.1 RESTRICTIONS ON EXERCISE AND TRANSFER. The holder of this Warrant,
as of the date of issuance hereof, represents to the Company that it
is acquiring the Warrants for its own account for investment
purposes and not with a view to the distribution thereof.
Notwithstanding any provisions contained in this Warrant to the
contrary, this Warrant and the related Warrant Shares shall not be
transferable except pursuant to the proviso contained in the
following sentence or upon the conditions specified in this Section
3, which conditions are intended, among other things, to insure
compliance with the provisions of the Act and applicable state law
in respect of the transfer of this Warrant or such Warrant Shares.
The holder of this Warrant, by its acceptance hereof, agrees that it
will not transfer this Warrant or the related Warrant Shares prior
to delivery to the Company of an opinion of such holder's counsel
(as such opinion and such counsel are described in Section 3.2
hereof) or until registration of such Warrant Shares under the Act
has become effective or after a sale of such Warrant or Warrant
Shares has been consummated pursuant to Rule 144 or Rule 144A under
the Act; PROVIDED, HOWEVER, that such holder may freely transfer
this Warrant or such Warrant Shares (without delivery to the Company
or opinion of Counsel) (w) to one of its nominees, Affiliates or a
nominee thereof, (x) to a pension or profit-sharing fund established
and maintained for its employees or for the employees of any such
Affiliate, (y) from a nominee to any of the aforementioned persons
as beneficial owner of this Warrant or such Warrant Shares, or (z)
to a Qualified Institutional Buyer (so long as such transfer is
effected in compliance with Rule 144A under the Act).
SEC. 3.2 NOTICE OF INTENTION TO TRANSFER; OPINION OF COUNSEL. The
Warrantholder, by its acceptance hereof, agrees that prior to any
transfer of this Warrant or of the related Warrant Shares (other
than as permitted by Section 3.1 hereof or pursuant to a
registration under the Act), the Warrantholder will give written
notice to the Company of its intention to effect such transfer,
together with an opinion of Orrick, Herrington & Sutcliffe LLP, or
such other counsel for the Warrantholder as shall be reasonably
acceptable to the Company, to the effect that the proposed transfer
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<PAGE>
of this Warrant and/or such Warrant Shares may be effected without
registration under the Act, PROVIDED, HOWEVER, that the Company will
reimburse the Warrantholder in full for the reasonable fees and
disbursements of such counsel incurred by or on behalf of the
Warrantholder in connection with obtaining of such opinion. Upon
delivery of such notice and opinion to the Company, the
Warrantholder shall be entitled to transfer this Warrant and/or such
Warrant Shares in accordance with the intended method of disposition
specified in the notice to the Company; PROVIDED, HOWEVER, that if
such method of disposition would, in the opinion of the
aforementioned counsel to the Warrantholder, require that the
Company (a) take any action, and/or execute and file with the
Commission and/or any applicable state securities authority, and/or
(b) deliver to the Warrantholder or any other person any form or
document (other than a registration statement under the Act or under
any state securities laws or any action or documentation required
solely a by federal or state banking regulatory body) in order to
establish that the Warrantholder is entitled to take advantage of
such method of disposition, the Company agrees promptly, at its
expense, to take any such action and/or execute and file and/or
deliver any such form or document, PROVIDED, FURTHER, that the
Company shall not be required to provide a general consent to
service of process or qualify as a foreign corporation in any
jurisdiction solely by reason of this Section 3.2.
SEC. 3.3 [Reserved].
SEC. 3.4 PIGGYBACK REGISTRATIONS.
(a) If the Company at any time prior to June ___, 2001, proposes
to register any of its equity securities (as defined in the
Act), other than securities which are convertible into shares
of Common Stock, under the Act on Forms S-1, S-2 or S-3 (but
not Form S-4 or S-8 or any substantially similar form of
limited scope) or on any other form upon which may be
registered securities similar to the Warrant Shares, it will
at each such time give written notice at least 30 days prior
to the filing of the registration statement to all
Warrantholders of its intention so to do. Such notice shall
specify the proposed date of the filing of the registration
statement and advise each Warrantholder of its right to
participate therein. Upon the written request of any
Warrantholder given prior to the proposed date of filing set
forth in such notice, the Company will cause each Warrant
Share not otherwise covered under an effective registration
statement that such Warrantholder has requested the Company to
register to be registered under the Act, all to the extent
requisite to permit the sale or other disposition of such
Warrant Shares by such Warrantholder .
(b) If, in the written opinion of the underwriter or underwriters
managing the public offering which is the subject
of a registration pursuant to Section 3.4(a) (or in the event
that such distribution shall not be underwritten, in the
written opinion of an investment banking firm of recognized
standing satisfactory to the Warrantholders), the total amount
of the securities to be so registered, when added to the total
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<PAGE>
amount of Warrant Shares which the Warrantholders have
requested to be registered pursuant to Section 3.4(a), will
exceed the maximum amount of securities of the Company which
can be marketed (i) at a price reasonably related to their
then-current market value, or (ii) without otherwise
materially and adversely affecting the entire offering, then
the Company shall have the right to exclude from such
registration such number of Warrant Shares which it would
otherwise be required to register pursuant to Section 3.4(a)
as is necessary to reduce the total amount of securities to be
so registered to the maximum amount of securities which can be
so marketed; PROVIDED, HOWEVER, that if the securities (other
than the Warrant Shares) to be so registered for sale are to
be offered for the account of the Company and others, the
Company may only exclude Warrant Shares pro rata with the
securities held by such other persons (it being agreed that in
the case where such registration is to be effected as a result
of the exercise by a holder of the Company's securities of
such holder's right to cause such securities to be so
registered, such pro rata exclusion shall include the Company,
but shall not include such holder exercising its right to have
the securities so registered).
SEC. 3.5 COMPANY'S OBLIGATIONS IN REGISTRATION. If and whenever
the Company is obligated by the provisions of this Section 3 to
effect the registration of any Warrant Shares under the Act, the
Company will keep the Warrantholder advised in writing as to the
initiation of each registration and will use its best efforts to:
(a) cause such registration statement to remain effective
during the period required for the distribution of the
securities covered by the registration statement (the
"Effectiveness Period"); PROVIDED, HOWEVER, that in the
event that the Warrant Shares covered by such
registration statement are not to be sold to or through
underwriters acting for the Company, the Company shall
not be required to keep such registration statement in
effect, or prepare and file any amendments or
supplements thereto, after the expiration of two years
following the date of this Warrant, SUBJECT, HOWEVER to
the following restrictions:
(i) If, at any time prior to the expiration of the
Effectiveness Period, counsel to the Company (which
counsel shall be experienced in securities laws
matters) has determined in good faith that it is
reasonable to conclude that the filing of a
registration statement or the compliance by the
Company with its disclosure obligations in
connection with such registration statement may
require the disclosure of information which the
Board of Directors of the Company has identified as
material and which the Board of Directors has
determined that the Company has a bona fide business
purpose for preserving as confidential, then the
Company may delay the filing or the effectiveness of
such registration statement (if not then filed or
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<PAGE>
effective, as applicable) and shall not be required
to maintain the effectiveness thereof or amend or
supplement such registration statement for a period
(an "Information Delay Period") expiring three
business days after the earlier to occur of (A) the
date on which such material information is disclosed
to the public or ceases to be material or the
Company is able to so comply with its disclosure
obligations and Commission requirements or (B) 45
days after the Company notifies the Holders of such
good faith determination. There shall not be more
than four Information Delay Periods during the
Effectiveness Period, and there shall not be two
Information Delay Periods during any contiguous 135
day period.
(ii) If, at any time prior to the expiration of
the Effectiveness Period, the Company is advised by
a nationally recognized investment banking firm
selected by the Company that, in such firm's written
reasonable opinion addressed to the Company, sales
of Common Stock pursuant to a registration statement
at such time would materially adversely affect any
immediately planned underwritten public equity
financing by the Company of at least $5 million, the
Company shall not be required to maintain the
effectiveness of such registration statement or
amend or supplement such registration statement for
a period (a "Transaction Delay Period") commencing
on the date of pricing of such equity financing and
expiring three business days after the earliest to
occur of (i) the abandonment of such financing or
(ii) 90 days after the completion of such financing.
There shall not be more than two Transaction Delay
Periods during the Effectiveness Period.
A Transaction Delay Period and an Information
Delay Period are hereinafter collectively referred to
as "Delay Periods" or a "Delay Period." The Company
will give prompt written notice, in the manner
prescribed by Section 10(b) hereof, to each Holder of
each Delay Period. Such notice shall be given (i) in
the case of a Transaction Delay Period, at least 20
days in advance of the commencement of such Delay
Period and (ii) in the case of an Information Delay
Period, as soon as practicable after the Board of
Directors makes the determination referenced in
Section 3.5(a)(i). Such notice shall state to the
extent, if any, as is practicable, an estimate of the
duration of such Delay Period. Each Holder agrees
that (i) upon receipt of such notice of an
Information Delay Period it will forthwith
discontinue disposition of any restricted securities
of the Company pursuant to the registration
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<PAGE>
statement, (ii) upon receipt of such notice of a
Transaction Delay Period it will forthwith
discontinue disposition of the Common Stock pursuant
to the registration statement and (iii) in either
such case, will not deliver any prospectus forming a
part of the registration statement in connection with
any sale of restricted securities or Common Stock, as
applicable until the expiration of such Delay Period.
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the
prospectus used in connection with such registration
statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of
all securities covered by such registration statement;
PROVIDED, HOWEVER, that in any event, the Company's
obligations under this Section 3.5(b) shall terminate
two years after the effective date of this Agreement;
(c) furnish such number of prospectuses and other
documents incident thereto, including any amendment of
or supplement to the prospectus, as the Warrantholder
from time to time may reasonably request;
(d) notify the Warrantholder at any time when a
prospectus relating thereto is required to be delivered
under the Act of the happening of any event which would
cause the prospectus included in such registration
statement, as then in effect, to include an untrue
statement of a material fact or omit to state a material
fact required to be stated therein or otherwise
necessary to make the statements therein not misleading
or incomplete in the light of the circumstances then
existing, and prepare and furnish to the Warrantholder a
reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such
shares, such prospectus shall not include an untrue
statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make
the statements therein not misleading or incomplete in
the light of the circumstances then existing;
(e) provide a transfer agent and registrar for all
Warrant Shares registered pursuant to such registration
statement and a CUSIP number for all such Warrant
Shares, in each case not later than the effective date
of such registration
(f) use its reasonable efforts to register or qualify
the Warrant Shares covered by such registration
statement under such other securities or blue sky laws
of such jurisdictions as the Warrantholders for whom
such Warrant Shares are registered or are to be
registered shall reasonably request, and do any and all
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other reasonable acts and things to so register or
qualify which may be necessary or advisable to enable
such Warrantholders to consummate the disposition in
such jurisdictions of such Warrant Shares, PROVIDED,
HOWEVER, that the Company shall not be required to
provide a general consent to service of process or
qualify as a foreign corporation in any jurisdiction
solely by reason of this Section 3.5;
In connection with any underwritten offering effected pursuant
to this Section 3, the Company will enter into an underwriting
agreement reasonably necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the
underwriter so requests, the underwriting agreement will contain
customary indemnification and contribution provisions. To the extent
reasonably necessary to effect the offer and sale of Common Stock in
connection with any underwritten offering in which it is
participating, the Warrantholder will agree to consent to and where
applicable, be subject to the terms and conditions of such
underwriting agreement.
SEC. 3.6 PAYMENT OF REGISTRATION EXPENSES. The costs and expenses
of all registrations under the Act and of all other actions which
the Company is required to take or effect pursuant to this Section 3
shall be paid by the Company (including, without limitation, all
registration, qualification and filing fees, printing expenses,
expenses of distributing prospectuses and other documents, fees and
disbursements of counsel and accountants for the Company, and
expenses of any special audits incident to or required in connection
with any such registration hereof, but excluding the fees and
disbursements of special counsel for the Warrantholders, any
consultants retained by the Warrantholders and underwriters' or
brokers' discounts or commissions applicable to the Warrant Shares).
SEC. 3.7 INFORMATION FROM WARRANTHOLDERS. Notices and requests
delivered by Warrantholders to the Company pursuant to this Section
3 shall contain such information regarding the Warrant Shares and
the intended method of disposition thereof as shall reasonably be
required in connection with the action to be taken. To the extent
that any Warrantholder fails to provide such information to the
Company with respect to any of such Warrantholder's Warrant Shares,
the Company shall be relieved of its obligation to maintain
registration of such Warrant Shares until the such Warrantholder has
provided the Company with the required information and the Company
has had a reasonable time thereafter (but in no event more than 10
calendar days) in which to incorporate such information into its
registration materials.
SEC. 3.8 COMPANY'S INDEMNIFICATION. In the event of any registration
under the Act of any Warrant Shares pursuant to this Section 3, the
Company hereby agrees to indemnify and hold harmless each
Warrantholder disposing of such Warrant Shares and each other
person, if any, who controls such Warrantholder within the meaning
of Section 15 of the Act, as well as each other person (including
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underwriters) who participates in the offering of such Warrant
Shares against any losses, claims, damages or liabilities, joint or
several, to which such Warrantholder or controlling person or
participating person may become subject under the Act or otherwise,
in so far as such losses, claims, damages or liabilities (or
proceedings in respect thereof): (a) arise out of or are based upon
any untrue statement or alleged untrue statement of any material
fact contained, on the effective date thereof: (i) in any
registration statement under which such Warrant Shares were
registered under the Act, (ii) in any preliminary prospectus or
final prospectus contained therein, or (iii) in any amendment or
supplement thereto, or (b) arise out of or are based upon the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse such Warrantholder and
each such controlling person or participating person for any legal
or any other expenses incurred by such Warrantholder or such
controlling person or participating person in connection with
investigating or defending any such loss, claim, damage, liability
or proceeding; PROVIDED, HOWEVER, that the Company will not be
liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon (a) an untrue
statement or alleged untrue statement or omission or alleged
omission made in such registration statement, said preliminary or
final prospectus or said amendment or supplement in reliance upon
and in conformity with written information furnished to the Company
by an instrument duly executed by such Warrantholder or such
controlling or participating person, as the case may be,
specifically for use in the preparation thereof or (b) an untrue
statement or alleged untrue statement, omission or alleged omission
in a prospectus, if such untrue statement or alleged untrue
statement, omission or alleged omission is corrected in an amendment
or supplement to the prospectus which amendment or supplement is
delivered to such Warrantholder and such Warrantholder thereafter
fails to deliver such prospectus as so amended or supplemented prior
to or concurrently with such Warrantholder's sale of Warrant Shares
to the person asserting such loss, claim, damage, liability or
expense.
SEC. 3.9 WARRANTHOLDER'S INDEMNIFICATION. It shall be a condition of
the Company's obligation under this Section 3 to effect any
registration under the Act that there shall have been delivered to
the Company an agreement or agreements duly executed by each
Warrantholder for whom Warrant Shares are to be so registered,
whereby such Warrantholder agrees to indemnify and hold harmless the
Company, each other person referred to in subparts (1), (2) and (3)
of Section 11(a) of Section 15 of the Act in respect of such
registration statement and each other person, if any, which controls
the Company within the meaning of the Act against any losses,
claims, damages or liabilities, joint or several, to which the
Company or its controlling person may become subject under the Act
or otherwise, in so far as such losses, claims, damages or
liabilities (or proceedings in respect thereof): (a) arise out of or
are based upon any untrue statement or alleged untrue statement of
any material fact contained, on the effective date thereof: (i) in
any registration statement under which such Warrant Shares were
registered under the Act, (ii) in any preliminary prospectus or
final prospectus contained therein, or (iii) in any amendment or
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supplement thereto, or (b) arise out of or are based upon the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse the Company and each such
controlling person for any legal or any other expenses incurred by
the Company or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability
or proceeding, PROVIDED, HOWEVER, that such Warrantholder shall be
liable to the Company only to the extent that such losses, claims,
damages or liabilities (or proceeding in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue
statement of any material fact contained, on the effective date
thereof, in any registration statement under which such Warrant
Shares were registered under the Act, in any preliminary prospectus
or final prospectus contained therein or in any amendment or
supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, which, in each such case, has been made in or omitted
from such registration statement, said preliminary or final
prospectus or said amendment or supplement in reliance upon, and in
conformity with, written information furnished to the Company by an
instrument duly executed by such Warrantholder specifically for use
in the preparation thereof. The Company shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the
distribution, to the same extent as provided above, with respect to
information with respect to such persons so furnished in writing by
such persons specifically for inclusion in any prospectus or
registration statement.
SEC. 3.10 CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any person entitled to
indemnification hereunder will (a) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks
indemnification and (b) unless, in such indemnified party's
reasonable judgment, a conflict of interest may exist between such
indemnified and indemnifying parties with respect to such claim,
permit such indemnifying party to assume the defense of such claim
with counsel reasonably satisfactory to the indemnified party;
PROVIDED, HOWEVER, that the failure of an indemnified party to give
notice as provided herein shall not relieve the indemnifying party
of its obligations under this Section 3.10 with respect to such
indemnified party, except to the extent that the indemnifying party
is actually prejudiced by such failure. Whether or not such defense
is assumed by the indemnifying party, the indemnifying party will
not be subject to any liability for any settlement made without its
consent (but such consent will not be unreasonably withheld). No
indemnifying party will consent to the entry of any judgment or
enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such
claim or litigation. An indemnifying party who is not entitled to,
or elects not to, assume the defense of the claim against the
indemnified party, will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by
such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest
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may exist between such indemnified party and any other such
indemnified parties with respect to such claim, in which event the
indemnifying party shall be obligated to pay the fees and expenses
of such additional counsel or counsels.
If for any reason the indemnification provided for in the
preceding Sections 3.8 and 3.9 hereof is unavailable to an
indemnified party as contemplated thereby, the indemnifying party
shall contribute to the amount paid or payable by the indemnified
party as a result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying
party, but also the relative fault of the indemnified party and the
indemnifying party, as well as any other relevant equitable
considerations. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled
to contribution from any person who was not guilty of fraudulent
misrepresentation.
SEC. 3.11 UNDERWRITING AGREEMENT INDEMNIFICATION PROVISIONS.
Notwithstanding the provisions of Sections 3.8, 3.9 and 3.10 hereof,
if an underwriting agreement executed by the Company pursuant to
Section 3.5 hereof shall contain indemnification, contribution and
related procedural provisions in a form customary to the underwriter
which are substantially to the same effect as the provisions
provided for in Sections 3.8, 3.9 and 3.10 hereof, such customary
indemnification provisions shall be incorporated in such
underwriting agreement in lieu of those provided for in Sections
3.8, 3.9 and 3.10 hereof.
SEC. 3.12 PUBLIC INFORMATION. The Company covenants and agrees that if
and so long as the Common Stock shall be registered under Section 12
of the Exchange Act, at any time when any Warrantholder so entitled
desires to make sales of any Warrant Shares in reliance on Rule 144
or Rule 144A under the Act either (i) there will be available
adequate current public information with respect to the Company as
required by said Rules, or (ii) if such information is not available
the Company will use its best efforts to make such information
available without delay. Without limiting the foregoing, after the
time of any such registration the Company will timely file with the
Commission all reports required to be filed under Sections 13 and
15(d) of the Exchange Act and will promptly furnish to any
Warrantholder so requesting a written statement that the Company has
complied with all such reporting requirements.
SEC. 3.13 NO CONFLICTING REGISTRATION RIGHTS. The Company covenants and
agrees that if and so long as any Warrants or any Warrant Shares
shall remain outstanding and the holders thereof shall have any
rights under this Section 3, it will not enter into any agreement
with any person creating any rights with respect to any shares of
Common Stock or any other security in conflict with or inconsistent
with any rights retained by any holder of Warrants or Warrant Shares
pursuant to this Section 3.
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SECTION 4. ANTI-DILUTION PROVISIONS.
SEC. 4.1 ADJUSTMENT OF CURRENT WARRANT PRICE AND NUMBER OF SHARES
PURCHASABLE. In the event that the Company shall (A) pay a dividend
or make a distribution, in shares of Common Stock of the Company or
any subsidiary which is not directly or indirectly wholly owned by
the Company, (B) split or subdivide its outstanding Common Stock
into a greater number of shares, or (C) combine its outstanding
Common Stock into a smaller number of shares, then in each such
case, the Current Warrant Price in effect immediately prior thereto
shall be adjusted so that the Warrantholder shall be entitled to
receive the number of shares of Common Stock that such Warrantholder
would have owned or have been entitled to receive after the
occurrence of any of the events described above had such warrant
been converted immediately prior to the occurrence of such event.
Any adjustment made pursuant to this Section 4.1 shall become
effective immediately after the close of business on the record date
in the case of a dividend or distribution and shall become effective
immediately after the close of business on the effective date in the
case of such subdivision, split or combination, as the case may be.
Any shares of Common Stock issuable in payment of a dividend shall
be deemed to have been issued immediately prior to the close of
business on the record date for such dividend for purposes of
calculating the number of outstanding shares of Common Stock under
Sections 4.2(a) and (b).
SEC. 4.2 CALCULATION OF ADJUSTMENTS.
(a) In the event that the Company shall commit to issue or
distribute Common Stock or issue rights, warrants, options
or convertible or exchangeable securities entitling the
holder thereof to subscribe for or purchase, convert into
or exchange for Common Stock, in any such case at a price
per share less than the Current Market Price on the
earliest of (i) the date the Company shall enter into a
firm contract for such issuance or distribution, (ii) the
record date for the determination of stockholders entitled
to receive any such Common Stock or rights, warrants,
options or convertible or exchangeable securities, if
applicable, or (iii) the date of actual issuance or
distribution of any such Common Stock or rights, warrants,
options or convertible or exchangeable securities
(PROVIDED, HOWEVER, that the issuance of Common Stock upon
the exercise of rights, warrants, options or convertible or
exchangeable securities will not cause an adjustment in the
Current Warrant Price if no such event would have been
required at the time such right, warrant, option or
convertible or exchangeable security was issued), then the
Current Warrant Price in effect immediately prior to such
earliest date shall be reduced so that the Current Warrant
Price shall equal the price determined by multiplying the
Current Warrant Price in effect immediately prior to such
earliest date by the fraction:
(x) whose numerator shall be the number of shares of Common
Stock outstanding on such date, plus the number of
shares which the aggregate offering price of the total
number of shares so offered would purchase at such
Current Market Price (such amount, with respect to any
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such rights, warrants, options or convertible or
exchangeable securities, determined by multiplying the
total number of shares subject thereto by the exercise
price of such rights, warrants, options or convertible
or exchangeable securities and dividing the product so
obtained by the Current Market Price); and
(y) whose denominator shall be the number of shares of
Common Stock outstanding on such date (including any
rights, warrants, options or convertible securities
issuable after giving effect to any anti-dilution
provisions of the Company's other securities as a
result of such Adjustment Event), plus the number of
additional shares of Common Stock to be issued or
distributed or receivable upon exercise of any such
right, warrant, option or convertible or exchangeable
security.
Such adjustment shall be made successively whenever any such
Common Stock, rights, warrants, options or convertible or
exchangeable securities are issued or distributed. In
determining whether any rights, warrants or options entitle
the holders to subscribe for or purchase shares of Common
Stock at less than Current Market Price, and in determining
the aggregate offering price of shares of Common Stock so
issued or distributed, there shall be taken into account any
consideration received by the Company for such Common Stock,
rights, warrants, options or convertible or exchangeable
securities, the value of such consideration, if other than
cash, to be determined by the Board of Directors, whose good
faith determination shall be conclusive, and described in a
certificate filed with the Company's corporate records. If any
right, warrant, option or convertible or exchangeable security
to purchase or acquire Common Stock, the issuance of which
resulted in an adjustment in the Conversion Price pursuant to
this Section 4.2 shall expire and shall not have been
exercised, the Current Warrant Price shall immediately upon
expiration be recomputed to the Current Warrant Price which
would have been in effect had the adjustment of the Current
Warrant Price made upon the issuance of such right, warrant,
option or convertible or exchangeable security been made on
the basis of offering for subscription, purchase or issuance,
as the case may be, only of that number of shares of Common
Stock actually purchased or issued upon the actual exercise of
such right, warrant, option or convertible or exchangeable
security.
(b) No adjustment in the Current Warrant Price shall be required
unless the adjustment would require an increase or decrease of
at least 1% in the Current Warrant Price, PROVIDED, HOWEVER,
that any adjustments that by reason of this Section 4.2(b) are
not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations
under this Section 4.2(b) shall be made to the nearest cent.
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(c) Notwithstanding anything to the contrary set forth in this
Section 4.2, no adjustment shall be made to the Current
Warrant Price upon (A) the issuance of shares of Common Stock
pursuant to any compensation or incentive plan for officers,
employees or consultants of the Company which plan has been
directors, duly approved on or prior to the date of this
Warrant by the Compensation Committee of the Board of
Directors (or if there is no such committee then serving, by
the majority vote of the Directors then serving who are not
(i) employees or officers of the Company, (b) 5% or greater
stockholders of the Company, or (c) of an officer, employee
or affiliate of any such 5% or greater stockholder) and, if
required by law, the requisite vote of the stockholders of
the Company (unless the exercise price or maximum
authorized number of shares of Common Stock issuable under
such plan is changed after the date hereof, other than by
operation of the anti-dilution provisions hereof); or ( B)
the issuance of Common Stock upon the conversion or
exercise of any option or warrant of the Company
outstanding as of the date of this warrant, unless the
conversion or exercise price thereof is changed thereafter
(other than solely by operation of the anti-dilution
provisions of such options or warrants).
(d) The Company from time to time may reduce the Current Warrant
Price by any amount for any period of time in the discretion
of the Board of Directors. A voluntary reduction of the
Current Warrant Price does not change or adjust the Current
Warrant Price otherwise in effect for purposes of this Section
4.2.
SEC. 4.3 EFFECT OF MERGER OR CONSOLIDATION. In case the Company shall, while
this Warrant remains outstanding, enter into any consolidation with
or merger into any other corporation wherein the Company is not the
surviving corporation, or wherein securities of a corporation other
than the Company are distributable to holders of Common Stock, or
sell or convey its property as an entirety or substantially as an
entirety followed by distribution of any or all of the proceeds
thereof to shareholders, and in connection with such consolidation,
merger, sale or conveyance, shares of stock or other securities or
property shall be issuable or deliverable in exchange for the Common
Stock, then, as a condition of such consolidation, merger, sale or
conveyance, lawful and adequate provision shall be made whereby the
Warrantholder shall thereafter be entitled to purchase pursuant to
this Warrant (in lieu of the number of shares of Common Stock which
such Warrantholder would have been entitled to purchase immediately
prior to such consolidation, merger, sale or conveyance) the shares
of stock or other securities or property to which a holder of any
equal number of shares of Common Stock would have been entitled at
the time of such consolidation, merger, sale or conveyance, at an
aggregate purchase price equal to that which would have been payable
if such number of shares of Common Stock had been purchased by
exercise of this Warrant immediately prior thereto. In case of any
such consolidation, merger, sale or conveyance, appropriate
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provisions shall be made with respect to the rights and interests
thereafter of the Warrantholders, to the end that all the provisions
of the Warrants (including the provisions of this Section 4) shall
thereafter be applicable, as nearly as practicable, to such stock or
other securities or property thereafter deliverable upon the
exercise of the Warrants. The Company shall not effect any such
consolidation, merger, sale or conveyance unless prior to or
simultaneously with the consummation thereof, the successor
corporation (if other than the Company) resulting from such
consolidation or merger or purchasing such assets shall assume by
written instrument, executed and mailed or delivered to each
Warrantholder, the obligation to deliver to such Warrantholder such
shares of stock or other securities or property as such
Warrantholder may be entitled to receive in accordance with the
foregoing provisions, which instrument shall contain the express
assumption by such successor corporation of the due and punctual
performance and observance of every provision of this Warrant to be
performed and observed by the Company and of all liabilities and
obligations of the Company hereunder.
SEC. 4.4 REORGANIZATION OR RECLASSIFICATION. In case of any capital
reorganization or any reclassification of the capital stock of the
Company (except as provided in Section 4.3 hereof) while this
Warrant remains outstanding, then, as a condition of such
reorganization or reclassification, lawful and adequate provision
shall be made whereby the holder of this Warrant shall thereafter be
entitled to purchase pursuant to this Warrant (in lieu of the number
of shares of Common Stock which such holder would have been entitled
to purchase immediately prior to such reorganization or
reclassification) the shares of stock of any class or classes or
other securities or property to which the holders of such number of
shares of Common Stock would have been entitled at the time of such
reorganization or reclassification, at an aggregate purchase price
equal to that which would have been payable if such number of shares
of Common Stock had been purchased immediately prior to such
reorganization or reclassification. In case of any such capital
reorganization or reclassification, appropriate provisions shall be
made with respect to the rights and interests thereafter of the
Warrantholders, to the end that all the provisions of the Warrants
(including the provisions of this Section 4) shall thereafter be
applicable, as nearly as practicable, to such stock or other
securities or property thereafter deliverable upon the exercise of
the Warrants.
SEC. 4.5 STATEMENT OF ADJUSTMENT. Upon each adjustment of the Current
Warrant Price and the number of shares of Common Stock purchasable
hereunder, and in the event of any change in the rights of the
Warrant holder by reason of other events herein set forth, then and
in each such case, the Company will promptly prepare a schedule
setting forth the adjusted Current Warrant Price and the adjusted
number of shares purchasable hereunder, or specifying the other
shares of stock, other securities or property and the amount thereof
receivable as a result of such change in rights, and setting forth
in reasonable detail the method of calculation and the facts upon
which such calculation is base. The Company will promptly mail a
copy of such schedule to the registered holder of this Warrant.
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SEC. 4.6 DETERMINATIONS BY THE BOARD OF DIRECTORS. All determinations
by the Board of Directors of the Company under this Warrant shall be
made in good faith with due regard to the interests of the holder of
this Warrant and the other holders of securities of the Company and
in accordance with good financial practice, and all valuations made
by the Board of Directors of the Company under the terms of this
Warrant must be made with due regard to any market quotations of
securities involved in, or related to, the subject of such
valuation.
SEC. 4.7 NOTIFICATIONS BY THE COMPANY. In case at any time the
Company proposes:
(a) to pay any dividend payable in stock (of any class or
classes) or in Convertible Securities upon Common Stock or
make any distribution to the holders of the Common Stock; or
(b) to make an offer for subscription pro rata to the holders of
Common Stock of any additional shares of stock of any class
or other rights or to grant to the holders of Common Stock
generally any rights, warrants or options; or
(c) to effect any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger
of the Company with, or sale of all or substantially all of
its assets to, another corporation; or
(d) to effect a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in any one or more such cases, the Company shall give written
notice to the registered holder of this Warrant of the date on which
(i) the transfer books of the Company shall close or a record date
shall be taken for such dividend, distribution, subscription rights
or grant, or (ii) a record date shall be taken to determine
stockholders entitled to notice of and to vote at any meeting of
stockholders at which any such proposed reorganization,
reclassification, consolidation, merger, sale of assets,
dissolution, liquidation or winding-up is to be considered, or (iii)
such reorganization, reclassification, consolidation, merger, sale
of assets, dissolution, liquidation or winding-up shall take place,
as the case may be. Such notice shall also specify the date as of
which the holders of Common Stock of record shall participate in
such dividend, distribution, subscription rights or grant, or shall
be entitled to vote on or exchange their Common Stock for securities
or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale of assets,
dissolution, liquidation or winding-up, as the case may be. Such
written notice shall be given not less than 20 days and not more
than 60 days prior to such date on which the transfer books of the
Company shall close or a record date shall be taken or any event
shall occur, as the case may be, and such notice may state that any
such action will be taken only if certain events specified in such
notice (such as the clearing of proxy material by the Commission or
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an affirmative vote of stockholders) occur prior thereto.
SECTION 5. CERTAIN DEFINITIONS.
For all purposes of this Warrant, unless the context otherwise requires,
the following terms shall have the following respective meanings:
"ACT": the Securities Act of 1933, as amended from time to time, or
any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"ADJUSTMENT EVENT": see Section 4.2(a) hereof.
"AFFILIATE" of an entity: any person controlling, controlled by or under
common control with such entity or who participates in a group within the
meaning of Section 13(d) of the Exchange Act which owns, including, but not
limited to (i) any director or officer of such entity or any of its subsidiaries
and (ii) any person who owns beneficially or of record 5% or more of the shares
of the capital stock of such entity or any of its subsidiaries or of which such
entity, directly or indirectly, owns beneficially or of record 5% or more of the
shares of capital stock.
"BUSINESS DAY": means any day other than a Saturday, Sunday or a day
on which national banks are authorized by law to close in California.
"CLOSING DATE": June ___, 1999.
"COMMISSION": the Securities and Exchange Commission, or any other
federal agency then administering the Act.
"COMMON STOCK": the Company's authorized Common Stock, as such class
existed on the Closing Date, including stock of the Company of any class
thereafter authorized which ranks, or is generally entitled to a participation,
as to assets or dividends substantially on a parity with Common Stock and
generally enjoys voting rights on a parity with Common Stock.
"COMPANY": Netrix Corporation, and any other corporation assuming the
Warrants pursuant to Section 4.4 hereof.
"CONVERTIBLE SECURITIES": see Section 4.2(b)(ii) hereof.
"CURRENT MARKET PRICE" (per share of Common Stock at any date): the per
share fair market value of the Common Stock (i) determined by the average of the
daily "market prices" over a period of 20 consecutive Business Days before such
date or (ii) if and so long as there is no exchange or over-the-counter market
for the Common Stock of the Company, the price per share which the Company could
obtain from a willing buyer for the shares sold by the Company from authorized
but unissued shares, as such price shall be determined in good faith by the
Board of Directors of the Company and the holder of the Warrant, provided if the
Company and the holder can not agree on a value, the Company and the holder(s)
of the majority of the Warrants shall retain an independent investment banking
firm, at the Company's expense, to determine the per share fair market value of
the Common Stock. The market price referred to in clause (i) above for each such
Business Day shall be the last sale price on such day on the principal
securities exchange on which the Common Stock is then listed or admitted to
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trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or if the Common Stock is not then listed or admitted on any
stock exchange, the market price for each such Business Day shall be the last
sale price on such day, or, if no sale takes place on such day, the average of
the closing bid and asked prices on such day in the over-the-counter market, in
either case as reported through NASDAQ, or, if such prices are not at the time
so reported, as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company.
"CREDIT AGREEMENT": see the second paragraph of this Warrant.
"CURRENT WARRANT PRICE" (per share of Common Stock at any date): the price
at which one share of Common Stock may be purchased hereunder at any time;
initially $0.01 and thereafter such price as may be determined from time to time
pursuant to Section 4 hereof.
"EXCHANGE ACT": the Securities Exchange Act of 1934, as amended from
time to time, or any successor federal statute, and the rules and regulations
of the Commission thereunder.
"OUTSTANDING": when used with reference to Common Stock at any date, all
issued shares of Common Stock (including, but without duplication, shares deemed
issued pursuant to Section 4 hereof) at such date, except shares then held in
the treasury of the Company.
"PERSON": an individual, corporation, partnership, joint venture,
trust estate, unincorporated organization or government or an agency or
political subdivision thereof.
"PRESUMED CONSIDERATION": see Section 4.2(b)(vii)(B) hereof.
"TOTAL WARRANTS": the sum of the aggregate number of shares of (i) Common
Stock purchasable by the holder(s) upon exercise of all Warrants then
outstanding and (ii) Warrant Shares which had been issued pursuant to the
exercise of Warrants.
"WARRANT OFFICE": see Section 2.1 hereof.
"WARRANT SHARES": the shares of Common Stock purchasable or purchased by
the Warrantholders upon the exercise of the Warrants. Unless otherwise expressly
stated herein, Warrant Shares shall not include shares of Common Stock purchased
upon exercise of a Warrant which have been sold by a Warrantholder pursuant to a
registration statement under the Act.
"WARRANTHOLDER": the registered holder of a Warrant or Warrants or any
related Warrant Shares.
"WARRANTS": the warrants (of which this Warrant is one) originally issued
by the Company pursuant to the Credit Agreement evidencing the right initially
to purchase an aggregate of 50,000 shares of Common Stock and all warrants
issued in substitution, combination or subdivision of any thereof.
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CERTAIN COVENANTS OF THE COMPANY
The Company covenants and agrees that:
(a) it will reserve and set apart and have at all times, free
from preemptive rights, a number of shares of authorized but
unissued Common Stock or other securities or property
deliverable upon the exercise of the Warrants sufficient to
enable it at any time to fulfill all its obligations
thereunder;
(b) before taking any action which would cause an adjustment
reducing the Current Warrant Price below the then par value
of the shares of Common Stock issuable upon exercise of the
Warrants, it will take any corporate action which may be
necessary in order that the Company may validly and legally
issue fully paid and nonassessable shares of such Common
Stock at such adjusted Current Warrant Price;
(c) if any shares of Common Stock required to be reserved for
the purposes of the exercise of this Warrant require
registration with or approval of any governmental authority
under any federal law (other than the Act) or under any
state law before such shares may be issued upon exercise of
this Warrant, the Company will, at its expense, as
expeditiously as possible, cause such shares to be duly
registered or approved, as the case may be;
(d) if and so long as the Common Stock is listed on any national
securities exchange (as defined in the Exchange Act), it
will, at its expense, obtain and maintain the approval for
listing upon official notice of issuance of all shares of
Common Stock issuable upon the exercise of the Warrants at
the time outstanding and maintain the listing of such shares
after their issuance; and the Company will so list on such
national securities exchange, will register under the
Exchange Act (or any similar statute then in effect) and
will maintain such listing of any other securities that at
any time are issuable upon exercise of the Warrants if, and
at the time that, any securities of the same class shall be
listed on such national securities exchange by the Company;
and
(e) this Warrant shall be binding upon any corporation
succeeding to the Company by merger, consolidation or
acquisition of all or substantially all of the Company's
assets.
SECTION 7. NOTICE.
Any notice or other document required to be given or delivered to the
Warrantholders shall be delivered at, or sent by certified or registered mail
to, each such holder at the last address shown on the books of the Company
maintained at the Warrant Office for the registration and registration of
transfer of the Warrants or at any more recent address of which any
Warrantholder shall have notified the Company in writing. Any notice or other
document required or permitted to be given or delivered to holders of record of
outstanding Warrant Shares shall be delivered at, or sent by certified or
registered mail to, each such holder at such holder's address as the same
appears on the stock records of the Company. Any notice or other document
required or permitted to be given or delivered to the Company, other than such
notice or documents required to be delivered to the Warrant Office, shall be
delivered at, or sent by certified or registered mail to, the office of the
Company at 13595 Dulles Technology Drive, Herndon, Virginia 22071, or such other
address within the United States of America as shall have been furnished by the
Company to the Warrantholders and the holders of record of Warrant Shares. Any
notice or other document sent by certified or registered mail, return receipt
requested, shall be deemed to have been delivered and received when sent if the
receipt is appropriately completed and returned. Notices or documents delivered
in any other manner shall be deemed to have been delivered only when and if
received.
SECTION 8. LIMITATIONS OF LIABILITY; NOT STOCKHOLDERS.
No provision of this Warrant shall be construed as conferring upon the
holder hereof the right to vote, consent, receive dividends or receive notice
other than as herein expressly provided in respect of meetings of stockholders
for the election of directors of the Company or any other matter whatsoever as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the holder hereof to purchase shares of Common Stock, and no mere
enumeration herein of the rights or privileges of the holder hereof, shall give
rise to any liability of such holder for the purchase price of any Warrant
Shares or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
SECTION 9. LOSS, DESTRUCTION, ETC. OF WARRANTS.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
mutilation or destruction of any Warrant, and in the case of any such loss,
theft or destruction upon delivery of a bond of indemnity in such form and
amount as shall be reasonably satisfactory to the Company, or in the event of
such mutilation upon surrender and cancellation of the Warrant, the Company will
make and deliver a new Warrant, of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Warrant; PROVIDED, HOWEVER, that neither the original
recipient of this Warrant pursuant to the Credit Agreement nor any other
financial institution having combined net capital, capital surplus and undivided
profits in excess of $50,000,000 which shall become a Warrantholder shall be
required to provide any such bond of indemnity. Any Warrant issued under the
provisions of this Section 9 in lieu of any Warrant alleged to be lost,
destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an
original contractual obligation on the part of the Company.
SECTION 10. LAW GOVERNING.
This Warrant shall be governed by, and construed and enforced in
accordance with, the law of the State of California.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its Chairman of the Board, President or a Vice President and its
corporate seal to be impressed hereon and attested by its Secretary or an
Assistant Secretary.
Dated: June __, 1999
NETRIX CORPORATION
By: /s/
_______________________________________
Title:
[Corporate Seal]
Attest:
/s/
_____________________________________
Secretary
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EXHIBIT A
EXERCISE FORM
(To be executed upon exercise of this Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase Warrant Shares and (check one):
herewith tenders payment for _______ of the Warrant Shares to the
order of Netrix Corporation in the amount of $_________ in
accordance with the terms of this Warrant; or
herewith tenders this Warrant for _______ Warrant Shares pursuant to
the Net Issue Exercise provisions of SECTION 1.3 of this Warrant.
The undersigned requests that a certificate (or certificates) for such Warrant
Shares be registered in the name of the undersigned and that such certificate
(or certificates) be delivered to the undersigned's address below.
In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the Warrant Shares are being acquired solely for the account
of the undersigned and not as a nominee for any other party, or for investment,
and that the undersigned will not offer, sell or otherwise dispose of any such
Warrant Shares except under circumstances that will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
Dated: ___________________.
Signature ______________________________
______________________________
(Print Name)
______________________________
(Street Address)
______________________________
(City) (State) (Zip Code)
If said number of shares shall not be all the shares purchasable under the
within Warrant, a new Warrant is to be issued in the name of said undersigned
for the balance remaining of the shares purchasable thereunder.
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ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________ the rights represented by the foregoing Warrant of
Netrix Corporation and appoints _____________________________ attorney to
transfer said rights on the books of said corporation, with full power of
substitution in the premises.
___________________________________________
Signature Guaranteed:
Dated:
1. Delay Periods; Suspension of Sales.
If at any time prior to the expiration of the Effectiveness Period counsel
to the Company (which counsel shall be experienced in securities laws
matters) has determined in good faith that it is reasonable to conclude that
the filing of the Shelf Registration Statement or the compliance by the
Company with its disclosure obligations in connection with the Shelf
Registration Statement may require the disclosure of information which the
Board of Directors of the Company has identified as material and which the
Board of Directors has determined that the Company has a bona fide business
purpose for preserving as confidential, then the Company may delay the
filing or the effectiveness of the Shelf Registration Statement (if not then
filed or effective, as applicable) and shall not be required to maintain the
effectiveness thereof or amend or supplement the Shelf Registration
Statement for a period (an "Information Delay Period") expiring three
business days after the earlier to occur of (A) the date on which such
material information is disclosed to the public or ceases to be material or
the Company is able to so comply with its disclosure obligations and
Commission requirements or (B) 45 days after the Company notifies the
Holders of such good faith determination. There shall not be more than four
Information Delay Periods during the Effectiveness Period, and there shall
not be two Information Delay Periods during any contiguous 135 day period.
(b) If at any time prior to the expiration of the Effectiveness Period the
Company is advised by a nationally recognized investment banking firm
selected by the Company that, in such firm's written reasonable opinion
addressed to the Company, sales of Common Stock pursuant to the Shelf
Registration Statement at such time would materially adversely affect any
immediately planned underwritten public equity financing by the Company of
at least $5 million, the Company shall not be required to maintain the
effectiveness of the Shelf Registration Statement or amend or supplement the
Shelf Registration Statement for a period (a "Transaction Delay Period")
commencing on the date of pricing of such equity financing and expiring
three business days after the earliest to occur of (i) the abandonment of
such financing or (ii) 90 days after the completion of such financing. There
shall not be more than two Transaction Delay Periods during the
Effectiveness Period.
-26-
<PAGE>
A Transaction Delay Period and an Information Delay Period are hereinafter
collectively referred to as "Delay Periods" or a "Delay Period." The Company
will give prompt written notice, in the manner prescribed by Section 10(b)
hereof, to each Holder of each Delay Period. Such notice shall be given
(i) in the case of a Transaction Delay Period, at least 20 days in advance
of the commencement of such Delay Period and (ii) in the case of an
Information Delay Period, as soon as practicable after the Board of
Directors makes the determination referenced in Section 3(a). Such notice
shall state to the extent, if any, as is practicable, an estimate of the
duration of such Delay Period. Each Holder, by his acceptance of any
Transfer Restricted Securities, agrees that (i) upon receipt of such notice
of an Information Delay Period it will forthwith discontinue disposition of
Transfer Restricted Securities pursuant to the Shelf Registration Statement,
(ii) upon receipt of such notice of a Transaction Delay Period it will
forthwith discontinue disposition of the Common Stock pursuant to the Shelf
Registration Statement and (iii) in either such case, will not deliver any
prospectus forming a part of the Shelf Registration Statement in connection
with any sale of Transfer Restricted Securities or Common Stock, as
applicable until the expiration of such Delay Period.
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 7,500 SHARES OF COMMON STOCK
THIS CERTIFIES THAT ___________________ and all registered and permitted assigns
(collectively, "Holder") is entitled to purchase, on or before _________, 2004,
_________ shares of the common stock ("Common Stock") of Netrix Corporation (the
"Corporation" or "Company") upon exercise of this Warrant along with
presentation of the full purchase price as provided herein. The purchase price
of the common stock upon exercise of this Warrant ("Warrant Shares") is equal to
seven USD $______ per share (the "Exercise Price"). The purchase price of this
Warrant is $10.00.
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole or in part on any business day on or
before the expiration date listed above by presentation and surrender hereof to
the Company at its principal office of an exercise request and the Exercise
Price in lawful money of the United States of America in the form of a wire
transfer or check, subject to collection, for the number of Warrant Shares
specified in the exercise request. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and an exercise request and representations, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all transfer agent fees, documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
(b) At any time during the Exercise Period, the Holder may, at its option,
exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the current
market value of a share of Common Stock. Current market value shall be the
average closing price for the 3-day period prior to the Exchange Date.
<PAGE>
2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES DELIVERABLE UPON EXERCISE
OF WARRANT.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares, or rights or warrants to purchase shares of its Common
Stock with respect to its outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of its
shares of Common Stock
the Exercise Price in effect and the number of Warrant Shares purchasable at the
time of the record date of such dividend, subdivision, combination, or
reclassification shall be proportionately adjusted so that Holder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised prior to such event, Holder would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplement Warrant") which will make lawful
and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive consolidations, mergers, sales, or conveyances.
3. REGISTRATION RIGHTS.
The Company will use its best efforts to ensure that shares underlying this
Warrant be registered in the next registration statement filed by the Company.
Otherwise;
(1) The Company shall advise the Holder of this Warrant or of the Warrant Shares
or any then holder of Warrants or Warrant Shares (such persons being
collectively referred to herein as "holders") by written notice at least two
weeks prior to the filing of any new registration statement ("Registration
Statement") under the Securities Act of 1933 (the "Act") covering securities of
the Company, other than a Registration Statement filed with respect to any
employee benefit plan or an offering solely related to an acquisition for which
such Warrant Shares cannot be appropriately registered or which does not permit
registration of the Warrants or Warrant Shares, and will for a period of five
years, from the date of this Warrant upon the request of any such holder,
2
<PAGE>
include in any such registration statement the number of Warrant Shares holder
desires to include in the Registration Statement. In the event the managing
underwriter for any said registration advises the Company that the inclusion of
the Warrant Shares would be detrimental to the offering, then such Warrant
Shares shall be included in the Registration Statement only if the Holder agrees
in writing, for a period of up to 120 days following such offering, not to sell
or otherwise dispose of the Warrant Shares. The Company shall supply
prospectuses and other documents as the Holder may request in order to
facilitate the public sale or other disposition of the Warrant Shares for sale
in such states where the Company qualifies its other securities pursuant to the
Registration Statement for sale and do any and all other acts and things which
may be necessary or desirable to enable such Holders to consummate the public
sale or other disposition of the Warrant or Warrant Shares. The Holder need not
exercise the Warrant to have the Warrant Shares included in a registration
statement. Nothing in this Section shall be construed to extend the expiration
date of this Warrant.
(2) The following provision of this Section shall also be applicable:
(A) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants Shares
subject to this Warrant may be included in any such registration. Any holder
whose Warrant Shares are included in any such registration statement shall,
however, bear the fees of his own counsel, transfer taxes or underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(B) Neither the giving of any notice by any holder nor making of any
request for prospectus shall impose upon such holder or owner making such
request any obligation to sell any Warrant Shares, or exercise any Warrants.
The Company's agreements with respect to Warrant Shares in this Section
shall continue in effect regardless of the exercise and surrender of this
Warrant.
4. ASSIGNMENT OR LOSS OF WARRANT.
(a) Any sale, transfer, assignment, hypothecation or other disposition of this
Warrant or of the Warrant Shares shall only be made if any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a Registration
Statement under the Act including such Shares is currently in effect, or (ii) in
the opinion of counsel, which counsel and which opinion shall be reasonably
satisfactory to the Company, a current Registration Statement is not required
for such disposition of the shares. Each stock certificate representing Warrant
Shares issued upon exercise or exchange of this Warrant shall bear the following
legend (unless, in the opinion of counsel, which counsel and which opinion shall
be reasonably satisfactory to the Company, such legend is not required):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN
OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT
THAT SUCH TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF
1933, AS AMENDED."
(b) The Holder understands that the Company may place, and may instruct any
transfer agent or depository for the Shares to place, a stop transfer notation
in the securities records in respect of the Shares.
(c) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
of this Warrant, if mutilated, the Company shall execute and deliver a new
Warrant of like tenor and date.
5. RESERVATION OF SHARES.
3
<PAGE>
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
6. NOTICES TO WARRANT HOLDERS. NO SHAREHOLDER RIGHTS.
So long as this Warrant shall be outstanding, (i) if the Company shall pay any
dividend or make any distribution upon the Common Stock or (ii) if the Company
shall offer to the holders of Common Stock for subscription or purchase by them
any share of any class or any other rights or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Company to another corporation, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be effected, then in
any such case, the Company shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior the date, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which such action is to take place and the date, if any is to be fixed, as of
which the holders of Common Stock or other securities shall receive cash or
other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
Nothing in this Warrant shall be construed as conferring upon the Holder or its
transferees any rights as a stockholder in the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders.
7. ARBITRATION.
In the event that a dispute arises between the Corporation and the Holder of
this Warrant as to any matte relating to this Warrant, the matter shall be
settled by arbitration in New York, NY in accordance with the Rules of the
American Arbitration Association and the award rendered by such arbitrator(s)
shall not be subject to appeal and may be entered in any federal or state court
located in New York having jurisdiction thereof, and actions or proceedings
shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers effective this 11th day of May, 1999.
Netrix Corporation
BY ___________________________
Norman Welsch
Chief Financial Officer
BY___________________________
Corporate Secretary
ACKNOWLEDGMENT OF REPRESENTATION:
- -------------------------------
Warrant Holder
4
<PAGE>
AMENDMENT TO LOAN AND SECURITY AGREEMENT
NETRIX CORPORATION ("BORROWER")
This AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") dated as
of this ___ day of April, 1999, between Coast Business Credit, a division of
Southern Pacific Bank ("Coast"), and Borrower, is made in reference to the
following facts:
A. Borrower previously entered into a Loan and Security Agreement with
Coast dated November 18, 1997 ("Loan Agreement") and related
documents connected therewith (as each may be amended, supplemented,
replaced or modified from time to time, the "Loan Documents"). Terms
used herein, unless otherwise defined herein, shall have the
meanings set forth in the Loan Agreement.
B. Borrower has caused an Event of Default under Section 8.1 of the
Loan Agreement as a result of, among other reasons, the failure of
Borrower to comply with the Tangible Net Worth requirements under
the Loan Agreement.
C. Borrower has requested that Coast waive the Event of Default, modify
the Tangible Net Worth requirements under the Loan Agreement, and
extend the Maturity Date.
D. Coast is willing to amend the Loan Agreement and waive the Event of
Default on the terms and subject to the conditions set forth in this
Amendment.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions hereof, the parties do hereby agree as follows, effective as of the
date set forth above.
1. LIMITED WAIVER. Subject to terms and conditions of this Amendment,
Coast hereby waives the Event of Default under Section 8.1 of the Loan Agreement
due to the failure of borrower to maintain a Tangible Net Worth of not less than
$13,500,000 for the months of October 1998, November 1998 and December 1998.
The foregoing waiver is a one-time waiver only and not a continuing
waiver, and shall apply only to the matters and time periods specifically set
forth in this Amendment. Without limiting the generality of the foregoing, this
waiver shall not apply to any future failure by Borrower to comply with the
terms of the Loan Agreement referenced above or any other term therein.
2. TANGIBLE NET WORTH. This first paragraph of Section 8.1 of the Schedule
is hereby amended in full and restated as follows:
<PAGE>
"TANGIBLE NET WORTH: As of the calendar quarter ending March 31,
1999, Borrower's Tangible Net Worth shall not be less than $9,800,000 and
as of the calendar quarter ending June 30, 1999 and thereafter, Borrower's
Tangible Net Worth shall be not less than $9,000,000. Compliance with the
Tangible Net Worth requirements under this Section 8.1 shall be determined
on a quarterly basis. Coast reserves the right to increase, in its
discretion, the Tangible Net Worth amounts required under this Section 8.1
upon Borrower receiving additional capital contributions."
3. TERMINATION FEE. Section 9.2 of the Schedule is hereby amended in full
and restated as follows:
"An amount equal to three percent (3%) of the Maximum Dollar Amount
or Increased Maximum, as applicable (as defined in the Schedule), if
termination occurs before the Maturity Date."
4. MATURITY DATE. Section 9.2 under Section 9 of the Schedule is hereby
amended in full and restated as follows:
"May 31, 2001, subject to automatic renewal as provided in Section
9.1 of the Agreement, and early termination as provided in Section 9.2 of
the Agreement."
5. CONDITIONS. The effectiveness of this Amendment is subject to
Borrower's execution and delivery to Coast a warrant in form and substance
satisfactory to Coast for 50,000 shares of common stock of Borrower with an
exercise price of $2 per share and an exercise period of five years.
6. REAFFIRMATION. Except as modified by the terms herein, the Loan
Agreement and the other Loan Documents remain in full force and effect. If there
is any conflict between the terms and provisions of this Amendment and the terms
and provisions of the Loan Agreement or the other Loan Documents, the terms and
provisions of this Amendment shall govern.
7. ACCOMMODATION FEES. In addition to all other fees and charges, Borrower
hereby agrees to pay coast an accommodation fee of $10,000, fully earned and
payable on the date hereof.
8. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9. GOVERNING LAW. This Amendment shall be governed by and construed
according to the laws of the State of California.
10. ATTORNEYS' FEES; COSTS. Borrower agrees to pay, on demand, all
attorneys' fees and costs incurred in connection with the negotiation,
documentation and execution of this Amendment. If any legal action or proceeding
shall be commenced at any time by any party to this Amendment in connection with
its interpretation or enforcement, the prevailing party or parties in such
action or proceeding shall be entitled to reimbursement of its reasonable
2
<PAGE>
attorneys' fees and costs in connection therewith, in addition to al other
relief to which the prevailing party or parties may be entitled.
11. JURY TRIAL WAIVER. BORROWER AND COAST EACH WAIVE ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OR THEM AGAINST THE
OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THE LOAN DOCUMENTS, THIS
AMENDMENT, THE OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY
BORROWER OR COAST, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR
RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND COAST.
"Borrower" "Coast"
NETRIX CORPORATION COAST BUSINESS CREDIT, A DIVISION
OF SOUTHERN PACIFIC BANK
By: /s/ By: /s/
_______________________ _______________________________
Name: _____________________ Name: _____________________________
Title: ______________________ Title: ______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF NETRIX CORPORATION FOR THE PERIOD ENDED JUNE
30, 1999. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,878,376
<SECURITIES> 0
<RECEIVABLES> 5,927,415
<ALLOWANCES> 675,000
<INVENTORY> 4,712,384
<CURRENT-ASSETS> 14,794,499
<PP&E> 24,417,087
<DEPRECIATION> (21,256,850)
<TOTAL-ASSETS> 18,569,925
<CURRENT-LIABILITIES> 6,232,532
<BONDS> 0
0
4,140,000
<COMMON> 576,845
<OTHER-SE> 7,619,547
<TOTAL-LIABILITY-AND-EQUITY> 18,569,925
<SALES> 13,327,036
<TOTAL-REVENUES> 13,327,036
<CGS> 7,387,971
<TOTAL-COSTS> 7,387,971
<OTHER-EXPENSES> 9,607,434
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,627
<INCOME-PRETAX> (3,840,995)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,840,995)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,840,995)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
