<PAGE>
As filed with the Securities and Exchange Commission on June 21, 1996
File No. 333-
=========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
Virtual Open Network Environment Corporation
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
Delaware 5045 52-1953278
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------------
1803 Research Boulevard - Suite 305,
Rockville, Maryland 20850
(301) 838-8900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------------------
James F. Chen,
President and Chief Executive Officer
Virtual Open Network Environment Corporation
1803 Research Boulevard - Suite 305
Rockville, Maryland 20850
(301) 838-8900
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------------------
Copy to:
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<CAPTION>
<S> <C>
Alan J. Berkley, Esq.
Cary J. Meer, Esq.
Kathy L. Kresch, Esq.
Sidney R. Smith, III, Esq. Stuart M. Cable, Esq.
Kirkpatrick & Lockhart LLP Goodwin, Proctor & Hoar LLP
1800 Massachusetts Avenue, N.W. Exchange Place
Washington, D.C. 20036 Boston, MA 02109
</TABLE>
<PAGE>
------------------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration
statement.
-------------------------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check
the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. /_ /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. /_ /
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. /_ /
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered (1) Per Share (2) Price (2) Fee
Common Stock, $.001 par
value....... 3,910,000 $6.67 26,079,700 $8,993.00
</TABLE>
(1) Includes 510,000 shares of Common Stock that the Underwriters
have the option to purchase solely to cover over-allotments, if
any.
(2) Estimated solely for purposes of calculating the registration
fee, pursuant to Rule 457(o) under the Securities Act of 1933, as
amended.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
===========================================================================
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
CROSS-REFERENCE SHEET
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<CAPTION>
Item Number of Caption Location in Prospectus
---------------------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Outside Front Page of Registration
Statement; Outside Front Cover Page
of Prospectus;
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors; and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors;
Selected Financial Data
4. Use of Proceeds....................... Use of Proceeds
5. Determination of Offering Price....... Underwriting
6. Dilution.............................. Dilution
7. Selling Security Holders.............. Selling Shareholders
8. Plan of Distribution.................. Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be
Registered............................ Outside Front Cover Page of
Prospectus; Prospectus Summary;
Dividend Policy; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and Counsel. Not Applicable
11. Information with Respect to Registrant. Prospectus Summary; Dividend Policy;
Selected Financial Data;
Management's Discussion of Financial
Condition and Results of Operations;
Business; Management; Principal
Shareholders; Certain Transactions;
Description of Capital Stock; Shares
Eligible for Future Sales; Financial
Statements
<PAGE>
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS Subject to completion, dated June 21, 1996
dated , 1996
3,400,000 SHARES
[LOGO]
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
COMMON STOCK
All of the 3,400,000 shares of Common Stock offered hereby (the
"Offering") are being sold by Virtual Open Network Environment Corporation
(the "Company" or "V-ONE").
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public
offering price will be between $5.33 and $6.67 per share. See
"Underwriting" for a discussion of the factors considered in determining
the initial public offering price. Application has been made for
quotation of the Common Stock on the Nasdaq National Market under the
symbol "VONE."
See "Risk Factors" beginning on page 6 for a discussion of certain factors
that should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Proceeds to
Price to Public Underwriting Discount(1) Company(2)
<S> <C> <C> <C>
Per Share . . . . . . . . . . . $ $ $
Total(3) . . . . . . . . . . . $ $ $
</TABLE>
(1) The Company and certain shareholders have agreed to indemnify
the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses, estimated at $650,000 payable by the
Company.
(3) The Company and certain shareholders have granted the
Underwriters a 30-day option to purchase up to 510,000 additional
shares of Common Stock solely to cover over-allotments, if any,
at the per share Price to Public less Underwriting Discount. If
the Underwriters exercise this option in full, the total Price to
Public, Underwriting Discount, and Proceeds to Company will be
$ , $ , and $ , respectively. See "Underwriting."
<PAGE>
The shares of Common Stock are offered by the Underwriters, subject to
prior sale when, as and if delivered to and accepted by the Underwriters
and subject to their right to reject orders in whole or in part. It is
expected that certificates for such shares will be available for delivery
at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about
, 1996.
PIPER JAFFRAY INC. VOLPE, WELTY & COMPANY
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OFFERED HEREBY OR OTHERWISE AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED
ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
[Description of graphic: This graphic is a two-page foldout that
describes a typical enterprise network secured by V-ONE's technology
products. This diagram describes the functional aspects, not the technical
components, of a typical enterprise network. Actual physical network
hardware components are not described. The network consists of 3 inter-
connected "clouds" representing the Internet (left-page/right-half/center);
the core/central ring of the corporate business network (right-page/left-
half/top); and a representation of a remote location (right-page/left-half/
bottom).]
The Company intends to furnish its shareholders with annual
reports containing financial statements audited by the Company's
independent accountants and quarterly reports for the first three fiscal
quarters of each fiscal year containing unaudited interim financial
information.
The Company has registrations for the trademarks V-ONE(REGISTERED
TRADEMARK) and SmartWall(REGISTERED TRADEMARK), and has filed applications
for trademark registration of, among others, SmartCAT(TRADEMARK),
SmartGATE(TRADEMARK), and SmartREM(TRADEMARK). This Prospectus also
contains trademarks, tradenames and servicemarks of other companies.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information contained in this Prospectus (i) reflects the
conversion of all outstanding shares of the Company's Series A Convertible
Preferred Stock ("Series A Stock") into an aggregate of 1,186,518 shares
of Common Stock at the closing of this Offering (see "Description of
Capital Stock - Series A Convertible Preferred Stock"), which occurs
automatically in the event the initial offering price is at least $5.25
per share of Common Stock (see "Risk Factors - Conversion of Series A
Stock," and "Description of Capital Stock - Series A Convertible Preferred
Stock"), (ii) has been retroactively adjusted to reflect a 10-for-1 stock
split of the Common Stock as of November 11, 1995, (iii) assumes no
exercise of the Underwriters' over-allotment option, (iv) assumes the
issuance of 280,812 shares of Common Stock to RSA Data Security, Inc. and
Massachusetts Institute of Technology (See "Business - Licensing
Agreements"), and (v) assumes no exercise of outstanding options and
warrants, other than a warrant to purchase 100,000 shares of Common Stock
at $0.01 per share (see "Certain Transactions"). The information
presented herein has not been adjusted to reflect a 2-for-3 reverse stock
split of the Common Stock expected to be approved at the Company's 1996
annual meeting of shareholders.
The Company
Virtual Open Network Environment Corporation ("V-ONE" or the
"Company") develops, markets, and licenses a comprehensive suite of
network security products that enable businesses to conduct secured
electronic transactions and information exchange using private enterprise
networks and public networks such as the Internet. The Company's suite of
products address network authentication, access control, and data
integrity through the use of smart cards, firewalls, and encryption
technology. The Company's products interoperate seamlessly and can be
combined to form a complete, integrated network security solution or can be
used as independent components in customized security solutions. The
Company's products have been designed with an open and flexible
architecture to allow for enhanced application functionality and to
support future network security standards. In addition, the Company's
products enable businesses to deploy and scale their solutions from
small, single-site networks to large, multi-site environments. The
Company's customers include key participants in the financial and
information services markets, as well as U.S. government agencies,
including BancOne Corp. ("BancOne"), BayBank Systems, Inc., Fuji
Capital Markets Corporation, GE Information Services, Inc. ("GEIS"), VISA
International and the National Security Agency ("NSA").
Organizations are increasing their dependence on public networks,
such as the Internet, and private enterprise networks using Internet
protocols ("intranets") as a cost-effective means to expand enterprise
networks, engage in electronic commerce, and increase information
2
<PAGE>
exchange. The demand for security in computer networks is expected to
grow significantly as a result of the increased use of the Internet and
intranets. The Yankee Group, a market research firm, indicated that it
expects the market for information security products and services will
grow at a 70% compound annual rate from $395 million in 1995 to $5.6
billion in the year 2000.
As businesses increase their use of the Internet and deploy
intranets, there is a growing need for comprehensive, enterprise-wide
network security solutions. To protect an organization's data, network and
computer systems, a comprehensive network security solution requires five
elements: identification and authentication, integrity, non-repudiation,
authorization, and encryption. To date, network security solutions have
focused on single function or point products that address one or a limited
number of these security elements. These products were designed with a
specific function or objective; however, few were designed to meet
all of the needs of enterprise-wide network security.
The Company offers a suite of products that are designed to
address the elements of a comprehensive enterprise-wide network security
solution. The Company's three major network security products are:
SmartGATE(TRADEMARK), a client/server product that offers identification
and authentication, integrity, non-repudiation, authorization, and
encryption; SmartWall(REGISTERED TRADEMARK), an application level firewall
that incorporates SmartGATE's functionality; and SmartCAT(TRADEMARK), a
smart card-based product that offers authentication and encryption. In
addition, the Company provides integrated security applications software,
including SmartREM(TRADEMARK), which will provide a secure environment for
sending and receiving e-mail over the Internet and intranets, and Wallet
Technology, a secure electronic payment system. The Company's modular
suite of products can be combined and configured to provide perimeter
defense, secure remote access, and intra/inter-enterprise security,
allowing the Company's customers to securely and easily deploy a broad
range of applications and services on the Internet and intranets.
The Company's marketing strategy is to achieve broad market
penetration through multiple distribution channels, including the
Company's direct sales force, Internet service providers, systems
integrators, value-added network service providers, and international
distributors. In particular, the Company has focused its direct sales
efforts on certain vertical markets that require sophisticated network
security solutions, including financial institutions, information services
companies, and government agencies. The Company has also established
strategic relationships with marketing and licensing partners to expand
the reach of its marketing efforts. The Company believes that these
alliances provide a cost effective means by which the Company can
efficiently penetrate new markets. For example, a major telecommunications
company is currently deploying a multi-purpose secure campus card program
that utilizes the Company's technology at a large university. This smart
card-based solution uses the Company's SmartGATE, SmartWall, and SmartCAT
products, and when fully deployed, will permit the university's 30,000
students to obtain secure access to their university records, student
3
<PAGE>
information, and campus services via the Internet. The smart cards also
include stored value, which may be transferred directly from the student's
bank account, for use at on- and off-campus vendors. The Company believes
that the major telecommunications company intends to promote this smart
card-based solution at other colleges and universities.
The Company was incorporated in Maryland in February 1993 and
reincorporated in Delaware in February 1996. The Company's principal
executive offices are located at 1803 Research Boulevard, Suite 305,
Rockville, Maryland 20850. The Company's telephone number is (301) 838-
8900, and its World Wide Web ("Web") address is http://www.v-one.com.
Information contained on the Company's Web site shall not be deemed part
of this Prospectus.
4
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Common Stock offered by the Company . . . . . . . . . . . . . . 3,400,000 shares
Common Stock outstanding after this Offering . . . . . . . . . . 17,440,638 shares(1)
Use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . For working capital and other general
corporate purposes including
expansion of marketing, sales, and
customer support, research and
development, capital expenditures,
and repayment of loans. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol . . . . . . . . . . . . . VONE
</TABLE>
<TABLE>
<CAPTION>
Summary Financial Data
<S> <C> <C> <C>
For the Period
February 16,
1993 (date of Year Ended Three Months
inception) to December 31, Ended March 31,
December 31, ----------------------- -------------------------
1993 1994 1995 1995 1996
------------ ---- ---- ---- ----
(unaudited)
Statement of Operations Data:
Revenues . . . . . . . . . . . . . $ 76,183 $ 59,716 $1,103,501 $ 150,257 $1,021,811
Gross profit . . . . . . . . . . . 38,093 24,602 726,342 97,667 699,813
Net loss . . . . . . . . . . . . . (35,684) (406,288) (1,032,311) (132,291) (994,660)
Net loss per common share (2) . . $ (0.00) $ (0.04) $ (0.08) $ (0.01) $ (0.08)
Weighted average shares
outstanding (2) . . . . . . . . 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714
5
<PAGE>
March 31, 1996
--------------------------------
As
Actual Adjusted(3)
------ -----------
Balance Sheet Data:
Working capital (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,297,123) $17,024,877
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,945,758 21,267,758
Long term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . 143,725 143,725
Shareholders' equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,134,598) 17,187,402
</TABLE>
----------------------------------
(1) Based upon shares outstanding as of June 12, 1996. Excludes
526,444 shares of Common Stock that were subject to outstanding
options under the Company's 1995 Non-Statutory Stock Option Plan
and 1,389,860 shares of Common Stock that were subject to
outstanding options under the Company's 1996 Incentive Stock Plan
with a weighted average exercise price of $2.12 per share;
110,000 shares of Common Stock reserved for issuance (see
"Certain Transactions"), and warrants to purchase 400,000 shares
of Common Stock at an exercise price of $3.00 per share (see
"Certain Transactions"). Includes warrants issued to JMI Equity
Fund II, L.P. ("JMI") to purchase 100,000 shares of Common Stock
at an exercise price of $0.01 per share, which must be exercised
by June 30, 1996. See "Certain Transactions."
(2) For a description of the computation of net loss per share and
shares used in computing net loss per share, see Note 2 of Notes
to the Financial Statements.
(3) Adjusted to reflect the sale of 3,400,000 shares offered hereby
and the application of the estimated net proceeds therefrom. See
"Use of Proceeds," and "Capitalization." Excludes 280,812 shares
of Common Stock reserved for issuance (see "Business - Licensing
Agreements"); and warrants issued to JMI to purchase 100,000
shares of Common Stock at an exercise price of $0.01 per share,
which must be exercised by June 30, 1996. See "Certain
Transactions."
6
<PAGE>
RISK FACTORS
In addition to the other information included in this Prospectus,
the following risk factors should be carefully considered in evaluating an
investment in the Common Stock offered by this Prospectus.
Limited Operating History; Accumulated Deficit
The Company was founded in February 1993 and introduced its first
product in December 1994. Accordingly, the Company did not generate any
significant revenue until 1995 when it commenced sales of its SmartWall
firewall product and introduced its SmartGATE client/server system.
Revenues for 1995 and for the three months ended March 31, 1996 were
approximately $1,104,000 and $1,022,000, respectively. The Company's
growth in recent periods may not be an accurate indication of future
results of operations in light of the Company's short operating history,
the evolving nature of the network security market and the uncertainty
of the demand for Internet and intranet products in general and the
Company's products in particular. As of March 31, 1996, the Company
had accumulated a deficit of approximately $2.5 million. The Company
currently expects to incur net losses over the next several quarters
as a result of greater operating expenses incurred to fund research
and development and to increase its sales and marketing efforts.
Because of the Company's limited operating history, there can be
no assurance that the Company will achieve or sustain profitability or
significant revenues. To address these risks, the Company must, among
other things, continue its emphasis on research and development,
successfully execute and implement its marketing strategy, respond to
competitive developments, and seek to attract and retain talented
personnel. There can be no assurance that the Company will successfully
address these risks and the failure to do so could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Anticipated Fluctuations in Quarterly Results
As a result of the Company's limited operating history, the
Company does not have historical financial data for a significant number
of periods on which to base planned operating expenses. Accordingly, the
Company's expense levels are based in part on its expectations as to
future revenue. The Company's quarterly sales and operating results
generally depend on the volume and timing of, and ability to fill, orders
received within the quarter, which are difficult to forecast. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall of
demand for the Company's products in relation to the Company's
expectations could have an immediate adverse impact on the Company's
business, financial condition, and results of operations. In addition,
the Company plans to increase its operating expenses to fund the rapid
growth of its sales and marketing operations, distribution channels,
7
<PAGE>
customer support capabilities, and research and development activities.
To the extent that such expenses precede or are not subsequently followed
by increased revenues, the Company's business, financial condition, and
results of operations may be materially adversely affected.
The Company expects to experience significant fluctuations in
future quarterly operating results, which may be caused by a number of
factors, such as the pricing and mix of products sold by the Company, the
introduction of new products by the Company and its competitors, the
timing of orders and the shipment of products, market acceptance of the
Company's products, the ability of the Company's direct sales force and
resellers to market the Company's products successfully, the mix of
products and services sold, distribution channels used, and other factors
that may be beyond the Company's control. Thus, the Company believes that
comparisons of quarterly operating results are not meaningful and should
not be relied upon, nor will they necessarily reflect the Company's future
performance. Because of the foregoing factors, it is likely that in some
future quarters the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Conversion of Series A Stock
In the event that the initial offering price per share of Common
Stock offered hereby is not at least $5.25 per share, the Series A Stock
does not automatically convert on a one-for-one basis into shares of
Common Stock. In such event, the conversion ratio will be adjusted so
that shares of Series A Stock are convertible, at the option of each
holder of Series A Stock, into shares of Common Stock on a greater than
one-for-one basis, which will increase the dilution suffered by purchasers
of the Common Stock offered hereby. Further, if the holders of Series A
Stock do not convert their shares into shares of Common Stock, the Series
A Stock will remain outstanding following the consummation of the
Offering. This will limit the ability of the Company to pay dividends on
the Common Stock and will further limit the rights of the holders of
Common Stock. See "Dividend Policy," "Dilution," and "Description of
Capital Stock - Series A Convertible Preferred Stock."
Competition
The Company competes in several different network security
markets: Internet and intranet perimeter defense and access control
(firewalls), token authentication, smart card-based security applications,
and electronic commerce applications. The Company's principal competitors
for Internet and intranet perimeter defense include Advanced Network and
Services (a subsidiary of America Online, Inc.), Bay Networks, Inc.,
Border Network Technologies, Inc., Check Point Software Technology Ltd.,
Cisco Systems, Inc., Digital Equipment Corporation, Harris Computer
Systems Corporation, International Business Machines Corporation, Milkyway
8
<PAGE>
Networks Corporation, Morningstar Technologies, Inc., Network Systems
Corporation, Raptor Systems, Inc., Secure Computing Corporation, Sun
Microsystems, Inc., and Trusted Information System Inc.'s ("TIS"), which
owns the Gauntlet(TRADEMARK) kernel and licenses it to the Company.
The Company competes to a lesser degree with token vendors
because the Company's SmartGATE product supports many vendor tokens.
Token vendors include Security Dynamics, Digital Pathways, Inc.,
CRYPTOCard Inc., Leemah DataCom Security Corporation, Racal-Guardata,
Inc., and National Semiconductor Inc. Security Dynamics has recently
agreed to acquire RSA Data Security, Inc. ("RSA"). RSA's technology is
licensed to and incorporated within certain products of the Company. As
a result, Security Dynamics may become a more substantial competitor of the
Company.
For smart card-based security applications, the Company
principally competes with those token vendors listed above who offer smart
card technology.
The Company's principal competitors in electronic commerce
applications are Netscape Communication's Secure Socket Layer (SSL), Open
Market Inc.'s Secure HTTP (S-HTTP), and Cylink Corporation's transaction
software. See "Business - Competition."
Because of the rapid expansion of the network security market,
the Company will face competition from existing and new entrants, possibly
including the Company's customers, suppliers, or resellers. There can be
no assurance that the Company's competitors will not develop network
security products that may be more effective than the Company's current or
future products or that the Company's technologies and products would not
be rendered obsolete by such developments.
Many of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger installed
customer bases, and significantly greater financial, technical, and
marketing resources than the Company. As a result, they may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of
their products than the Company. There can be no assurance that the
Company's customers will not perceive the products of such other companies
as substitutes for the Company's products.
The Company believes that the principal competitive factors
affecting the market for network security products include effectiveness,
scope of product offerings, technical features, ease of use, reliability,
customer service and support, name recognition, distribution resources,
and cost. Current and potential competitors have established, or may
establish in the future, strategic alliances to increase their ability to
compete for the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances may emerge and rapidly acquire
significant market share. Such competition could materially adversely
affect the Company's business, financial condition, and results of
operations.
9
<PAGE>
Management of Growth
The Company has recently experienced and may continue to
experience substantial growth in the number of its employees and the scope
of its operations, resulting in increased responsibilities for management
and added pressure on the Company's operating and financial systems. As
of May 31, 1996, the Company had grown to 52 employees, from 34 employees
on January 1, 1996 and 7 employees on January 1, 1995. To manage growth
effectively, the Company will need to continue to improve its operational,
financial and management information systems and will need to hire, train,
motivate, and manage a growing number of employees. Competition is
intense for qualified technical, marketing, and management personnel.
There can be no assurance that the Company will be able to achieve or
manage any future growth, and its failure to do so could delay product
development cycles and marketing efforts or otherwise have a material
adverse effect on the Company's business, financial condition, and results
of operations. Although the Company is not currently involved in
negotiations for any acquisitions, the Company may undertake acquisitions
in the future. Any such transactions would place additional strains upon
the Company's management resources. See "Management" and "Business -
Employees."
Dependence on the Internet and Intranets
The Company's success depends substantially upon the market
acceptance of the Internet and intranets as mediums for commerce and
communication. Although the Company believes that its software security
products will facilitate and fortify commerce and communication over the
Internet and intranets, there can be no assurance that commerce and
communication over the Internet and intranets will expand or that the
Company's products will be adopted for security purposes. In addition,
the Internet may not prove to be a viable commercial marketplace because
of inadequate development of the necessary infrastructure, such as a
reliable network backbone, or timely development of complementary products
and services. If the Internet and intranets do not develop as mediums of
commerce and communication or the Internet does not develop as a viable
commercial marketplace due to inadequate development of infrastructure or
complementary products and services, or for other reasons beyond the
Company's control, the Company's business, financial condition, and
results of operations may be materially adversely affected. See "Business
- Industry Background."
Risks Associated with the Emerging Network Security Market
The market for the Company's products is in an early stage of
development. The rapid development of Internet and intranet computing has
increased the ability of users to access proprietary information and
resources and has recently increased demand for network security products.
Because the market for network security products is only beginning to
develop, it is difficult to assess the size of the market, the product
features desired by the market, the optimal price structure for the
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Company's products, the optimal distribution strategy, and the competitive
environment that will develop in this market. Declines in demand for the
Company's products, whether as a result of competition, technological
change, the public's perception of the need for security products,
developments in the hardware and software environments in which these
products operate, general economic conditions, or other factors beyond the
Company's control, could have a material adverse effect on the Company's
business, financial condition, or results of operations. See "Business -
Industry Background."
Dependence on Principal Products; Uncertainty of Product Acceptance
The Company currently generates most of its revenues from its
SmartWall firewall and SmartGATE products. Accordingly, any factor that
adversely affects sales of these products could have a material adverse
effect on the Company. While the SmartWall firewall has met with a
favorable degree of market acceptance since sales commenced in the first
quarter of 1995, there can be no assurance that SmartWall will continue to
be accepted in the future. In addition, there can be no assurance that
there will be market acceptance of the Company's SmartGATE product, which
was introduced in the fourth quarter of 1995, or any of the Company's
products that may be introduced in the future. The Company's success
will, in part, depend upon the Company's ability to design, develop and
introduce new products, services, and enhancements on a timely basis to
meet changing customer needs, technological developments, and evolving
industry standards. See "Business - Products and Services," and "-
Product Development."
Dependence on Key Licensing Agreements, External Resources and Suppliers
The Company relies and intends to continue to rely on external
resources for the development of certain of its products and the
components thereof. The Company's SmartWall product incorporates the
TIS Gauntlet(TRADEMARK) kernel. The Company licenses the TIS
Gauntlet(TRADEMARK) kernel under a license agreement with TIS that requires
the Company to pay a fee, which varies based on the number of units
licensed, for each unit of the Gauntlet(TRADEMARK) kernel licensed
for use in SmartWall. The license expires on December 31, 1996;
however, the agreement provides for the automatic renewal of the
Company's license rights for successive three year terms. Either party
may terminate the agreement upon the default of the other party if the
defaulting party has failed to cure the default within 30 days of the
receipt of written notice of default. In addition, TIS may terminate the
agreement upon any second or subsequent breach of the agreement by the
Company or upon the Company's insolvency or bankruptcy. See "Business
- License Agreements."
The Company's SmartCAT and Wallet Technology software incorporate
data encryption and authentication technology owned by RSA. The Company
has a perpetual license agreement with RSA, which became effective as of
December 30, 1994. Either party may
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December 30, 1994. Either party may terminate the agreement upon the
default of the other party if the defaulting party has failed to cure
the default within 30 days of the receipt of written notice of default.
The agreement also may be terminated by either party upon the insolvency
or bankruptcy of the other party. RSA has announced that RSA will be
acquired by Security Dynamics Technologies, Inc. ("Security Dynamics"),
whose products compete with the Company's products in the token
authentication market. There can be no assurance that the change in
control of RSA will not adversely affect the Company's business relation-
ship with RSA, which could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business - License Agreements."
There can be no assurance that the Company will be able to
maintain its license rights for the TIS Gauntlet(TRADEMARK) kernel or the
RSA data encryption and authentication technology and the loss of such
rights could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company is in the
process of developing its own technology to replace the licensed firewall
technology. However, the Company's firewall technology is in
developmental stages and, until it is tested and integrated, the Company
intends to rely on the technology licensed from TIS. The loss of, or
inability to maintain, such technology licenses could result in lost
sales, delays in delivery of the Company's current products and services,
or delays in the introduction of new products and services until the
Company's technology is finally developed and tested or equivalent
technology, if available, is identified, licensed, and integrated, which
could have a material adverse effect on the Company's business, financial
condition, or results of operations. See "Business - License Agreements."
Intellectual Property Rights; Infringement Claims
The Company relies on trademark, copyright, patent and trade
secret laws, employee and third-party non-disclosure agreements, and other
methods to protect its proprietary rights. The Company has pending three
patent applications with the United States Patent and Trademark Office
that cover certain aspects of its technology. Prosecution of these patent
applications, and any other patent applications that the Company may
subsequently determine to file, may require the expenditure of substantial
resources. The issuance of a patent from a patent application may require
24 months or longer. There can be no assurance that the Company's
technology will not become obsolete while the Company's applications for
patents are pending. There also can be no assurance that any pending or
future patent application will be granted or that any future patents will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Further,
the Company has not pursued patent protection outside of the United States
for the technology covered by two of the pending patent applications. The
Company currently intends to pursue patent protection outside of the
United States for the technology covered by the most recently filed patent
application although there can be no assurance that any such protection
will be granted or, if granted, that it will adequately protect the
technology covered thereby.
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The Company's success is also dependent in part upon its
proprietary software technology. There can be no assurance that the
Company's trade secrets or non-disclosure agreements will provide
meaningful protection for the Company's proprietary technology and other
proprietary information. In addition, the Company relies on "shrink wrap"
license agreements that are not signed by the end user to license the
Company's products and, therefore, may be unenforceable under the laws of
certain jurisdictions. Further, there can be no assurance that others
will not independently develop similar technologies or duplicate any
technology developed by the Company or that the Company's technology will
not infringe upon patents, copyrights, or other intellectual property
rights owned by others.
Further, the Company may be subject to additional risk as the
Company enters into transactions in countries where intellectual property
laws are not well developed or are poorly enforced. Legal protections of
the Company's rights may be ineffective in foreign markets, and technology
developed abroad may not be protectable in jurisdictions in circumstances
where protection is ordinarily available in the United States.
The Company believes that, due to the rapid pace of technological
innovation for network security products, the Company's ability to
establish and, if established, maintain a position of technology
leadership in the industry is dependent more upon the skills of its
development personnel than upon legal protections afforded its existing or
future technology.
As the number of security products in the industry increases and
the functionality of these products further overlap, software developers
may become subject to infringement claims. There can be no assurance that
third parties will not assert infringement claims against the Company in
the future with respect to current or future products. The Company also
may desire or be required to obtain licenses from others in order to
develop, produce, and market commercially viable products effectively.
Failure to obtain those licenses could have a significant adverse effect
on the Company's ability to market its software security products. There
can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, that the patents underlying such licenses
will be valid and enforceable, or that the proprietary nature of the
unpatented technology underlying such licenses will remain proprietary.
The Company is aware of two pending law suits involving RSA and
Cylink Corporation ("Cylink") and Cylink's wholly owned subsidiary, Caro-
Kann Corporation ("Caro-Kann"). In the first law suit (N.D. Cal. No. C94
02332 CW) filed in 1994, Cylink sued RSA in a declaratory judgment action
seeking a declaration from the court that U.S. Patent No. 4,405,829 ("MIT
Patent"), under which RSA is licensed, is invalid and unenforceable. RSA
counterclaimed that Cylink and Caro-Kann were infringing the MIT Patent.
In a related proceeding, Cylink and Caro-Kann initiated arbitration
against RSA pursuant to the terms of a partnership agreement among those
parties. In the arbitrator's decision, issued in September 1995, the
partnership was dissolved. The arbitrators determined that RSA does not
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have the right to sublicense third parties under U.S. Patents Nos.
4,200,790, 4,218,582, and 4,424,414 ("Stanford Patents"), under which
Caro-Kann was licensed. The arbitrators stated further that, if RSA
provides code to third parties that causes an infringement of the Stanford
Patents, nothing in the arbitrator's decision would prevent Cylink and
Caro-Kann from pursuing their rights under the Stanford Patents against
such third parties. According to documents filed in the second law suit,
discussed below, Cylink sent letters to certain RSA licensees advising
them that they need a license from Cylink under the Stanford Patents to
use the RSA software. RSA has informed its customers that a sublicense to
the Stanford Patents is not necessary to practice the RSA cryptography
method. In the second law suit (N.D. Cal. C95-03256 WHO) filed September
15, 1995, RSA sued Cylink and Caro-Kann in a declaratory judgment action
seeking a declaration that the Stanford Patents are invalid and
unenforceable. Cylink and Caro-Kann have counterclaimed that RSA is
liable for direct infringement of the Stanford Patents and also is liable
for contributory infringement and inducing infringement of the Stanford
Patents by virtue of RSA's license of certain RSA software to third
parties. To the best of the Company's knowledge, both law suits are still
pending. There can be no assurances that Cylink will not initiate law
suits against RSA licensees, including the Company. In the Company's
license agreement with RSA, RSA agreed that RSA would, at its own expense:
(i) defend, or at its option settle, any claim, suit, or proceeding
against the Company, including any claim, suit, or proceeding instituted
by Cylink, Caro-Kann, or an entity related to either of them, on the basis
of infringement of any United States patent, copyright, or trade secret in
the field of cryptography regarding the unmodified software licensed by
RSA or any claim that RSA has no right to license the software; and (ii)
pay any final judgment or settlement entered against the Company on such
issue in any suit or proceeding defended by RSA. RSA's obligation to
indemnify the Company survives the termination of the license agreement.
There can be no assurance that the outcome of the law suits between RSA
and Cylink will support RSA's position. If the outcome of the lawsuit is
adverse to RSA, there can be no assurance that Cylink will license its
technology to the Company on commercially reasonable terms, or at all.
Any royalty obligations to Cylink by the Company would not be covered by
RSA's indemnification obligation to the Company. There also can be no
assurance that the Company will be able to obtain or develop alternative
technology on commercially reasonable terms, if at all. See "Business -
License Agreements" and "Business - Patents, Proprietary Technology,
Trademarks, and Licenses."
Any claims or litigation, with or without merit, could be costly
and could result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, financial
condition, and results of operations. Adverse determinations in such
claims or litigation could also have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business - Patents, Proprietary Technology, Trademarks, and Licenses."
Changes in Technology and Industry Standards; Risk of New Product
Introduction
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The network security industry is characterized by rapid changes,
including evolving industry standards, frequent new product introductions,
continuing advances in technology, and changes in customer requirements
and preferences. Advances in techniques by individuals and entities
seeking to gain unauthorized access to networks could expose the Company's
existing products to new and unexpected attacks and require accelerated
development of new products or enhancements to existing products. The
Company believes that customer support will remain a critical piece of its
services offering. The Company intends to enhance its existing customer
service system by adding toll-free line support and moving to a three-tier
support system. There can be no assurance that the Company will be able
to counter challenges to its current products, that the Company's future
product offerings will keep pace with technological changes implemented by
competitors or persons seeking to breach network security, that its
products and expanded customer support services will satisfy evolving
consumer preferences, or that the Company will be successful in developing
and marketing products for any future technology. Failure to develop and
introduce new products and product enhancements in a timely fashion could
have a material adverse effect on the Company's business, financial
condition, and results of operations. See "Business - Product
Development."
Risk of Defects and Development Delays
The Company may experience schedule overruns in software
development triggered by factors such as insufficient staffing or the
unavailability of development-related software, hardware, or technologies.
Further, when developing new software products, the Company's development
schedules may be altered as a result of the discovery of software bugs,
performance problems, or changes to the product specification in response
to customer requirements, market developments, or Company initiated
changes. Changes in product specifications may delay completion of
documentation, packaging, or testing, which may, in turn, affect the
release schedule of the product. When developing complex software
products, the technology market may shift during the development cycle,
requiring the Company either to enhance or change a product's
specifications to meet a customer's changing needs. These factors may
cause a product to enter the market behind schedule, which may adversely
affect market acceptance of the product or place it at a disadvantage to a
competitor's product that has already gained market share or market
acceptance during the delay.
Risk of Errors or Failures; Product Liability Risks
The complex nature of the Company's products can make the
detection of errors or failures in certain of its software products
difficult when such products are introduced, which may result in delays
and lost revenues during the correction process. In addition, there can
be no assurance that any technology licensed by the Company for use in the
Company's products does not contain errors that would adversely affect
such products. Despite testing by the Company and current and prospective
customers, there can be no assurance that errors will not be discovered in
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new products or releases after commencement of commercial shipments,
possibly resulting in delay, adverse publicity, loss of market acceptance,
and claims against the Company.
A malfunction or the inadequate design of the Company's products
could result in tort or warranty claims. While the Company attempts to
reduce the risk of such losses through warranty disclaimers and liability
limitation clauses in its license agreements, and by maintaining product
liability insurance, there can be no assurance that such measures will be
effective in limiting the Company's liability for any such damages. The
Company also relies on "shrink wrap" license agreements that are not
signed by the end user and, therefore, may be unenforceable under the laws
of certain jurisdictions. The Company currently intends to purchase
product liability insurance and it may seek additional insurance coverage
as it commences commercialization of its products. There can be no
assurance that adequate additional insurance coverage will be available at
an acceptable cost, if at all. Any product liability claim against the
Company for damages resulting from security breaches could be substantial
and could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, a well-
publicized actual or perceived security breach could adversely affect the
market's perception of security products in general, or the Company's
products in particular, regardless of whether such breach is attributable
to the Company's products. This could result in a decline in demand for
the Company's products, which could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Evolving Distribution Channels
Currently, the Company relies primarily on its direct sales force
for the sale and marketing of its products. The Company plans to add to
its internal sales and marketing staff in order to increase its direct
sales effort. There can be no assurance that such internal expansion will
be successfully completed, that the cost of such expansion will not exceed
the revenues generated, or that the Company's sales and marketing
organization will successfully compete against the more extensive and
well-funded sales and marketing operations of certain of the Company's
current and future competitors.
The Company has developed a distribution strategy that involves
the development of strategic alliances with resellers and international
distributors to enable the Company to achieve broad market penetration.
The Company is beginning to establish its reseller distribution channel.
There can be no assurance that the Company will be able to attract
resellers that will be able to market the Company's products effectively
and will be qualified to provide timely and cost-effective customer
support and service. The Company anticipates that it will ship products
to distributors and resellers on a purchase-order basis, and the Company's
distributors and resellers will likely carry competing product lines.
Therefore, there can be no assurance that any distributor or reseller will
continue to represent the Company's products. The inability to recruit,
or the loss of, important sales personnel, distributors, or resellers
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could materially adversely affect the Company's business, financial
condition, and results of operations in the future. See "Business - Sales
and Marketing."
Long Sales Cycle; Seasonality
Sales of the Company's products generally involve a significant
commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. Prior to such sales, the
Company often permits customers to evaluate products being considered for
license, generally for a period of up to 30 days. For these and other
reasons, the sales cycle associated with the Company's products is likely
to be lengthy and subject to a number of significant risks over which the
Company has little or no control and, as a result, the Company believes
that its quarterly results are likely to vary significantly in the future.
The Company may be required to ship products shortly after it receives
orders and, consequently, order backlog, if any, at the beginning of any
period may represent only a small portion of that period's expected
revenue. As a result, product revenue in any period will be substantially
dependent on orders booked and shipped in that period. The Company plans
its production and inventory levels based on internal forecasts of
customer demand, which is highly unpredictable and can fluctuate
substantially. If revenue falls significantly below anticipated levels,
the Company's financial condition and results of operations could be
materially and adversely affected. In addition, the Company may
experience significant seasonality in its business, and the Company's
financial condition and results of operations may be affected by such
trends in the future. Such trends may include higher revenue in the third
and fourth quarters of the year and lower revenue in the first and second
quarters. The Company believes that revenue may tend to be higher in the
third quarter due to the fiscal year end of the U.S. government and higher
in the fourth quarter due to year-end budgetary pressures on the Company's
commercial customers and the tendency of certain of the Company's existing
and prospective customers to implement changes in computer or network
security prior to the end of the calendar year.
Liquidity and Capital Requirements; Dependence on the Public Offering
The Company anticipates that its existing capital resources,
including the net proceeds of the sale of the shares of Common Stock
offered hereby, will be adequate to satisfy its capital requirements at
least through 1997. The Company's future capital requirements, however,
will depend on many factors, including its ability to successfully market
and sell its products. To the extent that the funds generated by this
Offering and from the Company's on-going operations are insufficient to
fund the Company's future operating requirements, it may be necessary to
raise additional funds, through public or private financings. Any equity
or debt financings, if available at all, may be on terms that are not
favorable to the Company and, in the case of equity financings, could
result in dilution to the Company's shareholders. If adequate capital is
not available, the Company may be required to curtail its operations
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significantly. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Risk of Sales to U.S. Government
In 1995, the Company derived a substantial portion of its revenue
from the sale of the SmartWall firewall to departments and agencies of the
U.S. government and government contractors. In 1996, the Company's
revenues will be attributable, in part, to a contract with NSA. Because
no government agency has an obligation to award contracts to, or to
purchase products from, the Company in the future, the Company believes
that future government contracts and orders for its network security
products will in part be dependent upon the continued favorable reaction
of government agencies to the development capabilities of the Company and
the reliability and perception of the Company's products. There can be no
assurance that the Company will be able to sell its products to
departments and agencies of the U.S. government and government contractors
or that such sales, if any, will result in commercial acceptance of the
Company's products. There also is no assurance that the Company will be
able to procure an extension of its current NSA contract when it expires
in September 1996 or additional contracts of similar magnitude in the
future. In addition, reductions or delays in federal funds available for
projects the Company is performing or to purchase the Company's products
could have an adverse impact on the Company's government contracts
business.
Contracts involving the U.S. government are also subject to the
risks of disallowance of costs upon audit, changes in government
procurement policies, the necessity to participate in competitive bidding
and, with respect to contracts involving prime contractors or government-
designated subcontractors, the inability of such parties to perform under
their contracts. The Company is also exposed to the risk of increased or
unexpected costs, causing losses or reduced profits, under government and
certain third-party contracts. Any of the foregoing events could have an
adverse impact on the Company's business, financial condition, and results
of operations. See "Business - Regulation and Government Contracts."
International Sales
The Company plans to increase its presence in overseas markets by
expanding international distribution relationships for its suite of
network security products, including SmartWall and SmartGATE. There can
be no assurance, however, that the Company will be successful in expanding
its relationships with international distributors or in gaining commercial
acceptance of its products abroad. To the extent the Company expands
international sales, currency fluctuations could make the Company's
products less competitive in foreign markets and contribute to
fluctuations in the Company's operating results. Political instability,
difficulties in staffing and managing international operations, potential
insolvency of international resellers, longer receivable collection
periods and difficulty in collecting accounts receivable also pose risks
to the development of international marketing efforts. Moreover, the laws
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of certain countries, or the enforcement thereof, may not protect the
Company's products and intellectual property rights to the same extent as
the laws of the United States. There can be no assurance that these
factors will not have a material adverse effect on the Company's business,
financial condition, and results of operations. See " Business - Sales and
Marketing."
Effect of Government Regulation of Technology Exports
The Company currently sells its products abroad and intends to
continue to expand its relationships with international distributors for
the sale of its products overseas. The Company's international sales and
operations could be subject to risks such as the imposition of
governmental controls, export license requirements, restrictions on the
export of critical technology, trade restrictions, and changes in tariffs.
In particular, the Company's information security products will be subject
to the export restrictions administered by the U.S. Department of State,
which permit the export of encryption products only with the required
level of export license. These export laws also prohibit the export of
encryption products to a number of hostile countries. In certain foreign
countries, the Company's distributors will be required to secure licenses
or formal permission before encryption products can be imported. There is
no assurance that the Company or its distributors will be able to secure
required licenses in a timely manner, if at all. As a result, foreign
competitors that face less stringent controls on their products may be
able to compete more effectively than the Company in the global network
security market. There can be no assurance that these factors will not
have a material adverse effect on the Company's business, financial
condition, and results of operations. See " Business - Technology," and "-
Products."
Dependence on Key Personnel
The Company's success will depend, to a large extent, upon the
performance of its senior management team and technical, marketing and
sales personnel many of whom have only recently joined the Company. There
is keen competition in the software security industry to hire and retain
qualified personnel, and the Company is actively searching for additional
qualified personnel. The Company's success will depend upon its ability
to retain and hire additional key personnel. The loss of the services of
key personnel, or the inability to attract additional qualified personnel,
could have a material adverse effect upon the Company's results of
operations and product development efforts. The Company currently has $1
million "key man" life insurance policies on the lives of each of James F.
Chen, its founder and Chief Executive Officer, and Jieh-Shan Wang, its
Senior Vice President of Engineering. This coverage, however, may not be
sufficient to mitigate the impact that the loss of the services of Mr.
Chen or Mr. Wang would have on the Company. See "Management."
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Certain Anti-takeover Provisions of Certificate of Incorporation, Bylaws,
and Delaware Law
The Company's Amended and Restated Certificate of Incorporation
("Restated Certificate of Incorporation") and Amended and Restated Bylaws
("Restated Bylaws") provide that any action required or permitted to be
taken by shareholders of the Company may be effected at a duly called
annual or special meeting. If a shareholder wishes a proposal to be
considered at an annual or special meeting under the Restated Bylaws, he
or she must give reasonable advance notice to the Company. The Company's
Restated Bylaws permit only the Company's Chief Executive Officer or a
majority of the members of the Company's Board of Directors to call a
special meeting of shareholders. In addition, the Company's Restated
Certificate of Incorporation provides that, at the 1996 annual meeting,
the Company's Board of Directors will be classified into three classes of
directors. Under the Restated Certificate of Incorporation and Restated
Bylaws, a Director may be removed only for cause and by the affirmative
vote of 67% of the outstanding shares entitled to vote an election of
directors at a special meeting called for that purpose.
In addition, the Board of Directors has the authority to issue up
to 20,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights
of those shares, without any further vote or action by the Company's
shareholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
voting stock of the Company. The Company has issued 1,186,518 shares of
Series A Stock, which, assuming the initial offering price exceeds $5.25,
will convert into 1,186,518 shares of Common Stock upon consummation of
the Offering. The Company has no present plans to issue any additional
series of Preferred Stock upon the consummation of the Offering. Further,
certain provisions of the Company's Restated Certificate of Incorporation,
Restated Bylaws, and Delaware law could delay or make difficult a merger,
tender offer or proxy contest involving the Company. In addition, the
Company is subject to Section 203 of the Delaware General Corporation Law
("Section 203"), which places certain restrictions on the ability of
Delaware corporations to engage in business combinations with interested
shareholders. See "Description of Capital Stock - Preferred Stock" and
" - Anti-takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws, and Delaware Law."
No Prior Public Market; Market Volatility
Prior to this Offering, there has been no public market for the
Company's Common Stock, and there can be no assurance that an active
public market for the Company's Common Stock will develop or be sustained
following the Offering. The initial public offering price of the Common
Stock will be determined in negotiations among the Company and the
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Underwriters based upon several factors and may be greater than the market
price for the Common Stock following the Offering. See "Underwriting."
The market price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of new products by the
Company or its competitors and changes in financial estimates by
securities analysts or other events. Moreover, the stock market has
experienced extreme volatility that has particularly affected the market
prices of equity securities of many technology companies and that has
often been unrelated and disproportionate to the operating performance of
such companies. Broad market fluctuations, as well as economic conditions
generally and in the software industry specifically, may adversely affect
the market price of the Company's Common Stock. There can be no assurance
that the market price of the Common Stock offered hereby will not decline
below the initial public offering price.
Concentration of Share Ownership
Upon completion of this Offering, the current directors,
executive officers and their respective affiliates will beneficially own
approximately 59.5% of the Company's outstanding Common Stock in the
aggregate on a fully-diluted basis (57.4% in the event the Underwriters
exercise the over-allotment option in full). This does not give effect to
the exercise of options to purchase 1,304,708 shares of Common Stock held
by these individuals, which, if exercised in whole or in part, will
further concentrate ownership of the Company's Common Stock. As a result,
these shareholders will retain the voting power required to elect all
directors and to approve all other matters requiring approval by a
majority of the shareholders of the Company. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Management - Directors and Executive
Officers" and "Principal Shareholders."
Potential Effect of Shares for Future Sale
Sales of substantial amounts of Common Stock in the public market
following the Offering could adversely affect the market price of the
Common Stock. Upon completion of the Offering, the Company will have
outstanding an aggregate of 14,040,638 shares that are "restricted" shares
under the Securities Act of 1933, as amended (the "Securities Act"). Only
the 3,400,000 shares of Common Stock offered hereby will be eligible for
sale in the public market immediately following the effective date of the
registration statement on Form S-1 relating to the Common Stock offered
hereby ("Registration Statement") filed with the Securities and Exchange
Commission ("SEC"), excluding the Common Stock to be offered in the over-
allotment option. Certain of the Company's current shareholders,
employees, directors, officers, and holders of options and warrants to
purchase Common Stock have agreed with Representatives of the Underwriters
not to sell or otherwise dispose of any shares of Common Stock not
included in the over-allotment option for a period of 180 days after the
date of this Prospectus without the consent of the Underwriters. After
the expiration of the 180-day period, 1,698,983 shares of Common Stock may
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be sold in compliance with Rule 144 or Rule 701 under the Securities Act.
The number of shares eligible for resale assumes the conversion of
1,186,518 shares of Series A Stock on a one-for-one basis, the issuance of
280,812 shares to RSA and Massachusetts Institute of Technology ("MIT"),
and the exercise, by June 30, 1996, of warrants to purchase 100,000 shares
of Common Stock at $0.01. The holders of Common Stock issuable upon the
conversion of Series A Stock and the holders of warrants exercisable at
$0.01 and $3.00 per share will have contractual rights to have those
shares registered under the Securities Act for resale to the public. See
"Shares Eligible for Future Sale."
Absence of Dividends
No dividends have been paid on the Common Stock to date and the
Company does not anticipate paying dividends in the foreseeable future.
See "Dividend Policy."
Dilution
Purchasers of the Common Stock offered hereby will experience
immediate and substantial dilution in net tangible book value per share of
the Common Stock. To the extent outstanding options and warrants to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
22
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of
the Common Stock offered hereby are estimated at $18.3 million ($20.0
million if the Underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $6.00 per share, after
deducting the underwriting discount and estimated Offering expenses
payable by the Company. The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Shareholders upon
exercise of the Underwriters' over-allotment option in full or in part.
The principal purposes of this Offering are to obtain additional capital,
create a public market for the Company's Common Stock and facilitate
future access by the Company to public equity markets.
The Company expects to use the net proceeds from this Offering
for working capital and for other general corporate purposes, including
the expansion of marketing, sales, and customer support activities,
research and development, and capital expenditures. A portion of the
proceeds of this Offering will be used to repay a $1.5 million loan from
JMI and loans in an aggregate amount of approximately $143,000 from James
F. Chen, the Company's President and Chief Executive Officer. See
"Certain Transactions." In addition, a portion of the net proceeds may be
used to acquire or invest in related businesses or products or to obtain
the right to use technologies that would broaden or enhance the Company's
products. The Company has no present plans, agreements or commitments and
is not currently engaged in any negotiations with respect to any such
transactions. Pending such use of the proceeds, the Company intends to
invest the funds in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its
Common Stock or other securities. The Company anticipates that all of its
net earnings, if any, will be retained for use in its operations and does
not anticipate paying cash dividends on its Common Stock in the
foreseeable future. Payments of future cash dividends, if any, will be at
the discretion of the Company's Board of Directors after taking into
account various factors, including the Company's financial condition,
operating results, and current and anticipated cash needs. The holders of
Common Stock are not entitled to receive dividends as long as any shares
of the Company's Series A Stock are issued and outstanding. See "Risk
Factors - Conversion of Series A Stock," "Description of Capital Stock -
Common Stock," and "Description of Capital Stock -Series A Convertible
Preferred Stock."
CAPITALIZATION
The following table sets forth the capitalization of the Company
as of March 31, 1996, and as adjusted to give effect to the sale of the
23
<PAGE>
shares of Common Stock offered hereby (at an assumed initial public
offering price of $6.00 per share and after deducting the estimated
underwriting discount and offering expenses), assuming the conversion of
all Series A Stock on a one-for-one basis into Common Stock and the
application of the net proceeds from this Offering as described under "Use
of Proceeds." See "Risk Factors - Conversion of Series A Stock" and
"Description of Capital Stock - Series A Convertible Preferred Stock" for
a description of the conversion of the Series A Stock on a one-for-one
basis, which will occur automatically if the initial offering price
exceeds $5.25 per share of Common Stock.
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Long term debt, less current portion . . . . . . . . . . . $ 143,725 $ 143,725
---------- -----------
Preferred Stock, $0.001 par value; 20,000,000
shares authorized; none issued and outstanding, actual
and as adjusted (1)(2) . . . . . . . . . . . . . . . . ---- ----
Shareholders' equity:
Common Stock, $0.001 par value; 50,000,000
shares authorized, 12,456,641 shares issued and
outstanding, actual; 15,856,641 shares issued and
outstanding, as adjusted (3) . . . . . . . . . . . 12,457 15,857
Additional paid-in capital . . . . . . . . . . . . . . 1,321,888 19,640,488
Accumulated deficit . . . . . . . . . . . . . . . . . (2,468,943) (2,468,943)
---------- -----------
Total shareholders' equity (deficit) . . . . . . . (1,134,598) 17,187,402
---------- ----------
Total capitalization . . . . . . . . . . . . . . . $ (990,873) $17,331,127
=========== ===========
</TABLE>
----------------------------------
(1) The Company's Restated Certificate of Incorporation authorizes the
Company to issue up to 20,000,000 shares of Preferred Stock. On
April 4, 1996, the Board of Directors authorized the issuance of
1,183,402 shares of Series A Stock and on May 12, 1996, the Board of
Directors authorized the issuance of an additional 6,071 shares of
Series A Stock. As of June 12, 1996, 1,186,518 shares of Series A
24
<PAGE>
Stock have been issued. See "Description of Capital Stock - Series A
Convertible Preferred Stock."
(2) In December 1995 and January 1996, the Company borrowed $2.5 million
through the sale of 7% interest bearing, unsecured Promissory Notes
("Notes") ("Note Offering"). In April and May 1996, the Company
exchanged all of the Notes (principal and accrued interest) for
shares of the Company's Series A Stock, at a price of $3.00 per
share. In addition, the Company permitted the certain investors to
purchase an additional 333,333 shares of Series A Stock at a price of
$3.00 per share. Assuming the initial offering price exceeds $5.25,
shares of Series A Stock will convert to Common Stock on a one-for-
one basis on consummation of the Offering. See "Risk Factors -
Conversion of Series A Stock," and "Description of Capital Stock -
Series A Convertible Preferred Stock."
(3) Excludes 280,812 shares of Common Stock reserved for issuance (see
"Business - Licensing Agreements") and warrants issued to JMI to
purchase 100,000 shares of Common Stock at an exercise price of $0.01
per share, which must be exercised by June 30, 1996. See "Certain
Transactions."
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
$(1,135,000) or $(0.09) per share of Common Stock. Net tangible book
value per share represents the amount of the Company's total tangible
assets less total liabilities divided by the number of shares of Common
Stock outstanding. Without taking into account any other changes in the
net tangible book value after March 31, 1996, other than to give effect to
the receipt by the Company of the net proceeds from the sale of the
3,400,000 shares of Common Stock offered by the Company at an assumed
offering price of $6.00 per share and after deducting the estimated
underwriting discount and offering expenses, the adjusted net tangible
book value of the Company as of March 31, 1996 would have been
approximately $17.2 million or $1.08 per share. This represents an
immediate increase in net tangible book value of $1.17 per share to
existing shareholders and an immediate dilution of $4.92 per share to new
investors. The following table illustrates this per share dilution:
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share (1) . . . . . $6.00
Net tangible book value per share before Offering . . . . . $ (0.09)
Increase in net tangible book value per share
attributable to payments by new investors (2) . . . . . . 1.17
Net tangible book value per share after Offering . . . . . . 1.08
-----
Dilution of net tangible book value per share to
new investors . . . . . . . . . . . . . . . . . . . . . $4.92
=====
</TABLE>
_____________________________________
(1) Before deducting the estimated underwriting discount and Offering
expenses.
(2) After deducting the estimated underwriting discount and Offering
expenses payable by the Company.
The following table summarizes as of March 31, 1996, the difference
between existing shareholders and new investors with respect to the number
of shares purchased from the Company, the total consideration paid, and
the average price paid per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------------- --------------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders (1) . 12,456,641 78.6% $ 1,334,345 6.1% $ 0.11
New investors (1) . . . . . 3,400,000 21.4 20,400,000 93.9 6.00
---------- ----- ---------- ----
Total . . . . . . . . . . . 15,856,641 100.0% $21,734,345 100.0%
========== ===== ========== =====
</TABLE>
_________________________________
(1) In the event the Underwriters exercise the over-allotment option
granted by the Company and the Selling Shareholders, the number of
shares held by existing shareholders will be reduced to 12,240,173 or
approximately 77.2% of the outstanding shares of the Common Stock and
will increase the number of shares held by new investors to 3,616,468
or approximately 22.8% of the total number of shares of Common Stock
outstanding after the Offering.
The foregoing table assumes no exercise of any outstanding stock
options, warrants, or the Underwriters' over-allotment option. As of
March 31, 1996, options to purchase 528,444 shares of Common Stock were
outstanding under the Company's 1995 Non-Statutory Stock Option Plan at a
26
<PAGE>
weighted average per share exercise price of $ 0.83. Additional dilution
may result if any of these stock options are exercised. See "Management."
27
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data set forth below with respect to
the Company's statements of operations from February 16, 1993 (date of
inception) to December 31, 1993 and for the years ended December 31, 1994
and 1995 and the three months ended March 31, 1996 and balance sheets as
of December 31, 1994 and 1995 and March 31, 1996 are derived from the
financial statements of the Company included elsewhere in this Prospectus
that have been audited by Coopers & Lybrand L.L.P., independent certified
public accountants. The data set forth below should be read in
conjunction with the Company's financial statements and the notes thereto
included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
For the Period
February 16,
1993 (date of
inception) to Year Ended Three Months
December 31, December 31, Ended March 31,
--------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1995 1996
------------- ---- ---- ---- ----
(unaudited)
Statement of Operations Data:
Revenues:
Product revenue . . . . . . . . . $ - $ - $ 1,101,418 $ 150,257 $ 981,642
Consulting and services . . . . . 76,183 59,716 2,083 - 40,169
----------- ----------- ------------ ----------- -----------
Total revenues . . . . . . . . 76,183 59,716 1,103,501 150,257 1,021,811
----------- ----------- ------------ ----------- -----------
Cost of revenues:
Cost of product revenue . . . . . - - 376,359 52,590 310,693
Cost of consulting and services
revenue . . . . . . . . . . . . 38,090 35,114 800 - 11,305
----------- ----------- ------------ ----------- ----------
Gross profit . . . . . . . . . . . 38,093 24,602 726,342 97,667 699,813
Operating expenses:
Sales and marketing . . . . . . . 3,652 21,212 103,917 33,980 709,111
General and administrative . . . 68,212 299,392 1,314,661 154,282 592,967
Research and development . . . . - 107,926 277,973 41,696 310,952
----------- ----------- ----------- ----------- -----------
Total operating expenses . . . 71,864 428,530 1,696,551 229,958 1,613,030
----------- ----------- ----------- ----------- -----------
28
<PAGE>
SELECTED FINANCIAL DATA (continued)
For the Period
February 16,
1993 (date of Year Ended Three Months
inception) to December 31, Ended March 31,
December 31, ------------------------ ---------------------
1993 1994 1995 1995 1996
--------------- ---- ---- (unaudited) ----
<S> <C> <C> <C> <C> <C>
Operating loss . . . . . . . . . . (33,771) (403,928) (970,209) (132,291) (913,217)
Other (expense) income:
Interest expense . . . . . . . . (1,913) (2,360) (66,615) - (104,934)
Interest income . . . . . . . . . - - 4,513 - 23,491
----------- ----------- ----------- ----------- -----------
Total other expenses . . . . . (1,913) (2,360) (62,102) - (81,443)
----------- ----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . $ (35,684) $ (406,288) $(1,032,311) $ (132,291) $ (994,660)
=========== =========== =========== =========== ===========
Net loss per common share . . . . . $ (0.00) $ (0.04) $ (0.08) $ (0.01) $ (0.08)
============ ============ ============ ============ ============
Weighted average shares
outstanding (1) . . . . . . . . . 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714
============ =========== =========== =========== ===========
December 31, March 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) . . . . . $ (19,436) $ 245,598 $ (168,311) $ 128,690 $(1,297,123)
Total assets . . . . . . . . . . . 28,182 394,906 2,050,602 264,580 2,945,758
Long term debt, less current portion - - 126,908 - 143,725
Shareholders' equity (deficit) . . (11,523) 318,028 (139,938) 185,737 (1,134,598)
</TABLE>
___________________________________
(1) For a description of the computation of net loss per share and
shares used in computing net loss per share, see Note 2 of Notes
to the Financial Statements.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. The
Company's actual results could differ significantly from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors"
as well as those discussed elsewhere in this Prospectus.
Overview
The Company develops, markets, and licenses a comprehensive suite
of network security products that enable businesses to conduct secured
electronic transactions and information exchange using private enterprise
networks and public networks such as the Internet. From inception in
February 1993 until December 1994, the Company's operating activities
related primarily to recruiting personnel, and conducting research and
development. Revenues were minimal during 1993 and 1994. The Company
introduced its first product, the SmartCAT smart card reader and
application software, in October 1994 and its second product, the
SmartWall application-level firewall, in December 1994. In December 1995,
the Company introduced SmartGATE, a client/server security enabling
product.
From inception until December 1994, the Company's revenues were
generated primarily from consulting and services. Currently, the Company
generates revenues primarily from software licenses and sale of hardware,
and to a lesser extent, consulting and related services. The Company
anticipates that revenue from products will continue to be the principal
source of the Company's revenues.
Under the Company's revenue recognition policy, revenue is
generally recognized from the license of software upon shipment, net of
allowances, provided that no significant vendor obligations remain. In
addition, the Company often permits customers to evaluate products being
considered for purchase, generally for a period of up to 30 days, in which
event the Company does not recognize revenue until the customer has
accepted the product. Accordingly, the Company's revenue recognition
policy does not necessarily correlate with signing of a contract or
shipment of a product. See "Risk Factors - Long Sales Cycle."
As of March 31, 1996, the Company had an accumulated deficit of
approximately $2,500,000. The Company currently expects to incur net
losses over the next several quarters as a result of greater operating
expenses incurred to fund research and development and to increase its
sales and marketing efforts. To date, the Company has expensed all
development costs as incurred in compliance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed." The Company believes
30
<PAGE>
that it will be able to continue to expense all development costs as
incurred.
The Company's President, Chief Executive Officer, and founder did
not receive salary in 1993, 1994, or 1995, which resulted in reduced
general and administrative costs for those years. Mr. Chen has begun
receiving a salary in 1996 and the Company recently has hired and intends
to continue to hire additional senior level personnel. See "Management -
Employment Agreement." In addition, general and administrative costs have
increased significantly since the Company's date of inception and the
Company expects such costs to continue to increase in the future.
In 1993, consulting and services revenue from MacTec
Magazine(TRADEMARK) ("MacTec") and IN-SNEC Groupe Technique, an air
traffic control equipment manufacturer located in France, accounted for
approximately 56% and 13%, respectively, of total revenues. In 1994,
consulting and services revenue from the U.S. Department of Energy and
MacTec accounted for approximately 37% and 29%, respectively, of total
revenues. In 1995, product revenue from GEIS, NCTS Washington, a division
of the Department of the Navy, and the U.S. Defense Information Systems
Agency accounted for approximately 19%, 10%, and 10%, respectively, of
total revenues. For the three months ended March 31, 1996, product
revenue from Solomon Technology Corporation, a Taiwanese manufacturer of
smart cards, accounted for approximately 20% of total revenues.
Results of Operations
The following table sets forth certain statement of operations
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
For the Period
February 16,
1993 (date of Year Ended Three Months Ended
inception) to December 31, March 31,
December 31, ---------------- --------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1995 1996
--------------- ---- ---- ---- ----
(unaudited)
Statement of Operations Data:
Revenues:
Product revenue . . . . . . . . . - % - % 99.8% 100.0% 96.1%
Consulting and services . . . . . 100.0 100.0 0.2 - 3.9
------ ------ ------ ----- ------
Total revenues. . . . . . . . . 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenue . . . . . - - 34.1 35.0 30.4
Cost of consulting and services
revenue . . . . . . . . . . . . 50.0 58.8 0.1 - 1.1
------ ------ ------ ----- ------
31
<PAGE>
For the Period
February 16,
1993 (date of Year Ended Three Months Ended
inception) to December 31, March 31,
December 31, ---------------- --------------------
1993 1994 1995 1995 1996
--------------- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Gross profit . . . . . . . . . . . . 50.0 41.2 65.8 65.0 68.5
Operating expenses:
Sales and marketing. . . . . . . . 4.8 35.5 9.4 22.6 69.4
General and administrative . . . . 89.5 501.4 119.1 102.7 58.0
Research and development . . . . . - 180.7 25.2 27.7 30.4
------ ------ ------ ------ ------
Total operating expenses . . . . 94.3 717.6 153.7 153.0 157.8
------ ------ ------ ------ ------
Operating loss . . . . . . . . . . . (44.3) 676.4 (87.9) (88.0) (89.3)
Other (expense) income:
Interest expense . . . . . . . . . (2.5) (4.0) (6.0) - (10.3)
Interest income. . . . . . . . . . - - 0.4 - 2.3
----- ----- ------ ----- ------
Total other expenses . . . . . . (2.5) (4.0) (5.6) - 8.0
Net loss . . . . . . . . . . . . . . (46.8)% (680.4)% (93.5)% (88.0)% (97.3)%
====== ====== ====== ===== =====
</TABLE>
_________________________________
(1) For a description of the computation of net loss per share and
shares used in computing net loss per share, see Note 2 of Notes
to the Financial Statements.
32
<PAGE>
Three Months Ended March 31, 1996 Compared with Three Months Ended
March 31, 1995
Revenues
Total revenues increased significantly from approximately
$150,000 for the three months ended March 31, 1995 to approximately
$1,022,000 for the three months ended March 31, 1996. This increase was
principally attributable to increased sales of the Company's network
security products.
Product Revenue. Product revenue is derived principally from
software licenses and the sale of hardware. Product revenue increased
significantly from approximately $150,000 for the three months ended March
31, 1995 to approximately $982,000 for the three months ended March 31,
1996. The increase was due principally to increased sales of the
Company's SmartWall product and the introduction of its SmartGATE product
in December 1995.
Consulting and Services Revenue. Consulting and services revenue
is derived principally from fees for services complementary to the
Company's products, including consulting, maintenance, and training.
Consulting and services revenue was approximately $40,000, or 3.9% of
total revenue, for the three months ended March 31, 1996. The Company
anticipates that consulting and services revenues will increase as a
percentage of total revenue as compared to the three months ended
March 31, 1996.
Cost of Revenues
Cost of Product Revenue. Cost of product revenue consists
principally of the costs of computer hardware, licensed technology,
manuals, and labor associated with the distribution and support of the
Company's products. Cost of product revenue increased from approximately
$53,000 for the three months ended March 31, 1995 to approximately
$311,000 for the three months ended March 31, 1996. Cost of product
revenue as a percentage of product revenue was 35.0% and 31.7% for the
three months ended March 31, 1995 and March 31, 1996, respectively. The
increase in absolute dollars was principally related to the higher level
of product sales compared with the prior year's period. The decrease in
cost of product revenue as a percentage of product revenue was primarily
due to an increase in sales of the Company's software products as a
component of product revenue in the later period.
Cost of Consulting and Services Revenue. Cost of consulting and
service revenue consists principally of personnel and related costs
incurred in providing consulting, support, and training services to
customers. There was no cost of consulting and services revenue for the
three months ended March 31, 1995 as compared to approximately $11,000, or
28.1% of consulting and services revenue, for the three months ended
March 31, 1996.
33
<PAGE>
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist
principally of the costs of sales and marketing personnel, advertising,
promotions, and trade shows. Sales and marketing expenses increased
significantly from approximately $34,000 for the three months ended
March 31, 1995 to approximately $709,000 for the three months ended
March 31, 1996. Sales and marketing expenses as a percentage of total
revenue were 22.6% and 69.4% for the three months ended March 31, 1995 and
March 31, 1996, respectively. The dollar and percentage increase were
principally related to expenses associated with increases in the number of
sales and marketing personnel, as well as expenses related to advertising
and promotional efforts. Sales and marketing expenses can be expected to
increase both in the aggregate and as a percentage of total revenues in
the near term as a result of the Company's increased sales and marketing
efforts.
General and Administrative. General and administrative expenses
consist principally of the costs of finance, management, and
administrative personnel and facilities expenses. General and
administrative expenses increased substantially from approximately
$154,000 for the three months ended March 31, 1995 to approximately
$593,000 for the three months ended March 31, 1996. General and
administrative expenses as a percentage of total revenues were 102.7% and
58.0% for the three months ended March 31, 1995 and March 31, 1996,
respectively. In addition, during the three months ended March 31, 1996,
the Company added approximately $76,000 to its allowance for potentially
uncollectible accounts receivable and nonsalable inventory. The remainder
of the dollar increase was principally attributable to additional hiring
of management and administrative personnel and professional and legal
fees. The percentage decrease was primarily due to allocation over a
larger revenue base. The Company anticipates that general and
administrative expenses will increase in future periods.
Research and Development. Research and development expenses
consist principally of the cost of research and development personnel and
other expenses associated with the development of new products and
enhancement of existing products. Research and development expenses
increased significantly from approximately $42,000 for the three months
ended March 31, 1995 to approximately $311,000 for the three months ended
March 31, 1996. Research and development expenses as a percentages of
total revenue were 27.7% and 30.4% for the three months ended March 31,
1995 and March 31, 1996, respectively. The dollar and percentage increase
were principally attributable to an increase in the number of personnel
associated with the Company's technical development efforts. The Company
believes that a continuing commitment to research and development is
required to remain competitive. Accordingly, the Company intends to
allocate substantial resources to research and development, but research
and development expenses may vary as a percentage of revenues.
Interest Income and Expense. Interest income represents interest
earned on cash, cash equivalents and marketable securities. Interest
34
<PAGE>
income was approximately $23,000 for the three months ended March 31,
1996. Interest expense was approximately $105,000 for the three months
ended March 31, 1996. Interest expense represents interest payable on
promissory notes and capitalized lease obligations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Income Taxes. The Company did not incur income tax expense for
the three months ended March 31, 1995 and the three months ended March 31,
1996 as a result of the net loss incurred during each period. As of March
31, 1996, the Company had net operating loss carryforwards of
approximately $1,785,000 as a result of net losses incurred since
inception.
Comparison of Years Ended December 31, 1993, 1994, and 1995
Revenues
Total revenues decreased 21.6% from approximately $76,000 in 1993
to approximately $60,000 in 1994 and increased substantially to
approximately $1,104,000 in 1995. The Company had no revenues from
products in 1993 and 1994. The decrease in revenues from 1993 to 1994 was
primarily due to the Company's focus on product development. The increase
from 1994 to 1995 was primarily due to the introduction of the Company's
SmartWall product in December 1994.
Cost of Revenues
Cost of revenues decreased 7.8% from approximately $38,000 in
1993 to approximately $35,000 in 1994 and increased substantially to
approximately $377,000 in 1995. Cost of revenues as a percentage of total
revenues were 50.0%, 58.8% and 34.2% in 1993, 1994, and 1995,
respectively. The dollar decrease and percentage increase in 1994 was
primarily due to a decrease in revenues and higher service costs. The
dollar increase and percentage decrease in 1995 is primarily attributable
to an increase in revenues from the introduction of SmartWall.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from
approximately $4,000 in 1993 to approximately $21,000 in 1994 and
increased to approximately $104,000 in 1995. Sales and marketing expenses
as a percentage of total revenues were 4.8%, 35.5%, and 9.4% in 1993,
1994, and 1995, respectively. The dollar increase in 1994 was primarily
due to the costs associated with expanding operations. The percentage
increase in 1994 was primarily attributable to allocation over a smaller
revenue base. The dollar increase in 1995 was principally due to
increased personnel and marketing efforts and costs associated with the
sales of SmartWall. The percentage decrease in 1995 was principally due
to allocation over a larger revenue base.
35
<PAGE>
General and Administrative. General and administrative expenses
increased from approximately $68,000 in 1993 to approximately $299,000 in
1994 and increased to approximately $1,315,000 in 1995. General and
administrative expenses as a percentage of total revenues were 89.5%,
501.4% and 119.1% in 1993, 1994, and 1995, respectively. The dollar
increase in 1994 was primarily as a result of increased staffing levels.
The dollar increase in 1995 was primarily as a result of increased
staffing levels, leasing of additional office space, additional travel
expense, establishing an allowance for potentially uncollectible and
nonsaleable inventory, and increased professional fees.
Research Development. Research and development expenses
increased from $0 to approximately $108,000 in 1994 and increased to
approximately $278,000 in 1995. Research and development expenses as a
percentage of total revenues were 0%, 180.7%, and 25.2% in 1993, 1994, and
1995, respectively. The dollar increases in 1994 and 1995 were primarily
due to increases in the number of personnel associated with the Company's
product development efforts.
Interest Income and Expense. There was no interest income in
1993 and 1994. Interest income in 1995 was approximately $5,000 from
interest earned on the net proceeds from the Company's private financings.
Interest expense was approximately $2,000 in both 1993 and 1994. Interest
expense was approximately $67,000 in 1995. The increase was primarily due
to the Company's issuance of $1,250,000 in promissory notes in 1995.
Income Taxes. The Company did not incur income tax expenses in
December 31, 1993, 1994, and 1995 as a result of the net loss incurred
during these periods. As of December 31, 1995, the Company had net
operating loss carryforwards of approximately $1,172,000 as a result of
net losses incurred since inception.
36
<PAGE>
Quarterly Results of Operations
The following table sets forth selected financial data for the
periods indicated. This information (other than the three months ended
March 31, 1996) has been derived from the Company's unaudited financial
statements, which, in management's opinion, reflect all adjustments
necessary to fairly present this information when read in conjunction with
the financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
_______________________________________________________________
<S> <C> <C> <C> <C> <C>
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1995 1995 1995 1995 1996
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Statement of Operations Data:
Revenues:
Product revenue . . . . . . . . . . . . $ 150,257 $ 218,961 $ 356,021 $ 376,179 $ 981,642
Consulting and services . . . . . . . . - - - 2,083 40,169
----------- ---------- ---------- ----------- ----------
Total revenues . . . . . . . . . . . 150,257 218,961 356,021 378,262 1,021,811
----------- ---------- ---------- ----------- ----------
Cost of revenues:
Cost of product revenue . . . . . . . . 52,590 78,560 125,482 119,727 310,693
Cost of consulting and services
revenue . . . . . . . . . . . . . . . - - - 800 11,305
----------- ----------- ---------- ----------- ----------
Gross profit . . . . . . . . . . . . . . 97,667 140,401 230,539 257,735 699,813
Operating expenses:
Sales and marketing . . . . . . . . . . 33,980 18,562 17,280 34,095 709,111
General and administrative . . . . . . 154,282 289,181 167,903 703,295 592,967
Research and development . . . . . . . 41,696 55,594 83,392 97,291 310,952
---------- ---------- ---------- ----------- ---------
Total operating expenses . . . . . . 229,958 363,337 268,575 834,681 1,613,030
---------- ---------- ---------- ----------- ---------
Operating loss . . . . . . . . . . . . . (132,291) (222,936) (38,036) (576,946) (913,217)
Other (expenses) income:
37
<PAGE>
Three Months Ended
__________________________________________________________________
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1995 1995 1995 1995 1996
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Interest expense . . . . . . . . . . . - - - (66,615) (104,934)
Interest income . . . . . . . . . . . . - - - 4,513 23,491
----------- ----------- ---------- ----------- ---------
Total other expenses . . . . . . . - - - (62,102) (81,443)
----------- ----------- ---------- ----------- ----------
Net loss . . . . . . . . . . . . . . . . $ (132,291) $ (222,936) $ (38,036) $ (639,048) $(994,660)
=========== =========== ========== =========== ==========
</TABLE>
The Company's total revenues and operating results have varied
substantially from quarter to quarter and should not be relied upon as an
indication of future results. Quarterly operating results can be
difficult to forecast because the Company's sales cycle can be relatively
long and depend on factors such as the size and timing of individual
transactions; changes in customer budget authorizations; the level of
sales and marketing, research and development, and general and
administrative expenses; and general economic conditions.
Operating results for a given period could be disproportionately
affected by any shortfall in expected revenues. In addition, fluctuation
in revenues from quarter to quarter will likely have an increasingly
significant impact on the Company's results of operations. The Company's
growth in recent periods may not be an accurate indication of future
results of operations in light of the Company's short operating history,
the evolving nature of the network security market, and the uncertainty of
the demand for Internet and intranet products in general and the Company's
products in particular. See "Risk Factors - Anticipated Fluctuations in
Quarterly Results."
The Company may experience significant seasonality in its
business, and the Company's financial condition and results of operations
may be affected by such trends in the future. Such trends may include
higher revenues in the third and fourth quarters of the year and lower
revenues in the first and second quarters. The Company believes that
revenues may be higher in the third quarter due to the fiscal year end of
the U.S. government and higher in the fourth quarter due to year-end
budgetary pressures on the Company's commercial customers and the tendency
of certain of the Company's existing or prospective customers to implement
changes in computer or network security prior to the end of the calendar
year. Because the Company's operating expenses are based on anticipated
revenue levels, a small variation in the time of recognition of revenues
can cause significant variations in operating results from quarter to
quarter.
Liquidity and Capital Resources
Since its organization, the Company has financed its operations
through the private sale of equity securities, notes to shareholders, and
short-term borrowings. In 1993, the Company raised approximately $40,000
38
<PAGE>
from the issuance of an 8% note. In 1994 and 1995, the Company raised
approximately $750,000 and $400,000, respectively, through the sale of
Common Stock. In addition, in December 1995 and January 1996, the Company
raised $2,500,000 from the sale of the 7% unsecured promissory notes
scheduled to mature on June 30, 1996. In April and May of 1996, the
Company exchanged all of the 7% unsecured promissory notes for Series A
Stock. In June 1996, the Company raised an additional $1,500,000 by
issuing to JMI an 8% unsecured senior subordinated note with detachable
warrants to purchase 500,000 shares of Common Stock. See
"Capitalization," "Description of Capital Stock - Series A Convertible
Preferred Stock," and "Certain Transactions."
In October 1995, the Company obtained a secured equipment loan
from a bank in the amount of $50,000 at the bank's prime rate for the
first year, which is scheduled to increase to the bank's prime rate plus
1.5% in October 1996. The Company is required to repay the loan over 36
months commencing in October 1996 and ending in October 1999. The amount
outstanding under this loan at March 31, 1996 totalled $50,000. At March
31, 1996, the bank's prime rate was 8.25%.
The Company's operating activities used cash of approximately
$21,000, $353,000, and $1,121,000 in 1993, 1994, and 1995, respectively.
For the three months ended March 31, 1996, the Company's operating
activities used cash of $967,000. Cash used in operating activities was
principally a result of net losses and increases in accounts receivable
and inventory, which were partially offset by increases in accounts
payable and the establishment of an allowance for potentially
uncollectible accounts receivable and nonsaleable inventory.
Capital expenditures for property and equipment were
approximately $20,000, $13,000, and $20,000 in 1993, 1994, and 1995,
respectively. Capital expenditures for the three months ended March 31,
1996 were $155,000. These expenditures have generally been for computer
workstations and personal computers, office furniture and equipment, and
leasehold additions and improvements. The Company expects to purchase
additional computer equipment and office furniture in 1996. The Company
may use a portion of the net proceeds of this Offering for such
expenditures.
The Company believes that the net proceeds from this Offering,
together with existing cash and cash equivalent and funds generated from
on-going operations will be sufficient to finance the Company's operations
at least through 1997. However, the Company may require additional funds
to support its working capital requirements or for other purposes and may
seek to raise such additional funds through public or private equity
financing or from other sources. No assurance can be given that
additional financing will be available or, if available, that such
additional financing will be on terms favorable to the Company or its
shareholders.
39
<PAGE>
BUSINESS
Overview
Virtual Open Network Environment Corporation ("V-ONE" or the
"Company") develops, markets, and licenses a comprehensive suite of
network security products that enable businesses to conduct secured
electronic transactions and information exchange using private enterprise
networks and public networks such as the Internet. The Company's suite
of products address network authentication, access control, and data
integrity through the use of smart cards, firewalls, and encryption
technology. The Company's products interoperate seamlessly and can be
combined to form a complete, integrated network security solution or can
be used as independent components in customized security solutions. The
Company's products have been designed with an open and flexible architec-
ture to allow for enhanced application functionality and to support future
network security standards. In addition, the Company's products enable
businesses to deploy and scale their solutions from small, single-site
networks to large, multi-site environments.
Industry Background
Overview. Over the last decade decentralized computing has
emerged as a result of the widespread adoption of personal computers,
local area networks ("LANs"), and wide area networks ("WANs"). This
emergence has enabled users to communicate with each other and share data
throughout an entire organization. With the recent popularization of the
Internet and increased performance capabilities offered by high-speed
modems, ISDN services and Frame Relay technology, the volume of data
transferred over networks has increased dramatically.
In addition, leading hardware and software vendors have adopted
and support TCP/IP, the Internet's non-proprietary communications
protocol, for computer communications and information exchange. This open
platform, along with the emergence of the Internet, allows increasing
numbers of businesses and consumers to engage in electronic commerce, such
as home banking, credit verification, securities trading, and home
shopping.
Organizations are increasingly using public networks, such as the
Internet, as an extension of their enterprise networks. Public networks
offer a cost-effective means of connecting branch offices and remote and
mobile users to mission critical applications and corporate resources such
as groupware, customer databases, and inventory control systems. Also,
the Internet can be used as a lower cost alternative to value-added
networks as a means to link companies with customers, suppliers and
trading partners. In addition, businesses are deploying intranets,
internal networks using TCP/IP protocols, to facilitate geographically
40
<PAGE>
dispersed communications and the transmission of information throughout an
enterprise in a cost effective manner.
With the increased use of the Internet and intranets, many
organizations are discovering that network security is a key element in
successfully implementing distributed applications and services, including
electronic mail, electronic data interchange, electronic commerce, and
information exchange services. Information becomes more vulnerable as
organizations rely heavily on computer networks for the electronic
transmission of data. In the absence of comprehensive network security,
individuals and organizations are able to exploit system weaknesses to
gain unauthorized access to networks, network transmissions, and
individual network computers. These individuals and organizations use
such access to alter or steal data or, in some cases, to launch
destructive attacks on data and computers within a network.
Demand for computer network security products is expected to grow
significantly as a result of the increased use of the Internet and
intranets. The Yankee Group, a market research firm, indicated that it
expects the market for information security products and services to grow
at a 70% compounded annual rate to the end of the decade from $395 million
in 1995 to $5.6 billion in the year 2000.
Network Security Elements. Each of the following elements is
critical in creating a complete network security solution to protect an
organization's data, network, and computer systems:
. Identification and Authentication - Verifying the user's
identity to prevent unauthorized access to computer and
network resources.
. Integrity - Ensuring that network data, whether in
storage or transmission, has not been changed or
compromised by any unauthorized manipulation.
. Non-repudiation - Verifying that data transmissions have
been executed between specific parties so that neither
party may legitimately claim that the transaction did not
occur.
. Authorization - Controlling which systems, data, and
applications a user can access.
. Encryption - Preventing unauthorized users from viewing
private data through the process of "scrambling" data
before it is transmitted or placed into electronic
storage.
To date, network security solutions have focused on single function or
point products that address one or a limited number of these specific
security elements.
41
<PAGE>
Network Security Products. Over the years a number of security
products have been developed, including passwords, token-based access
devices, firewalls, encryption products, smart cards, and digital
certificates. Each of these products was designed with a specific
function or objective; however, few were designed to meet all of the needs
of enterprise-wide security. Single function or point products that have
been developed to address one or a limited number of security requirements
include the following:
Passwords and Tokens. Until recently, passwords were the
most common method of authentication. Static (non-changing)
passwords were developed as the first attempt to address the need
for authentication. Static passwords, however, are inadequate as
they are susceptible to "sniffing" (unauthorized viewing) and to
attacks using software designed to randomly generate and enter
thousands of passwords. As a result, dynamic passwords,
including single-use passwords, were created to provide a greater
level of authentication. Dynamic password implementations
include the use of time-varying and challenge-response passwords.
Generally, dynamic authentication passwords require the use of a
hand-held, electronic device called a hardware token. Dynamic
passwords were subsequently strengthened by incorporating two-
factor identification, which provides a higher level of
authentication in that two independent components are combined to
identify a user (for example, a bank ATM card and a PIN code).
However, dynamic passwords and two-factor identification provide
only a limited level of security because the sessions they
authenticate are still vulnerable to interception.
Firewalls. Firewalls are network access control devices
that regulate the passage of information based on a set of user-
defined rules. Generally, firewalls are based upon one of two
technical architectures: packet filters (customarily used in
routers) and proxy-based application-level gateways. Packet
filters screen network traffic and allow or prevent network
access based upon source and destination Internet protocol
addresses. Proxy-based application-level gateways provide access
to applications on the network only after the user has identified
the desired application and submitted a valid password.
Encryption. Encryption products provide privacy for
transmitted data. Encryption algorithms scramble data so that
only users with the appropriate decoding key are able to view
transmitted or stored data. Public-key encryption has recently
gained additional credibility for managing the keys (codes) used
to encrypt, and subsequently decrypt user designated data.
Smart Cards. Smart cards are similar in size to credit
cards, but contain a small, tamper-proof microprocessor chip,
capable of storing data and processing complex encryption
algorithms. Smart cards are an advanced authentication token
that are also capable of storing information, such as credit card
42
<PAGE>
or bank account numbers, medical records, photographic images, or
digital certificates.
Digital Certificates. A digital certificate serves as an
individual's electronic identification card. The certificates
are digitally signed by a trusted third-party, called a
certificate authority, who vouches for the identity of the
certificate holder. Digital certificates are being standardized
as a means of authenticating on-line users, and are perceived to
be a key technology for the expansion of secure transactions and
electronic commerce.
As businesses increase their dependence on the Internet and
deploy intranets, the Company believes that there will be an increasing
need for a comprehensive enterprise-wide network security solution. Many
network security vendors, however, have focused on developing products
that address only one or a limited number of specific security
requirements. In addition, products developed by different vendors are
often difficult to integrate with each other and pose interoperability
problems. Consequently, the Company believes that businesses will
increasingly demand comprehensive network security solutions that are easy
to implement and transparent to the user. These solutions must have the
ability to integrate with existing applications, networks, and/or
mainframe applications, while being flexible and powerful enough to
address the needs of newly developed applications.
The V-ONE Solution
The Company offers a comprehensive suite of network security
products that address the need for identification and authentication,
integrity, nonrepudiation, authorization, and encryption. The Company
believes that, because of its unique combination of firewalls, smart cards,
and encryption technology, it is the first network security vendor to
provide two-factor identification, mutual authentication, and fine-grained
access control. This combination of network security products enables
organizations to identify and authenticate network users while controlling
access to network services. The Company's technology is designed to prevent
unauthorized access to an organization's mission critical applications and
internal data without impeding permitted uses of the organization's
resources and information. The Company's products are compatible with many
leading hardware platforms and operating systems, as well as many third-
party security products, such as firewalls. The Company's customers are
able to integrate V-ONE's security products into their networks with
minimal impact on existing systems and applications.
The Company's suite of products can be combined and configured to
provide perimeter defense, secure remote access, and intra/inter-
enterprise security to facilitate secured electronic commerce and
information exchange. The Company's principal products are SmartGATE, a
client/server product that offers identification and authentication,
integrity, nonrepudiation, authorization, and encryption; and SmartWall, an
application-level firewall that incorporates SmartGATE's functionality. The
Company provides customers with two-factor identification, mutual
authentication, fine-grained access control, and encryption by combining
43
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SmartCAT, V-One's smart card technology, with the SmartGATE server. In
addition, SmartGATE users can access enterprise networks from remote
locations using SmartCAT.
Network security solutions created using the Company's technology
enable its customers to securely deploy a broad range of services and
applications to engage in secured electronic transactions, information
exchange, and remote access to legacy applications. The Company's
technology is designed to be (i) modular, allowing businesses to utilize
the security product or products best suited to address their immediate
needs, with a seamless migration path to additional products as required,
(ii) scaleable, ranging from a single system supporting several users to
multiple systems potentially supporting hundreds of thousands of users,
and (iii) portable, employing smart card technology capable of securing
access independent of any particular user's machine or network entry
point.
Examples of network security solutions created using V-ONE's
products include:
Multi-purpose Smart Cards. A major telecommunications company,
under a reseller agreement, is using V-ONE technology to offer multi-
purpose, secure campus card programs to colleges and universities. The
telecommunications company is currently deploying that program at a large
university. See "- Strategic Alliances - Telecommunications." At the
university, the Company's products have been combined to provide secure
access to the Internet and the university's internal network. Students can
use smart cards to obtain access to their university records, student
information, and campus services via secure Internet access. The smart
cards also include stored value for use at on- and off-campus vendors and
pay telephones. In addition, students can transfer cash value from their
bank accounts to the smart cards by using advanced card readers located on
campus. The initial campus program began in the spring of 1996, and it is
currently expected that the program will be fully implemented to the
university's 30,000 students in the fall of 1996.
Home Banking. Several commercial banks are deploying
applications to their customers that utilize the Company's SmartGATE and
SmartWall technology to enable secure, cost-effective, and convenient
Internet-based, home banking services. V-ONE's technology is designed to
allow a bank's customers to securely transfer funds, review accounts, and
communicate with other bank departments using the Internet. To protect
the customer's privacy, all data streams between a bank customer and the
bank's private network are encrypted. By using V-ONE's technology, a bank
is able to cost-effectively provide secured data transmissions while
deploying applications to its customers that are intended to result in
higher levels of customer service and convenience to the customer. In
some cases, the Company's products augment a bank's existing private dial-
up network system for home banking. Historically, dial up solutions have
afforded banks quick entry into the home banking market, but such
solutions have typically had certain administrative and financial
limitations.
Electronic Data Interchange ("EDI"). GE InterBusiness , the
secure Internet offering of GEIS, a worldwide provider of computer
44
<PAGE>
communications services, is designed to provide electronic commerce, such
as EDI, and secured messaging, as well as access to GEIS's value-added
network ("VAN") over the Internet. GEIS has made this integrated product
offering available to its installed client base of approximately 40,000
corporations. Using SmartGATE, GEIS has established an environment that
provides secure data transfer over the Internet. The use of V-ONE
technology permits GEIS' business clients to conduct electronic commerce,
to share business information via bulletin boards, and to take advantage
of the Internet's open standards while maintaining transparent
authentication, authorization, and encryption. Each time a GE
InterBusiness member engages in a transaction using the GE InterBusiness
service, SmartGATE authenticates the member, checks the member's right to
perform the transaction, and encrypts the session.
Internet Services. It is expected that Virtual Networks, Inc.
("VNI") will be the first Internet service provider ("ISP") to deploy the
Company's secured messaging module SmartREM (Smart Registered Electronic
Messaging), which is expected to be introduced in the third quarter of
1996. SmartREM will couple SmartGATE with a SmartGATE-aware TCP/IP mail
server to enable secure registered e-mail over the Internet. SmartREM
will provide a mail system that authenticates the identity of the sender
of each message, guarantees delivery of the message to only the addressee,
and will encrypt the message during transit between the sender and the
receiver to ensure privacy of the data stream.
Strategy
The Company's goal is to become the leading provider of
comprehensive, open, and interoperable network security products that are
convenient to the end user. The Company's strategy to realize its goal
contains the following elements:
o Provide an Interoperable, Scaleable, and Open Solution. The
Company intends to continue to provide network security products
that operate on leading platforms and that are interoperable and
compatible with other network security products. The flexible and
open architecture of the Company's products enable the Company to
deliver component technologies for a seamless and interoperable
system. In addition, the Company's technology is scaleable,
application-independent, and designed both to integrate with
existing technology as well as to support emerging standards and
applications.
o Augment and Integrate with Existing Security Products. The
Company will continue to offer products that interoperate with a
wide variety of third-party security products, including
firewalls and tokens, allowing a customer to augment existing
network security systems. The Company believes that its
technology protects a customer's existing network security
investments because the Company's products are designed to
integrate easily with point products currently employed by its
customers.
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o Leverage Key Reference Accounts in Selected Vertical Markets.
The Company has identified strategic vertical markets that
require sophisticated network security solutions. The Company
has targeted its marketing and direct sales efforts on key
participants within these selected vertical markets. By
successfully installing its products at key accounts, the Company
intends to leverage positive references from its installed
customer base to expand its market penetration within those
information critical industries. In the future, the Company
intends to increase its marketing and sales efforts to expand its
customer base in additional vertical markets, such as healthcare.
o Develop and Leverage Strategic Alliances. The Company has
established strategic alliances to increase the distribution and
market acceptance of its network security products including
alliances with Software.com, Inc. ("Software.com") and a large
telecommunication company. The Company intends to continue to
strengthen its existing strategic alliances while forging new
relationships with key industry participants. In addition,
the Company is exploring opportunities to develop new products and
expand the functionality of its existing products through
alliances with key vendors of complementary technologies.
Products and Services
The Company's network security products are designed to protect
the user's information and networks from unauthorized access while
allowing users of the network to conduct business securely over the
Internet and intranets. These products have been designed to interoperate
seamlessly and enhance application functionality. The Company designs its
products so that they can be combined in different configurations to
provide customized solutions for its customers.
<TABLE>
<CAPTION>
Date of
Product Category Description Introduction
------- -------- ----------- ------------
<S> <C> <C> <C>
SmartGATE(TRADEMARK) Client/server End-to-end, application level network Q4
security data security system providing two-factor 1995
identification, mutual authentication,
encryption and access control
SmartWall(REGISTERED Network perimeter An application level, dual-homed firewall Q4
TRADEMARK) defense (firewall) that protects internal networks while 1994
enabling remote access to internal
resources
46
<PAGE>
Date of
Product Category Description Introduction
------- -------- ----------- ------------
SmartCAT(TRADEMARK) Smart card technology Smart card client software that is Q4
interoperable with third-party smart 1994
cards and smart card readers
Online Registration Client/server token A system that allows remote creation and Q2
Service(TRADEMARK) distribution management of secure tokens and 1996
workstation configuration files
SmartREM(TRADEMARK) Secured e-mail A system that allows authenticated and Q3
encrypted message transfer between users 1996
of a secure messaging community over (proposed)
untrusted networks
Wallet Electronic commerce Electronic technology that enables secure Q3
Technology(TRADEMARK) payment transactions containing credit 1995
card information over untrusted networks
NetChart(TRADEMARK) On-line financial Stock performance analysis application Q2
analysis 1996
</TABLE>
SmartGATE Server and SmartGATE Client. SmartGATE server and
SmartGATE client are designed to interoperate easily with most TCP/IP
based applications and to allow the end-user to safely use existing and
future software applications over the Internet and intranets. SmartGATE
employs two-factor identification (two independent components are combined
to authenticate a user) and mutual authentication (both the server and
client determine that the other party to the transaction is authorized to
participate in the transaction) through the use of virtual or physical
smart cards. Two-factor identification and mutual authentication are the
foundation for V-ONE's bulk encryption technology and non-repudiation of
the user's session.
Once both parties to a communication involving an untrusted
network have been identified and authenticated, SmartGATE establishes a
secured, encrypted link over the untrusted network. The authorized user
is then granted access to only those services and data for which the user
has been approved. SmartGATE supports secure remote administration, which
can be accessed using a Web browser or telnet. SmartGATE also supports
the data encryption standard ("DES") (which, in most forms, cannot be
exported from the United States without the approval of the State
Department) and RSA's RC4 (which is exportable).
SmartGATE server software versions are available on a variety of
leading operating systems, including Berkeley Software Development, Inc.'s
BSD/OS, Sun Microsystems' SunOS, and Hewlett-Packard's HP-UX. SmartGATE
client supports Microsoft's Windows versions 3.0 and 3.1, Windows 95, and
Windows NT. The Company believes that SmartGATE server software versions
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<PAGE>
will also be commercially available for Windows NT and SunSolaris by the
end of the third quarter of 1996. In addition, the Company believes that
SmartGATE client software versions will also be commercially available for
Apple Computer's Macintosh by the end of the third quarter of 1996. A
turnkey version of SmartGATE server is available for BSD/OS on an Intel
Pentium hardware platform. The Company intends to support additional
leading hardware and software platforms based on specific market
opportunities.
SmartWall. SmartWall, the Company's firewall product, provides a
high level of protection against unauthorized access to a trusted network
from an untrusted network. SmartWall also allows transparent access from
the trusted network to services and applications on the untrusted network.
SmartWall includes a secured graphical user interface for firewall
administration, strong mutual authentication to identify users, and
complete transparency for authorized traffic. In addition, SmartWall
allows multiple sites to be administered from any location using a Web
browser or telnet. SmartWall supports multiple types of standard
encryption, authentication tokens, proxy services, and secure transmission
channels. SmartGATE is fully integrated into every SmartWall. The
SmartWall firewall incorporates TIS's Gauntlet(REGISTERED TRADEMARK)
kernel.
SmartWall software-only versions are currently available on a
variety of leading operating systems, including BSD/OS, SunOS, and HP-UX.
A SmartWall turnkey system is currently available for BSD/OS. The Company
intends to support additional leading hardware and software platforms
based on specific market opportunities.
SmartCAT. The SmartCAT product, when used with the SmartGATE
server, provides two-factor identification and mutual authentication using
physical smart card technology. There are three parts to the SmartCAT
product: (i) a standard smart card (ISO/IEC 7816-3, T=0 compliant), (ii) a
smart card reader designed by the Company, and (iii) the Company's
proprietary SmartGATE client software. Together these elementsprovide smart
card-based encryption and authentication services.
Online Registration Service. A user must be registered to access
an authentication-based system. The Online Registration Service product
is a system for efficient on-line enrollment of large user communities.
The Online Registration Service completely automates the creation and
exchange of the user's keys and initializes the user's default access
privileges. The Online Registration Service either creates a virtual
smart card or formats a physical smart card that contains a shared secret
key that is PIN code protected.
SmartREM. It is currently anticipated that the Company will
introduce SmartREM in the third-quarter of 1996. When introduced,
SmartREM will provide a private mail box environment for secured e-mail
over the Internet or intranets. SmartREM will combine SmartGATE client,
SmartGATE server, and a TCP/IP mail server, enabling individuals to
initiate non-repudiable sessions for sending and receiving authenticated
48
<PAGE>
messages within the same secured community. SmartREM will address the
concern of interception or wrongful delivery of private or sensitive e-
mail by allowing users to send "registered" e-mail. For example,
businesses will be able to use SmartREM to securely send price quotes,
volume discounts, and other sensitive information over the Internet from
remote locations.
Wallet Technology. Wallet Technology enables secured electronic
credit card payment transactions over untrusted networks, including the
Internet. Wallet Technology encrypts the credit card information supplied
by the purchaser and forwards that information to the vendor. The vendor
adds the purchase value to the encrypted credit card information, and
sends all of this information to the credit card issuer/processor. The
issuer/processor decodes this information and either authorizes or rejects
the purchaser's request. The Company's design does not allow the vendor
to view the unencrypted credit card information supplied by the purchaser.
NetChart. NetChart is a stock performance analysis application.
This application was originally developed to demonstrate the Company's
technology. Recently, prospective and existing customers have expressed
interest in using this application.
Network Security Consulting. The Company's consulting staff
provides pre- and post-sales support, vulnerability analysis, performance
analysis, systems integration, and system security architecture support.
The Company's consulting staff also provides fee-based engineering
services. The Company believes that maintaining a staff of nationally
recognized consultants greatly enhances its position as an innovative
supplier of network security products.
Technology
The Company believes that its technology and product architecture
provide it with an important competitive advantage. The cornerstone of
the Company's network security solution is its proprietary SmartGATE
client/server security product. SmartGATE enables two-factor
identification, mutual authentication and fine-grained access control for
most TCP/IP client/server applications. Using SmartGATE technology,
organizations can employ two-factor identification and mutual
authentication to identify and authenticate a user's access to the network
while fine-grained access control confines each user's access to only
those services to which the user is entitled.
Two-Factor Identification. Two-factor identification employs two
independent components to identify a user using an identity token
contained in a physical or virtual smart card. The information in the
physical or virtual smart card is secured by a PIN code that is set by the
user and is not known by anyone else. SmartCAT provides the means for
accessing and using smart cards via smart card readers. SmartGATE client
provides the means for using virtual smart cards. Both physical and
virtual smart cards store information about the user including the user's
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<PAGE>
keys, which are used for authentication. The keys also contain
information that allow the SmartGATE client to authenticate the SmartGATE
server with which it communicates.
Mutual Authentication. Mutual authentication employs a dual set
of challenges and encrypted responses that interact to enable both the
client and the server to determine that the other party to the transaction
is authorized to participate in the transaction. SmartGATE's mutual
authentication employs dual challenges coupled with encrypted responses to
ensure non-repudiation between the two parties to an electronic
transaction. When a client application attempts to make a connection with
an application service protected by a SmartGATE server, the SmartGATE
client first performs a mutual authentication process with the SmartGATE
server protecting the application service. During the authentication
process, the SmartGATE server sends a challenge to the SmartGATE client,
and the SmartGATE client uses the secret keys on the physical or virtual
smart card to correctly respond to the challenge. The SmartGATE client
also sends a challenge to the SmartGATE server, and the SmartGATE server
must prove to the client that the server is the issuer of the client's
secret key.
Fine-Grained Access Control. Fine-grained access control employs
access control lists to compare an identified user's request for services
against a list of entitlements to determine whether to grant the user
access to the requested service. SmartGATE employs an access control list
to define the specific Web content page, file, or host application that
identified users are permitted to use. If SmartGATE determines that the
user is permitted to access the requested service, then the connection is
passed through the SmartGATE server to the requested service, otherwise
the connection is dropped.
In addition to providing identification, authentication, and
access control, the SmartGATE client and server independently compute a
session key for encrypting the current TCP/IP data stream. The encryption
key is computed based on information exchanged during the authentication
process and is never transmitted over the network.
Strategic Alliances
Telecommunications. A major telecommunication company is using
the Company's technology to offer multi-purpose secure campus card programs
to colleges and universities. The Company has appointed and the telecom-
munications company has agreed to act as the Company's exclusive reseller
of the Company's SmartGATE, SmartWall, and SmartCAT products for resale and
distribution to colleges and universities. The telecommunication company
is currently deploying this program at a large university. See "- The
V-ONE Solution - Multi-purpose Smart Card." The Company believes that
the telecommunication company intends to promote this technology at other
campuses at which it has preexisting relationships; however, there can be
no assurance that any additional campuses will adopt this technology in
whole or in part.
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Software.com. The Company has entered into a strategic
relationship with Software.com for the joint deployment and implementation
of a secured electronic messaging system that will employ the Company's
SmartGATE product and Software.com's Post.Office product. The Company
believes that the integration of SmartGATE and Software.com's Post.Office
product will provide Internet users with the ability to communicate
efficiently, effectively, and securely. Presently, e-mail communications
over the Internet are not secure. The sender cannot ascertain whether the
intended receiver, in fact, received the message and the receiver cannot
authenticate the actual identity of the sender. The strategic alliance
with Software.com combines the Company's SmartGATE server with
Software.com's Post.Office product so that the Post.Office server, using
SmartREM, authenticates each sender by means of two-factor identification
and mutual authentication (similar to the technology used by bank ATM
machines to dispense cash) and guarantees delivery only to the specified
addressee. In addition, the Post.Office product will notify the sender
when the addressee has retrieved the message (return receipt requested).
The Software.com agreement expires on July 19, 1996; however, the
agreement provides for the automatic renewal for successive three month
terms. The agreement may be terminated for cause by either party upon
thirty days' prior written notice.
Customers
The Company has identified strategic vertical markets that
require sophisticated network security solutions, including financial
institutions, information services companies, and government agencies. The
Company targets key participants within these industries that the Company
believes can benefit from the functionality, scaleability, and
interoperability provided by its products. A representative list of the
Company's customers includes:
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Information Services,
Financial Institutions and Other Companies Government Entities
---------------------- ---------------------- --------------------
BancOne Corp. GE Information Services Inc. National Security Agency
BayBank Systems, Inc. Virtual Networks, Inc. NCTS Washington, a division of
the Department of the Navy
Bear, Stearns & Co. Inc. State of Utah
Fuji Capital Markets Corporation
Svenska Handelsbank
Visa International
</TABLE>
Sales and Marketing
The Company markets its network security products through its
direct sales force and, to a lesser extent, through systems integrators,
value-added resellers ("VARs") and international distributors. The
Company is currently seeking to expand its sales and marketing staff and
intends to devote additional resources to marketing and business
development activities in order to expand its third-party distribution
channels.
Direct Marketing Effort. The Company has concentrated its
initial marketing and direct sales efforts on key industry participants
within certain industry and market segments, including financial
institutions, information services companies, and government agencies. The
Company employs a direct sales force to market its products to these key
industry participants. The Company's direct sales force solicits
prospective customers and provides technical advice and support with
respect to the Company's products. As of May 31, 1996, the Company
employed ten direct sales representatives. In 1996, the Company
anticipates hiring additional direct sales representatives and opening
regional sales offices in select cities.
Indirect Marketing Effort. An important component of the
Company's sales strategy is the development of indirect sales channels
such as ISPs, systems integrators, and value-added network service
providers. The Company utilizes indirect sales channels to leverage the
efforts of its direct sales force. For example, in the secured messaging
market, the Company has targeted ISPs like VNI. The Company has initiated
sales and marketing programs to sign up integrators, VARs, and original
equipment manufacturers within the United States. As of June 7, 1996, the
Company had established relationships with four integrators within the
United States and has signed VAR agreements with GEIS and a major
telecommunication company. As of June 7, 1996, the Company has established
relationships with international distributors in the United Kingdom,
Sweden, Germany, Belgium, South Africa, and Australia, including
relationships with Internet Solutions, Ltd. in the United Kingdom and
PromaCom A.B. in Sweden.
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Strategic Alliance Development. The Company plans to increase
market penetration by developing and capitalizing upon strategic
alliances. These alliances are intended to increase the distribution and
market acceptance of V-ONE's network security products in markets where
direct sales and traditional indirect sales efforts are not cost
effective. For example, the Company has developed a strategic alliance
with a large telecommunication company to offer to colleges and
universities a multi-purpose, secure campus card program that integrates
V-ONE technology with the telecommunication company's products and
services. The Company has also entered into a strategic alliance with
Software.com that is designed to allow secure messaging over the Internet.
The Company intends to continue efforts to strengthen its existing
relationships while also forging new relationships with key industry
participants.
Customer Service and Support
The Company believes that customer support and product
maintenance is critical to retaining existing customers and attracting
prospective customers. The Company provides on-site installation support
and basic administrator training with each turnkey hardware product sale.
Each such turnkey product comes with 24 hours a day, seven days per week
hardware and software support for 90 days. Upon expiration of the 90-day
period, customers may purchase an annual maintenance plan. Purchasers of
the Company's software products may also purchase annual maintenance
plans. The annual maintenance plan provides customers access to the
Company's customer service line, technical support personnel, and software
upgrades.
The Company provides additional user or administrator training,
on-site support, vulnerability analysis, performance analysis, systems
integration, and system security architecture support as an optional
service through its consulting staff. Additionally, the Company provides
customer support services for those customers who have entered into an
evaluation agreement with the Company.
The Company intends to enhance its existing customer service
system by adding a toll-free line and developing a three-tier support
system. The first tier of the Company's enhanced customer support system
will consist of help desk support personnel accessing customer information
and a problem database. Second tier support for elevated problems will be
provided by the Company's existing systems engineering staff. Lastly,
critical third tier problems will be addressed by the Company's in-house
consulting staff. The Company believes that moving to a three-tier
customer support system will increase its effectiveness and responsiveness
to meeting customer's expanding needs.
Product Development
The Company is expanding and intends to continue to expand its
existing product offerings to meet existing and evolving network security
needs of businesses and organizations. The Company's products and product
enhancements are developed in response to customer needs. Compatibility
and interoperability with other applications are strategic focuses of V-
ONE's product development efforts. The Company intends to continue to
monitor emerging standards for networking and security, and adapt its
suite of products to encompass these standards. In keeping with the
Company's customer-driven product strategy, the Company will also focus on
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developing business partnerships with other companies that provide
security related services, and exploiting new market opportunities.
The market for the Company's products is dynamic and rapidly
changing. The Company believes that its future success will depend upon
its ability to: (i) enhance its existing products, (ii) identify new
opportunities to leverage existing technologies, and (iii) develop new
technologies resulting in new products, markets, and services.
Accordingly, the Company expects to continue to make a significant
investment in research and development, product market analysis, and
systems integration. The Company believes that its customer-driven
development strategy will enable it to continue to broaden its product
offerings.
As of May 31, 1996, the Company employed 8 full-time software
developers, and 3 software project managers.
Competition
The market for network security products and services is
intensely competitive. The Company expects competition to intensify in
the future.
Currently, the Company competes in several different markets:
Internet and intranet perimeter defense and access control (firewalls),
token authentication, smart card-based security applications, and
electronic commerce applications. The Company's principal competitors for
Internet and intranet perimeter defense include Advanced Network and
Services (a subsidiary of America Online, Inc.), Bay Networks, Inc.,
Border Network Technologies, Inc., Check Point Software Technology Ltd.,
Cisco Systems, Inc., Digital Equipment Corporation, Harris Computer
Systems Corporation, International Business Machines Corporation, Milkyway
Networks Corporation, Morningstar Technologies, Inc., Network Systems
Corporation, Raptor Systems, Inc., Secure Computing Corporation, Sun
Microsystems, Inc., and TIS, which owns the Gauntlet(TRADEMARK) kernel and
licenses it to the Company.
The Company competes to a lesser degree with token vendors
because the Company's SmartGATE product supports many vendor tokens.
Token vendors include Security Dynamics, Digital Pathways, Inc.,
CRYPTOCard Inc., Leemah DataCom Security Corporation, Racal-Guardata,
Inc., and National Semiconductor Inc. Security Dynamics has recently
agreed to acquire RSA. RSA's technology is licensed to and incorporated
within certain products of the Company. As a result, Security Dynamics
may become a more substantial competitor of the Company.
For smart card-based security applications, the Company
principally competes with those token vendors listed above who offer smart
card technology.
The Company's principal competitors in electronic commerce
applications are Netscape Communication's Secure Socket Layer (SSL), Open
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Market Inc.'s Secure HTTP (S-HTTP), and Cylink Corporation's transaction
software.
Because of the rapid expansion of the network security market,
the Company will face competition from existing and new entrants, possibly
including the Company's customers, suppliers, and/or resellers. There can
be no assurance that the Company's competitors will not develop network
security products that may be more effective than the Company's current or
future products or that the Company's technologies and products would not
be rendered obsolete by such developments.
Many of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger installed
customer bases, and significantly greater financial, technical, and
marketing resources than the Company. As a result, they may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of
their products, than the Company. There can be no assurance that the
Company's customers will not perceive the products of such other companies
as substitutes for the Company's products.
The Company believes that the principal competitive factors
affecting the market for network security products include effectiveness,
scope of product offerings, technical features, ease of use, reliability,
customer service and support, name recognition, distribution resources,
and cost. Current and potential competitors have established, or may
establish in the future, strategic alliances to increase their ability to
compete for the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances may emerge and rapidly acquire
significant market share. Increased competition may result in price
reductions, reduced gross margins, and loss of market share, which would
materially adversely affect the Company's business, financial condition,
and results of operations. See "Risk Factors - Competition."
Backlog
Orders for the Company's products are usually placed by customers
on an as-needed basis and the Company has typically been able to ship
products within 30 days after the customer submits a firm purchase order.
The Company does not generally maintain long-term contracts with its
customers that require customers to purchase the Company's products.
Accordingly, the Company has not maintained, and does not anticipate
maintaining, a backlog. See "Risk Factors - Anticipated Fluctuations in
Quarterly Results," "- Long Sales Cycle; Seasonality," and "- Risk of
Defect and Development Delays."
Supply Sources
Components used in the Company's network security products
consist primarily of computer diskettes and computer magnetic tapes
purchased from commercial vendors. Components used in the Company's
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<PAGE>
turnkey SmartWall and SmartGATE server products consist primarily of off-
the-shelf computers, memory, displays, power supplies, and third-party
peripherals (such as hard drives and network interface cards).
The Company has agreements with at least two vendors for each of
its parts and components. However, the Company orders most of each of its
parts and components from a single vendor to maintain quality control and
enhance working relationships. The Company obtains most of the hardware
for its turnkey systems from Beltron Computers, a subsidiary of DBA MAX
Technology Corp. The Company uses smart card readers manufactured by two
contract manufacturers based on the Company's design specifications.
While the Company believes that alternative sources of supply
could be obtained, the Company's inability to develop alternative sources
if and as required in the future could result in delays or reductions in
product shipments that could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Regulation and Government Contracts
The Company's information security products are subject to the
export restrictions administered by the U.S. Department of State, which
permit the export of encryption products only with the required level of
export license. For example, there are two versions of the SmartGATE
client; one supports DES for bulk encryption and can only be exported from
the United States for financial transactions. The other supports RC4 (an
encryption algorithm) for bulk encryption and is exportable. In addition,
these U.S. export laws prohibit the export of encryption products to a
number of hostile countries. Although to date the Company has been able
to secure all required U.S. export licenses, there can be no assurance
that the Company will continue to be able to secure such licenses in a
timely manner in the future, or at all. See "Risk Factors - Risk of Sales
to U.S. Government," "- International Sales," and "- Effect of Government
Regulation of Technology Exports."
In certain foreign countries, the Company's distributors are
required to secure licenses or formal permission before encryption
products can be imported. To date, except for certain limited cases, the
Company's distributors have not been denied permission to import the
Company's products.
License Agreements
Trusted Information Systems, Inc. ("TIS") Agreement. The
Company's license agreement with TIS requires the Company to pay a fee
(which varies based on the number of units licensed) for each unit of the
Gauntlet(TRADEMARK) product licensed for use in SmartWall. The license
expires on December 31, 1996; however, the agreement provides for the
automatic renewal of the Company's license rights for successive three
year terms. Either party may terminate the agreement upon the default of
the other party if the defaulting party has failed to cure the default
within 30 days of the receipt of written notice of default. See "Risk
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<PAGE>
Factors - Dependence on Key Licensing Agreements, External Resources and
Suppliers."
RSA Data Security, Inc. ("RSA") Agreement. The Company's
SmartCAT and Wallet Technology software incorporate data encryption and
authentication technology owned by RSA. The Company has a perpetual
license agreement with RSA, which became effective as of December 30,
1994. On May 23, 1996, RSA exercised an option granted under the
agreement to convert its right to receive future royalties into 2% of the
Company's outstanding voting securities, after giving effect to the
issuance to RSA, until the date of the Company's initial public offering.
Pursuant to a separate agreement between RSA and MIT, MIT is entitled to
receive a portion of any royalties that RSA receives. As a result, the
Company will issue directly to MIT a portion of the shares of Common Stock
to which RSA is entitled under the RSA Agreement. The Company has
reserved a total of 280,812 shares of Common Stock to be issued to RSA and
MIT immediately prior to consummation of the Offering. Either party may
terminate the agreement upon the default of the other party if the
defaulting party has failed to cure the default within 30 days of the
receipt of written notice of default. RSA has announced that RSA will be
acquired by Security Dynamics. There is no assurance that the change in
control of RSA will not adversely affect the Company's business
relationship with RSA. See "Risk Factors - Dependence on Key Licensing
Agreements, External Resources and Suppliers" and "- Intellectual Property
Rights; Infringement Claims."
Patents, Proprietary Technology, Trademarks and Licenses
The Company relies on trademark, copyright, patent and trade
secret laws, employee and third-party non-disclosure agreements, and other
methods to protect its proprietary rights. The Company has pending three
patent applications with the United States Patent and Trademark Office
that cover certain aspects of its technology. Prosecution of these patent
applications, and any other patent applications that the Company may
subsequently determine to file, may require the expenditure of substantial
resources. The issuance of a patent from a patent application may require
24 months or longer. There can be no assurance that the Company's
technology will not become obsolete while the Company's applications for
patents are pending. There also can be no assurance that any pending or
future patent application will be granted or that any future patents will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Further,
the Company has not pursued patent protection outside of the United States
for the technology covered by two of the pending patent applications. The
Company currently intends to pursue patent protection outside of the
United States for the technology covered by the most recently filed patent
application although there can be no assurance that any such protection
will be granted or, if granted, that it will adequately protect the
technology covered thereby.
The Company's success is also dependent in part upon its
proprietary software technology. There can be no assurance that the
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Company's trade secrets or non-disclosure agreements will provide
meaningful protection for the Company's proprietary technology and other
proprietary information. In addition, the Company relies on "shrink wrap"
license agreements that are not signed by the end user to license the
Company's products and, therefore, may be unenforceable under the laws of
certain jurisdictions. Further, there can be no assurance that others
will not independently develop similar technologies or duplicate any
technology developed by the Company or that the Company's technology will
not infringe upon patents, copyrights, or other intellectual property
rights owned by others.
Further, the Company may be subject to additional risk as the
Company enters into transactions in countries where intellectual property
laws are not well developed or are poorly enforced. Legal protections of
the Company's rights may be ineffective in foreign markets, and technology
manufactured or sold abroad may not be protectable in jurisdictions in
circumstances where protection is ordinarily available in the United
States.
The Company believes that, due to the rapid pace of technological
innovation for network security products, the Company's ability to
establish and, if established, maintain a position of technology
leadership in the industry is dependent more upon the skills of its
development personnel than upon legal protections afforded its existing or
future technology.
As the number of security products in the industry increases and
the functionality of these products further overlaps, software developers
may become subject to infringement claims. There can be no assurance that
third parties will not assert infringement claims against the Company in
the future with respect to current or future products. The Company also
may desire or be required to obtain licenses from others in order to
effectively develop, produce and market commercially viable products.
Failure to obtain those licenses could have a material adverse effect on
the Company's ability to market its software security products. There can
be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, that the patents underlying such licenses
will be valid and enforceable, or that the proprietary nature of the
unpatented technology underlying such licenses will remain proprietary.
There has been, and the Company believes that there may be in the
future, significant litigation in the industry regarding patent and other
intellectual property rights. Although the Company is not currently the
subject of any intellectual property litigation, litigation involving
other software developers, including companies from which the Company
licenses certain technology, could have a material adverse affect on the
Company's business, financial condition, and results of operations. See
"Risk Factors - Intellectual Property Rights; Infringement Claims."
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Employees
As of May 31, 1996, the Company had 52 full-time employees. Of
these employees 12 were in development, 20 were in sales and marketing, 12
were in customer support, and 8 were in finance and administration. None
of the Company's employees is represented by a labor union or is subject
to a collective bargaining agreement. The Company has never experienced a
work stoppage and believes that its employee relations are good.
Facilities
The Company leases approximately 10,700 square feet of office
space in Rockville, Maryland under a lease agreement that will expire on
April 17, 2001. The Company expects that this space will be sufficient
for its needs through August 30, 1996. The Company is currently
evaluating and intends to lease additional office space as necessary.
Legal Proceedings
The Company is not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company, and their
respective ages at March 31, 1996, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James F. Chen (1)(3) . . . . . . 45 President, Chief Executive Officer, and Director
Jieh-Shan Wang . . . . . . . . . 41 Senior Vice President - Engineering
Robert W. Rybicki . . . . . . . . 51 Vice President - Indirect Channels
Frederick J. Hitt . . . . . . . . 52 Vice President - Technology
William C. Wilson . . . . . . . . 41 Vice President - Business Development
Barnaby M. Page . . . . . . . . . 32 Vice President - Direct Sales
Chansothi Um . . . . . . . . . . 27 Treasurer and Acting Chief Financial Officer
Marcus J. Ranum . . . . . . . . . 33 Chief Scientist
Charles C. Chen (1)(2)(3) . . . . 41 Secretary and Director
Hai Hua Cheng (2) . . . . . . . . 47 Director
</TABLE>
__________________________
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Committee.
James F. Chen founded the Company in February 1993 and has since
served as its President and Chief Executive Officer. From December 1980
to January 1993, Mr. Chen served as Director of the Ground Network
Engineering Division of INTELSAT, where he was responsible for ground-
network design, development and deployment. Mr. Chen earned an M.S. in
Computer Science from George Washington University in 1977 and a B.S. in
Electrical Engineering from Georgia Institute of Technology in 1973. He
is Charles C. Chen's brother.
Jieh-Shan Wang, Ph.D. has been with the Company since its
inception and has served as the Company's Senior Vice President of
Engineering since April 1996. From August 1995 to April 1996, Dr. Wang
served as the Company's Vice President of Engineering and, from April 1994
to August 1995 Dr. Wang served as the Company's Chief Engineer. Dr. Wang
was with INTELSAT from June 1991 to April 1994, as Senior Systems
Engineer, where he led a team of engineers in the development of network
applications. From February 1988 to May 1988, Dr. Wang served on the
technical staff of AT&T Bell Laboratories. Dr. Wang holds a Ph.D. in
Physics from the University of Maryland and holds a B.S. in Physics from
National Taiwan University.
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Robert W. Rybicki has served as the Company's Vice President of
Indirect Channels since May 1996. From October 1995 to May 1996, Mr.
Rybicki served as the Company's Vice President of Business Development.
Prior to joining the Company, Mr. Rybicki was Vice President of Marketing
and Customer Support for Spyglass Inc. from July 1994 to September 1995,
and Vice President of North American Sales for Kubota Pacific from October
1990 to June 1994. Mr. Rybicki holds an M.B.A. in Finance and a B.S. in
Accounting from the University of Detroit.
Frederick J. Hitt has served as Vice President of Technology
since he joined the Company in January 1996. From August 1981 to January
1996, Mr. Hitt was with GEIS holding a number of technology-related
positions including Manager of Software Engineering, Manager of Quality
Design, Business Talk Products, Manager of Software Development and, most
recently, Principal Consultant.
William C. Wilson has served as the Company's Vice President of
Business Development since May 1996. Mr. Wilson served as the Company's
Vice President of Operations from April 1995 to May 1996 and as Director
of Business Development from December 1994 to April 1995. Prior to
joining the Company, Mr. Wilson provided consulting services to the
Company from August 1994 to December 1994 and served as an independent
consultant from August 1985 to November 1994. Mr. Wilson holds a B.S. in
Journalism and Economics from Ohio State University, School of
Agriculture.
Barnaby M. Page has served as the Company's Vice President of
Direct Sales since June 1996 and served as its Director of Sales from
October 1995 to June 1996. From August 1995 to October 1995, Mr. Page
served as the Company's Manager of Commercial Sales. From January 1993 to
August 1995, Mr. Page served as Regional Sales Manger for DiBiasio &
Edgington, Inc. and from July 1992 to December 1992, as Regional Sales
Representative for Thompson Financial Services. From July 1990 to July
1992, Mr. Page was with Bloomberg Financial Markets as a Sales
Representative, and from June 1989 to July 1990, Mr. Page was with First
Boston Corporation as a swaps negotiator. Mr. Page earned a Certificate
from the University of Copenhagen, Denmark in International Relations and
Economics and holds a B.A. in Political Science and Journalism from the
University of Massachusetts at Amherst.
Chansothi Um has served as Treasurer and acting Chief Financial
Officer for the Company since January 1996. Prior to joining the Company,
Mr. Um was a consultant with the Strategic Services Practice of Andersen
Consulting from August 1995 to January 1996. Mr. Um was a Financial
Analyst at Philip Morris Companies from May 1994 to August 1994, and a
Project Engineer at Kraft General Foods from June 1991 to August 1993.
Mr. Um holds an M.B.A. in Finance from the Wharton School of the
University of Pennsylvania and a B.S. in Electrical Engineering from the
University of Illinois at Urbana-Champaign.
Marcus J. Ranum has served as the Company's Chief Scientist since
October 1995. From June 1995 to October 1995, Mr. Ranum was an
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independent consultant, and from January 1993 to June 1995, Mr. Ranum
served as Senior Scientist at TIS. From August 1990 to November 1992, Mr.
Ranum served as a consultant for Digital Equipment Corporation. In both
positions, Mr. Ranum designed, developed and deployed network security
products. Mr. Ranum holds a B.A. in Psychology from Johns Hopkins
University.
Charles C. Chen D.D.S., has served as a Director of the Company
since February 1993 and as the Company's Secretary since December 12,
1995. Since July 1982, Dr. Chen has practiced periodontics with Zupnik,
Winson & Chen, D.D.S.P.A. Dr. Chen holds a B.S. in Chemistry from the
University of Maryland and a D.D.S. from the Baltimore College of Dental
Surgery, University of Maryland. He is James F. Chen's brother.
Hai Hua Cheng has served as a director of the Company since
September 1995. Mr. Cheng is the majority owner of Scientek Corporation
in Taiwan and since August 1979 has served as Vice-President and a
Director of that company. Mr. Cheng is also the principal owner of
Scientek Private Venture Capital and has served as a Director of that
company since March 1990. In addition, Mr. Cheng has served on the board
of directors of United Test Center Inc. (Taiwan) since March 1995. Mr.
Cheng holds a B.S. in Computer and Control Engineering from National Chiao
Tung University.
The Board of Directors and Board Committees
The business of the Company will be managed under the direction
of the Company's Board of Directors. The Company's Restated Bylaws
authorize a seven-member Board of Directors. Currently the Board of
Directors consists of 3 directors. The Company's Restated Certificate of
Incorporation provides for a classified Board of Directors effective as of
the Company's annual meeting of shareholders in June 1996. In accordance
with the Restated Certificate of Incorporation, the terms of the Board of
Directors will be divided into three classes: Class I will expire at the
annual meeting of shareholders to be held in 1997, Class II will expire at
the annual meeting of shareholders to be held in 1998, and Class III will
expire at the annual meeting of shareholders to be held in 1999. At each
annual meeting of shareholders beginning with the 1997 annual meeting, the
successors to directors whose terms will then expire will be elected to
serve until the third annual meeting following election and until their
successors have been duly elected and qualified. Any additional
directorships resulting from an increase in the number of directors will
be distributed among the three classes so that as nearly as possible, each
class will consist of an equal number of directors. The Restated
Certificate of Incorporation and Restated Bylaws provide that a director
may be removed at any time, but only for cause and only by the affirmative
vote of 67% or more of the outstanding shares of the Company entitled to
vote at an election of directors at a special meeting of shareholders
called for that purpose.
The Company's Board of Directors has established an Audit
Committee (the "Audit Committee") to recommend the firm to be appointed as
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independent accountants to audit financial statements and to perform
services related to the audit, review the scope and results of the audit
with the independent accountants, review with management and the
independent accountants the Company's year-end operating results, and
consider the adequacy of the internal accounting procedures. The Audit
Committee will consist of at least 2 directors neither of whom are
employees of the Company.
The Company's Board of Directors has also established a
Compensation Committee (the "Compensation Committee") and an Executive
Committee (the "Executive Committee"). The Compensation Committee, which
consists of 2 directors, reviews and recommends the compensation
arrangements for all directors and officers, approves such arrangements
for other senior level employees, and administers and takes such other
action as may be required in connection with certain compensation and
incentive plans of the Company. The Executive Committee, which consists
of 2 directors, addresses significant corporate, operating, and management
matters between meetings of the full Board of Directors.
The Company intends to seek election of at least two additional
directors who are neither officers nor employees of the Company prior to
consummation of the Offering.
Executive Compensation
Summary Compensation. The following table sets forth
compensation paid to the Chief Executive Officer during the year ended
December 31, 1995. The Company had no executive officers whose salary
plus bonus exceeded $100,000 during the year ended December 31, 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
--------------------------------------
Name and Principal All Other
Position Year Salary Bonus Other Compensation
-------- ---- ------ ----- ----- ------------
<S> <C> <C> <C> <C> <C>
James F. Chen 1995 ---- $ 18,000 $ 2,213(1) $ 3,060(2)
(President, Chief
Executive Officer,
and Director)
</TABLE>
_______________________
(1) Represents payments made by the Company to finance Mr. Chen's
automobile.
(2) Represents health insurance premiums paid by the Company.
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<PAGE>
Option Grants. James F. Chen, the Company's President and Chief
Executive Officer, does not currently hold, nor has he ever been granted,
options to purchase the Company's Common Stock.
Stock Option Plans
1995 Non-Statutory Stock Option Plan
In May 1995, the Company adopted the Virtual Open Network
Environment Corporation 1995 Non-Statutory Stock Option Plan ("1995 Plan")
under which stock options may be awarded to key employees of the Company.
It is expected that the 1995 Plan will be ratified by the Company's
shareholders at the 1996 annual meeting to be held on June 28, 1996. As
of June 12, 1996, 8 employees and 1 former employee received awards under
the 1995 Plan.
Stock Option Awards. Stock options ("Non-Qualified Options")
that do not meet the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended ("Code") are available for grant under the 1995
Plan. The term of each Non-Qualified Option is determined by the
committee of the Board of Directors that administers the 1995 Plan, but no
option is exercisable more than ten years after the date of grant. Unless
otherwise provided in an employee's option agreement, Non-Qualified
Options granted under the 1995 Plan expire ten years from the date of
grant and are exercisable in three equal installments over a twenty-four
month period. Non-Qualified Options also may be subject to restrictions
on exercise, as determined by the Committee.
The exercise price for Non-Qualified Options may be no less than
par value per share. The exercise price is payable by either a check in
the amount of the purchase price or by previously owned shares of Common
Stock with a market value equal to the purchase price.
Non-Qualified Options granted under the 1995 Plan are not
transferable by the Optionee during an employee's lifetime. Unless
otherwise provided in the employee's option agreement, Non-Qualified
Options will be exercisable within three months of any termination of
employment.
Duration of the Plan; Share Authorization. The 1995 Plan will
remain in effect until May 15, 2005, unless terminated earlier by the
Company's Board of Directors. Awards have been issued with respect to
528,444 shares of Common Stock. Such shares of Common Stock have an
aggregate market value of $3,170,664 based on the initial offering price
of $6.00.
On June 12, 1996, the Board determined that no further options
would be granted under the 1995 Plan.
1995 Plan Administration. The 1995 Plan is administered by the
Compensation Committee of the Board. The 1995 Plan authorizes the
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<PAGE>
Compensation Committee to grant Non-Qualified Options to key employees to
purchase up to 528,444 shares of Common Stock and to determine the
employees to whom Non-Qualified Options will be granted, the number of
shares subject to each Non-Qualified Option and applicable vesting
schedules.
The members of the Committee are appointed by the Board. The
Committee must be comprised of at least two members. Members of the
Committee are eligible to receive options under the 1995 Plan, provided
that such members do not participate in the decision to grant themselves
options.
Transferability; Repurchase Right. Each employee who receives an
award under the 1995 Plan is prohibited from transferring or otherwise
disposing of the underlying shares of Common Stock until 180 days have
elapsed following such time the Company has consummated the Offering.
However, shares of Common Stock may be used to pay the exercise price of
Non-Qualified Options.
Upon an employee's termination of employment with the Company,
the Company has the right to repurchase any or all of the shares of Common
Stock issued to the employee with respect to Non-Statutory Options granted
under the 1995 Plan, whether then held by the employee or a transferee.
The Company's right to repurchase shares of Common Stock terminates once
the Offering is consummated.
Termination and Amendment. The 1995 Plan may be terminated,
modified or amended by the Company's shareholders. Although the Board of
Directors may terminate, modify or amend the 1995 Plan to conform to any
change in law or regulation, the Board of Directors may not, without
shareholder approval, (i) increase the maximum number of shares as to
which Non-Statutory Options may be granted under the Plan; (ii) change the
class of employees eligible to be granted Non-Qualified Options, (iii)
increase the periods during which Non-Qualified Options may be granted or
exercised, or (iv) provide for the administration of the Plan by other
than the Committee. No termination, modification or amendment may be made
to the 1995 Plan without the consent of any employee whose rights would be
adversely affected thereby.
Awards Made. As of June 12, 1996, Non-Qualified Options to
purchase 526,444 shares of Common Stock are outstanding under the 1995
Plan.
65
<PAGE>
Further information regarding the awards made to date is set
forth in the table below:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Name Underlying Option Exercise Price (or Range)
---- ----------------- -------------------------
<S> <C> <C>
James F. Chen --- ---
(President, Chief Executive
Officer, and Director)
William C. Wilson 200,000 $0.283
(Vice President-Business
Development)
Barnaby M. Page 156,003 $1.67
(Vice President - Direct Sales)
Ban L. Eap 49,441 $1.67
(Controller)
Robert A. Dorsey 40,000 $0.283
(Manager of Government
Sales)
James V. Reed 30,000 $0.283
(Manager of Communications)
John T. Tralka 30,000 $0.283
(Senior Programmer)
All executive officers as a group 356,033 $0.283 - $1.67
All employees who are not
executive officers as a group 170,441 $0.283 - $3.00
All directors who are not
executive officers as a group --- ---
</TABLE>
For a description of the principal federal income tax
consequences of the 1995 Plan, see "- 1996 Incentive Stock Plan - Certain
Federal Income Tax Consequences."
1996 Non-Statutory Stock Option Plan
The Company's 1996 Non-Statutory Stock Option Plan ("Non-
Statutory Plan") was adopted by the Board of Directors on April 4, 1996.
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<PAGE>
The Non-Statutory Plan provides for the grant of options to purchase
Common Stock subject to certain restrictions on transfer ("Restricted
Stock"). The Non-Statutory Plan expires on December 31, 1996 and is
administered by the Non-Statutory Stock Option Plan Committee of the Board
of Directors. The purchase price per share under each option granted is
an amount equal to the fair market value of the underlying share on the
date the option is granted. Each option granted under the Non-Statutory
Plan is exercisable during the period beginning on the date the option is
granted and ending on December 31, 1996. As of May 15, 1996 all options
granted under the Non-Statutory Plan had been exercised and a total of
575,951 shares of Restricted Stock had been issued.
In connection with their exercise of options granted under the
Non-Statutory Plan, the optionees, including certain executive officers,
paid the par value of the Restricted Stock in cash and executed promissory
notes in favor of the Company as consideration for the remaining purchase
price of the Restricted Stock. See "Certain Transactions." Five of the
six optionees have executed promissory notes with terms of 10 years that
are secured by the Restricted Stock purchased therewith, bearing a 6
percent per annum interest rate, with installments of principal and
interest due annually. One of the optionees has executed a one-year
promissory note, bearing a 6 percent per annum interest rate, with payment
of principal and interest due at the expiration of the promissory note's
one-year term.
Each optionee may make payments to the Company to reduce the
principal amount of his or her promissory note with the Restricted Stock
serving as collateral therefor; however, if the fair market value of such
consideration is less than the then outstanding portion of the
indebtedness being satisfied therewith, each promissory note provides that
the optionee bears personal liability for the disparity. Each promissory
note may be prepaid without penalty.
The Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise disposed of for six years from the date the option to
purchase the shares was granted. As long as this restriction remains in
effect, no holder of Restricted Stock has the right to vote the restricted
shares for any purpose. All voting rights with respect to the Restricted
Stock are to be exercised by a majority vote of the Board of Directors.
The restrictions lapse 180 days after the consummation of the Offering or
the acquisition of the Company in exchange for publicly traded shares.
On June 12, 1996, the Company's Board of Directors determined
that no further options will be granted under the Non-Statutory Plan.
1996 Incentive Stock Plan
On June 12, 1996, the Board of Directors of the Company adopted
the Virtual Open Network Environment Corporation 1996 Incentive Stock Plan
("1996 Plan"), under which both options and restricted share awards may be
made to the Company's key employees and consultants. Under the 1996 Plan,
automatic stock option awards are made to non-employee directors. It is
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<PAGE>
expected that the 1996 Plan will be ratified by the Company's shareholders
at the 1996 annual meeting to be held on June 28, 1996.
Awards Available Under the 1996 Plan. Awards to key employees
and consultants under the 1996 Plan may take the form of both stock
options and restricted share awards; however, no employee may receive
awards with respect to more than 750,000 shares of Common Stock under the
1996 Plan. As of May 31, 1996, approximately 52 employees and 1
consultant were eligible to receive awards under the 1996 Plan. Awards
under the 1996 Plan may be granted alone or in combination with other
awards. Non-employee directors may only receive non-discretionary stock
option awards (described in more detail below) under the 1996 Plan. As of
May 31, 1996, none of the Company's directors were eligible to participate
in the 1996 Plan.
Stock Options. Stock options ("Incentive Stock Options") meeting
the requirements of Section 422 of the Code and stock options that do not
meet such requirements ("Non-Qualified Options") are both available for
grant under the 1996 Plan. The term of each option will be determined by
the committee that administers the 1996 Plan ("Committee"), but no option
will be exercisable more than ten years after the date of grant. Options
will also be subject to restrictions on exercise, such as exercise in
periodic installments, as determined by the Committee. The exercise price
for an Incentive Stock Option must be at least 100% of the fair market
value of a share of Common Stock on the date of grant of such option (110%
in the case of Incentive Stock Options granted to a shareholder who owns
in excess of 10% of the Company's voting stock). There is no minimum
exercise price for Non-Qualified Options. The exercise price is payable
in cash, in shares of Common Stock owned by a participant, with respect to
Non-Qualified Options, a promissory note payable to the Company, or by
cashless exercise with a participant's broker, as determined by the
Committee.
Stock options granted under the 1996 Plan are not transferable
except by will or the laws of descent and distribution. Unless otherwise
provided in the relevant option agreement, options will only be
exercisable within three months of any termination of employment other
than termination for "cause" or termination due to death or disability.
Unless otherwise provided in the relevant option agreement, options will
be exercisable by a participant or beneficiary, as the case may be, within
one year of a termination of employment by reason of death or disability.
If a participant's employment is terminated for "cause," his or her
options will no longer be exercisable after the date of such termination
of employment unless the option agreement provides otherwise.
The Committee may provide, at the time of grant of Incentive
Stock Options and at or after the time of grant of Non-Qualified Options,
that, if a participant surrenders already owned shares of Common Stock in
full or partial payment of an option, then, concurrent with such
surrender, the participant, subject to the availability of shares of
Common Stock under the 1996 Plan, will be granted a new Non-Qualified
Option (a "Reload Option") covering a number of shares of Common Stock
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<PAGE>
equal to the number so surrendered. A Reload Option may be granted in
connection with the exercise of an option that is itself a Reload Option.
Each Reload Option will have the same expiration date as the original
option and an exercise price equal to the fair market value of the
Company's shares of Common Stock on the date of grant of the Reload
Option. A Reload Option is exercisable immediately or at such time or
times as the Committee determines and will be subject to such other terms
and conditions as the Committee may prescribe.
Restricted Shares. The Committee may award restricted shares to
a participant. Such a grant gives a participant the right to receive
shares of Common Stock subject to a risk of forfeiture based upon certain
conditions. The forfeiture restrictions on the shares of Common Stock may
be based upon performance standards, length of service, or other criteria
as the Committee may determine. Until all restrictions are satisfied,
lapsed, or waived, the Company will maintain control over the restricted
shares but the participant will be able to vote the shares of Common Stock
and generally will be entitled to dividends on the shares of Common Stock.
Upon termination of employment, the participant generally forfeits the
right to the shares of Common Stock to the extent the applicable
performance standards, length of service requirements, or other
measurement criteria have not been met.
Non-Employee Director Options. The 1996 Plan provides for the
automatic grant of a Non-Qualified Option to purchase 10,000 shares of
Common Stock to each non-employee director on the first date he or she is
elected as such by the Company's shareholders. However, non-employee
directors who are first elected as such by the Company's shareholders
prior to the 1996 annual meeting are not entitled to receive such an
option. The option price is the fair market value of a share of Common
Stock on the date of grant of such option. All such options have a five
year term and are exercisable in full on the date of grant.
If a non-employee director's service with the Company terminates
by reason of death, his or her option may be exercised for a period of one
year from the date of death or until the expiration of the option,
whichever is shorter. If a non-employee director's service with the
Company terminates other than by reason of death, his or her option may be
exercised for a period of three months from the date of such termination,
or until the expiration of the stated term of the option, whichever is
shorter.
Duration of the 1996 Plan; Share Authorization. The 1996 Plan
will remain in effect until June 11, 2006, unless terminated earlier by
the Company's Board of Directors. Awards may be issued with respect to up
to 3,500,000 shares of Common Stock. Such shares of Common Stock have an
aggregate market value of $21 million based on the initial public offering
price of $6.00.
In the event the purchase price of an option is paid, or tax or
withholding payments relating to an award are satisfied, in whole or in
part through the delivery of already owned shares of Common Stock, a
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<PAGE>
participant will be deemed to have received an award with respect to those
shares of Common Stock. The Common Stock covered by any unexercised
portions of terminated options, shares of Common Stock forfeited and
shares of Common Stock subject to awards that are otherwise surrendered by
a participant without receiving any payment or other benefit with respect
thereto may again be subject to new awards under the 1996 Plan.
1996 Plan Administration. The 1996 Plan is administered by the
Compensation Committee, a committee of the Company's Board of Directors.
Prior to consummation of the Offering, the Committee will be comprised
solely of non-employee directors who are not eligible to participate in the
1996 Plan except with respect to certain automatic, non-discretionary stock
option awards, as described above. The Committee will determine the key
employees and consultants who are eligible for and granted awards,
determine the amount and type of awards, determine the duration of the
option (which may not exceed ten years), establish rules and guidelines
relating to the 1996 Plan, establish, modify, and terminate terms and
conditions of awards and take such other action as may be necessary for
the proper administration of the 1996 Plan.
The members of the Committee are appointed by the Board. As
directors, members of the Committee may be removed at any time but only
for cause and only by the affirmative vote of the holders of 67% or more
of the outstanding shares of the Company's capital stock entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose.
Transferability; Repurchase Right. Each participant who receives
an award under the 1996 Plan is prohibited from transferring or otherwise
disposing of the underlying shares of Common Stock until 180 days have
elapsed following such time as the Company has consummated the Offering.
However, shares of Common Stock may be used to pay the exercise price of
options and to pay withholding and other taxes as otherwise provided in
the 1996 Plan.
Upon a participant's termination of employment, the Company has
the right to repurchase any or all of the shares of Common Stock issued to
the participant with respect to awards made under the 1996 Plan, whether
then held by the participant or a transferee, at fair market value as
determined by the Committee. The Company's right to repurchase shares of
Common Stock terminates once the Offering is consummated.
Change in Control. Upon the occurrence of a change in control of
the Company, all options become immediately exercisable and all
restrictions on restricted shares lapse. A change in control includes:
(1) approval of the Company's shareholders of a
consolidation or merger of the Company with any third
party, unless the Company is the entity surviving such
merger or consolidation;
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<PAGE>
(2) approval of the Company's shareholders of a
transfer of all or substantially all of the assets of the
Company to a third party or a complete liquidation or
dissolution of the Company;
(3) A third party (other than James F. Chen and
his affiliates), directly or indirectly, through one or
more subsidiaries or transactions or acting in concert
with one or more persons or entities: (a) acquires any
combination of beneficial ownership of the Company's
voting stock and irrevocable proxies representing more
than 20% of the Company's voting stock; (b) acquires the
ability to control in any manner the election of a
majority of the directors of the Company; or (c) acquires
the ability to directly or indirectly exercise a
controlling influence over the management or policies of
the Company;
(4) any election has occurred of persons to the
Company's Board of Directors that causes a majority of
such Board to consist of persons other than (a) persons
who were members of the Board on June 12, 1996
("Effective Date") and/or (b) persons who were nominated
for election as members of the Board by the Board (or a
committee of the Board) at a time when the majority of
the Board (or of such committee) consisted of persons who
were members of the Board on the Effective Date; or
(5) A determination is made by the SEC or any
similar agency having regulatory control over the Company
that a change in control, as defined in the securities
laws or regulations then applicable to the Company, has
occurred.
Termination and Amendment. The Board may amend or terminate the
1996 Plan and the Committee may amend or alter the terms of awards under
the 1996 Plan but no such action shall affect or in any way impair the
rights of a participant under any award previously granted without such
participant's consent. No amendment may be made, without shareholder
approval, that would require shareholder approval under any applicable law
or rule unless the Board determines that compliance with such law or rule
is no longer desired.
Antidilution Provisions. The number of shares of Common Stock
authorized to be issued under the 1996 Plan and subject to outstanding
awards (and the purchase or exercise price thereof) will be adjusted to
prevent dilution or enlargement of rights in the event of any stock
dividend, stock split, combination or exchange of shares, merger,
consolidation or other change in capitalization with a similar substantive
effect upon the 1996 Plan or the awards.
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<PAGE>
Awards Made. As of June 12, 1996, the Committee has granted
Incentive and Non-Qualified Options to purchase 1,389,860 shares of Common
Stock under the 1996 Plan. As of such date, no restricted share awards
have been granted, and no awards of non-employee director options have
been made, under the 1996 Plan.
Further information regarding the awards made to date is set
forth in the table below:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Exercise Price
Name Underlying Option (or Range)
---- ----------------- -------------
<S> <C> <C>
James F. Chen --- ---
(President, Chief Executive
Officer, and Director)
Robert W. Rybicki 143,066 $2.50 - $3.00
(Vice President-Indirect
Channels)
Marcus J. Ranum 486,585 $2.50 - $3.00
(Chief Scientist)
Frederick J. Hitt 143,066 $2.50 - $3.00
(Vice President-Technology)
Barnaby M. Page 12,709 $3.00
(Vice President-Direct Sales)
Chansothi Um 160,488 $2.50 - $3.00
(Treasurer and Acting Chief
Financial Officer)
Matthew B. Mancuso 85,854 $2.50 - $3.00
(Director of Engineering)
All executive officers as a group 948,675 $2.50 - $3.00
All employees who are not executive
officers as a group 441,185 $2.50 - $3.00
All directors who are not executive
officers as a group --- ---
</TABLE>
72
<PAGE>
Certain Federal Income Tax Consequences. The following is a
brief summary of the principal federal income tax consequences of awards
under the 1996 Plan based upon current federal income tax laws.
A participant is not generally subject to federal income tax
either at the time of grant or at the time of exercise of an Incentive
Stock Option. However, upon exercise, the difference between the fair
market value of the shares of Common Stock and the exercise price may be
includable in the participant's alternative minimum taxable income. If a
participant does not dispose of shares of Common Stock acquired through
the exercise of an Incentive Stock Option within one year after their
receipt and within two years after the date of the option's grant, any
gain or loss upon the disposition will be taxed as long-term capital gain
or loss.
The Company will not receive any tax deduction on the exercise of
an Incentive Stock Option or, if the holding requirements are met, on the
sale of the underlying shares of Common Stock. If a disqualifying
disposition occurs (i.e., one of the holding requirements is not met), the
participant will be treated as receiving compensation subject to ordinary
income tax in the year of the disqualifying disposition, and the Company
will be entitled to a deduction for compensation expense in an amount
equal to the amount the participant includes in income. The tax will
generally be imposed on the difference between the fair market value of
the shares of Common Stock at the time of exercise and the exercise price
or, if less, the gain the participant realized on the sale of the shares.
Any appreciation in value after the time of exercise will be taxed as
long-term or short-term capital gain (depending on how long the shares are
held after exercise) and will not result in any deduction by the Company.
There are no federal income tax consequences to participant at
the time of grant of a Non-Qualified Option. Upon exercise of the option,
the participant must pay tax on ordinary income equal to the difference
between the exercise price and the fair market value of the underlying
shares on the date of exercise. The Company will receive a commensurate
tax deduction at the time of exercise. Any appreciation in value after
the time of exercise will be taxed upon the disposition of the shares as
long-term or short-term capital gain (depending on how long the shares are
held after exercise), and will not result in any deduction by the Company.
Non-employee director options will receive the same federal income tax
treatment as other Non-Qualified Options.
Except as described below, a grant of restricted shares does not
constitute a taxable event for either a participant or the Company.
However, the participant will be subject to tax, at ordinary income rates,
when any restrictions on ownership of the shares of Common Stock lapse.
The Company will be entitled to take a commensurate deduction at that
time.
A participant may elect to recognize taxable ordinary income at
the time restricted shares are awarded in an amount equal to the fair
market value of the shares of Common Stock at the time of grant,
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<PAGE>
determined without regard to any forfeiture restrictions. If such an
election is made, the Company will be entitled to a deduction at that time
in the same amount. Future appreciation on the shares of Common Stock
will be taxed when the shares are sold as capital gain (depending on how
long the shares are held after exercise), and will not result in any
deduction by the Company. If, after making such an election, the shares
of Common Stock are forfeited, the participant will be unable to claim a
deduction.
Employment Agreement
On June 12, 1996, the Company entered into an employment
agreement with James F. Chen at an annual base salary of $125,000. The
employment agreement has a two year term commencing on June 12, 1996 and
is automatically renewed for additional two year terms on each successive
June 12, commencing June 12, 1997. However, either party may serve
written notice of termination prior to June 12, 1997 or prior to June 12
of each succeeding year, as the case may be, in which case the agreement
will terminate at the end of the two year period that begins with the June
12 following the date of such written notice.
Under the employment agreement, the Board (or a Board committee)
is obligated to review Mr. Chen's base salary promptly following the
completion of the Offering and thereafter at least annually. As a result
of such review, the Board or committee may, in its discretion, increase,
but generally may not decrease, Mr. Chen's base salary. After any
adjustment following the Offering, the Board or committee may not increase
his base salary for any one year by an amount greater than 50% of his then
base salary. It is intended that the Board or committee will consider in
any such review factors relating to his performance, duties, and
responsibilities and endeavor to maintain his compensation at a level
comparable to that of similarly situated executives in the Company's
industry. The employment agreement also provides that Mr. Chen may be
paid such bonuses, if any, as may be awarded from time to time by the
Board or such committee, in its discretion. Such bonuses shall be based
on results of operations, special contributions made by him, seniority,
competitive conditions in the Company's industry, and such other factors
as the Board or such committee considers relevant.
In the event that (i) Mr. Chen terminates his employment with the
Company (other than because of his death) within two years following a
change in control (as defined in the employment agreement), (ii) the
Company terminates Mr. Chen's employment for any reason (other than
because of death, disability, or just cause) within two years following a
change in control, (iii) Mr. Chen terminates his employment with the
Company because of the Company's material breach of the employment
agreement, (iv) Mr. Chen's base salary is reduced unless such reduction is
permitted by the employment agreement, or (v) the Company's principal
executive offices are relocated to a location outside Montgomery County,
Maryland, or the Company requires Mr. Chen to be based anywhere other than
the Company's principal executive offices, then the Company must make a
lump sum severance payment to Mr. Chen. The payment is equal to the sum
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<PAGE>
of (a) the aggregate amount of the future base salary payments Mr. Chen
would have received if he continued in the employ of the Company until 24
months (36 months if an event described in clauses (i) or (ii) above
occurs) following the termination date and (b) Mr. Chen's projected bonus
for the year in which the termination date occurs. The payment required
by clause (a) is calculated at the highest rate of base salary paid to Mr.
Chen at any time under the employment agreement, with such payments
discounted to present value at a discount rate equal to 1% above the per
annum one-year Treasury Bill rate. The bonus amount is computed assuming
that Mr. Chen had remained in the Company's employ until the end of that
year and that all performance goals or other performance measures have
been met at the then current level for the remainder of that year.
The Company may terminate Mr. Chen's employment for "just cause"
at any time by giving him written notice, in which case the Company is
only obligated to pay him his base salary as then in effect through the
termination date. If Mr. Chen fails to perform his duties under the
employment agreement on account of a disability, the Company may terminate
the agreement on a date not less than 30 days thereafter unless he resumes
full performance of his duties within such period. Mr. Chen is entitled
to terminate his employment with the Company on, or at any date after, a
date on which he is at least 65 years old. The employment agreement also
terminates in the event of Mr. Chen's death. In either such event, the
Company must pay Mr. Chen or his legal representative Mr. Chen's base
salary as then in effect that has accrued to the last day of the month in
which the retirement date or the date of death occurs.
Director Compensation
To date, directors have received no compensation for their
services as directors. As of April 26, 1996, the Company began to
reimburse directors for travel expenses incurred in connection with their
attendance at meetings of the Board of Directors and its committees. The
new non-employee directors elected at the June 1996 annual meeting of
shareholders will receive an option to purchase 10,000 shares of Common
Stock under the 1996 Plan upon such election. See " - 1996 Incentive
Stock Plan."
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1995, the Company's
Compensation Committee was composed of directors James F. Chen, President
and Chief Executive Officer of the Company, and his brother, Charles C.
Chen, Secretary of the Company.
CERTAIN TRANSACTIONS
The Company was initially capitalized by a $10,000 investment by
its founder, President and Chief Executive Officer, James F. Chen. Mr.
Chen has, on three separate occasions, made loans to the Company. On
December 31, 1993, 1994, and 1995, in consideration for loans of $39,705,
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<PAGE>
$32,729, and $143,644, respectively, the Company issued 8% interest
bearing notes, due on demand, to Mr. Chen.
On May 15, 1995, Scientek Corporation, through Hai Hua Cheng, a
director of the Company, and C.C. Tsai, invested $500,000 in V-ONE in
consideration for ownership of 15% of the Company's outstanding Common
Stock after giving effect to this issuance. As further consideration for
this investment, the Company issued 84,000 shares of Common Stock to a
voting trust (the "Voting Trust") for the benefit of Mr. Cheng, the
majority owner of Scientek Corporation. Mr. Chen serves as voting trustee
for this trust under a Voting Trust Agreement dated January 1, 1996. The
proceeds of this financing were used to meet general operating expenses.
On June 1, 1995, the Company borrowed $330,000 from Scientek
Corporation and issued a promissory note, bearing no interest, due June 1,
1996. The note has been assigned to Hai Hua Cheng by Scientek Corporation.
The terms of the note provide that, as further consideration for the loan,
the Company would issue 230,000 shares of Common Stock to Scientek
Corporation immediately after repayment of the loan. As further
consideration for the loan, the Company issued 115,000 shares of Common
Stock to the voting trust for the benefit of Mr. Cheng described above.
On May 17, 1996, Mr. Cheng executed an agreement extending the term of the
note to May 31, 1997. On June 12, 1996, in consideration for Mr. Cheng's
agreement not to demand payment of the note until May 31, 1997, the Board
of Directors authorized the Company to offer Mr. Cheng the option to
receive Common Stock based on a $3.00 per share conversion price in lieu
of cash in payment of the note. The Board reserved and authorized the
issuance of 110,000 shares of Common Stock for this purpose. In
connection with this loan, the Company recognized interest expenses of
$32,545 and $63,624 during the year ended December 31, 1995 and the three
months ended March 31, 1996, respectively.
On May 15, 1995, Mr. Chen contributed 199,000 shares of Common
Stock to the capital of the Company for the Company's use in transferring
the above-described 84,000 and 115,000 shares to the Voting Trust. When
the Company issues the above-described 230,000 shares of Common Stock to
Mr. Cheng, Mr. Chen will contribute 230,000 shares of Common Stock to the
capital of the Company.
On May 15, 1995, Mr. Chen also contributed 500,000 shares of
Common Stock owned by him to the capital of the Company for the Company to
transfer to Jieh-Shan Wang, Senior Vice President of Engineering, for
services rendered. In addition, on April 4, 1996 Mr. Chen contributed
575,951 shares of Common Stock owned by him to the capital of the Company
for the Company to transfer to participants in the Non-Statutory Plan.
Two of the Company's executive officers, Jieh-Shan Wang and
William C. Wilson, have paid for options granted under the Non-Statutory
Plan with promissory notes. The only one of the two executive officers
who borrowed more than $60,000 from the Company is Jieh-Shan Wang, Senior
Vice President - Engineering. Mr. Wang borrowed $124,750 from the Company
and executed a 6% interest-bearing promissory note, due April 22, 2006,
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that is secured by the shares of Common Stock issued on exercise of the
option by Mr. Wang (the "Pledged Shares"). The terms of the note provide
for payments of principal and interest to be made annually, beginning on
April 22, 1997. If, at any time, the fair market value of the Pledged
Shares securing the note is less than the amount due under the note, Mr.
Wang will remain liable for the balance due. If Mr. Wang sells the
Pledged Shares at any time prior to April 22, 2006, then the proceeds of
the sale will be applied to the balance of the note before payment will be
made to Mr. Wang. See "Management - 1996 Non-Statutory Stock Option
Plan."
In June 1996, the Company borrowed $1.5 million from JMI pursuant
to the issuances of unsecured, 8% interest-bearing, senior subordinated
notes in the principal amount of $1.5 million with detachable warrants to
purchase 500,000 shares of Common Stock. Of the 500,000 detachable
warrants, 400,000 are exercisable at $3.00 per share and 100,000 are
exercisable at $0.01 per share. The notes must be redeemed upon
consummation of the Offering and the warrants with an exercise price of
$0.01 per share must be exercised by June 30, 1996.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock and Series A Stock as of
June 12, 1996, and as adjusted to reflect the conversion of all shares of
Series A Stock into shares of Common Stock on completion of the Offering
(assuming the initial offering price is $5.25 or greater), the exercise of
100,000 detachable warrants issued to JMI, and the sale by the Company of
the shares offered hereby, by (i) each person who is known by the Company
to own beneficially more than 5% of the outstanding Common Stock or Series
A Stock, (ii) each of the Company's directors, and (iii) all current
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned (2)
Number of Shares ----------------------
of Common Stock Before After
Name and Address Beneficially Owned (1) Offering Offering
---------------- ---------------------- -------- --------
<S> <C> <C>
James F. Chen 7,264,050(3) 58.2% 41.7%
1803 Research Boulevard
Suite 305
Rockville, MD 20850
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Percentage of Shares
Beneficially Owned (2)
Number of Shares ----------------------
of Common Stock Before After
Name and Address Beneficially Owned (1) Offering Offering
---------------- ---------------------- -------- --------
Hai Hua Cheng 1,964,710(4) 15.8% 11.3%
1803 Research Boulevard
Suite 305
Rockville, MD 20850
Charles C. Chen 300,000(5) 2.4% 1.7%
1803 Research Boulevard
Suite 305
Rockville, MD 20850
Jieh-Shan Wang 750,000(6) 6.0% 4.3%
1803 Research Boulevard
Suite 305
Rockville, MD 20850
Trustee for Shapiro Family 68,175(7) 0.5% 0.4%
Trust
2401 Pennsylvania Avenue, N.W.
Washington, D.C. 20037
Lewis M. Schott 317,400(8) 2.5% 1.8%
220 Sunrise Avenue
Palm Beach, FL 33480
Bryan T. Vanas 106,785(9) 0.8% 0.6%
1600 Smith, Suite 3100
Houston, TX 77002
Joseph and Rosa Lupo 61,068(10) 0.5% 0.4%
758 Oneida
Franklin Lakes, NJ 07417
Lee DeVisser and 137,321(11) 1.1% 0.8%
Linda DeVisser,
Trustees of the Lee
DeVisser Trust
2480 N.W. 53rd Street
Boca Raton, FL 33496
Steven A. Cohen 227,876(12) 1.8% 1.3%
520 Madison Avenue
New York, NY 10022
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Percentage of Shares
Beneficially Owned (2)
Number of Shares ----------------------
of Common Stock Before After
Name and Address Beneficially Owned (1) Offering Offering
---------------- ---------------------- -------- --------
Kenneth Lissak 68,328(13) 0.5% 0.4%
520 Madison Avenue
New York, NY 10022
All directors and executive 11,138,872(14) 84.3% 61.3%
officers as a group (10
persons)
</TABLE>
----------------------------
(1) Each shareholder possesses sole voting and investment power
with respect to the shares listed, except as otherwise
indicated. The number of shares beneficially owned by each
shareholder is determined under rules promulgated by the
SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting power or investment
power, and also any shares which the individual has the
right to acquire within 60 days after June 12, 1996.
(2) Number of shares deemed outstanding includes any shares
subject to stock options held by the person in question that
are currently exercisable or exercisable within 60 days
following May 15, 1996. Number of shares deemed outstanding
after this Offering includes the additional 3,400,000 newly-
issued shares of Common Stock that are being offered by the
Company hereby.
(3) Includes 150,000 shares of Common Stock subject to the over-
allotment option granted to the Underwriters by the Company
and the Selling Shareholders. See "Selling Shareholders"
and "Underwriting." Includes 249,000 shares registered in
the name of James F. Chen as Trustee under voting trusts for
Hai Hua Cheng, Dennis Winson and Robert Zupnik with respect
which Mr. Chen possesses sole voting power. Also includes:
(i) 900,000 shares jointly owned with Mary S. Chen;
(ii) 106,666 shares registered in the names of Mary S. Chen,
Mr. Chen's wife, and Mark R. Feinberg as Co-Trustees under
trusts for the benefit of Mr. Chen's children with respect
to which Mary S. Chen and Mark R. Feinberg possesses voting
and investment power; and (iii) 230,000 shares to be
contributed to the Company for issuance to Mr. Cheng upon
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the repayment by the Company of the $330,000 promissory note
due to Mr. Cheng.
(4) Includes 200,000 shares transferred to Mr. Cheng by Raymond
E. Hanner pursuant to an Assignment of Contract Rights dated
January 16, 1996.
(5) Owned jointly with Kathleen H. Chen.
(6) Includes 50,000 shares of Common Stock subject to the over-
allotment option granted to the Underwriters by the Company
and the Selling Shareholders. See "Selling Shareholders"
and "Underwriting." Includes 250,000 shares of Common Stock
subject to restrictions on transferability under the terms
of the Company's 1996 Non-Statutory Stock Option Plan.
(7) Represents 5.7% of the outstanding Series A Stock and 68,175
shares of Common Stock to be issued on the conversion of
Series A Stock, assuming the conversion of shares of Series A
Stock into shares of Common Stock on a one-for-one basis as
a result of the Offering. See "Description of Capital Stock
- Series A Convertible Preferred Stock" and "Risk Factors -
Conversion of Series A Stock."
(8) Represents 26.8% of the outstanding Series A Stock and
317,400 shares of Common Stock to be issued on the conversion
of Series A Stock, assuming the conversion of shares of
Series A Stock into shares of Common Stock on a one-for-one
basis as a result of the Offering. See "Description of
Capital Stock - Series A Convertible Preferred Stock" and
"Risk Factors - Conversion of Series A Stock."
(9) Represents 9.0% of the outstanding Series A Stock and 106,785
shares of Common Stock to be issued on the conversion of
Series A Stock, assuming the conversion of shares of Series A
Stock into shares of Common Stock on a one-for-one basis as
a result of the Offering. See "Description of Capital
Stock - Series A Convertible Preferred Stock" and "Risk
Factors - Conversion of Series A Stock."
(10) Represents 5.2% of the outstanding Series A Stock and 61,068
shares of Common Stock to be issued on the conversion of
Series A Stock, assuming the conversion of shares of Series
A Stock into shares of Common Stock on a one-for-one basis as
a result of the Offering. See "Description of Capital Stock
- Series A Convertible Preferred Stock" and "Risk Factors -
Conversion of Series A Stock."
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<PAGE>
(11) Represents 11.6% of the outstanding Series A Stock and
137,321 shares of Common Stock to be issued on the conversion
of Series A Stock, assuming the conversion of shares of
Series A Stock into shares of Common Stock on a one-for-one
basis as a result of the Offering. See "Description of
Capital Stock - Series A Convertible Preferred Stock" and
"Risk Factors - Conversion of Series A Stock."
(12) Represents 19.2% of the outstanding Series A Stock and
227,876 shares of Common Stock to be issued on the conversion
of Series A Stock, assuming the conversion of shares of
Series A Stock into shares of Common Stock on a one-for-one
basis as a result of the Offering. See "Description of
Capital Stock - Series A Convertible Preferred Stock"
and "Risk Factors - Conversion of Series A Stock."
(13) Represents 5.8% of the outstanding Series A Stock and 68,328
shares of Common Stock to be issued on the conversion
of Series A Stock, assuming the conversion of shares of
Series A Stock into shares of Common Stock on a one-for-one
basis as a result of the Offering. See "Description of
Capital Stock - Series A Convertible Preferred Stock" and
"Risk Factors - Conversion of Series A Stock."
(14) Includes 350,000 shares of Common Stock shares subject to
restrictions on transferability under the terms of the
Company's Non-Statutory Plan and 738,352 shares of Common
Stock subject to stock options granted under the Company's
1995 Plan and 1996 Plan currently exercisable or exercisable
within 60 days after June 12, 1996. None of the Company's
directors or executive officers own shares of the Series A
Stock.
SELLING SHAREHOLDERS
Set forth below are the names of the Selling Shareholders and the
number of shares of Common Stock that are subject to the over-allotment
option granted to the Underwriters by the Company and the Selling
Shareholders, which may be exercised in whole or in part by the
Underwriters within 30 days of consummation of the Offering solely to
cover over-allotments, if any.
Number of Shares
Subject to
the Over-Allotment
Name of Selling Shareholder Option
--------------------------- ------------------
James F. Chen (President, 150,000
Chief Executive Officer,
and Director)
Jieh-Shan Wang (Senior Vice 50,000
President - Engineering)
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Golden Eagle Partners 16,468
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue up to 50,000,000 shares of Common
Stock, $0.001 par value, and 20,000,000 shares of Preferred Stock, $0.001
par value.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Restated
Certificate of Incorporation and Restated Bylaws, which are included as
exhibits to the Registration Statement of which this Prospectus is a part,
and by the provisions of applicable law.
Common Stock
As of June 12, 1996, there were 12,473,308 shares of Common Stock
outstanding that were held of record by approximately 43 shareholders.
There will be 17,440,638 shares of Common Stock outstanding (assuming no
exercise of the Underwriters' over-allotment option and no exercise of
outstanding options) after giving effect to the sale of newly-issued
Common Stock offered to the public hereby.
The holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of shareholders. The holders
of Common Stock are not entitled to receive dividends as long as any
shares of the Company's Series A Stock are issued and outstanding.
Dividends, if any, may be declared by the Board of Directors out of funds
legally available for the payment of dividends. Dividends may be paid in
cash, in property or in shares of capital stock. See "Dividend Policy."
In the event of any voluntary or involuntary liquidation, sale, or winding
up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and
liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights to subscribe for any of
the Company's securities or rights to convert their Common Stock into any
other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock
are fully paid and non-assessable, and the shares of Common Stock to be
issued upon completion of this Offering will be fully paid and non-
assessable.
Preferred Stock
The Board of Directors has the authority to issue up to 20,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences and the number of shares constituting any series or the
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<PAGE>
designation of such series, without any further vote or action by
shareholders. The issuance of preferred stock may have the effect of
delaying or preventing a change in control of the Company.
Series A Convertible Preferred Stock
The Company's Board of Directors created a series of Preferred Stock
designated as "Series A Convertible Preferred Stock" (herein referred to
as "Series A Stock") pursuant to Board Resolution and a Certificate of
Designation, both dated April 4, 1994. As of the date of this Prospectus,
1,186,518 shares of Series A Stock are outstanding and are held of record
by 12 shareholders. There will be no shares of Series A Stock outstanding
after the Offering is consummated.
The holders of Series A Stock ("Series A Shareholders") do not have any
preemptive rights to subscribe for any securities of the Company. Series
A Shareholders are entitled to vote on all matters submitted to a vote of
the shareholders of the Company. Series A Shareholders also are entitled
to vote as a class on matters affecting the value of the Series A Stock.
All actions requiring the approval of Series A Shareholders voting as a
class must be authorized by a majority vote of the holders thereof. The
Board of Directors may declare dividends on the Series A Stock payable at
any time in cash, in property, or in shares of Series A Stock. Series A
Shareholders are entitled to share ratably in dividends with the holders
of any other series of the Company's preferred stock now existing or
hereafter created, but receive no preference in dividends declared. The
Company will not pay dividends on Common Stock as long as any shares of
Series A Stock are issued and outstanding. In the event of any voluntary
or involuntary liquidation, sale, or winding up of the Company, Series A
Shareholders are entitled to receive, in preference to holders of Common
Stock, an amount equal to the purchase price per share of the Series A
Stock plus any accrued but unpaid dividends. Any remaining proceeds shall
be allocated between Common and Series A Shareholders on a pro rata basis,
treating the shares of Series A Stock on an as-converted basis.
Shares of Series A Stock may at any time be converted into shares of
Common Stock, on a one-for-one basis, provided that such shares of Series
A Stock have not previously been converted by automatic conversion. A
mandatory conversion will occur in the event of an initial public offering
in which at least $15 million is raised and the offering price per share
is at least 1.75 times the initial conversion price of $3.00 per share of
Series A Stock ($5.25). The Series A Stock will not, however, convert
automatically if the initial offering price is less than $5.25 per share.
The conversion ratio will be adjusted so that shares of Series A Stock are
convertible into shares of Common Stock on a greater than one-for-one
basis as follows. If the Company effects an initial public offering prior
to March 31, 1997 at a price less than $5.25 per share, the conversion
ratio will be adjusted by multiplying the subscription price of $3.00 per
share by 1.75 ("Conversion Factor") and dividing such product by the
midpoint of the offering price range contained in the final pre-effective
amendment to the registration statement relating to such initial public
offering. If the Company's initial public offering occurs (i) during the
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<PAGE>
period from April 1, 1997 to March 31, 1998 at a price less than $6.00 per
share or (ii) after March 31, 1998 at a price less than $9.00 per share,
the conversion ratio is adjusted as set forth in the preceding sentence
except the Conversion Factor becomes 2.00 in the event clause (i) applies
or 3.00 in the event clause (ii) applies. The failure to automatically
convert (i) may result in shares of Series A Stock remaining outstanding
after the Offering, and (ii) will result in further dilution to holders of
Common Stock as a result of the adjustment of the conversion ratio. This
will limit the ability of the Company to pay dividends on the Common Stock
and will further limit the rights of the holders of Common Stock. See
"Risk Factors - Conversion of Series A Stock."
Anti-takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law
The following provisions of the Restated Certificate of Incorporation
and Restated Bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such
provisions also may have the effect of preventing changes in the
management of the Company. See "Risk Factors - Effect of Certain Charter
Provisions; Anti-takeover Effects of Certificate of Incorporation, Bylaws
and Delaware law."
Directors. The Company's Restated Certificate of Incorporation provides
that, upon the closing of this Offering, the Company's Board of Directors
will be classified into three classes of directors.
Under the Restated Certificate of Incorporation and Restated Bylaws, a
director may be removed only for cause and by the affirmative vote of 67%
of the outstanding shares entitled to vote an election of directors at a
special meeting called for that purpose. See "Management - Executive
Officers and Directors."
Preferred Stock. The Restated Certificate of Incorporation authorizes
20,000,000 shares of Preferred Stock with a par value of $0.001. The
Company is authorized to issue preferred stock from time to time in one or
more series, and the Board of Directors is authorized to fix the
designations, powers preferences and relative participating, optional and
other special rights, qualifications, limitations or restrictions with
respect to such shares. In the event of a proposed merger, tender offer
or other attempt to gain control of the Company of which management does
not approve, it might be possible for the Board of Directors to authorize
the issuance of a series of preferred stock with rights and preferences
that could impede the completion of such a transaction. See "Risk Factors
- Anti-takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
Certain Business Combinations. The Restated Certificate of
Incorporation also requires the affirmative vote of not less than 75% of
the outstanding shares of capital stock of the Company entitled to vote to
effect a merger, consolidation or sale of the Company with any "Interested
Person" as defined in the Certificate of Incorporation. The Restated
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<PAGE>
Certificate of Incorporation also provides that the holders of the
Company's voting securities must receive consideration no less than the
"Fair Price" or fair market value of the share in connection with a
merger, consolidation or sale of the Company.
Special Meetings of Shareholders. In addition, the Company's Restated
Bylaws do not permit shareholders of the Company to call a special meeting
of shareholders; only the Company's Chief Executive Officer or a majority
of the members of the Company's Board of Directors may call a special
meeting of shareholders.
Amendment of Bylaws. The Restated Certificate of Incorporation requires
the affirmative vote of not less than 75% of the outstanding shares of
capital stock of the Company entitled to vote at an election of directors
to amend the Company's bylaws.
Inspection of Books and Records. The Restated Certificate of
Incorporation authorizes the Board of Directors to determine whether, to
what extent and under what conditions, the accounts and books of the
Corporation (other than the stock ledger) shall be open to inspection by
shareholders.
Delaware Anti-Takeover Statute. The Company is subject to Section 203
of the Delaware General Corporation Law, which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested shareholder for a period of three years
following the date that such shareholder became an interested shareholder,
unless: (1) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted
in the shareholder becoming an interested shareholder; (2) upon
consummation of the transaction that resulted in the shareholder becoming
an interested shareholder, the interested shareholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (i) by persons who are directors and
also officers and (ii) by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer, or (3) on or subsequent to such date the business combination is
approved by the board of directors and authorized at an annual or special
meeting of shareholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock that is not owned
by the interested shareholder.
Section 203 defines business combination when used in reference to a
corporation and any interested shareholder to include: (i) any merger or
consolidation of the corporation with the interested shareholder or with
any other corporation if the merger or consolidation is caused by the
interested shareholder and, as a result of the transaction, Section 203(a)
does not apply to the surviving corporation; (ii) any sale, lease,
exchange, mortgage, transfer, pledge or other disposition involving the
interested shareholder of 10% or more of the assets of the corporation;
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<PAGE>
(iii) subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested shareholder; (iv) any transaction involving the corporation
that has the effect of increasing the proportionate share of the stock of
any class or series of the corporation owned by the interested
shareholder; or (v) any receipt by the interested shareholder of the
benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203
defines an interested shareholder as any entity or person beneficially
owns, or within three years did own, 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
17,440,638 shares of Common Stock (assuming the Underwriters' over-
allotment option is not exercised). The 3,400,000 shares sold in this
Offering will be freely tradeable without restriction or registration by
persons other than "affiliates" of the Company, as defined in the
Securities Act, who would be required to sell under Rule 144 under the
Securities Act. The 14,040,638 shares of Common Stock held by existing
shareholders upon completion of this Offering, without giving effect to
shares of Common Stock that are subject to the Underwriters' over-
allotment option, will be "restricted securities" as that term is defined
in Rule 144, and may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or
701, which rules are summarized below. The foregoing numbers assume the
issuance of 280,812 shares to RSA and MIT, the conversion of the Series A
Stock on a one-for-one basis (assuming an initial offering price of at
least $5.25 per share), and the exercise of 100,000 warrants at $0.01 upon
consummation of the Offering. See "Risk Factors - Conversion of Series A
Stock." "Business - License Agreements," "Description of Capital Stock -
Series A Convertible Preferred Stock," and "Certain Transactions." As a
result of the contractual provisions described below and the provisions of
Rules 144, 144(k) and 701, additional shares will be available for sale in
the public market as follows: (i) except for the shares of Common Stock
offered hereby and the shares of Common Stock subject to the over-
allotment option, if exercised, no additional shares will be eligible for
immediate sale on the date of this Prospectus, and (ii) 1,698,983 shares
will be eligible for sale upon expiration of the lock-up agreements 180
days after the date of this Prospectus in compliance with Rules 144,
144(k) or 701.
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this Prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least two years
(including the holding period of any prior owner except an "affiliate" of
the Company as that term is defined under Rule 144), is entitled to sell
in "brokers' transactions" or to market makers, within any three-month
period commencing 90 days after the completion of this Offering, a number
of shares that does not exceed the greater of: (i) 1% of the number of
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<PAGE>
shares of the Company's Common Stock then outstanding (approximately
174,406 shares immediately after the Offering); or (ii) the average weekly
trading volume of the Company's Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also generally subject to the availability
of current public information about the Company. Under Rule 144(k), a
person who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least three years (including the
holding period of any prior owner except an affiliate), is entitled to
sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of this Offering. The SEC is currently considering a
revision to Rule 144 that would reduce the two year holding period in Rule
144(d) to one year and the three year holding period in Rule 144(k) to two
years. If enacted, such modification will have a material effect on the
timing of when certain shares of Common Stock become eligible for resale.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701
promulgated under the Securities Act. Rule 701 permits affiliates to sell
their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-
affiliates may sell such shares in reliance on Rule 144 without having to
comply with the public information, volume limitation, or notice
provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before
selling such shares. Upon completion of this Offering, 501,358 of the
575,951 shares of Common Stock issued upon the exercise of options granted
under the Non-Statutory Plan may be sold under Rule 701.
The Company has agreed not to offer, issue, sell, agree to sell, grant
any option for the sale of or otherwise dispose of directly or indirectly
any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (except for options to be
granted pursuant to the Company's 1996 Plan) for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives. This agreement may be released without notice to persons
purchasing shares in the Offering and without notice to any market on
which the Common Stock is traded.
The Company's current shareholders, employees, officers, directors, and
holders of options and warrants to purchase shares of Common Stock have
also agreed with the Underwriters not to offer, sell agree to sell, grant
any option to purchase or otherwise dispose of any shares of Common Stock
owned by them for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representatives, except for sales
to the Underwriters pursuant to the Purchase Agreement. This agreement
may be released without notice to persons purchasing shares in the
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Offering and without notice to any market on which the Common Stock is
traded.
Individuals who participated in the Note Offering and subsequently
exchanged their Notes for shares of Series A Stock ("Investors") were
granted two demand registration rights for underwritten and shelf
offerings of Common Stock by the Company. Investors, as a group, may
exercise the demand registration rights at any time for a period of two
years from the closing date of this Offering, unless the holding period
under Rule 144 is shortened to a period of less than two years. Investors
also were granted unlimited piggyback registration rights with respect to
any offering of Common Stock or Series A Stock by the Company. Except for
one Selling Shareholder, all holders of Series A Stock have waived their
piggyback registration rights with respect to the Offering.
In connection with the Company's issuances of senior subordinated notes
to JMI, with detachable warrants to purchase 500,000 shares of Common
Stock, the Company has granted certain registration rights to the holders
of such warrants. See "Certain Transactions." At any time after six
months following the consummation of the Offering, holders of such
warrants may exercise one demand registration right to require the Company
to register shares of the Company's Common Stock issuable upon exercise of
the warrants in whole or in part. In addition, the Company has granted
such warrant holders unlimited piggyback registration rights with respect
to any offering of securities of the Company and unlimited registrations
on Form S-3 with respect to at least 20% of the warrant shares then
outstanding. The exercise of registration rights and the sale of the
shares so registered could have an adverse effect on the trading price of
the Common Stock.
The Company intends to file a registration statement or registration
statements on Form S-8 under the Securities Act to register all shares of
Common Stock issuable under the 1995 Plan and the 1996 Plan. The
registration statement or statements are expected to be filed shortly
after the effective date of the Registration Statement of which this
Prospectus is a part and will be effective upon filing. Shares issued
upon the exercise of stock options after the effective date of the Form S-
8 registration statement or statements will be eligible for resale in the
public market without restriction, subject to Rule 144 limitations
applicable to affiliates and the lock-up agreements described above.
Prior to this Offering, there has been no trading market for shares of
Common Stock, and no prediction can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on
the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of a substantial number of shares of Common Stock in
the public market could adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities.
88
<PAGE>
UNDERWRITING
The Company has entered into a Purchase Agreement (the "Purchase
Agreement") with the underwriters listed in the table below (the
"Underwriters"), for whom Piper Jaffray Inc. and Volpe, Welty & Company
are acting as representatives (the "Representatives"). Subject to the
terms and conditions set forth in the Purchase Agreement, the Company has
agreed to sell to the Underwriters, and each of the Underwriters has
severally agreed to purchase, the following number of shares of Common
Stock set forth opposite each Underwriter's name in the table below:
Name Number of Shares
---- ----------------
Piper Jaffray Inc. . . . . . . . . .
Volpe, Welty & Company . . . . . . .
________
Total . . . . . . . . . . . 3,400,000
Subject to the terms and conditions of the Purchase Agreement,
the Underwriters have agreed to purchase all of the Common Stock being
sold pursuant to the Purchase Agreement, if any is purchased (excluding
shares covered by the over-allotment option granted therein). In the event
of a default by any Underwriter, the Purchase Agreement provides that in
certain circumstances purchase commitments of the nondefaulting
Underwriters may be increased or the Purchase Agreement may be terminated.
The Representatives have advised the Company that the
Underwriters propose to offer Common Stock directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not
more than $ per share. Additionally, the Underwriters may allow, and
such dealers may reallow a concession not in excess of $ per share
to certain other dealers. After the public offering, the public offering
price and other selling terms may be changed by the Underwriters.
The Company and the Selling Shareholders have granted to the
Underwriters an option, exercisable by the Representatives within 30 days
after the date of the Purchase Agreement, to purchase up to an additional
510,000 shares of Common Stock at the same price per share to be paid by
the Underwriters for the other shares offered hereby. If the Underwriters
purchase any of such additional shares pursuant to this option, each
Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the
Common Stock offered hereby.
The Representatives have informed the Company that neither they,
nor any other member of the National Association of Securities Dealers,
Inc. (the "NASD") participating in the distribution of this offering, will
make sales of the Common Stock offered hereby to accounts over which they
exercise discretionary authority without the prior specific written
approval of the customer.
89<PAGE>
The offering of the shares is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The
Underwriters reserve the right to reject an order for the purchase of
shares in whole or in part.
The Company's current shareholders, employees, officers,
directors, and holders of options and warrants, who will beneficially own
in the aggregate 14,040,638 shares of Common Stock after the Offering,
have agreed that they will not sell, offer to sell, issue, distribute or
otherwise dispose of any shares of Common Stock owned by them prior to the
date of this Prospectus for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representatives. See
"Shares Eligible For Future Sale." The Company has agreed that it will
not, without the Representatives' prior written consent, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180-day period
following the date of this Prospectus, except that the Company may issue
shares upon the exercise of options granted prior to the date hereof, and
may grant additional options under the 1996 Plan.
Prior to this Offering, there has been no public market for the
Common Stock. The initial public offering price for the Common Stock will
be determined by negotiation among the Company and the Representatives.
Among the factors to be considered in determining the initial public
offering price will be prevailing market and economic conditions, the
Company's revenue and earnings, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management and the
consideration of the above factors in relation to the market valuations of
companies in related businesses. The estimated initial public offering
price range set forth on the cover of this preliminary prospectus is
subject to change as a result of market conditions and other factors. See
"Risk Factors-No Prior Public Market; Market Volatility."
The Company and the Selling Shareholders have agreed to indemnify
the Underwriters and their controlling persons against certain
liabilities, including liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed
upon for the Company by Kirkpatrick & Lockhart LLP. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters
by Goodwin, Procter & Hoar LLP.
EXPERTS
The balance sheets as of December 31, 1994 and 1995 and March 31, 1996
and the statements of operations, shareholders' equity (deficit) and cash
flows for the period from February 16, 1993 (date of inception) to
December 31, 1993 and for each of the two years in the period ended
December 31, 1995 and the three months ended March 31, 1996 included in
90
<PAGE>
this Prospectus have been included herein in reliance upon the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority
of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any
other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. Further information
with respect to the Company and the Common Stock offered hereby is
included or incorporated by reference in the Registration Statement and
exhibits.
A copy of the Registration Statement may be inspected without charge and
may be obtained at rates prescribed by the SEC at the Public Reference
Section of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549, the New York Regional Office located at 7 World Trade Center, New
York, New York 10048, and the Chicago Regional Office located at 500 West
Madison Street, Chicago, Illinois 60661-2511.
Upon completion of the Offering, the Company will be subject to the
information reporting requirements of the Exchange Act and, in accordance
therewith, will file reports, proxy statements and other information with
the SEC.
91
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Balance sheets as of December 31, 1994,
December 31, 1995 and March 31, 1996 F-3
Statements of Operations for the period from
February 16, 1993 (date of inception) to
December 31, 1993, the years ended
December 31, 1994 and 1995 and the
three months ended March 31, 1996 F-5
Statements of Shareholders' Equity for
the period from February 16, 1993
(date of inception) to December 31, 1993,
the years ended December 31, 1994
and 1995 and the three months ended
March 31, 1996 F-6
Statements of Cash Flows for the period from
February 16, 1993 (date of inception) to
December 31, 1993, the years ended
December 31, 1994 and 1995 and the
three months ended March 31, 1996 F-7
Notes to Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
_________
To the Board of Directors of
Virtual Open Network Environment Corporation
We have audited the accompanying balance sheets of Virtual Open
Network Environment Corporation (the Company) as of December 31, 1994 and
1995, and March 31, 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from February
16, 1993 (date of inception) to December 31, 1993, and for each of the two
years in the period ended December 31, 1995, and the three month period
ended March 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1994 and 1995, and March 31, 1996, and the
results of its operations and its cash flows for the period from February
16, 1993 (date of inception) to December 31, 1993, and for each of the two
years in the period ended December 31, 1995, and the three month period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
June 7, 1996
F-2<PAGE>
<TABLE>
<CAPTION>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
BALANCE SHEETS
December 31,
----------------------------- March 31,
1994 1995 1996
---- ---- ----
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 321,636 $1,328,385 $1,446,143
Accounts receivable, less allowances of $-0- and $23,620
as of December 31, 1994 and 1995, and $100,000 as of
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 840 242,392 857,849
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . - 257,630 191,629
Prepaid expenses and other current assets . . . . . . . . . . . - 13,955 65,003
-------------- ------------ ------------
Total current assets . . . . . . . . . . . . . . . . . 322,476 1,842,362 2,560,624
-------------- ------------ ------------
Property and equipment:
Office and computer equipment . . . . . . . . . . . . . . . . . 83,760 219,044 330,734
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . - 14,958 88,123
-------------- ------------ ------------
83,760 234,002 418,857
Less accumulated depreciation . . . . . . . . . . . . . . . . . (11,330) (35,952) (47,953)
-------------- ------------ ------------
72,430 198,050 370,904
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,190 14,230
-------------- ------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 394,906 $ 2,050,602 $ 2,945,758
============== ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . $ 52,812 $ 189,384 $ 741,656
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 4,273 38,161 78,398
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . - 12,500 16,667
Capital lease obligations - current . . . . . . . . . . . . . . - 40,928 40,524
Notes payable - current . . . . . . . . . . . . . . . . . . . . - 1,255,556 2,508,333
Notes payable to related parties . . . . . . . . . . . . . . . 19,793 474,144 472,169
------------- ------------ -------------
Total current liabilities . . . . . . . . . . . . . . . 76,878 2,010,673 3,857,747
------------- ------------ -------------
Notes payable - noncurrent . . . . . . . . . . . . . . . . . . . - 44,444 41,667
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . - 52,959 78,884
Capital lease obligations - noncurrent . . . . . . . . . . . . . - 82,464 102,058
------------- ------------ -------------
Total liabilities . . . . . . . . . . . . . . . . . . . 76,878 2,190,540 4,080,356
------------- ------------ -------------
Commitments and contingencies
F-3
<PAGE>
Series A Convertible preferred stock, $0.001 par value;
20,000,000 shares authorized, none issued and outstanding . . . - - -
Stockholders' equity (deficit)
Common stock, $0.001 par value; 50,000,000 shares authorized,
11,764,710 and 12,456,641 and 12,456,641 shares issued and
outstanding, as of December 31, 1994 and 1995 and March 31,
1996, respectively . . . . . . . . . . . . . . . . . . . . . 11,765 12,457 12,457
Additional paid-in capital . . . . . . . . . . . . . . . . . . 748,235 1,321,888 1,321,888
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (441,972) (1,474,283) (2,468,943)
------------ ------------ ------------
Total stockholders' equity (deficit) . . . . . . . . . 318,028 (139,938) (1,134,598)
------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) . $ 394,906 $ 2,050,602 $ 2,945,758
============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
STATEMENTS OF OPERATIONS
For the Period
February 16,
1993 (date of Year Ended Three Months Ended
inception) to December 31, March 31,
December 31, --------------------- -------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue . . . . . . . . . $ - $ - $1,101,418 $ 150,257 $ 981,642
Consulting and services . . . . . 76,183 59,716 2,083 - 40,169
------------- ------------ --------- ---------- ----------
Total revenues. . . . . . 76,183 59,716 1,103,501 150,257 1,021,811
------------- ------------ --------- ---------- ----------
Cost of revenues:
Cost of product revenue . . . . . - - 376,359 52,590 310,693
Cost of consulting and
services revenue. . . . . . . . 38,090 35,114 800 - 11,305
------------- ---------- ---------- --------- ----------
Gross profit. . . . . . . . . . . . 38,093 24,602 726,342 97,667 699,813
Operating expenses:
Sales and marketing . . . . . . . 3,652 21,212 103,917 33,980 709,111
General and administrative. . . . 68,212 299,392 1,314,661 154,282 592,967
Research and development. . . . . - 107,926 277,973 41,696 310,952
------------- ----------- ----------- ---------- ----------
Total operating expenses. . . 71,864 428,530 1,696,551 229,958 1,613,030
------------- ----------- ----------- ---------- ----------
Operating loss. . . . . . . . . . . (33,771) (403,928) (970,209) (132,291) (913,217)
Other (expense) income:
Interest expense. . . . . . . . . (1,913) (2,360) (66,615) - (104,934)
Interest income . . . . . . . . . - - 4,513 - 23,491
------------- ----------- ----------- ---------- ----------
Total other expenses. . . (1,913) (2,360) (62,102) - (81,443)
------------- ----------- ----------- ---------- ----------
Net loss. . . . . . . . . . . . . . $ (35,684) $ (406,288) $(1,032,311) $ (132,291) $ (994,660)
============= =========== =========== ========== ==========
Net loss per common share . . . . . $ (.00) $ (.04) $ (.08) $ (.01) $ (.08)
============= =========== =========== ========== ==========
Weighted average shares
outstanding. . . . . . . . . . . . 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714
============= ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5<PAGE>
<TABLE>
<CAPTION>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Initial issuance of common
stock. . . . . . . . . . . . . 8,500,000 $ 8,500 $ 1,500 $ - $ 10,000
Net loss . . . . . . . . . . . . - - - (35,684) (35,684)
-------------- ----------- -------------- -------------- ------------
Balance, December 31, 1993 . . . 8,500,000 8,500 1,500 (35,684) (25,684)
Sale of common stock . . . . . . 3,264,710 3,265 746,735 - 750,000
Contribution of common stock
from related party . . . . . . (500,000) (500) 500 - -
Issuance of common stock as
payment for services . . . . . 500,000 500 (500) - -
Net loss . . . . . . . . . . . . - - - (406,288) (406,288)
-------------- ----------- -------------- ------------- -----------
Balance, December 31, 1994 . . . 11,764,710 11,765 748,235 (441,972) 318,028
Sale of common stock . . . . . . 161,931 162 399,838 - 400,000
Contribution of common stock
from related party . . . . . . (199,000) (199) 199 - -
Issuance of common stock in
accordance with anti-dilution
agreement. . . . . . . . . . . 84,000 84 (84) - -
Issuance of common stock as
payment on accrued interest. . 115,000 115 32,430 - 32,545
Issuance of common stock . . . . 530,000 530 141,270 - 141,800
Net loss . . . . . . . . . . . . - - - (1,032,311) (1,032,311)
--------------- ----------- -------------- ------------ ------------
Balance, December 31, 1995 . . . 12,456,641 12,457 1,321,888 (1,474,283) (139,938)
Net loss . . . . . . . . . . . . - - - (994,660) (994,660)
--------------- ----------- -------------- ------------ ------------
Balance, March 31, 1996. . . . . 12,456,641 $ 12,457 $1,321,888 $(2,468,943) $(1,134,598)
=========== =========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
STATEMENTS OF CASH FLOWS
For the Period
February 16,
1993 (date of Year Ended Three Months Ended
inception) to December 31, March 31,
December 31, --------------------- -----------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Cash flows from operating activities: (Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss . . . . . . . . . . . . . . . . . $(35,684) $(406,288) $(1,032,311) $(132,291) $(994,660)
Adjustments to reconcile net loss to
net cash from operating activities:
Provision for doubtful accounts. . . . . . - - 23,620 - 76,380
Provision for obsolete inventory . . . . . - - 50,000 - -
Depreciation and amortization. . . . . . . 1,023 10,307 24,623 18,340 12,001
Consulting expense satisfied by issuance of
common stock . . . . . . . . . . . . . . - 500 - - -
Compensation expense satisfied by issuance
of common stock. . . . . . . . . . . . . - - 141,800 - -
Accrued interest to be satisfied
with common stock. . . . . . . . . . . . - - 32,545 - 63,624
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . - (840) (265,172) (90,202) (691,837)
Loan receivable. . . . . . . . . . . . . . - - - (2,200) -
Inventory. . . . . . . . . . . . . . . . . - - (307,630) (25,596) 66,001
Prepaid expenses and other . . . . . . . . - - (24,145) (2,958) (55,088)
Accounts payable and accrued expenses. . . 14,161 42,924 235,919 (24,569) 557,002
------- -------- ---------- -------- ---------
Net cash used in operating activities . (20,500) (353,397) (1,120,751) (259,476) (966,577)
------- -------- ---------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment . . . . (20,460) (13,300) (19,840) - (155,437)
------- -------- ---------- --------- ----------
Net cash used in investing activities. . . (20,460) (13,300) (19,840) - (155,437)
------- -------- ---------- --------- ----------
Cash flows from financing activities:
Issuance of common stock . . . . . . . . . 10,000 700,000 400,000 - -
Issuance of notes payable. . . . . . . . . 39,705 - 1,300,000 - 1,250,000
Issuance of notes payable to related
parties . . . . . . . . . . . . . . . . - - 454,351 26,534 -
Principal payments on capitalized
lease obligations . . . . . . . . . . . - - (7,011) - (10,228)
Repayment of notes payable to
related parties . . . . . . . . . . . . - (20,412) - - -
--------- ---------- ----------- ---------- -------------
Net cash provided by
financing activities. . . . . . . . . 49,705 679,588 2,147,340 26,534 1,239,772
------- ---------- ---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . 8,745 312,891 1,006,749 (232,942) 117,758
F-7<PAGE>
Cash and cash equivalents at beginning
of period. . . . . . . . . . . . . . . . - 8,745 321,636 321,636 1,328,385
---------- ----------- ----------- --------- ----------
Cash and cash equivalents at end
of the period . . . . . . . . . . . . . $ 8,745 $ 321,636 $1,328,385 $ 88,694 $1,446,143
======== ========== ========== ========= ==========
F-8
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
STATEMENTS OF CASH FLOWS
(continued)
For the Period
February 16,
1993 (date of Year Ended Three Months Ended
inception) to December 31, March 31,
December 31, ------------------- ------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Noncash investing and financing activities:
Property and equipment acquired through
capital leases. . . . . . . . . . . . . . . $ - $ - $ 130,403 $ - $ 29,418
========== ========== ========== =========== ===========
Property and equipment acquired through
the issuance of common stock. . . . . . . . $ - $ 50,000 $ - $ - $ -
========== ========== ========== =========== ===========
Issuance of common stock
as compensation . . . . . . . . . . . . . . $ - $ - $ 141,800 $ - $ -
========== ========== ========== =========== ===========
Accrued interest to be satisfied
with common stock . . . . . . . . . . . . . $ - $ - $ 32,545 $ - $ 63,624
========== ========== ========== =========== ===========
Supplemental cash flow disclosure:
Cash paid for interest $ - $ - $ 182 $ - $ 1,074
========== ========== ========== =========== ===========
</TABLE>
F-9
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
1. Nature of Business:
------------------
V-ONE develops, markets, and licenses a comprehensive suite of
network security products that enable businesses to conduct secured
electronic transactions and information exchange using private
enterprise networks and public networks such as the Internet.
The Company was originally incorporated in the State of Maryland on
February 16, 1993. The Board of Directors authorized and the
stockholders approved a ten-for-one stock split of the Company's
common stock as of November 11, 1995. Effective February 7, 1996, the
Company merged with a pre-existing corporation formed in Delaware.
The Delaware corporation is the surviving corporation.
In connection with the reincorporation, the Company increased the
number of authorized shares of common stock from 20 million to 50
million and authorized 20 million shares of preferred stock. All
references to common and preferred stock have been restated to give
effect to this transaction.
2. Significant Accounting Policies:
-------------------------------
Interim Financial Statements and Reporting Period:
-------------------------------------------------
The financial statements for the three months ended March 31, 1995
and related footnote information are unaudited and have been prepared
on a basis substantially consistent with the audited financial
statements, and in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the results of the interim period. The results of the
three months ended March 31, 1996, are not necessarily indicative of
the results for the entire year.
Revenue Recognition:
-------------------
The Company's revenue recognition policy is in conformance with the
American Institute of Certified Public Accountants' Statement of
Position, 91-1 "Software Revenue Recognition." Revenue is generally
recognized from the license of software upon shipment, net of
allowances, provided that no significant vendor obligations remain.
Allowances for estimated future returns, credits, and doubtful
accounts are netted against accounts receivable. Service and training
revenue is recognized as the services are performed.
F-10
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
2. Significant Accounting Policies:
-------------------------------
Revenue Recognition, continued:
-------------------
Maintenance and support revenue is recognized ratably over the
contract term, typically one year. Payments received in advance of
revenue recognition are included in deferred income.
In some instances, the Company recognizes revenues from the sale of
systems using the percentage of completion method as the work is
performed, measured primarily by the ratio of labor hours incurred to
total estimated labor hours for each specific contract. When the
total estimated cost of a contract is expected to exceed the contract
price, the total estimated loss is charged to expense in the period
when the information becomes known.
Research and Development and Software Development Costs:
-------------------------------------------------------
Software development costs are included in research and development
and are expensed as incurred. Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased or Otherwise Marketed" requires the
capitalization of certain software development costs once
technological feasibility is established, which the Company generally
defines as completion of a working model. Capitalization ceases when
the products are available for general release to customers, at which
time amortization of the capitalized costs begins on a straight-line
basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater.
To date, the period between achieving technological feasibility and
the general availability of such software has been short, and software
development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any
software development costs.
Cash and Cash Equivalents:
-------------------------
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash and
cash equivalents include time deposits with commercial banks used for
temporary cash management purposes.
Inventories:
-----------
Inventories are valued at the lower of cost or market and consist
primarily of computer equipment for sale on orders received from
customers, items held for stock, and training kits. Cost is
determined based on specific identification.
F-11
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
2. Significant Accounting Policies:
--------------------------------
Property and Equipment:
----------------------
Computer and office equipment, furniture and fixtures are recorded
at cost. Depreciation and amortization of furniture and equipment is
calculated using the straight-line method over a useful life of three
to seven years.
Repairs and maintenance costs are charged to expense as incurred.
Upon sale or retirement of property and equipment, the costs and
related accumulated depreciation are eliminated from the accounts and
any resulting gain or loss on such disposition is included in the
determination of net income.
Income Taxes:
------------
Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred income tax
assets and liabilities are measured by applying presently enacted
statutory tax rates, that are applicable to the future years in which
deferred income tax assets or liabilities are expected to be settled
or realized, to the differences between the financial statement
carrying amount and the tax bases of existing assets and liabilities.
The effect of a change in tax rates on deferred income tax assets and
liabilities is recognized in net income in the period which the tax
rate is enacted.
The Company provides a valuation allowance against net deferred
income tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred income tax assets may
not be realized.
Computation of Net Loss Per Common Share:
----------------------------------------
Common equivalent shares are included in the per share calculations
where the effect of their inclusion would be dilutive. Common
equivalent shares consist of Series A Convertible Preferred Stock and
the assumed exercise of outstanding stock options. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No.
83, the common equivalent shares issued by the Company during the
twelve-months preceding the initial filing date of the registration
statement relating to the Company's initial public
F-12
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
2. Significant Accounting Policies:
-------------------------------
Computation of Net Loss Per Common Share, continued:
----------------------------------------
offering (July 15, 1996), using the treasury stock method and the
assumed public offering price (of $6.00 per share), have been included
in the calculation of net loss per common share for all periods
presented.
Fully diluted net loss per common share is the same as primary net
loss per common share.
Risks, Uncertainties and Concentrations:
---------------------------------------
The Company invests its cash primarily in money market funds with an
international commercial bank. The Company had a balance in these
funds of $0, $1,175,279 and $1,390,341 as of December 31, 1994 and
1995 and March 31, 1996, respectively. The Company has not
experienced any losses to date on its invested cash. The Company's
cash balances exceed Federal insured amounts.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates and could impact future results of
operations and cash flows.
The Company sells its product to a wide variety of customers in a
variety of industries. The Company performs ongoing credit
evaluations of its customers but does not require collateral or other
security to support customer accounts receivable. In management's
opinion, the Company has provided sufficient provisions to prevent a
significant impact of credit losses to the financial statements.
In 1993 and 1994, two customers accounted for over 70% and 65% of
total revenue respectively. In 1995, three customers accounted for
over 39% of total revenue.
Twenty percent of revenues generated in the three month period ended
March 31, 1996 related to one customer.
F-13
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
2. Significant Accounting Policies:
-------------------------------
Risks, Uncertainties and Concentrations, continued:
---------------------------------------
One customer accounted for 36% of total accounts receivable as of
December 31, 1995. Two customers accounted for 32% of total accounts
receivable as of March 31, 1996.
Fair value of financial instruments:
-----------------------------------
The carrying amounts of the Company's assets and liabilities
approximate fair value due to either the short-term maturity of those
financial instruments or their negotiated market terms.
Stock-based Compensation:
------------------------
In October 1995, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
Accounting for Stock-Based Compensation, which is effective for the
Company's financial statements for fiscal years beginning after
December 15, 1995. SFAS 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS 123 or under
the provisions of Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees, but requires pro forma
disclosure in the footnotes to the financial statements as if the
measurement provisions of SFAS 123 had been adopted. The Company has
continued to account for its stock based compensation in accordance
with the provisions of APB 25.
Reclassifications:
-----------------
Certain reclassifications have been made to the prior years'
financial statements to conform to the classifications used in the
current period.
3. Inventory:
---------
The Company has provided an allowance for potentially non-salable
inventory in the amounts of $0, $50,000 and $50,000 as of December 31,
1994 and 1995, and March 31, 1996, respectively.
F-14
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
4. Notes Payable:
-------------
In both December 1995 and January 1996, the Company issued $1.25
million in promissory notes to individual investors bearing interest
at 7%. As of March 31, 1996, $2.5 million was outstanding related to
the promissory notes. The principal and interest are due and payable
on June 30, 1996. In the event the Company enters into a private or
public offering, or the notes become due and payable, the note holders
may convert the principal and interest into the shares of the
Company's capital stock. In the event the Company conducts a private
placement, the conversion price is equal to the price per share being
offered in the placement. In the event of an initial public offering,
or on the maturity date of the notes, the price per common share is
based on current fair value.
In October 1995, the Company entered into a $50,000 loan agreement
with an international financial institution. The loan requires
monthly payments of interest at a rate equal to the institutions prime
lending rate for the first twelve months, thereafter the interest rate
increases to 1.5% over prime (9.75% as of March 31, 1996). The
Company is required to repay the loan through 36 monthly payments
commencing October 1996. The loan is collateralized by the assets of
the Company and is subordinate to notes payable to a shareholder (See
Note 5).
Maturities of notes payable as of March 31, 1996 are as follows:
1996 $2,508,333
1997 16,666
1998 16,667
1999 8,334
----------
$2,550,000
==========
F-15
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
5. Notes Payable to Related Parties:
--------------------------------
On June 1, 1995, the Company issued a promissory note for $330,000
to a foreign shareholder. In lieu of cash payments for interest the
Company agreed to issue 345,000 shares of the Company's common stock
to the note holder. As of March 31, 1996, the Company had issued
115,000 shares under this agreement, recognizing interest expense of
$63,624 and $32,545 during 1996 and 1995, respectively.
The Company's president, who is the majority shareholder, has
advanced the Company operating funds three separate promissory notes
which are updated on an annual basis. The notes bear interest at 8%
and are due on demand. Total amounts outstanding under the notes were
$19,293, $143,644 and $142,169 as of December 31, 1994 and 1995, and
March 31, 1996, respectively.
6. Income taxes:
------------
The tax effect of temporary differences that give rise to
significant portions of deferred income taxes are as follows as of:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1994 1995 1996
---- ---- ----
<S>
Deferred income tax assets: <C> <C> <C>
Deferred income. . . . . . . . . . . . . . . . $ - $ 4,828 $ 6,437
Inventory allowance. . . . . . . . . . . . . . - 19,310 19,310
Allowance for bad debts. . . . . . . . . . . . - 9,122 38,620
Nondeductible accruals . . . . . . . . . . . . - - 65,654
Deferred rent. . . . . . . . . . . . . . . . . - 20,453 30,465
Net operating loss carryforward. . . . . . . . 165,804 452,580 689,525
----------- ----------- -----------
Total deferred income tax asset. . . . . . . . 165,804 506,293 850,011
Less valuation allowance . . . . . . . . . . . (165,804) (506,293) (850,011)
----------- ----------- -----------
Deferred income taxes, net . . . . . . . . . . $ - $ - $ -
=========== =========== ===========
</TABLE>
F-16
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
6. Income taxes, continued:
------------
In 1995 and 1996, respectively, the net change in the valuation
allowance for deferred income tax assets was an increase of
approximately $344,000 and $300,000 due principally to increases in
the net operating loss. A valuation allowance has been recognized due
to the uncertainty of realizing the benefit of net operating
carryforwards. As of March 31, 1996, the Company had net operating
loss carryforwards of approximately $1,785,000, for Federal and state
income tax purposes available to offset future taxable income. The
net operating loss carryforwards begin expiring in 2008.
7. Stockholders' Equity:
--------------------
Stock Split:
-----------
On November 11, 1995, the Board of Directors authorized and the
stockholders approved a ten-for-one stock split of the outstanding
shares of the Company's common stock. All references to common stock,
options, and per share data have been restated to give effect to the
stock split.
1995 Non-Statutory Stock Option Plan:
------------------------------------
During 1995, the Company adopted the 1995 Non-Statutory Stock Option
Plan (SOP) to attract and retain key employees. The SOP is
administered by a committee, appointed by the Board of Directors,
which determines the number of options granted to a qualified
employee, the vesting period, and the exercise price provided it is
not below market value on the date of the grant. In most cases the
options vest over a three year period and terminate in ten years from
the date of grant. The SOP will terminate during May 2005 unless
terminated earlier in accordance with the provisions of the SOP.
F-17
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
7. Stockholders' Equity:
--------------------
1995 Non-Statutory Stock Option Plan, continued:
------------------------------------
Option activity for the period from the plan's inception to March
31, 1996 was as follows:
Shares Price
------ -----
Balance as of December 31, 1994. . - -
Granted. . . . . . . . . . . . . 525,444 $.283 - 1.67
Exercised. . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . - -
Balance as of December 31, 1995. . 525,444 $.283 - 1.67
Granted. . . . . . . . . . . . . 3,000 $3.00
Exercised. . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . - -
----------- -----------------
Balance as of March 31, 1996 . . . 528,444 $.283 - 3.00
=========== =================
F-18
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
7. Stockholders' Equity:
--------------------
1995 Non-Statutory Stock Option Plan, continued:
------------------------------------
As of March 31, 1996, the Compensation committee was authorized by
the Board of Directors to grant options for a total of 528,444 shares
of common stock under the SOP. As of December 31, 1995 and March 31,
1996, respectively, 66,667 and 209,484 of the options were vested and
exercisable. As of March 31, 1996, the Company had no shares of
common stock available for grant under the plan.
The Company accounts for the fair value of its grants under this
plan in accordance with APB Opinion 25. Accordingly, no compensation
cost has been recognized for its incentive stock option plan. Had
compensation cost been determined based on the fair value at the grant
dates for awards under the plan consistent with the method of SFAS
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net loss As reported $ 994,660 $1,032,311
Pro forma $ 995,950 $1,100,618
Loss per common share As reported $ 0.08 $ 0.08
Pro forma $ 0.08 $ 0.08
The fair value of each option is estimated on the date of grant
using a type of Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the three month
period ended March 31, 1996: dividend yield of 0%, expected volatility
of 0%, risk-free interest rate of 5.35% and expected lives of 3 years.
F-19
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
7. Stockholders' Equity:
--------------------
1995 Non-Statutory Stock Option Plan, continued:
------------------------------------
A summary of the status of the Company's stock option plan is
presented below:
<TABLE>
<CAPTION>
Three
Months Ended Year Ended
March 31, 1996 December 31, 1995
-------------- -----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Options outstanding
beginning of period. . . . . . . . . 525,444 $0.82 - -
Options exercised . . . . . . . . . . . - - - -
Options granted . . . . . . . . . . . . 3,000 $3.00 525,444 $0.82
Options outstanding
end of period. . . . . . . . . . . . 528,444 $0.83 525,444 $0.82
Options exercisable
at end of period . . . . . . . . . . 206,151 $0.75 66,667 $0.28
Weighted-average fair value of options
granted during the period. . . . . . - $0.43 - $0.13
</TABLE>
As of March 31, 1996, the weighted average remaining contractual
life of the options that range from $ .283 to $3.00 is 9.3 years.
F-20
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
7. Stockholders' Equity:
--------------------
1995 Non-Statutory Stock Option Plan, continued:
------------------------------------
As of March 31, 1996 and December 31, 1995, the proforma tax effects
under SFAS 109 of this standard would include an increase to both the
deferred tax asset and the valuation allowance of $500 and $26,400,
respectively, and no impact to the statement of operations.
Reserved for Issuance:
---------------------
The Board of Directors has authorized 280,812 shares of the
Company's common stock to be reserved for issuance in accordance with
a license agreement whereby the licensor may waive its future rights
to any license fees in exchange for 2% of the Company's outstanding
common stock until the date of an initial public offering (See Note
8).
Series A Convertible Preferred Stock:
------------------------------------
The holders of Series A Convertible Preferred Stock ("Preferred
Stock") do not have any preemptive rights to subscribe for any
securities of the Company. Preferred Stockholders are entitled to
vote on all matters submitted to a vote of the stockholders of the
Company. The holders of Preferred Stock also are entitled to vote, as
a class, on matters affecting the value of the Preferred Stock. All
action requiring the approval of holders of shares of Preferred Stock
voting as a class must be authorized by a majority vote of the holders
thereof. The Board of Directors may declare dividends on the
Preferred Stock payable at any time in cash, in property, or in shares
of Preferred Stock. Preferred Stock holders are entitled to share
ratably in dividends with the holders of any other series of the
Company's preferred stock now existing or hereafter created, but
receive no preference in dividends declared. The Company will not pay
dividends on Common Stock as long as any shares of Preferred Stock are
issued and outstanding. In the event of any voluntary or involuntary
liquidation, sale, or winding up of the Company, the holders of
Preferred Stock are entitled to receive, in preference to holders of
Common Stock, an amount equal to the purchase price per share of the
Preferred Stock plus any accrued but unpaid dividends. Any remaining
proceeds shall be allocated between Common and Preferred Shareholders
on a pro rata basis, treating the shares of Preferred Stock on an as
if converted basis. Shares of Preferred Stock may at any time be
converted into shares of Common Stock, provided that such shares of
Preferred Stock have not previously been converted by a mandatory
conversion which shall take place in the event of an initial public
offering in which at least $15 million is raised and the offering
price per share is at least 1.75 times the initial conversion price
per share of the Preferred Stock of $3.00 per share.
F-21
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
7. Stockholders' Equity:
--------------------
Series A Convertible Preferred Stock, continued:
------------------------------------
As of December 31, 1994 and 1995, and March 31, 1996, there were no
shares of the Preferred Stock outstanding.
8. Commitments:
-----------
Leases
------
The Company is obligated under various operating and capital lease
agreements, primarily for office space and equipment through 2001.
Future minimum lease payments under these non-cancelable operating and
capital leases as of March 31, 1996 are as follows:
Operating Capital
--------- -------
1996. . . . . . . . . . . . $116,794 $ 51,551
1997. . . . . . . . . . . . 187,224 56,092
1998. . . . . . . . . . . . 191,238 28,415
1999. . . . . . . . . . . . 197,928 20,679
2000. . . . . . . . . . . . 197,928 17,773
Thereafter. . . . . . . . . 61,991 1,915
-------- --------
Less: Portion
representing interest . . - (33,843)
-------- --------
$953,103 $142,582
======== ========
F-22
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
8. Commitments:
-----------
Leases:
------
Rental expense was $0, $12,366, $92,785 and $42,864, for the period
February 16, 1993 to December 31, 1993 and for the years ended
December 31, 1994 and 1995, and for the three month period ended March
31, 1996, respectively.
The cost and accumulated amortization of assets under capital leases
were as follows as of:
December 31, March 31,
1995 1996
---- ----
Furniture. . . . . . . . . . . . . $ 8,752 $ 8,752
Computers and equipment. . . . . . 114,640 144,058
-------- --------
123,392 152,810
Less: Accumulated amortization. . (3,192) (10,228)
--------- --------
$120,200 $142,582
======== ========
License Agreements:
------------------
In 1994 the Company entered into two licensing agreements whereby
the Company obtained the right to modify and sell certain technology
used in the Company's product line. One of the agreements requires
the Company to pay fees based on product and subscription sales for
any product using the licensed technology. The other agreement
provides for payment of fees based upon gross revenues of the Company.
This latter agreement also gives the licensor the right to forfeit
future licensing fees in exchange for 2% of the Company's outstanding
voting stock (See Note 7). The Company incurred expenses totaling $0,
$110,860 and $67,690 relating to these agreements in 1994, 1995 and
1996, respectively.
Licensing rights:
----------------
The Company has incorporated in its services, the data encryption
and authentication technology developed by another company (the
Licensor) under the licensing agreement previously described. The
Company has become aware of a third party dispute over the rights to
the Licensor's technology. The Company has received no notification
F-23
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
8. Commitments:
-----------
Licensing rights, continued:
----------------
with respect to this matter and management believes that the Company
will not experience detrimental effects from the outcome of this
dispute. The financial statements do not contain any adjustments that
may result from the resolution of this matter.
9. Financing:
---------
The Company has incurred net losses of $35,684, $406,288, $1,032,311
and $994,660, for the period February 16, 1993 to December 31, 1993,
for the years ended December 31, 1994 and 1995, and for the three
month period ended March 31, 1996. Management has historically been
successful in obtaining outside financing to meet obligations and
funding working capital requirements as they come due. Most recently,
the Company closed on several transactions that provided additional
cash flow. These are summarized below.
During April 1996, the Company converted $2,500,000 in promissory
notes to Preferred Stock. The Company also raised an additional
$1,000,000 by issuing 333,333 shares of Preferred Stock at $3.00 per
share (See Note 10).
During June 1996, the Company borrowed $1.5 million and issued
unsecured, 8% interest-bearing, senior subordinated notes due June 18,
2000, with 500,000 detachable warrants to purchase Common Stock.
During June 1996, the Company signed a software license contract
with a customer for $2 million, with payment terms of $500,000 to be
received by June 30, 1996 and the remaining $1.5 million to be paid
over the remaining two year contract period.
During April 1996, the Board of Directors authorized the President
to proceed with plans for the initial public offering of the Company's
common stock. In the event the Company does not successfully complete
its initial public offering, the Company intends to pursue other
financing alternatives that may be available to the Company and, if
required, reduce its operating expenses.
F-24
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information for the three months ended March 31, 1995 is unaudited)
10. Subsequent Events:
---------------
On April 15, 1996, the Company repaid the full amount of the
promissory notes outstanding, including accrued interest, to seven of
the investors who participated in the December 1995 and January 1996
note offering, by issuing to those investors shares of the Company's
Preferred Stock, at a price of $3.00 per share. The Company paid cash
to each of these investors in an amount equal to the value of any
fractional shares of Preferred Stock that would otherwise have been
transferred to such investors. In addition, the Company permitted the
seven investors to purchase an additional 333,333 shares of Preferred
Stock at a price of $3.00 per share. Of the remaining seven
investors, two transferred their notes to one of the other remaining
investors. The remaining five investors exchanged their notes,
including the transferred notes, for shares of the Company's Preferred
Stock on May 24, 1996, also at a price of $3.00 per share. A total of
1,186,518 shares of Preferred Stock were issued as of May 24, 1996.
Shares of Preferred Stock may at any time be converted into shares
of Common Stock, on a one-for-one basis, provided that such shares of
Preferred Stock have not previously been converted by automatic
conversion. A mandatory conversion will occur in the event of an
initial public offering in which at least $15 million is raised and
the offering price per share is at least 1.75 times the initial
conversion price of $3.00 per share of Preferred Stock ($5.25). The
Preferred Stock will not, however, convert automatically if the
initial offering price is less than $5.25 per share. The conversion
ratio will be adjusted so that shares of Preferred Stock are
convertible into shares of Common Stock on greater than one-for-one
basis as follows. If the Company effects an initial public offering
prior to March 31, 1997 at a price less than $5.25 per share, the
conversion ratio will be adjusted by multiplying the subscription
price of $3.00 per share by 1.75 ("Conversion Factor") and dividing
such product by the midpoint of the offering price range contained in
the final pre-effective amendment to the registration statement
relating to such initial public offering. If the Company's initial
public offering occurs (i) during the period from April 1, 1997 to
March 31, 1998 at a price less than $6.00 per share or (ii) after
March 31, 1998 at a price less than $9.00 per share, the conversion
ratio is adjusted as set forth in the preceding sentence except the
Conversion Factor becomes 2.00 in the event clause (i) applies or 3.00
in the event clause (ii) applies.
F-25
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information for the three months ended March 31, 1995 is unaudited)
10. Subsequent Events, continued:
-----------------
On June 12, 1996, in consideration for the foreign shareholder's
agreement not to demand payment of the $330,000 note until May 31,
1997, the Board of Directors authorized the Company to offer the
foreign shareholder the option to receive common stock at $3.00 per
share, in lieu of cash in payment of the note. The Board reserved and
authorized the issuance of 110,000 shares of common stock for this
purpose. On May 17, 1996, the foreign shareholder executed an
agreement extending the term of the note to May 31, 1997.
During April 1996, the Company adopted the 1996 Non-Statutory Stock
Option Plan to attract and retain executive employees. The plan is
administered by a committee, appointed by the Board of Directors. The
option price will be the fair market value of the stock on the date of
grant. The options are not transferable, subject to various
restrictions outlined in the agreement and must be exercised by
December 31, 1996. As of April 2, 1996, 575,951 options were granted
under the plan. No additional options are available for grant under
the plan. The options were exercised on April 22, 1996 at $.50 a
share.
During June 1996, the Company adopted the 1996 Incentive Stock
Option Plan (the 1996 Plan), under which both options and restricted
share awards may be made to the Company's key employees. Both
incentive stock options and options that are not qualified under
Section 422 of the Internal Revenue Code of 1986, as amended ("Non-
Qualified Options") are available under this plan. The options are
not transferable and are subject to various restrictions outlined in
the agreement. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors, which determines the number of
options granted to a qualified employee, the vesting period, and the
exercise price provided that it is not below market value. The 1996
Plan will terminate during June 2006 unless terminated earlier by the
Board of Directors.
During June 1996, the Compensation Committee was authorized by the
Board of Directors to grant options for a total of 3,500,000 shares of
common stock under the 1996 Plan. To date, the committee has granted
a total of 1,103,868 Non-Qualified Options and 285,992 incentive stock
options, of which 466,674 and 85,792, respectively, were vested and
exercisable. Subsequent to the initial grants, the Company had
2,110,140 shares of common stock available for grant under the 1996
Plan.
The 1996 Plan also provides for the automatic grant of a non-
qualified option to purchase 10,000 shares of common stock to each
non-employee director. All options have a five year term and are
exercisable on the date of grant. As of June 1996, none of the
Company's directors were eligible to participate in the 1996 Plan.
F-26
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesperson or any other person has been
authorized to give any information or to make any
representations in connection with the Offering other than
those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon
as having been authorized by the Company, any Selling
Shareholder or the Underwriters. This Prospectus does not 3,400,000 SHARES
constitute an offer to sell, or a solicitation of an offer
to purchase, any securities other than the securities to
which it relates or an offer to sell or the solicitation of Virtual Open Network Environment Corporation
an offer to buy the Common Stock in any circumstances in
which such offer or solicitation is unlawful. Neither the COMMON STOCK
delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that
there has been no change in the facts set forth in the
Prospectus or in the affairs of the Company since the date
hereof or that the information contained herein is correct
as of any time subsequent to the date hereof.
---------------------------------- _____________________
TABLE OF CONTENTS PROSPECTUS
Page _____________________
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . 18
Dividend Policy . . . . . . . . . . . . . . . . . . . . . 18
Capitalization . . . . . . . . . . . . . . . . . . . . . 18
Dilution . . . . . . . . . . . . . . . . . . . . . . . . 19
Selected Financial Data . . . . . . . . . . . . . . . . . 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 22
Business . . . . . . . . . . . . . . . . . . . . . . . . 30 Piper Jaffray Inc.
Management . . . . . . . . . . . . . . . . . . . . . . . 46
Certain Transactions. . . . . . . . . . . . . . . . . . . 58 Volpe, Welty & Company
Principal Shareholders . . . . . . . . . . . . . . . . . 59
Selling Shareholders . . . . . . . . . . . . . . . . . . 62
Description of Capital Stock . . . . . . . . . . . . . . 63
Shares Eligible for Future Sale . . . . . . . . . . . . . 66
Underwriting . . . . . . . . . . . . . . . . . . . . . . 68
Legal Matters . . . . . . . . . . . . . . . . . . . . . . 69
Experts . . . . . . . . . . . . . . . . . . . . . . . . . 70
Additional Information . . . . . . . . . . . . . . . . . 70
Index to Financial Statements . . . . . . . . . . . . . .F-1
Until , 1996 (25 days after the date of this
Prospectus), all dealers effecting transactions in the
registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This
is in addition to the obligations of the dealers to deliver
a Prospectus when acting as Underwriters and with respect to , 1996
their unsold allotments or subscriptions.
========================================================================================================================
/TABLE
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth estimated expenses expected to be
incurred by the Company in connection with the issuance and distribution
of the securities being registered.
Securities and Exchange
Commission Registration Fee........ $8,993.00
NASD Filing Fee.................... $3,108.00
NASDAQ Listing Fee................. *
Blue Sky Fees and Expenses......... *
Printing and Engraving Expenses.... *
Accounting Fees and Expenses....... *
Legal Fees and Expenses............ *
Transfer Agent Fees and Expenses... *
Miscellaneous...................... -------
Total..................... $ *
____________________
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers
Article Ninth of the Company's Amended and Restated Certificate
of Incorporation provides that the Company shall indemnify, to the fullest
extent now or hereafter permitted by law, each director, officer employee
or agent (including each former director, officer, employee agent) of the
Company who was or is made party to or a witness in or is threatened to be
made a party to or a witness in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was an authorized
representative of the Company, against all expenses (including attorneys'
fees and disbursements), judgments, fines (including excise taxes and
penalties) and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding.
Article VI, Section 6.1 of the Company's Amended Bylaws provides
that each person who was or is made a party to or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a Director,
officer, agent or employee of the Company, shall be indemnified and held
harmless by the Company to the fullest extent authorized by the General
Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended, against any expenses (including attorneys fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by such person in connection therewith. Notwithstanding the
foregoing, no Director shall be indemnified nor held harmless in violation
II-1
<PAGE>
of the provisions of the Company's Amended and Restated Certificate of
Incorporation; and no Director, officer, agent or employee shall be
indemnified nor held harmless by the Company unless:
(i) In the case of conduct in his/her official capacity
with the Company, he/she acted in good faith and in a
manner he/she reasonably believed to be in the best
interests of the Company;
(ii) In all other cases, his/her conduct was at least
not opposed to the best interests of the Company nor in
violation of the Amended and Restated Certificate of
Incorporation, Bylaws or any agreement entered into by
the Company; and
(iii) In the case of any criminal proceeding, he/she had
no reasonable cause to believe that his/her conduct was
unlawful.
Section 145 of the Delaware General Corporation Law provides that
a corporation has the power to indemnify a director, officer, employee or
agent of the corporation and certain other persons serving at the request
of the corporation in related capacities against amounts paid and expenses
incurred in connection with an action or proceeding to which he is or is
threatened to be made a party by reason of such position, if such person
shall have acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, in
any criminal proceeding, if such person had no reasonable cause to believe
his conduct was unlawful; provided that, in the case of actions brought by
or in the right of the corporation, no indemnification shall be made with
respect to any matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the
adjudicating court determines that such indemnification is proper under
the circumstances.
Pursuant to the provisions of the Common Stock Purchase Agreement
(the "Underwriting Agreement"), the underwriters are obligated, under
certain circumstances to indemnify directors and officers for the Company
against certain liability, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1
hereto.
Item 15. Recent Sales of Unregistered Securities.
During the past three years, the Company has issued unregistered
securities to persons as described below. No underwriters or underwriting
discounts or commissions were paid in connection with such issuances.
There were no public offerings in such transactions, and the Company
believes that each transaction, unless otherwise noted, was exempt from
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), by reason of Section 4(2) thereof, based on the private
nature of the transactions and the financial sophistication of the
purchasers, all of whom had access to complete information concerning the
II-2
<PAGE>
Company and acquired the securities for investment and not with a view to
the distribution thereof. All share numbers indicated below have been
retroactively adjusted to reflect the 10-for-1 stock split effective
November 13, 1995.
On February 21, 1994, the Company issued 8,500,000 shares to
James F. Chen in consideration for a payment of $10,000. On February 21,
1994, the Company also issued: (i) 150,000 shares of Common Stock to
Maxine Loh in consideration for a payment of $25,000; (ii) 450,000 shares
of Common Stock to Ed Lee, Teresa Lee, David Luk and Lousia Lee in
consideration for a payment of $75,000; (iii) 300,000 shares of Common
Stock to Charles C. Chen in consideration for a payment of $49,500; (iv)
300,000 shares of Common Stock to How Lin in consideration for equipment
valued at $50,000; (v) 150,000 shares of Common Stock to Dr. Mark
Rosenthal in consideration for a payment of $25,000; and (vi) 150,000
shares of Common Stock to Ngan Ying Chen in consideration for a payment of
$25,000.
On May 15, 1995, James F. Chen contributed 500,000 shares of
Common Stock to the capital of the Company and the Company issued 500,000
shares of Common Stock to Jieh-Shan Wang in consideration for services
rendered.
On June 1, 1995, James F. Chen contributed 199,000 shares of
Common Stock to the capital of the Company. On that date, the Company
issued 1,764,710 shares of Common Stock to Mr. H.H. Cheng in consideration
for a payment of $500,000 which was made to the Company in December 1994.
To provide protection against dilution to Mr. Cheng's $500,000 investment,
the Company issued 84,000 shares of Common Stock to Mr. James F. Chen as
trustee of a voting trust for Mr. Cheng on June 1, 1995. Also on June 1,
1996, the Company issued an additional 115,000 shares of Common Stock to
the voting trust established for Mr. Chen in consideration for providing a
loan of $300,000.
On December 12, 1995, the Company issued: (i) 61,930 shares of
Common Stock to Ban Leong Eap and Pisei Phlong Eap in consideration for a
payment of $100,000; (ii) 8,333 shares of Common Stock to Joseph D.
Gallagher in consideration for a payment of $25,000; (iii) 8,334 shares of
Common Stock to Gill & Sippel Profit Sharing Plan, FBO Joseph D. Gallagher
in consideration for a payment of $25,000; (iv) 16,667 shares of Common
Stock to Chansothi Um and Viseth Um in consideration for a payment of
$50,000; (v) 41,667 shares of Common Stock to Stanley Shapiro in
consideration for a payment of $125,000; (vi) 16,667 shares of Common
Stock to Burnett Moody in consideration for a payment of $50,000; and (vi)
8,333 shares of Common Stock to Norman Fine in consideration for a payment
of $25,000.
On December 12, 1995, the Company also issued 500,000 shares of
Common Stock to Ray Hanner for services rendered and 30,000 shares of
Common Stock to Scott Hu consisting of 16,667 shares in accordance with
the terms of Mr. Hu's Employment Agreement and 13,333 shares issued as a
severance payment.
II-3
<PAGE>
Between May, 1995 and June 12, 1996, the Company granted options
to purchase 320,000 shares of Common Stock at $0.283 and 206,444 shares of
Common Stock at $1.67 per share under the Company's 1995 Non-Statutory
Stock Option Plan. On June 12, 1996, the Company granted options to
purchase 885,604 shares of Common Stock $2.50 per share and options to
purchase 504,256 shares of Common Stock at $3.00 per share under the
Company's 1996 Incentive Stock Plan. The Company believes that the option
grants described in this paragraph are exempt from the registration
requirements of the Securities Act by reason of Rule 701 promulgated
thereunder because the options were granted pursuant to written
compensatory benefit plans of the Company, copies of which were provided
to each participant, and the aggregate offering price did not exceed the
limit prescribed by Rule 701 in connection with any such grant.
In April, 1996, the Company issued options to purchase 575,951
shares of Common Stock subject to restrictions on transferability
("Restricted Stock"), at $0.50 per share, under the Company's 1996 Non-
Statutory Stock Option Plan. As of June 12, 1996, all options granted
under the Plan had been exercised and a total of 575,951 shares of
Restricted Stock had been issued. The Company also believes that the
transactions described in this paragraph are exempt from registration
under the Securities Act by reason of Rule 701 as the options were granted
pursuant to a written compensatory benefit plan of the Company, a copy of
the plan was provided to each participant, and the aggregate offering
price did not exceed the limit prescribed by Rule 701.
In December, 1995 and January, 1996, the Company borrowed $2.5
million through the sale of 7% interest bearing, unsecured promissory
notes due June 30, 1996 to fourteen investors ("Note Offering"). The
Company issued: (i) a note dated December 19, 1995 in the amount of
$200,000 to the Trustee under the Shapiro Family Trust; (ii) a note dated
December 18, 1995 in the amount of $25,000 to Burnett H. Moody; (iii) a
note dated December 15, 1995 in the amount of $25,000 to Norman D. Fine;
(iv) a note dated December 15, 1995 in the amount of $500,000 to Lewis M.
Schott; (v) a note dated December 22, 1995 in the amount of $175,000 to
Bryan T. Vanas; (vi) a note dated December 22, 1995 in the amount of
$100,000 to Joseph Lupo and Rosa Lupo; (vii) a note dated December 22,
1995 in the amount of $225,000 to Lee DeVisser and Linda DeVisser,
Trustees of the DeVisser Trust dated January 4, 1993; (viii) a note dated
January 15, 1996 in the amount of $166,500 to Edgehill Capital Management
LP; (ix) a note dated January 15, 1996 in the amount of $60,000 to J.
Francis Lavelle; (x) a note dated January 15, 1996 in the amount of
$547,000 to Steven A. Cohen; (xi) a note dated January 15, 1996 in the
amount of $60,000 to John P. Holmes III; (xii) a note dated January 15,
1996 in the amount of $166,500 to Golden Eagle Partners; (xiii) a note
dated January 15, 1996 in the amount of $50,000 to John J. Egan IV; and
(xiv) a note dated January 15, 1996, in the amount of $200,000 to Kenneth
Lissak.
On April 15, 1996, the Company exchanged the full amount
of notes (including accrued interest) issued to seven investors for shares
of the Company's Series A Convertible Preferred Stock ("Series A Stock")
II-4
<PAGE>
at $3.00 per share and paid cash to each of the seven investors in an
amount equal to any fractional shares of Series A Stock. The Company
issued: (i) 68,175 shares of Series A Stock to the Trustee of the Shapiro
Family Trust; (ii) 8,523 shares of Series A Stock to Burnett H. Moody;
(iii) 8,528 shares of Series A Stock to Norman D. Fine; (iv) 170,566
shares of Series A Stock to Lewis M. Schott; (v) 59,619 shares of Series A
Stock to Bryan T. Vanas, (vi) 34,068 shares of Series A Stock to Joseph
Lupo and Rosa Lupo and (vii) 76,654 shares of Series A Stock to Lee
DeVisser and Linda DeVisser Trustees of the Lee DeVisser Trust dated
January 4, 1993.
On April 15, 1996 the Company offered certain of the investors
who agreed to exchange their notes for Series A Stock, the opportunity to
subscribe for an additional 333,333 shares of Series A Stock at a price of
$3.00 per share in proportion to each investor's pro-rata interest in the
Note Offering. The Company issued (i) 41,667 shares of Series A Stock to
Stanley Shapiro in consideration for a payment of $125,001; (ii) 6,666
shares of Series A Stock to Burnett H. Moody in consideration for a
payment of $19,998; (iii) 3,333 shares of Series A Stock to Norman D. Fine
in consideration for a payment of $9,999; (iv) 146,834 shares of Series A
Stock to Lewis M. Schott in consideration for a payment of $440,502; (v)
47,166 shares of Series A Stock to Bryan T. Vanas in consideration for a
payment of $141,498; (vi) 27,000 shares of Series A Stock to Joseph Lupo
and Rosa Lupo in consideration for a payment of $81,000; and (vii) 60,667
shares of Series A Stock to Lee DeVisser and Linda DeVisser Trustees of
the Lee DeVisser Trust dated January 4, 1993 in consideration for a
payment of $182,001.
Two of the remaining seven noteholders transferred their notes to
another noteholder. On May 24, 1996, the Company exchanged the full
amount of the remaining notes (including accrued interest) for Shares of
Series A Stock at $3.00 per share and paid cash in an amount equal to any
fractional shares. The Company issued: (i) 17,082 shares of Series A
Stock to John J. Egan, IV; (ii) 56,883 shares of Series A Stock to Golden
Eagle Partners; (iii) 56,883 shares of Series A Stock to Edgehill Capital
Management; (iv) 227,876 shares of Series A Stock to Steven A. Cohen; and
(v) 68,328 shares of Series A Stock to Kenneth Lissak.
On May 23, 1996 RSA Data Security, Inc. ("RSA") exercised an
option granted under the Company's license agreement with RSA, to convert
its right to receive future royalties into 2% of the Company's issued and
outstanding voting securities, after giving effect to the issuance to RSA,
through the date of the public offering. Pursuant to a separate agreement
between RSA and Massachusetts Institute of Technology ("MIT"), MIT is
entitled to receive 7.2% of any royalties that RSA receives. As a result,
the Company will issue to MIT, 7.2% of the 2% of shares to which RSA was
entitled under the license agreement. At the time of the Offering, RSA
and MIT will be entitled to receive 260,594 and 20,218 shares of Common
Stock, respectively,
In June, 1996, the Company issued 16,667 shares of Common Stock
to John J. Egan IV in consideration for consulting services rendered to the
Company.
II-5
<PAGE>
In June, 1996, the Company borrowed $1.5 million from JMI
Equity Fund II, L.P. by issuing unsecured, 8% interest-bearing, senior
subordinated notes in the principal amount of $1.5 million with detachable
warrants to purchase 500,000 shares of Common Stock. Of the 500,000
detachable warrants, 400,000 are exercisable at $3.00 per shares and
100,000 are exercisable at $0.01 per share.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following Financial Statement Schedules are filed as
part of this registration statement:
Number Description
------ -----------
Schedule II Valuation and Qualifying Accounts
(b) The following exhibits are filed as part of this
registration statement:
Number Description
------- -----------
1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of
Incorporation dated January 10, 1996
3.2 Amended Bylaws dated June 12, 1996
3.3 Certificate of Designation, Preferences, and
Rights of Series A Convertible Preferred Stock
dated April 4, 1996
3.4 Certificate of Increase in the Number of Shares
of Series A Convertible Preferred Stock dated
May 21, 1996
5 Opinion on Legality*
9.1 Voting Trust Agreement between H. H. Cheng and
James F. Chen, Trustee
9.2 Voting Trust Agreement between Robert Zupnick and
James F. Chen, Trustee
9.3 Voting Trust Agreement between Dennis Winson and
James F. Chen, Trustee
II-6
<PAGE>
10.1 Employment Agreement between Virtual Open Network
Environment Corporation and James F. Chen dated
as of June 12, 1996
10.2 Virtual Open Network Environment Corporation 1995
Non-Statutory Stock Option Plan
10.3 Virtual Open Network Environment Corporation 1996
Non-Statutory Stock Option Plan
10.4 Virtual Open Network Environment Corporation 1996
Incentive Stock Plan
10.5 Software License Agreement between Trusted
Information Systems, Inc. ("TIS") and V-ONE
executed October 6, 1994
10.6 First Amendment to the Software License Agreement
between TIS and V-ONE
10.7 Second Amendment to the Software License
Agreement between TIS and V-ONE
10.8 Third Amendment to the Software License Agreement
between TIS and V-ONE
10.9 Fourth Amendment to the Software License
Agreement between TIS and V-ONE
10.10 OEM Master License Agreement between RSA Data
Security, Inc. ("RSA") and V-ONE dated December
30, 1994 and Amendment Number One to the OEM
Master License Agreement between RSA and V-ONE
10.11 Amendment Number Two to the OEM Master License
Agreement between RSA and V-ONE and Conversion
Agreement dated May 23, 1996
10.12 Promissory Note for H.H. Cheng with Allonge and
Amendment dated June 12, 1996
10.13 Form of Exchange and Purchase Agreement dated
April 1996
10.14 Registration Rights Agreement between V-ONE and
JMI Equity Fund II, L.P. ("JMI")
10.15 8% Senior Subordinated Note due June 18, 2000
issued by V-ONE to JMI
10.16 Warrant to Purchase 100,000 shares of Common
Stock Issued by V-ONE to JMI
II-7
<PAGE>
10.17 Warrant to Purchase 400,000 shares of Common
Stock Issued by V-ONE to JMI
11 Computation of Primary and Fully Diluted
Loss Per Share
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Kirkpatrick & Lockhart, LLP*
24 Power of Attorney: see signature page of this
registration statement
27 Financial Data Schedule for the year ended
December 31, 1995 and the three months ended
March 31, 1996
__________________________
*To be filed by amendment
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b), if, in the aggregate
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment
II-8
<PAGE>
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Rockville, State of Maryland, on June 21, 1996.
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
(Registrant)
By: /s/ James F. Chen
------------------------------------
Name: James F. Chen
Title: President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James F. Chen, Charles C. Chen,
Chansothi Um and Ban L. Eap, and each of them, his or her true and lawful
attorneys-in-fact and agents with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents and each of
them full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, to all
intents and purposes and as fully as they might or could do in person,
thereby ratifying and confirming all that such attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James F. Chen President, Chief Executive June 21, 1996
------------------- Office and Director
James F. Chen
/s/ Chansothi Um Treasurer and Acting Chief June 21, 1996
------------------- Financial Officer
Chansothi Um
<PAGE>
/s/ Ban L. Eap Controller June 21, 1996
-------------------
Ban L. Eap
/s/ Hai Hua Cheng Director June 21, 1996
-------------------
Hai Hua Cheng
/s/ Charles C. Chen Director June 21, 1996
-------------------
Charles C. Chen
</TABLE>
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
(For the period from February 16, 1993 (date of inception)
to December 31, 1993 and for the years ended December 31, 1994 and 1995
and the three months ended March 31, 1996)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
February 16, 1993 to December 31, 1993 $ - $ - $ - $ -
December 31, 1994 . . . . . . . . . . . - - - -
December 31, 1995 . . . . . . . . . . . - 23,620 - 23,620
January 1, 1996 to March 31, 1996 . . . 23,620 76,380 - 100,000
DEFERRED TAX ASSET VALUATION ALLOWANCE
February 16, 1993 to December 31, 1993 $ - $ - $ - $ -
December 31, 1994 . . . . . . . . . . . - 165,804 - 165,804
December 31, 1995 . . . . . . . . . . . 165,804 340,489 - 506,293
January 1, 1996 to March 31, 1996 . . . 506,293 343,718 - 850,011
ALLOWANCE FOR NON-SALABLE INVENTORY
February 16, 1993 to December 31, 1993 $ - $ - $ - $ -
December 31, 1994 . . . . . . . . . . . - - - -
December 31, 1995 . . . . . . . . . . . - 50,000 - 50,000
January 1, 1996 to March 31, 1996 . . . 50,000 - - 50,000
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Number Description
------ -----------
1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation dated
January 10, 1996
3.2 Amended Bylaws dated June 12, 1996
3.3 Certificate of Designation, Preferences, and Rights of
Series A Convertible Preferred Stock dated April 4, 1996
3.4 Certificate of Increase in the Number of Shares of Series
A Convertible Preferred Stock dated May 21, 1996
5 Opinion on Legality*
9.1 Voting Trust Agreement between H. H. Cheng and James F.
Chen, Trustee
9.2 Voting Trust Agreement between Robert Zupnick and
James F. Chen, Trustee
9.3 Voting Trust Agreement between Dennis Winson and James F.
Chen, Trustee
10.1 Employment Agreement between Virtual Open Network
Environment Corporation and James F. Chen dated as of
June 12, 1996
10.2 Virtual Open Network Environment Corporation 1995 Non-
Statutory Stock Option Plan
10.3 Virtual Open Network Environment Corporation 1996 Non-
Statutory Stock Option Plan
10.4 Virtual Open Network Environment Corporation 1996
Incentive Stock Plan
10.5 Software License Agreement between Trusted Information
Systems, Inc. ("TIS") and V-ONE executed October 6, 1994
10.6 First Amendment to the Software License Agreement between
TIS and V-ONE
10.7 Second Amendment to the Software License Agreement
between TIS and V-ONE
<PAGE>
10.8 Third Amendment to the Software License Agreement between
TIS and V-ONE
10.9 Fourth Amendment to the Software License Agreement
between TIS and V-ONE
10.10 OEM Master License Agreement between RSA Data Security,
Inc. ("RSA") and V-ONE dated December 30, 1994 and
Amendment Number One to the OEM Master License Agreement
between RSA and V-ONE
10.11 Amendment Number Two to the OEM Master License Agreement
between RSA and V-ONE and Conversion Agreement dated
May 23, 1996
10.12 Promissory Note for H.H. Cheng with Allonge and Amendment
dated June 12, 1996
10.13 Form of Exchange and Purchase Agreement dated April 1996
10.14 Registration Rights Agreement between V-ONE and JMI
Equity Fund II, L.P. ("JMI")
10.15 8% Senior Subordinated Note due June 18, 2000 issued by
V-ONE to JMI
10.16 Warrant to Purchase 100,000 shares of Common Stock Issued
by V-ONE to JMI
10.17 Warrant to Purchase 400,000 shares of Common Stock Issued
by V-ONE to JMI
11 Computation of Primary and Fully Diluted Loss Per Share
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Kirkpatrick & Lockhart, LLP*
24 Power of Attorney: see signature page of this
registration statement
27 Financial Data Schedule for the year ended December 31,
1995 and the three months ended March 31, 1996
__________________________
*To be filed by amendment
<PAGE>
<PAGE>
FORM OF
-------
________ Shares1
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
Common Stock
PURCHASE AGREEMENT
------------------
__________, 1996
PIPER JAFFRAY INC.
VOLPE, WELTY & COMPANY
As Representatives of the several
Underwriters named in Schedule I hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Virtual Open Network Environment Corporation, a Delaware
corporation (the "Company") proposes to sell to the several Underwriters
named in Schedule I hereto (the "Underwriters") an aggregate of _________
shares (the "Firm Shares") of Common Stock, $.001 par value per share (the
"Common Stock"), of the Company. The Company and the stockholders of the
Company listed in Schedule II hereto (the "Selling Stockholders")
severally have also granted to the several Underwriters an option to
purchase an aggregate of up to ______ additional shares of Common Stock,
on the terms and for the purposes set forth in Section 3 hereof (the
"Option Shares"). The Option Shares consist of _____ authorized but
unissued shares of Common Stock to be issued and sold by the Company and
__________ outstanding shares of Common Stock to be sold by the Selling
Stockholders. The Firm Shares and any Option Shares purchased pursuant to
this Purchase Agreement are herein collectively called the "Securities."
The Company and the Selling Stockholders hereby confirm their
agreement with respect to the sale of the Securities to the several
Underwriters, for whom you are acting as Representatives (the
"Representatives").
1 Plus an option to purchase up to _______ additional shares to
cover over-allotments.
<PAGE>
1. Registration Statement. A registration statement on Form
S-1 (File No. 33-____) with respect to the Securities, including a
preliminary form of prospectus, has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations ("Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission; one or more amendments to such
registration statement have also been so prepared and have been, or will
be, so filed. Copies of such registration statement and amendments and
each related preliminary prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the
Rules and Regulations, the Company has prepared and will promptly file an
amendment to the registration statement and an amended prospectus. If the
Company has elected to rely upon Rule 430A of the Rules and Regulations,
it will prepare and file a prospectus pursuant to Rule 424(b) that
discloses the information previously omitted from the prospectus in
reliance upon Rule 430A. Such registration statement as amended at the
time it is or was declared effective by the Commission, and, in the event
of any amendment thereto after the effective date and prior to the First
Closing Date (as hereinafter defined), such registration statement as so
amended (but only from and after the effectiveness of such amendment),
including the information deemed to be part of the registration statement
at the time of effectiveness pursuant to Rule 430A(b), if applicable, is
hereinafter called the "Registration Statement." The prospectus included
in the Registration Statement at the time it is or was declared effective
by the Commission is hereinafter called the "Prospectus," except that if
any prospectus filed by the Company with the Commission pursuant to Rule
424(b) of the Rules and Regulations or any other prospectus provided to
the Underwriters by the Company for use in connection with the offering of
the Securities (whether or not required to be filed by the Company with
the Commission pursuant to Rule 424(b) of the Rules and Regulations)
differs from the prospectus on file at the time the Registration Statement
is or was declared effective by the Commission, the term "Prospectus"
shall refer to such differing prospectus from and after the time such
prospectus is filed with the Commission or transmitted to the Commission
for filing pursuant to such Rule 424(b) or from and after the time it is
first provided to the Underwriters by the Company for such use. The term
"Preliminary Prospectus" as used herein means any preliminary prospectus
included in the Registration Statement prior to the time it becomes or
became effective under the Act and any prospectus subject to completion as
described in Rule 430A of the Rules and Regulations.
2. Representations and Warranties of the Company and the
Selling Stockholders.
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(a) The Company represents and warrants to, and
agrees with, the several Underwriters as follows:
(i) No order preventing or suspending the
use of any Preliminary Prospectus has been issued by the
Commission and each Preliminary Prospectus, at the time
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<PAGE>
of filing thereof, did not contain an untrue statement of
a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which
they were made, not misleading; except that the foregoing
shall not apply to statements in or omissions from any
Preliminary Prospectus in reliance upon, and in
conformity with, written information furnished to the
Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof.
(ii) As of the time the Registration
Statement (or any post-effective amendment thereto) is or
was declared effective by the Commission, upon the filing
or first delivery to the Underwriters of the Prospectus
(or any supplement to the Prospectus) and at the First
Closing Date and Second Closing Date (as hereinafter
defined), (A) the Registration Statement and Prospectus
(in each case, as so amended and/or supplemented) will
conform or conformed in all material respects to the
requirements of the Act and the Rules and Regulations,
(B) the Registration Statement (as so amended) will not
or did 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, and (C) the Prospectus (as so supplemented)
will not or did 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, in light of the circumstances in which they are
or were made, not misleading; except that the foregoing
shall not apply to statements in or omissions from any
such document in reliance upon, and in conformity with,
written information furnished to the Company by you, or
by any Underwriter through you, specifically for use in
the preparation thereof. If the Registration Statement
has been declared effective by the Commission, no stop
order suspending the effectiveness of the Registration
Statement has been issued, and no proceeding for that
purpose has been initiated or, to the Company's
knowledge, threatened by the Commission.
(iii) The financial statements of the Company,
together with the notes thereto, set forth in the
Registration Statement and Prospectus comply in all
material respects with the requirements of the Act and
fairly present the financial condition of the Company as
of the dates indicated and the results of operations and
changes in stockholders equity and cash flows for the
periods therein specified in conformity with generally
accepted accounting principles consistently applied
throughout the periods involved (except as otherwise
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<PAGE>
stated therein); and the supporting schedules included in
the Registration Statement present fairly the information
required to be stated therein. No other financial
statements or schedules are required to be included in
the Registration Statement or Prospectus. Coopers &
Lybrand, L.L.P., who have expressed their opinion with
respect to the financial statements and schedules filed
as a part of the Registration Statement and included in
the Registration Statement and Prospectus, are
independent public accountants as required by the Act and
the Rules and Regulations. The summary financial and
statistical data included in the Registration Statement
fairly present the information shown therein and have
been compiled on a basis consistent with the financial
statements presented in the Registration Statement.
(iv) Each of the Company and its subsidiaries
(if any) has been duly organized and is validly existing
as a corporation in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and
its subsidiaries has full corporate power and authority
to own, lease and operate its properties and conduct its
business as currently being carried on and as described
in the Registration Statement and Prospectus, and is duly
qualified to do business as a foreign corporation in good
standing in each domestic and foreign jurisdiction in
which it owns or leases real property or in which the
conduct of its business makes such qualification
necessary and in which the failure to so qualify would
have a material adverse effect upon the business,
condition (financial or otherwise) or properties of the
Company and its subsidiaries, taken as a whole.
(v) Except as contemplated in the
Prospectus, subsequent to the respective dates as of
which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any
material transactions, or declared or paid any dividends
or made any distribution of any kind with respect to its
capital stock; and there has not been any change in the
capital stock, or any material change in the short-term
or long-term debt, or any issuance of options, warrants,
convertible securities or other rights to purchase the
capital stock, of the Company or any of its subsidiaries,
or any material adverse change, or any development
involving a prospective material adverse change, in the
general affairs, condition (financial or otherwise),
business, key personnel, property, prospects, net worth
or results of operations of the Company and its
subsidiaries, taken as a whole.
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<PAGE>
(vi) Except as set forth in the Prospectus
under the caption "Business Legal Proceedings," there is
not pending or, to the knowledge of the Company,
threatened or contemplated, any action, suit or
proceeding to which the Company or any of its
subsidiaries or, to the best knowledge of the Company
after due inquiry, any of its officers, is a party before
or by any domestic or foreign court or governmental
agency, authority or body, or any arbitrator, which might
result in any material adverse change in the condition
(financial or otherwise), business, prospects, net worth
or results of operations of the Company and its
subsidiaries, taken as a whole, or prevent the
consummation of the transactions contemplated hereby.
(vii) There are no contracts or documents of
the Company or any of its subsidiaries that are required
to be described in the Prospectus or filed as exhibits to
the Registration Statement by the Act or by the Rules and
Regulations that have not been accurately described in
all material respects or so filed.
(viii) This Agreement has been duly authorized,
executed and delivered by the Company, and constitutes a
valid, legal and binding obligation of the Company,
enforceable against the Company in accordance with its
terms, except as rights to indemnity and contribution
hereunder may be limited by federal or state securities
laws and except as such enforceability against the
Company may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of
equity. The execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a
default under, any statute, any agreement or instrument
to which the Company is a party or by which it is bound
or to which any of its property is subject, the Company's
charter or by-laws, or any order, rule, regulation or
decree of any court or governmental agency or body having
jurisdiction over the Company or any of its properties.
No consent, approval, authorization or order of, or
filing with, any court or governmental agency or body is
required for the execution, delivery and performance of
this Agreement or for the consummation of the
transactions contemplated hereby, including the issuance
or sale of the Securities by the Company, except such as
may be required under the Act or state securities or blue
sky laws; or the by-laws or rules of the National
Association of Securities Dealers ("NASD") relating to
the corporate financing arrangements, and the Company has
- 5 -
<PAGE>
full power and authority to enter into this Agreement and
to authorize, issue and sell the Securities as
contemplated by this Agreement.
(ix) All of the issued and outstanding shares
of capital stock of the Company, including the
outstanding shares of Common Stock, are duly authorized
and validly issued, fully paid and nonassessable, have
been issued in compliance with all federal and state
securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the holders
thereof are not subject to personal liability by reason
of being such holders; the Securities which may be sold
hereunder by the Company have been duly authorized and,
when issued, delivered and paid for in accordance with
the terms hereof, will have been duly and validly issued
and will be fully paid and nonassessable, and the holders
thereof will not be subject to personal liability by
reason of being such holders; and the capital stock of
the Company, including the Common Stock, conforms to the
description thereof in the Registration Statement and
Prospectus. There are no preemptive rights or other
rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of
Common Stock pursuant to the Company's charter, by-laws
or any agreement or other instrument to which the Company
is a party or by which the Company is bound. Neither the
filing of the Registration Statement nor the offering or
sale of the Securities as contemplated by this Agreement
gives rise to any rights for or relating to the
registration of any shares of Common Stock or other
securities of the Company. All of the issued and
outstanding shares of capital stock of each of the
Company's subsidiaries (if any) have been duly and
validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise described in the
Registration Statement and Prospectus and except for any
directors' qualifying shares, the Company owns of record
and beneficially, free and clear of any security
interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding shares of
such stock. Except as described in the Registration
Statement and the Prospectus, there are no options,
warrants, agreements, contracts or other rights in
existence to purchase or acquire from the Company or any
subsidiary of the Company any shares of the capital stock
of the Company or any subsidiary of the Company. The
Company has an authorized and outstanding capitalization
as set forth in the Registration Statement and the
Prospectus.
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<PAGE>
(x) The Company and each of its subsidiaries
holds, and is operating in compliance with, all
franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any
governmental or self-regulatory body required for the
conduct of its business and all such franchises, grants,
authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and
effect; and the Company and each of its subsidiaries is
in compliance with all applicable federal, state, local
and foreign laws, regulations, orders and decrees,
including without limitation all export and re-export
laws, regulations, orders, decrees, permits and licenses.
(xi) The Company and its subsidiaries have
good and marketable title to all property and assets
described in the Registration Statement and Prospectus as
being owned by them, in each case free and clear of all
liens, claims, security interests or other encumbrances
except such as are described in the Registration
Statement and the Prospectus; the property held under
lease by the Company and its subsidiaries is held by them
under valid, subsisting and enforceable leases with only
such exceptions with respect to any particular lease as
do not interfere in any material respect with the conduct
of the business of the Company or its subsidiaries.
(xii) The Company and each of its subsidiaries
owns or possesses adequate rights to use all patents,
patent applications, trademarks, service marks, trade
names, trademark registrations, service mark
registrations, copyrights, licenses, inventions,
know-how, trade secrets and rights ("Intellectual
Property") necessary for the conduct of the business of
the Company and its subsidiaries as currently carried on
and as described in the Registration Statement and
Prospectus, including without limitation the Intellectual
Property described or referred to in the Prospectus as
being owned or used by the Company or any subsidiary.
Except as stated in the Registration Statement and
Prospectus, no activity engaged in by or aspect of the
business of the Company or any of its subsidiaries uses
and no other aspect of the business of the Company or any
of its subsidiaries will involve or give rise to any
infringement of or conflict with, or license or similar
fees for, any Intellectual Property or other similar
rights of others, and neither the Company nor any of its
subsidiaries has received any notice alleging, or is
aware of, any such infringement or conflict or that any
such fee is due. No officer or employee of the Company
or any of its subsidiaries is obligated under any
contract or subject to any judgment, decree or order of
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<PAGE>
any court or administrative agency that would interfere
with the use of such person's best efforts to promote the
interests of the Company and its subsidiaries or which
would conflict in any material respect with the business
of the Company and its subsidiaries as described in the
Registration Statement. No prior employer of any
employee of the Company or any of its subsidiaries has
any right to or interest in any inventions, improvements,
discoveries or other information assigned to the Company
or any of its subsidiaries. The Company and each of the
subsidiaries have taken reasonable security measures to
protect and enforce the secrecy, confidentiality and
value of its Intellectual Property.
(xiii) Neither the Company nor any of its
subsidiaries is in violation of its respective charter or
by-laws or in breach of or otherwise in default in the
performance of any material obligation, agreement or
condition contained in any bond, debenture, note,
indenture, loan agreement or any other material contract,
lease or other instrument to which it is subject or by
which any of them may be bound, or to which any of the
material property or assets of the Company or any of its
subsidiaries is subject.
(xiv) The Company and its subsidiaries have
filed on a timely basis all federal, state, local and
foreign income, franchise and other tax returns required
to be filed (or timely filed for extensions thereof) and
are not in default in the payment of any taxes which were
payable pursuant to said returns or any assessments with
respect thereto, other than any which the Company or any
of its subsidiaries is contesting in good faith.
(xv) The Company has not distributed and will
not distribute any prospectus or other offering material
in connection with the offering and sale of the
Securities other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act.
(xvi) The Securities have been conditionally
approved for listing on the Nasdaq National Market and,
on the date the Registration Statement became or becomes
effective, the Company's Registration Statement on Form
8-A or other applicable form under the Securities
Exchange Act of 1934, as amended, became or will become
effective.
(xvii) Other than the subsidiaries (if any) of
the Company listed in Exhibit 21.1 to the Registration
Statement, the Company owns no capital stock or other
equity or ownership or proprietary interest in any
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<PAGE>
corporation, partnership, association, trust or other
entity.
(xviii) The Company maintains a system of
internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed
in accordance with management's general or specific
authorization; (ii) transactions are recorded as
necessary to permit preparation of financial statements
in conformity with generally accepted accounting
principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance
with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and
appropriate action is taken with respect to any
differences.
(xix) To the best of the Company's knowledge,
each of the Company and its subsidiaries (A) is in
compliance with any and all applicable foreign, federal,
state and local laws and regulations relating to the
protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (B) has received all
permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business and
(C) is in compliance with all terms and conditions of any
such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure
to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the
business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as
a whole.
(xx) The Company is not, and upon receipt and
pending application of the net proceeds from the sale of
the Common Stock to be sold by the Company in the manner
described in the Prospectus will not be, an "investment
company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment
Company Act of 1940, as amended.
(xxi) Each of the Company and its subsidiaries
maintains insurance of the types and in the amounts that
the Company believes are reasonably adequate for its
business, including, but not limited to, insurance
covering real and personal property owned or leased by
the Company and its subsidiaries against theft, damage,
- 9 -
<PAGE>
destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in
full force and effect. The Company has not been refused
any insurance coverage sought or applied for; and the
Company has no reason to believe that it will not be able
to renew its existing insurance overage as and when such
coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its
business at a cost that would not materially and
adversely affect the condition (financial or otherwise),
earnings, operations or business of the Company and its
subsidiaries taken as a whole.
(xxii) Neither the Company nor any of its
subsidiaries has at any time during the last five (5)
years in any jurisdiction (i) made any unlawful
contribution to any candidate for office, or failed to
disclose fully any contribution in violation of law, or
(ii) made any payment to any governmental officer or
official or other person charged with similar public or
quasi-public duties other than payments required or
permitted by the laws of the United States.
(xxiii) Other than as contemplated by this
Agreement, the Company has not incurred any liability for
any finder's or broker's fee or agent's commission in
connection with the execution and delivery of this
Agreement or the consummation of the transactions
contemplated hereby.
(xxiv) Neither the Company nor any of its
affiliates is presently doing business with the
government of Cuba or with any person or affiliate
located in Cuba.
(xxv) The Company and its subsidiaries are not
involved in any labor dispute or disturbance nor, to the
knowledge of the Company, is any such dispute or
disturbance threatened.
(b) Each Selling Stockholder severally and not
jointly represents and warrants to, and agrees with, the Underwriters as
follows:
(i) Such Selling Stockholder is the record
and beneficial owner of, and has, and on the First
Closing Date and/or the Second Closing Date, as the case
may be (each as defined herein), will have, good, valid
and marketable title to the Securities to be sold by such
Selling Stockholder, free and clear of all security
interests, claims, liens, restrictions on
transferability, legends, proxies, equities or other
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encumbrances; and upon delivery of and payment for such
Securities hereunder, the Underwriters will acquire valid
and marketable title thereto, free and clear of any
security interests, claims, liens, restrictions on
transferability, legends, proxies, equities or other
encumbrances. Such Selling Stockholder is selling the
Securities to be sold by such Selling Stockholder for
such Selling Stockholder's own account, and no part of
the proceeds of such sale received by such Selling
Stockholder will inure, either directly or indirectly, to
the benefit of the Company other than as described in the
Registration Statement and Prospectus.
(ii) Such Selling Stockholder has duly
authorized, executed and delivered a Power of Attorney
and Custody Agreement ("Custody Agreement"), which
Custody Agreement is a valid and binding obligation of
such Selling Stockholder, to ________________________, as
Custodian (the "Custodian"); pursuant to the Custody
Agreement the Selling Stockholder has placed in custody
with the Custodian, for delivery under this Agreement,
the certificates representing the Securities to be sold
by such Selling Stockholder; and such certificates were
duly and properly endorsed in blank for transfer, or were
accompanied by all documents duly and properly executed
that are necessary to effect the transfer to the
Underwriters of title thereto, free of any legend,
restriction on transferability, proxy, lien or claim,
whatsoever.
(iii) Such Selling Stockholder has the power
and authority to enter into this Agreement and to sell,
transfer and deliver the Securities to be sold by such
Selling Stockholder; and such Selling Stockholder has
duly authorized, executed and delivered to
_______________ as attorney-in-fact (the
"Attorney-in-Fact"), an irrevocable power of attorney (a
"Power of Attorney") authorizing and directing the
Attorney-in-Fact, or any of them, to effect the sale and
delivery of the Securities being sold by such Selling
Stockholder, to enter into this Agreement and to take all
such other action as may be necessary hereunder.
(iv) This Agreement, the Custody Agreement
and the Power of Attorney have each been duly authorized,
executed and delivered by or on behalf of such Selling
Stockholder and each constitutes a valid and binding
agreement of such Selling Stockholder, enforceable
against such Selling Stockholder in accordance with its
terms, except as rights to indemnity or contribution
hereunder or thereunder may be limited by federal or
state securities laws and except as such enforceability
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<PAGE>
may be limited by bankruptcy, insolvency, reorganization
or laws affecting the rights of creditors generally and
subject to general principles of equity.
(v) Such Selling Stockholder owns the
Securities such Selling Stockholder is selling as an
individual or as a custodian for a minor, and not as a
trustee or in any other similar capacity.
(vi) Such Selling Stockholder has not
distributed and will not distribute any prospectus or
other offering material in connection with the offering
and sale of the Securities other than any Preliminary
Prospectus or the Prospectus or other materials permitted
by the Act to be distributed by such Selling Stockholder.
(vii) Such Selling Stockholder has not taken
and will not take, directly or indirectly any action
designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the
price of the Company's Common Stock, to facilitate the
sale or resale of the Securities.
(c) Any certificate signed by any officer of the
Company and delivered to you or to counsel for the Underwriters pursuant
to this Agreement shall be deemed a representation and warranty by the
Company to the Underwriters as to the matters covered thereby; any
certificate signed by or on behalf of any Selling Stockholder as such and
delivered to you or to counsel for the Underwriters pursuant to this
Agreement shall be deemed a representation and warranty by such Selling
Stockholder to the Underwriters as to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
-----------------------------------------
(a) On the basis of the representations, warranties
and agreements herein contained, but subject to the terms and conditions
herein set forth, the Company agrees to issue and sell ____ Firm Shares,
to the Underwriters, and the Underwriters severally agree to purchase from
the Company the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereto. The purchase price for each Firm Share
shall be $___ per share. The obligation of each Underwriter to the
Company shall be to purchase from the Company that number of Firm Shares
(to be adjusted by the Representatives to avoid fractional shares) which
represents the same proportion of the number of Firm Shares to be sold by
the Company pursuant to this Agreement as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto
represents to the total number of Firm Shares to be purchased by all
Underwriters pursuant to this Agreement. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided
in paragraphs (b) and (d) of this Section 3 and in Section 8 hereof, the
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<PAGE>
agreement of each Underwriter is to purchase only the respective number of
Firm Shares specified in Schedule I.
The Firm Shares will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the
purchase price therefor by certified or official bank check or other next
day funds payable to the order of the Company at the offices of Piper
Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
MN, 55402 or such other location as may be mutually acceptable, at 9:00
a.m. Minneapolis time on the third full business day (or, if the Firm
Shares are priced as contemplated by Rule 15c6-1(c) of the Exchange Act,
after 4:30 p.m., Washington, D.C. time, the fourth full business day)
following the date hereof, or at such other time as you and the Company
determine, such time and date of delivery being herein referred to as the
"First Closing Date." The Firm Shares, in definitive form and in such
denominations and registered in such names as you may request upon at
least two business days' prior notice to the Company, will be made
available for checking and packaging at the offices of Piper Jaffray Inc.,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, MN, 55402 or
such other location as may be mutually acceptable, at least one business
day prior to the First Closing Date. The Company shall instruct the bank
at which the check is deposited that the funds are not to be made
available to the Company (nor transferred from the account of the
Underwriters) prior to the first business day following the First Closing
Date. In this regard, the Company agrees not to deposit any such check in
the bank on which it is drawn earlier than the first business day
following the First Closing Date (if such deposit would have the purpose
or effect of receiving immediately available funds or earning interest on
such funds) and further agrees not to take any other action with the
purpose or effect of receiving immediately available funds or earning
interest on such funds until the first business day following the First
Closing Date. In the event of any breach of the foregoing, the Company
shall reimburse the Underwriters for the interest lost and any other
expenses borne by the Underwriters by reason of such breach.
(b) If for any reason one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section 9 or 10
hereof) to purchase and pay for the number of Firm Shares agreed to be
purchased by such Underwriter or Underwriters, the Company shall
immediately give notice thereof to each other Underwriter, and the non-
defaulting Underwriters shall have the right within 24 hours after the
receipt of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon
between the non-defaulting Underwriters and such purchasing Underwriter or
Underwriters and upon the terms herein set forth, all or any part of the
Firm Shares which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number of
Firm Shares which each non-defaulting Underwriter is otherwise obligated
to purchase under this Agreement shall be automatically increased on a pro
rata basis to absorb the remaining shares and portion which the defaulting
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Underwriter or Underwriters agreed to purchase; provided, however, that
the non-defaulting Underwriters shall not be obligated to purchase the
shares and portion which the defaulting Underwriter or Underwriters agreed
to purchase if the aggregate number of such shares exceeds 10% of the
total number of Firm Shares, which all Underwriters agreed to purchase
hereunder. If the total number of Firm Shares which the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two proceeding sentences, the Company
shall have the right to postpone the First Closing Date determined as
provided in Section 3(a) hereof for not more than seven business days
after the date originally fixed as the First Closing Date pursuant to said
Section 3(a) in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be
made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour period stated above for the purchase
of all of the Firm Shares which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without
further act or deed and without any liability on the part of the Company
to any non-defaulting Underwriter and without any liability on the part of
any non-defaulting Underwriter to the Company. Nothing in this paragraph
(b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter
under this Agreement.
(c) On the basis of the representations, warranties
and agreements herein contained, but subject to the terms and conditions
herein set forth, the Company and the Selling Stockholders hereby grant to
the several Underwriters an option to purchase all or any portion of the
Option Shares at the same purchase price as the Firm Shares, for use
solely in covering any over-allotments made by the Underwriters in the
sale and distribution of the Firm Shares. The option granted hereunder
may be exercised at any time (but not more than once) within 30 days after
the effective date of this Agreement upon notice (confirmed in writing) by
the Representatives to the Company and the Custodian setting forth the
aggregate number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the
certificates for the Option Shares are to be registered and the date and
time, as determined by you, when the Option Shares are to be delivered,
such time and date being herein referred to as the "Second Closing" and
"Second Closing Date", respectively; provided, however, that the Second
Closing Date shall not be earlier than the First Closing Date nor earlier
than the second business day after the date on which the option shall have
been exercised. If the option granted hereunder is exercised, the number
of Option Shares to be purchased by each Underwriter shall be the same
percentage of the total number of Option Shares to be purchased by the
several Underwriters as the number of Firm Shares to be purchased by such
Underwriter is of the total number of Firm Shares to be purchased by the
several Underwriters, as adjusted by the Representatives in such manner as
the Representatives deem advisable to avoid fractional shares. If the
option is exercised in part, the respective number of Option Shares to be
sold by the Company and the Selling Stockholders shall be in the same
proportion to the aggregate number of Option Shares to be sold as the
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maximum number of Option Shares to be sold by each of the Company and the
Selling Stockholders bears to the total number of Option Shares, as
adjusted by the Representatives in such a manner as they deem advisable to
avoid fractional shares. No Option Shares shall be sold and delivered
unless the Firm Shares previously have been, or simultaneously are, sold
and delivered.
The Option Shares will be delivered by the Company and
the Custodian to you for the accounts of the several Underwriters against
payment of the purchase price therefor by certified or official bank check
or other next day funds payable to the order of the Company or the
Custodian, as appropriate, at the offices of Piper Jaffray Inc., Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, MN, 55402 or such
other location as may be mutually acceptable at 9:00 a.m. Minneapolis time
on the Second Closing Date. The Option Shares in definitive form and in
such denominations and registered in such names as you have set forth in
your notice of option exercise, will be made available for checking and
packaging at the office of Piper Jaffray, Inc., Piper Jaffray Tower, 222
South 9th Street, Minneapolis, MN, 55402 or such other location as may be
mutually acceptable, at least one business day prior to the Second Closing
Date. The Company and the Custodian shall instruct the respective banks
at which the checks are deposited that the funds are not to be made
available to the Company or the Custodian, as the case may be, (nor
transferred from the account of the Underwriters) prior to the first
business day following the Second Closing Date. In this regard, each of
the Company and the Custodian agree not to deposit any such check in the
bank on which it is drawn earlier than the first business day following
the Second Closing Date (if such deposit would have the purpose or effect
of receiving immediately available funds or earning interest on such
funds) and further agrees not to take any other action with the purpose or
effect of receiving immediately available funds or earning interest on
such funds until the first business day following the Second Closing Date.
In the event of any breach of the foregoing, the Company shall reimburse
the Underwriters for the interest lost and any other expenses borne by the
Underwriters by reason of such breach.
(d) It is understood that you, individually and not
as Representatives of the several Underwriters, may (but shall not be
obligated to) make payment to the Company on behalf of any Underwriter for
the Securities to be purchased by such Underwriter. Any such payment by
you shall not relieve any such Underwriter of any of its obligations
hereunder. Nothing herein contained shall constitute any of the
Underwriters an unincorporated association or partner with the Company.
4. Covenants.
---------
(a) The Company covenants and agrees with the several
Underwriters as follows:
(i) If the Registration Statement has not
already been declared effective by the Commission, the
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Company will use its best efforts to cause the
Registration Statement and any post-effective amendments
thereto to become effective as promptly as possible; the
Company will notify you promptly of the time when the
Registration Statement or any post-effective amendment to
the Registration Statement has become effective or any
supplement to the Prospectus has been filed and of any
request by the Commission for any amendment or supplement
to the Registration Statement or Prospectus or additional
information; if the Company has elected to rely on Rule
430A of the Rules and Regulations or the filing of the
Prospectus is otherwise required under Rule 424(b) of the
Rules and Regulations, the Company will file a Prospectus
containing the information omitted therefrom pursuant to
such Rule 430A or otherwise with the Commission within
the time period required by, and otherwise in accordance
with the provisions of, Rule 424(b) and, if applicable,
Rule 430A of the Rules and Regulations; the Company will
prepare and file with the Commission, promptly upon your
request, any amendments or supplements to the
Registration Statement or Prospectus that, in your
opinion, may be necessary or advisable in connection with
the distribution of the Securities by the Underwriters;
and the Company will not file any amendment or supplement
to the Registration Statement or Prospectus to which you
or your counsel shall reasonably object by notice to the
Company after having been furnished a copy a reasonable
time prior to the filing.
(ii) The Company will advise you, promptly
after it shall receive notice or obtain knowledge
thereof, of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or suspending the use of the Prospectus, of the
suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the
initiation or threatening of any proceeding for any such
purpose; and the Company will promptly use its best
efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if
such a stop order should be issued.
(iii) Within the time during which a
prospectus relating to the Securities is required to be
delivered under the Act, the Company will comply with all
requirements imposed upon it by the Act, as now and
hereafter amended, and by the Rules and Regulations, as
from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Securities
as contemplated by the provisions hereof and the
Prospectus. If during such period any event occurs as a
result of which the Prospectus or any other prospectus
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relating to the Securities as then in effect would
include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements
therein, in the light of the circumstances then existing,
not misleading, or if during such period it is necessary
to amend the Registration Statement or supplement the
Prospectus to comply with the Act, the Company will
promptly notify you and will promptly amend the
Registration Statement or supplement the Prospectus (at
the expense of the Company) so as to correct such
statement or omission or effect such compliance.
(iv) The Company will use its best efforts to
qualify the Securities for offering and sale under the
securities laws of such jurisdictions as you reasonably
designate and to continue such qualifications in effect
so long as required for the distribution of the
Securities, except that the Company shall not be required
in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of
process in any state.
(v) The Company will furnish to the
Underwriters copies of the Registration Statement (four
of which will be signed and will include all exhibits),
and each Preliminary Prospectus, and all amendments and
supplements to such documents, in each case as soon as
available and in such quantities as you may from time to
time reasonably request. The Company will furnish the
Underwriters with copies of the Prospectus in Minneapolis
prior to 10:00 a.m., Minneapolis time, on the business
day next succeeding the date of this Agreement.
(vi) During a period of five years commencing
with the date hereof, the Company will furnish to the
Representatives, and to each Underwriter who may so
request in writing, copies of all periodic and special
reports furnished to the stockholders of the Company and
all information, documents and reports filed with the
Commission, the National Association of Securities
Dealers, Inc., the Nasdaq National Market or any
securities exchange.
(vii) The Company will make generally
available to its security holders as soon as practicable,
but in any event not later than 15 months after the end
of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a 12-month
period beginning after the effective date of the
Registration Statement that shall satisfy the provisions
of Section 11(a) of the Act and Rule 158 of the Rules and
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Regulations and will advise you in writing when such
statement has been made available.
(viii) The Company, whether or not the
transactions contemplated hereunder are consummated or
this Agreement is prevented from becoming effective under
the provisions of Section 9(a) hereof or is terminated,
will pay or cause to be paid (A) all expenses (including
transfer taxes allocated to the respective transferees)
incurred in connection with the delivery to the
Underwriters of the Securities, (B) all expenses and fees
(including, without limitation, fees and expenses of the
Company's accountants and counsel but, except as
otherwise provided below, not including fees of the
Underwriters' counsel) in connection with the
preparation, printing, filing, delivery, and shipping of
the Registration Statement (including the financial
statements therein and all amendments, schedules, and
exhibits thereto), the Securities, each Preliminary
Prospectus, the Prospectus, and any amendment thereof or
supplement thereto, and the printing, delivery, and
shipping of this Agreement and other underwriting
documents, including Blue Sky Memoranda, (C) all filing
fees and fees and disbursements of the Underwriters'
counsel incurred in connection with the qualification of
the Securities for offering and sale by the Underwriters
or by dealers under the securities or blue sky laws of
the states and other jurisdictions which you shall
designate in accordance with Section 4(d) hereof, (D) the
fees and expenses of any transfer agent or registrar, (E)
the filing fees incident to any required review by the
NASD of the terms of the sale of the Securities, (F)
listing fees, if any, and (G) all other costs and
expenses incident to the performance of its obligations
hereunder that are not otherwise specifically provided
for herein. If the sale of the Securities provided for
herein is not consummated by reason of action by the
Company pursuant to Section 9(a) hereof which prevents
this Agreement from becoming effective, or by reason of
any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be
performed, or because any other condition of the
Underwriters' obligations hereunder required to be
fulfilled by the Company is not fulfilled, the Company
will reimburse the several Underwriters for all
out-of-pocket disbursements (including fees and
disbursements of counsel) incurred by the Underwriters in
connection with their investigation, preparing to market
and marketing the Securities or in contemplation of
performing their obligations hereunder. The Company
shall not in any event be liable to any of the
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Underwriters for loss of anticipated profits from the
transactions covered by this Agreement.
(ix) The Company will apply the net proceeds
from the sale of the Securities to be sold by it
hereunder for the purposes set forth in the Prospectus
under "Use of Proceeds" and will file such reports with
the Commission with respect to the sale of the Securities
and the application of the proceeds therefrom as may be
required in accordance with Rule 463 of the Rules and
Regulations.
(x) The Company will not, without the prior
written consent of the Representatives, offer for sale,
sell, contract to sell, grant any option for the sale of
or otherwise issue or dispose of any Common Stock or any
securities convertible into or exchangeable for, or any
options or rights to purchase or acquire, Common Stock,
for a period of 180 days after the commencement of the
public offering of the Securities by the Underwriters,
except (i) to the Underwriters pursuant to this
Agreement, or (ii) upon the exercise of outstanding stock
options under the Company's 1996 Stock Incentive Plan
(the "1996 Stock Incentive Plan") described in the
Registration Statement and Prospectus. The Company will
not, without the prior consent of the Representatives or
unless subject to the Lock-Up Agreements (as more fully
described in Section 4(a)(xi) below), grant any new
option under the 1996 Stock Incentive Plan which becomes
exercisable during such 180 day period. The foregoing
restriction is expressly agreed to preclude the Company
from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or
result in such disposition during such 180 day period
even if such shares of Common Stock or such options or
rights to purchase or acquire Common Stock would be
disposed of by someone other than the Company. Such
prohibited hedging or other transactions would include,
without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any
right (including, without limitation, any put or call
option) with respect to any such shares of Common Stock
or such options or rights or with respect to any security
(other than a broad-based market basket or index) that
includes, relates to or derives any significant part of
its value from such shares of Common Stock or such
options or rights.
(xi) The Company either has caused to be
delivered to you or will cause to be delivered to you
prior to the effective date of the Registration Statement
true, accurate and complete copies of agreements
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<PAGE>
(collectively, the "Lock-Up Agreements"), in the form set
forth on Exhibit A hereto, from each of the Company's
directors, officers, stockholders and holders of
outstanding options and warrants to purchase Common Stock
on the date of this Agreement stating that such person
agrees that he or she will not, without your prior
written consent, directly or indirectly offer, sell,
contract to sell, make subject to any purchase option,
grant a security interest in or otherwise dispose of any
shares of Common Stock or rights to purchase Common
Stock, for a period of 180 days after commencement of the
public offering of the Securities by the Underwriters.
(xii) The Company has not taken and will not
take, directly or indirectly, any action designed to or
which might reasonably be expected to cause or result in,
or which has constituted, the stabilization or
manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities, and
has not effected any sales of Common Stock which are
required to be disclosed in response to Item 701 of
Regulation S-K under the Act which have not been so
disclosed in the Registration Statement.
(xiii) The Company will not incur any liability
for any finder's or broker's fee or agent's commission in
connection with the execution and delivery of this
Agreement or the consummation of the transactions
contemplated hereby.
(xiv) The Company will inform the Florida
Department of Banking and Finance at any time prior to
the consummation of the distribution of the Securities by
the Underwriters if it commences engaging in business
with the government of Cuba or with any person or
affiliate located in Cuba. Such information will be
provided within 90 days after the commencement thereof or
after a change occurs with respect to previously reported
information.
(xv) The Company will maintain a transfer
agent and, if necessary under the jurisdiction of
incorporation of the Company, a registrar (which may be
the same entity as the transfer agent) for its Common
Stock.
(xvi) The Company is familiar with the
Investment Company Act of 1940, as amended, and the rules
and regulations thereunder, and has in the past conducted
its affairs and will in the future conduct its affairs,
in such a manner so as to insure that the Company was not
and will not be an "Investment Company" within the
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meaning of the Investment Company Act of 1940 and the
rules and regulations promulgated thereunder.
(b) Each Selling Stockholder covenants and agrees
with the Underwriters as follows:
(i) Such Selling Stockholder will pay all
taxes, if any, on the transfer and sale, respectively, of
the Securities being sold by such Selling Stockholder and
except as otherwise agreed to by the Company and the
Selling Stockholder, the fees of such Selling
Stockholder's counsel if such Selling Stockholder elects
to be represented by counsel other than Company counsel;
provided, however, that each Selling Stockholder
severally agrees to reimburse the Company for any
reimbursement made by the Company to the Underwriters
pursuant to Section 4(a)(viii) hereof to the extent such
reimbursement resulted from the failure or refusal on the
part of such Selling Stockholder to comply under the
terms or fulfill any of the conditions of this Agreement,
which failure or refusal arises out of or results from
(A) the breach by such Selling Stockholder of any
representation or warranty herein or in such Selling
Stockholder's Power of Attorney, or (B) any act taken or
attempted to be taken by such Selling Stockholder in its
own right and in derogation of the authority granted by
such Selling Stockholder in such Power of Attorney.
(ii) The Securities to be sold by such
Selling Stockholder, represented by the certificates on
deposit with the Custodian pursuant to the Custody
Agreement of such Selling Stockholder, are subject to the
interest of the Underwriters and the other Selling
Stockholders; the arrangements made for such custody are,
except as specifically provided in the Custody Agreement,
irrevocable; and the obligations of such Selling
Stockholder hereunder shall not be terminated, except as
provided in this Agreement or in the Custody Agreement,
by any act of such Selling Stockholder, by operation of
law, whether by the liquidation, dissolution or merger of
such Selling Stockholder, by the death of such Selling
Stockholder, or by the occurrence of any other event. If
any Selling Stockholder should liquidate, dissolve or be
a party to a merger or if any other such event should
occur before the delivery of the Securities hereunder,
certificates for the Securities deposited with the
Custodian shall be delivered by the Custodian in
accordance with the terms and conditions of this
Agreement as if such liquidation, dissolution, merger or
other event had not occurred, whether or not the
Custodian shall have received notice thereof.
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<PAGE>
(iii) Such Selling Stockholder will not,
without your prior written consent, offer for sale, sell,
contract to sell, grant any option for the sale of or
otherwise dispose of any Common Stock or any securities
convertible into or exchangeable for, or any options or
rights to purchase or acquire, Common Stock, except (i)
to the Underwriters pursuant to this Agreement and (ii)
exercises of options, for the period of 180 days after
the commencement of the public offering of the Securities
by the Underwriters as set forth in such Selling
Stockholder's respective Lock-Up Agreement, which
Agreement has been delivered to you prior to the
effective date of the Registration Statement. Each
Selling Stockholder agrees and consents to the entry of
stop transfer instructions with the Company's transfer
agent against the transfer of shares of Common Stock held
by such Selling Stockholder, except in accordance with
the terms hereof.
(iv) Such Selling Stockholder has not taken
and will not take, directly or indirectly, any action
designed to or which might reasonably be expected to
cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the
sale or resale of the Securities.
(v) Such Selling Stockholder shall
immediately notify you if any event occurs, or of any
change in information relating to such Selling
Stockholder or the Company or any new information
relating to the Company or relating to any matter stated
in the Prospectus or any supplement thereto, which
results in the Prospectus (as supplemented) including an
untrue statement of a material fact or omitting to state
any material fact necessary to make the statements
therein, in light of the circumstances under which they
were made, not misleading to the extent such event or
change relates to written information specifically
provided to the Company by such Selling Stockholders for
use in the Prospectus.
5. Conditions of Underwriters' Obligations. The obligations
of the several Underwriters hereunder are subject to the accuracy, as of
the date hereof and at each of the First Closing Date and the Second
Closing Date (as if made at such Closing Date), of and compliance with all
representations, warranties and agreements of the Company and the Selling
Stockholders contained herein, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder and to the
following additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., Minneapolis time, on the date of this
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Agreement, or such later time and date as you, as Representatives of the
several Underwriters, shall approve and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been timely made; no
stop order suspending the effectiveness of the Registration Statement or
any amendment thereof shall have been issued; no proceedings for the
issuance of such an order shall have been initiated or threatened; and any
request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) No Underwriter shall have advised the Company
that the Registration Statement or the Prospectus, or any amendment
thereof or supplement thereto, contains an untrue statement of fact which,
in your opinion, is material, or omits to state a fact which, in your
opinion, is material and is required to be stated therein or necessary to
make the statements therein not misleading.
(c) Except as contemplated in the Prospectus,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any of
its subsidiaries shall have incurred any material liabilities or
obligations, direct or contingent, or entered into any material
transactions, or declared or paid any dividends or made any distribution
of any kind with respect to its capital stock; and there shall not have
been any change in the capital stock (other than a change in the number of
outstanding shares of Common Stock due to the issuance of shares upon the
exercise of outstanding options under the 1996 Stock Incentive Plan), or
any material change in the short-term or long-term debt of the Company, or
any issuance of options, warrants, convertible securities or other rights
to purchase the capital stock of the Company or any of its subsidiaries,
or any material adverse change or any development likely to involve a
prospective material adverse change (whether or not arising in the
ordinary course of business), in the general affairs, condition (financial
or otherwise), business, key personnel, property, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a
whole, that, in your judgment, makes it impractical or inadvisable to
offer or deliver the Securities on the terms and in the manner
contemplated in the Prospectus.
(d) On each Closing Date, there shall have been
furnished to you, as Representatives of the several Underwriters, the
opinion of Kirkpatrick & Lockhart L.L.P., counsel for the Company, dated
such Closing Date and addressed to you, in form and substance satisfactory
to you, to the effect that:
(i) Each of the Company and its subsidiaries
has been duly organized and is validly existing as a
corporation in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and
its subsidiaries has full corporate power and authority
to own its properties and conduct its business as
currently being carried on and as described in the
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Registration Statement and Prospectus, and is duly
qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which it owns or
leases real property or in which the conduct of its
business makes such qualification necessary and in which
the failure to so qualify would have a material adverse
effect upon the business, condition (financial or
otherwise) or properties of the Company and its
subsidiaries, taken as a whole.
(ii) The capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus under the caption
"Description of Capital Stock." All of the issued and
outstanding shares of the capital stock of the Company
have been duly authorized and validly issued and are
fully paid and nonassessable, and the holders thereof are
not subject to personal liability by reason of being such
holders. All outstanding shares of the Company's capital
stock and all outstanding options to purchase the
Company's capital stock were issued in compliance in all
material respects with the registration and qualification
requirements of all applicable federal and state
securities laws. The Securities to be issued and sold by
the Company hereunder have been duly authorized and, when
issued, delivered and paid for in accordance with the
terms of this Agreement, will have been validly issued
and will be fully paid and nonassessable, and the holders
thereof will not be subject to personal liability by
reason of being such holders. Except as otherwise stated
in the Registration Statement and Prospectus, there are
no preemptive rights or other rights to subscribe for or
to purchase, or any restriction upon the voting or
transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other
instrument known to such counsel to which the Company is
a party or by which the Company is bound. To the best of
such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise
to any rights for or relating to the registration of any
shares of Common Stock or other securities of the
Company.
(iii) All of the issued and outstanding shares
of capital stock of each of the Company's subsidiaries
have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise
described in the Registration Statement and Prospectus
and except for directors' qualifying shares, the Company
owns of record and beneficially, free and clear of any
security interests, claims, liens, proxies, equities or
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other encumbrances, all of the issued and outstanding
shares of such stock. To the best of such counsel's
knowledge, except as described in the Registration
Statement and Prospectus, there are no options, warrants,
agreements, contracts or other rights in existence to
purchase or acquire from the Company or any subsidiary
any shares of the capital stock of the Company or any
subsidiary of the Company.
(iv) The Registration Statement has become
effective under the Act and, to the best of such
counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been
instituted or, to the knowledge of such counsel,
threatened by the Commission; any required filing of the
Prospectus and any supplement thereto pursuant to Rule
424(b) of the Rules and Regulations has been made in the
manner and within the time period required by Rule
424(b).
(v) The descriptions in the Registration
Statement and Prospectus of statutes, legal and
governmental proceedings, contracts and other documents
are accurate and fairly present the information required
to be disclosed with respect thereto; and such counsel
does not know of any statutes or legal or governmental
proceedings required to be described in the Prospectus
that are not described as required, or of any contracts
or documents of a character required to be described in
the Registration Statement or Prospectus or included as
exhibits to the Registration Statement that are not
described or included as required.
(vi) The Company has full corporate power and
authority to enter into this Agreement and to issue, sell
and deliver to the several Underwriters the Securities to
be issued and sold by it hereunder. This Agreement has
been duly authorized, executed and delivered by the
Company and constitutes a valid, legal and binding
obligation of the Company enforceable against the Company
in accordance with its terms (except as rights to
indemnity and contribution hereunder may be limited by
federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of
equity); the execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a
default under, any statute, rule, regulation, license,
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authorization, approval or permit issued or promulgated
by any governmental agency or body having jurisdiction
over the Company or any agreement or instrument known to
such counsel to which the Company is a party or by which
it is bound or to which any of its property is subject,
the Company's charter or by-laws, or any order, judgment,
writ or decree known to such counsel of any court or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of its or their
respective properties; and no consent, approval,
authorization or order of, or filing with, any court or
governmental agency or body is required for the
execution, delivery and performance of this Agreement or
for the consummation of the transactions contemplated
hereby, including the issuance or sale of the Securities
by the Company, except such as may be required under the
Act or state securities laws.
(vii) To the best of such counsel's knowledge,
the Company and each of its subsidiaries holds, and is
operating in compliance in all material respects with,
all franchises, grants, authorizations, licenses,
permits, easements, consents, certificates and orders of
any governmental or self-regulatory body required for the
conduct of its business and all such franchises, grants,
authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and
effect.
(viii) To the best of such counsel's knowledge,
neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws. To the
best of such counsel's knowledge, neither the Company nor
any of its subsidiaries is in breach of or otherwise in
default in the performance of any material obligation,
agreement or condition contained in any bond, debenture,
note, contract, indenture, loan agreement, permit,
approval, registration, judgment, decree, order, statute,
rule or regulation or any other contract, lease or other
instrument to which it is subject or by which any of them
may be bound, or to which any of the material property or
assets of the Company or any of its subsidiaries is
subject.
(ix) The Registration Statement and the
Prospectus, and any amendment thereof or supplement
thereto, comply as to form in all material respects with
the requirements of the Act and the Rules and
Regulations, and on the basis of conferences with
officers of the Company, examination of documents
referred to in the Registration Statement and Prospectus
and such other procedures as such counsel deemed
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<PAGE>
appropriate, nothing has come to the attention of such
counsel which causes such counsel to believe that the
Registration Statement or any amendment thereof, at the
time the Registration Statement became effective and as
of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus
(as of its date and as of such Closing Date), as amended
or supplemented, includes any untrue statement of
material fact or omits to state a material fact necessary
to make the statements therein, in light of the
circumstances under which they were made, not misleading;
it being understood that such counsel need express no
opinion as to the financial statements and notes thereto,
financial statement schedules and other financial and
statistical data included in any of the documents
mentioned in this clause.
(x) Except as set forth in the Registration
Statement and Prospectus, such counsel knows of no
pending or threatened action, suit, claim, proceeding or
investigation before any court or governmental agency or
body that, if determined adversely to the Company, would
have a material adverse effect on the Company and its
subsidiaries, taken as a whole, or which would limit,
revoke, cancel, suspend, or cause not be renewed any
existing license, certificate, registration, approval or
permit from any state, federal or regulatory authority
that is material to the conduct of the business or the
Company and its subsidiaries, taken as a whole, as
presently conducted.
(xi) To the best of such counsel's knowledge,
no holders of shares of Common Stock or other securities
of the Company have registration rights with respect to
securities of the Company, other than as described in the
Prospectus.
(xii) The Company is not an "Investment
Company" within the meaning of the Investment Company Act
of 1940, as amended, and the rules and regulations
thereunder.
(xiii) The statements under the captions
"Certain Transactions", "Description of Capital Stock"
and "Shares Eligible for Future Sale" in the Prospectus
and in Items 14 and 15 of the Registration Statement,
insofar as such statements constitute a summary of
documents referred to therein or of matters of law, are
accurate summaries and fairly and correctly present the
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information called for with respect to such documents and
matters.
(xiv) The statements in the Prospectus under
the captions "Risk Factors Pending Litigation" and
"Business Legal Proceedings" fairly summarize the legal
matters, documents and proceedings referred to therein.
(xv) Such other matters as you may reasonably
request.
In rendering such opinion such counsel may rely (i) as to
matters of law other than the law of the District of Columbia and federal
law, upon the opinion or opinions of local counsel provided that the
extent of such reliance is specified in such opinion and that such counsel
shall state that such opinion or opinions of local counsel are
satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, to the extent such counsel
deems reasonable upon certificates of officers of the Company and its
subsidiaries provided that the extent of such reliance is specified in
such opinion. Copies of any opinion or certificate relied upon shall be
delivered to you, as Representatives of the Underwriters.
(e) On each Closing Date, there shall have been
furnished to you, as Representatives of the several Underwriters, the
opinion of ____________________, [intellectual property] counsel for the
Company, dated such Closing Date and addressed to you, in form and
substance satisfactory to you, to the effect that:
(i) To the best of such counsel's knowledge,
neither the Registration Statement nor the Prospectus
contains any untrue statement of a material fact with
respect to the Intellectual Property owned or used by the
Company or omits to state any material fact relating to
Intellectual Property owned or used by the Company that
is required to be stated in the Registration Statement or
the Prospectus or that is necessary to make the
statements therein not misleading;
(ii) To the best of such counsel's knowledge,
there are no legal or governmental proceedings pending
relating to Intellectual Property other than prosecution
by the Company of its patent applications before the
United States Patent and Trademark Office and appropriate
foreign government agencies, and to the best of such
counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or others;
(iii) The Company has duly and properly filed
patent applications and patent cooperation treaty
applications, listed or otherwise referred to in the
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<PAGE>
Prospectus under the caption "BUSINESS - Patents,
Proprietary Technology, Trademarks and Licenses";
(iv) Such counsel do not know of any
contracts or other documents relating to the Company's
Intellectual Property of a character required to be filed
as an exhibit to the Registration Statement or required
to be described in the Registration Statement or the
Prospectus that are not filed or described as required.
(v) To the best of such counsel's knowledge,
the Company is not infringing or otherwise violating any
trademarks, trade names, patents, mask works, copyrights,
licenses, trade secrets or other intellectual property
rights of others and, to the best of such counsel's
knowledge, there are no infringements by others of any of
the Company's Intellectual Property which in the judgment
of such counsel would have a material adverse effect upon
the business condition (financial or otherwise) or
properties of the Company and its subsidiaries, taken as
a whole; and
(vi) To the best of such counsel's knowledge,
the Company owns or possesses sufficient licenses or
other rights to use all Intellectual Property necessary
to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus.
In rendering such opinion, such counsel may, to the
extent stated therein, rely as to matters of fact on certificates of
officers of the Company, copies of which shall be attached to the opinion.
In rendering such opinion, such counsel need not have conducted any
independent investigation or conducted searches to locate any third party
patents, mask works, copyrights or other intellectual property rights that
might impact the Company's activities, unless such counsel has knowledge
of any actual, potential or alleged infringement.
(f) On each Closing Date, there shall have been
furnished to you the opinion of ____________________, dated such Closing
Date and addressed to you, to the effect that:
(i) Immediately prior to the Closing Date,
each of the Selling Stockholders was the sole registered
owner of the Securities to be sold by such Selling
Stockholder; upon registration of the Securities in the
names of the Underwriters in the stock records of the
Company, the Underwriters will acquire all the rights of
such Selling Stockholder in the Securities (assuming the
Underwriters purchased the Securities in good faith and
without notice of an adverse claim), free and clear of
any adverse claim, lien in favor of the Company and
restrictions on transfer imposed by the Company.
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<PAGE>
(ii) The Attorney-in-Fact has the power and
authority to enter into the Custody Agreement, the Power
of Attorney and this Agreement and to perform and
discharge such Selling Stockholder's obligations
thereunder and hereunder; and this Agreement, the Custody
Agreements and the Powers of Attorney have been duly and
validly authorized, executed and delivered by (or by any
Attorney-in-Fact, or any of them, on behalf of) the
Selling Stockholders.
In rendering such opinion such counsel may rely as to matters of
fact, to the extent such counsel deems reasonable upon certificates of the
Attorney-in-Fact or Selling Stockholders. Copies of any opinion or
certificate relied upon shall be delivered to you.
(g) On each Closing Date, there shall have been
furnished to you, as Representatives of the several Underwriters, such
opinion or opinions from Goodwin, Procter & Hoar LLP, counsel for the
several Underwriters, dated such Closing Date and addressed to you, with
respect to the formation of the Company, the validity of the Securities,
the Registration Statement, the Prospectus and other related matters as
you reasonably may request, and such counsel shall have received such
papers and information as they request to enable them to pass upon such
matters.
(h) On each Closing Date you, as Representatives of
the several Underwriters, shall have received a letter of Coopers &
Lybrand, L.L.P., dated such Closing Date and addressed to you, confirming
that they are independent public accountants within the meaning of the Act
and are in compliance with the applicable requirements relating to the
qualifications of accountants under Rule 2-01 of Regulation S-X of the
Commission, and stating, as of the date of such letter (or, with respect
to matters involving changes or developments since the respective dates as
of which specified financial information is given in the Prospectus, as of
a date not more than five days prior to the date of such letter), the
conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently with the execution of this Agreement, and the effect of the
letter so to be delivered on such Closing Date shall be to confirm the
conclusions and findings set forth in such prior letter. All such letters
shall be in a form reasonably satisfactory to the Representatives and
counsel thereto.
(i) On each Closing Date, there shall have been
furnished to you, as Representatives of the Underwriters, a certificate,
dated such Closing Date and addressed to you, signed by the chief
executive officer and by the chief financial officer of the Company, to
the effect that (and you shall be satisfied that as of such date):
(i) The representations and warranties of
the Company in this Agreement are true and correct as if
made at and as of such Closing Date, and the Company has
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<PAGE>
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to such Closing Date;
(ii) The Registration Statement has become
effective and no stop order or other order suspending the
effectiveness of the Registration Statement or any
amendment thereof or the qualification of the Securities
for offering or sale has been issued, and no proceeding
for that purpose has been instituted or, to the best of
their knowledge, is contemplated by the Commission or any
state or regulatory body; and
(iii) The signers of said certificate have
carefully examined the Registration Statement and the
Prospectus, and any amendments thereof or supplements
thereto, and (A) such documents contain all statements
and information required to be included therein, the
Registration Statement, or any amendment thereof, does
not contain any untrue statement of a material fact or
omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading, and the Prospectus, as amended or
supplemented, does not include any untrue statement of
material fact or omit to state a material fact necessary
to make the statements therein, in light of the
circumstances under which they were made, not misleading,
(B) since the effective date of the Registration
Statement there has occurred no event required to be set
forth in an amended or supplemented prospectus which has
not been so set forth, (C) subsequent to the respective
dates as of which information is given in the
Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has incurred any
material liabilities or obligations, direct or
contingent, or entered into any material transactions,
not in the ordinary course of business, or declared or
paid any dividends or made any distribution of any kind
with respect to its capital stock, and except as
disclosed in the Prospectus, there has not been any
change in the capital stock (other than a change in the
number of outstanding shares of Common Stock due to the
issuance of shares upon the exercise of outstanding
options under the 1996 Stock Incentive Plan), or any
material change in the short-term or long-term debt, or
any issuance of options, warrants, convertible securities
or other rights to purchase the capital stock, of the
Company, or any of its subsidiaries, or any material
adverse change or any development involving a prospective
material adverse change (whether or not arising in the
ordinary course of business), in the general affairs,
condition (financial or otherwise), business, key
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<PAGE>
personnel, property, prospects, net worth or results of
operations of the Company and its subsidiaries, taken as
a whole, and (D) except as stated in the Registration
Statement and the Prospectus, there is not pending, or,
to the knowledge of the Company, threatened or
contemplated, any action, suit or proceeding to which the
Company or any of its subsidiaries is a party before or
by any court or governmental agency, authority or body,
or any arbitrator, which might result in any material
adverse change in the condition (financial or otherwise),
business, prospects or results of operations of the
Company and its subsidiaries, taken as a whole.
(j) On each Closing Date, there shall have been
furnished to you a certificate or certificates, dated such Closing Date
and addressed to you, signed by each of the Selling Stockholders or any of
such Selling Stockholder's Attorney-in-Fact to the effect that the
representations and warranties of such Selling Stockholder contained in
this Agreement are true and correct as if made at and as of such Closing
Date, and that such Selling Stockholder has complied with all the
agreements and satisfied all the conditions on such Selling Stockholder's
part to be performed or satisfied at or prior to such Closing Date.
(k) The Company shall have furnished to you and
counsel for the
Underwriters such additional documents, certificates and evidence as you
or they may have reasonably requested.
(l) The Common Stock shall be approved for quotation,
subject to issuance of the Firm Shares, on the Nasdaq National Market.
All such opinions, certificates, letters and other
documents will be in compliance with the provisions hereof only if they
are satisfactory in form and substance to you and counsel for the
Underwriters. The Company will furnish you with such conformed copies of
such opinions, certificates, letters and other documents as you shall
reasonably request.
6. Indemnification and Contribution.
--------------------------------
(a) The Company and each Selling Stockholder,
severally and not jointly, agree to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company and/or such Selling
Stockholder, as the case may be), insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based
upon any breach of any representation, warranty or covenant of the Company
and/or such Selling Stockholder, as the case may be, herein contained or
any untrue statement or alleged untrue statement of a material fact
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<PAGE>
contained in the Registration Statement, including the information deemed
to be a part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A, if applicable, any Preliminary Prospectus, the
Prospectus, or 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, and will reimburse each Underwriter for any legal
or other expenses reasonably incurred by it in connection with
investigating or defending against such loss, claim, damage, liability or
action; provided, however, that neither the Company nor any Selling
Stockholder shall be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by you, or
by any Underwriter through you, specifically for use in the preparation
thereof.
Notwithstanding anything in this Agreement, (i) each Selling
Stockholder shall only be liable to the extent such untrue statement or
omission was made in reliance on and in conformity with written
information furnished by the Selling Stockholder in such capacity to the
Company or the Underwriters specifically for use in the preparation of the
Registration Statement and Prospectus; and (ii) the aggregate liability of
any Selling Stockholder for indemnification and contribution pursuant to
this Agreement shall not exceed an amount equal to the proceeds of the
sale of the Securities by the Selling Stockholder after deducting all
underwriting discounts and commissions and other costs and expenses paid
or to be paid by such Selling Stockholder in connection with or relating
to the transactions contemplated by this Agreement.
In addition to their other obligations under this Section
6(a), the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising
out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 6(a), it will reimburse each
Underwriter on a monthly basis for all reasonable legal fees or other
expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters
for such expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriter that received such payment shall promptly return
it to the party or parties that made such payment, together with interest,
compounded daily, at the Prime Rate, as defined below. Any such interim
reimbursement payments which are not made to an Underwriter within 30 days
of a request for reimbursement shall bear interest determined on the basis
of the prime rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by _______________
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<PAGE>
(the "Prime Rate") from the date of such request. This indemnity
agreement shall be in addition to any liabilities which the Company may
otherwise have.
(b) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company and each Selling Stockholder
against any losses, claims, damages or liabilities to which the Company
and such Selling Stockholder may become subject, under the Act or
otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of such Underwriter), insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or 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, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by you, or by such
Underwriter through you, specifically for use in the preparation thereof,
and will reimburse the Company and such Selling Stockholder for any legal
or other expenses reasonably incurred by the Company or any such Selling
Stockholder in connection with investigating or defending against any such
loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party
under subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to
be made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve the
indemnifying party from any liability that it may have to any indemnified
party. In case any such action shall be brought against any indemnified
party, and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in, and,
to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the sole judgment of the
Representatives, it is advisable for the Underwriters to be represented as
a group by separate counsel, the Representatives shall have the right to
employ a single counsel to represent the Representatives and all
Underwriters who may be subject to liability arising from any claim in
respect of which indemnity may be sought by the Underwriters under
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<PAGE>
subsection (a) of this Section 6, in which event the reasonable fees and
expenses of such separate counsel shall be borne by the indemnifying party
or parties and reimbursed to the Underwriters as incurred (in accordance
with the provisions of the third paragraph in subsection (a) above). An
indemnifying party shall not be obligated under any settlement agreement
relating to any action under this Section 6 to which it has not agreed in
writing.
(d) If the indemnification provided for in this
Section 6 is unavailable or insufficient to hold harmless an indemnified
party under subsection (a) or (b) above, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party
as a result of the losses, claims, damages or liabilities referred to in
subsection (a) or (b) above, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from the
offering of the Securities or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the
Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and
the Selling Stockholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Selling Stockholders or the Underwriters and the parties'
relevant intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The Company, the
Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (d) were to be
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to in the
first sentence of this subsection (d). The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred
to in the first sentence of this subsection (d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending against any action or claim
which is the subject of this subsection (d). Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
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<PAGE>
alleged untrue statement or omission or alleged omission. The aggregate
liability of any Selling Stockholder for indemnification and contribution
pursuant to this Agreement shall not exceed an amount equal to the
proceeds of the sale of the Securities by the Selling Stockholder after
deducting all underwriting discounts and commissions and other costs and
expenses paid or to be paid by such Selling Stockholder in connection with
or relating to the transactions contemplated by this Agreement. 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 such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion
to their respective underwriting obligations and not joint.
(e) The obligations of the Company and the Selling
Stockholders under this Section 6 shall be in addition to any liability
which the Company and the Selling Stockholders may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any,
who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section 6 shall be in addition
to any liability that the respective Underwriters may otherwise have and
shall extend, upon the same terms and conditions, to each director of the
Company (including any person who, with his consent, is named in the
Registration Statement as about to become a director of the Company), to
each officer of the Company who has signed the Registration Statement and
to each person, if any, who controls the Company or any Selling
Stockholder within the meaning of the Act.
7. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties, and agreements of the Company
and the Selling Stockholders herein or in certificates delivered pursuant
hereto, and the agreements of the several Underwriters and the Company and
the Selling Stockholders contained in Section 6 hereof, shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter or any controlling person thereof,
or the Company or any of its officers, directors, or controlling persons,
or any Selling Stockholder or any controlling person thereof, and shall
survive delivery of, and payment for, the Securities to and by the
Underwriters hereunder.
8. Substitution of Underwriters.
----------------------------
(a) If any Underwriter or Underwriters shall fail to
take up and pay for the amount of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder, upon tender of such Firm Shares
in accordance with the terms hereof, and the amount of Firm Shares not
purchased does not aggregate more than 10% of the total amount of Firm
Shares set forth in Schedule I hereto, the remaining Underwriters shall be
obligated to take up and pay for (in proportion to their respective
underwriting obligations hereunder as set forth in Schedule I hereto
except as may otherwise be determined by you) the Firm Shares that the
withdrawing or defaulting Underwriters agreed but failed to purchase.
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<PAGE>
(b) If any Underwriter or Underwriters shall fail to
take up and pay for the amount of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder, upon tender of such Firm Shares
in accordance with the terms hereof, and the amount of Firm Shares not
purchased aggregates more than 10% of the total amount of Firm Shares set
forth in Schedule I hereto, and arrangements satisfactory to you for the
purchase of such Firm Shares by other persons are not made within 36 hours
thereafter, this Agreement shall terminate. In the event of any such
termination the Company shall not be under any liability to any
Underwriter (except to the extent provided in 4(a)(vii) and Section 6
hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this
Agreement, to purchase the amount of Firm Shares agreed by such
Underwriter to be purchased hereunder) be under any liability to the
Company (except to the extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by any other party or
parties, the Representatives or the Company shall have the right to
postpone the First Closing Date for not more than seven business days in
order that the necessary changes in the Registration Statement, Prospectus
and any other documents, as well as any other arrangements, may be
effected. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 8.
9. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at 10:00
a.m., Minneapolis time, on the first full business day following the
effective date of the Registration Statement, or at such earlier time
after the effective time of the Registration Statement as you in your
discretion shall first release the Securities for sale to the public;
provided, that if the Registration Statement is effective at the time this
Agreement is executed, this Agreement shall become effective at such time
as you in your discretion shall first release the Securities for sale to
the public. For the purpose of this Section, the Securities shall be
deemed to have been released for sale to the public upon release by you of
the publication of a newspaper advertisement relating thereto or upon
release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter
specified before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company may prevent
this Agreement from becoming effective without liability of any party to
any other party, except that the provisions of Section 4(a)(vii),m Section
4(b)(i) and Section 6 hereof shall at all times be effective.
(b) You, as Representatives of the several
Underwriters, shall have the right to terminate this Agreement by giving
notice as hereinafter specified at any time at or prior to the First
Closing Date, and the option referred to in Section 3(b), if exercised,
may be cancelled at any time prior to the Second Closing Date, if (i) the
- 37 -
<PAGE>
Company or the Selling Stockholders shall have failed, refused or been
unable, at or prior to such Closing Date, to perform any agreement on its
part to be performed hereunder, (ii) any other condition of the
Underwriters' obligations hereunder is not fulfilled, (iii) since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there shall have occurred any material
adverse change or any development involving prospective material adverse
change in or affecting the condition, financial or otherwise, of the
Company's subsidiaries taken as a whole or the earnings, business affairs,
management, or business prospects of the Company and its subsidiaries,
taken as a whole whether or not arising in the ordinary course of
business, (iv) any federal or state statute, regulation, rule or order of
any court or other governmental authority shall have been enacted,
published, decreed or otherwise promulgated which in your reasonable
opinion materially and adversely affects or will materially and adversely
affect the business or operations of the Company or any of its
subsidiaries, (v) trading on the New York Stock Exchange or the American
Stock Exchange shall have been wholly suspended, (vi) minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required, on the New York Stock Exchange or the
American Stock Exchange, by such Exchange or by order of the Commission or
any other governmental authority having jurisdiction, (vii) a banking
moratorium shall have been declared by Federal, New York, Minnesota or
Maryland authorities, or (viii) there has occurred any material adverse
change in the financial markets in the United States or an outbreak of
major hostilities (or an escalation thereof) in which the United States is
involved, a declaration of war by Congress, any other substantial national
or international calamity or any other event or occurrence of a similar
character shall have occurred since the execution of this Agreement that,
in your judgment, makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Securities. Any such
termination shall be without liability of any party to any other party
except that the provisions of Section 4(a)(viii), Section 4(b)(i) and
Section 6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this
Section, the Company and an Attorney-in-Fact, on behalf of the Selling
Stockholders, shall be notified promptly by you by telephone or telegram,
confirmed by letter. If the Company elects to prevent this Agreement from
becoming effective, you and an Attorney-in-Fact, on behalf of the Selling
Stockholders, shall be notified by the Company by telephone or telegram,
confirmed by letter.
10. Default by the Company. If the Company shall fail at the
First Closing Date to sell and deliver the number of Securities which it
is obligated to sell hereunder, then this Agreement shall terminate
without any liability on the part of any non-defaulting party.
No action taken pursuant to this Section shall relieve
the Company from liability, if any, in respect of such default.
- 38 -
<PAGE>
11. Information Furnished by Underwriters. The statements
set forth in the last paragraph of the cover page (to the extent related
to the Underwriters) and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written
information furnished by or on behalf of the Underwriters referred to in
Section 2 and Section 6 hereof.
12. Notices. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to
the Underwriters, shall be mailed, telegraphed or delivered to the
Representatives c/o Piper Jaffray Inc., Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402, except that notices given to
an Underwriter pursuant to Section 6 hereof shall be sent to such
Underwriter at the address stated in the Underwriters' Questionnaire
furnished by such Underwriter in connection with this offering; if to the
Company, shall be mailed, telegraphed or delivered to it at 1803 Research
Blvd., Suite 305, Rockville, Maryland 20850 Attention: James F. Chen,
President and Chief Executive Officer, if to any of the Selling
Stockholders, at the address of the Attorneys-in-Fact as set forth in the
Powers of Attorney, or in each case to such other address as the person to
be notified may have requested in writing. All notices given by telegram
shall be promptly confirmed by letter. Any party to this Agreement may
change such address for notices by sending to the parties to this
Agreement written notice of a new address for such purpose.
13. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and
their respective successors and assigns and the controlling persons,
officers and directors referred to in Section 6. Nothing in this
Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in
respect of this Agreement or any provision herein contained. The term
"successors and assigns" as herein used shall not include any purchaser,
as such purchaser, of any of the Securities from any of the several
Underwriters.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the substantive laws of the State of
Minnesota.
[Remainder of this page is left intentionally blank]
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<PAGE>
Please sign and return to the Company the enclosed
duplicates of this letter whereupon this letter will become a binding
agreement between the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
VIRTUAL OPEN NETWORK
ENVIRONMENT CORPORATION
By:_______________________________
Name:
Title:
SELLING STOCKHOLDERS
By:______________________________
Attorney-in-Fact
Confirmed as of the date first
above mentioned, on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
PIPER JAFFRAY INC.
By:_______________________________
Name:
Title:
VOLPE, WELTY & COMPANY
By:_______________________________
Name:
Title:
- 40 -
<PAGE>
SCHEDULE I
Number of
Underwriter Firm Shares (1)
----------- ---------------
Piper Jaffray Inc.
Volpe, Welty & Company
Total ..................._________
=========
_________________
(1) The Underwriters may purchase up to an additional _______ Option
Shares, to the extent the option described in Section 3 of the
Agreement is exercised, in the proportions and in the manner
described in the Agreement.
- 41 -
<PAGE>
SCHEDULE II
Number of
Name of Selling Stockholder Option Shares
--------------------------- -------------
-------------
Total =============
- 42 -
<PAGE>
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
Virtual Open Network Environment Corp., a corporation organized
and existing under the laws of the State of Delaware, hereby certifies as
follows:
1. The name of the Corporation is Virtual Open Network
Environment Corporation, originally incorporated on October 24, 1994.
2. Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware, this Amended and Restated
Certificate of Incorporation restates and integrates and further amends
the provision of the Certificate of Incorporation of this Corporation.
3. The text of the Amended and Restated Certificate of
Incorporation is hereby restated and amended to read in its entirety as
follows:
FIRST. The name of the Corporation is Virtual Open Network
Environment Corporation.
SECOND. The registered agent of the Corporation is The
Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801, County of New Castle.
THIRD. The purpose of the Corporation is to engage in any lawful
act or activity for which Corporations may be organized under the General
Corporation Law of Delaware.
FOURTH. The Corporation is authorized to issue two classes of
shares to be designated Common Stock and Preferred Stock, respectively.
The total number of shares of stock the Corporation shall have authority
to issue is seventy million (70,000,000) shares: fifty million
(50,000,000) shares of Common Stock with par value of $0.001 per share,
and twenty million (20,000,000) shares of Preferred Stock with par value
of $0.001 per share.
The Corporation shall from time to time in accordance with the
laws of the State of Delaware increase the authorized amount of its Common
Stock if at any time the number of shares of Common Stock remaining
unissued and available for issuance shall not be sufficient to permit
conversion of the Preferred Stock.
FIFTH. The Board of Directors is authorized, subject to
limitations prescribed by law and the provisions of Article Fourth, to
provide, by resolution or resolutions and by filing a certificate pursuant
<PAGE>
to the applicable law of the State of Delaware, for the issuance of
additional classes of stock and one or more series of stock within any
such class, and the number of shares to be included in such classes and
series, which classes and series may have such voting powers, full or
limited, or no voting powers, and such powers, designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof as shall be stated in
such resolution or resolutions and certificate.
SIXTH. The names of the directors of the Corporation are
James F. Chen, Charles Chen, Maxine Loh and H.H. Cheng. The mailing
address for each is 1803 Research Boulevard, Suite 305, Rockville, MD
20850.
SEVENTH. The Corporation is to have perpetual existence.
EIGHTH. Elections of directors need not be by written ballot
except and to the extent provided in the bylaws of the Corporation.
(a) The number of directors constituting the entire Board
shall be not less than three nor more than seven as fixed from time to
time by vote of a majority of the entire Board, provided, however, that
the number of directors shall not be reduced so as to shorten the term of
any director at the time in office.
(b) The Board of Directors shall be divided into three
classes, as nearly equal in numbers as the then total number of directors
constituting the entire Board permits with the term of office of one class
expiring each year. At the annual meeting of stockholders in 1996,
directors of the first class shall be elected to hold office for a term
expiring at the next succeeding annual meeting, directors of the second
class shall be elected to hold office for a term expiring at the second
succeeding annual meeting and directors of the third class shall be
elected to hold office for a term expiring at the third succeeding annual
meeting. Any vacancies in the Board of Directors for any reason, and any
directorships resulting from any increase in the number of directors,
shall be filled by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors
so chosen shall hold office until the next election of the class for which
such directors shall have been chosen and until their successors shall be
elected and qualified. Notwithstanding the foregoing, and except as
otherwise required by law, whenever the holders of any one or more series
of Preferred Stock shall have the right, voting separately as a class, to
elect one or more directors of the Corporation, the terms of the director
or directors elected by such holders shall expire at the next succeeding
annual meeting of stockholders. Subject to the foregoing, at each annual
meeting of stockholders the successors to the class of directors whose
term shall then expire shall be elected to hold office for a term expiring
at the third succeeding annual meeting.
(c) Notwithstanding any other provisions of this Certificate
of Incorporation or the bylaws of the Corporation (and notwithstanding the
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<PAGE>
fact that some lesser percentage may be specified by law, this Certificate
of Incorporation or the bylaws of the Corporation), any director or the
entire Board of Directors of the Corporation may be removed at any time,
but only for cause and only by the affirmative vote of the holders of 75%
or more of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for
this purpose as one class) cast at a meeting of the stockholders called
for that purpose.
NINTH. The Corporation shall indemnify, to the fullest extent
now or hereafter permitted by law, each director, officer employee or
agent (including each former director, officer, employee or agent) of the
Corporation who was or is made a party to or a witness in or is threatened
to be made a party to or a witness in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was an authorized
representative of the Corporation, against all expenses (including
attorneys' fees and disbursements), judgments, fines (including excise
taxes and penalties) and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding.
A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that this provision shall
not eliminate or limit the liability of a director to the extent that such
elimination or limitation of liability is expressly prohibited by the
General Corporation Law of the State of Delaware as in effect at the time
of the alleged breach of fiduciary duty by such director.
Any repeal or modification of this Article Ninth by the
stockholders of the Corporation shall not adversely affect any right or
protection existing at the time of such repeal or modification to which
any person may be entitled under this Article Ninth. The rights conferred
by this Article Ninth shall not be exclusive of any other right which the
Corporation may now or hereafter grant, or any person may have or
hereafter acquire, under any statute, provision of this Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise. The rights conferred by this Article Ninth shall
continue as to any person who has ceased to be a director or officer of
the Corporation and shall inure to the benefit of the heirs, executors and
administrators of such person.
For the purposes of this Article Ninth, the term "authorized
representative" shall mean a director, officer, employee or agent of the
Corporation or of any subsidiary of the Corporation, or a trustee,
custodian, administrator, committeeman or fiduciary of any employee
benefit plan established and maintained by the Corporation or by any
subsidiary of the Corporation; or a person who is or was serving another
corporation, partnership, joint venture, trust or other enterprise in any
of the foregoing capacities at the specific written request of the
Corporation.
- 3 -
<PAGE>
The affirmative vote of the holders of at least 75% of the
outstanding shares of the capital stock of the Corporation, given in
person or by proxy, at a meeting called for the purpose of voting thereon
shall be required to amend or repeal this Article Ninth.
TENTH. All corporate powers and authority of the Corporation
shall be vested in and exercised by the Board of Directors except as
otherwise provided by statute, this Certificate of Incorporation or the
bylaws of the Corporation. In furtherance and not in limitation of that
power, the Board of Directors shall have the power to make, adopt, alter,
amend and repeal from time to time the bylaws of the Corporation, subject
to the right of the stockholders entitled to vote with respect thereto to
adopt, alter, amend and repeal bylaws made by the Board of Directors;
provided, however, that the bylaws shall not be adopted, altered, amended
or repealed by the stockholders of the Corporation except by the vote of
the holders of not less than 75% of the outstanding shares of stock
entitled to vote upon the election of directors. The Board of Directors
also shall have the authority to determine whether and to what extent, and
at what times and places, and under what conditions and regulations the
accounts and books of the Corporation (other than the stock ledger) shall
be open to inspection by stockholders. No stockholder shall have any
right to inspect any account, book, or document of the Corporation except
to the extent permitted by statute or the bylaws.
ELEVENTH. The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statue, and
all rights conferred upon the officers, directors and stockholders are
granted subject to this reservation.
TWELFTH:
(a) Vote Required for Certain Business Combinations.
The affirmative vote of not less than 75% of the outstanding
shares of "Voting Stock" (as hereinafter defined) held by
stockholders other than an "Interested Person" (as hereinafter
defined) shall be required for the approval or authorization of
any "Business Combination" (as hereinafter defined) of the
Corporation with any Interested Person; provided, however, that
the 75% voting requirement shall not be applicable if:
(1) the "Disinterested Directors" (as
hereinafter defined) of the Corporation have expressly
approved such Business Combination either in advance of
or subsequent to such Interested Person's having become
an Interested Person; or
(2) the following requirements are satisfied:
(i) the cash or Fair Market Value (as hereinafter
defined) of the property, securities or "Other
Consideration" (as hereinafter defined) per share to be
received by holders of the Voting Stock of the
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<PAGE>
Corporation in the Business Combination is not less than
the "Fair Price" (as hereinafter defined) of such share
of Voting Stock of the Corporation; and (ii) the
Interested Person shall not have received the benefit,
directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges
or other financial assistance or any tax credits or other
tax advantages provided by the Corporation, whether in
anticipation of or in connection with such Business
Combination or otherwise; and (iii) a proxy or
information statement describing the proposed Business
Combination and complying with the requirements of the
Securities Exchange Act of 1934 ("Exchange Act") and the
General Rules and Regulations thereunder shall be mailed
to the stockholders of the Corporation at least 30 days
prior to the consummation of a Business Combination
(whether or not such proxy or information statement is
required to be mailed pursuant to the Exchange Act).
(b) Tender for Remaining Shares. Every Interested
Person, within 60 days of the date they became an Interested
Person, must offer to purchase all of the outstanding shares of
capital stock of the Corporation at the Fair Price of such stock
unless a majority of the Disinterested Directors have expressly
approved in advance the transaction through which the Interested
Person became an Interested Person. The tender offer must comply
with the Exchange Act and applicable General Rules and
Regulations thereunder, notwithstanding that such Act or such
Rules and Regulations may not require such compliance. The
expenses of making the tender offer shall be borne in whole by
the Interested Person. Consideration due a shareholder who
tenders a share of the Corporation's capital stock in response to
such tender offer shall be paid within 60 days of the date on
which such stock is tendered.
(c) Definitions. The following definitions shall apply
to certain words and terms used in this Article TWELFTH:
(1) Business Combination. The term "Business
Combination" means (i) any merger or consolidation of the
Corporation or an "Affiliate" (as defined in Rule 12b-2
of the General Rules and Regulations under the Exchange
Act as in effect at the date of the adoption of this
Article TWELFTH by the stockholders of the Corporation)
of the Corporation with or into an Interested Person,
(ii) any sale, lease, exchange, transfer or other
disposition, including without imitation, a mortgage or
any other security device, of all or any "Substantial
Part" (as hereinafter defined) of the assets either of
the Corporation (including without limitation, any voting
securities of an Affiliate) or of an Affiliate of the
Corporation to an Interested Person, (iii) any merger or
- 5 -
<PAGE>
consolidation of an Interested Person with or into the
Corporation or an Affiliate of the Corporation, (iv) any
sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage or other
security device, of all or any Substantial Part of the
assets of an Interested Person to the Corporation or an
Affiliate of the Corporation, (v) the issuance or
transfer by the Corporation or any Affiliate of the
Corporation of any securities of the Corporation or of an
Affiliate of the Corporation to an Interested Person,
(vi) any reclassification of securities,
recapitalization, merger or consolidation of the
Corporation with any of its Affiliates, or other
comparable transaction involving the Corporation that
would have the effect of increasing the voting power to
any Interested Person with respect to Voting Stock of the
Corporation, (vii) any plan or proposal for the
liquidation or dissolution of the Corporation or of an
Affiliate of the Corporation proposed by or on behalf of
an Interested Person, and (viii) any agreement, contract
or other arrangement providing for any of the
transactions described in this definition of Business
Combination.
(2) Interested Person. The term "Interested
Person" means and includes any individual, Corporation,
partnership or other person or entity which, together
with its Affiliates and "Associates" (as defined in Rule
12b-2 of the General Rules and Regulations under the
Exchange Act as in effect at the date of the adoption of
this Article TWELFTH by the stockholders of the
Corporation), is the "Beneficial Owner" (as defined in
Rule 13d-3 of the General Rules and Regulations under the
Exchange Act as in effect at the date of the adoption of
this Article TWELFTH by the stockholders of the
Corporation) of in the aggregate 25 percent or more of
the outstanding shares of Voting Stock of the
Corporation, and any Affiliate or Associate of any such
individual, Corporation, partnership or other person or
entity. Notwithstanding paragraph three (3) of this
section (c), any share of Voting Stock of the Corporation
that any Interested Person has the right to acquire at
any time (notwithstanding that Rule 13d-3 of the General
Rules and Regulations under the Exchange Act deems such
shares to be beneficially owned only if such right may be
exercised within 60 days) pursuant to any agreement, or
upon exercise of conversion rights, warrants or options
or otherwise, shall be deemed to be beneficially owned by
the Interested Person and to be outstanding for purposes
of this definition. An Interested Person shall be deemed
to have acquired a share of the Voting Stock of the
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<PAGE>
Corporation at the time when such Interested Person
became the Beneficial Owner thereof.
(3) Voting Stock. The term "Voting Stock" means
all of the outstanding shares of common stock of the
Corporation and any outstanding shares of preferred stock
of the Corporation entitled to vote on each matter on
which the holders of record of common stock of the
Corporation shall be entitled to vote, and each reference
to a proportion of shares of Voting Stock shall refer to
such proportion of the votes entitled to be cast by such
shares voting together as a single class.
(4) Disinterested Director. The term
"Disinterested Director" means a director who is
unaffiliated with an Interested Person and who (i) was a
member of the Board of Directors of the Corporation
immediately prior to the time that the Interested Person
involved in a Business Combination became an Interested
Person, or (ii) was elected or appointed to fill a
vacancy after the date the Interested Person became an
Interested Person by a majority of the Disinterested
Directors then on the Board of Directors, or (iii) was
recommended to succeed a Disinterested Director by a
majority of the Disinterested Directors then on the Board
of Directors.
(5) Fair Price. The term "Fair Price" means
with respect to each class and series of capital stock of
the Corporation, the highest of (i) the amount determined
by a majority of the Continuing Directors to be the
highest per share price or price equivalent paid at any
time by the Interested Person for any share or shares of
that class and series of capital stock of the
Corporation, or (ii) the Fair Market Value of the stock,
or, (iii) if applicable, the highest preferential amount
per share to which holders of shares of such class or
series of capital stock are entitled in the event of any
liquidation, dissolution or winding up of the
Corporation. In determining the Fair Price, all
purchases by the Interested Person shall be taken into
account regardless of whether the shares were purchased
before or after the Interested Person became an
Interested Person. Also, the Fair Price includes any
brokerage commissions, transfer taxes and soliciting
dealers' fees paid by the Interested Person with respect
to the shares of capital stock of the Corporation
acquired by the Interested Person. The Fair Price of
capital stock of the Corporation purchased by an
Interested Person also includes interest compounded
annually from the date an Interested Person became an
Interested Person through the date the Business
- 7 -
<PAGE>
Combination is consummated at the publicly announced
prime rate of interest of Citibank, N.A. less the
aggregate amount of any cash dividends paid and the Fair
Market Value of any dividends paid in other than cash on
each share of capital stock in the same time period, in
an amount up to but not exceeding the amount of interest
so payable per share of capital stock. The consideration
to be received by holders of a particular class and
series of outstanding capital stock shall be, at the
option of each stockholder of the Corporation, in cash or
in the form of consideration the Interested Person used
to acquire the largest number of shares of such class and
series of capital stock previously acquired by it. The
price determined in accordance with this paragraph shall
be subject to appropriate adjustment in the event of any
stock dividend, stock split, combination of shares or
similar event.
(6) Fair Market Value. The term "Fair Market
Value" means in the case of securities, the highest
closing sale price during the 30-day period immediately
preceding the date in question of a share of such
security on the Composite Tape for New York Stock
Exchange Listed Securities, or, if such security is not
listed on such exchange, on the principal United States
securities exchange registered under the Securities
Exchange Act of 1934 on which such security is listed,
or, if such security is not listed on any such exchange,
the highest closing bid quotation with respect to such
security during the 30-day period preceding the date in
question on the National Association of Securities
Dealers, Inc. Automated Quotations System or any system
then in use, or if no such quotations are available, the
value on the date in question of the security as
determined by the Board of Directors in good faith. The
Fair Market Value of property other than cash or stock
shall be as determined by the Board of Directors in good
faith. In the case of Business Combinations, the Fair
Market Value, as determined above, shall be determined
with reference to higher of the fair market value on the
date the Interested Person became an Interested Person or
on the date of the first public announcement of the
Business combination. In the case of Tenders for
Remaining Shares, the Fair Market Value, as determined
above, shall be determined with reference to the higher
of the fair market value on the date the Interested
Person became an Interested Person or on the last
business day before the date upon which the Interested
Person makes the tender offer.
(7) Substantial Part. The term "Substantial
Part" means more than 20 percent of the Fair Market Value
- 8 -
<PAGE>
of the total consolidated assets of the Corporation and
its Affiliates taken as a whole as of the end of its most
recent fiscal year ended prior to the date the
termination is being made.
(8) Other Consideration. The term "Other
Consideration" includes, without limitation, common stock
or other capital stock of the Corporation retained by its
existing stockholders other than Interested Persons or
other parties to such Business Combination in the event
of a Business Combination in which the Corporation is the
surviving Corporation.
(d) Fiduciary Obligations of Interested Persons.
Nothing contained in this Article TWELFTH shall be construed to
relieve any Interested Person from any fiduciary obligation
imposed by law.
(e) Determinations by the Disinterested Directors. In
making any determinations, the Disinterested Directors may, at
the expense of the Corporation, engage such persons, including
investment banking firms and the independent accountants who have
reported on the most recent financial statements of the
Corporation, and utilize employees and agents of the Corporation,
who will, in the judgment of the Disinterested Directors, be of
assistance to the Disinterested Directors. Any determinations
made by the Disinterested Directors, acting in good faith on the
basis of such information and assistance as was then reasonably
available for such purposes, shall be conclusive and binding upon
the Corporation and its stockholders, including any Interested
Person.
(f) Amendments to the Article. Notwithstanding any
other provision of this Certificate of Incorporation or the
bylaws of the Corporation and notwithstanding that absent this
provision, a lesser percentage may be sufficient under applicable
law, the affirmative vote of not less than 75% of the Voting
Stock held by stockholders other than an Interested Person shall
be required to amend, repeal or adopt any provisions inconsistent
with this Article TWELFTH.
- 9 -
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed under the seal of the Corporation this
10 day of January, 1996.
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
/s/ James F. Chen
---------------------------------------
James F. Chen, President
[Seal]
Attest:
/s/ Charles Chen
--------------------------------
Charles Chen, Secretary
- 10 -
<PAGE>
<PAGE>
AMENDED BYLAWS
OF
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
ARTICLE I.
----------
MEETINGS OF SHAREHOLDERS
------------------------
Section 1.1 Places of Meetings. All meetings of the share-
holders shall be held at such place, either within or without the State of
Delaware, as from time to time may be fixed by the Board of Directors.
Section 1.2 Annual Meeting. The annual meeting of the
shareholders for the election of Directors and transaction of such other
business as may come before the meeting shall be held at such date and
time as shall be designated from time to time by the Board of Directors
and stated in the notice of the meeting. Unless otherwise designated by
the Board of Directors, the annual meeting shall be held on the first
Friday of the month of June.
Section 1.3 Special Meetings. A special meeting of the
shareholders for any purpose or purposes may be called at any time by the
President or the Chairman of the Board or a majority of the Board of
Directors as prescribed by statute.
Section 1.4 Notice of Meetings. Written notice of all
meetings shall be given, stating the place, date, and hour of the meeting
and stating the place within the city or other municipality or community
at which the list of stockholders of the Corporation may be examined. The
notice of a meeting shall in all instances state the purpose or purposes
for which the meeting is called. If any action is proposed to be taken
which would, if taken, entitle stockholders to receive payment for their
shares of stock, the notice shall include a statement of that purpose and
to that effect. Except as otherwise provided by the General Corporation
Law of the State of Delaware, a copy of the notice of any meeting shall be
given, personally or by telex, telefax, telephone, telegraph or postal
mail, not less than ten days nor more than sixty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have
been waived, and directed to each stockholder at his record address or at
such other address which he/she may have furnished by request in writing
to the Secretary of the Corporation. Notice by mail shall be deemed to be
given when deposited, with postage thereon prepaid, in the U.S. mail. If
a meeting is adjourned to another time, not more than thirty days hence,
and/or to another place, and if an announcement of the adjourned time
and/or place is made at the meeting, it shall not be necessary to give
notice of the adjourned meeting. Notice need not be given to any
stockholder who submits a written waiver of notice by him/her before or
after the time stated therein. Attendance of a person at a meeting of
<PAGE>
stockholders shall constitute a waiver of notice of such meeting, except
when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any meeting of the
stockholders need be specified in any written waiver of notice.
Section 1.5 Quorum. Any number of shareholders together
holding at least a majority of the outstanding shares of stock entitled to
vote with respect to the business to be transacted, who shall be present
in person or represented by proxy at any meeting duly called, shall
constitute a quorum for the transaction of business. If less than quorum
shall be in attendance at the time for which a meeting shall have been
called, the meeting may be adjourned from time to time by a majority of
the shareholders present or represented by proxy without notice other than
by announcement at the meeting.
Section 1.6 Proxies and Voting. Each shareholder shall, at
every meeting of the shareholders, be entitled to one vote in person or by
proxy for each share of capital stock having voting power held by such
shareholder as of the record date set for the meeting. All action
requiring the approval of the shareholders shall be authorized by a
majority of the votes cast except where the General Corporation Laws of
the State of Delaware prescribes a different percentage of votes and/or a
different exercise of voting power. A proxy shall be authorized by an
instrument in writing, dated and signed by the shareholder entitled to
vote or his duly authorized attorney-in-fact. The original or a facsimile
of the proxy shall be filed with the Secretary. All voting may be taken
either by voice vote or by written ballots, except where otherwise
required by law. No proxy shall be voted after three years from its date,
unless the proxy provides for a longer period.
Section 1.7 Inspectors and Judges. The person presiding at
any meeting of shareholders may, but need not, appoint one or more
inspectors or judges. Each inspector or judge, if any, before entering
upon the discharge of his/her duties, shall take and sign an oath
faithfully to execute the duties of inspector or judge at such meeting
with strict impartiality and according to the best of his/her ability.
The inspectors or judges, if any, shall determine the number of shares of
stock outstanding and the voting power of each, the shares of stock
represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders. On request of the
person presiding at the meeting, the inspector or inspectors or judge or
judges, if any, shall make a report in writing of any challenge, question
or matter determined by him/her or them and execute a certificate of any
fact found by him/her or them.
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Section 1.8 Written Consent. Any action required or
permitted by law to be taken at a shareholders' meeting may be taken
without a meeting, without action by the Board of Directors, without prior
notice, and without a vote, if consents in writing setting forth the
action are signed by all shareholders entitled to vote upon the action.
Written consents, in order to be valid, must be delivered by postal mail
or telefax to the Secretary of the Corporation for inclusion in the
minutes or filing in the corporate minutes. Every written consent shall
bear the signature of each shareholder who makes the consent and the date
upon which the consent was signed.
ARTICLE II.
-----------
DIRECTORS
---------
Section 2.1 Powers of Directors. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors, which shall exercise all powers of the Corporation, except as
otherwise expressly provided by law, the Certificate of Incorporation, or
these Bylaws.
Section 2.2 Number of Directors. The number of Directors
which shall constitute the Board of Directors shall be not more than
seven. The first Board of Directors shall consist of the following four
Directors: James F. Chen, Charles Chen, Maxine Loh and H.H. Cheng.
Thereafter, within the limits specified above, the number of Directors
shall be determined by resolution of the Board of Directors at the annual
meeting.
Section 2.3 Election of Directors. Directors shall be
elected at each annual meeting of shareholders to succeed those Directors
whose terms have expired and to fill any vacancies then existing.
Directors shall hold their offices for terms of one year and until their
successors are elected on a staggered basis as provided for in the Amended
and Restated Certificate of Incorporation.
Section 2.4 Advance Notice of Nomination of Directors.
Unless a Director is nominated by a member of the Board of Directors, no
person shall be nominated or elected as a Director unless the Board
receives written notice of his nomination not less than 120 calendar days
in advance of the anniversary date of the Corporation's previous year's
annual meeting of stockholders.
Section 2.5 Newly Created Directorships and Vacancies. Newly
created directorships resulting from an increase in the authorized number
of Directors shall be filled by vote of a majority of the Directors then
in office and shall be distributed among the three classes of Directors so
that, as nearly as possible, each class will consist of an equal number of
Directors. Vacancies in the Board of Directors however occurring shall be
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<PAGE>
filled by a majority of the Directors then in office, although less than a
quorum, or by a sole remaining Director. A Director chosen to fill a
vacancy shall have the same term as that Director's predecessor.
Section 2.6 Removal and Resignation of Directors. Directors
may be removed from office only for cause at a meeting called expressly
for that purpose by the vote of shareholders holding not less than 75% of
the shares entitled to vote at an election of Directors or by a vote of a
majority of the Directors. Directors may resign at any time upon written
notice to the Corporation. Such resignation shall become effective upon
receipt and need not be accepted by the Board to become effective.
ARTICLE III.
-----------
BOARD OF DIRECTORS' MEETINGS
---------------------------
Section 3.1 Regular Meetings. The first meeting of the Board
of Directors shall be held at such time and place as shall be fixed by the
vote of the shareholders at the annual meeting and no notice of such
meeting shall be necessary to the newly elected Directors in order legally
to constitute the meeting, provided a quorum shall be present, or it may
convene at such place and time as shall be fixed by the consent in writing
of all the Directors. Thereafter regular meetings of the Board of
Directors shall be held at such time and place as the Board of Directors
shall from time to time determine. No notice shall be required for any
such regular meetings.
Section 3.2 Special Meetings. Special meetings of the Board
of Directors, or the reconvening of any regular meeting, may be called by
one-third of the Directors then in office, or by the President or Chairman
of the Board, by giving: (1) no less than one day's actual notice to each
Director by oral communication, computer e-mail, telegram, telefax or
telex; or (2) no less than 10 days' notice to each Director by registered
letter.
Section 3.3 Participation in Meetings by Telephone. Members
of the Board of Directors, or any Committee thereof, may participate in
meetings by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can
hear each other and be heard.
Section 3.4 Unanimous Written Consent. Any action required
or permitted to be taken at any meeting of the Board of Directors, or of
any Committee thereof, may be taken without a meeting if all the members
of the Board of Directors or Committee consent thereto in writing and the
writing is filed in the minute book of the Corporation.
Section 3.5 Quorum. Except as otherwise provided in these
Bylaws, a majority of the Directors in office shall constitute a quorum
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<PAGE>
for the transaction of business, and the vote of a majority of the
Directors present at any meeting at which a quorum is present shall be the
act of the Board of Directors. If a quorum shall fail to attend any
meeting, a majority of those Directors present may adjourn and reconvene
the meeting at another place, date, or time, without further notice other
than an announcement at the originally scheduled meeting.
Section 3.6 Conduct of Business. The Board of Directors
shall have the authority to make, and from time to time to alter, amend
and supplement, rules of conduct for its own meetings. Any Director shall
have the right to put any item on the agenda of any meeting of the Board
of Directors.
ARTICLE IV.
-----------
COMMITTEES
----------
Section 4.1 Establishment. The Board of Directors, by
resolution adopted by a majority of the number of Directors fixed by these
Bylaws, may establish such Committees of the Board as it may deem
advisable, consisting of not less than two Directors; and the members,
terms and authority of such Committees shall be as set forth in the
resolutions establishing the same; provided, however, no Committee of the
Board of Directors shall have the power to (1) amend the Certificate of
Incorporation; (2) adopt an agreement of merger or consolidation; (3)
recommend to the shareholders the sale, lease or exchange of all or
substantially all of the Corporation's assets; (4) recommend to the
shareholders a dissolution of the Corporation or a revocation of a
dissolution; (5) amend the Bylaws of the Corporation; (6) declare a
dividend; (7) authorize the issuance of stock; (8) change the number of
Directors or fill a vacancy in the Board of Directors or in any Committee;
or (9) perform any other function prohibited by law. Persons who are not
directors may attend and participate in Committee meetings in an advisory
capacity at the invitation of the Committee, but they may not vote.
The Board of Directors may establish rules and regulations for
the conduct of the proceedings of any Committee and may appoint the
chairman of the Committee and a secretary of the Committee. To the extent
that the Board of Directors does not exercise these powers of appointment,
they may be exercised by the Committee, subject to the power of the Board
of Directors to change the Committee's action. Each Committee may be
terminated at the will of the Board of Directors.
Section 4.2 Meetings. Regular and special meetings of any
Committee established pursuant to this Article may be called and held
subject to the same requirements with respect to time, place and notice as
are specified in these Bylaws for regular and special meetings of the
Board of Directors.
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<PAGE>
Section 4.3 Quorum and Manner of Acting. A majority of the
members of any Committee serving at the time of any meeting thereof shall
constitute a quorum for the transaction of business at such meeting. The
action of a majority of those members present at a Committee meeting at
which a quorum is present shall constitute the act of the Committee.
Section 4.4 Term of Office. Members of any Committee shall
be elected as above provided and shall hold office so long as they serve
as Directors or until their successors are elected by the Board of
Directors or until such Committee is dissolved by the Board of Directors.
Section 4.5 Resignation and Removal. Any member of a
Committee may resign at any time by giving written notice of the member's
intention to do so to the President, the Chairman of the Board or the
Secretary of the Corporation, or may be removed, with or without cause, at
any time by such vote of the Board of Directors as would suffice for the
member's election.
Section 4.6 Vacancies. Any vacancy occurring in a Committee
resulting from any cause whatever may be filled by a majority of the
number of Directors fixed by these Bylaws or by a majority of the
remaining Committee members.
ARTICLE V.
----------
OFFICERS
--------
Section 5.1 General. The executive officers of the
Corporation shall be chosen by the Board of Directors and shall be a
Chairman of the Board and Chief Executive Officer, a President, a
Treasurer, a Secretary, and such Vice-Presidents as the Board of Directors
may from time to time determine. Other offices may be established by the
Board of Directors from time to time. Any number of offices may be held
by the same person. Any number of offices may be left temporarily vacant
at the option of the Board of Directors. The initial officers shall be as
follows: President, James F. Chen; and Secretary and Treasurer, Charles
Chen. Thereafter, the officers shall be reaffirmed or replaced at the
first meeting of the Board of Directors subsequent to each annual meeting
of shareholders, unless the Board of Directors determines, upon appointing
an officer, that he/she shall serve for a different term. All executive
officers have a right to act as a second signatory on contracts when such
a second signature is required by law.
Section 5.2 Chairman of the Board and Chief Executive
Officer. The Chairman of the Board and Chief Executive Officer shall
preside at all meetings of the shareholders and the Board of Directors,
shall see that all orders and resolutions of the Board of Directors are
carried into effect, and shall have general active management of the
business of the Corporation. Except where, by law, the signature of the
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<PAGE>
President is required, the Chairman of the Board and Chief Executive
Officer shall possess the same power as the President to sign all
certificates, contracts, and other instruments of the Corporation which
may be authorized by the Board of Directors.
Section 5.3 President. The President, in the absence of the
Chairman of the Board and Chief Executive Officer, shall be preside at all
meetings of the shareholders and of the Board of Directors, shall have
general and active management of the business of the Corporation, and
shall see that all orders and resolutions of the Board of Directors are
carried into effect. The President shall have authority to sign all stock
certificates, contracts and other instruments of the Corporation, and to
affix the seal of the Corporation to such documents. The President has
the authority to delegate portions of his power to one or more Vice
Presidents. The President shall perform such other functions as the Board
of Directors may from time to time require.
Section 5.4 Chief Operating Officer. The Chief Operating
Officer shall perform such functions as the Board of Directors may from
time to time require.
Section 5.5 Executive Vice President and Vice President. In
the absence of the President, an Executive Vice President or a Vice
President (as one or more may be appointed by the Board of Directors; or
in the absence of such delegation appointed by the President) shall
perform the duties of the President. The Vice Presidents shall not have
the power to sign stock certificates, contracts or other instruments of
the Corporation, nor to affix the seal of the Corporation to such
documents, unless authorized to do so by the President. The Vice
Presidents shall perform such other functions as the Board of Directors
may from time to time require.
Section 5.6 Treasurer. The Treasurer shall have
responsibility for the Corporation's funds and for keeping full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation. The Treasurer shall deposit, or authorize deposit of, all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors.
The Treasurer shall disburse, or authorize disbursements of, the
funds of the Corporation as necessary and proper for the operation of the
Corporation, taking proper receipts for such disbursements; provided,
however, that the Board of Directors shall, from time to time, set a
maximum expenditure amount, and disbursement of sums over and above such
amount shall require a resolution of the Board of Directors. The
Treasurer may authorize another officer of the Corporation or an
accountant retained by the Corporation to disburse sums of the Corporation
necessary and proper for the daily operating expenses of the Corporation,
up to a maximum amount which the Treasurer shall set from time to time,
which will not exceed any maximum expenditure amount set by the Board of
Directors. The Treasurer shall not be required to be bonded.
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<PAGE>
The Treasurer shall, when required, render to the President or
the Board of Directors an account of the transactions and of the financial
condition of the Corporation. The accounting of the Corporation shall be
maintained according to generally accepted accounting principles. The
Treasurer shall have the authority to retain, from time to time, an
attorney or accountant to review the accounts, prepare the tax returns of
the Corporation, and perform such other services as may be necessary and
proper to maintain the financial records of the Corporation.
The Treasurer shall perform such other functions as the Board of
Directors may from time to time require.
Section 5.6 Secretary. The Secretary shall issue all
authorized notices for, and shall prepare and maintain custody of the
minutes of, all meetings of the shareholders and the Board of Directors.
The Secretary shall have charge of the corporate books. The Secretary
shall have custody of the seal of the Corporation and shall have authority
to affix the seal to any instrument requiring it and to attest to the
authenticity of that seal by the Secretary's signature. The Secretary
shall authenticate records of the Corporation. The Secretary shall sign
all stock certificates. The Secretary shall perform such other functions
as the Board of Directors may from time to time require.
Section 5.7 Delegation of Authority. The Board of Directors
may, from time to time, delegate the powers and duties of any executive
officer to any other executive officer, and may designate the powers of
non-executive officers to any other officers or agents, notwithstanding
the provisions hereof.
Section 5.8 Compensation. The salaries of all officers and
agents of the Corporation shall be fixed by the Board of Directors or set
forth in employment agreements or other compensation arrangements approved
by the Board.
Section 5.9 Removal. Any officer may be removed at any time,
with or without cause, by the Board of Directors.
ARTICLE VI.
-----------
INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES
-------------------------------------------------------------
Section 6.1 Right to Indemnification. Each person who was or
is made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he/she is or was
a Director, officer, agent, or employee of the Corporation shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the
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<PAGE>
same exists or may hereafter be amended, against any expenses, (including
attorneys fees), judgments, fines and amounts paid in settlement, actually
and reasonably incurred by such person in connection therewith.
Notwithstanding the above, no Director shall be indemnified nor held
harmless in violation of the provisions set forth in the Certificate of
Incorporation; and no Director, officer, agent, or employee shall be
indemnified nor held harmless by the Corporation unless:
(1) In the case of conduct in his/her official
capacity with the Corporation, he/she acted in good faith and in
a manner he/she reasonably believed to be in the best interests
of the Corporation;
(2) In all other cases, his/her conduct was at least
not opposed to the best interests of the Corporation nor in
violation of the Certificate, Bylaws or any agreement entered
into by the Corporation; and
(3) In the case of any criminal proceeding, he/she
had no reasonable cause to believe that his/her conduct was
unlawful.
Section 6.2 Right to Advancement of Expenses. The right to
indemnification conferred in Section 6.1 of this Article shall include the
right to be paid by the Corporation the expenses incurred in defending any
such proceeding in advance of its final disposition; provided, however,
that such an advancement of expenses shall be made only upon delivery to
the Corporation of (1) a statement of his/her good faith belief that
he/she has met the standard of conduct described in Section 6.1; and (2)
an undertaking by or on behalf of the indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision
that he/she is not entitled to be indemnified for such expenses.
Section 6.3 Determination and Authorization to Indemnify.
The Corporation may not indemnify a Director under Section 6.1 unless
authorized after a determination has been made that indemnification of the
Director is permissible in the circumstances because he/she has met the
standard of conduct in Section 6.1. This determination shall be made by
the Board of Directors by a majority vote of a quorum consisting of
Directors not at the time parties to the proceeding.
Section 6.4 Non-Exclusivity of Rights. The rights to
indemnification and to the advancement of expenses conferred in this
Article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, agreement, vote of shareholders or disinterested
Directors, or otherwise.
Section 6.5 Insurance. The Corporation may maintain
insurance, at its expense, to protect itself and any Director, officer,
employee or agent of the Corporation against any expense, liability or
loss.
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<PAGE>
ARTICLE VII.
------------
STOCK
-----
Section 7.1 Issuance. The Corporation may issue shares of
capital stock of any class or series now or hereafter authorized in the
Certificate of Incorporation, in accordance with the authority granted by
a Board of Directors resolution.
Section 7.2. Stock Certificates. Each shareholder shall be
entitled to a certificate signed in the name of the Corporation by the
President and by the Secretary, and affixed with the seal of the
Corporation. The Treasurer may sign in lieu of the Secretary. Signatures
on the certificate may be facsimiles. In case any officer who has signed
or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer before such certificate is issued, it may
be issued by the Corporation with the same effect as if he/she were such
officer at the date of its issue.
Section 7.3 Transfer of Stock. Transfer of stock may be made
only on the transfer ledger of the Corporation kept at an office of the
Corporation or in the possession of the Secretary or the corporate
transfer agent. Upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 7.4 Record Date. In order that the Corporation may
determine the shareholders entitled to notice of or to vote at any meeting
of shareholders, or to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any rights in
respect of any change, conversion or exchange of stock, the Board of
Directors may fix a record date. Such record date shall not precede the
date on which the Board of Directors' resolution fixing the record date is
adopted, and shall not be more than 70 days prior to the meeting or such
other action as above described.
If no record date is fixed by the Board of Directors for
determination of who is entitled to vote or receive notice of a
shareholders' meeting, the record date shall be at the close of business
on the day preceding the day on which notice is given; or if notice is
waived, at the close of business on the day preceding the day on which the
meeting is held. If no record date is set for determining shareholders
entitled to receive a dividend or other distribution or allotment of
rights or to exercise any rights in respect to any change, conversion or
exchange of stock, the record date shall be at the close of business on
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<PAGE>
the day on which the Board of Directors adopts a resolution relating
thereto.
When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this Section, such
determination shall apply to any adjournment thereof unless the Board of
Directors fixes a new record date, which it shall do if the meeting is
adjourned to a date more than 120 days after the date fixed for the
original meeting.
In order that the Corporation may determine the shareholders
entitled to consent in writing to corporate action taken without a
meeting, the Board of Directors may fix a record date, which shall not
precede and shall not be more than ten days after the date on which the
resolution fixing the record date is adopted. If no record date has been
fixed by the Board of Directors, and the Board of Directors is not
required by law to take some action prior to the action for which written
consent is sought, the record date shall be the first date on which a
signed written consent is properly delivered to the Corporation. If no
record date had been fixed by the Board of Directors and the Board of
Directors is required by law to take some action prior to the action for
which written consent is sought, the record date shall be the close of
business on the day on which the Board of Directors adopts a resolution
taking such prior action.
Section 7.5 Replacement Certificates. New stock certificates
may be issued to replace certificates lost, stolen, destroyed, or
mutilated, upon such terms and conditions, including proof of loss or
destruction and the giving of a satisfactory bond of indemnity, as the
Board of Directors may from time to time determine.
Section 7.6 Holders of Record. The Corporation shall be
entitled to treat the holder of record of any share or shares of capital
stock as the holder and owner in fact thereof for all purposes and shall
not be bound to recognize any equitable or other claim of right, title, or
interest in such share or shares on the part of any other person, whether
or not the Corporation shall have express or other notice thereof, except
as otherwise provided by law.
Section 7.7 Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VIII.
-------------
LIST OF SHAREHOLDERS
--------------------
The officer or agent having charge of the transfer books for
shares shall make, at least ten days before each meeting of shareholders,
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a complete list of the shareholders entitled to vote at such meeting,
arranged by voting group and within each voting group by class or series
of shares, with the address of each and the number of shares held by each,
which list, for a period of ten days prior to such meeting, shall be kept
on file at the principal business office of the Corporation and shall be
subject to inspection by any shareholder at any time during usual business
hours. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any
shareholder during the whole time of the meeting. The original share
transfer book, or a duplicate thereof, shall be prima facie evidence as to
who are the shareholders entitled to examine such list or share transfer
book or to vote at any meeting of the shareholders.
ARTICLE IX.
-----------
MISCELLANEOUS
-------------
Section 9.1 Dividends. Dividends upon the capital stock of
the Corporation may be declared by the Board of Directors at any regular
or special meeting, pursuant to law. Dividends may be paid in cash, in
property, or in shares of capital stock. Before payment of any dividend,
there may be set aside out of any funds of the Corporation available for
dividends such sum or sums as the Board of Directors in its absolute
discretion, from time to time, believes is proper as a reserve fund to
meet contingencies, or equalize dividends, or for such other purposes as
the Board of Directors determines is conducive to the interests of the
Corporation. The Board of Directors may at any time modify or abolish any
such reserve fund.
Section 9.2 Annual Statement. The Board of Directors shall
present at each annual meeting, and at any special meeting of the
shareholders when called for by vote of the shareholders, a full and clear
statement of the business and condition of the Corporation.
Section 9.3 Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors from time to time.
Section 9.4 Checks. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or
such other person or persons as the Board of Directors may from time to
time designate.
Section 9.5 Seal. The Corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any manner reproduced.
Section 9.6 Amendments. These Bylaws may be altered,
amended, repealed, or replaced by new Bylaws by the affirmative vote of a
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majority of the Board of Directors at any regular or special meeting of
the Board of Directors unless the Certificate of Incorporation or law
reserve this power to the shareholders.
I HEREBY CERTIFY that the foregoing is a full, true and correct
copy of the Bylaws of Virtual Open Network Environment Corporation, a
Delaware corporation, as in effect on the date hereof.
WITNESS my hand and the seal of the Corporation.
Dated: January 10, 1996 /s/ Charles Chen
By: -------------------------
Charles Chen, Secretary
(SEAL)
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<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES, AND
RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK
of
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
We, James F. Chen, President and Chief Executive Officer, and
Charles Chen, Secretary, of Virtual Open Network Environment Corporation,
a corporation organized and existing under the General Corporation Law of
the State of Delaware ("Corporation"), in accordance with the provisions
of Section 103 thereof, DO HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Corporation, the
Board of Directors of the Corporation on April 4, 1996, adopted the
following resolution creating a series of 1,183,402 shares of convertible
preferred stock designated as Series A Convertible Preferred Stock;
That, pursuant to the authority vested in the Board of Directors
of the Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of preferred stock of the Corporation be, and it
hereby is, created, and that the designation and amount thereof and the
powers, preferences, and relative, optional, and other special rights of
the shares of such series, and the qualifications, limitations, or
restrictions thereof are as follows:
Section 1. DESIGNATION AND AMOUNT. The shares of such series
shall be designated as "Series A Convertible Preferred Stock" and the
number of shares constituting such series shall be 1,183,402.
Section 2. DIVIDENDS AND DISTRIBUTIONS. Dividends upon the
shares of Series A Convertible Preferred Stock may be declared by the
Board of Directors at any time and may be paid in cash, in property, or in
shares of Series A Convertible Preferred Stock. The holders of shares of
Series A Convertible Preferred Stock are entitled to share ratably in
dividends with holders of any other series of preferred stock of the
Corporation now existing or hereafter created, but shall receive no
preference in dividends declared. The Corporation will not pay dividends
on Common Stock as long as Series A Convertible Preferred Stock is
outstanding.
Section 3. VOTING RIGHTS. In addition to any other voting
rights required by law, the holders of shares of Series A Convertible
Preferred Stock shall have the following voting rights:
(a) Each share of Series A Convertible Preferred Stock shall
entitle the holder thereof to vote on all matters submitted to a vote of
the stockholders of the Corporation, and the holders of Series A
Convertible Preferred Stock shall vote as a class on matters affecting
their value including a) issuance of any new series of Preferred Stock of
<PAGE>
the Corporation with superior rights, and b) any merger, dissolution, or
sale of the Corporation. All action requiring the approval of holders of
shares of Series A Convertible Preferred Stock voting as a class shall be
authorized by a majority vote of such holders.
(b) Except as set forth herein, holders of Series A
Convertible Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. REACQUIRED SHARES. Any shares of Series A
Convertible Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and canceled
promptly after the acquisition thereof. All such shares shall, upon their
cancellation, become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock to be created
by resolution or resolutions of the Board of Directors. The Corporation
will not repurchase Common Stock as long as Series A Convertible Preferred
Stock is outstanding without the approval of the holders of the Series A
Convertible Preferred Stock voting as a class.
Section 5. LIQUIDATION PREFERENCE. In the event of any
voluntary or involuntary liquidation, sale, or winding up of the
Corporation, the holders of Series A Convertible Preferred Stock shall be
entitled to receive in preference to holders of Common Stock an amount
equal to the purchase price per share of the Series A Convertible
Preferred Stock plus any accrued but unpaid dividends. Any remaining
proceeds shall be allocated between Common and Preferred Shareholders on a
pro-rata basis, treating the shares of Series A Convertible Preferred
Stock on an as-if converted basis.
Section 6. CONVERSION. Shares of Series A Convertible Preferred
Stock may at any time be converted into shares of Common Stock, on a one
for one basis, provided that such shares of Series A Convertible Stock
have not been previously converted pursuant to Section 7 below.
Section 7. MANDATORY CONVERSION. Shares of Series A Convertible
Preferred Stock will be subject to a mandatory conversion by the
Corporation on ten (10) days written notice in the event of an initial
public offering of shares of the Corporation's Common Stock in which over
$15 million is raised and the offering price per share is at least 1.75
times the initial conversion price per share of the Series A Convertible
Preferred Stock.
Section 8. CONVERSION RATIO ADJUSTMENT. The conversion ratio
provided in Section 6 shall be subject to adjustment under the
circumstances and in the manner as described below:
(a) In the event that the Corporation effects an initial
public offering prior to March 31, 1997 at a price less than $5.25 per
share, the conversion ratio shall be adjusted by multiplying the
subscription price of the Series A Convertible Preferred Stock times a
factor of 1.75, and dividing the product by the midpoint of the filing
<PAGE>
range contained in the final pre-effective amendment to the registration
statement for the initial public offering, so that if the subscription
price is $3.00 per share and the midpoint of the filing range is $4.50 per
share, the conversion ratio would be determined by multiplying $3.00 x
1.75, and dividing the product by $4.50 to reach a conversion ratio of
1.1667 shares of Common Stock for each converted share of Series A
Convertible Preferred Stock;
(b) In the event that the Corporation effects an initial
public offering during the period from April 1, 1997 until March 31, 1998
at a price less than $6.00 per share, the conversion ratio shall be
adjusted by multiplying the subscription price of the Series A Convertible
Preferred Stock times a factor of 2.00, and dividing the product by the
midpoint of the filing range contained in the final pre-effective
amendment to the registration statement for the initial public offering,
so that if the subscription price is $3.00 per share and the midpoint of
the filing range is $4.50 per share, the conversion ratio would be
determined by multiplying $3.00 x 2.00, and dividing the product by $4.50
to reach a conversion ratio of 1.333 shares of Common Stock for each
converted share of Series A Convertible Preferred Stock;
(c) In the event that the Corporation effects an initial
public offering after March 31, 1998 at a price less than $9.00 per share,
the conversion ratio shall be adjusted by multiplying the subscription
price of the Series A Convertible Preferred Stock times a factor of 3.00,
and dividing the product by the midpoint of the filing range contained in
the final pre-effective amendment to the registration statement for the
initial public offering, so that if the subscription price is $3.00 per
share and the midpoint of the filing range is $4.50 per share, the
conversion ratio would be determined by multiplying $3.00 x 3.00, and
dividing the product by $4.50 to reach a conversion ratio of 2.00 shares
of Common Stock for each converted share of Series A Convertible Preferred
Stock.
Section 9. CONSOLIDATION, MERGER, ETC. In case the Corporation
shall enter into any consolidation, merger, combination, or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash, and/or any other property,
then in any such case the shares of Series A Convertible Preferred Stock
shall at the same time be similarly exchanged or changed in an amount per
share (subject to the provision for adjustment hereinafter set forth)
equal to the amount of stock, securities, cash, and/or any other property
(payable in kind), as the case may be, into which or for which each share
of Common Stock is changed or exchanged. In the event the Corporation
shall at any time after the date hereof (a) declare any dividend on Common
Stock payable in shares of Common Stock, (b) subdivide the outstanding
shares of Common Stock, or (c) combine the outstanding shares of Common
Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change
of shares of Series A Convertible Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
<PAGE>
Section 10. REDEMPTION. The shares of Series A Convertible
Preferred Stock, on or before December 31, 2001, will be subject to
redemption at the option of the holder, if not previously converted, at
the earlier of a dissolution, winding up, or sale or merger wherein a
"change of control" occurs ("Liquidity Events"). A change of control will
occur: a) upon the sale or transfer of substantially all the assets of the
Corporation by sale, merger or otherwise, or b) if any "person" (as such
term is used in Sections 13(d) or 14(d) of the 1934 Act) is or becomes the
beneficial owner, directly or indirectly, of securities of the Corporation
representing 50% or more of the combined voting power of the then-existing
outstanding securities of the Corporation. If no Liquidity Event occurs
on or before December 31, 2001, shares of Series A Convertible Preferred
Stock will be subject to redemption, at the option of the holder, in equal
amounts effective as of December 31, 2001, December 31, 2002, and December
31, 2003. The redemption price will equal the initial purchase price and
there shall be no interest or premium paid.
Section 11. AMENDMENT. The Certificate of Incorporation of the
Corporation shall not be further amended in any manner that would
materially alter or change the powers, preferences, or special rights of
the Series A Convertible Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of a majority of the
outstanding shares of Series A Convertible Preferred Stock, voting
separately as a class.
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties of
perjury this 4th day of April, 1996.
/s/ James F. Chen
----------------------------------
James F. Chen, President and
Chief Executive Officer
Attest:
/s/ Charles Chen
-------------------------
Charles Chen
Secretary
<PAGE>
PAGE 1
State of Delaware
OFFICE OF THE SECRETARY OF STATE
---------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE,
DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF DESIGNATION OF "VIRTUAL OPEN NETWORK ENVIRONMENT
CORPORATION", FILED IN THIS OFFICE ON THE NINETEENTH DAY OF APRIL, A.D.
1996, AT 12 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE
NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
SEAL /s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION:
2447723 8100 7915153
960113363 DATE: 04-22-96
<PAGE>
<PAGE>
CERTIFICATE OF INCREASE IN THE NUMBER OF SHARES
OF SERIES A CONVERTIBLE PREFERRED STOCK
of
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
We, James F. Chen, President and Chief Executive Officer, and
Charles Chen, Secretary of Virtual Open Network Environment Corporation, a
corporation organized and existing under the general Corporation Law of
the State of Delaware ("Corporation"), in accordance with the provisions
of sections 151 and 103 thereof, do hereby certify that
1. Pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Corporation, the
Board of Directors of the Corporation on April 4, 1996, adopted a
resolution creating a series of preferred stock designated as "Series" A
Convertible Preferred Stock." The number of shares constituting the
Series A Convertible Preferred Stock was established by such resolution at
1,183,402. A Certificate of Designation, Preferences, and Rights of
Series A Convertible Preferred Stock was duly executed, acknowledged,
filed and recorded pursuant to Section 103 of the General Corporation Law
of the State of Delaware.
2. Pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Corporation, and
pursuant to Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation on May 13, 1996,
adopted a further resolution increasing the number of shares constituting
the Series A Convertible Preferred Stock by 6,071 shares to a total of
1,189,473 shares.
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties of
perjury this 21st day of May, 1996.
/s/ James F. Chen
-------------------------------
JAMES F. CHEN, President and
Chief Executive Officer
Attest:
/s/ Charles Chen
--------------------------
CHARLES CHEN, Secretary
<PAGE>
<PAGE>
VOTING TRUST AGREEMENT
THIS AGREEMENT, is intended to memorialize and consolidate the
terms of prior understandings of the parties and is therefore made
effective as of the 1st day of January, 1996, by and between H.H. Cheng
(hereinafter referred to as "Stockholder"), and James F. Chen, Trustee,
and his successor and successors in the Trust, (hereinafter collectively
referred to as "Voting Trustee"):
1. Stockholder has assigned and transferred to Voting
Trustee the number of shares of Virtual Open Network Environment
Corporation (the Corporation) set opposite his or her signature hereto,
for the purpose of vesting in Voting Trustee, as Trustee of an active
trust, the right to vote thereon and act in respect thereof, for a period
of 1 year from the date hereof, or initial public offering whichever is
first, subject to earlier termination by the Trustee as hereinafter
provided.
2. Voting Trustee shall cause to be issued, in respect of
the stock of the Corporation held by him, pursuant to the terms hereof, a
voting trust certificate in a form acceptable to the parties and the
Corporation (hereinafter referred to as the "voting trust certificate"):
3. In the event that Voting Trustee shall receive any
additional stock certificates of Corporation by way of dividend upon stock
held by it under this Agreement, Voting Trustee shall hold such stock
certificates likewise subject to the terms of this Agreement, and shall
issue voting trust certificates representing such stock certificates to
the respective registered holder of the then outstanding voting trust
certificate entitled to such dividend.
4. Voting Trustee shall execute any and all of the said
voting trust certificates, and no voting trust certificate shall be valid
unless duly signed by Voting Trustee. Each voting trust certificate shall
be transferable on the voting trust certificate books of Voting Trustee
(which shall be kept for that purpose at the office of the said Trustee)
by the registered holder thereof, either in person or by duly authorized
attorney, upon the surrender of such voting trust certificate properly
endorsed for transfer. Until so transferred, the Voting Trustee may treat
the registered holder of voting trust certificates as owner thereof for
all purposes, except that the delivery of stock certificates hereunder and
certain payments hereunder, as hereinafter provided, shall not be made
without surrender of such voting trust certificates.
5. Until the termination of this Agreement each registered
holder of a voting trust certificate shall be entitled to receive promptly
from Voting Trustee payments equal to the amount of dividends (other than
dividends represented by capital stock of the Corporation) or other
distributions if any, collected by Voting Trustees upon the number of
shares of stock of the Corporation standing in the name of such registered
holder, and any payment representing the amount received upon redemption
or sale of any common stock, represented by the voting trust certificate
<PAGE>
or certificates held by him, subject, however, to the terms and conditions
of this Agreement. Those registered as holders of voting trust
certificates on the dates fixed as record dates by the Corporation for
dividends and for the allotment of rights shall be entitled to such
payments and to any rights to the benefit of which holders of voting trust
certificates may be entitled under this Agreement. Voting Trustee may,
in his discretion, from time to time, close the voting trust certificate
books against transfers of voting trust certificates for the purpose of
determining the voting trust certificate holder entitled to such payments
or to such rights, or for the purpose of determining the voting trust
certificate holder entitled to vote at any meeting thereof or to do any
thing or act to be done or performed by said holders.
6. This Agreement shall terminate one year from its
effective date or upon initial public offering if earlier without notice
by or action of the Voting Trustee; but, at any earlier time, it may be
terminated by the written action of the Voting Trustee, in his
uncontrolled discretion, by signing a declaration to that effect and
sending a copy of the same to each registered holder of voting trust
certificates issued hereunder. Upon termination of this Agreement as
above specified, Voting Trustee, in exchange for, or upon surrender of,
any voting trust certificate then outstanding, shall, in accordance with
the terms hereof, and out of the stock held by him hereunder, deliver
proper certificates of stock of the Corporation to the holders of voting
trust certificates and thereupon all liability of Voting Trustee, or his
successors, or successor, or of any of them, for the delivery of said
stock certificates shall cease and terminate. Voting Trustee may call
upon and require the holders of voting trust certificates to surrender
them in exchange for certificates of stock of the number of shares to
which they are entitled hereunder.
7. Until the actual transfer of stock certificates to the
holders of voting trust certificates hereunder, Voting Trustee shall, in
his uncontrolled discretion, in respect of any and all of the stock held
by him hereunder, except as in this Agreement expressly limited, possess
and be entitled to exercise the right to vote thereon for every purpose,
in person or by proxy, to waive any stockholder's privilege in respect
thereof, excluding any right or privilege to subscribe for any increased
stock, and to consent to any lawful corporate act of the Corporation, as
though absolute owner of said stock, it being expressly agreed that no
voting right shall pass to others by or under said voting trust
certificates, or by or under this Agreement, or by or under any other
agreement, express or implied. Voting Trustee is specifically authorized
by way of example, without limiting his rights hereunder, to vote the
stock held by him for, or to consent in respect thereof to, any increase
or reduction of the stock of the Corporation, any agreement of
consolidation, merger, share exchange or the sale or other disposition of
all, substantially all, or any part of the property, assets and franchises
of the Corporation and the granting, ratification or confirmation of any
option or options therefor (whether executed before or after the execution
of this Agreement, and whether or not such option or options extend(s)
beyond the term of this Agreement), or the dissolution of the Corporation,
- 2 -
<PAGE>
and the judgment of Voting Trustee as to the adequacy of the consideration
thereby to be received by the Corporation and Stockholder (provided
Stockholder and each holder of a voting trust certificate of each class is
treated uniformly, share for share) shall be conclusive and binding upon
Stockholder and the holders of voting trust certificates and all persons
claiming through or under them. Any person acting as a Voting Trustee
under this Agreement may, directly or indirectly, transact any lawful
business with the Corporation, notwithstanding is position as Voting
Trustee. Voting Trustee may also serve as director and compensated
officer of the Corporation and may vote for himself, as such.
8. In the event of the death, resignation or other permanent
inability to serve of the Voting Trustee, James F. Chen, then Not
Applicable shall serve as successor Voting Trustee, and in the event of
the death, resignation, inability or refusal to serve of such successor,
then anything contained herein to the contrary notwithstanding, this
Agreement shall cease and terminate without notice by or action of such
successor Voting Trustee. Such successor shall serve for the unexpired
term in the place and stead of the original Voting Trustee, as above
provided, and the authority, powers, duties, obligations, and limitations
of the said original Voting Trustee shall devolve upon such successor with
the same effect as if such successor had been the person named as original
Voting Trustee. The successor of any person acting as Voting Trustee
shall, by written agreement, undertake the performance of this voting
trust in accordance with its terms.
9. At any meeting of the stockholders of the Corporation,
any person then acting as a Voting Trustee may vote or act in person or by
proxy to any other person whether or not such other person is a Voting
Trustee, and any person acting as a Voting Trustee may give a power or
attorney to any other person, whether or not such other person is acting
as a Voting Trustee, to sign for him in case of action taken in writing
without a meeting. Voting Trustee may adopt his own rules of procedure
and may vote as stockholder of the Corporation in person or by proxy.
10. In voting the stock represented by the stock certificates
issued to Voting Trustee as hereinbefore provided, the person acting as
Voting Trustee shall exercise his best judgment to the end that the
business and affairs of the Corporation shall be properly managed; but no
person acting as Voting Trustee assumes any responsibility in respect of
such management, or in respect of any action taken by Voting Trustee, or
of his successor, or of any person acting as such, or taken in pursuance
of his consent thereto, or in pursuance of his vote so cast, and no person
acting as a Voting Trustee shall incur any responsibility, as stockholder,
trustee or otherwise, by reason of any error of law, or of any matter or
thing done, except for his own wilful misconduct.
11. The term "Corporation", for the purposes of this
agreement and of all rights hereunder, including the issue and delivery of
stock certificates, shall be taken to mean Virtual Open Network
Environment Corporation, a Maryland corporation, or any corporation
successor to it.
- 3 -
<PAGE>
12. Each and all of the terms and provisions of this
agreement shall be and are hereby made binding upon the parties, their
heirs, personal representatives, guardians and assigns.
13. Voting Trustee shall have no duty to hold meetings of
holders of voting trust certificates, but he shall be entitled to do so if
he wishes. Ten days' written notice of every meeting of holders of voting
trust certificates shall be given and such notice shall state the place,
day and hour and the purpose, if any, of such meeting, but any holder of a
voting trust certificate may waive such notice in writing, either before
or after the holding of the meeting. No notice of any adjourned meeting
need be given. Every such meeting shall be held in the State of Maryland
at a place designated by Voting Trustee, unless the holders of voting
trust certificates representing two-thirds of the stock held by the Voting
Trustee consent in writing to the holding thereof at another place. The
failure to hold meetings shall not in any manner or degree impair or
reduce the authority of Voting Trustee hereunder.
14. All notices to be given to the holders of voting trust
certificates may be given by mailing the same to the registered holders
thereof at their addresses as the same last appear on the voting trust
certificate books of Voting Trustee, and any notice, mailed as herein
provided, shall be taken as though personally served on all the holders of
voting trust certificates, and such mailing shall be the only notice
required to be given under any provisions of this agreement.
15. This agreement shall be filed with Voting Trustee, and a
duplicate hereof shall be filed in the principal office of Corporation.
16. The Voting Trustee, hereby accepts the above trust,
subject to all of the terms, conditions and reservations herein contained,
and agrees that he will exercise the powers and perform the duties of
Voting Trustee as herein set forth, according to his best judgment.
IN WITNESS WHEREOF, this agreement is executed at Rockville,
Maryland.
Witness:
--------------------------- ------------------------------------
James F. Chen, Voting Trustee
/s/ H.H. Cheng 199,000 shares
--------------------------- ------------------------------------
H.H. Cheng, Stockholder
- 4 -
<PAGE>
<PAGE>
VOTING TRUST AGREEMENT
THIS AGREEMENT, is intended to memorialize and consolidate the
terms of prior understandings of the parties and is therefore made
effective as of the 15th day of October, 1994, by and between Robert M.
Zupnik (hereinafter referred to as "Stockholder"), and James F. Chen,
Trustee, and his successor and successors in the Trust, (hereinafter
collectively referred to as "Voting Trustee"):
1. Stockholder has assigned and transferred to
Voting Trustee the number of Shares of Virtual Open Network Environment
Corporation (the Corporation) set opposite his or her signature hereto,
for the purpose of vesting in Voting Trustee, as Trustee of an active
trust, the right to vote thereon and act in respect thereof, for a period
of two (2) years from the date hereof, subject to earlier termination by
the Trustee as hereinafter provided.
2. Voting Trustee shall cause to be issued, in
respect of the stock of the Corporation held by him, pursuant to the terms
hereof, a voting trust certificate in a form acceptable to the parties and
the Corporation (hereinafter referred to as the "voting trust
certificate"):
3. In the event that Voting Trustee shall receive
any additional stock certificates of Corporation by way of dividend upon
stock held by it under this Agreement, Voting Trustee shall hold such
stock certificates likewise subject to the terms of this Agreement, and
shall issue voting trust certificates representing such stock certificates
to the respective registered holder of the then outstanding voting trust
certificate entitled to such dividend.
4. Voting Trustee shall execute any and all of the
said voting trust certificates, and no voting trust certificate shall be
valid unless duly signed by Voting Trustee. Each voting trust certificate
shall be transferable on the voting trust certificate books of Voting
Trustee (which shall be kept for that purpose at the office of the said
Trustee) by the registered holder thereof, either in person of by duly
authorized attorney, upon the surrender of such voting trust certificate
properly endorsed for transfer. Until so transferred, the Voting Trustee
may treat the registered holder of voting trust certificates as owner
thereof for all purposes, except that the delivery of stock certificates
hereunder and certain payments hereunder, as hereinafter provided, shall
not be made without surrender of such voting trust certificates.
5. Until the termination of this Agreement each
registered holder of a voting trust certificate shall be entitled to
receive promptly from Voting Trustee payments equal to the amount of
dividends (other than dividends represented by capital stock of the
Corporation) or other distributions if any, collected by Voting Trustees
upon the number of shares of stock of the Corporation standing in the name
of such registered holder, and any payment representing the amount
received upon redemption or sale of any common stock, represented by the
voting trust certificate or certificates held by him, subject, however, to
<PAGE>
the terms and conditions of this Agreement. Those registered as holders
of voting trust certificates on the dates fixed as record dates by the
Corporation for dividends and for the allotment of rights shall be
entitled to such payments and to any rights to the benefit of which
holders of voting trust certificates may be entitled under this Agreement.
Voting Trustee may, in his discretion, from time to time, close the voting
trust certificate books against transfers of voting trust certificates for
the purpose of determining the voting trust certificate holder entitled to
such payments or to such rights, or for the purpose of determining the
voting trust certificate holder entitled to vote at any meeting thereof or
to do any thing or act to be done or performed by said holders.
6. This Agreement shall terminate two (2) years from
its effective date without notice by or action of the Voting Trustee; but,
at any earlier time, it may be terminated by the written action of the
Voting Trustee, in his uncontrolled discretion, by signing a declaration
to that effect and sending a copy of the same to each registered holder of
voting trust certificates issued hereunder. Upon termination of this
Agreement as above specified, Voting Trustee, in exchange for, or upon
surrender of, any voting trust certificate then outstanding, shall, in
accordance with the terms hereof, and out of the stock held by him
hereunder, deliver proper certificates of stock of the Corporation to the
holders of voting trust certificates and thereupon all liability of Voting
Trustee, or his successors, or successor, or of any of them, for the
delivery of said stock certificates shall cease and terminate. Voting
Trustee may call upon and require the holders of voting trust certificates
to surrender them in exchange for certificates of stock of the number of
shares to which they are entitled hereunder.
7. Until the actual transfer of stock certificates
to the holders of voting trust certificates hereunder, Voting Trustee
shall, in his uncontrolled discretion, in respect of any and all of the
stock held by him hereunder, except as in this Agreement expressly
limited, possess and be entitled to exercise the right to vote thereon for
every purpose, in person or by proxy, to waive any stockholder's privilege
in respect thereof, excluding any right or privilege to subscribe for any
increased stock, and to consent to any lawful corporate act of the
Corporation, as though absolute owner of said stock, it being expressly
agreed that no voting right shall pass to others by or under said voting
trust certificates, or by or under this Agreement, or by or under any
other agreement, express or implied. Voting Trustee is specifically
authorized by way of example, without limiting his rights hereunder, to
vote the stock held by him for, or to consent in respect thereof to, any
increase or reduction of the stock of the Corporation, any agreement of
consolidation, merger, share exchange or the sale or other disposition of
all, substantially all, or any part of the property, assets and franchises
of the Corporation and the granting, ratification or confirmation of any
option or options therefor (whether executed before or after the execution
of this Agreement, and whether or not such option or options extend(s)
beyond the term of this Agreement), or the dissolution of the Corporation,
and the judgment of Voting Trustee as to the adequacy of the consideration
thereby to be received by the Corporation and Stockholder (provided
2
<PAGE>
Stockholder and each holder of a voting trust certificate of each class is
treated uniformly, share for share) shall be conclusive and binding upon
Stockholder and the holders of voting trust certificates and all persons
claiming through or under them. Any person acting as a Voting Trustee
under this Agreement may, directly or indirectly, transact any lawful
business with the Corporation, notwithstanding is position as Voting
Trustee. Voting Trustee may also serve as director and compensated
officer of the Corporation and may vote for himself, as such.
8. In the event of the death, resignation or other
permanent inability to serve of the Voting Trustee, James F. Chen, then
/s/ Charles C. Chen shall serve as successor Voting Trustee, and in the
event of the death, resignation, inability or refusal to serve of such
successor, then anything contained herein to the contrary notwithstanding,
this Agreement shall cease and terminate without notice by or action of
such successor Voting Trustee. Such successor shall serve for the
unexpired term in the place and stead of the original Voting Trustee, as
above provided, and the authority, powers, duties, obligations, and
limitations of the said original Voting Trustee shall devolve upon such
successor with the same effect as if such successor had been the person
named as original Voting Trustee. The successor of any person acting as
Voting Trustee shall, by written agreement, undertake the performance of
this voting trust in accordance with its terms.
9. At any meeting of the stockholders of the
Corporation, any person then acting as a Voting Trustee may vote or act in
person or by proxy to any other person whether or not such other person is
a Voting Trustee, and any person acting as a Voting Trustee may give a
power or attorney to any other person, whether or not such other person is
acting as a Voting Trustee, to sign for him in case of action taken in
writing without a meeting. Voting Trustee may adopt his own rules of
procedure and may vote as stockholder of the Corporation in person or by
proxy.
10. In voting the stock represented by the stock
certificates issued to Voting Trustee as hereinbefore provided, the person
acting as Voting Trustee shall exercise his best judgment to the end that
the business and affairs of the Corporation shall be properly managed; but
no person acting as Voting Trustee assumes any responsibility in respect
of such management, or in respect of any action taken by Voting Trustee,
or of his successor, or of any person acting as such, or taken in
pursuance of his consent thereto, or in pursuance of his vote so cast, and
no person acting as a Voting Trustee shall incur any responsibility, as
stockholder, trustee or otherwise, by reason of any error of law, or of
any matter or thing done, except for his own wilful misconduct.
11. The term "Corporation", for the purposes of this
agreement and of all rights hereunder, including the issue and delivery of
stock certificates, shall be taken to mean Virtual Open Network
Environment Corporation, a Maryland corporation, or any corporation
successor to it.
3
<PAGE>
12. Each and all of the terms and provisions of this
agreement shall be and are hereby made binding upon the parties, their
heirs, personal representatives, guardians and assigns.
13. Voting Trustee shall have no duty to hold
meetings of holders of voting trust certificates, but he shall be entitled
to do so if he wishes. Ten days' written notice of every meeting of
holders of voting trust certificates shall be given and such notice shall
state the place, day and hour and the purpose, if any, of such meeting,
but any holder of a voting trust certificate may waive such notice in
writing, either before or after the holding of the meeting. No notice of
any adjourned meeting need be given. Every such meeting shall be held in
the State of Maryland at a place designated by Voting Trustee, unless the
holders of voting trust certificates representing two-thirds of the stock
held by the Voting Trustee consent in writing to the holding thereof at
another place. The failure to hold meetings shall not in any manner or
degree impair or reduce the authority of Voting Trustee hereunder.
14. All notices to be given to the holders of voting
trust certificates may be given by mailing the same to the registered
holders thereof at their addresses as the same last appear on the voting
trust certificate books of Voting Trustee, and any notice, mailed as
herein provided, shall be taken as though personally served on all the
holders of voting trust certificates, and such mailing shall be the only
notice required to be given under any provisions of this agreement.
15. This agreement shall be filed with Voting
Trustee, and a duplicate hereof shall be filed in the principal office of
Corporation.
16. The Voting Trustee, hereby accepts the above
trust, subject to all of the terms, conditions and reservations herein
contained, and agrees that he will exercise the powers and perform the
duties of Voting Trustee as herein set forth, according to his best
judgment.
IN WITNESS WHEREOF, this agreement is executed at
Rockville, Maryland.
Witness:
--------------------------- -----------------------------------
James F. Chen, Voting Trustee
/s/ Robert M. Zupnik 25,000 shares
----------------------- ------------------------------------
, Stockholder
4
<PAGE>
<PAGE>
VOTING TRUST AGREEMENT
THIS AGREEMENT, is intended to memorialize and consolidate the
terms of prior understandings of the parties and is therefore made
effective as of the 15th day of October, 1994, by and between Dennis E.
Winson (hereinafter referred to as "Stockholder"), and James F. Chen,
Trustee, and his successor and successors in the Trust, (hereinafter
collectively referred to as "Voting Trustee"):
1. Stockholder has assigned and transferred to
Voting Trustee the number of Shares of Virtual Open Network Environment
Corporation (the Corporation) set opposite his or her signature hereto,
for the purpose of vesting in Voting Trustee, as Trustee of an active
trust, the right to vote thereon and act in respect thereof, for a period
of two (2) years from the date hereof, subject to earlier termination by
the Trustee as hereinafter provided.
2. Voting Trustee shall cause to be issued, in
respect of the stock of the Corporation held by him, pursuant to the terms
hereof, a voting trust certificate in a form acceptable to the parties and
the Corporation (hereinafter referred to as the "voting trust
certificate"):
3. In the event that Voting Trustee shall receive
any additional stock certificates of Corporation by way of dividend upon
stock held by it under this Agreement, Voting Trustee shall hold such
stock certificates likewise subject to the terms of this Agreement, and
shall issue voting trust certificates representing such stock certificates
to the respective registered holder of the then outstanding voting trust
certificate entitled to such dividend.
4. Voting Trustee shall execute any and all of the
said voting trust certificates, and no voting trust certificate shall be
valid unless duly signed by Voting Trustee. Each voting trust certificate
shall be transferable on the voting trust certificate books of Voting
Trustee (which shall be kept for that purpose at the office of the said
Trustee) by the registered holder thereof, either in person or by duly
authorized attorney, upon the surrender of such voting trust certificate
properly endorsed for transfer. Until so transferred, the Voting Trustee
may treat the registered holder of voting trust certificates as owner
thereof for all purposes, except that the delivery of stock certificates
hereunder and certain payments hereunder, as hereinafter provided, shall
not be made without surrender of such voting trust certificates.
5. Until the termination of this Agreement each
registered holder of a voting trust certificate shall be entitled to
receive promptly from Voting Trustee payments equal to the amount of
dividends (other than dividends represented by capital stock of the
Corporation) or other distributions if any, collected by Voting Trustees
upon the number of shares of stock of the Corporation standing in the name
of such registered holder, and any payment representing the amount
received upon redemption or sale of any common stock, represented by the
voting trust certificate or certificates held by him, subject, however, to
the terms and conditions of this Agreement. Those registered as holders
<PAGE>
of voting trust certificates on the dates fixed as record dates by the
Corporation for dividends and for the allotment of rights shall be
entitled to such payments and to any rights to the benefit of which
holders of voting trust certificates may be entitled under this Agreement.
Voting Trustee may, in his discretion, from time to time, close the voting
trust certificate books against transfers of voting trust certificates for
the purpose of determining the voting trust certificate holder entitled to
such payments or to such rights, or for the purpose of determining the
voting trust certificate holder entitled to vote at any meeting thereof or
to do any thing or act to be done or performed by said holders.
6. This Agreement shall terminate two (2) years from
its effective date without notice by or action of the Voting Trustee; but,
at any earlier time, it may be terminated by the written action of the
Voting Trustee, in his uncontrolled discretion, by signing a declaration
to that effect and sending a copy of the same to each registered holder of
voting trust certificates issued hereunder. Upon termination of this
Agreement as above specified, Voting Trustee, in exchange for, or upon
surrender of, any voting trust certificate then outstanding, shall, in
accordance with the terms hereof, and out of the stock held by him
hereunder, deliver proper certificates of stock of the Corporation to the
holders of voting trust certificates and thereupon all liability of Voting
Trustee, or his successors, or successor, or of any of them, for the
delivery of said stock certificates shall cease and terminate. Voting
Trustee may call upon and require the holders of voting trust certificates
to surrender them in exchange for certificates of stock of the number of
shares to which they are entitled thereunder.
7. Until the actual transfer of stock certificates
to the holders of voting trust certificates hereunder, Voting Trustee
shall, in his uncontrolled discretion, in respect of any and all of the
stock held by him hereunder, except as in this Agreement expressly
limited, possess and be entitled to exercise the right to vote thereon for
every purpose, in person or by proxy, to waive any stockholder's privilege
in respect thereof, excluding any right or privilege to subscribe for any
increased stock, and to consent to any lawful corporate act of the
Corporation, as though absolute owner of said stock, it being expressly
agreed that no voting right shall pass to others by or under said voting
trust certificates, or by or under this Agreement, or by or under any
other agreement, express or implied. Voting Trustee is specifically
authorized by way of example, without limiting his rights hereunder, to
vote the stock held by him for, or to consent in respect thereof to, any
increase or reduction of the stock of the Corporation, any agreement of
consolidation, merger, share exchange or the sale or other disposition of
all, substantially all, or any part of the property, assets and franchises
of the Corporation and the granting, ratification or confirmation of any
option or options therefor (whether executed before or after the execution
of this Agreement, and whether or not such option or options extend(s)
beyond the term of this Agreement), or the dissolution of the Corporation,
and the judgement of Voting Trustee as to the adequacy of the
consideration thereby to be received by the Corporation and Stockholder
(provided Stockholder and each holder of a voting trust certificate of
2
<PAGE>
each class is treated uniformly, share for share) shall be conclusive and
binding upon Stockholder and the holders of voting trust certificates and
all persons claiming through or under them. Any person acting as a Voting
Trustee under this Agreement may, directly or indirectly, transact any
lawful business with the Corporation, notwithstanding is position as
Voting Trustee. Voting Trustee may also serve as director and compensated
officer of the Corporation and may vote for himself, as such.
8. In the event of the death, resignation or other
permanent inability to serve of the Voting Trustee, James F. Chen, then
Charles C. Chen shall serve as successor Voting Trustee, and in the event
of the death, resignation, inability or refusal to serve of such
successor, then anything contained herein to the contrary notwithstanding,
this Agreement shall cease and terminate without notice by or action of
such successor Voting Trustee. Such successor shall serve for the
unexpired term in the place and stead of the original Voting Trustee, as
above provided, and the authority, powers, duties, obligations, and
limitations of the said original Voting Trustee shall devolve upon such
successor with the same effect as if such successor had been the person
named as original Voting Trustee. The successor of any person acting as
Voting Trustee shall, by written agreement, undertake the performance of
this voting trust in accordance with its terms.
9. At any meeting of the stockholders of the
Corporation, any person then acting as a Voting Trustee may vote or act in
person or by proxy to any other person whether or not such other person is
a Voting Trustee, and any person acting as a Voting Trustee may give a
power or attorney to any other person, whether or not such other person is
acting as a Voting Trustee, to sign for him in case of action taken in
writing without a meeting. Voting Trustee may adopt his own rules of
procedure and may vote as stockholder of the Corporation in person or by
proxy.
10. In voting the stock represented by the stock
certificates issued to Voting Trustee as hereinbefore provided, the person
acting as Voting Trustee shall exercise his best judgment to the end that
the business and affairs of the Corporation shall be properly managed; but
no person acting as Voting Trustee assumes any responsibility in respect
of such management, or in respect of any action taken by Voting Trustee,
or of his successor, or of any person acting as such, or taken in
pursuance of his consent thereto, or in pursuance of his vote so cast, and
no person acting as a Voting Trustee shall incur any responsibility, as
stockholder, trustee or otherwise, by reason of any error of law, or of
any matter or thing done, except for his own wilful misconduct.
11. The term "Corporation", for the purposes of this
agreement and of all rights hereunder, including the issue and delivery of
stock certificates, shall be taken to mean Virtual Open Network
Environment Corporation, a Maryland corporation, or any corporation
successor to it.
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<PAGE>
12. Each and all of the terms and provisions of this
agreement shall be and are hereby make binding upon the parties, their
heirs, personal representatives, guardians and assigns.
13. Voting Trustee shall have no duty to hold
meetings of holders of voting trust certificates, but he shall be entitled
to do so if he wishes. Ten days' written notice of every meeting of
holders of voting trust certificates shall be given and such notice shall
state the place, day and hour and the purpose, if any, of such meeting,
but any holder of a voting trust certificate may waive such notice in
writing, either before or after the holding of the meeting. No notice of
any adjourned meeting need be given. Every such meeting shall be held in
the State of Maryland at a place designated by Voting Trustee, unless the
holders of voting trust certificates representing two-thirds of the stock
held by the Voting Trustee consent in writing to the holding thereof at
another place. The failure to hold meetings shall not in any manner or
degree impair or reduce the authority of Voting Trustee hereunder.
14. All notices to be given to the holders of voting
trust certificates may be given by mailing the same to the registered
holders thereof at their addresses as the same last appear on the voting
trust certificate books of Voting Trustee, and any notice, mailed as
herein provided, shall be taken as though personally served on all the
holders of voting trust certificates, and such mailing shall be the only
notice required to be given under any provisions of this agreement.
15. This agreement shall be filed with Voting
Trustee, and a duplicate hereof shall be filed in the principal office of
Corporation.
16. The Voting Trustee, hereby accepts the above
trust, subject to all of the terms, conditions and reservations herein
contained, and agrees that he will exercise the powers and perform the
duties of Voting Trustee as herein set forth, according to his best
judgment.
IN WITNESS WHEREOF, this agreement is executed at
Rockville, Maryland.
Witness:
---------------------------- ------------------------------------
James F. Chen, Voting Trustee
/s/ Dennie E. Winson 25,000 shares
---------------------------- ------------------------------------
, Stockholder
4
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered as of this 12th day of June,
1996 ("Effective Date"), by and between Virtual Open Network Environment
Corporation, a Delaware corporation with its principal executive offices
at 1803 Research Boulevard, Suite 305, Rockville, Maryland 20850
("Company"), and James F. Chen, an individual residing at 9924 Hall Road,
Potomac, Maryland 20854 ("Executive");
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is
willing to serve in the employ of the Company on a full-time basis for
said period;
WHEREAS, the Company and Executive desire to set forth the
amounts payable and benefits to be provided by the Company to Executive in
the event of a termination of Executive's employment with the Company
under the circumstances set forth herein, including after the happening of
a Change in Control (as defined herein); and
WHEREAS, the parties intend that the provisions of this Agreement
shall be in lieu of Executive's right to make any claim or demand with
respect to any presently existing or prospectively adopted severance
policy of the Company;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. Employment. The Company agrees to continue Executive in
its employ, and Executive agrees to remain in the employ of the Company,
for the period stated in Section 3 hereof and upon the other terms and
conditions herein provided.
2. Position and Responsibilities.
-----------------------------
(a) The Company employs Executive, and Executive agrees to
serve, as President and Chief Executive Officer of the Company on the
conditions hereinafter set forth. Executive agrees to perform such
services consistent with his position as President and Chief Executive
Officer as shall from time to time be assigned to him by the Company's
Board of Directors ("Board") or by an executive designated by the Board.
(b) If the Company appoints, or consents to the appointment
of, Executive to serve as an executive officer and/or director of any
present or future subsidiary or affiliate of the Company, Executive agrees
to serve as an officer and/or director of such subsidiary or affiliate
without any diminution of his duties or increase in his remuneration under
this Agreement. For the purposes of this Agreement, the term "subsidiary"
means any organization that is controlled by the Company and the term
"affiliate" means any organization that is under common control with the
Company.
<PAGE>
3. Term and Duties.
---------------
(a) Term of Employment. The period of Executive's employment
under this Agreement with the Company (i) shall be deemed to have
commenced as of the Effective Date, and (ii) shall continue for a period
of twenty-four (24) full calendar months thereafter and any extensions
thereafter, unless this Agreement is earlier terminated in accordance with
the terms hereof. The period of employment shall automatically be
extended without further action by the respective parties as of June 12,
1997 and each succeeding June 12 for the twenty-four (24) month period
beginning on June 12, 1997 and each June 12 thereafter, unless either
party shall have served written notice upon the other prior to June 12,
1997 or prior to June 12 of each succeeding year, as the case may be, of
his or its intention that this Agreement shall terminate at the end of the
twenty-four (24) month period that begins with the June 12 following such
date of written notice.
(b) Duties. During the period of his employment hereunder by
the Company and except for illness, reasonable vacation periods having an
aggregate duration of not less than that provided pursuant to the
Company's practices in effect on the Effective Date, and reasonable leaves
of absence, Executive shall devote all his business time, attention,
skill, and efforts to the faithful performance of his duties hereunder.
(c) Headquarters Location. The Company agrees to maintain
Executive's offices within Montgomery County in the State of Maryland
("Base Employment Area").
4. Compensation and Reimbursement of Expenses.
------------------------------------------
(a) Compensation.
------------
(i) For all services rendered by Executive in
any capacity during his employment under this Agreement
(including, without limitation, services as an executive,
officer, or director of the Company, or any subsidiary or
affiliate of the Company, or as a member of any committee
of the Board of Directors of the Company or any
subsidiary or affiliate of the Company), the Company
shall pay Executive as compensation (A) an annual salary
("Base Salary") and (B) such bonus for such period, if
any, as may be awarded to Executive from time to time by
the Board or by a committee designated by the Board.
Effective the Effective Date and until adjusted in
accordance with the provisions hereof, Base Salary shall
be paid at the rate of not less than $125,000 per year.
Such bonus shall be based on results of operations,
special contributions made by Executive, seniority,
competitive conditions in the Company's industry, and
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<PAGE>
such other factors as the Board (or a committee or
committees designated by the Board) shall consider
relevant.
(ii) Such salary shall be payable in
accordance with the customary payroll practices of the
Company, but in no event less frequently than monthly,
and any such bonus shall be payable in the manner
specified by the Board, or committee of the Board, at the
time any such bonus is awarded.
(iii) Executive's Base Salary shall be reviewed
promptly following the completion of the Company's
initial public offering and thereafter at least annually.
Such review shall be conducted by the Board or a
committee designated by the Board. As a result of such
review, the Board or committee may, in its discretion,
increase (to reflect Executive's performance, duties, and
responsibilities and to maintain a compensation level
comparable to that of similarly situated executives in
the Company's industry), but not decrease, Executive's
Base Salary then in effect; provided, however, that the
Board or such committee may, in its discretion and
without Executive's consent, proportionally reduce
Executive's Base Salary if, at the same time, it reduces
the salaries of all the Company's executive officers;
provided further, however, that in no event shall
Executive's Base Salary be reduced below $125,000 per
year without Executive's consent. After any adjustment
following the Company's initial public offering, the
Board or committee may not increase Executive's Base
Salary for any one year by an amount greater than 50% of
Executive's then Base Salary.
(iv) Executive shall not be entitled to receive
any fees for service as a director, officer, or employee
of any subsidiary or affiliate of the Company.
(b) Reimbursement of Expenses. The Company shall pay or
reimburse Executive, in accordance with such policies and procedures as
the Board may establish from time to time, for all reasonable travel and
other expenses incurred by Executive in the performance of his obligations
under this Agreement.
5. Participation in Benefit Plans. The payments provided
for in this Agreement, except where specifically provided otherwise, are
in addition to any other benefits to which Executive may be, or may
become, entitled under any of the Company's group hospitalization, health,
dental care, and/or sick-leave plans; life, other insurance and/or death
benefit plans; travel and/or accident insurance plans; deferred
compensation plans; capital accumulation programs; restricted and/or stock
purchase plans; stock option plans; retirement income and/or pension
- 3 -
<PAGE>
plans; supplemental pension plans; excess benefit plans; short- and long-
term disability programs; and other present and future group employee
benefit plans and programs for which Company executives are or shall
become eligible. Executive shall be eligible to receive, during the
period of his employment under this Agreement and during any subsequent
period for which he shall be entitled to receive payments from the Company
under Section 6, all of the foregoing benefits and emoluments for which
executives are eligible under every such plan and program to the extent
permissible under the general terms and provisions of such plans and
programs and in accordance with the provisions thereof. Nothing contained
in this Agreement shall prevent the Board from amending or otherwise
altering any such plan, program, or arrangement as long as such amendment
or alteration equitably affects all the Company's executive officers (of
the level of vice president or above).
6. Termination of Employment. Executive's employment under
this Agreement may be terminated by the Company or Executive as follows:
(a) Disability.
(i) If Executive fails to perform his duties
under this Agreement on account of Disability (as
hereinafter defined), the Company may give notice to
Executive to terminate this Agreement on a date not less
than thirty (30) days thereafter ("Notice Period") and,
if Executive has not resumed full performance of his
duties under this Agreement within such Notice Period,
then Executive's employment under this Agreement will
terminate on the date provided in the notice ("Disability
Termination Date").
(ii) During any period of Disability, the
Company shall maintain and pay for health insurance
benefits for Executive at least equal to those he had at
the commencement of such Disability.
(iii) As used in this Agreement, the term
"Disability" shall mean the complete inability of
Executive to perform his duties under this Agreement by
reason of his total and permanent disability, as
determined by an independent physician selected with the
approval of the Board and Executive.
(b) Death. If Executive dies while employed under this
Agreement, his employment under this Agreement will terminate as of the
date of his death ("Date of Death"). Within thirty (30) days after the
Date of Death, the Company shall pay to Executive's legal representative
Executive's Base Salary as then in effect that has accrued to the last day
of the month in which the Date of Death occurs.
(c) Termination by Executive. In the event that
(i) Executive terminates his employment with the Company (other than
- 4 -
<PAGE>
because of his death) within two (2) years following a Change in Control
(as hereinafter defined), (ii) the Company terminates Executive's
employment for any reason (other than because of death, Disability, or
"just cause" (as hereinafter defined)) within two (2) years following a
Change in Control, (iii) Executive terminates his employment with the
Company because of the Company's material breach of this Agreement, (iv)
Executive's Base Salary, as in effect on the Effective Date or as the same
may be increased from time to time, is reduced unless such reduction is
permitted by this Agreement, or (v) the Company's principal executive
offices are relocated to a location outside the Base Employment Area or
the Company requires Executive to be based anywhere other than the
Company's principal executive offices (except for required travel on the
Company's business), then the Company shall pay Executive within ten (10)
days following the date his employment with the Company is so terminated
("Executive Termination Date") as severance pay a lump sum payment equal
to the sum of (A) the aggregate amount of the future Base Salary payments
Executive would have received if he continued in the employ of the Company
until twenty-four (24) months (thirty-six (36) months if an event
described in clauses (i) or (ii) of this Section 6(c) occurs) following
the Executive Termination Date and (B) Executive's projected bonus for the
year in which the Executive Termination Date occurs, which shall be
computed assuming that Executive had remained in the Company's employ
until the end of that year and that all performance goals or other
performance measures have been met at the then current level for the
remainder of that year. The payment required by clause (A) shall be
calculated at the highest rate of Base Salary paid to Executive at any
time under this Agreement with such payments discounted to present value
at a discount rate equal to one percent (1%) above the per annum one-year
Treasury Bill rate, as published in the Eastern Edition of the Wall Street
Journal, on the Executive Termination Date (or the next preceding date on
which such rate is published), applied to each such future payment from
the time it would have become payable to the date Executive receives
payment. No termination of employment pursuant to this Section 6(c) shall
operate to prohibit Executive from negotiating and entering into a new
employment contract with the Company or such entity as survives the Change
in Control.
(d) Retirement. Executive shall be entitled to terminate his
employment with the Company on, or at any date after, a date on which he
is at least sixty-five (65) years old. Any date on which Executive elects
to retire shall be referred to as the "Retirement Termination Date." The
Company shall pay to Executive his Base Salary as then in effect that has
accrued to the last day of the month in which the Retirement Termination
Date occurs.
(e) Termination By The Company For Just Cause.
-----------------------------------------
(i) The Company may terminate Executive's
employment for "just cause" at any time by giving written
notice thereof to Executive. (Except as provided below,
the date of such notice is the "Just Cause Termination
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<PAGE>
Date" unless otherwise provided in the notice). Within
thirty (30) days after the Just Cause Termination Date,
the Company shall pay to Executive his Base Salary as
then in effect that has accrued to the Just Cause
Termination Date. For the purposes of this subparagraph,
"just cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than
traffic violations or similar offenses), or material
breach of any provision of this Agreement. Unless
otherwise determined by the Board, Executive shall have
no right to receive compensation or other benefits under
this Agreement after a termination for just cause.
(ii) Notwithstanding the foregoing, Executive
shall not be deemed to have been terminated for just
cause pursuant to this Section 6(e) unless and until he
shall have received a copy of a resolution duly adopted
by the affirmative vote of a majority of the Board, at a
meeting held for that purpose, declaring that in the good
faith opinion of the Board one or more of the conditions
set forth in clause (i) of this Section 6(e) has occurred
and specifying the particulars thereof.
7. Change in Control. For purposes of this Agreement, a
"Change in Control" shall mean the occurrence, after the Effective Date,
of any of the following events, directly or indirectly or in one or more
series of transactions:
(i) A consolidation or merger of the Company
with any third party (which includes a single person or
entity or a group of persons or entities acting in
concert) not wholly owned directly or indirectly by the
Company (a "Third Party"), unless the Company is the
entity surviving such merger or consolidation;
(ii) A transfer of all or substantially all of
the assets of the Company to a Third Party or a complete
liquidation or dissolution of the Company;
(iii) A Third Party (other than James F. Chen
and his affiliates), directly or indirectly, through one
or more subsidiaries or transactions or acting in concert
with one or more persons or entities:
(A) acquires beneficial
ownership of more than 20% of the
classes of stock of the Company entitled
to vote generally in the election of
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<PAGE>
directors of the Company ("Voting
Stock");
(B) acquires irrevocable
proxies representing more than 20% of
the Voting Stock;
(C) acquires any combination of
beneficial ownership of Voting Stock and
irrevocable proxies representing more
than 20% of the Voting Stock;
(D) acquires the ability to
control in any manner the election of a
majority of the directors of the
Company; or
(E) acquires the ability to
directly or indirectly exercise a
controlling influence over the
management or policies of the Company;
(iv) any election has occurred of persons to the
Board that causes a majority of the Board to consist of
persons other than (A) persons who were members of the
Board on the Effective Date and/or (B) persons who were
nominated for election as members of the Board by the
Board (or a committee of the Board) at a time when the
majority of the Board (or of such committee) consisted of
persons who were members of the Board on the Effective
Date; provided, however, that any persons nominated for
election by the Board (or a committee of the Board), a
majority of whom are persons described in clauses (A)
and/or (B), or are persons who were themselves nominated
by such Board (or a committee of such Board), shall for
this purpose be deemed to have been nominated by a Board
composed of persons described in clause (A); or
(v) A determination is made by the Securities
and Exchange Commission ("SEC") or any similar agency
having regulatory control over the Company that a change
in control, as defined in the securities laws or
regulations then applicable to the Company, has occurred.
Notwithstanding any provision contained herein, a Change in Control shall
not include any of the above described events if they are the result of a
Third Party's inadvertently acquiring beneficial ownership or irrevocable
proxies or a combination of both for 20% or more of the Voting Stock, and
the Third Party as promptly as practicable thereafter divests itself of
beneficial ownership or irrevocable proxies for a sufficient number of
shares so that the Third Party no longer has beneficial ownership or
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<PAGE>
irrevocable proxies or a combination of both for 20% or more of the Voting
Stock.
8. Excise Tax.
----------
(a) Excess Parachute Payment. Notwithstanding anything to
the contrary in this Agreement, if tax counsel selected by the Company and
acceptable to Executive determines that any portion of any payment by the
Company to Executive under this Agreement or otherwise would constitute an
"excess parachute payment," then the payments to be made to Executive by
the Company shall be reduced such that the value of the aggregate payments
that Executive is entitled to receive under this Agreement and any other
agreement, plan or program of the Company shall be one dollar ($1.00) less
than the maximum amount of payments that Executive may receive without
becoming subject to the tax imposed by Section 4999 of the Code; provided,
however, that the foregoing limitation shall not apply in the event that
such tax counsel determines that the benefits to Executive on an after-tax
basis (i.e., after federal, state, and local income and excise taxes) if
such limitation is not applied would exceed the after-tax benefits to
Executive if such limitation is applied.
(b) The Company Not Responsible for Excise Tax. If the
Internal Revenue Service assesses an excise tax against Executive pursuant
to Sections 280G and 4999 of the Code, the Company shall be under no
obligation to Executive with respect to the amount of (i) the excise tax
or (ii) any additional federal income tax due from and payable by
Executive as the result of his receipt of any payment hereunder or
otherwise.
9. Covenant Not to Compete. Executive covenants and agrees
that, in consideration of the amounts to be paid Executive hereunder and
other good and valuable consideration, for a period of two (2) years
beyond the Retirement Termination Date or the Just Cause Termination Date
(each a "Termination Date"), Executive shall not be employed as an
executive officer of, control, manage, or otherwise participate in the
management of the business of a "significant competitor" of the Company.
The term "significant competitor" shall mean any company or division of a
company that, on the date of its employment of Executive, derives more
than 50% of its gross revenues from network security products and/or
services, or a company that owns or controls a majority of the voting
securities of any such company. The Company and Executive agree that the
terms and conditions of this Section 9 shall survive the termination of
this Agreement following the Termination Date.
10. Confidential Information.
------------------------
(a) Executive shall not, directly or indirectly, during the term
of his employment hereunder and at any time after a termination of his
employment for any reason, to the detriment of the Company, knowingly
divulge, disclose, disseminate, publish, reveal or otherwise communicate
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<PAGE>
to any unauthorized person any Confidential Information relating to the
Company, the Company's subsidiaries or affiliates, or to any of the
businesses operated by any of them.
(b) Executive confirms that Confidential Information
constitutes the exclusive property of the Company and the Company's
subsidiaries and affiliates. Upon a termination of his employment
hereunder, Executive will promptly return to the Company all Materials
(whether prepared by Executive or others) containing, constituting,
embodying or illustrating Confidential Information, and all other property
of the Company or of the Company's subsidiaries and affiliates then in his
possession or custody.
(c) As used in this Section 10 the following terms shall have
the following meanings:
(i) the term "Confidential Information" means
information disclosed to Executive or known to Executive
as a consequence of or through his employment by the
Company and not generally known in the Company's
industry. Such information includes, but is not limited
to, information relating to the Company's products,
research, development, accounting, finances, marketing,
merchandising and selling, and specifically includes
future business plans, client lists, lists of current and
prospective employees and consultants, potential
acquisition candidates, and training and operating
methods and techniques. The term "Confidential
Information" does not include information that (A) at the
time it was received by Executive was generally available
to the public; (B) prior to its use by Executive, becomes
generally available to the public through no act or
failure of Executive; or (C) is received by Executive
from a person who is not a party to this Agreement and
who is not under an obligation of confidence with respect
to such information.
(ii) "Materials" includes, but is not limited
to, books, notebooks, documents, records, photographs,
films, video tapes, audio tape recordings, computer
disks, diskettes or other electronic or optical storage
media, software and support materials, and similar or
other materials.
(d) Executive shall not otherwise knowingly act or conduct
himself (i) to the material detriment of the Company or the Company's
subsidiaries or affiliates, or (ii) in a manner that is inimical or
contrary to the interests thereof.
(e) The Company and Executive agree that the provisions of
this Section 10 shall survive the termination of this Agreement for any
reason whatsoever; provided, however, that this Section 10 shall become
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immediately inoperative and Executive shall no longer be bound by it in
the event that Executive's employment with the Company is terminated
following a Change in Control.
11. General Provisions.
------------------
(a) Entire Agreement. This Agreement contains the entire
understanding between the parties hereto and supersedes any prior
employment agreement between the Company and Executive.
(b) Consolidation, Merger, or Sale of Assets. Nothing in
this Agreement shall preclude the Company from consolidating or merging
into or with, or transferring all or substantially all of its assets to,
another corporation or corporations; provided, however, that such
consolidation, merger or transfer shall not affect Executive's rights
under Section 6(c) hereof. Upon such a consolidation, merger, or transfer
of assets and assumption, the term "the Company," as used herein, shall
mean such other corporation or corporations, and this Agreement shall
continue in full force and effect and such other corporation or
corporations shall be liable for all payments to Executive under the
Agreement.
(c) No Duty to Mitigate. Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor shall any amounts received from
other employment or otherwise by Executive offset in any manner the
obligations of the Company hereunder.
(d) Nonassignability. Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof is
assignable by Executive, his beneficiaries, or legal representatives
without the Company's prior written consent; provided, however, that
nothing in this Section 11(d) shall preclude (i) Executive from
designating a beneficiary to receive any benefit payable hereunder upon
his death, or (ii) the executors, administrators, or other legal
representatives of Executive or his estate from assigning any rights
hereunder to the person or persons entitled thereto.
(e) No Attachment. Except as required by law, no right to
receive payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or the execution, attachment, levy, or similar process or
assignment by operation of law, and any attempt, voluntary or involuntary,
to effect any such action shall be null, void and of no effect.
(f) General Creditor. All payments required hereunder shall
be made from the Company's general assets and Executive shall have no
rights greater than the rights of a general creditor of the Company.
(g) Notices. All notices and other communications required
or permitted to be given under this Agreement shall be in writing and
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<PAGE>
shall be deemed to have been duly given if delivered personally or sent by
certified mail, return receipt requested, first-class postage prepaid, to
the parties to this Agreement at the following addresses:
(i) if to the Company at:
Virtual Open Network Environment Corporation
1803 Research Boulevard
Suite 305
Rockville, Maryland 20850
Attention: Chief Financial Officer
and
(ii) if to Executive at the address
set forth at the end of this
Agreement
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and
communications shall be deemed to have been received on the earlier of the
date of receipt or the third business day after the date of mailing
thereof.
(h) Binding Effect; Benefits. This Agreement shall be
binding upon and inure to the benefit of the parties to this Agreement and
their respective successors and permitted assigns. Nothing in this
Agreement, express or implied, is intended or shall be construed to give
any person, other than the parties to this Agreement or their respective
successors or permitted assigns, any legal or equitable right, remedy, or
claim under or in respect of any agreement or any provision contained
herein.
(i) Dispute Resolution. Any controversy or claim arising out
of or relating to this Agreement or the breach thereof shall be settled by
arbitration in accordance with the then existing Commercial Arbitration
Rules of the American Arbitration Association ("AAA").
(i) The matter shall be heard and decided, and
award rendered, by a panel of three (3) arbitrators
("Arbitration Panel"). The Company and Executive shall
each select one (1) arbitrator from the AAA National
Panel of Commercial Arbitrators ("Commercial Panel") and
the AAA shall elect a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration
Panel shall be final and binding as between the parties
hereto and their heirs, executors, administrators,
successors, and assigns. Judgment on the award may be
entered by any court having jurisdiction thereof.
(ii) The parties irrevocably consent to the
jurisdiction of the Federal and state courts located in
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<PAGE>
the State of Maryland for this purpose. Each such
arbitration proceeding shall be located in Maryland.
(iii) The arbitrators may, in the course of the
proceedings, order any provisional remedy or conservatory
measure (including, without limitation, attachment,
preliminary injunction, or the deposit of specified
security) that the arbitrators consider to be necessary,
just, and equitable. The failure of a party to comply
with such an interim order may, after due notice and
opportunity to cure such noncompliance, be treated by the
arbitrators as a default, and some or all of the claims
or defenses of the defaulting party may be stricken and
partial or final award entered against such party, or the
arbitrators may impose such lesser sanctions as the
arbitrators may deem appropriate. A request for interim
or provisional relief by a party to a court shall not be
deemed incompatible with the agreement to arbitrate or a
waiver of that agreement.
(iv) The parties acknowledge that any remedy at
law for breach of this Agreement may be inadequate, and
that, in the event of a breach of Sections 9 and 10 by
Executive, any remedy at law would be inadequate in that
any such breach would cause irreparable competitive harm
to the Company. Consequently, in addition to any other
relief that may be available, the arbitrators may also
order temporary and permanent injunctive relief,
including, without limitation, specific performance,
without the necessity of the prevailing party proving
actual damages and without regard to the adequacy of any
remedy at law.
(v) In the event Executive is the prevailing
party in such arbitration, then Executive shall be
entitled to reimbursement by the Company for all
reasonable legal and other professional fees and expenses
incurred by him in such arbitration or in enforcing the
award, including reasonable attorneys' fees.
(j) Waiver. Either party hereto may by written notice to the
other (i) extend the time for the performance of any of the obligations or
other actions of the other under this Agreement; (ii) waive compliance
with any of the conditions or covenants of the other contained in this
Agreement; and (iii) waive or modify performance of any of the obligations
of the other under this Agreement. Except as provided in the preceding
sentence, no action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of
compliance with any representation, warranty, covenant, or agreement
contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver
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<PAGE>
of any preceding or succeeding breach, and no failure by either party to
exercise any right or privilege hereunder shall be deemed a waiver of such
party's rights or privileges hereunder or shall be deemed a waiver of such
party's rights to exercise that right or privilege at any subsequent time
or times hereunder.
(k) Amendment. This Agreement may be terminated, amended,
modified, or supplemented only by a written instrument executed by
Executive and the Company.
(l) Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of Maryland, regardless
of the law that might be applied under principles of conflict of laws;
provided, however, that any arbitration under Section 11(i) hereof shall
be conducted in accordance with the United States Arbitration Act as then
in force.
(m) Section and Other Headings. The section and other
headings contained in this Agreement are for reference purposes only and
shall not affect the meaning or interpretation of this Agreement.
(n) Withholding of Taxes. The Company may withhold from
amounts required to be paid to Executive hereunder any applicable federal,
state, local, and other taxes with respect thereto; provided, however,
that the Company shall promptly pay over the amounts so withheld to the
appropriate taxing bodies and provide to Executive appropriate statements
on forms proscribed for such purposes on the amounts so withheld.
(o) Severability. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other
provision of this Agreement not held so invalid, and each such other
provision shall, to the full extent consistent with law, continue in full
force and effect. If any provision of this Agreement shall be held
invalid in part, such invalidity shall in no way affect the rest of such
provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent
consistent with law continue in full force and effect.
(p) Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the same
instrument.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its officers thereunto
duly authorized, and Executive has signed this Agreement, all as of the
Effective Date.
ATTEST: VIRTUAL OPEN NETWORK ENVIRONMENT
CORPORATION
By: /s/ Ban Leong Eap
--------------------------- -----------------------------
(Corporate Seal)
WITNESS: EXECUTIVE:
/s/ illigible /s/ James F. Chen
--------------------------- --------------------------------
James F. Chen
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<PAGE>
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
1995 NON-STATUTORY STOCK OPTION PLAN
This 1995 Non-Statutory Stock Option Plan ("Plan") is adopted as
of May 15, 1995 by Virtual Open Network Environment Corporation
("Corporation").
1. PURPOSE OF PLAN. The purpose of this Plan is to attract
and retain outstanding key employees, to furnish existing key employees
with further inducement to continue their employment with the Corporation
and to encourage key employees to acquire a greater stake in the
Corporation's success and, thus, provide an additional incentive for them
to promote the Corporation's best interests.
2. SHARES RESERVED FOR PLAN. Subject to adjustment as
provided in Section 14 hereof, a total of 528,444 ("Shares") of the
Corporation's common stock ("Common Stock") shall be subject to the Plan,
and such amount shall be, and is hereby reserved for sale for such
purpose. The Shares shall consist of shares of the Corporation's Common
Stock that are presently authorized but unissued or that were previously
issued, reacquired and held by the Corporation as treasury shares. Any of
the Shares that remain unsold and that are not subject to outstanding
options at the termination of the Plan shall cease to be reserved for the
purpose of the Plan. If any Option (as hereinafter defined) granted under
the Plan shall expire or terminate for any reason without having been
exercised in full, the Shares subject to such Option, but not purchased
thereunder, shall be removed from the reserve.
3. ADMINISTRATION OF THE PLAN.
--------------------------
3.1 The Plan shall be administered by a committee appointed from
time to time by the Board of Directors of the Corporation ("Committee").
The Committee shall consist of not less than two (2) members, each of
which shall be a director of the Corporation. Members of the Committee
shall be eligible to receive Options under the Plan, provided that such
members do not participate in the decision to grant options to themselves.
3.2 Subject to the terms of the Plan, the Committee shall have
full and final authority to determine the persons who are to be granted
Options under the Plan, the number of Shares subject to each Option and
the schedule by which the Options may be exercised.
3.3 Subject to the terms of the Plan, the Committee shall also
have complete authority to interpret the Plan, to prescribe, amend, and
rescind rules and regulations relating to the Plan, to determine the
details and provisions of each Option Agreement (as hereinafter defined)
and to make all other determinations necessary or desirable in the
administration of the Plan.
<PAGE>
3.4 The Committee shall have the authority to grant options that
do not qualify as incentive stock options ("Options") under Section 422 of
the Internal Revenue Code of 1986, as amended ("Code").
4. ELIGIBILITY.
-----------
4.1 The individuals who shall be eligible to participate in the
Plan shall be such key employees ("Optionees") of the Corporation as the
Committee shall determine, in its sole discretion. In determining the
employees to whom Options shall be granted and the number of Shares to be
covered by each Option, the Committee may take into account the nature of
the services rendered by the respective employees, their present and
potential contributions to the success of the Corporation and such other
factors as the Committee, in its sole discretion, may deem relevant.
Options may be granted to key employees who hold or have held options
under previous plans.
4.2 Except as provided herein, or in the agreement between the
Corporation and the Optionee with respect to any particular grant of
Options ("Option Agreement"), there is no limit on the number or value of
Options exercisable in any one (1) year.
5. OPTION AGREEMENT. The grant of each Option shall be
evidenced by minutes of a meeting of the Committee or the unanimous
written consent of all members of the Committee and by a written Option
Agreement effective as of the date of the grant, which Option Agreement
shall set forth such terms and conditions as may be determined by the
Committee to be consistent with the Plan.
6. TERM AND EXERCISABILITY OF OPTION.
---------------------------------
6.1 Each Option shall commence on the date provided in the
Option Agreement ("Date of Grant"). Except as otherwise provided in the
Option Agreement, each Option shall terminate ten (10) years after its
Date of Grant. If the Optionee shall cease to be a regular full-time
employee of the Corporation for any reason, any unexercised Options shall
terminate three (3) months from the date of such termination of
employment.
6.2 Nothing in the Plan or in any Option shall confer on any
Optionee the right to continue in the employ of the Corporation or
interfere in any way with the right of the Corporation to terminate the
Optionee's employment at any time.
6.3 Unless otherwise provided in an Option Agreement, all
Options granted hereunder shall become exercisable in three (3)
installments, the Optionee having the right to purchase from the
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<PAGE>
Corporation a portion of the Shares subject to the Option ("Option
Shares") on and after the following dates on a cumulative basis:
(a) on and after the date that is twelve (12) months from
the Date of Grant, up to thirty-three and one-third percent (33 1/3%) of
the total number of Option Shares;
(b) on and after the date that is twenty-four (24) months
from the Date of Grant, up to an additional thirty-three and one-third
percent (33 1/3%) of the total number of Option Shares; and
(c) on and after the date that is thirty-six (36) months
from the Date of Grant, up to an additional thirty-three and one-third
percent (33 1/3%) of the total number of Option Shares.
For example, if Options to acquire 1,000 Shares are granted to an
Optionee on May 15, 1995, the Optionee would not have any right to acquire
Shares under the Options until May 15, 1996. From May 15, 1996 until May
14, 1997, he would have the right to exercise thirty-three and one-third
percent (33 1/3%) of his Options and thereby acquire 333 1/3 Shares. From
May 15, 1997 until May 14, 1998, he would have the right to exercise an
additional thirty-three and one-third percent (33 1/3%) of his options for
an additional 333 1/3 Shares; if, however, he had not previously exercised
the Option for the initial 333 1/3 Shares, he would have a continuing
right to exercise the initial portion of the Option Shares as well as the
second portion, for a total of 66 2/3% or 666 2/3 Shares.
7. PURCHASE PRICE. The purchase price per Share shall be set by
the Committee. The purchase price per Share shall be no less than par
value per Share.
8. MANNER OF PAYMENT. Options shall be exercised by
delivery by the Optionee to the Corporation of an executed Notice of
Exercise in the form provided by the Corporation, accompanied by either
(i) a check in the amount of the purchase price, or (ii) by previously
owned shares of Common Stock with a fair market value equal to the
purchase price.
9. RESTRICTIONS ON SHARES.
9.1 As soon as practicable after receipt of the purchase
price, the Corporation shall deliver to the Optionee a certificate or
certificates for the purchased Shares. The Optionee shall thereupon
become a shareholder of the Corporation with respect to the Shares
represented by such certificates and, as such, shall be fully entitled to
receive dividends and other distributions with respect to such Shares and
shall have all of the other rights of a shareholder. Notwithstanding the
foregoing, the Optionee shall be prohibited from the sale, exchange,
transfer, pledge, hypothecation, gift or other disposition of such Shares
until the date on which such Shares are traded on an established
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<PAGE>
securities exchange or secondary market; however, such Shares may be used
as payment of the purchase price of Shares issued upon the exercise of
other Options. The aforesaid restriction shall apply to any new,
additional or different securities the Optionee may receive with respect
to such Shares by virtue of a stock split or stock dividend or any other
change in the corporate or capital structure of the Corporation.
9.2 At any time after termination of employment with the
Corporation by the Optionee for any reason, including death, the
Corporation shall have the right to repurchase all or any portion of the
Shares acquired by such Optionee pursuant to this Plan (whether then held
by the Optionee or by a transferee). Such right must be exercised by the
Corporation, if at all, at a time when the Shares are not traded on an
established securities exchange or secondary market. The purchase price
for such re-acquired shares shall be the per share value most recently
established by the Board of Directors as the fair market value of the
Corporation's Common Stock for purposes of the grant of Options under this
Plan. The entire purchase price shall be paid at closing of such
purchase, which shall occur on the date set by the Corporation within
ninety (90) days after exercise by the Corporation of its right to
repurchase.
9.3 Until such time as the restrictions hereunder lapse with
respect to the Shares, the certificates representing the Shares shall
contain a legend evidencing such restrictions. Alternatively, the
Corporation may require the Optionee to deposit the Share certificate(s)
with the Corporation or its agent, endorsed in blank or accompanied by a
duly executed irrevocable stock power or other instrument of transfer.
10. NON-ASSIGNABILITY OF OPTION. During the Optionee's
lifetime, the Option shall not be transferrable by the Optionee.
11. DIVIDENDS. If at any time after an Option is granted but
prior to its exercise, the Board of Directors shall declare, with respect
to the Common Stock, any dividend payable in shares of stock of the
Corporation of any class, then there shall be deliverable upon the
subsequent exercise of any Option under this Plan, in addition to each
Option Share granted, and for no additional price, such additional share
or shares as shall have been distributable as a result of such share
dividend in respect of an Option Share; except that fractional shares
shall not be so deliverable. Any such share dividend shall be deemed part
of the Option Shares for the purpose of this Plan.
12. COMPLIANCE WITH LAWS. Notwithstanding any other
provisions of the Plan, each Option Agreement shall contain such
provisions as the Committee shall determine to be appropriate to ensure
that the Optionee agrees for himself or herself and for his or her legal
representatives, that the Option shall not be exercisable by him, her or
them and that the Corporation shall not be obligated to issue any Shares,
during a time period in which such exercise would adversely affect any
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<PAGE>
exemption from registration under applicable state and federal securities
laws that is being relied upon, or is being considered by the Corporation
for the issuance of any of its securities whether pursuant to the Plan or
otherwise.
13. NO RIGHTS IN OPTION STOCK. An Optionee shall not have
any rights as a shareholder with respect to Shares for which an Option has
not been exercised and payment has not been made as herein provided nor
shall an Optionee have rights with respect to shares or the Corporation's
stock not expressly conferred by the Plan.
14. ADJUSTMENTS. If there are any changes in the
capitalization of the Corporation affecting in any manner the number or
kind of outstanding shares of the Corporation's stock, whether such
changes have been occasioned by recapitalization, reorganization or other
changes in the Corporation's capital structure or its business, merger or
consolidation of the Corporation, issuance of bonds, debentures, preferred
or prior preference stocks ahead of or affecting the Common Stock or the
rights thereof, dissolution or liquidation of the Corporation, or any sale
or transfer of all or any part of its assets or business, or any other
corporate act or proceedings, whether of a similar character or otherwise,
then the number and kinds of shares of the Corporation's stock then
subject to Options and the price to be paid therefor shall be
appropriately adjusted by the Committee.
15. AMENDMENT AND TERMINATION. Unless the Plan has been
terminated as hereinafter provided, it shall terminate on the date that is
ten (10) years after the date of adoption hereof, except as to Options
previously granted and outstanding under the Plan at such date, and no
Options shall be granted hereunder after such date. The Plan may be
terminated, modified, or amended by the shareholders of the Corporation.
The Board of Directors of the Corporation may terminate the Plan or make
such modifications or amendment thereof as it shall deem advisable or in
order to conform to any change in any law or regulation applicable
thereto; provided, however, that the Board of Directors may not, without
further approval by the holders of a majority of the outstanding shares of
the Corporation having general voting power; (a) increase the maximum
number of shares as to which Options may be granted under the Plan, (b)
change the class of employees eligible to be granted Options, (c) increase
the periods during which Options may be granted or exercised, or (d)
provide for the administration of the Plan otherwise than by the
Committee. No termination, modification, or amendment of the Plan may,
without the consent of the employee to which any Option shall theretofore
have been granted, adversely affect the rights of each such employee under
such Option.
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<PAGE>
This 1995 Non-Statutory Stock Option Plan has been adopted by the
Board of Directors of the Corporation, effective as of the date first
above written.
/s/ James F. Chen
--------------------------
James F. Chen
/s/ Charles Chen
--------------------------
Charles Chen
/s/ Maxine Loh
--------------------------
Maxine Loh
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<PAGE>
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
1996 Non-Statutory Stock Option Plan
ARTICLE I
General
1.1 PURPOSE. It is the purpose of the 1996 Non-Statutory Stock
Option Plan ("Plan") to promote the interests of Virtual Open Network
Environment Corporation ("Corporation") and its stockholders by
attracting, retaining, and stimulating the performance of selected
Employees, Directors, and Independent Contractors (each an "Optionee") by
giving such individuals the opportunity to acquire a proprietary interest
in the Corporation and an increased personal interest in its continued
success and progress.
1.2 DEFINITIONS. As used herein the following terms have the
following meanings:
(a) "Board" means the Board of Directors of the
Corporation.
(b) "Book Value" means the historical cost of the
Corporation's assets reduced by the Corporation's liabilities
calculated in accordance with generally accepted accounting
principles, determined on the last day of the immediately
preceding tax year. In no event will Book Value be less than
zero.
(c) "Change in Control" means any of the events set forth
below:
(i) The direct or indirect acquisition in one or more
transactions, other than from the Corporation, by any
individual, entity or group of beneficial ownership of
a number of Corporation Voting Securities in excess of
50% of the Corporation Voting Securities unless such
acquisition has been approved by the Board; or
(ii) The approval by the Board of a reorganization,
merger or consolidation, unless, following such
reorganization, merger or consolidation, all or
substantially all of the individuals and entities who
were the respective beneficial owners of the
Outstanding Stock and Corporation Voting Securities
immediately prior to such reorganization, merger or
consolidation, following such reorganization, merger or
consolidation beneficially own, directly or indirectly,
more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote
generally in the election of directors or trustees, as
the case may be, of the entity resulting from such
reorganization, merger or consolidation in
<PAGE>
substantially the same proportion as their ownership of
the Outstanding Common Stock and Corporation Voting
Securities immediately prior to such reorganization,
merger or consolidation, as the case may be.
(d) "Code" means the Internal Revenue Code of 1986, as
amended.
(e) "Commencement Date" means the day immediately following
the date of adoption of the Plan by the Board in accordance with the
provisions of Section 4.10 of Article IV hereof.
(f) "Committee" means the Non-Statutory Stock Option Plan
Committee of the Board; PROVIDED, HOWEVER, that in the event the
Board has not appointed members to the Stock Option Committee, all
references to the Committee shall be deemed to refer to the
Compensation Committee of the Board.
(g) "Corporation" means Virtual Open Network Environment
Corporation, a Delaware corporation.
(h) "Corporation Voting Securities" means the combined
voting power of all outstanding voting securities of the Corporation
entitled to vote generally in the election of the Board.
(i) "Date of Grant" means April 22, 1996.
(j) "Director" means a member of the Board.
(k) "Employee" means any employee of the Corporation.
(l) "Expiration Date" means December 31, 1996.
(m) "Fair Market Value" means the fair market value of a
share of Restricted Stock as determined by the Board in good faith.
(n) "Formula Price" means the price at which the
Corporation shall purchase an Optionee's Restricted Stock upon the
Optionee's Termination of Employment.
(o) "Independent Contractor" means a person that provides
services to the Corporation and who is not an Employee or a
Director.
(p) "Option" means any option to purchase shares of
Restricted Stock granted pursuant to the provisions of Article III
or IV of the Plan.
(q) "Optionee" means an Employee, Director, or Independent
Contractor who has been granted an Option.
(r) "Option Term" means the period beginning on April 22,
1996, and ending December 31, 1996.
2
<PAGE>
(s) "Outstanding Common Stock" means, at any time, the
issued and outstanding Common Stock of the Corporation.
(t) "Plan" means this Virtual Open Network Environment
Corporation 1996 Non-Statutory Stock Option Plan.
(u) "Purchase Price" means the Fair Market Value of shares
of Restricted Stock on the Date of Grant of such shares subject to
the Options.
(v) "Purchase Date" means the day on which Optionee
delivers the amount of cash (or other consideration determined by
the Board to be acceptable to the Company, pursuant to the Plan)
payable hereunder for shares of Restricted Stock.
(w) "Restricted Stock" means the $0.001 par value Common
Stock of the Corporation subject to the restrictions set forth on
Exhibit A attached hereto.
(x) "Termination of Employment" means, with respect to an
Optionee, the voluntary or involuntary discontinuation of the
provision of services to the Corporation for any reason whatsoever,
including but not limited to the death, disability, or retirement of
the Optionee.
1.3 NUMBER OF SHARES. Optionee may purchase the number of shares
of the Restricted Stock set forth on Exhibit B attached hereto and the
Corporation does hereby agree to sell to Optionee such shares. If any
Option expires or terminates for any reason without having been exercised
in full, the unpurchased shares of Restricted Stock subject to such
expired or terminated Option shall not be available for purposes of the
Plan.
ARTICLE II
Administration
2.1 The Plan shall be administered by the Committee. Each member
of the Committee shall be appointed by and shall serve at the pleasure of
the Board. The Board shall have the sole continuing authority to appoint
members of the Committee both in substitution for members previously
appointed and to fill vacancies however caused. The following provisions
shall apply to the administration of the Plan:
(a) The Committee shall designate one of its members as
Chairman and shall hold meetings at such times and places as it may
determine. Each member of the Committee shall be notified in
writing of the time and place of any meeting of the Committee at
least two days prior to such meeting, provided that such notice may
be waived by a Committee member. A majority of the members of the
Committee shall constitute a quorum, and any action taken by a
majority of the members of the Committee present at any duly called
3
<PAGE>
meeting at which a quorum is present (as well as any action
unanimously approved in writing) shall constitute action by the
Committee. The Committee may act by unanimous written consent of
its members.
(b) The Committee may appoint a Secretary (who need not be a
member of the Committee) who shall keep minutes of its meetings.
The Committee may make such rules and regulations for the conduct of
its business as it may determine.
(c) The Committee shall have full and exclusive authority,
subject to the express provisions of the Plan, to interpret the Plan
as it relates to Options granted or to be granted to Optionees under
the Plan, to provide, modify and rescind rules and regulations
relating thereto, to determine the terms and provisions of each
Option granted to Optionees and the form of each option agreement
evidencing an Option granted to Optionees under the Plan, and to
make all other determinations and perform such actions as the
Committee deems necessary or advisable to administer the Plan as it
relates to Options granted or to be granted to Optionees under the
Plan. In addition, the Committee shall have full authority, subject
to the express provisions of the Plan, to determine to whom Options
shall be granted, the time or date of grant of each such Option, the
number of shares subject thereto and the price at which such shares
may be purchased. In making such determinations, the Committee may
take into account the nature of the services rendered by the
Optionees, his or her present and potential contributions to the
success of the Corporation's business and such other facts as the
Committee in its discretion shall deem appropriate to carry out the
purposes of the Plan.
(d) No member of the Committee or the Board shall be liable
for any action taken or determination made in good faith with
respect to the Plan or any Option granted hereunder.
ARTICLE III
Grant of Options
3.1 GRANT OF OPTIONS. On April 22, 1996, Options will be granted
under the Plan to the persons listed on Exhibit B hereto to purchase the
number of shares of Restricted Stock set forth on Exhibit B opposite such
person's name. Any person who has been granted Options under this Article
III may decline to accept such Options. Such person may indicate his
election to decline to accept the Options by giving notice thereof to the
Corporation or by refusing to execute a stock option agreement relating to
the Options.
3.2 PRICE. The purchase price per share of Restricted Stock under
each Option granted under this Article III shall be an amount equal to
Fair Market Value.
3.3 OPTION PERIOD AND TERMS OF EXERCISE OF OPTIONS.
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(a) Notwithstanding anything contained herein to the
contrary or in any option agreement executed by and between
Corporation and any Optionee, each Option granted under this Article
III shall be fully exercisable during the period beginning on the
Date of Grant and ending on the Expiration Date.
(b) Notwithstanding anything contained herein to the
contrary or in any option agreement executed by and between
Corporation, all obligations to an Optionee hereunder shall
terminate in the event of the Termination of Employment of the
Optionee with the Corporation, for any reason whatsoever, including
but not limited to the death, disability, or retirement of the
Optionee, prior to the purchase and sale of the shares of Restricted
Stock hereunder. Any unexercised Option granted to an Optionee
under this Article III shall expire and become null and void
immediately upon the Optionee's Termination of Employment.
(c) Under the provisions of any option agreement evidencing
an Option granted hereunder, the Committee or the Board may impose
such other terms and conditions upon the exercise of an Option as
are not inconsistent with the terms of the Plan.
ARTICLE IV
Miscellaneous
4.1 ADJUSTMENTS TO REFLECT CAPITAL AND OTHER CORPORATE CHANGES.
The Options and the exercise price for such Options shall be appropriately
adjusted to reflect any stock dividend, stock split, combination or
exchange of shares, recapitalization, merger, consolidation or other
change in capitalization with a similar substantive effect upon the
Options granted hereunder. After any reorganization, merger or
consolidation in which the Corporation is not the surviving corporation,
Optionee shall, at no additional cost, be entitled upon the exercise of
the Options to receive (subject to any required action by shareholders),
in lieu of the number of shares of Restricted Stock receivable pursuant
hereto, the number and class of shares of stock or other securities to
which Optionee would have been entitled pursuant to the terms of the
reorganization, merger or consolidation if, at the time of such
reorganization, merger or consolidation, Optionee had been the holder of
record of a number of shares of stock equal to the number of shares
receivable or exercisable pursuant hereto. Comparable rights shall accrue
to Optionee in the event of successive reorganizations, mergers or
consolidations of the character described above.
In the event of a reclassification of Common Stock not covered by
the foregoing, or in the event of a liquidation or reorganization
(including a merger, consolidation or sale of assets) of the Corporation,
the Board shall make such adjustments, if any, as it may deem appropriate
in the number, purchase price and kind of shares covered by the
unexercised portions of the Options theretofore granted under the Plan.
The provisions of this Section 4.1 shall only be applicable if, and only
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to the extent that, the application thereof does not conflict with any
valid governmental statute, regulation, or rule.
4.2 AMENDMENT AND TERMINATION OF THE PLAN. Subject to the right
of the Board to terminate the Plan prior thereto and extend the term of
the Plan, the Plan shall terminate on January 1, 1997. No Options may be
granted after termination of the Plan. The Board may at any time alter or
amend the Plan but the Board may not make any alteration or amendment
thereof which operates to (i) abolish the Committee, change the
qualifications of its members, or withdraw the administration of the Plan
from its supervision, (ii) increase the total number of shares of
Restricted Stock which may be granted under the Plan (other than as
provided in Section 4.1 of this Article IV), (iii) extend the term of the
Plan or the maximum exercise periods provided in Article III hereof, (iv)
decrease the minimum purchase price for Restricted Stock under the Plan
(other than as provided in Section 4.1 of this Article IV), (v) materially
increase the benefits accruing to participants under the Plan, or (vi)
materially modify the requirements as to eligibility for participation in
the Plan.
No termination or amendment of the Plan shall adversely affect the
rights of an Optionee under an Option, except with the consent of such
Optionee.
4.3 NO FRACTIONAL SHARES. Notwithstanding any contrary indication
in the Plan or in any option agreement evidencing an Option granted under
the Plan, no fractional shares of Restricted Stock may be purchased upon
exercise of any Option.
4.4 LEGEND. Each certificate for the shares of the Restricted
Stock issued hereunder or in substitution or exchange therefor, or upon
the transfer thereof, together with any other Restricted Stock subject to
the restrictions of this Plan, shall be stamped or otherwise imprinted
with the legend in substantially the following form:
The transfer of this instrument or the securities
evidenced hereby is restricted under the terms of
the 1996 Non-Statutory Stock Option Plan dated as
of April 22, 1996, a copy of which is on file at
the principal office of Virtual Open Network
Environment Corporation, and no transfer of this
instrument or such securities shall be made until
the conditions thereof shall have been fulfilled.
4.5 LAPSE OF RESTRICTIONS. The restrictions on each share of
Restricted Stock as described in this Plan and Exhibit A attached hereto
shall lapse One Hundred Eighty (180) days after any public offering of the
Corporation's stock.
4.6 PAYMENT OF PURCHASE PRICE; APPLICATION OF FUNDS. Upon
exercise of an Option, the purchase price shall be paid in full by check;
provided, however, that at the request of an Optionee and to the extent
permitted by applicable law, the Corporation may, in its sole and absolute
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discretion, approve reasonable arrangements with one or more Optionees,
under which such an Optionee may exercise an Option by delivering to the
Corporation an irrevocable notice of exercise, together with such other
documents as the Corporation shall require, and the Corporation shall,
upon receipt of full payment by check, or any other reasonable payment
arrangement, of the purchase price and any other amounts due in respect of
such exercise, deliver to such Optionee one or more certificates
representing the shares of Restricted Stock issued in respect of such
exercise. The proceeds of any sale of Restricted Stock covered by Options
shall constitute general funds of the Corporation. Upon exercise of an
Option, the Optionee will be required to pay, or arrange with the
Corporation for the payment of, the amount of any federal, state, or local
taxes required by law to be withheld in connection with such exercise. No
shares of Restricted Stock shall be issued upon exercise of an Option
until full payment therefor has been made, and an Optionee shall have none
of the rights of a stockholder until shares are issued to him.
4.7 REQUIREMENTS OF LAW. The granting of Options and the issuance
of Restricted Stock upon the exercise of an Option shall be subject to all
applicable laws, rules and regulations, and to such approval by
governmental agencies as may be required.
4.8 NONTRANSFERABILITY OF OPTIONS. An Option granted under the
Plan shall not be transferable by the Optionee and shall be exercisable
during the lifetime of the Optionee only by the Optionee.
4.9 OPTION AGREEMENT; INVESTMENT LETTER.
(a) Each person who accepts an Option offered to him
hereunder shall enter into an agreement with the Corporation, in
such form as the Committee may prescribe, setting forth the terms
and conditions of the Option, whereupon such person shall become a
participant in the Plan.
(b) The Corporation's obligation to deliver Restricted
Stock with respect to an Option shall be conditioned upon its
receipt from the Optionee, to whom such Restricted Stock is to be
delivered, of an executed investment letter containing such
representations and agreements as the Committee may determine to be
necessary or advisable in order to enable the Corporation to issue
and deliver such Restricted Stock to such Optionee in compliance
with applicable federal, state, or local securities laws, rules, or
regulations.
4.10 EFFECTIVE DATE OF THE PLAN. The Plan shall become effective,
as of the date of its adoption by the Board. If the Plan is not so
adopted, the Plan shall terminate and all Options granted hereunder shall
be null and void.
4.11 TERMINATION OF EMPLOYMENT. A transfer of employment within
the Corporation shall not be considered to be a Termination of Employment
for the purposes of the Plan. Nothing in the Plan or in any option
agreement evidencing an Option granted under the Plan to an Optionee shall
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confer upon any Optionee any right to continue in the employ of the
Corporation or in any way interfere with the right of the Corporation to
terminate the employment or contractual relationship with the Optionee at
any time, with or without cause.
4.12 CONSTRUCTION. Options granted under the Plan are not intended
to be treated as incentive stock options under Section 422 of the Code.
Words of any gender used in the Plan shall be construed to include any
other gender, unless the context requires otherwise.
4.13 INTERPRETATION. The section headings hereof are inserted
solely for convenience of reference only and shall be disregarded in
interpreting the provisions hereof. As used in this Plan, any gender
shall include any other gender, the plural shall include the singular and
the singular shall include the plural, the disjunctive shall include the
conjunctive and the conjunctive shall include the disjunctive, wherever
appropriate.
4.14 GOVERNING LAW. This Plan and all the terms and provisions
hereof, shall be interpreted and construed in accordance with the laws of
the State of Delaware, except for its rules relating to the conflict of
laws; provided, however, that such terms and provisions relating to
federal income tax law shall be interpreted and construed in accordance
with federal law, and such terms and provisions relating to the
application of securities laws shall be interpreted and construed in
accordance with federal law and the laws of the jurisdiction in which
Optionee resides or is domiciled.
4.15 SEVERABILITY. If any provision, or portion thereof, of this
Plan, or the application thereof to any person or circumstances, shall, to
any extent be invalid or unenforceable, the remainder hereof, or the
application of such provision, or portion thereof, to any other person or
circumstance shall not be affected thereby; and each provision of this
Plan shall be valid and enforceable to the fullest extent permitted by
law.
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EXHIBIT A
ARTICLE I
Restrictions on Transferability
1.1 GENERAL RESTRICTIONS. Upon the purchase of Restricted Stock
pursuant to the Plan, all of the shares of stock shall not be sold,
assigned, transferred, pledged or otherwise disposed of, within six years
of the Purchase Date, except as otherwise provided in Section 1.2. and
Section 1.3 of Article I hereof. Transfers are permitted under Article II
hereof following the passage of six years after the Purchase Date. As
long as the aforesaid restrictions remain in effect, no holder of
Restricted Stock shall have the right to vote the restricted shares for
any purpose. All voting rights with respect to the Restricted Stock shall
be exercised by a majority vote of the Board.
1.2 LAPSE OF RESTRICTIONS. The restrictions set forth herein
shall lapse One Hundred Eighty (180) days following any public offering of
the Corporation's stock or the acquisition of the Corporation in exchange
for publicly traded shares.
1.3 REQUIRED TRANSFERS.
(a) Except as provided in Section 1.2 of Article I hereof,
in the event of the Optionee's Termination of Employment within the
time period specified below after the Purchase Date, for any reason
whatsoever, Optionee, within ten (10) business days after the date
of the said termination (75 days in the case of the death of an
Optionee), shall give to the Corporation a written offer to sell the
Restricted Stock purchased by him or her hereunder for the purchase
price specified hereunder as payable by the Corporation and, for a
period of ninety (90) days thereafter, the Corporation shall have an
option to purchase such Restricted Stock, in whole or in part, for
such price and on such terms as set forth herein.
(b) The Formula Price payable by the Corporation for the
Restricted Stock shall be as follows:
Upon the Optionee's Termination The price per share of Restricted
of Employment after acquiring Stock to be paid to Optionee
Restricted Stock within: shall be:
One year The lesser of the (a) Purchase
Price or (b) Book Value.
80% of Optionee's Restricted
Two years Stock shall be purchased for the
lesser of the Purchase Price or
Book Value; 20% shall be
purchased for Book Value.
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Upon the Optionee's Termination The price per share of Restricted
of Employment after acquiring Stock to be paid to Optionee
Restricted Stock within: shall be:
60% of Optionee's Restricted
Three years Stock shall be purchased for the
lesser of the Purchase Price or
Book Value; 40% shall be
purchased for Book Value.
40% of Optionee's Restricted
Four years Stock shall be purchased for the
lesser of the Purchase Price or
Book Value; 60% shall be
purchased for Book Value.
20% of Optionee's Restricted
Five years Stock shall be purchased for the
lesser of the Purchase Price or
Book Value; 80% shall be
purchased for Book Value.
Six or more years 100% of Optionee's Restricted
Stock shall be purchased for Book
Value.
(c) The purchase price payable for the Restricted Stock
shall be paid to or for the benefit of Optionee in the event of the
exercise by the Corporation of the option provided hereunder at a
closing, the time, date and place of which shall be established by
the Corporation upon the exercise of such option by written notice
to Optionee; provided, however, that the time thereof shall be
during regular business hours, the date thereof shall be a regular
business day no earlier than five (5) business days and no later
than twenty (20) business days following such notice and the place
thereof shall be the principal business offices of the Corporation.
At such closing, against performance by the Corporation of its
obligations hereunder, Optionee shall deliver to the Corporation the
certificate or certificates evidencing the Restricted Stock to be
sold hereunder, duly endorsed for transfer, subject only to those
restrictions provided in this Plan; and, against performance by
Optionee of his or her obligations hereunder, the Corporation shall
pay to or for the benefit of Optionee the purchase price therefor in
cash.
1.4 THE RESTRICTED STOCK. For the purposes hereof, the Restricted
Stock purchased by Optionee hereunder shall include any stock dividends,
stock splits and capital stock or other securities subsequently issued
with respect to such shares of Restricted Stock following the date hereof.
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ARTICLE II
Other Transfers
2.1 RIGHT OF FIRST REFUSAL UPON PRESENTATION OF THIRD-PARTY OFFER.
(a) Except as provided in Section 1.2 and Section 1.3 of
Article I and Section 2.2 of Article II hereof, and provided
Optionee holds the Restricted Stock for a period in excess of six
years beyond the Purchase Date, Optionee may sell any of the shares
of Restricted Stock provided Optionee gives to the Corporation
written notice containing a copy of a bona fide, legally enforceable
written offer of a third party forthwith to purchase such Restricted
Stock for a consideration consisting solely of cash to be paid upon
the delivery of such Restricted Stock, in transferable form, free
and clear of all liens, encumbrances, purchase options, equities,
claims and restrictions, except for those set forth in this Plan;
and for a period of twenty (20) days thereafter or such shorter
period as the Board of the Corporation may then designate, the
Corporation shall have an option to purchase such Restricted Stock
from Optionee, in whole but not in part, for a price equal to the
Book Value per share of such Restricted Stock.
(b) If the Corporation shall fail to exercise its option
provided in this Section 2.1 of Article II with respect to any of
the Restricted Stock, within the twenty (20) day period thereof,
then, for a period of ten (10) days thereafter, such option shall be
suspended with respect to the Restricted Stock as to which such
option shall not be exercised, and Optionee shall have the right to
accept the written offer to purchase such Restricted Stock as to
which such option shall be suspended as contained in the notice
thereof and shall have the right to transfer such Restricted Stock
in accordance with the terms of such offer, subject to the
restrictions set forth in this Plan.
2.2 PERMITTED TRANSFERS TO CORPORATION, STOCK OR BENEFIT PLAN, OR
OTHER SHAREHOLDER. Except as provided in Section 1.2 and Section 1.3 of
Article I and Section 2.1 of Article II hereof, and provided Optionee
holds the Restricted Stock for a period in excess of six years beyond the
Purchase Date, Optionee may sell any Restricted Stock to (a) the
Corporation, (b) any employee stock or employee benefit plan sponsored by
the Corporation, or (c) any other person who shall then be a shareholder
of the Corporation, nothing contained in this Plan hereof shall prevent
the sale, of any Restricted Stock thereto; provided, however, that such
Restricted Stock may not be sold for a price in excess of the Book Value
per share of such stock; provided, further, that any transferee, other
than the Corporation or any such employee stock plan, to whom such
securities shall be sold shall execute and deliver to the Corporation an
addendum hereto, pursuant to which such transferee shall agree to be a
party hereto bound by the provisions of this Plan, with the same force and
effect as if such transferee shall have been Optionee hereunder. For the
purposes hereof, the trustees of any trust forming part of a stock bonus,
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profit sharing or pension plan sponsored by the Corporation for the
benefit of all or any part of its employees or the employees of any
subsidiaries thereof, including but not limited to an employee stock
ownership plan, shall constitute an employee stock plan.
2.3 RIGHT TO PLEDGE. Provided the Optionee holds the Restricted
Stock more than six years beyond the Purchase Date, the Optionee may
pledge as security for a loan, encumber, hypothecate, or otherwise borrow
against Optionee's Restricted Stock.
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EXHIBIT B
Number of Common
Shares Exercisable
Optionee Number of Options With Options
-------- ----------------- ------------------
Jieh-Shan Wang 250,000 250,000
William Wilson 100,000 100,000
Ban Leong Eap 32,870 32,870
Maxine Loh 150,000 150,000
David K. Rowland 10,000 10,000
Joseph D. Gallagher 33,081 33,081
<PAGE>
<PAGE>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
1996 INCENTIVE STOCK PLAN
Article I. Purpose, Adoption and Term of the Plan
1.01 Purpose. The purpose of the Virtual Open Network
Environment Corporation 1996 Incentive Stock Plan (hereinafter referred to
as the "Plan") is to advance the interests of the Company (as hereinafter
defined) and its Subsidiaries (as hereinafter defined), if any, by
encouraging and providing for the acquisition of an equity interest in the
Company by non-employee directors, key employees and consultants through
the grant of awards with respect to shares of Common Stock (as hereinafter
defined). The Plan will enable the Company to retain the services of non-
employee directors, key employees and consultants upon whose judgment,
interest, and special effort the successful conduct of its operations is
largely dependent and to compete effectively with other enterprises for
the services of non-employee directors, key employees and consultants as
may be needed for the continued improvement of its business.
1.02 Adoption and Term. The Plan shall become effective on June
12, 1996 ("Effective Date"), subject to the prior approval of a simple
majority of the holders of Voting Stock (as hereinafter defined)
represented, by person or by proxy, and entitled to vote at an annual or
special meeting of the holders of Voting Stock. The Plan shall terminate
on June 11, 2006, or such earlier date as shall be determined by the Board
(as hereinafter defined).
Article II. Definitions
For purposes of the Plan, capitalized terms shall have the
following meanings:
2.01 Award means (a) any grant to an Employee or a Consultant
Participant of any one or a combination of Non-Qualified Stock Options or
Incentive Stock Options described in Article VI, or Restricted Shares
described in Article VII, or (b) any grant to a Non-Employee Director of a
Non-Employee Director Option described in Article VIII.
2.02 Award Agreement means a written agreement between the
Company and a Participant or a written acknowledgment from the Company
specifically setting forth the terms and conditions of an Award granted to
a Participant under the Plan.
2.03 Beneficiary means an individual, trust or estate who or
that, by will or the laws of descent and distribution, succeeds to the
rights and obligations of the Participant under the Plan and an Award
Agreement upon the Participant's death.
2.04 Board means the Board of Directors of the Company.
2.05 Cause means, with respect to an Employee Participant or a
Consultant Participant, termination for, as determined by the Committee in
its sole discretion, (i) dishonest or fraudulent conduct relating to the
<PAGE>
Company or any of its Subsidiaries or their businesses; (ii) conviction of
any felony that, in the judgment of the Committee, involves moral
turpitude or otherwise reflects on the Company or any of its Subsidiaries
in a significantly adverse way; or (iii) gross neglect by the Participant
in the performance of his or her duties as an employee or a consultant, or
any material breach by a Participant under any employment agreement or
consulting agreement with the Company or any of its Subsidiaries.
2.06 Change in Control shall mean the occurrence, after the
Effective Date, of any of the following events, directly or indirectly or
in one or more series of transactions:
(i) Approval of the Company's shareholders of a
consolidation or merger of the Company with any Third
Party, unless the Company is the entity surviving such
merger or consolidation;
(ii) Approval of the Company's shareholders of a
transfer of all or substantially all of the assets of the
Company to a Third Party or a complete liquidation or
dissolution of the Company;
(iii) A Third Party (other than James F. Chen
and his affiliates), directly or indirectly, through one
or more subsidiaries or transactions or acting in concert
with one or more persons or entities:
(A) acquires beneficial
ownership of more than 20% of the Voting
Stock;
(B) acquires irrevocable
proxies representing more than 20% of
the Voting Stock;
(C) acquires any combination of
beneficial ownership of Voting Stock and
irrevocable proxies representing more
than 20% of the Voting Stock;
(D) acquires the ability to
control in any manner the election of a
majority of the directors of the
Company; or
(E) acquires the ability to
directly or indirectly exercise a
controlling influence over the
management or policies of the Company;
(iv) any election has occurred of persons to the
Board that causes a majority of the Board to consist of
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persons other than (A) persons who were members of the
Board on the Effective Date and/or (B) persons who were
nominated for election as members of the Board by the
Board (or a committee of the Board) at a time when the
majority of the Board (or of such committee) consisted of
persons who were members of the Board on the Effective
Date; provided, however, that any persons nominated for
election by the Board (or a committee of the Board), a
majority of whom are persons described in clauses (A)
and/or (B), or are persons who were themselves nominated
by such Board (or a committee of such Board), shall for
this purpose be deemed to have been nominated by a Board
composed of persons described in clause (A); or
(v) A determination is made by the SEC or any
similar agency having regulatory control over the Company
that a change in control, as defined in the securities
laws or regulations then applicable to the Company, has
occurred.
Notwithstanding any provision contained herein, a Change in Control shall
not include any of the above described events if they are the result of a
Third Party's inadvertently acquiring beneficial ownership or irrevocable
proxies or a combination of both for 20% or more of the Voting Stock, and
the Third Party as promptly as practicable thereafter divests itself of
beneficial ownership or irrevocable proxies for a sufficient number of
shares so that the Third Party no longer has beneficial ownership or
irrevocable proxies or a combination of both for 20% or more of the Voting
Stock.
2.07 Code means the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto. References to a section of
the Code shall include that section and any comparable section or sections
of any future legislation that amends, supplements, or supersedes said
section.
2.08 Committee means a committee of the Board as may be
appointed, from time to time, by the Board. The Board may, from time to
time, appoint members of the Committee in substitution for those members
who were previously appointed and may fill vacancies, however caused, in
the Committee. The Committee shall be composed of at least three
directors of the Company, each of whom is a "disinterested person" as
defined in Rule 16b-3, as promulgated by the SEC under the Exchange Act,
and an "outside director" within the meaning of Section 162(m). The
Committee shall have the power and authority to administer the Plan in
accordance with Article III.
2.09 Common Stock means the Common Stock, par value $.001 per
share, of the Company.
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2.10 Company means Virtual Open Network Environment Corporation,
a corporation organized under the laws of the State of Delaware, and its
successors.
2.11 Consultant Participant means a Participant who is a
consultant to the Company or one of its Subsidiaries.
2.12 Date of Grant means the date designated by the Plan or the
Committee as the date as of which an Award is granted, which shall not be
earlier than the date on which the Committee approves the granting of such
Award.
2.13 Disability means any physical or mental injury or disease
of a permanent nature that renders an Employee or a Consultant Participant
incapable of meeting the requirements of the employment or other work that
Employee or Consultant Participant performed immediately before that
disability commenced. The determination of whether an Employee or a
Consultant Participant is disabled and when an Employee or a Consultant
Participant becomes disabled shall be made by the Committee in its sole
and absolute discretion.
2.14 Disability Date means the date which is six months after
the date on which an Employee or a Consultant Participant is first absent
from active employment or work with the Company due to a Disability.
2.15 Employee Participant means a Participant who is an employee
of the Company or one of its Subsidiaries.
2.16 ERISA means the Employee Retirement Income Security Act of
1974, as amended.
2.17 Exchange Act means the Securities Exchange Act of 1934, as
amended.
2.18 Fair Market Value of a share of Common Stock means, as of
any given date, the closing sales price of a share of Common Stock on such
date on the principal national securities exchange on which the Common
Stock is then traded or, if the Common Stock is not then traded on a
national securities exchange, the closing sales price or, if none, the
average of the bid and asked prices of the Common Stock on such date as
reported on the National Association of Securities Dealers Automated
Quotation System ("Nasdaq"); provided, however, that, if there were no
sales reported as of such date, Fair Market Value shall be computed as of
the last date preceding such date on which a sale was reported; provided,
further, that, if any such exchange or quotation system is closed on any
day on which Fair Market Value is to be determined, Fair Market Value
shall be determined as of the first date immediately preceding such date
on which such exchange or quotation system was open for trading. In the
event the Common Stock is not admitted to trade on a securities exchange
or quoted on Nasdaq, the Fair Market Value of a share of Common Stock as
of any given date shall be as determined in good faith by the Committee,
which determination may be based on, among other things, the opinion of
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<PAGE>
one or more independent and reputable appraisers qualified to value
companies in the Company's line of business. Notwithstanding the
foregoing, the Fair Market Value of a share of Common Stock shall never be
less than par value per share.
2.19 Incentive Stock Option means an Option designated as an
incentive stock option and that meets the requirements of Section 422 of
the Code.
2.20 Non-Employee Director means each member of the Board who is
not an employee of the Company or of any of its Subsidiaries.
2.21 Non-Employee Director Option means an Option granted in
accordance with Article VIII.
2.22 Non-Qualified Stock Option means an Option that is not an
Incentive Stock Option.
2.23 Option means any option to purchase Common Stock granted to
a Participant pursuant to Article VI or to a Non-Employee Director
pursuant to Article VIII.
2.24 Participant means any employee of or consultant to the
Company or any of its Subsidiaries selected by the Committee to receive an
Option under the Plan in accordance with Article VI and/or Restricted
Shares under the Plan in accordance with Article VII and, solely to the
extent provided in Article VIII, any Non-Employee Director.
2.25 Plan means the Virtual Open Network Environment Corporation
1996 Incentive Stock Plan as set forth herein, and as the same may be
amended from time to time.
2.26 Reload Option shall have the meaning set forth in
Section 6.03(e) of the Plan.
2.27 Restricted Shares means shares of Common Stock subject to
restrictions imposed in connection with Awards granted under Article VII.
2.28 Rule 16b-3 means Rule 16b-3 promulgated by the Securities
and Exchange Commission under Section 16 of the Exchange Act, as amended,
and any successor rule.
2.29 SEC means the Securities and Exchange Commission.
2.30 Section 162(m) means Section 162(m) of the Code and the
regulations thereunder.
2.31 Subsidiary means a company more than 50% of the equity
interests of which are beneficially owned, directly or indirectly, by the
Company.
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2.32 Ten Percent Shareholder means a Participant who, at the
time of grant of an Option, owns (or is deemed to own under Section 424(d)
of the Code) more than 10% of the Voting Stock.
2.33 Termination of Employment means, with respect to an
Employee Participant, the voluntary or involuntary termination of a
Participant's employment with the Company or any of its Subsidiaries for
any reason, including death, Disability, retirement or as the result of
the sale or other divestiture of the Participant's employer or any similar
transaction in which the Participant's employer ceases to be the Company
or one of its Subsidiaries. Whether entering military or other government
service shall constitute Termination of Employment, and whether a
Termination of Employment is a result of Disability, shall be determined
in each case by the Committee. Termination of Employment means, with
respect to a consultant, termination of his or her services as a
consultant to the Company or one of its Subsidiaries.
2.34 Third Party includes a single person or a group of persons
or entities acting in concert not wholly owned directly or indirectly by
the Company.
2.35 Voting Stock means the classes of stock of the Company
entitled to vote generally in the election of directors of the Company.
Article III. Administration
3.01 Committee. The Plan shall be administered by the
Committee, which shall have exclusive and final authority in each
determination, interpretation, or other action affecting the Plan and its
Participants other than with respect to Non-Employee Director Options
granted under Article VIII. The Committee shall have the sole and
absolute discretion to interpret the Plan, to establish and modify
administrative rules for the Plan, to select the officers, other key
employees and consultants to whom Awards may be granted, to determine the
terms and provisions of the respective Award Agreements (which need not be
identical), to determine all claims for benefits under the Plan, to impose
such conditions and restrictions on Awards as it determines appropriate,
to determine whether the shares offered with respect to an Award will be
treasury shares or will be authorized but previously unissued shares, and
to take such steps in connection with the Plan and Award granted hereunder
as it may deem necessary or advisable. No action of the Committee will be
effective if it contravenes or amends the Plan in any respect.
3.02 Actions of the Committee. All determinations of the
Committee shall be made by a majority vote of its members. Any decision
or determination reduced to writing and signed by all of the members shall
be fully as effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee shall also have express
authorization to hold Committee meetings by conference telephone, or
similar communication equipment by means of which all persons
participating in the meeting can hear each other.
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Article IV. Shares of Common Stock
4.01 Number of Shares of Common Stock Issuable. Subject to
adjustments as provided in Section 9.05, 3,500,000 shares of Common Stock
shall be available for Awards under the Plan. The Common Stock to be
offered under the Plan shall be authorized and unissued Common Stock, or
issued Common Stock that shall have been reacquired by the Company and
held in its treasury.
4.02 Calculation of Number of Shares of Common Stock Awarded
to any Participant. In the event the purchase price of an Option is paid,
or tax or withholding payments relating to an Award are satisfied, in
whole or in part through the delivery of shares of Common Stock, a
Participant will be deemed to have received an Award with respect to those
shares of Common Stock.
4.03 Shares of Common Stock Subject to Terminated Awards. The
Common Stock covered by any unexercised portions of terminated Options,
shares of Common Stock forfeited as provided in Section 7.02(a) and shares
of Common Stock subject to Awards that are otherwise surrendered by the
Participant without receiving any payment or other benefit with respect
thereto may again be subject to new Awards under the Plan.
Article V. Participation
5.01 Eligible Participants. Participants in the Plan shall
include such officers, other key employees of and consultants to the
Company or its Subsidiaries, whether or not directors of the Company, as
the Committee, in its sole discretion, may designate from time to time.
In making such designation, the Committee may take into account the nature
of the services rendered by the officers, key employees and consultants,
their present and potential contributions to the success of the Company,
and such other factors as the Committee, in its discretion, may deem
relevant. The Committee's designation of a Participant in any year shall
not require the Committee to designate such person to receive Awards in
any other year. The Committee shall consider such factors as it deems
pertinent in selecting Participants and in determining the type and amount
of their respective Awards. A Participant may hold more than one Award
granted under the Plan. During the term of the Plan, no Employee
Participant may receive Awards with respect to more than 750,000 shares of
Common Stock.
Non-Employee Directors shall receive Non-Employee Director
Options in accordance with Article VIII, the provisions of which are
automatic and non-discretionary in operation. Non-Employee Directors
shall not be eligible to receive any other Awards under the Plan unless
they are no longer Non-Employee Directors on the Date of Grant of such
Awards.
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Article VI. Stock Options
6.01 Grant of Option. Any Option granted under this Article VI
shall have such terms as the Committee may, from time to time, approve,
and the terms and conditions of Options need not be the same with respect
to each Participant. Under this Article VI, the Committee may grant to
any Employee or Consultant Participant one or more Incentive Stock
Options, Non-Qualified Stock Options or both types of Options; provided,
however, that Incentive Stock Options may only be granted to Employee
Participants. To the extent any Option does not qualify as an Incentive
Stock Option (whether because of its provisions, the time or manner of its
exercise or otherwise), that Option or the portion thereof that does not
so qualify shall constitute a separate Non-Qualified Stock Option.
6.02 Incentive Stock Options. In the case of any grant of an
Incentive Stock Option, whenever possible, each provision hereof and in
any Award Agreement relating to such Option shall be interpreted to
entitle the holder thereof to the tax treatment afforded by Section 422 of
the Code, except in connection with the exercise of Options following a
Participant's Termination of Employment, except in accordance with a
specific determination of the Committee with the consent of the affected
Participant and except to the extent that the operation of Section 9.05
would cause an Option to no longer be entitled to such treatment. If any
provision hereof or that Award Agreement is held not to comply with
requirements necessary to entitle that Option to that tax treatment, then
except as otherwise provided in the preceding sentence: (a) that provision
shall be deemed to have contained from the outset such language as is
necessary to entitle the Option to the tax treatment afforded under
Section 422 of the Code; and (b) all other provisions hereof and of that
Award Agreement remain in full force and effect. Except as otherwise
specified in the first sentence of this Section 6.02, if any Award
Agreement covering an Option the Committee designates to be an Incentive
Stock Option hereunder does not explicitly include any term required to
entitle that Incentive Stock Option to the tax treatment afforded by
Section 422 of the Code, all such terms shall be deemed implicit in the
designation of that Option, and that Option shall be deemed to have been
granted subject to all such terms.
6.03 Terms of Options. Options granted under this Article VI
shall be subject to the following terms and conditions and shall be in
such form and contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
desirable:
(a) Option Price. The option price per share of
Common Stock purchasable under an Option shall be
determined by the Committee at the time of grant but, if
the Option is an Incentive Stock Option, the option price
per share shall not be less than 100% of the Fair Market
Value of a share of Common Stock on the Date of Grant;
provided, however, that, if an Incentive Stock Option is
granted to a Ten Percent Shareholder, the option price
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per share shall be at least 110% of the Fair Market Value
of a share of Common Stock on the Date of Grant.
(b) Option Term. The term of each Option shall
be fixed by the Committee, but no Option shall be
exercisable more than ten years after its Date of Grant;
provided, however, that, if an Incentive Stock Option is
granted to a Ten Percent Shareholder, the Option shall
not be exercisable more than five years after its Date of
Grant.
(c) Exercisability. An Award Agreement with
respect to Options may contain such performance targets,
waiting periods, exercise dates, restrictions on exercise
(including, but not limited to, a requirement that an
Option is exercisable in periodic installments), and
restrictions on the transfer of the underlying shares of
Common Stock, if any, as may be determined by the
Committee at the time of grant. To the extent not
exercised, installments shall cumulate and be
exercisable, in whole or in part, at any time after
becoming exercisable, subject to the limitations set
forth in Sections 6.03(b) and (h). If an Option is an
Incentive Stock Option and if required by Section 422 of
the Code, the aggregate Fair Market Value of the shares
of Common Stock underlying such Option (determined at the
time the Option is granted) that becomes exercisable in
any one calendar year shall not exceed $100,000.
(d) Method of Exercise. Subject to whatever
installment exercise and waiting period provisions that
apply under Section 6.03(c) above, Options may be
exercised in whole or in part at any time during the term
of the Option, by giving written notice of exercise to
the Company specifying the number of shares of Common
Stock to be purchased. Such notice shall be accompanied
by payment in full of the purchase price in such form as
the Committee may accept (including payment in accordance
with a cashless exercise program approved by the
Committee). If and to the extent the Committee
determines in its sole discretion at or after grant,
payment in full or in part may also be made in the form
of shares of Common Stock already owned by the
Participant (and for which the Participant has good
title, free and clear of any liens or encumbrances) based
on the Fair Market Value of the shares of Common Stock on
the date the Option is exercised; provided, however, that
the right to make payment of the purchase price of an
Incentive Stock Option in the form of already owned
shares may be authorized only at the time of grant. Any
already owned Common Stock used for payment must have
been held by the Participant for at least six months. No
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Common Stock shall be issued on exercise of an Option
until payment, as provided herein, therefor has been
made. A Participant shall generally have the right to
dividends or other rights of a stockholder with respect
to Common Stock subject to the Option only when
certificates for shares of Common Stock are issued to the
Participant.
(e) Reload Options. The Committee shall have the
authority to specify, at the time of grant or, with respect to
Non-Qualified Stock Options, at or after the time of grant, that
an Employee or a Consultant Participant shall be granted a Non-
Qualified Stock Option (a "Reload Option") in the event such
Participant exercises all or a part of an Option (an "Original
Option") by surrendering in accordance with Section 6.03(d) of
the Plan already owned shares of Common Stock in full or partial
payment of the purchase price under the Original Option, subject
to the availability of shares of Common Stock under the Plan at
the time of such exercise; provided, however, that no Reload
Option shall be granted to a Non-Employee Director. Each Reload
Option shall cover a number of shares of Common Stock equal to
the number of shares of Common Stock surrendered in payment of
the purchase price under such Original Option, shall have a
purchase price per share of Common Stock equal to the 100% of the
Fair Market Value of a share of Common Stock on the Date of Grant
of such Reload Option, and shall expire on the stated expiration
date of the Original Option. A Reload Option shall be
exercisable at any time and from time to time after the time of
grant of such Reload Option (or, as the Committee in its sole
discretion shall determine at or after the time of grant, at such
time or times as shall be specified in the Reload Option). Any
Reload Option may provide for the grant, when exercised, of
subsequent Reload Options to the extent and upon such terms and
conditions, consistent with this Section 6.03(e), as the
Committee in its sole discretion shall specify at or after the
Date of Grant of such Reload Option. A Reload Option shall
contain such other terms and conditions, which may include a
restriction on the transferability of the shares of Common Stock
received upon exercise of the Original Option representing at
least the after-tax profit received upon exercise of the Original
Option, as the Committee in its sole discretion shall deem
desirable, and which may be set forth in rules or guidelines
adopted by the Committee or in the Award Agreements evidencing
the Reload Options.
(f) Non-Transferability of Options. No Option
shall be transferable by the Participant otherwise than
by will or the laws of descent and distribution.
(g) Acceleration or Extension of Exercise Time.
The Committee, in its sole discretion, shall have the
right (but shall not in any case be obligated) to permit
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purchase of Common Stock subject to any Option granted to
an Employee or a Consultant Participant prior to the time
such Option would otherwise become exercisable under the
terms of the Award Agreement. In addition, the
Committee, in its sole discretion, shall have the right
(but shall not in any case be obligated) to permit any
Option granted to an Employee or a Consultant Participant
to be exercised after its expiration date, subject,
however to the limitation set forth in Section 6.03(b).
(h) Exercise of Options Upon Termination of
Employment.
(i) Exercise of Vested Options
Upon Termination of Employment.
(A) Termination.
Unless the Committee, in its
sole discretion, provides for a
shorter or longer period of time
in the Award Agreement or a
longer period of time in
accordance with Section 6.03(g),
upon an Employee or a Consultant
Participant's Termination of
Employment other than by reason
of death or Disability, an
Employee or a Consultant
Participant may, within three
months from the date of such
Termination of Employment,
exercise all or any part of his
or her Options as were
exercisable on the date of
Termination of Employment if
such Termination of Employment
is not for Cause. If such
Termination of Employment is for
Cause, the right of the Employee
or Consultant Participant to
exercise such Options shall
terminate on the date of
Termination of Employment. In
no event, however, may any
Option be exercised later than
the date determined pursuant to
Section 6.03(b).
(B) Disability.
Unless the Committee, in its
sole discretion, provides for a
shorter or longer period of time
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in the Award Agreement or a
longer period of time in
accordance with Section 6.03(g),
upon an Employee or a Consultant
Participant's Disability Date,
the Employee or Consultant
Participant may, within one year
after the Disability Date,
exercise all or a part of his or
her Options, whether or not such
Option was exercisable on the
Disability Date, but only to the
extent not previously exercised.
In no event, however, may any
Option be exercised later than
the date determined pursuant to
Section 6.03(b).
(C) Death. Unless the
Committee, in its sole
discretion, provides for a
shorter or longer period of time
in the Award Agreement or a
longer period of time in
accordance with Section 6.03(g),
in the event of the death of an
Employee or a Consultant
Participant while employed by
the Company, the right of the
Employee or Consultant
Participant's Beneficiary to
exercise the Option in full
(whether or not all or any part
of the Option was exercisable as
of the date of death of the
Employee or Consultant
Participant, but only to the
extent not previously exercised)
shall expire upon the expiration
of one year from the date of the
Employee or Consultant
Participant's death or on the
date of expiration of the Option
determined pursuant to Section
6.03(b), whichever is earlier.
(ii) Expiration of Unvested
Options Upon Termination of Employment.
Subject to Sections 6.03(g) and
6.03(h)(i)(B) and (C), to the extent all
or any part of an Option granted to an
Employee or a Consultant Participant was
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not exercisable as of the date of
Termination of Employment, such right
shall expire at the date of such
Termination of Employment.
Notwithstanding the foregoing, the
Committee, in its sole discretion and
under such terms as it deems
appropriate, may permit an Employee or a
Consultant Participant who will continue
to render significant services to the
Company after his or her Termination of
Employment to continue to accrue service
with respect to the right to exercise
his or her Options during the period in
which the individual continues to render
such services.
Article VII. Restricted Shares
7.01 Restricted Share Awards. Restricted Shares may be issued
either alone or in addition to other Awards granted under the Plan. The
Committee may grant to any Employee or Consultant Participant an Award of
shares of Common Stock in such number, and subject to such terms and
conditions relating to forfeitability and restrictions on delivery and
transfer (whether based on performance standards, periods of service or
otherwise) as the Committee shall establish. The terms of any Restricted
Share Award granted under the Plan shall be set forth in an Award
Agreement, which shall contain provisions determined by the Committee and
not inconsistent with the Plan. The provisions of Restricted Share Awards
need not be the same for each Participant receiving such Awards.
(a) Issuance of Restricted Shares. As soon as
practicable after the Date of Grant of a Restricted Share Award
by the Committee, the Company shall cause to be transferred on
the books of the Company shares of Common Stock, registered on
behalf of the Participant in nominee form, evidencing the
Restricted Shares covered by the Award, but subject to forfeiture
to the Company retroactive to the Date of Grant if an Award
Agreement delivered to the Participant by the Company with
respect to the Restricted Shares covered by the Award is not duly
executed by the Participant and timely returned to the Company.
Each Participant, as a condition to the receipt of a Restricted
Share Award, shall pay to the Company in cash the par value of a
share of Common Stock multiplied by the number of shares of
Common Stock covered by such Restricted Share Award. All shares
of Common Stock covered by Awards under this Article VII shall be
subject to the restrictions, terms and conditions contained in
the Plan and the Award Agreement entered into by and between the
Company and the Participant. Until the lapse or release of all
restrictions applicable to an Award of Restricted Shares, the
stock certificates representing such Restricted Shares shall be
held in custody by the Company or its designee. Upon the lapse
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or release of all restrictions with respect to an Award as
described in Section 7.01(d), one or more stock certificates,
registered in the name of the Participant, for an appropriate
number of shares of Common Stock as provided in Section 7.01(d),
free of any restrictions set forth in the Plan and the Award
Agreement, shall be delivered to the Participant.
(b) Shareholder Rights. Beginning on the Date of
Grant of the Restricted Share Award and subject to execution of
the Award Agreement as provided in Section 7.01(a), the
Participant shall become a shareholder of the Company with
respect to all shares of Common Stock subject to the Award
Agreement and shall have all of the rights of a shareholder,
including, but not limited to, the right to vote such shares of
Common Stock and, except as otherwise determined by the Committee
and specified in the applicable Award Agreement, the right to
receive dividends (or dividend equivalents); provided, however,
that any shares of Common Stock distributed as a dividend or
otherwise with respect to any Restricted Shares as to which the
restrictions have not yet lapsed shall be subject to the same
restrictions as such Restricted Shares and shall be held in
custody by the Company as prescribed in Section 7.01(a).
(c) Restriction on Transferability. None of the
Restricted Shares may be assigned or transferred (other than by
will or the laws of descent and distribution), pledged or sold
prior to lapse or release of the restrictions applicable thereto.
(d) Delivery of Shares of Common Stock Upon Release
of Restrictions. Upon expiration or earlier termination of the
forfeiture period without a forfeiture and the satisfaction of or
release from any other conditions prescribed by the Committee,
the restrictions applicable to the Restricted Shares shall lapse.
As promptly as administratively feasible thereafter, subject to
the requirements of Section 9.04, the Company shall deliver to
the Participant or, in case of the Participant's death, to the
Participant's Beneficiary, one or more stock certificates for the
appropriate number of shares of Common Stock, free of all such
restrictions, except for any restrictions that may be imposed by
law.
7.02 Terms of Restricted Shares.
(a) Forfeiture of Restricted Shares. Subject to
Section 7.02(b), all Restricted Shares shall be forfeited and
returned to the Company and all rights of the Participant with
respect to such Restricted Shares shall terminate unless the
Participant continues in the service of the Company or any
Subsidiary of the Company as an employee or consultant, as the
case may be, until the expiration of the forfeiture period for
such Restricted Shares and satisfies any and all other conditions
set forth in the Award Agreement. The Committee, in its sole
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discretion, shall determine the forfeiture period (which may, but
need not, lapse in installments) and any other terms and
conditions applicable with respect to any Restricted Share Award.
(b) Waiver of Forfeiture Period. Notwithstanding
anything contained in this Article VII to the contrary, the
Committee may, in its sole discretion, waive the forfeiture
period and any other conditions set forth in any Award Agreement
under appropriate circumstances (including the death, Disability
or retirement of the Participant or a material change in
circumstances arising after the date of an Award) and subject to
such terms and conditions (including forfeiture of a
proportionate number of Restricted Shares) as the Committee shall
deem appropriate, provided that the Participant shall at that
time have completed at least one year of employment or service as
a consultant after the Date of Grant.
Article VIII. Non-Employee Director Options
8.01 Grant of Non-Employee Director Options. On the date a Non-
Employee Director is elected as such for the first time by the holders of
Voting Stock, such person shall be granted a Non-Employee Director Option
consisting of an Option to purchase 10,000 shares of Common Stock;
provided, however, that Non-Employee Directors who are first elected as
such by the holders of Voting Stock prior to the 1996 annual meeting of
holders of Voting Stock shall not be entitled to receive a Non-Employee
Director Option under this Article VIII. The option price for such Non-
Employee Director Options shall be the Fair Market Value of a share of
Common Stock on the Date of Grant. All such Options shall be designated
as Non-Qualified Stock Options and shall have a five year term. Each such
Option shall be exercisable in full on the Date of Grant of such Option.
If a Non-Employee Director's service with the Company terminates
by reason of death, any Option held by such Non-Employee Director may be
exercised for a period of one year from the date of death or until the
expiration of the Option, whichever is shorter. If a Non-Employee
Director's service with the Company terminates other than by reason of
death, any Option held by such Non-Employee Director may be exercised for
a period of three months from the date of such termination, or until the
expiration of the stated term of the Option, whichever is shorter. All
applicable provisions of the Plan (other than Sections 6.03(g) and (h))
not inconsistent with this Section 8.01 shall apply to Options granted to
Non-Employee Directors.
Article IX. Terms Applicable to All Awards Granted Under the
Plan
9.01 Award Agreement. No person shall have any rights under any
Award granted under the Plan unless and until the Company and the
Participant to whom such Award shall have been granted shall have executed
and delivered an Award Agreement authorized by the Committee expressly
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granting the Award to such person and containing provisions setting forth
the terms of the Award.
9.02 Plan Provisions Control Award Terms. The terms of the Plan
shall govern all Awards granted under the Plan, and in no event shall the
Committee have the power to grant to a Participant any Award under the
Plan that is contrary to any provisions of the Plan. If any provision of
any Award shall conflict with any of the terms in the Plan as constituted
on the Date of Grant of such Award, the terms in the Plan as constituted
on the Date of Grant of such Award shall control.
9.03 Modification of Award After Grant. Except as provided by
the Committee, in its sole discretion, in the Award Agreement or as
provided in Section 9.05, no Award granted under the Plan to a Participant
may be modified (unless such modification does not materially decrease the
value of the Award) after the Date of Grant except by express written
agreement between the Company and the Participant, provided that any such
change (a) shall not be inconsistent with the terms of the Plan, and (b)
shall be approved by the Committee.
9.04 Taxes. The Company shall be entitled, if the Committee
deems it necessary or desirable, to withhold (or secure payment from the
Participant in lieu of withholding) the amount of any withholding or other
tax required by law to be withheld or paid by the Company with respect to
any Award. The Company may defer issuance of Common Stock under an Award
unless indemnified to its satisfaction against any liability for any such
tax. The amount of such withholding or tax payment shall be determined by
the Committee or its delegate and shall be payable by the Participant at
such time as the Committee determines. A Participant shall be permitted
to satisfy his or her tax or withholding obligation by (a) having cash
withheld from the Participant's salary or other compensation payable by
the Company, (b) the payment of cash by the Participant to the Company,
(c) the payment in shares of Common Stock already owned by the Participant
valued at Fair Market Value, and/or (d) the withholding from the Award, at
the appropriate time, of a number of shares of Common Stock sufficient,
based upon the Fair Market Value of such Common Stock, to satisfy such tax
or withholding requirements. The Committee shall be authorized, in its
sole discretion, to establish rules and procedures relating to any such
withholding methods it deems necessary or appropriate (including, without
limitation, rules and procedures relating to elections by Participants who
are subject to the provisions of Section 16 of the Exchange Act to have
shares of Common Stock withheld from an Award to meet those withholding
obligations).
9.05 Adjustments to Reflect Capital Changes; Change in Control.
(a) Recapitalization. The number and kind of
shares subject to outstanding Awards, the purchase price
or exercise price of such Awards, the amount of Non-
Employee Director Options to be granted on any date under
Article VIII, and the number and kind of shares available
for Awards subsequently granted under the Plan shall be
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appropriately adjusted to reflect any stock dividend,
stock split, combination or exchange of shares, merger,
consolidation or other change in capitalization with a
similar substantive effect upon the Plan or the Awards
granted under the Plan. The Committee shall have the
power and sole discretion to determine the nature and
amount of the adjustment to be made in each case. In no
event shall any adjustments be made under the provisions
of this Section 9.05(a) to any outstanding Restricted
Share Award if an adjustment has been or will be made to
the shares of Common Stock awarded to a Participant in
such person's capacity as a stockholder.
(b) Sale or Reorganization. After any
reorganization, merger, or consolidation in which the
Company is or is not the surviving entity, each
Participant shall, at no additional cost, be entitled
upon the exercise of an Option outstanding prior to such
event to receive (subject to any required action by
stockholders), in lieu of the number of shares of Common
Stock receivable on exercise pursuant to such Option, the
number and class of shares of stock or other securities
to which such Participant would have been entitled
pursuant to the terms of the reorganization, merger, or
consolidation if, at the time of such reorganization,
merger, or consolidation, such Participant had been the
holder of record of a number of shares of Common Stock
equal to the number of shares of Common Stock receivable
on exercise of such Option. Comparable rights shall
accrue to each Participant in the event of successive
reorganizations, mergers, or consolidations of the
character described above.
(c) Options to Purchase Stock of Acquired
Companies. After any reorganization, merger, or
consolidation in which the Company shall be a surviving
entity, the Committee may grant substituted Options under
the provisions of the Plan, replacing old options granted
under a plan of another party to the reorganization,
merger, or consolidation whose stock subject to the old
options may no longer be issued following such
reorganization, merger, or consolidation. The foregoing
adjustments and manner of application of the foregoing
provisions shall be determined by the Committee in its
sole discretion. Any such adjustments may provide for
the elimination of any fractional shares of Common Stock
that might otherwise become subject to any Options.
(d) Change in Control. Upon a Change in
Control, unless otherwise specifically prohibited by Rule
16b-3:
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(1) Any and all Options shall become
exercisable as of the date of the Change in Control; and
(2) The restrictions on vesting on all
Restricted Share Awards shall be deemed to have satisfied
as of the date of the Change in Control.
(e) Existence of Awards. The existence of outstanding
Awards shall not affect the right of the Company or its
stockholders to make or authorize any and all adjustments,
recapitalizations, reclassifications, reorganizations and other
changes in the Company's capital structure, the Company's
business, any merger or consolidation of the Company, any issue
of bonds, debentures or preferred stock of the Company, the
Company's liquidation or dissolution, any sale or transfer of all
or any part of the Company's assets or business, or any other
corporate act or proceeding, whether of a similar nature or
otherwise.
9.06 Surrender of Awards. Any Award granted to a Participant
under the Plan may be surrendered to the Company for cancellation on such
terms as the Committee and holder approve.
9.07 No Right to Award; No Right to Employment. Except as
provided in Article VIII, no director, employee, consultant or other
person shall have any claim or right to be granted an Award. Neither the
Plan nor any action taken hereunder shall be construed as giving any
director, employee or consultant any right to be retained by the Company
or any of its Subsidiaries.
9.08 Awards Not Includable for Benefit Purposes. Income
recognized by a Participant pursuant to the provisions of the Plan shall
not be included in the determination of benefits under any employee
pension benefit plan (as such term is defined in Section 3(2) of ERISA) or
group insurance or other benefit plans applicable to the Participant that
are maintained by the Company or any of its Subsidiaries, except as may be
provided under the terms of such plans or determined by resolution of the
Board.
9.09 Governing Law. The Plan and all determinations made and
actions taken pursuant to the Plan shall be governed by the laws of the
State of Delaware other than the conflict of laws provisions of such laws,
and shall be construed in accordance therewith.
9.10 No Strict Construction. No rule of strict construction
shall be implied against the Company, the Committee, or any other person
in the interpretation of any of the terms of the Plan, any Award granted
under the Plan or any rule or procedure established by the Committee.
9.11 Compliance with Rule 16b-3 and Section 162(m). It is
intended that the Plan be applied and administered in compliance with Rule
16b-3 and with Section 162(m). If any provision of the Plan would be in
- 18 -
<PAGE>
violation of Rule 16b-3 or Section 162(m) if applied as written, such
provision shall not have effect as written and shall be given effect so as
to comply with Rule 16b-3 or Section 162(m), as the case may be, as
determined by the Committee. The Board is authorized to amend the Plan
and to make any such modifications to Award Agreements to comply with Rule
16b-3 and Section 162(m), as they may be amended from time to time, and to
make any other such amendments or modifications deemed necessary or
appropriate to better accomplish the purposes of the Plan in light of any
amendments made to Rule 16b-3 and Section 162(m). Notwithstanding the
foregoing, the Board may amend the Plan so that it (or certain of its
provisions) no longer comply with either or both of Rule 16b-3 or Section
162(m) if the Board specifically determines that such compliance is no
longer desired.
9.12 Captions. The captions (i.e., all Section headings) used
in the Plan are for convenience only, do not constitute a part of the
Plan, and shall not be deemed to limit, characterize, or affect in any way
any provisions of the Plan, and all provisions of the Plan shall be
construed as if no captions have been used in the Plan.
9.13 Severability. Whenever possible, each provision in the
Plan and every Award at any time granted under the Plan shall be
interpreted in such manner as to be effective and valid under applicable
law, but if any provision of the Plan or any Award at any time granted
under the Plan shall be held to be prohibited by or invalid under
applicable law, then (a) such provision shall be deemed amended to
accomplish the objectives of the provision as originally written to the
fullest extent permitted by law, and (b) all other provisions of the Plan
and every other Award at any time granted under the Plan shall remain in
full force and effect.
9.14 Legends. All certificates for Common Stock delivered under
the Plan shall be subject to such transfer restrictions set forth in the
Plan and such other restrictions as the Committee may deem advisable under
the rules, regulations, and other requirements of the SEC, any stock
exchange upon which the Common Stock is then listed, and any applicable
federal or state securities law. The Committee may cause a legend or
legends to be put on any such certificates to make appropriate references
to such restrictions.
9.15 Investment Representation. The Committee may, in its
discretion, demand that any Participant awarded an Award deliver to the
Committee at the time of grant or exercise of such Award a written
representation that the shares of Common Stock subject to such Award are
to be acquired for investment and not for resale or with a view to the
distribution thereof. Upon such demand, delivery of such written
representation by the Participant prior to the delivery of any shares of
Common Stock pursuant to the grant or exercise of his or her Award shall
be a condition precedent to the Participant's right to purchase or
otherwise acquire such shares of Common Stock by such grant or exercise.
The Company is not legally obliged hereunder if fulfillment of its
obligations under the Plan would violate federal or state securities laws.
- 19 -
<PAGE>
9.16 Amendment and Termination.
(a) Amendment. The Board shall have complete
power and authority to amend the Plan at any time it is
deemed necessary or appropriate; provided, however, that
the Board shall not, without the affirmative approval of
a simple majority of the holders of Voting Stock,
represented, by person or by proxy, and entitled to vote
at an annual or special meeting of the holders of Voting
Stock, make any amendment that requires stockholder
approval under any applicable law or rule, unless the
Board determines that compliance with such law or rule is
no longer desired. No termination or amendment of the
Plan may, without the consent of the Participant to whom
any Award shall theretofore have been granted under the
Plan, adversely affect the right of such individual under
such Award; provided, however, that the Committee may, in
its sole discretion, make provision in an Award Agreement
for such amendments that, in its sole discretion, it
deems appropriate. If required by Rule 16b-3, Article
VIII shall not be amended or modified more frequently
than once in any period of six consecutive months other
than to comport with changes in ERISA, the Code or the
rules and regulations promulgated thereunder.
(b) Termination. The Board shall have the right
and the power to terminate the Plan at any time. No
Award shall be granted under the Plan after the
termination of the Plan, but the termination of the Plan
shall not have any other effect and any Award outstanding
at the time of the termination of the Plan may be
exercised and may vest after termination of the Plan at
any time prior to the expiration date of such Award to
the same extent such Award would have been exercisable or
vest had the Plan not terminated.
9.17 Costs and Expenses. All costs and expenses incurred in
administering the Plan shall be borne by the Company.
9.18 Unfunded Plan. The Plan shall be unfunded. The Company
shall not be required to establish any special or separate fund or make
any other segregation of assets to assure the payment of any award under
the Plan.
9.19 Additional Restrictions on Transfer; Company's Repurchase
Right; Legends.
(a) Additional Restrictions on Transfer.
Each Participant who receives an Award under the Plan
shall be prohibited from selling, exchanging,
transferring, pledging, hypothecating, giving or
otherwise disposing of the underlying shares of Common
- 20 -
<PAGE>
Stock until 180 days have elapsed following such time as
the Company has consummated an initial public offering of
its Common Stock; provided, however, that shares of
Common Stock may be used to pay the option price of
Options and to pay withholding and other taxes as
otherwise provided in the Plan.
(b) Company's Repurchase Right. Upon a
Participant's Termination of Employment, the Company
shall have the right to repurchase any or all of the
shares of Common Stock issued to the Participant with
respect to Awards made under the Plan, whether then held
by the Participant or a transferee. If the Company
wishes to exercise such right, it must pay the repurchase
price for such shares of Common Stock to the Participant
within sixty (60) days following the date of Termination
of Employment. If the Company determines to repurchase
shares of Common Stock from the Participant, the Company
shall pay the affected Participant the Fair Market Value
of the shares of Common Stock to be repurchased, as
determined by the Committee, without regard to any
restrictions on transfer to which the underlying shares
of Common Stock may be subject. The Company's right to
repurchase shares of Common Stock under this Section
9.19(b) shall terminate with respect to all Awards
granted under the Plan once the Company consummates an
initial public offering of its Common Stock (even if the
Company is within the sixty (60) day period referred to
above with respect to a particular Participant).
(c) Legends. Until the restrictions
provided by Sections 9.19(a) and (b) lapse by their own
terms, each share of Common Stock issued under the Plan
shall bear legends describing or referring to the
existence of these restrictions.
9.20 Loans. The Committee shall be entitled to grant to
Participants granted Non-Qualified Stock Options (other than Non-Employee
Director Options) the right to pay the exercise price of such Options by
delivery to the Company of an amount of cash equal to the par value per
share of Common Stock purchased on exercise and a recourse promissory
note. Each such recourse promissory note shall have the following terms
and conditions: (a) such promissory note shall not bear interest for the
first year following the issuance thereof but thereafter shall bear
interest at 2% over the prime rate of Citibank on such one year
anniversary date, (b) interest shall be due and payable quarterly in
arrears beginning in the second year, (c) the principal amount shall be
due in full on the second anniversary date, (d) principal and accrued
interest may be prepaid at any time, in whole or in part, without penalty,
(e) in the event of a default in the payment of principal or interest when
due and the continuance of such default for ten (10) days, the full
principal amount of the promissory note plus accrued and unpaid interest
- 21 -
<PAGE>
shall become immediately due and payable, and (vi) the promissory note
shall be secured by a pledge to the Corporation of shares of Common Stock
having a Fair Market Value equal to 110% of the principal amount of the
promissory note.
- 22 -
<PAGE>
<PAGE>
TRUSTED INFORMATION SYSTEMS, INC. (TIS)
SOFTWARE LICENSE AGREEMENT
(SOURCE AND OBJECT CODE)
(Version: September 21, 1994)
THIS SOFTWARE LICENSE AGREEMENT ("Agreement") is entered on the
date of execution of this Agreement by the last party hereto between
Trusted Information Systems, Inc. ("TIS"), a Maryland corporation having
its principal mailing address at 3060 Washington Road (Rt. 97), Glenwood,
Maryland 21738 and Virtual Open network Environment Corp. ("V-ONE"),
having a principal mailing address at 12300 Twinbrook Parkway, Suite 235,
Rockville, MD 20852.
RECITALS
--------
A. TIS is the owner of the TIS Software (as defined below)
B. V-ONE is engaged in the business of installing and
marketing certain software and hardware products and desires to obtain a
license from TIS to market, install, and sublicense the TIS Software, and
make suitable modifications and/or enhancements to such software to serve
the needs of V-ONE customers.
AGREEMENT
---------
NOW, THEREFORE, and in consideration of the mutual promises and
covenants set forth herein, TIS and V-ONE agree as follows:
1. DEFINITIONS
--------------
The following terms when used in this Agreement shall have the
following meanings:
1.1 "END USER CUSTOMER" means a person or entity
sublicensing TIS Software from V-ONE solely for personal or internal use
(whether or not such TIS Software is bundled with other software or
hardware), and without right to sublicense, transfer or assign to any
other entity, except as otherwise provided herein.
<PAGE>
1.2 "LICENSE FEES" shall have the meaning set forth in
Section 3.
1.3 "TIS OBJECT CODE" means any part of the TIS Software in
machine-readable object code form.
1.4 "TIS SOFTWARE" means the software computer program(s) as
described in Exhibit "A" and the TIS Documentation associated therewith
including the TIS Object Code and TIS Source Code. "TIS Software" shall
also include any modifications, enhancements, improvements, or new
versions of such programs that may be provided under this agreement by TIS
to V-ONE. V-ONE shall have the rights under this Agreement to receive
modifications, enhancements, improvements, or new versions of the TIS
Software, as provided under Section 4.
1.5 "TIS SOURCE CODE" means the mnemonic, high level
statement versions of the TIS Software written in the source language used
in programmers.
1.6 "TERRITORY" means those countries or portions of
countries listed in Exhibit "A" hereto.
1.7 "TIS DOCUMENTATION" means the most current version of the
TIS Software system documentation at any time that TIS delivers to V-ONE
copies of the TIS Object Code and TIS Source Code.
1.8 "TIS SOFTWARE UPDATE" means software components that
repair bugs and/or provide additional functionality and/or increased
assurance to the TIS Software.
1.9 "TIS SOFTWARE SUBSCRIPTION" means the software service as
described in Exhibit "A".
2. GRANT OF LIMITED LICENSES
-----------------------------
2.1 OBJECT CODE LICENSE. TIS hereby grants V-ONE, and V-ONE
accepts, a non-exclusive, non-transferable, non-assignable limited license
in the Territory during the term specified in Section 8 below to:
2.1.1 Make, have made, copy, use, market, and
sublicense the TIS Object Code for End User Customers.
2.1.2 Make, have made, copy, use, market, enhance,
improve, adapt, and sublicense the TIS Documentation to support End User
Customer installations. TIS proprietary notices will be included.
2.2 LIMITATIONS ON TIS OBJECT CODE LICENSE. The license
granted in Section 2.1.1 shall be limited as follows:
2
<PAGE>
2.2.1 All sublicenses of the TIS Object Code shall be
only to End User Customers.
2.2.2 V-ONE may not in any way sell, rent, license,
sublicense or otherwise distribute the TIS Object Code or the right to use
the TIS Object Code by any other product name than that which is
identified in Exhibit "A", or such other product name as V-ONE shall
reasonably select which shall not be confusingly similar to the name
specified in Exhibit A.
2.3 TIS SOURCE CODE LICENSE. TIS hereby grants V-ONE, and V-
ONE accepts, a non-exclusive, non-transferable, non-assignable limited
license in the Territory during the term specified in Section 8 below to:
2.3.1 Use, copy, modify, enhance, improve, and adapt the
TIS Source Code to create interfaces and other software necessary to
permit the TIS Object Code to operate in accordance with the TIS
Documentation on an End User Customer's system and to add additional
features, enhancements or improvements to the TIS Software (all such
features, modifications, enhancements, improvements, or adaptations to
the TIS Source Code, interfaces and such other software referenced
collectively as "Software Modifications").
2.3.2 Make, have made, copy, use, market, enhance,
improve, adapt, and sublicense the TIS Source Code for End User Customers.
TIS proprietary notices will be included.
2.3.3 Use the TIS Source Code in the support of End User
Customers.
2.3.4 Compile the TIS Source Code to create TIS Object Code.
2.3.5 V-ONE is not authorized to distribute, loan, license or in
any manner make TIS Source Code available to any entity or individual who
is not a V-ONE employee directly involved with the support of TIS Object
Code for End User Customers or not a V-ONE End User Customer for the TIS
Object Code. V-ONE may disclose TIS Source Code to persons or entities
that may be contacted by V-ONE to assist it in performing its duties or
utilizing its rights under this Agreement, so long as they agree to be
bound by the pertinent provisions of this License Agreement.
2.4 TITLE.
2.4.1 Except for the limited license granted in Section
2.1 and 2.3 above, as between the parties hereto, TIS shall at all times
retain full and exclusive right, title and ownership interest in and to
the TIS Software and in any and all related patents, trademarks,
copyrights or proprietary or trade secret rights therein. TIS retains
unto itself the right to distribute copies of the TIS Software as a
standalone product or bundled with other equipment or programs.
3
<PAGE>
2.4.2 V-ONE shall at all times retain full and exclusive
right, title and ownership interest in and to any Software Modifications
developed solely by V-ONE and without any assistance from TIS and in any
and all related patents, trademarks, copyrights or proprietary or trade
secret rights therein.
3. FEES
--------
3.1 ADVANCE FEE. In consideration of TIS's grant to V-ONE of
the limited license rights hereunder, V-ONE shall pay to TIS A one-time
fee (the "Advance Fee") as set forth in Exhibit "B". Such Advance Fee
shall be paid within thirty (30) days from the date of Exhibit "B".
3.2 PER COPY LICENSE AND ANNUAL SUBSCRIPTION FEES. V-ONE
shall pay to TIS License Fees in the amount calculated as set forth on
Exhibit "B" hereto (the "Per Copy License Fee") for each copy of TIS
Software used or sublicensed by V-ONE. Additionally, V-ONE shall pay to
TIS fees in the amount calculated as set forth on Exhibit "B" hereto (the
"Per Annual Subscription Fee") for each TIS Software Annual Subscription
provided to an End User Customer.
3.3 TERMS OF PAYMENT. Per Copy License Fees and Per Annual
Subscription Fees shall accrue with respect to TIS Software licensed by V-
ONE upon the date of invoice, shipment, or use, whichever comes first, of
the TIS Software by V-ONE to an End User Customer. Fees due TIS hereunder
shall be paid by V-ONE to TIS at TIS's address set forth on page 1 of this
Agreement on or before the thirtieth (30th) day after the close of the
calendar quarter during which the fees accrued. A late payment penalty of
one percent (1%) of any fees not paid when due shall be assessed for each
thirty (30)-day period, or portion thereof, compounded monthly, not in
advance, during which such payment is delayed, beginning on the thirty-
first (31st) day after the last day of the calendar quarter to which the
delayed payment relates until payment is made.
3.4 U.S. CURRENCY. All payments hereunder shall be made in
lawful United States currency. All fee currency rates identified in this
Agreement and Exhibits are in United States Dollars.
3.5 REMITTANCE REPORT. A remittance report in reasonably
detailed form setting forth the calculation of fees due from V-ONE and
signed by a responsible officer of V-ONE shall be delivered quarterly to
TIS concurrently with payments made pursuant to paragraph 3.3, above. V-
ONE shall keep separate, complete, and accurate books of account relating
to its licensing of the TIS Software and TIS Software subscriptions.
Subject to the confidentiality restrictions provided in this Agreement, V-
ONE hereby grants TIS or its authorized representative the right, after
reasonable notice, but no less than three (3) working days, and during
normal business hours, to enter V-ONE's premises, in which such accounts
are located, no more frequently than annually, solely for purposes of
auditing all such books of account. The parties shall promptly meet to
4
<PAGE>
review the results of such audit and resolve any discrepancies arising
from such audit. The cost of any such audit shall be borne solely by TIS,
unless discrepancies exceed ten percent (10%) of the TIS Software payments
paid by V-ONE during any quarter in which case the cost of such audit
shall be borne solely by V-ONE. All payments necessary to eliminate any
underpayments discovered in any such audit and costs of such audits by TIS
shall be made by V-ONE to TIS within thirty (30) days after the
discrepancy is reported to V-ONE.
3.6 TAXES. All taxes, duties, fees and other government
charges of any kind (except United States or state taxes based on the net
income of TIS, or Maryland sales taxes associated with TIS' license or
software to V-ONE under this Agreement) which are levied, assessed or
otherwise imposed by or under the authority of any government or any
political subdivision thereof on the fees payable hereunder, or any aspect
of this Agreement shall be borne by V-ONE and shall not be considered a
part of, a deduction from, or an offset against the fees.
4. MAINTENANCE
---------------
4.1 MAINTENANCE. V-ONE has inspected the TIS Internet
Firewall Toolkit upon which the TIS Software and the TIS Documentation are
based and has determined the suitability, adequacy and proper operation of
the software to its satisfaction. TIS will provide V-ONE software
telephone technical support during substantially all normal TIS working
hours. TIS shall provide V-ONE with any modifications, enhancements, or
new versions of the TIS Software promptly when ready for delivery to end
user customers.
4.2 CUSTOMER SUPPORT. TIS shall not be responsible for
providing any support for the TIS Software to End User Customers. V-ONE
will provide first line support to End User Customers.
4.3 TIS SOFTWARE PROBLEM RESOLUTION TEAM. V-ONE will
establish a TIS Software Problem Resolution Team consisting of qualified
UNIX programmer personnel, with a maximum of five (5). These personnel
will gain familiarity with the TIS Software and the installation process
and provide the first line technical support for TIS Software for V-ONE
and End User Customers. V-ONE will identify the members of this TIS
Software Problem Resolution Team to TIS. The members of this team will be
the only personnel associated with V-ONE that TIS will provide with TIS
Software telephone technical support.
4.4 UPDATES. TIS shall provide V-ONE with copies of all
updates for the TIS Software promptly when ready for delivery to end user
customers. V-ONE shall pay TIS fees identified in Schedule "B" for TIS
Software Updates provided to End User Customers without an active annual
TIS Software Subscription. V-ONE shall distribute reasonably promptly TIS
Software Updates to End User Customers with an active TIS Software
Subscription.
5
<PAGE>
5. MASTER COPY
---------------
As soon as practicable, TIS shall deliver to V-ONE two (2)
electronic copies of the TIS Object Code and TIS Source Code, TIS
Documentation and any such other information, documentation and
instructions reasonably deemed necessary by TIS to enable V-ONE to perform
its obligations under this Agreement (collectively the "Master Copy").
TIS shall provide additional copies as necessary or appropriate upon any
changes to TIS Object Code, TIS Source Code or TIS Documentation promptly
when ready for delivery to end user customers.
6. ADDITIONAL OBLIGATION OF V-ONE
----------------------------------
6.1 PRODUCT IDENTIFICATION. V-ONE agrees that it shall
clearly identify on all TIS Software packaging, supporting document, and
advertisements that the TIS Software is "Trusted Information Systems'
Gauntlet Internet Firewall", except as otherwise provided in this
Agreement, and shall include such proprietary notices as may be reasonably
requested by TIS.
6.2 PRODUCT MARKETING. V-ONE is authorized to represent to
its End User Customers only such facts about the TIS Software as TIS
states in its product descriptions, advertising and promotional materials
or as may be stated in other non-confidential written material furnished
by TIS. V-ONE agrees to obtain written TIS concurrence, prior to
publication, on the accuracy of statements describing TIS Software that
are developed by V-ONE for product packaging, advertising and promotional
materials. TIS will use its best efforts to provide written approval or
corrections within three TIS working days following the receipt of V-ONE's
request for concurrence, and if approval or disapproval is not provided
within five TIS working days, TIS waives its right to approve the
particular publication.
6.3 LICENSE AGREEMENTS. V-ONE shall cause to be delivered to
each End user Customer a license agreement which shall contain, at a
minimum, all of the limitations of rights and the protection for TIS which
are contained in Section 2.4.1., 7.1, 7.2, 7.3, 7.4, and 9.19 of this
Agreement to the extent they apply to the rights granted to End user
Customers. V-ONE shall submit to TIS for its approval of such terms,
which shall not be unreasonably withheld, a copy of its general form of
sublicense agreement. V-ONE shall use its reasonable efforts to ensure
that all End user Customers abide by the terms of such license agreements
and TIS shall retain the right to enforce such license agreements
directly.
6.4 CONFIDENTIALITY.
6.4.1 Each party understands and agrees that in the
other party's performance of its duties and exercise of its rights
6
hereunder, such party will communicate certain confidential and
proprietary information concerning TIS Software, Software Modifications,
know-how, technology, techniques or marketing plans (collectively, the
"Know-How). Neither party shall use the Know-How of the other for any
purpose other than the performance of this Agreement. To the extent such
information is confidential and proprietary to and trade secrets of the
party disclosing such information, all such disclosures are made in utmost
confidence. Except as expressly authorized herein, each party agrees to
hold all the Know-How within its own organization and shall not, without
specific written consent of the disclosing party or as authorized herein,
utilize in any manner, publish, communicate or disclose any part of such
Know-How to third parties. Each party will take all reasonable steps to
protect the security, confidentiality and trade secrets status of the
Know-How and will take such steps as are consistent with protection of its
own confidential and proprietary information (but will in no event
exercise less than reasonable care) to ensure that the provisions of this
Agreement are not violated by such party's End User Customers, employees,
agents or any other person to whom such has made lawful disclosure
hereunder. A party's obligations with respect to a particular portion of
the Know-How will cease if and when that portion (i) becomes part of the
public domain without any wrongful act attributable to such party; (ii) is
lawfully received by such party from a third party without violation of
this Agreement or any similar agreement; (iii) is approved for release by
written authorization of the other party; (iv) is already known by such
party as evidenced by its written records; or (v) is independently
developed by such party, provided that the person or persons responsible
for development did not have access to the Know-How.
6.4.2 V-ONE agrees to take all reasonable steps to
protect the security and confidentiality of all data, information,
programs, systems, materials, techniques and/or procedures relating to the
TIS Source Code and further agrees not to remove or destroy any copyright
or proprietary markings or confidential legends placed upon or contained
within the TIS Source Code or Documentation, and to insert such copyright
or proprietary markings or confidential legends in any copies of the TIS
Source Codes or Documentation. Except as specifically permitted in this
Agreement, V-ONE agrees that it will not sell, license, distribute, copy
or duplicate, or permit anyone else to sell, license, distribute, copy or
duplicate, any aspect of the TIS Source Code.
6.4.3 Each party acknowledges that the restrictions contained in
this Section are reasonable and necessary to protect the other party's
legitimate interests, that remedies at law will be inadequate, that any
violation of these restrictions will cause irreparable damage within a
short period of time and that the non-breaching party will be entitled to
injunctive relief against such violation. Each party further agrees that
all confidentiality commitments hereunder shall survive the expiration or
termination of this Agreement or the license granted herein.
6.5 PROTECTION OF PROPRIETARY RIGHTS. V-ONE shall, at its
own costs and expense, protect and defend TIS's exclusive ownership of the
TIS Software and all patents, copyrights, trademarks, proprietary and
7
trade secret rights associated with the foregoing against all claims,
liens, and legal processes of creditors of V-ONE brought against V-ONE or
TIS and keep the same free and clear from all such claims, liens and
processes. V-ONE shall immediately advise TIS in writing of the
occurrence of any such claim, lien or legal process, and TIS, at its
option and expense, shall have the right at any time, but not the
obligation, to either monitor and participate in, or to control and direct
(but not with respect to any aspect involving solely the liability of V-
ONE, the investigation, preparation and settlement of any such claim, lien
and legal process. V-ONE shall fully cooperate with TIS in any such
action.
6.6 NOTICES. Each party shall promptly advise the other of
any legal notices served on such party which might affect the other party
or other party's products.
6.7 COSTS AND EXPENSES. Except as otherwise expressly
provided in this Agreement, each party shall be solely responsible for all
of its costs, salaries and other expenses incurred in connection with the
performance of its obligations hereunder, and the other party shall not
have any liability, obligation or responsibility whatsoever therefore.
6.8 INDEMNITY, V-ONE EXPRESSLY SAVES, INDEMNIFIES AND HOLDS
TIS, ITS SUBSIDIARIES, AGENTS AND AFFILIATES HARMLESS FROM (i) ANY AND ALL
LIABILITY OF ANY KIND OR NATURE WHATSOEVER TO V-ONE's CUSTOMERS,
DISTRIBUTORS AND THIRD PARTIES WHICH MAY ARISE FROM ACTS OF V-ONE OR FROM
THE LICENSE OF THE TIS SOFTWARE BY V-ONE, OR ANY DOCUMENTATION, SERVICES
OR ANY OTHER ITEM FURNISHED BY V-ONE TO ITS CUSTOMERS; AND (ii) ANY
LIABILITY ARISING IN CONNECTION WITH AN UNAUTHORIZED STATEMENT OR
MISREPRESENTATION OF FACT MADE BY V-ONE OR ITS AGENTS, EMPLOYEES OR
DISTRIBUTORS TO ANY PARTY WITH RESPECT TO THE TIS SOFTWARE.
7. DISCLAIMER LIMITATION OF LIABILITY, WARRANTY AND
INTELLECTUAL PROPERTY INDEMNITIES
----------------------------------------------------
7.1 DISCLAIMER. THE TIS SOFTWARE IS PROVIDED "AS-IS" WITHOUT
ANY WARRANTY WHATSOEVER. TIS DISCLAIMS ALL WARRANTIES WITH REGARD TO THE
TIS SOFTWARE INCLUDING ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE AND ALL OBLIGATIONS OR LIABILITIES ON
THE PART OF TIS FOR DAMAGES INCLUDING BUT NOT LIMITED TO CONSEQUENTIAL
DAMAGES ARISING OUT OF, OR IN CONNECTION WITH, THE USE OR PERFORMANCE OF
THE TIS SOFTWARE.
7.2 LIMITATION OF LIABILITY. IN NO EVENT WILL TIS BE LIABLE
TO V-ONE OR ANY THIRD PARTIES FOR DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES OR LOST PROFITS EVEN IF TIS HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
7.3 PROPRIETARY RIGHTS INFRINGEMENT BY TIS
7.3.1 TIS shall indemnify and hold V-ONE harmless from
any and all liability, damages, costs or expenses (including reasonable
8
attorneys' fees) which may be sustained or incurred by V-ONE as a result
of any claim or claims that the unmodified TIS Software as delivered by
TIS (excluding Software Modifications) infringes on a patent, copyright or
trade secret. TIS shall have no obligation to V-ONE pursuant to this
Section 7.3 unless: (i) V-ONE gives TIS prompt written notice of the
claim; (ii) TIS is given the right to control and direct the
investigation, preparation, defense and settlement of the claim; and (iii)
the claim is based on V-ONE's use of the unmodified TIS Software in
accordance with this Agreement.
7.3.2 If TIS receives notice of an alleged infringement,
TIS shall have the right, at its sole option, to obtain the right to
continue use of the TIS Software or modify the TIS Software so that it is
not longer infringing. If neither of the foregoing options is reasonably
available to TIS, then the license rights granted pursuant to Section 2 of
this Agreement may be terminated at the option of any party hereto.
7.3.3 The rights and remedies set forth in Section 7.3.1
and 7.3.2 above state the entire obligation of TIS and the exclusive
remedies of V-ONE concerning TIS's proprietary rights infringement.
7.4 PROPRIETARY RIGHTS INFRINGEMENT BY V-ONE
7.4.1 V-ONE shall indemnify and hold TIS harmless from
any and all liability, damage, costs or expenses to third parties
(including reasonable attorneys' fees) which may be sustained or incurred
as a result of any claim or claims that the Software Modifications
infringe on a patent, copyright or trade secret. V-ONE shall have no
obligation to TIS pursuant to this Section 7.4.1 unless: (i) TIS gives V-
ONE prompt written notice of the claim; (ii) V-ONE is given the right to
control and direct the investigation, preparation, defense and settlement
of the claim; and (iii) the claim is not based solely on V-ONE's use of
the unmodified TIS Software.
7.4.2 If V-ONE receives notice of an alleged
infringement, V-ONE shall have the right, at its sole option, to obtain
the right to continued use of the Software Modifications or to replace or
modify the Software Modifications so that they are no longer infringing.
If neither of the foregoing options is reasonably available to V-ONE, then
the license rights granted pursuant to Section 2 of this Agreement may be
terminated at the option of any party hereto, and in the event of such
termination, TIS shall retain all License Fees paid by V-ONE hereunder.
7.4.3 The rights and remedies set forth in Sections
7.4.1 and 7.4.2 above state the entire obligation of V-ONE and the
exclusive remedies of TIS concerning V-ONE's proprietary rights
infringement.
9
8. TERM AND TERMINATION
------------------------
8.1 TERM. The license rights granted pursuant to Section 2
hereof shall be effective as of the date hereof and shall continue in full
force and effect until December 31, following the second anniversary of
this Agreement unless sooner terminated pursuant to the terms of this
Agreement.
8.2 RENEWAL. The license rights granted pursuant to Section
2 of this agreement shall be automatically extended twice for successive
one-year terms on the first day of each calendar year, provided that V-
ONE:
8.2.1 Is not in material breach of this Agreement.
8.2.2 Is not delinquent in any payments to TIS at the
same time of the renewal.
8.2.3 Provides TIS with a minimum of $20,000 in combined
fees from Per copy License Fees and Per Copy Annual Subscription Fees in
the preceding full calendar year. Failure shall result in the termination
of the license rights granted pursuant to Section 2 of this Agreement
effective as of the last day of the calendar year for which the minimum
combined fees from annual Per Copy License Fees and Per Copy Annual
Subscription Fees were not paid to TIS.
8.3 TERMINATION. Notwithstanding the foregoing, either party
shall be entitled to terminate the license rights granted pursuant to this
Agreement at any time on written notice to the other in the event of a
material breach of this Agreement by such other party and a failure to
cure such breach within a period of thirty (30) days following receipt of
written notice specifying that a breach has occurred, or if such breach is
not reasonably susceptive to cure within such 30 day period and the
breaching party does not commence remedial action within such 30 day
period, and thereafter diligently continues such action until the breach
is cured. Notwithstanding the foregoing, should V-ONE on one or more
occasion in any twelve (12) month period perform or fail to perform any
act which gives TIS the right to terminate all or any part of the licensed
rights granted to V-ONE, but for V-ONE's right to remedy such breach, TIS
may on such second or subsequent breach, terminate this agreement
forthwith by giving notice of such termination to V-ONE.
8.4 INSOLVENCY. In the event that V-ONE be adjudged
insolvent or bankrupt, or upon the institution of any proceedings by or
against it seeking relief, reorganization or arrangement under any laws
relating to insolvency, or upon any assignment for the benefit of
creditors, or upon the appointment of a receiver, liquidator or trustee of
any of its property or assets, or upon the liquidation, dissolution or
winding up of its business, then and in any such events the license rights
granted pursuant to Section 2 of this Agreement may forthwith be
terminated or canceled by the other part upon giving written notice
10
thereof, and upon the giving of such notice the license rights granted
pursuant to Section 2 of this Agreement shall terminate forthwith;
provided that, the rights of any sublicenses with respect to the TIS
Software shall remain unaffected by such termination.
8.5 TRANSFER AND ASSIGNMENT. The license rights granted
pursuant to Section 2 of this Agreement may not be transferred, by
operation of law or otherwise, to any entity (including any successor or
affiliate of V-ONE) except with the prior written consent of TIS that will
not be unreasonably withheld; provided that, TIS hereby confirms and
agrees that such consent will not be withheld for any proposed assignment
or transfer in connection with a change of control in ownership of V-ONE
or any sublicensee hereunder. TIS may freely assign its rights under this
Agreement.
8.6 DISPOSITION OF TIS SOFTWARE AND TIS DOCUMENTATION ON
TERMINATION. Upon the expiration or termination of the license rights
granted pursuant to this Agreement for any reason, the license rights
granted pursuant to Section 2 of this Agreement shall immediately cease
and terminate (except as provided below) and the remaining provisions
hereof (including without limitation the confidentiality provisions of
Section 6.4 hereof) shall remain in full force and effect. If the license
rights granted pursuant to Section 2 of this Agreement have expired or are
terminated for any reason, V-ONE shall cease making copies of, using or
licensing the TIS Software, except for such actions by V-ONE as are
reasonably necessary to provide for sublicenses previously granted and
orders placed with V-ONE in the ordinary course of business prior to such
expiration or termination. V-ONE shall return the Master Copies in V-
ONE's possession to TIS as soon practicable after such expiration or
termination and shall destroy or deliver to TIS all copies of the TIS
Software. Notwithstanding the above, for a period of two years after the
date of expiration or termination of the license rights granted under this
Agreement, V-ONE may retain one copy of the TIS Source Code and is hereby
licensed for such term to use such TIS Source Code internally solely for
the purpose of supporting End user Customers of TIS Software. Upon the
expiration of such two-year period, V-ONE shall destroy or return to TIS
such single copy of TIS Source Code.
9. MISCELLANEOUS PROVISIONS
----------------------------
9.1 GOVERNING LAWS. It is the intention of the parties
hereto that the internal laws of the State of Maryland, U.S.A.
(irrespective of its choice of law principles) shall govern the validity
of this Agreement, the construction of its terms, and the interpretation
and enforcement of the rights and duties of the parties hereto.
9.2 BINDING UPON SUCCESSOR AND ASSIGNS. Subject to, and
unless otherwise provided in this Agreement, each and all of the
covenants, terms, provisions, and agreements contained herein shall be
binding upon, and inure to the benefit of, the permitted successors,
11
representative, administrators and assigns of the parties hereto. TIS (i)
has investigated V-ONE in connection with the execution and delivery of
this Agreement by TIS, (ii) has selected V-ONE as a licensee of the TIS
Software hereunder because of V-ONE's business, reputation, and
competitive posture and (iii) but for V-ONE's business, reputation, and
competitive posture and (iii) but for V-ONE's unique qualifications would
not have entered into this Agreement.
9.3 SEVERABILITY. If any provision of this Agreement, or the
application hereof, shall for any reason and to any extent, be invalid or
unenforceable, the remained of this Agreement and application of such
provisions to other persons or circumstances shall be interrupted so as
best to reasonably effect the intent of the parties hereto. The parties
further agree to replace such void or unenforceable provisions of this
Agreement with valid and enforceable provisions which will achieve, to the
extent possible, the economic, business and other purposes of the void or
unenforceable provisions.
9.4 ENTIRE AGREEMENT. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto
with respect to the subject matter hereof and thereof and supersede all
prior and contemporaneous agreements or understandings, inducements or
conditions, express or implied, written or oral, between the parties with
respect hereto and thereto. The express terms hereof control and
supersede any course of performance or usage of the trade inconsistent
with any of the terms hereof.
9.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against any
party whose signature appears thereon and all of which together shall
constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon
as signatories.
9.6 EXPENSES. Each party shall pay all of its own costs and
expenses incurred with respect to the negotiation, execution and delivery
of this Agreement and the exhibit hereto.
9.7 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only by a writing signed by the party to
be bound thereby.
9.8 SURVIVAL OF AGREEMENTS. All covenants, agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby.
12
9.9 NO WAIVER. The failure of any party to enforce any of
the provisions hereof shall not be construed to be a waiver of the right
of such party thereafter to enforce such provisions.
9.10 OTHER REMEDIES. Any and all remedies herein expressly
conferred upon a party shall be deemed cumulative with and not exclusive
of any other remedy conferred hereby or by law, and the exercise of any
one remedy shall not preclude the exercise of any other.
9.11 RESOLUTION OF PROBLEMS; ATTORNEY'S FEES. In the event of
any problem, claim, or dispute arising from this Agreement, the aggrieved
party shall promptly notify the other party of the existence of the
problem, claim, or dispute, and such party shall promptly undertake all
reasonable efforts to resolve the matter within thirty days of such
notice. If such efforts are not successful, the parties shall meet
promptly thereafter to resolve the matter amicably, and each party shall
exert its reasonable best efforts toward this solution. If the matter
cannot be resolved through this process, then the parties shall submit the
matter to non-binding arbitration, in accordance with the rules of the
American Arbitration Association. The arbitration shall be held in
Washington, D.C., and shall utilize a single arbitrator selected by the
parties. Each party shall bear one-half of the costs of the arbitration.
In the event the arbitration process does not lead to resolution of the
problem, then the parties shall then have recourse to all available rights
and remedies under applicable law. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be
entitled to recover, as an element of the costs of suit and not as
damages, reasonable attorneys' fees to be fixed by the court (including
without limitation, costs, expenses and fees on any appeal).
9.12 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement,
each such communication shall be in writing and shall be effective only if
it is delivered by personal service or mailed, United States certified
mail, postage prepaid, return receipt requested, addressed as follows:
TIS: To the address set forth on page 1 hereof
V-ONE: To the address set forth on page 1 hereof
Such communications shall be effective when they are received by
the addressee thereof; but if sent by certified mail in the manner set
forth above, they shall be effective five (5) days after being deposited
in the United States mail. Any party may change its address for such
communications by giving notice thereof to the other party in conformity
with this Section.
9.13 TIME. Time is of the essence of this Agreement.
9.14 CONSTRUCTION OF AGREEMENT. This Agreement has been
negotiated by the respective parties hereto and the language hereof shall
not be construed for or against any party. A reference in this Agreement
13
to any Section shall include a reference to every Section the number of
which begins with the number of the Sections to which reference is
specifically made (e.g., a reference to Section 2.1 shall include a
reference to Section 2.1.2).
9.15 NO JOINT VENTURE. Nothing contained in this Agreement
shall be deemed or construed as creating a joint venture or partnership
between any of the parties hereto. No party is by virtue of this
Agreement authorized as an agent, employee or legal representative of any
other party. No party shall have the power to control the activities and
operations of any other, and their status is, and at all times, will
continue to be, that of independent contractors with respect to each
other. No party shall have any power or authority to bind or commit any
other. No party shall hold itself out as having any authority or
relationship in contravention of this Section.
9.16 PRONOUNS. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural,
as the identify of the person, entity or entities may require.
9.17 FURTHER ASSISTANCES. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents
and agreements and to give such further written assurances, as may be
reasonably requested by any party to better evidence and reflect the
transactions described herein and contemplated hereby, and to carry into
effect the intents and purposes of this Agreement.
9.18 EXPORT. This Agreement is expressly made subject to any
laws, regulations, or other restrictions on the export from the United
states of America of the TIS Software or of information about such TIS
Software which may be imposed from time to time by the Government of the
United states of America. Notwithstanding anything contained in this
Agreement to the contrary, V-ONE shall not export or re-export, directly
or indirectly, any TIS Software or information pertaining thereto to any
country for which such government or any agency thereof requires an export
license or other governmental approval at the time of export or reexport
without first obtaining such license or approval.
9.19 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions
of this Agreement are intended nor shall be interpreted to provide or
create any third party beneficiary rights or any other rights of any kind
in any client, customer, affiliate, shareholder, partner of any party
hereto or any other person; unless specifically provided otherwise herein,
and, except as so provided, all provisions hereof shall be personal solely
between the parties of this Agreement.
14
IN WITNESS WHEREOF, the parties have execute this Agreement as of
the date indicated below:
Trusted Information Systems, Inc. Virtual Open Network Environment
Corp.
BY /s/ BY /s/
------------------------------- -----------------------------
TITLE Vice President TITLE President
----------------------------- --------------------------
DATE Oct. 6, 1994 DATE Oct. 6, 1994
----------------------------- ---------------------------
15
EXHIBIT "A"
----------
DESCRIPTIONS AND TERRITORY
"TIS Software" includes the following:
Gauntlet[Trademark] software, Trusted Information
Systems' firewall product which is based on the TIS
Internet Firewall Toolkit, source and object code.
"TIS Software Annual Subscription" includes the following:
Gauntlet[Trademark] software, TIS Software Annual
Subscription provides the End User Customer with the
following for one (1) year:
For V-ONE's End User Customers, TIS will provide V-ONE
with the right to redistribute software updates, TIS
Software, TIS Documentation, and the TIS Firewall
Newsletter, and discounts at TIS security workshops and
training.
"Territory" consists of the following areas:
United States, Taiwan, Australia, Hong Kong, Singapore, Canada,
Mexico
In the event that V-ONE fails to provide TIS with at least $5,000 in
combined fees from Per Copy License Fees and Per Annual Subscription Fees
from any country in the Territory in each full year beginning January 1,
1995, TIS shall have the right to remove that country from the Territory
by giving 60 days' notice to V-ONE.
Approved (initials): TIS: AA
--------------------------
V-ONE: JL
------------------------
Date: Oct. 6, 1994
------------------------
16
EXHIBIT "B"
SCHEDULE OF FEES
ADVANCE FEE. V-ONE shall pay to TIS an Advance Fee of Ten Thousand
Dollars ($10,000). Such Advance fee shall be credited in the following
manner:
1. Five Thousand Dollars ($5,000) will cover the cost of firewall
installation and configuration training at V-ONE's site. This training
consists of 16 hours of lecture/lab experiences and will be delivered to a
maximum of 10 students by experienced TIS personnel. TIS will make all
reasonable effort to deliver this training within 60 (sixty) days of the
signing of this agreement.
2. Five Thousand Dollars ($5,000) will be credited to Per Copy
License Fees and Per Annual Subscription Fees paid by V-ONE to TIS under
the terms of this Agreement during the first year this Agreement is in
effect.
Gauntlet[Trademark] Firewall fees. Additionally, shall pay a Per Copy
License Fee for each unit of the TIS software licensed for use on a single
host computer system, in accordance with the following pricing schedule:
for licenses one (1) to six (6), Two Thousand and Five
Hundred Dollars ($2,500) for each license;
for licenses seven (7) to two hundred and fifty (250),
One Thousand, Seven Hundred and Fifty Dollars ($1,750)
for each license;
for licenses two hundred and fifty-one (251) to five
hundred (500), One Thousand and Five Hundred Dollars
($1,500) for each license;
for licenses five hundred and one (501) to one thousand
(1000), One Thousand Two Hundred and Fifty Dollars
($1,250) for each license;
for licenses one thousand and one (1001) and subsequent
licenses, One Thousand Dollars ($1,000) for each license.
TIS SOFTWARE PER ANNUAL SUBSCRIPTION FEES. V-ONE shall pay to TIS A Per
Annual Subscription Fee of Five Hundred ($500.00) for each TIS Software
Annual Subscription sold to the End user Customer for each copy of the TIS
Software.
17
FEES FOR UPDATES FOR NON-SUBSCRIBERS. V-ONE shall pay to TIS a Per Annual
Subscription Fee of Five Hundred ($500.00) for each TIS Software Annual
Subscription sold to the End User Customer for each copy of the TIS
Software.
FEES FOR UPDATES FOR NON-SUBSCRIBERS. V-ONE shall pay to TIS an Update
Fee in an amount to be specified by TIS but not to exceed the TIS Software
Annual Subscription Fee for each instance in which an end User Customer
who is not covered by an Annual Subscription wishes to update the TIS
Software to a new version.
Approved (initials): TIS: AA
--------------------------
V-ONE: JL
------------------------
Date: Oct. 6, 1994
------------------------
18
FIRST AMENDMENT
to
SOFTWARE LICENSE AGREEMENT
THIS FIRST AMENDMENT (this "Amendment") is entered into as of
November 15, 1995 between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V-
ONE"), a Maryland corporation, and TRUSTED INFORMATION SYSTEMS, INC.
("TIS"), a Maryland corporation, in order to revise, supplement and
reaffirm the Software License Agreement (the "Agreement") entered into by
the parties as of October 6, 1994. Capitalized terms employed in this
Amendment and not otherwise defined herein shall have the meanings given
in definition of such terms in the Agreement.
1. AMENDMENT OF SECTION 2.4.2. Section 2.4.2 of the
Agreement is hereby amended by the addition, at the end of the present
section, of the following:
V-ONE shall have the right to market and distribute,
directly through third-party resellers, software products
designed by V-ONE that combine the TIS Software and
Software Modifications. V-ONE shall submit to TIS for
advance review and approval all training materials
intended to instruct such third-party resellers regarding
the design, functionality, operation, maintenance or
support of the modified TIS Software.
2. RATIFICATION OF AGREEMENT. Except as expressly modified
by this Amendment, all provisions of the Agreement, which is incorporated
herein by this reference, shall remain in full force and effect following
the execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
signed by their duly authorized representatives as of the ate first
written above.
VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
By: /s/ Bob Rybicki
----------------------------------
Title: V.P., Bus. Dev.
-------------------------------
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ Steven Lipner
----------------------------------
Title: Vice President
-------------------------------
<PAGE>
<PAGE>
SECOND AMENDMENT
to
SOFTWARE LICENSE AGREEMENT
THIS SECOND AMENDMENT (this "Amendment") is entered into as of
May 8, 1996, between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V-ONE"), a
Delaware corporation, and TRUSTED INFORMATION SYSTEMS, INC. ("TIS"), a
Maryland corporation, in order to revise, supplement and reaffirm the
Software License Agreement (the "Agreement") entered into by the parties
as of October 6, 1994. Capitalized terms employed in this Amendment and
not otherwise defined herein shall have the meanings given in definition
of such terms in the Agreement.
1. AMENDMENT OF EXHIBIT "A" Exhibit "A" of the Agreement is
hereby amended by the addition, at the end of the present section, of the
following:
and all other countries in the world where the distribution is
allowed by law.
2. RATIFICATION OF AGREEMENT. Except as expressly modified
by this Amendment all provisions of the Agreement, which is incorporated
herein by this reference, shall remain in full force and effect following
the execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
signed by their duly authorized representatives as of the date first
written above.
VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
By: /s/ Bob Rybicki
-----------------------------------
Title: V.P. Business Development
--------------------------------
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ Gina Dubbe
-----------------------------------
Title: V.P. Sales
--------------------------------
<PAGE>
<PAGE>
THIRD AMENDMENT
to
SOFTWARE LICENSE AGREEMENT
THIS THIRD AMENDMENT (this "Amendment") is entered into as of May
8, 1996, between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V-ONE"), a
Delaware corporation, and TRUSTED INFORMATION SYSTEMS, INC. ("TIS"), a
Maryland corporation, in order to revise, supplement and reaffirm the
Software License Agreement (the "Agreement") entered into by the parties
as of October 6, 1994. Capitalized terms employed in this Amendment and
not otherwise defined herein shall have the meanings given in definition
of such terms in the Agreement.
1. AMENDMENT OF SECTION 3.3 Section 3.3 of the Agreement is
hereby amended by replacing the existing Section with the following:
TERMS OF PAYMENT Per Copy License Fees and Per Annual
Subscription Fees shall accrue with respect to TIS Software licensed
excluding evaluation copies by V-ONE upon the date of invoice, shipment,
or use, whichever comes first, of the TIS Software by V-ONE to an End User
Customer. Fees due TIS hereunder shall be paid by V-One to TIS at TIS's
address set forth on page 1 of this Agreement on or before the thirtieth
(30th) day after the close of the month during which the fees accrued. A
late payment penalty of one percent (1%) of any fees not paid when due
shall be assessed for each thirty (30)-day period, or portion thereof,
compounded monthly, not in advance, during which such payment is delayed,
beginning on the thirty-first (31st) day after the last day of the month
to which the delayed payment relates until payment is made.
2. AMENDMENT OF SECTION 3.5 Section 3.5 of the Agreement is
hereby amended by the replacement of the first sentence in the Section
with the following:
REMITTANCE REPORT A remittance report in reasonably detailed form
setting forth the calculation of fees due from V-ONE and signed by a
responsible officer of V-ONE shall be delivered monthly to TIS
concurrently with payments made pursuant to paragraph 3.3. above. V-ONE
shall use its best effort to provide a detailed report and will, at a
minimum, provide the quantity shipped, the date of invoice and shipment
for each product shipped and a breakdown of the general location.
3. RATIFICATION OF AGREEMENT
Except as expressly modified by this Amendment, all provisions of
the Agreement, which is incorporated herein by this reference, shall
remain in full force and effect following the execution and delivery of
this Amendment.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
signed by their duly authorized representatives as of the date first
written above.
VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
By: /s/ Bob Rybicki
----------------------------------
Title: V.P. Business Development
-------------------------------
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ G. Dubbe
-----------------------------------
Title: V.P. Sales
--------------------------------
<PAGE>
<PAGE>
FOURTH AMENDMENT
to
SOFTWARE LICENSE AGREEMENT
THIS FOURTH AMENDMENT (this "Amendment") is entered into as of
May 8, 1996, between VIRTUAL OPEN NETWORK ENVIRONMENT CORP. ("V-ONE"), a
Delaware corporation, in order to revise, supplement and reaffirm the
Software License Agreement (the "Agreement") entered into by the parties
as of October 6, 1994. Capitalized terms employed in this Amendment and
not otherwise defined herein shall have the meanings given in definition
of such terms in the Agreement.
1. AMENDMENT OF SECTION 8.2 Section 8.2 of the Agreement is
hereby amended by the replacement of the first sentence with the
following:
8.2 RENEWAL. The license rights granted pursuant to Section
2 of this agreement shall be automatically extended for successive terms
of three-years on the first day of the calendar year after expiration,
provided that V-ONE:
8.2.1 Is hereby deleted in its entirety and replaced with the
following: "Is not in material breach of this Agreement and has not cured
such breach as prescribed in 8.3 below.
8.2.2 Is hereby deleted in its entirety and replaced with the
following: "Is not delinquent in any payments to TIS at the time of
renewal and has not cured such delinquency within (30) days following
receipt of written notice specifying such delinquency has occurred."
2. RATIFICATION OF AGREEMENT. Except as expressly modified
by this Amendment, all provisions of the Agreement, which is incorporated
herein by this reference, shall remain in full force and effect following
the execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
signed by their duly authorized representatives as of the date first
written above.
VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
By: /s/ Bob Rybicki
-----------------------------------
Title: V.P. Business Development
-------------------------------
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ G. Dubbe
----------------------------------
Title: V.P. Sales
-------------------------------
<PAGE>
<PAGE>
OEM Master License Agreement Number: 1294-VON-O-MLA-1
Date of Agreement: 12/30/94
BSAFE/TIPEM
OEM MASTER LICENSE AGREEMENT
This OEM MASTER LICENSE AGREEMENT ("Agreement") is entered into
on the date set forth below between RSA Data Security, Inc., a Delaware
corporation ("RSA"), having a principal mailing address at 100 Marine
Parkway, Suite 500, Redwood City, California 94065, and the entity named
below as "OEM" ("OEM"), having a principal address as set forth below.
OEM:
Virtual Open Network Environment Corp., a corporation
--------------------------------------------------------------------------
(Name and jurisdiction of incorporation)
OEM Address:
12300 Twinbrook Pkwy., Suite 235
Rockville, MD 20852
--------------------------------------------------------------------------
OEM Legal Contact:
Karen Casser, Esq., (202) 429-6824
-------------------------------------------------------------------------
(name, telephone and title)
OEM Billing Contact:
Bob Dorsey, (301) 881-2297, Exec. Assist.
-------------------------------------------------------------------------
(name, telephone and title)
OEM Technical Contact:
Jason Wang, (301) 881-2297, Chief Engineer
-------------------------------------------------------------------------
(name, telephone and title)
<PAGE>
RSA Data Security, Inc.
OEM Master License Agreement
Page 2
OEM Commercial Contact:
Ray Hanner, (301) 881-2297, Director of Marketing
-------------------------------------------------------------------------
(name, telephone and title)
OEM Initial P.O. Number:
-------------------------------------------------------------------------
Territory:
WORLDWIDE; PROVIDED, HOWEVER, THAT OEM SHALL NOT GRANT LICENSES FOR USE OF
THE BUNDLED PRODUCT IN ANY FOREIGN COUNTRY WHERE THE TERMS OF THE LICENSE
AGREEMENT WOULD NOT PROVIDE THE INTELLECTUAL PROPERTY PROTECTIONS INTENDED
TO BE PROVIDED BY SUCH LICENSE, OR WHERE THERE IS A SIGNIFICANT RISK THAT
THE RSA SOFTWARE OR ANY PART THEREOF WOULD THEREBY FALL INTO THE PUBLIC
DOMAIN. EXHIBIT "D" HERETO SETS FORTH A LIST OF COUNTRIES WHERE RSA
AGREES THAT OEM MAY IN ANY EVENT GRANT LICENSES FOR USE OF THE BUNDLED
PRODUCT. IF OEM WISHES TO GRANT A LICENSE IN A COUNTRY NOT LISTED ON
EXHIBIT "D," RSA WILL CONSIDER IN GOOD FAITH ANY INFORMATION PROVIDED BY
OEM TO DETERMINE WITHIN THIRTY (30) CALENDAR DAYS WHETHER RSA BELIEVES
LICENSES GRANTED IN SUCH COUNTRY WOULD MEET THE REQUIREMENTS SET FORTH IN
THIS PARAGRAPH.
Exhibit "C" Special Terms and Conditions Attached:
YES [ X ] NO [ ]
1. DEFINITIONS
-----------
The following terms when used in this Agreement shall have the
following meanings:
1.1 "BUNDLED PRODUCTS" means one or more of the specific
products described on a License/Product Schedule attached hereto and
referencing this Agreement which has been or will be developed by OEM and
which incorporates in the OEM Product in any manner any portion of the RSA
Object Code. A Bundled Product must represent a significant functional
and value enhancement to the Licensed Software such that the primary
reason for an End User Customer to license such Bundled Product is other
than the right to receive a license to the Licensed Software included in
the Bundled Product.
<PAGE>
RSA Data Security, Inc.
OEM Master License Agreement
Page 3
1.2 "DISTRIBUTOR" means a dealer or distributor in the
business of reselling or sublicensing Bundled Products by virtue of
authority of OEM. Bundled Products resold and sublicensed by a
Distributor shall bear OEM's trademarks and service marks and shall not be
privately labeled by such Distributor or other parties. A Distributor
shall have no right to modify any part of the Licensed Software.
1.3 "END USER CUSTOMER" means a person or entity sublicensing
RSA Object Code as part of a Bundled Product from OEM or a Distributor
solely for personal or internal use and without right to sublicense,
assign or otherwise transfer such Bundled Product to any other person or
entity.
1.4 "LICENSE/PRODUCT SCHEDULE" shall mean a schedule
substantially in the form of Exhibit "A" hereto completed and executed
with respect to each Bundled Product specifying the Licensed Software and
Licensed Functionality with respect to such Bundled Products. A
License/Product Schedule can be amended pursuant to Section 9.5 to provide
additional Licensed Software or Licensed Functionality with respect to a
specified Bundled Product. Additional Bundled Products may be added to
this License Agreement by executing an additional License/Product Schedule
referencing this Agreement. All such License/Product Schedules are
incorporated in this Agreement by this reference.
1.5 "INTERFACE MODIFICATIONS" shall have the meaning set
forth in Section 2.1.1.
1.6 "KNOW-HOW" shall have the meaning set forth in Section
6.4.1.
1.7 "LICENSE FEES" shall have the meaning set forth in
Section 3.1.
1.8 "LICENSED FUNCTIONALITY" means with respect to the
Licensed Software for a Bundled Product the functionality listed on the
License/Product Schedule for such Bundled Product.
1.9 "LICENSED SOFTWARE" means that portion of the RSA
Software specified on a License/Product Schedule hereto as having been
licensed by OEM and that produces the functionality specified in the
associated User Manual section relating to the named Licensed Software.
Only those portions of the RSA Software specified as having been licensed
are included in the Licensed Software. Licensed Software shall include
modifications and enhancements (including all New Releases and New
Versions) to such software as provided by RSA to OEM under this Agreement.
Licensed Software shall be specified by Bundled Product and OEM may elect
as set forth on the License/Product Schedule to license different Licensed
Software with respect to different Bundled Products.
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1.10 "NEW RELEASE" means a version of the RSA Software which
shall generally be designated by a new version number which has changed
from the prior number only to the right of the decimal point (e.g.,
Version 2.2 to Version 2.3).
1.11 "NEW VERSION" means a version of the RSA Software which
shall generally be designated by a new version number which has changed
from the prior number to the left of the decimal point (e.g., Version 2.3
to Version 3.0).
1.12 "OEM PRODUCT" means any product developed by OEM which is
to be bundled with the Licensed Software or into which the Licensed
Software is to be incorporated to create a Bundled Product.
1.13 "RSA OBJECT CODE" means the Licensed Software in machine-
readable, compiled object code form.
1.14 "RSA SOFTWARE" means RSA proprietary software known as
BSAFE and TIPEM as described in the User Manuals associated therewith.
"RSA Software" shall also include all modifications and enhancements
(including all New Releases and New Versions) to such programs as provided
by RSA to OEM.
1.15 "RSA SOURCE CODE" means the mnemonic, high level
statement versions of the RSA Software written in the source language used
by programmers.
1.16 "TERRITORY" means those countries or portions of
countries listed on page 1 hereof.
1.17 "USER MANUAL" means the most current version of the user
manual customarily supplied by RSA to end users who license the RSA Object
Code.
2. GRANT OF LIMITED LICENSES
-------------------------
2.1 RSA SOURCE CODE LICENSE. For OEM's convenience, RSA
wishes to permit OEM to port the RSA Software to any environment OEM
desires in accordance with the following license, if granted. If a source
code license is specified in a License/Product Schedule, RSA hereby grants
OEM a non-exclusive, non-transferable, non-assignable limited license in
the Territory during the term specified in Section 8 to:
2.1.1 Modify the RSA Source Code to create interfaces
and other software necessary to permit the object code to the RSA Software
to operate in accordance with the User Manual in any of OEM's proprietary
products (all such modifications to the RSA Source Code referenced
collectively as "Interface Modifications").
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2.1.2 Use the RSA Source Code to provide support of
Bundled Products to End User Customers.
2.1.3 Compile the RSA Source Code to create object code
solely to permit creation of Interface Modifications and for the purposes
set forth in Section 2.2 (with the limitations set forth in Section 2.3).
2.2 OBJECT CODE LICENSE. RSA wishes to permit OEM to
incorporate into Bundled Products only specified portions and
functionality of the RSA Software; additional portions and functionality
of the RSA Software can be added and additional Bundled Products can be
added by executing an amendment to a License/Product Schedule or a new
License/Product Schedule. RSA hereby grants OEM a non-exclusive, non-
transferable, non-assignable limited license in the Territory during the
term specified in Section 8 to:
2.2.1 Incorporate the Licensed Functionality of the RSA
Object Code into the OEM Product to create a Bundled Product.
2.2.2 Reproduce, have reproduced, and sublicense the
Licensed Functionality of the RSA Object Code and the User Manual
incorporated in a Bundled Product.
2.3 LIMITATIONS ON OBJECT CODE LICENSE. The licenses granted
in Section 2.2 shall be limited as follows:
2.3.1 Sublicenses of the RSA Object Code to Licensed
Software shall be granted only to (i) Distributors and (ii) End User
Customers.
2.3.2 OEM may not in any way sell, rent, license,
sublicense or otherwise distribute the RSA Software or any part thereof or
the right to use the RSA Software or any part thereof as a stand-alone
product to any person or entity.
2.3.3 OEM may not incorporate into any Bundled Product
any algorithm or other functionality included within the RSA Software
which is not Licensed Software as set forth on the License/Product
Schedule with respect to such Bundled Product.
2.3.4 If Licensed Software with respect to a Bundled
Product has a specified Licensed Functionality, it may be incorporated,
reproduced, or sublicensed only with respect to such Licensed
Functionality and no other functionality of such Licensed Software is
permitted to be incorporated, reproduced, or sublicensed in such Bundled
Product. If no Licensed Functionality restriction is specified for an
item of Licensed Software with respect to a Bundled Product, then OEM
shall have the rights set forth in Section 2.2 with respect to all
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functionalities of such Licensed Software with respect to such Bundled
Product.
2.4 TITLE.
2.4.1 Except for the limited licenses granted in
Sections 2.1 and 2.2, RSA shall at all times retain full and exclusive
right, title and ownership interest in and to the RSA Software and in any
and all related patents, trademarks, copyrights or proprietary or trade
secret rights.
2.4.2 OEM shall at all times retain full and exclusive
right, title and ownership interest in and to the Interface Modifications
and in any and all related copyrights or proprietary or trade secret
rights; provided, however, that OEM hereby agrees that it will not assert
against RSA any of such copyrights or proprietary or trade secret rights
with respect to any interfaces independently developed by RSA without
reference to the source code to the Interface Modifications.
3. LICENSE FEES
------------
3.1 LICENSE FEES. In consideration of RSA's grant to OEM of
the limited license rights hereunder, OEM shall pay to RSA the amounts set
forth below (the "License Fees"):
3.1.1 SOURCE CODE LICENSE FEES. If RSA is granting to
OEM RSA Source Code license rights as specified in a License/Product
Schedule, OEM shall pay to RSA the license fee as specified on each such
License/Product Schedule.
3.1.2 OBJECT CODE LICENSE FEES. In consideration of
RSA's grant to OEM of the RSA Object Code sublicense rights for each
Bundled Product described in each License/Product Schedule, OEM shall pay
to RSA the license fees set forth in each such License/Product Schedule,
subject to the following:
3.1.2.1 FIXED DOLLAR AMOUNT. If a fixed dollar
fee is specified for each copy/unit of a Bundled Product licensed or
otherwise distributed by OEM or a Distributor, the License Fee per
copy/unit shall be in the amount specified in the License Product
Schedule.
3.1.2.2 PERCENTAGE OF NET SALES. If a License
Fee based on Net Sales is specified in the License/Product Schedule, a
License Fee shall be due for each copy/unit of a Bundled Product licensed
or otherwise distributed by OEM or a Distributor, in the amount of the
specified percentage of the Net Sales Price of the Bundled Product. The
"Net Sales Price" shall be the gross amount of all cash, in-kind or other
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consideration receivable by OEM or such Distributor at any time in
consideration of the licensing or other distribution of the Bundled
Product, excluding any amounts received by OEM or such Distributor for
sales and use taxes, shipping, insurance and duties, and reduced by all
discounts, rebates, refunds or allowances granted in the ordinary course
of business. For the purposes of determining Net Sales Price, the amount
of in-kind or other non-cash consideration receivable by OEM shall be
deemed to have a dollar value equal to the standard price (as listed in
OEM's published price schedule on the date of the grant of the license or
the sale in question) ("Standard Price") for such Bundled Product, less
all cash paid. With respect to a Bundled Product which is licensed or
otherwise distributed by OEM or a Distributor as part of a larger group of
products or as an integral part of another product, a license fee shall be
due as set forth above as though the Bundled Product had been licensed or
distributed separately by OEM or such Distributor; provided, however, that
if the amount invoiced for the Bundled Product when licensed or
distributed in this manner is more than five percent (5%) below the
Standard Price for the Bundled Product, then the Net Sale Price relating
to such invoice shall be deemed to be no less than ninety-five percent
(95%) of the Standard Price, notwithstanding the actual amount of the
invoice.
3.1.3 PREPAYMENT OF LICENSE FEES. OEM shall prepay
license fees in the amount set forth in the License/Product Schedule upon
execution of the License/Product Schedule. In no event shall such
prepayment be refundable. If OEM has prepaid License Fees with respect to
a Bundled Product, one-half (1/2) of the License Fees accrued may be
offset against such prepaid License Fees. OEM shall show the application
of prepaid fees in the licensing reports provided to RSA pursuant to
Section 3.5.
3.2 TAXES. All taxes, duties, fees and other governmental
charges of any kind (including sales and use taxes, but excluding United
States or California taxes based on the gross revenues or net income of
RSA) which are imposed by or under the authority of any government or any
political subdivision thereof on the License Fees or any aspect of this
Agreement shall be borne by OEM and shall not be considered a part of, a
deduction from or an offset against, the License Fees.
3.3 TERMS OF PAYMENT. License fees shall accrue with respect
to Bundled Products licensed or otherwise distributed by OEM or
Distributors upon the date of invoice of the Bundled Product to an End
User Customer or Distributor. License fees due RSA hereunder shall be
paid by OEM to the attention of the Software Licensing Department at RSA's
address set forth above on or before the thirtieth (30th) day after the
close of the calendar quarter during which the fees accrued. If OEM has
prepaid License Fees with respect to a Bundled Product, one-half (1/2) of
License Fees accrued with respect to that Bundled Product may be offset
against such prepaid License Fees. A late payment penalty of one percent
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(1%) of any license fees not paid when due shall be assessed for each
thirty (30) day period, or portion thereof, during which such payment is
delayed, beginning on the thirty-first (31st) day after the last day of
the calendar quarter to which the delayed payment relates.
3.4 U.S. Currency. All payments hereunder shall be paid in
lawful United States currency. If OEM receives payment in foreign
currencies, the amount of its license fees to RSA shall be calculated
using the closing exchange rate published in THE WALL STREET JOURNAL
Western Edition on the last business day such journal is published in the
calendar quarter immediately preceding the date of payment.
3.5 LICENSING REPORT. A report in reasonably detailed form
setting forth the calculation of license fees due from OEM and signed by a
responsible officer of OEM shall be delivered to RSA on or before the
thirtieth (30th) day after the close of each calendar quarter during the
term of this Agreement, regardless of whether royalty payments are
required to be made pursuant to Section 3.3. The report shall include, at
a minimum, the following information (if applicable to OEM's designated
method of calculating license fees) with respect to the relevant quarter:
(i) the total number of copies/units of Bundled Products licensed or
otherwise distributed (indicating the names and versions thereof); (ii) if
applicable, the total Net Set Sales Price invoiced to Distributors and End
User Customers; and (iii) total license fees accrued.
3.6 AUDIT RIGHTS. RSA shall have the right, at its sole cost
and expense, to conduct during normal business hours and not more
frequently than annually, an audit of the appropriate records of OEM to
verify the number of copies/units of Bundled Products licensed or
otherwise distributed by OEM and Distributors and, if relevant to OEM's
designated method of calculating license fees, the Net Sales Price
therefor. If such amounts are found to be different than those reported,
or the license fees accrued are different than those reported, OEM will be
invoiced or credited for the difference, as applicable. Any additional
license fees, along with the late payment penalty assessed in accordance
with Section 3.3, shall be payable within thirty (30) days of such
invoice. If OEM has prepaid License Fees with respect to a Bundled
Product, one-half (1/2) of License Fees accrued with respect to that
Bundled Product may be offset against such prepaid License Fees. If the
deficiency in license fees paid by OEM is greater than five percent (5%)
of the license fees reported by OEM for any quarter, OEM will pay the
reasonable expenses associated with such audit, in addition to the
deficiency.
4. WARRANTY AND MAINTENANCE
------------------------
4.1 LIMITED WARRANTY. During the initial ninety (90)-day
term of each License/Product Schedule RSA warrants that the Licensed
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Functionality of the Licensed Software specified in each License/Product
Schedule will operate in material conformance to RSA's published
specifications for such Licensed Functionality of the Licensed Software.
RSA does not warrant that the RSA Software or any portion thereof is
error-free. OEM's exclusive remedy, and RSA's entire liability in tort,
contract or otherwise, shall be correction of any warranted nonconformity
as provided in Section 4.4. This limited warranty and any obligations of
RSA under Section 4.2 shall not apply to any Interface Modifications or
any nonconformities caused thereby and shall terminate immediately if OEM
makes any modification to the RSA Software other than Interface
Modifications.
4.2 OPTIONAL MAINTENANCE. For the year commencing upon the
expiration of the first ninety (90) days of each License/Product Schedule
and for each year thereafter commencing on the anniversary of such
expiration, OEM may elect to purchase annual maintenance, as defined in
Section 4.4, by paying the then-current annual maintenance fee. Such
amount shall be payable for the first year upon the execution of each
License/Product Schedule and for each subsequent year in advance of the
commencement of such year. RSA may cease to offer maintenance by notice
delivered to OEM ninety (90) days or more before the end of the then-
current maintenance term.
4.3 ADDITIONAL CHARGES. In the event RSA is required to take
actions to correct a difficulty or defect which is traced to OEM errors,
modifications, enhancements, software or hardware, then OEM shall pay to
RSA its time and materials charges at RSA's rates then in effect. In the
event RSA's personnel must travel to perform maintenance or on-site
support, OEM shall reimburse RSA for any reasonable out-of-pocket expenses
incurred, including travel to and from OEM's sites, lodging, meals and
shipping, as may be necessary in connection with duties performed under
this Section 4 by RSA.
4.4 MAINTENANCE PROVIDED BY RSA. During the ninety (90) days
following commencement of a License/Product Schedule and for periods for
which OEM has paid an annual maintenance fee, RSA will provide OEM with
the following services:
4.4.1 RSA will provide telephone support to OEM during
RSA's normal business hours. RSA may provide on-site support reasonably
determined to be necessary by RSA at OEM's location specified on page 1
hereof. RSA shall provide the support specified in this Section 4.4.1 to
OEM's employees responsible for developing Bundled Products, maintaining
Bundled Products, and providing support to End User Customers. No more
than two (2) OEM employees may obtain such support from RSA at any one
time. On RSA's request, OEM will provide a list with the names of the
employees designated to receive support from RSA. OEM may change the
names on the list at any time by providing written notice to RSA.
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4.4.2 In the event OEM discovers an error in the
Licensed Functionality of the Licensed Software which causes the Licensed
Functionality of the Licensed Software not to operate in material
conformance to RSA's published specifications therefor, OEM shall submit
to RSA a written report describing such error in sufficient detail to
permit RSA to reproduce such error. Upon receipt of any such written
report, RSA will use its reasonable business judgment to classify a
reported error as either: (i) a "Level 1 Severity" error, meaning an
error that causes the Licensed Functionality of the Licensed Software to
fail to operate in a material manner or to produce materially incorrect
results and for which there is no workaround or only a difficult
workaround; or (ii) a "Level 2 Severity" error, meaning an error that
produces a situation in which the Licensed Functionality of the Licensed
Software is usable but does not function in the most convenient or
expeditious manner, and the use or value of the Licensed Functionality of
the Licensed Software suffers no material impact. RSA will acknowledge
receipt of a conforming error report within two (2) business days and (A)
will use its continuing best efforts to provide a correction for any Level
1 Severity error to OEM as early as practicable; and (B) will use its
reasonable efforts to include a correction for any Level 2 Severity error
in the next release of the RSA Software.
4.4.3 RSA will provide OEM information relating to New
Releases and New Versions of the RSA Software during the term of this
Agreement. New Releases will be provided at no additional charge. New
Versions will be provided at RSA's standard upgrade charges in effect at
the time. Any New Releases or New Versions acquired by OEM shall be
governed by all of the terms and provisions of this Agreement.
4.5 LICENSE OF NEW RELEASES. In the event OEM has not purchased
optional maintenance with respect to any Licensed Software, OEM may obtain
a license of a New Release of such Licensed Software or any service which
is provided as a part of maintenance by paying the maintenance fees which
would otherwise have been due from the expiration of maintenance provided
pursuant to Section 4.1 to the date of license of such New Release.
5. MASTER COPY
-----------
As soon as practicable but not later than five (5) business days
after the date of execution of a License/Product Schedule RSA shall
deliver to OEM one (1) copy of each of the RSA Object Code, the RSA Source
Code and the User Manual licensed hereunder and such other information,
documentation and instructions reasonably deemed necessary by RSA to
enable OEM to perform its obligations under this Agreement.
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6. ADDITIONAL OBLIGATIONS OF OEM
-----------------------------
6.1 BUNDLED PRODUCT MARKETING. OEM is authorized to
represent to Distributors and End User Customers only such facts about the
RSA Software as RSA states in its published product descriptions,
advertising and promotional materials or as may be stated in other non-
confidential written material furnished by RSA.
6.2 CUSTOMER SUPPORT. OEM shall, at its expense, provide all
support for the Bundled Products to Distributors and End User Customers.
6.3 LICENSE AGREEMENTS. OEM shall cause to be delivered to
each Distributor and End User Customer a license agreement which shall
contain, at a minimum, substantially all of the limitations of rights and
the protections for RSA which are contained in Sections 2.3, 6.4.2, 6.6,
7.1, 7.2, 9.8 and 9.9 of this Agreement and shall prohibit Distributors
and End User Customers pursuant to written agreements from modifying,
reverse engineering, decompiling or disassembling the RSA Object Code or
any part thereof. OEM shall use its reasonable best efforts to ensure
that all Distributors and End User Customers abide by the terms of such
agreements.
6.4 CONFIDENTIALITY.
----------------
6.4.1 OEM acknowledges that in RSA's performance of its
duties hereunder RSA will communicate to OEM (or its designees) certain
confidential and proprietary information concerning the RSA Software, and
know-how, technology, techniques or marketing plans related thereto
(collectively, the "Know-How") all of which are confidential and
proprietary to, and trade secrets of, RSA. OEM agrees to hold all the RSA
Software and Know-How within its own organization and shall not, without
specific written consent of RSA or as expressly authorized herein, utilize
in any manner, publish, communicate or disclose any part of the RSA
Software or Know-How to third parties. This Section 6.4.1 shall impose no
obligation on OEM with respect to any Know-How which: (i) at the time of
disclosure in writing is not marked or stamped with a legend identifying
it as "Company Private," "Proprietary," "Confidential" or a similar
legend, or, within thirty (30) days after oral disclosure, is not so
identified in writing; (ii) is in the public domain at the time disclosed
by RSA; (iii) enters the public domain after disclosure other than by
breach of OEM's obligations hereunder or by breach of another party's
confidentiality obligations; or (iv) is shown by documentary evidence to
have been known by OEM prior to its receipt from RSA. OEM will take such
steps as are consistent with OEM's protection of its own confidential and
proprietary information (but will in no event exercise less than
reasonable care) to ensure that the provisions of this Section 6.4.1 are
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not violated by OEM's End User Customers, Distributors, employees, agents
or any other person.
6.4.2 OEM agrees not to remove or destroy any proprie-
tary, trademark or copyright markings or confidentiality legends placed
upon or contained within the RSA Source Code, RSA Object Code, User
Manuals or any related materials or documentation. OEM further agrees to
insert and maintain: (i) within every Bundled Product and any related
materials or documentation a copyright notice in the name of OEM; and (ii)
within the splash screens, user documentation, printed product collateral,
product packaging and advertisements for the Bundled Product, the
appropriate RSA "Licensee Seal" from the form attached as Exhibit "B" to
this Agreement and a statement that the Bundled Product contains the RSA
Software. OEM shall not take any action which might adversely affect the
validity of RSA's proprietary, trademark or copyright markings or
ownership by RSA thereof, and shall cease to use the markings, or any
similar markings, in any manner on the expiration or other termination of
the license rights granted pursuant to Section 2.
6.4.3 OEM acknowledges the extreme importance of the
confidentiality and trade secret status of the RSA Source Code and OEM
agrees, in addition to complying with the requirements of Sections 6.4.1
and 6.4.2 as they relate to the RSA Source Code, to: (i) inform any
employee that is granted access to all or any portion of the RSA Source
Code of the importance of preserving the confidentiality and trade secret
status of the RSA Source Code; and (ii) maintain a controlled, secure
environment for the storage and use of the RSA Source Code.
6.4.4 The placement of a copyright notice on any of the
RSA Software shall not constitute publication or otherwise impair the
confidential or trade secret nature of the RSA Software.
6.4.5 OEM acknowledges that the restrictions contained
in this Section 6.4 are reasonable and necessary to protect RSA's
legitimate interests and that any violation of these restrictions will
cause irreparable damage to RSA within a short period of time and OEM
agrees that RSA will be entitled to injunctive relief against each
violation. OEM further agrees that all confidentiality commitments
hereunder shall survive the expiration or termination for any reason of
this Agreement or the license rights granted pursuant to Section 2.
6.5 FEDERAL GOVERNMENT SUBLICENSE. Any sublicense of a
Bundled Product acquired from OEM or any Distributor under a United States
government contract shall be subject to restrictions as set forth in
subparagraph (c)(1)(ii) of Defense Federal Acquisition Regulations
Supplement (DFARs) Section 252.227-7013 for Department of Defense
contracts and as set forth in Federal Acquisition Regulations (FARs)
Section 52.227-19 for civilian agency contracts or any successor
regulations. OEM agrees that any such sublicense shall set forth all of
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such restrictions and the tape or diskette label for the Bundled Product
and any documentation delivered with the Bundled Product shall contain a
restricted rights legend conforming to the requirements of the current,
applicable DFARs or FARs.
6.6 NOTICES. OEM shall immediately advise RSA of any legal
notices served on OEM which might affect RSA, the RSA Software or any
Bundled Products.
6.7 INDEMNITY. OEM EXPRESSLY INDEMNIFIES AND HOLDS HARMLESS
RSA, ITS SUBSIDIARIES, AGENTS AND AFFILIATES FROM: (i) ANY AND ALL
LIABILITY OF ANY KIND OR NATURE WHATSOEVER TO OEM'S END USER CUSTOMERS,
DISTRIBUTORS AND THIRD PARTIES WHICH MAY ARISE FROM ACTS OF OEM OR FROM
THE LICENSE OF BUNDLED PRODUCTS BY OEM OR ANY DOCUMENTATION, SERVICES OR
ANY OTHER ITEM FURNISHED BY OEM TO ITS END USER CUSTOMERS OR DISTRIBUTORS;
AND (ii) ANY LIABILITY ARISING IN CONNECTION WITH AN UNAUTHORIZED
REPRESENTATION OR ANY MISREPRESENTATION OF FACT MADE BY OEM OR ITS AGENTS,
EMPLOYEES OR DISTRIBUTORS TO ANY PARTY WITH RESPECT TO THE RSA SOFTWARE OR
ANY BUNDLED PRODUCTS.
7. DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY; INTELLECTUAL
PROPERTY INDEMNITIES
---------------------------------------------------------------
7.1 DISCLAIMER. EXCEPT FOR THE EXPRESS LIMITED WARRANTY
PROVIDED IN SECTION 4.1, THE RSA SOFTWARE IS PROVIDED "AS IS" WITHOUT ANY
WARRANTY WHATSOEVER. RSA DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY, AS TO ANY MATTER WHATSOEVER, INCLUDING ALL IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. RSA DISCLAIMS
ANY WARRANTY OR REPRESENTATION TO ANY PERSON OTHER THAN OEM WITH RESPECT
TO THE RSA SOFTWARE. OEM SHALL NOT, AND SHALL TAKE ALL MEASURES NECESSARY
TO INSURE THAT ITS AGENTS AND EMPLOYEES DO NOT, MAKE OR PASS THROUGH ANY
SUCH WARRANTY ON BEHALF OF RSA TO ANY DISTRIBUTOR, END USER CUSTOMER OR
OTHER THIRD PARTY.
7.2 LIMITATION OF LIABILITY. IN NO EVENT WILL RSA BE LIABLE
TO OEM (OR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM OEM) FOR INDIRECT,
INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES ARISING OUT OF OR
RELATED TO THE TRANSACTIONS CONTEMPLATED UNDER THIS AGREEMENT, INCLUDING
BUT NOT LIMITED TO LOST PROFITS, BUSINESS INTERRUPTION OR LOSS OF BUSINESS
INFORMATION, EVEN IF RSA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. UNDER NO CIRCUMSTANCES SHALL RSA'S TOTAL LIABILITY ARISING OUT
OF OR RELATED TO THIS AGREEMENT EXCEED THE TOTAL AMOUNT PAID BY OEM TO RSA
HEREUNDER, REGARDLESS OF WHETHER ANY ACTION OR CLAIM IS BASED ON WARRANTY,
CONTRACT, TORT OR OTHERWISE.
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7.3 PROPRIETARY RIGHTS INFRINGEMENT BY RSA.
--------------------------------------
7.3.1 Subject to the limitations set forth below, RSA,
at its own expense, shall: (i) defend, or at its option settle, any
claim, suit or proceeding against OEM on the basis of infringement of any
United States patent, copyright or trade secret in the field of
cryptography by the unmodified Licensed Software as delivered by RSA
(excluding the Interface Modifications) or any claim that RSA has no right
to license the Licensed Software hereunder; and (ii) pay any final
judgment entered or settlement against OEM on such issue in any such suit
or proceeding defended by RSA. RSA shall have no obligation to OEM
pursuant to this Section 7.3.1 unless: (A) OEM gives RSA prompt written
notice of the claim; (B) RSA is given the right to control and direct the
investigation, preparation, defense and settlement of the claim; and (C)
the claim is based on OEM's use of the unmodified License Software in
accordance with this Agreement.
7.3.2 If RSA receives notice of an alleged infringement,
RSA shall have the right, at its sole option, to obtain the right to
continue use of the Licensed Software or to replace or modify the Licensed
Software so that it is no longer infringing. If neither of the foregoing
options is reasonably available to RSA, then the license rights granted
pursuant to Section 2 may be terminated at the option of either party
hereto without further obligation or liability except as provided in
Sections 7.3.1 and 8.3 and in the event of such termination, RSA shall
refund the License Fees paid by OEM hereunder less depreciation for use
assuming straight line depreciation over a five (5)-year useful life.
7.3.3 THE RIGHTS AND REMEDIES SET FORTH IN SECTIONS
7.3.1 AND 7.3.2 CONSTITUTE THE ENTIRE OBLIGATION OF RSA AND THE EXCLUSIVE
REMEDIES OF OEM CONCERNING RSA'S PROPRIETARY RIGHTS INFRINGEMENT.
7.4 PROPRIETARY RIGHTS INFRINGEMENT BY OEM.
--------------------------------------
7.4.1 Subject to the limitations set forth below, OEM,
at its own expense, shall: (i) defend, or at its option settle, any
claim, suit or proceeding against RSA on the basis of infringement of any
United States patent, copyright or trade secret by any Bundled Product
(excluding the unmodified RSA Software) or the Interface Modifications;
and (ii) pay any final judgment entered or settlement against RSA on such
issue in any such suit or proceeding defended by OEM. OEM shall have no
obligation to RSA pursuant to this Section 7.4.1 unless: (A) RSA gives
OEM prompt written notice of the claim; and (B) OEM is given the right to
control and direct the investigation, preparation, defense and settlement
of the claim.
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7.4.2 If OEM receives notice of an alleged infringement,
OEM shall have the right, at its sole option, to obtain the right to
continued use of the Interface Modifications or the Bundled Product or to
replace or modify the Interface Modifications or Bundled Product so that
they are no longer infringing. If neither of the foregoing options is
reasonably available to OEM, then the license rights granted pursuant to
Section 2 of this Agreement may be terminated at the option of either
party hereto without further obligation or liability except as provided in
Sections 7.4.1 and 8.3, and in the event of such termination, RSA shall
retain all License Fees paid by OEM hereunder.
7.4.3 THE RIGHTS AND REMEDIES SET FORTH IN SECTIONS
7.4.1 AND 7.4.2 CONSTITUTE THE ENTIRE OBLIGATION OF OEM AND THE EXCLUSIVE
REMEDIES OF RSA CONCERNING OEM'S PROPRIETARY RIGHTS INFRINGEMENT.
8. TERM AND TERMINATION
--------------------
8.1 TERM. The license rights granted pursuant to Section 2
shall be effective with respect to each License/Product Schedule as of the
date thereof and shall continue in full force and effect for each item of
Licensed Software for an initial period as set forth on each
License/Product Schedule unless sooner terminated pursuant to the terms of
this Agreement. Such license rights shall be automatically renewed for
successive one (1)-year terms unless either party notifies the other party
in writing of its intention not to renew at least sixty (60) days prior to
the expiration of the then-current term. Such non-renewal option may be
exercised by either party with or without cause. Notwithstanding the
foregoing, either party shall be entitled to terminate all the license
rights granted pursuant to this Agreement at any time on written notice to
the other in the event of a default by the other party and a failure to
cure such default within a period of thirty (30) days (five (5) if the
default involves the payment of money) following receipt of written notice
specifying that a default has occurred.
8.2 INSOLVENCY. In the event that either party is adjudged
insolvent or bankrupt, or upon the institution of any proceedings by or
against either party seeking relief, reorganization or arrangement under
any laws relating to insolvency, or upon any assignment for the benefit of
creditors, or upon the appointment of a receiver, liquidator or trustee of
any of either party's property or assets, or upon the liquidation,
dissolution or winding up of either party's business, then and in any such
events all the license rights granted pursuant to this Agreement may
immediately be terminated by the other party upon giving written notice.
8.3 DISPOSITION OF RSA SOFTWARE AND USER MANUALS ON
TERMINATION. Upon the expiration or termination pursuant to this Section
8 of the license rights granted pursuant to Section 2, the remaining
provisions of this Agreement (including without limitation the
<PAGE>
RSA Data Security, Inc.
OEM Master License Agreement
Page 16
confidentiality provisions of Section 6.4) shall remain in full force and
effect, and OEM shall cease making copies of, using or licensing the RSA
Software and Bundled Products excepting only such copies of Bundled
Products necessary to fill orders placed with OEM prior to such expiration
or termination. OEM shall destroy all copies of the RSA Software and
Bundled Products not subject to any then-effective license agreement with
an End User Customer and all information and documentation provided by RSA
to OEM (including all Know-How), other than such copies of the RSA Object
Code, the User Manual and the Bundled Products as are necessary to enable
OEM to perform its continuing support obligations in accordance with
Section 6.2, if any, and except as provided in the next following
sentence. If OEM has licensed Source Code hereunder, for a period of one
(1) year after the date of expiration or termination of the license rights
granted under this Agreement, OEM may retain one (1) copy of the RSA
Source Code and is hereby licensed for such term to use such RSA Source
Code solely for the purpose of supporting End User Customers of Bundled
Products. Upon the expiration of such one (1)-year period, OEM shall
destroy or return to RSA such single copy of the RSA Source Code.
9. MISCELLANEOUS PROVISIONS.
9.1 GOVERNING LAWS. IT IS THE INTENTION OF THE PARTIES
HERETO THAT THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, U.S.A.
(IRRESPECTIVE OF ITS CHOICE OF LAW PRINCIPLES) SHALL GOVERN THE VALIDITY
OF THIS AGREEMENT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION
AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO. THE
PARTIES AGREE THAT THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE
INTERNATIONAL SALE OF GOODS SHALL NOT APPLY TO THIS AGREEMENT. THE
PARTIES HEREBY AGREE THAT ANY SUIT TO ENFORCE ANY PROVISION OF THIS
AGREEMENT OR ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE BUSINESS
RELATIONSHIP BETWEEN THE PARTIES HERETO SHALL BE BROUGHT IN THE UNITED
STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA OR THE
SUPERIOR OR MUNICIPAL COURT IN AND FOR THE COUNTY OF SAN MATEO,
CALIFORNIA, U.S.A. Each party hereby agrees that such courts shall have
exclusive in personam jurisdiction and venue with respect to such party,
and each party hereby submits to the exclusive in personam jurisdiction
and venue of such courts.
9.2 BINDING UPON SUCCESSORS AND ASSIGNS. Except as otherwise
provided herein, this Agreement shall be binding upon, and inure to the
benefit of, the successors, executors, heirs, representatives,
administrators and assigns of the parties hereto; provided, however, that
this Agreement shall not be assignable by OEM, by operation of law or
otherwise, without the prior written consent of RSA, which shall not be
unreasonably withheld. Any such purported assignment or delegation
without RSA's written consent shall be void and of no effect.
9.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent, be invalid or
<PAGE>
RSA Data Security, Inc.
OEM Master License Agreement
Page 17
unenforceable, the remainder of this Agreement and application of such
provision to other persons or circumstances shall be interpreted so as
best to reasonably effect the intent of the parties hereto. IT IS
EXPRESSLY UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS
AGREEMENT WHICH PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF
WARRANTIES OR EXCLUSION OF DAMAGES IS INTENDED BY THE PARTIES TO BE
SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED AS
SUCH.
9.4 ENTIRE AGREEMENT. This Agreement and the exhibits and
schedules hereto constitute the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof and supersede all
prior and contemporaneous agreements or understandings between the
parties.
9.5 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement
may be waived, only by a writing signed by the party to be bound thereby.
9.6 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be
entitled to recover, as an element of the costs of suit and not as
damages, reasonable attorneys' fees to be fixed by the court (including
without limitation, costs, expenses and fees on any appeal).
9.7 NOTICES. Whenever any party hereto desires or is
required to give any notice, demand, or request with respect to this
Agreement, each such communication shall be in writing and shall be
effective only if it is delivered by personal service or mailed, United
States certified or registered mail, postage prepaid, return receipt
requested, addressed as follows:
RSA: To the address set forth on page 1
If to RSA, with a copy to:
Timothy Tomlinson, Esq.
Tomlinson Zisko Morosoli & Maser
200 Page Mill Road, Second Floor
Palo Alto, California 94306
OEM: To the address set forth on page 1
Such communications shall be effective when they are received by
the addressee thereof; but if sent by certified or registered mail in the
manner set forth above, they shall be effective five (5) days after being
deposited in the United States mail in the contiguous 48 states or ten
(10) days after being deposited in the United States mail in any other
<PAGE>
RSA Data Security, Inc.
OEM Master License Agreement
Page 18
location. Any party may change its address for such communications by
giving notice thereof to the other party in conformity with this Section.
9.8 FOREIGN RESHIPMENT LIABILITY. THIS AGREEMENT IS
EXPRESSLY MADE SUBJECT TO ANY LAWS, REGULATIONS, ORDERS OR OTHER
RESTRICTIONS ON THE EXPORT FROM THE UNITED STATES OF AMERICA OF THE RSA
SOFTWARE OR BUNDLED PRODUCTS OR OF INFORMATION ABOUT SUCH RSA SOFTWARE OR
BUNDLED PRODUCTS WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE GOVERNMENT
OF THE UNITED STATES OF AMERICA. NOTWITHSTANDING ANYTHING CONTAINED IN
THIS AGREEMENT TO THE CONTRARY, OEM SHALL NOT EXPORT OR REEXPORT,DIRECTLY
OR INDIRECTLY, ANY RSA SOFTWARE OR BUNDLED PRODUCTS OR INFORMATION
PERTAINING THERETO TO ANY COUNTRY FOR WHICH SUCH GOVERNMENT OR ANY AGENCY
THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE
TIME OF EXPORT OR REEXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR
APPROVAL.
9.9 TRADE NAMES, LOGOS; PUBLICITY. By reason of this
Agreement or the performance hereof, OEM shall acquire no rights of any
kind in any RSA trademark, trade name, logo or product designation under
which the RSA Software was or is marketed and OEM shall not make any use
of the same for any reason except as expressly authorized by this
Agreement or otherwise authorized in writing by RSA. RSA shall have the
right during the term of the license rights granted hereunder to disclose
to third parties that OEM is an OEM of the RSA Software and that any
publicly-announced Bundled Product incorporates the RSA Software. OEM
shall provide to RSA, solely for RSA's display purposes, one (1) working
copy of each Bundled Product which consists solely of computer software
and one (1) working or non-working unit of any hardware product in which
is incorporated a Bundled Product which consists of an integrated circuit
or other hardware.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
OEM:
By: /s/ James F. Chen
-----------------------------------------------------------------
Printed Name: James F. Chen
---------------------------------------------------------
Title: President
-----------------------------------------------------------------
<PAGE>
RSA Data Security, Inc.
OEM Master License Agreement
Page 19
RSA DATA SECURITY, INC.:
By: /s/ D. James Bidzos
----------------------------------------------------------------
Printed Name: D. JAMES BIDZOS
---------------------------------------------------------
Title: President
-----------------------------------------------------------------
<PAGE>
License/Product Schedule Number: 1
------------------------------
Date of this License/Product Schedule: 12/30/94
---------------------
EXHIBIT "A"
<TABLE>
<CAPTION>
LICENSE/PRODUCT SCHEDULE
<S> <C>
OEM:
Virtual Open Network Environment Corp.
---------------------------------------------------------
SOURCE CODE LICENSE
OEM Master License Agreement Number: -------------------
1294-VON-0-MLA-1
--------------------------------------------------------- BSAFE
YES [ ] NO [X]
TIPEM
Date of OEM Master License Agreement: YES [ ] NO [X]
12/30/94
---------------------------------------------------------
This License/Product Schedule Amends Schedules Dated:
N/A
---------------------------------------------------------
Term of Agreement for this Bundled Product:
Perpetual
----------------------------------------------------------
Bundled Product:
OEM's smart card product currently known as "SmartCat,"
and OEM's smart card plus firewall product currently known
as "SmartWall," and scaled-down versions of the foregoing
products.
----------------------------------------------------------
RSA Software:
BSAFE, TIPEM
----------------------------------------------------------
RSA Software Distribution Method:
__ X___ Tangible Media or
_______ Electronic Transmission
</TABLE>
<PAGE>
Exhibit "A"
License/Product Schedule
Page 2
<TABLE>
<CAPTION>
OBJECT CODE LICENSES
--------------------
LICENSED SOFTWARE AND FUNCTIONALITY
FOR THIS BUNDLED PRODUCT:
RIGHT TO INCLUDE LICENSED SOFTWARE DESCRIBE LICENSED
OBJECT CODE FOR FUNCTIONALITY FUNCTIONALITY
BUNDLED PRODUCT RESTRICTION
<S> <C> <C> <C> <C> <C>
BSAFE YES NO YES NO
RSA Public Key [x] [] [] [x]
Cryptosystem
Diffie-Hellman Key [x] [] [] [x]
Negotiation
Data Encryption [x] [] [] [x]
Standard (DES)
Extended Data Encryption [x] [] [] [x]
Standard (DESX)
RC2 Variable-Key Size [x] [] [] [x]
Symmetric Block Cipher
RC4 Variable-Key Size [x] [] [] [x]
Symmetric Stream Cipher
MD Hashing Algorithm [x] [] [] [x]
MD2 Hashing Algorithm [x] [] [] [x]
MD5 Hashing Algorithm [x] [] [] [x]
TIPEM (all set forth below) [x] [] [] [x]
RSA Public Key
Cryptosystem
Data Encryption Standard
(DES)
RC2 Variable Key Size
Symmetric Block Cipher
MD2 Hashing Algorithm
MD5 Hashing Algorithm
</TABLE>
<PAGE>
Exhibit "A"
License/Product Schedule
Page 3
<TABLE>
<CAPTION>
LICENSE AND MAINTENANCE FEES
----------------------------
Prepayment of License Fees: APPROVED:
--------------------------
<S> <C> <C>
Total of $15,000 invoiced on the date of
execution of this License/Product Schedule OEM:
and payable as follows:
. $5,000 due within 30 days after
execution of this License/Product By: /s/ Jame F. Chen
Schedule ------------------------
. $5,000 due within 90 days after Printed Name: JAMES F. CHEN
execution of this License/Product --------------
Schedule Title: President
---------------------
. $5,000 due within 180 days after
execution of this License/Product
Schedule
Percentage of Net Sales License Fees: RSA DATA SECURITY, INC.:
------------------------------------
For SmartCat (including scaled-down By: /s/ D. James Bidzos
versions): --------------------------
Printed Name: D. JAMES BIDZOS'
3% of Net Sales with a minimum of $3.00 per -----------------
unit Title: President
-----------------------
For SmartWall (including scaled-down
versions):
3% of Net Sales with a minimum of
$500.00 per unit
Notwithstanding the foregoing, after OEM has paid
an aggregate of Three Million Dollars ($3,000,000)
in License Fees under this License/Product
Schedule, no further License Fees shall be payable
under this License/Product Schedule.
Present Annual Maintenance Fee for this
License/Product Schedule: $5,000
------------------------
</TABLE>
<PAGE>
EXHIBIT "C"
SPECIAL TERMS AND CONDITIONS
OEM: Virtual Open Network Environment Corp.
--------------------------------------------------------------------
Master License Agreement Number: 1294-VON-0-MLA-1
-----------------------------------------
Master License Agreement Date: 12/30/94
-------------------------------------------
Exhibit "C" Date: 12/30/94
-------------------------------------------------------
THE OEM MASTER LICENSE AGREEMENT between RSA Data Security, Inc.
and the OEM set forth above dated as of the date set forth above
("Agreement") is amended as set forth below.
1. DEFINITIONS. Capitalized terms used and not otherwise
defined in this Exhibit "C" shall have the meanings designated for such
terms in the Agreement.
2. AMENDMENTS TO AGREEMENT. The following provisions of the
Agreement, referenced by the applicable Section numbers in the Agreement,
are hereby amended as follows:
2.1 SECTION 2.4. The existing Section 2.4 is
renumbered as Section 2.5, and a new Section 2.4 is added, as follows:
2.4 TRANSLATION OF USER MANUAL. RSA
hereby grants OEM a non-exclusive, nontransfer-
rable, non-assignable limited license in the
Territory during the terms specified in Section 8
to translate the User Manual into languages other
than the English language for the purpose of
creating non-English language versions of user
documentation ("Translations") for any Bundled
Product and only for use and distribution with
such Bundled Product.
2.2 SECTION 2.5.2 (formerly Section 2.4.2). The
following language is added at the end of Section 2.5.2: "OEM SHALL AT ALL
TIMES RETAIN FULL AND EXCLUSIVE RIGHT, TITLE AND OWNERSHIP INTEREST IN AND
TO THE TRANSLATIONS AND IN ANY AND ALL RELATED COPYRIGHTS; PROVIDED,
HOWEVER, THAT (I) OEM AGREES THAT IT SHALL NOT USE, REPRODUCE, MODIFY,
DISPLAY, PERFORM, DISTRIBUTE OR OTHERWISE EXERCISE ANY OF ITS COPYRIGHTS
WITH RESPECT TO THE TRANSLATIONS, OR ALLOW OTHERS TO DO SO, OTHER THAN FOR
THE PURPOSE OF SUPPORTING BUNDLED PRODUCTS AND (II) AT THE REQUEST OF RSA,
OEM SHALL GRANT TO RSA A NON-EXCLUSIVE, NON-TRANSFERRABLE LICENSE TO USE,
REPRODUCE AND DISTRIBUTE THE TRANSLATIONS, SUBJECT TO THE PAYMENT OF A
<PAGE>
Exhibit "C"
Page 2
LICENSE FEE WHICH IS REASONABLE BASED UPON THE EFFORTS OF OEM IN CREATING
THE TRANSLATIONS.
2.3 SECTION 6.7. Section 6.7 is amended by inserting
the following parenthetical after the "DOCUMENTATION": "(INCLUDING ANY
TRANSLATIONS)."
2.4 SECTION 7.4.1. Section 7.4.1 is amended by
adding the following language after the parenthetical expression
"(excluding the unmodified RSA Software)": "..., the Translations...."
2.5 SECTION 7.4.2. Section 7.4.2 is amended by
adding the words "..., the Translations" after each occurrence of the term
"Interface Modifications."
3. EFFECT OF AMENDMENT. This Exhibit "C" is an amendment to
the Agreement. Except as expressly amended above, the Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Exhibit "C" as
of the date set forth above.
OEM RSA DATA SECURITY, INC.
By: /s/ James F. Chen By: /s/ D. James Bidzos
----------------------------- -----------------------------
Printed Name: James F. Chen Printed Name: D. James Bidzos
------------------- -------------------
Title: President Title: President
-------------------------- --------------------------
<PAGE>
FIRST AMENDMENT TO BSAFE/TIPEM
OEM MASTER LICENSE AGREEMENT
THIS FIRST AMENDMENT (the "Amendment") modifies that certain
BSAFE/TIPEM OEM Master License Agreement dated as of December 30, 1994 by
and between RSA Data Security, Inc. ("RSA") and Virtual Open Network
Environment Corp. ("OEM") (the "Agreement").
1. DEFINITIONS. Capitalized terms used in this Amendment and
not otherwise defined shall have the meanings set forth in the Agreement.
2. AMENDMENTS TO THE AGREEMENT. RSA and OEM agree that,
effective on the execution of this Amendment, the following Sections of
the Agreement are amended as follows:
2.1 SECTION 1.1. Section 1.1. is amended by adding
the following language at the end thereof: "THE RSA SECURITY FACILITIES
PROVIDED BY THE LICENSED SOFTWARE SHALL ONLY BE ACCESSIBLE WITHIN THE
BUNDLED PRODUCT; THEREFORE, OEM WILL NOT PROVIDE IN ANY BUNDLED PRODUCT
ANY APPLICATION PROGRAMMING INTERFACE (API) WHICH WOULD, IF EXPOSED,
PERMIT A THIRD PARTY APPLICATION TO PULL OUT RSA SECURITY PRIMITIVES FROM
THE BUNDLED PRODUCT TO BE USED IN THE APPLICATION."
2.2 SECTION 4.5. Section 4.5 is amended by adding
the following language at the end thereof: "RSA AGREES THAT, UPON OEM'S
WRITTEN REQUEST, OEM WILL BE INCLUDED IN THE "BETA" TEST GROUP OF
LICENSEES OF THE LICENSED SOFTWARE AND WILL BE GRANTED ACCESS TO NEW
RELEASES OF THE LICENSED SOFTWARE AT THE SAME TIME AS OTHER SIMILARLY-
SITUATED OEMS OF THE LICENSED SOFTWARE."
2.3 EXHIBIT "A". Exhibit "A" (License/Product
Schedule) of the Agreement is replaced in its entirety with the Exhibit
"A" (License/Product Schedule) attached to this Amendment.
3. EFFECT OF AMENDMENT. This Amendment constitutes an
amendment to the Sections and Exhibits of the Agreement referenced in
Section 2 of this Amendment and, in the event of any inconsistency between
the terms of this Amendment and the Agreement with respect to such
Sections, the terms of this Amendment shall be controlling. Except as
specifically and to the extent modified by this Amendment all of the terms
and provisions of the Agreement shall continue to remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the date set forth above.
OEM RSA DATA SECURITY, INC.
By: /s/ James F. Chen By: /s/ D. James Bidzos
----------------------------- -----------------------------
Printed Name: James F. Chen Printed Name: D. James Bidzos
------------------- -------------------
Title: President Title: President
-------------------------- --------------------------
<PAGE>
License/Product Schedule Number: ___________________________
Date of this License/Product Schedule:______________________
<TABLE>
<CAPTION>
EXHIBIT "A"
LICENSE/PRODUCT SCHEDULE
OEM:
Virtual Open Network Environment Corp.
----------------------------------------
<S> <C>
RSA Software Distribution Method:
OEM Master License Agreement Number: __X__ Tangible Media or
1294-VON-0-MLA-1 __X__ Electronic Transmission
---------------------------------------------
Date of OEM Master License Agreement:
December 30, 1994
----------------------------------------------
SOURCE CODE LICENSE
This License/Product Schedule Amends Schedules -------------------
Dated:
December 30, 1994 BSAFE
YES [X] NO [ ]
Term of Agreement for this Bundled Product: TIPEM
Perpetual YES [X] NO [ ]
----------------------------------------------
Bundled Product:
1. OEM's hardware token currently known as
"SmartCAT" and scaled-down versions of
"SmartCAT"
-----------------------------------------
2. OEM's hardware token plus firewall
product currently known as "SmartWall,"
and scaled-down versions of "SmartWall."
-----------------------------------------
3. OEM's Software token currently known as
"Virtual SmartCAT" and scaled-down
versions of Virtual SmartCat.
-----------------------------------------
<PAGE>
Exhibit "A"
License/Product Schedule
Page 2
OEM:
Virtual Open Network Environment Corp.
----------------------------------------
4. OEM's secure electronic payment product
currently known as "SmartCAT Cyber
Wallet," provided that such product
provides no functionality other than
processing payment information working in
conjunction with an OEM financial
transaction server where OEM is receiving
a transaction processing fee.
-----------------------------------------
RSA Software:
BSAFE, TIPEM
----------------------------------------------
</TABLE>
<PAGE>
Exhibit "A"
License/Product Schedule
Page 3
<TABLE>
<CAPTION>
OBJECT CODE LICENSES
LICENSED SOFTWARE AND FUNCTIONALITY FOR THIS BUNDLED PRODUCT:
RIGHT TO LICENSED SOFTWARE DESCRIBE
INCLUDE OBJECT FUNCTIONALITY LICENSED
CODE FOR RESTRICTION FUNCTIONALITY
BUNDLED PRODUCT RESTRICTION
<S> <C> <C> <C> <C> <C>
BSAFE YES NO YES NO
RSA Public Key [x] [] [] [x]
Cryptosystem
Diffie-Hellman Key [x] [] [] [x]
Negotiation
Data Encryption [x] [] [] [x]
Standard (DES)
Extended Data Encryption [x] [] [] [x]
Standard (DESX)
RC2 Variable-Key Size [x] [] [] [x]
Symmetric Block Cipher
RC4 Variable-Key Size [x] [] [] [x]
Symmetric Stream Cipher
MD Hashing Algorithm [x] [] [] [x]
MD2 Hashing Algorithm [x] [] [] [x]
MD5 Hashing Algorithm [x] [] [] [x]
TIPEM (all set forth below) [x] [] [] [x]
RSA Public Key
Cryptosystem
Data Encryption Standard
(DES)
RC2 Variable Key Size
Symmetric Block Cipher
MD2 Hashing Algorithm
MD5 Hashing Algorithm
</TABLE>
<PAGE>
Exhibit "A"
License/Product Schedule
Page 4
LICENSE AND MAINTENANCE FEES:
----------------------------
Prepayment of License Fees:
--------------------------
Waived for this License/Product Schedule
Source Code and Object Code License Fees:
----------------------------------------
1. AMOUNT OF LICENSE FEES. The provisions of Sections 3.1.1 and
3.1.2 of the Agreement shall not apply to this License/Product Schedule.
As consideration for the RSA Source Code and RSA Object Code licenses
granted in this License/Product Schedule, OEM shall pay to RSA an amount
equal to two percent (2%) of OEM's Gross Revenues during the term of this
License/Product Schedule. "Gross Revenues" means OEM's gross revenues
from all of its products and services, as reflected in OEM's financial
statements prepared in accordance with generally accepted accounting
principles. RSA shall have the option, at any time following the date of
the Amendment until the date of the initial public offering of OEM's
securities, to convert its right to future License Fees described in this
paragraph 1 to Common Stock of OEM representing two percent (2%) of OEM's
then-outstanding voting securities on an as-converted basis.
2. PAYMENT AND REPORTING. Sections 3.3, 3.5 and 3.6 of the
Agreement shall not apply to this License/Product Schedule. License Fees
with respect to this License/Product Schedule shall accrue when OEM's
Gross Revenues are realized, as determined for OEM's accounting purposes,
in accordance with generally accepted accounting principles. License Fees
due RSA shall be paid by OEM to the attention of the Software Licensing
Department at RSA's address set forth on the first page of the Agreement
on or before the thirtieth (30th) day after the close of the calendar
quarter during which the License Fees accrued. A late payment penalty of
one percent (1%) of any License Fees not paid when due shall be assessed
for each thirty (30)-day period, or portion thereof, during which such
payment is delayed beginning on the thirty-first (31st) day after the last
day of the calendar quarter to which the delayed payment relates. OEM's
unaudited quarterly financial statementsin reasonably detailed form
setting forth OEM's Gross Revenues and the calculation of License Fees due
from OEM, certified by a responsible officer of OEM, shall be delivered to
RSA on or before the thirtieth (30th) day after the close of each calendar
quarter during the term of this License/Product Schedule, regardless of
whether License Fees are due for such quarter pursuant to the preceding
sentences. Within sixty (60) days after the close of OEM's fiscal year,
OEM shall provide RSA with a copy of OEM's audited financial statements
showing OEM's Gross Revenues for such fiscal year, along with a
<PAGE>
Exhibit "A"
License/Product Schedule
Page 5
reconciliation of those Gross Revenues with the Gross Revenues previously
reported on a quarterly basis with respect to such fiscal year. OEM
shall, at the same time, pay to RSA any deficiency in License Fees
previously paid for such fiscal year. If OEM has overpaid License Fees
for such fiscal year, such overpayment shall be credited against OEM's
next required payment of License Fees.
3. MINIMUM LICENSE FEES FOR VIRTUAL SmartCAT. In addition to the
License Fees payable by OEM pursuant to paragraph 2 above, OEM shall pay
to RSA the amount of One Dollar ($1.00) for each copy of Virtual SmartCAT
sublicensed or otherwise distributed by OEM, unless: (i) OEM charges more
than a de minimis amount of royalties or other fees such copy, or (ii)
such copy contains a feature which disables the functionality of Virtual
SmartCAT within forty-five (45) days or less of the date the copy is
delivered.
4. ADDITIONAL CONSIDERATION. As additional consideration for the
RSA Source Code and RSA Object Code licenses granted in this
License/Product Schedule, OEM will:
a. Promptly after the date of execution of this License/Product
Schedule provide to RSA at no cost to RSA one complete SmartWall system
and grant RSA a non-exclusive, perpetual, irrevocable, royalty-free
license to use such SmartWall system for RSA's internal business purposes.
Such license shall include all bug fixes, updates, enhancements, support,
and new releases provided to OEM's other licensees, at no additional cost
to RSA.
b. Each copy of SmartCAT Cyber Wallet distributed by or under
authority of OEM will identify RSA as the provider of the encryption
technology within the product by displaying, with each occurrence of the
product name "Cyber Wallet," the words "with RSA encryption" or the
appropriate RSA licensee seal from Exhibit B to the Agreement.
Maintenance Fees for this License/Product Schedule:
--------------------------------------------------
Annual maintenance fees for the Bundled Products covered by this
License/Product Schedule shall be waived during the periods that License
Fees are paid to RSA pursuant to this License/Product Schedule.
Notwithstanding the provisions of Section 4.4.3 of the Agreement, New
Versions of the Licensed Software will be provided to OEM at no additional
charge during the period that License Fees are paid to RSA pursuant to
this License/Product Schedule; provided, however, that OEM shall not on
the basis of so obtaining any New Version receive any rights under this
License/Product Schedule to any algorithms not included with the Licensed
Software as designated on page 2 of this License/Product Schedule.
<PAGE>
Exhibit "A"
License/Product Schedule
Page 6
APPROVED:
OEM:
VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
By: /s/ James F. Chen
-------------------------------------
Printed Name: James F. Chen
---------------------------
Title: President
---------------------------------
RSA DATA SECURITY, INC.:
By: /s/ D. James Bidzos
-------------------------------------
Printed Name: D. JAMES BIDZOS
----------------------------
Title: President
----------------------------------
<PAGE>
<PAGE>
AMENDMENT NUMBER TWO TO BSAFE/TIPEM
OEM MASTER LICENSE AGREEMENT
THIS AMENDMENT NUMBER TWO TO BSAFE/TIPEM OEM MASTER LICENSE
AGREEMENT (the "Amendment") modifies that certain BSAFE/TIPEM OEM Master
License Agreement dated as of December 30, 1994 by and between RSA Data
Security, Inc. ("RSA") and Virtual Open Network Environment Corp. ("OEM"),
as amended by that certain First Amendment thereto (the "First Amendment")
(collectively, the "Agreement").
1. DEFINITIONS. Capitalized terms used in this Amendment
and not otherwise defined shall have the meanings set forth in the
Agreement.
2. EXERCISE OF OPTION. Pursuant to the First Amendment, OEM
granted RSA an option to convert its right to [certain] future License
Fees to Common Stock of OEM, as more particularly set forth in the First
Amendment. RSA hereby exercises such option to convert, and the parties
hereby agree, in connection therewith, to enter into the Conversion
Agreement attached to this Amendment as Attachment 1 (the "Conversion
Agreement") contemporaneously with the execution of this Amendment.
3. AMENDMENTS TO THE AGREEMENT. RSA and OEM agree that,
effective upon the date of the later signature below, the Agreement is
amended as follows:
3.1 Section 7.2. Section 7.2 of the Agreement is
amended to read in its entirety as follows:
3.2 LIMITATION OF LIABILITY. IN NO EVENT
WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY (OR TO ANY
PERSON CLAIMING RIGHTS DERIVED FROM THE OTHER PARTY) FOR
INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY
DAMAGES ARISING OUT OF OR RELATED TO THE TRANSACTIONS
CONTEMPLATED UNDER THIS AGREEMENT, INCLUDING BUT NOT
LIMITED TO LOST PROFITS, BUSINESS INTERRUPTION OR LOSS OF
BUSINESS INFORMATION, EVEN IF SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT WILL
EITHER PARTY'S LIABILITY ARISING OUT OF OR RELATED TO
THIS AGREEMENT EXCEED THE AMOUNT OF $250,000, REGARDLESS
OF WHETHER ANY ACTION OR CLAIM IS BASED ON WARRANTY,
CONTRACT, TORT OR OTHERWISE. NONE OF THE ABOVE
LIMITATIONS OF LIABILITY SHALL APPLY TO EITHER PARTY'S
INDEMNITY OBLIGATIONS HEREUNDER OR TO ANY BREACHES OF
SECTIONS 2 AND 6.4 AS SUCH BREACHES RELATE TO RSA'S
SOURCE CODE, OR TO ANY OTHER BREACHES OF SECTIONS 2, 6.1,
6.3, 6.4 AND 6.5 ARISING OUT OF A PARTY'S INTENTIONAL
CONDUCT OR FAILURE TO EXERCISE REASONABLE CARE.
3.3 Section 7.3.1. Section 7.3.1 of the Agreement is amended
by inserting the following after the word "OEM" in the fourth line:
"...(including any claim, suit or proceeding instituted by Cylink
<PAGE>
Corporation, Caro-Kann Corporation, or an entity related to either of
them)...."
3.4 Section 7.3.2. Section 7.3.2 is amended by replacing the
words "the License Fees paid by OEM hereunder" with the words "...an
amount equal to the value of the Common Stock issued by OEM to RSA
pursuant to the Conversion Agreement, assuming a per-share value of
$3.00,...."
3.5 Exhibit "A." Exhibit "A" (License/Product Schedule) to
the Agreement (attached to the First Amendment) is replaced in its
entirety with the "Exhibit "A" (License/Product Schedule No. 0596-VON-O-
LPS-3) attached to this Amendment.
4. EFFECT OF AMENDMENT. This Amendment constitutes an
amendment to the Sections and Exhibits of the Agreement referenced in this
Amendment and, in the event of any inconsistency between the terms of this
Amendment and the Agreement with respect to such Sections and Exhibits,
the terms of this Amendment shall be controlling. Except as specifically
and to the extent modified by this Amendment all of the terms and
provisions of the Agreement shall continue to remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Amendment and
the attached Exhibit "A" to be executed by their duly authorized
representatives.
OEM:
VIRTUAL OPEN NETWORK ENVIRONMENT RSA DATA SECURITY, INC.
CORP.
By:/s/ Bob Rybicki By: /s/ D. James Bidzos
-------------------------------- ----------------------------
Printed Name: Bob Rybicki Printed Name: D. James Bidzos
Title: Vice President Title: President
Date: 5/24/96 Date: 5/24/96
- 2 - 54177.3
<PAGE>
License/Product Schedule Number: 0596-VON-O-LPS-3
Date of this License/Product Schedule: May , 1996
EXHIBIT "A"
LICENSE/PRODUCT SCHEDULE
OEM:
Virtual Open Network Environment Corp.
---------------------------------------
OEM Master License Agreement Number:
1294-VON-Q-MLA-1
---------------------------------------
Date of OEM Master License Agreement:
December 30, 1994
---------------------------------------
This License/Product Schedule Amends Schedules
Dated:
December 30, 1994 and the Schedule attached to the First Amendment and
replaces them in their entirety as of the date of this License/Product
Schedule.
-----------------------------------------------------------------------
Term of Agreement for this Bundled Product:
Perpetual
-------------------------------------------
Bundled Product:
A. The following current products and all future versions of such OEM
products (provided such future versions meet the definition of "Bundled
Product" and do not function as a cryptographic toolkit or provide an
exposed API to the functionality provided by the Licensed Software):
--------------------------------------------------------------------------
1. OEM's hardware token currently known as "SmartCAT" and
scaled-down versions of "SmartCAT."
--------------------------------------------------------------------------
2. OEM's hardware token plus firewall product currently known as
"SmartWall" and scaled-down versions of "SmartWall."
--------------------------------------------------------------------------
3. OEM's Software token currently known as "Virtual SmartCat"
and scaled-down versions of Virtual SmartCat.
--------------------------------------------------------------------------
4. OEM's secure electronic payment product currently known as
"SmartCAT Cyber Wallet," provided that such product provides no
functionality other than processing payment information working in
conjunction with an OEM financial transaction server where OEM is
receiving a transaction processing fee.
- 3 - 54177.3
<PAGE>
5. OEM's client/server security software product currently known
as "SmartGate" and scaled-down version of "SmartGate."
--------------------------------------------------------------------------
B. The parties acknowledge that, in addition to the future
versions of the OEM products set forth above, additional products of OEM
meeting the definition of "Bundled Product" set forth in Section 1.1 of
the Agreement may be added to this License/Product Schedule upon mutual
agreement of the parties evidenced by a written amendment hereto. If OEM
wishes to add such additional products in the manner described above, it
will provide written notice to RSA with sufficient detail for RSA to
determine the structure and function of the proposed additional Bundled
Product. RSA agrees that it will approve any additional firewall product
similar to OEM's "SmartWall" product and any client/server product with
substantial value added to the Licensed Software in which there are no
exposed API's to the functionality provided by the Licensed Software. The
parties acknowledge that RSA will not approve any product that functions
as a cryptographic toolkit or which provides an exposed API to the
functionality provided by the Licensed Software.
--------------------------------------------------------------------------
RSA Software:
BSAFE, TIPEM
--------------------------------------------------------------------------
RSA Software Distribution Method:
OEM acknowledges receipt of the items specified in Section 5 of the
Agreement.
SOURCE CODE LICENSE
BSAFE
YES [x] NO [ ]
TIPEM
YES [x] NO [ ]
- 4 - 54177.3
<PAGE>
OBJECT CODE LICENSES
--------------------
LICENSED SOFTWARE AND FUNCTIONALITY FOR THIS BUNDLED PRODUCT:
<TABLE>
<CAPTION
RIGHT TO INCLUDE LICENSED SOFTWARE DESCRIBE LICENSED
OBJECT CODE FOR FUNCTIONALITY FUNCTIONALITY
BUNDLED PRODUCT RESTRICTION RESTRICTION
<S> <C> <C> <C>
BSAFE YES NO YES NO
RSA Public Key Cryposystem [X] [ ] [ ] [X]
Diffie-Hellman Key Negotiation [X] [ ] [ ] [X]
Data Encryption Standard (DES) [X] [ ] [ ] [X]
Extended Data Encryption [X] [ ] [ ] [X]
Standard (DESX)
RC2 Variable-Key Size [X] [ ] [ ] [X]
Symmetric Block Cipher
RC4 Variable-Key Size [X] [ ] [ ] [X]
Symmetric Stream Cipher
MD Hashing Algorithm [X] [ ] [ ] [X]
MD2 Hashing Algorithm [X] [ ] [ ] [X]
MD5 Hashing Algorithm [X] [ ] [ ] [X]
TIPEM (all set forth below) [X] [ ] [ ] [X]
RSA Public Key Cryptosystem
Data Encryption Standard (DES)
RC2 Variable Key Size
Symmetric Block Cipher
MD2 Hashing Algorithm
MD5 Hashing Algorithm
</TABLE>
- 5 - 54177.3
<PAGE>
LICENSE AND MAINTENANCE FEES
Prepayment of License Fees:
--------------------------
The provisions of Section 3.1.3 of the Agreement shall not apply to this
License/Product Schedule.
Source Code and Object Code License Fees:
----------------------------------------
1. AMOUNT OF LICENSE FEES. The provisions of Sections 3.1.1 and
3.1.2 of the Agreement shall not apply to this License/Product Schedule.
As consideration for the RSA Source Code and RSA Object Code licenses
granted in this License/Product Schedule, OEM shall issue to RSA shares of
OEM's Common Stock as more fully described in the Conversion Agreement
attached to this Amendment as Attachment 1 and executed by the parties
contemporaneously with the execution of this License/Product Schedule.
2. PAYMENT AND REPORTING. Sections 3.3, 3.5 and 3.6 of the
Agreement shall not apply to this License/Product Schedule.
3. ADDITIONAL CONSIDERATION. As additional consideration for the
RSA Source Code and RSA Object Code licenses granted in this
License/Product Schedule, OEM will:
a. At no cost to RSA, grant RSA a non-exclusive, perpetual,
irrevocable, royalty-free license to use one complete SmartWall system for
RSA's internal business purposes. Such license shall include all bug
fixes, updates, enhancements, support, and new releases provided to OEM's
other licensees, at no additional cost to RSA. RSA acknowledges receipt
of the SmartWall system.
b. Each copy of SmartCAT Cyber Wallet distributed by or under
authority of OEM will identify RSA as the provider of the encryption
technology within the product by displaying, with each occurrence of the
product name "Cyber Wallet," the words "with RSA encryption" or the
appropriate RSA licensee seal from Exhibit B to the Agreement.
Present Annual Maintenance Fees for this License/Product Schedule:
------------------------------------------------------------------
$5,000.00. If OEM elects to purchase annual maintenance pursuant to
Section 4.2 of the Agreement, the initial maintenance term under this
License/Product Schedule shall commence on the date hereof, and the annual
maintenance fee for the initial maintenance term shall be payable upon
execution of this License/Product Schedule. The annual maintenance fee
under this License/Product Schedule may not be increased by more than ten
percent (10%) per maintenance year elapsed.
- 6 - 54177.3
<PAGE>
SPECIAL TERMS AND CONDITIONS
----------------------------
1. Limited Rights to Sublicense.
-----------------------------
Notwithstanding the provisions of Section 2.3.1 of the Agreement, RSA
further hereby grants to OEM a non-exclusive, non-transferable, non-
assignable license during the term of this License/Product Schedule to
sublicense its rights granted in Section 2.2, as limited by Section 2.3,
of the Agreement with respect to the RSA Object Code as part of the
Bundled Products to OEM's licensees in the Territory (each, an "OEM
Sublicensee") for use only (i) in their own products in which substantial
functionality or value is added to the Bundled Products so that such
products are not a substitute for the RSA Software, or (ii) in their own
privately-labelled products consisting of the Bundled Products with no
modifications other than minor packaging changes (collectively,
"Sublicensee Products"). All sublicenses permitted under this paragraph
shall be subject to all of the following conditions: (i) all such
sublicenses will be granted in a signed writing containing at a minimum
all of the restrictions set forth in Exhibit "A-1" attached hereto, and
RSA shall be an express third party beneficiary of such sublicense
agreements; (ii) OEM shall use its best efforts to enforce the provisions
of such sublicenses as they relate to RSA and the RSA Software; (iii) the
Sublicensee Products shall incorporate the Licensed Functionality of the
RSA Object Code in such a way so as to ensure that the security functions
of the RSA Object Code may only be accessed by the functionality of the
Sublicensee Product in which it is included so that the RSA Object Code
shall not be directly accessible to End User Customers or to software
products other than the Sublicensee Products; (iv) the OEM Sublicensees to
whom such rights are sublicensed shall have no further right to sublicense
such rights; (v) on or before the date that OEM grants any sublicense
hereunder, OEM shall submit to RSA an Exhibit "A" Extension in the form
attached as Exhibit "A-2" for the applicable OEM Sublicensee; and (vi) any
rights of any OEM Sublicensee sublicensed by OEM shall survive only so
long as both the Agreement and the sublicense between OEM and such OEM
Sublicensee remain in effect. In connection with the foregoing, RSA
further hereby grants to OEM a non-exclusive, non-transferable, non-
assignable license during the term of this License/Product Schedule to use
the RSA Source Code to provide support of Bundled Products to OEM
Sublicensees.
2. New Versions.
-------------
a. RSA agrees that the upgrade fees payable by OEM for any New
Version pursuant to Section 4.3.3 with respect to Bundled Products covered
by this License/Product Schedule shall be no less favorable than the
upgrade fees for the same New Version paid by RSA's other similarly-
situated OEMs.
b. RSA agrees that the upgrade fees payable by OEM for New
Versions pursuant to Section 4.3.3 with respect to Bundled Products
- 7 - 54177.3
<PAGE>
covered by this License/Product Schedule shall not include any periodic
License Fees in the nature of royalties.
3. Section 8.1. The second and third sentences of Section 8.1 shall
not apply to this License/Product Schedule.
APPROVED:
OEM:
VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
By: /s/ Bob Rybicki
-------------------------------------
Printed Name: Bob Rybicki
Title: V.P.
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
-------------------------------------
Printed Name: D. James Bidzos
Title: President
- 8 - 54177.3
<PAGE>
EXHIBIT "A-1"
MANDATORY SUBLICENSE TERMS
All sublicense agreements for the license of the RSA Object Code
in Bundled Products by OEM to OEM Sublicensees will include all of the
following restrictions:
I. The OEM Sublicensee will receive no greater rights with
respect to the Bundled Products than those permitted in Sections 2.2 of
the Agreement as limited by Section 2.3 of the Agreement.
II. The OEM Sublicensee will agree not to remove or destroy any
proprietary, trademark or copyright markings or confidentiality legends
placed upon or contained within the Bundled Products or any related
materials or documentation.
III. If applicable, the OEM Sublicensee will agree
that any sublicense of the Bundled Products to the United States
Government or any agency thereof will state that such software is subject
to limited rights in technical data and restricted rights applicable to
commercial computer software developed entirely at private expense and
that any associated documentation will include a restricted rights legend
conforming to the Federal Acquisition Regulations (FARs) or the Department
of Defense Federal Acquisition Regulations Supplement (DFARS), as
applicable, then in effect that apply to software developed entirely at
private expense.
IV. The OEM Sublicensee will agree not to export or reexport any
Bundled Products or any part thereof or information pertaining thereto any
country for which a U.S. government agency requires an export license or
other governmental approval without first obtaining such license or
approval.
V. The OEM Sublicensee will agree that, except for the limited
licenses granted under the license agreement, OEM and its licensors will
retain full and exclusive right, title and ownership interest in and to
the Bundled Products and in any and all related patents, trademarks,
copyrights or proprietary or trade secret rights.
VI. OEM will have the right to terminate the license for the OEM
Sublicensee's breach of a material term. The OEM Sublicensee will agree
that, upon termination of the license, the OEM Sublicensee will return to
OEM all copies of the object code and documentation for the Bundled
Products or certify to OEM that the OEM Sublicensee has destroyed all such
copies, except that the OEM Sublicensee may retain one (1) copy of the
object code for the Bundled Products solely for the purpose of supporting
the OEM Sublicensee's existing licensees.
VII. The OEM Sublicensee will agree not to reverse
compile, disassemble or modify the Bundled Product.
- 9 - 54177.3
<PAGE>
VIII. The OEM Sublicensee will agree not to distribute
the Bundled Product or any part thereof except pursuant to a license
agreement meeting the requirements in Section 6.3 of the Agreement.
IX. The sublicense agreement will state that in no event will OEM
or its licensors be liable for indirect, incidental, special,
consequential or exemplary damages arising out of or related to the
Bundled Product, including but not limited to lost profits, business
interruption or loss of business information, even if such party has been
advised of the possibility of such damages.
- 10 - 54177.3
<PAGE>
Exhibit A Extension Number:________________________________
Date of this Exhibit A Extension:__________________________
<TABLE>
<CAPTION>
EXHIBIT "A-2"
EXHIBIT A (LICENSE/PRODUCT SCHEDULE) EXTENSION
<S> <C>
OEM: APPROVED:
Virtual Open Network Environment Corp.
-------------------------------------- OEM:
OEM Master License Agreement Number: VIRTUAL OPEN NETWORK ENVIRONMENT CORP.
1294-VON-O-MLA-1
--------------------------------------
By:______________________________________
Date of OEM Master License Agreement: Printed Name: ___________________________
December 30, 1994
------------------------------------- Title:___________________________________
This Extension Extends License/Product
Schedule Number:
0596-VON-O-LPS-3
--------------------------------------
RSA DATA DESCURITY, INC.
Name and Jurisdiction of Incorporation
of OEM Sublicensee:
By:________________________________________
--------------------------------------
Printed Name:______________________________
Sublicensee Product which Incorporates
Bundled Product: Title:_____________________________________
--------------------------------------
</TABLE>
- 11 - 54177.3
<PAGE>
CONVERSION AGREEMENT
This Conversion Agreement ("Agreement") is made and entered into
between Virtual Open Network Environment Corporation, a Delaware
corporation with its principal offices at 1803 Research Boulevard,
Rockville, Maryland 20850 ("V-ONE"), RSA Data Security, Inc., a Delaware
corporation, with its principal offices at 100 Marine Parkway, Redwood
City, California 94065 ("RSA"), and Massachusetts Institute of Technology,
a corporation organized under the laws of the Commonwealth of
Massachusetts, as a third party beneficiary, with its principal offices at
77 Massachusetts Avenue, Cambridge, Massachusetts 02139 ("MIT").
Recitals
--------
WHEREAS, V-ONE has granted to RSA the option to convert the right
to receive future license fees under the BSAFE/TIPEM OEM Master License
Agreement (No. 1294-VON-O-MLA-1), originally dated as of December 30, 1994
and subsequently amended ("License Agreement"), between them into an
equity interest in V-ONE, and
WHEREAS, RSA has granted to MIT the right to receive 7.2% of the
royalties received by RSA under the License Agreement, and
WHEREAS, V-ONE proposes to issue to RSA 243,690 shares of its
common stock, which number of shares is equal to 1.856% of V-ONE's
currently issued and outstanding voting securities on an as-converted
basis, and to issue to MIT 18,907 shares of its common stock, which number
of shares is equal to 0.144% of V-ONE's currently issued and outstanding
voting securities on an as-converted basis, and to deliver promptly a
certificate representing such shares, and
WHEREAS, V-ONE proposes to issue to RSA additional shares of its
common stock equal to 1.856% of all additional issuances of voting
securities, on an as-converted basis, that take place on or before the
effective date of the registration statement for V-ONE's initial public
offering, and to issue to MIT additional shares of its common stock equal
to 0.144% of all additional issuances of voting securities, on an as-
converted basis, that take place on or before the effective date of the
registration statement for V-ONE's initial public offering, each issuance
to be reduced by the number of any such shares that are repurchased by V-
ONE prior to such effective date, and to deliver promptly a certificate or
certificates representing such shares, and
WHEREAS, RSA desires to exercise its option to convert its right
to receive future license fees under the License Agreement into an equity
interest in V-ONE, and
WHEREAS, RSA desires to receive shares of V-ONE common stock in
satisfaction of V-ONE's obligation to pay future license fees to RSA, and
to have V-ONE issue shares of V-ONE common stock to MIT in satisfaction of
- 12 - 54177.3
<PAGE>
RSA's obligation to pay MIT 7.2% of the royalties received by RSA from V-
ONE, and
WHEREAS, MIT desires to receive shares of V-ONE common stock in
satisfaction of RSA's obligation to pay MIT an amount of 7.2% of the
royalties received by RSA from V-ONE;
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, and intending to be legally bound hereby, V-ONE, RSA and
MIT agree as follows:
1. RSA exercises the option granted to RSA to convert the right
to receive future license fees under the BSAFE/TIPEM OEM Master License
Agreement (No. 1294-VON-O-MLA-1), originally dated as of December 30, 1994
and subsequently amended, between them into an equity interest in V-ONE as
of the date set forth below.
2. V-ONE agrees to issue to RSA 243,690 shares of its common
stock, which number of shares is equal to 1.856% of V-ONE's currently
issued and outstanding voting securities on an as-converted basis, and to
issue to MIT 18,907 shares of its common stock, which number of shares is
equal to 0.144% of V-ONE's currently issued and outstanding voting
securities on an as-converted basis, and to deliver promptly a certificate
representing such shares.
3. V-ONE agrees to issue to RSA additional shares of its common
stock equal to 1.856% of all additional issuances of voting securities, on
an as-converted basis, that take place on or before the effective date of
the registration statement for V-ONE's initial public offering, and to
issue to RSA additional shares of its common stock equal to 0.144% of all
additional issuances of voting securities, on an as-converted basis, that
take place on or before the effective date of the registration statement
for V-ONE's initial public offering, each issuance to be reduced by the
number of any such shares that are repurchased by V-ONE prior to such
effective date, and to deliver promptly a certificate or certificates
representing such shares.
4. RSA is a key licensor to V-ONE. MIT is a third party
beneficiary of the License Agreement and this Agreement. RSA and MIT are
aware of V-ONE's business affairs and financial condition, are accredited
investors for purposes of the Securities Act of 1933, as amended
("Securities Act"), and have acquired sufficient information about V-ONE
to reach an informed and knowledgeable decision to exercise the conversion
option and acquire the common stock as herein provided. In making their
decision, RSA and MIT are not relying on representations of any officer,
director, stockholder or agent of the Company. RSA is exercising the
conversion option and acquiring the common stock for its own account for
investment purposes only and not with a view to, or for the resale in
connection with any "distribution" thereof for purposes of the Securities
Act. MIT is entering into this Agreement as a third party beneficiary of
the License Agreement and this Agreement and is acquiring the common stock
for its own account for investment purposes only and not with a view to,
- 13 - 54177.3
<PAGE>
or for the resale in connection with any "distribution" thereof for
purposes of the Securities Act.
5. RSA and MIT understand and acknowledge that the common stock
to be issued upon exercise of the conversion option will be issued
pursuant to an exemption from the registration provisions of the
Securities Act, that they may be required to hold such shares indefinitely
unless subsequently registered under the Securities Act or unless an
exemption from registration is otherwise available, that such common stock
will be "restricted stock" as that term is defined in Rule 144 under the
Securities Act and will be subject to that Rule, and that the certificates
for such shares will be so legended. RSA and MIT understand and
acknowledge that V-ONE is under no obligation to register the common stock
for sale under the Securities Act.
IN WITNESS WHEREOF, V-ONE, RSA, and MIT, as a third party
beneficiary, have entered this Conversion Agreement as of the Effective
Date set forth below.
Virtual Open Network RSA Data Security, Inc.
Environment Corporation
By: /s/ Bob Raybicki By: /s/ D. James Bidzos
-------------------- -------------------
Name: Bob Raybicki Name: D. James Bidzos
Title: Vice President Title: President
Massachusetts Institute of
Technology
By: /s/ John H. Turner, Jr.
-----------------------
Name: John H. Turner, Jr.
Title: Assistant Director
Technology Licensing Office
Effective Date: 05/23/96
- 14 - 54177.3
<PAGE>
<PAGE>
Promissory Note
---------------
V-ONE hereby acknowledges that Scientek Corporation has agreed to lend the
sum of $330,000 to V-ONE corporation. This loan will be delivered as soon
as possible. The principal loan amount shall bear no interest and shall
be due on the anniversary date of this agreement.
As further consideration for the aforementioned loan, Mr. James Chen,
President of V-ONE corporation will transfer 23,000 shares of V-ONE stocks
over from his personal account. The transfer shall occur immediately
after the repayment of the loan.
/s/ James F. Chen
-------------------------
James F. Chen
President
V-ONE Corporation
<PAGE>
ALLONGE AND AMENDMENT TO PROMISSORY NOTE
THIS ALLONGE AND AMENDMENT TO PROMISSORY NOTE ("Amendment") is
made this 12th day of June, 1996, by and between HAI HUA CHENG
("Mr. Cheng") and VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION ("V-ONE").
WHEREAS, on June 1, 1995, V-ONE executed that certain Promissory
Note ("Note") with a term of one year in favor of Scientek Corporation
("Scientek") in the original principal amount of Three Hundred Thirty
Thousand and No Hundredths Dollars ($330,000.00);
WHEREAS, the Note obligated James F. Chen, the president of V-ONE
("President"), to transfer 23,000 old shares of the common stock of V-ONE
("Old Shares") to Scientek in consideration for the loan immediately upon
satisfaction of the Note;
WHEREAS, prior and subsequent to the execution of the Note,
Scientek, the President, and V-ONE intended for the Old Shares to be
issued by V-ONE and not by the President;
WHEREAS, on November 13, 1995, each Old Share was split into 10
new shares of common stock of V-ONE ("New Shares");
WHEREAS, for valuable consideration Scientek assigned its rights,
title, and interest in the Note to Mr. Cheng;
WHEREAS, as further consideration for the Note, V-ONE issued
115,000 New Shares to a voting trust for the benefit of Mr. Cheng;
WHEREAS, on May 17, 1996, Mr. Cheng agreed to extend the term of
the Note to May 31, 1997;
WHEREAS, in consideration for Mr. Cheng's agreement not to demand
payment of the Note until after the public offering of New Shares, V-ONE
offered Mr. Cheng the option of receiving New Shares in lieu of cash as
full consideration for the principal amount of the Note, the value of each
such New Share to be determined by reference to the price of a New Share
on April 26, 1996; and
WHEREAS, V-ONE and Mr. Cheng desire to amend the terms of the
Note (i) to reflect the assignment of Scientek's rights, title, and
interest therein to Mr. Cheng, (ii) to extend the Note's term, and (iii)
to modify certain other terms of the Note, all as more particularly set
forth herein.
NOW THEREFORE, in consideration of the foregoing and other good
and valuable consideration, receipt and sufficiency of which are hereby
<PAGE>
acknowledged, V-ONE and Mr. Cheng hereby agree that the Note shall be
amended as follows:
1. PRINCIPAL
The outstanding principal balance of the Note is $330,000.00.
2. PARTIES
The obligor under the Note shall remain V-ONE. The obligee under
the Note shall be Mr. Cheng.
3. TERM
The Note shall become due and payable on May 31, 1997.
4. TRANSFER OF SHARES
V-ONE shall transfer 230,000 New Shares to Mr. Cheng immediately
upon repayment of the outstanding balance of the Note.
5. ELECTION REGARDING PAYMENT OF PRINCIPAL
At Mr. Cheng's election, on or prior to May 31, 1997, V-ONE shall
transfer to Cheng an amount of cash sufficient to satisfy the then
outstanding balance of the Note, or a sufficient number of New Shares
that, in the aggregate, equal the then outstanding balance of the Note at
$3.00 per New Share.
6. REAFFIRMATION; RENEWAL; NO NOVATION
V-ONE hereby ratifies, confirms and renews its obligations under
the Note, and promises to pay and perform all of such obligations, as
modified by this Amendment. V-ONE hereby reaffirms all of its
representations, covenants and warranties set forth in the Note. The
execution and delivery of this Amendment does not constitute a novation of
the debt evidenced by the Note. All references in the Note to the term
"loan" shall mean the Note as amended hereby.
EXCEPT AS EXPRESSLY MODIFIED HEREBY, all of the terms, covenants
and conditions of the Note remain in full force and effect.
- 2 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have placed their
respective hands and seals as of the date first above written.
By: /s/ James F. Chen, President
------------------------------------
(SEAL) JAMES F. CHEN, PRESIDENT,
VIRTUAL OPEN NETWORK ENVIRONMENT
CORPORATION
By: /s/ Hai Hua Cheng
------------------------------------
HAI HUA CHENG
- 3 -
<PAGE>
<PAGE>
EXCHANGE AND PURCHASE AGREEMENT
This Exchange and Purchase Agreement ("Agreement") is entered
into this _____ day of April, 1996 by and between Virtual Open Network
Environment Corporation ("V-ONE"), a Delaware Corporation
and _________________________________________ ("Investor").
Recitals
WHEREAS, V-ONE borrowed $2.5 million in the aggregate through
the sale of interest-bearing, unsecured Promissory Notes ("Notes") to
fourteen investors ("Investors") in December 1995 and January 1996
("Offering"), and
WHEREAS, pursuant to a Purchase Agreement between Investor
and V-ONE dated ___________________ ("Purchase Agreement"), Investor
purchased an interest-bearing, unsecured Promissory Note from V-ONE in the
amount of _____________, payable in full by V-ONE on June 30, 1996
("Note"), as part of the Offering, and
WHEREAS, V-ONE proposes to repay the full amount of the Notes
and accrued interest thereon by transferring to Investors whole shares of
V-ONE Series A Convertible Preferred Stock ("Preferred Stock"), valued at
a price of $3.00 per share, in exchange for the Notes, and paying cash to
Investors in an amount equal to the value of any fractional shares of
Preferred Stock to be transferred to Investors in exchange for the Note
and accrued interest thereon, and
WHEREAS, V-ONE proposes to offer to those Investors who
exchange their Notes for shares of Preferred Stock, an additional 333,333
shares of Preferred Stock, at a price of $3.00 per share, based upon
Investors' pro-rata interest in the Offering, and
WHEREAS, Investor desires to receive shares of Preferred
Stock in exchange for the Note, in repayment of the full amount of the
Note and the accrued interest thereon, and to receive cash in lieu of any
fractional shares or Preferred Stock, and
WHEREAS, Investor desires to subscribe for the number of
shares of Preferred Stock set forth on lines three and four of the
signature page of this Agreement;
NOW, THEREFORE, in consideration of the promises set forth
herein, the parties hereby covenant and agree as follows:
SECTION 1
Exchange and Sale of Preferred Stock
------------------------------------
1.1. Investor agrees to deliver the Note to V-ONE and to accept in
full payment of the Note and accrued interest thereon calculated up to and
including the closing date hereunder a) the number of shares of Preferred
<PAGE>
Stock set forth on the signature page of this Agreement, and, if
applicable, b) the amount in cash set forth on line two of the signature
page of this Agreement, which shall be the amount to be received by
Investor in lieu of any fractional shares of Preferred Stock.
1.2. Contingent upon Investor's exchange of the Note for shares of
Preferred Stock, Investor subscribes for the number of shares of Preferred
Stock set forth on the signature page of this Agreement, on the terms and
conditions described herein. The number of shares of Preferred Stock
initially allocated to Investor or to be made available to Investor in the
event that all Investors do not purchase their full allocation of shares,
shall be in the same proportion as the Investor's Note bears to the $2.5
million of Notes in the Offering. Investor is entitled to an amount of
any such additional shares at least equal to his pro-rata portion, but may
subscribe for any amount ranging from "none" to "all available." Investor
must indicate such amount on line four of the signature page. Investor
will not be apportioned a greater number of shares of Preferred Stock than
subscribed for on lines three and four of the signature page of this
Agreement and for which payment is timely received by V-ONE.
SECTION 2
Closing Dates; Delivery
-----------------------
2.1. The exchange and purchase and sale of the Preferred Stock
shall take place at a closing ("Closing") to be held at the offices of V-
ONE on April ___, 1996, or on such other date as mutually agreed upon by
V-ONE and Investor.
2.2. Not less than two (2) days prior to Closing, Investor will
deliver to V-ONE an executed copy of this Agreement, accompanied by the
Note and, if applicable, a check payable to V-ONE for the number of shares
of Preferred Stock (indicated on line three of the signature page), at a
price of $3.00 per share, equal to Investor's pro-rata interest in the
Offering.
2.3. Immediately prior to the Closing, V-ONE will apportion any
shares of Preferred Stock that are not initially allocated among those
Investors who have subscribed for additional shares on the signature page
of this Agreement and notify such Investors of the number of additional
shares of Preferred Stock to be allocated to them. Investor must deliver
payment for the additional shares to V-ONE at the Closing.
2.4. At the Closing, V-ONE will:
(a) accept delivery of Investor's Note;
(b) deliver to Investor a certificate in Investor's name
representing the shares of Preferred Stock issued in
payment of the principal amount of the Note and
interest thereon calculated up to and including the
date of Closing;
- 2 -
<PAGE>
(c) deliver to Investor its check payable to Investor equal
to the value of any fractional shares of Preferred
Stock to be transferred to Investor in exchange for the
Note and accrued interest thereon;
(d) accept Investor's subscription for the number of shares
of Preferred Stock initially allocated to Investor and
for which payment was received by V-ONE; and
(e) accept payment for any additional shares allocated to
Investor by V-ONE.
2.5. Not more than five (5) days after the Closing, V-ONE will
deliver to Investor a certificate in Investor's name
representing the additional shares of Preferred Stock
allocated to Investor.
SECTION 3
Representations, Warranties, and Covenants of
V-ONE and Investor
----------------------------------------------
3.1. V-ONE Represents, Warrants and Covenants:
-----------------------------------------
3.1.1. V-ONE is a corporation duly organized and existing
under, and by virtue of, the laws of the State of Delaware and is in good
standing under such laws. V-ONE has requisite corporate power to own and
operate its properties and assets, and to carry on its business as
presently conducted and as proposed to be conducted. V-ONE is presently
qualified to do business as a foreign corporation in each jurisdiction
where the failure to be so qualified would have a material adverse effect
on V-ONE's business as now conducted or as now proposed to be conducted.
3.1.2. The authorized capital stock of V-ONE consists of
50,000,000 shares of Common Stock, of which 11,926,641 are issued and
outstanding, and 20,000,000 shares of Preferred Stock. 1,183,402 shares
of Preferred Stock have been designated "Series A Convertible Preferred
Stock," none of which are issued and outstanding prior to the date of the
Closing. The outstanding shares have been duly authorized and validly
issued in compliance with applicable securities laws, and are fully paid
and nonassessable. V-ONE has reserved all 1,183,402 shares of Series A
Convertible Preferred Stock for issuance hereunder. The Common and
Preferred Stock shall have the rights, preferences, privileges and
restrictions set forth in the Certificate.
3.1.3. All corporate action on the part of V-ONE, its
directors and stockholders necessary for the authorization, execution and
delivery of this Agreement by V-ONE, the authorization, sale, issuance and
delivery of the Preferred Stock and the performance of V-ONE's obligations
under this Agreement has been taken or will be taken prior to the Closing.
The Agreement, when executed and delivered by V-ONE, shall constitute
valid and binding obligations of V-ONE, enforceable in accordance with its
- 3 -
<PAGE>
terms. The shares of Preferred Stock, when issued in compliance with the
provisions of this Agreement, will be validly issued, will be fully paid
and nonassessable, and will have the rights, preferences and privileges
described in the Certificate, and will be free of any liens or
encumbrances, other than any liens or encumbrances created by or imposed
upon Investor; provided, however, that shares of Preferred Stock are
subject to restrictions on transfer under state and/or federal securities
laws as set forth herein. The shares of Preferred Stock are not subject
to any preemptive rights or rights of first refusal.
3.1.4. V-ONE makes no representation or warranty as to the
minimum amount of any subscription or capital investment it may require
and reserves the right to treat the shares of Preferred Stock as finally
sold and to retain the purchase price for the Preferred Stock provided
herein without regard to the amount of subscriptions.
3.2. Investor Represents, Warrants and Covenants:
--------------------------------------------
3.2.1. Investor represents that no events have occurred
since the date of the Purchase Agreement that have altered Investor's
representation that he or she was an accredited investor at that time, and
Investor is, and remains, an accredited investor, as defined in the
federal securities laws.
3.2.2. Investor acknowledges that he or she has been
provided with and has carefully read a copy of the V-ONE Corporation
Business Plan dated March 1996, V-ONE's 1995 Annual Report, balance sheets
of V-ONE as of December 31, 1994 and 1995 and the related statements of
operations, stockholders' equity and cash flows for the period from
February 16, 1993 (date of inception) to December 31, 1993 and for the
years ended December 31, 1994 and 1995, and unaudited balance sheets for
January and February of 1996 ("Financial Statements"), and a copy the
Certificate of Designation, Preferences, and Rights of Series A
Convertible Preferred Stock of V-ONE.
3.2.3. Investor represents and affirms that he or she has
prior investment experience, including investments in unregistered
securities, recognizes the highly speculative nature of this investment
and is able to bear the economic risk of such an investment.
3.2.4. The shares of Preferred Stock are being purchased for
Investor's own account, for investment purposes only, and not with a view
to the sale and distribution thereof, in whole or in part.
3.2.5. Investor acknowledges that shares of Preferred Stock
must be held indefinitely unless subsequently registered under the
Securities Act or unless an exemption from such registration is available.
Investor is aware of the provisions of Rule 144 promulgated under the
Securities Act (as defined below) which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public
market for the shares, the availability of certain current public
information about V-ONE, the resale occurring not less than two years
- 4 -
<PAGE>
after a party has purchased and paid for the security to be sold, the sale
being effected through a "broker's transaction" or in transactions
directly with a "market maker" and the number of shares being sold during
any three-month period not exceeding specified limitations.
3.2.6. Investor has either: (a) employed the services of an
investment adviser, attorney or accountant who has read the Business Plan
and who is qualified by training and experience in business and financial
matters to evaluate the merits and risks of purchasing the Notes; or (b)
had the opportunity to seek the advice of such an investment adviser,
attorney, or accountant with respect to this matter and has willingly and
consciously chosen not to seek such advice.
3.2.7. Investor and his or her investment adviser, attorney
and accountant, if any, have been furnished, during the course of this
transaction, with all the information regarding V-ONE which any of them
has requested or desired; all documents which could be reasonably provided
have been made available for inspection and review by Investor or his or
her advisers.
3.2.8. Investor acknowledges that V-ONE is relying upon
Investor's representations as to Investor's accredited investor status and
Investor's ability to read and understand information supplied herein, in
determining Investor's suitability as an investor and in making the
decision to enter in this Agreement with Investor. Accordingly, Investor
represents and covenants that the information supplied herein is complete,
does not omit any material item, and is true, accurate and correct in all
respects.
SECTION 4
Restrictions on Transferability of Securities;
Compliance with Securities Act; Registration Rights
---------------------------------------------------
4.1. The Preferred Stock shall not be sold, assigned, transferred
or pledged except upon the conditions specified in this Section 4.
Investor will cause any proposed purchaser, assignee, transferee, or
pledgee of any such shares held by Investor to agree to take and hold such
securities subject to the provisions and upon the conditions specified in
this Section 4.
4.2. As used in this Agreement, the following terms shall have the
following respective meanings:
"COMMISSION" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act.
"REGISTRATION SHARES" shall mean shares of Preferred Stock
and any shares issued in respect of the Preferred Stock upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar
event of V-ONE.
- 5 -
<PAGE>
"RESTRICTED SECURITIES" shall mean the securities of V-ONE
required to bear the legend in Section 4.3.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
4.3. The certificates representing Preferred Stock and any other
securities issued in respect of the Preferred Stock upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar event,
shall (unless otherwise permitted by the provisions of Section 4.4 below)
be stamped or otherwise imprinted with a legend in the following form (in
addition to any legend required under any other agreement between Investor
and V-ONE or under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND ARE NOT THE
SUBJECT OF A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF SAID ACT.
Investor consents to V-ONE making a notation on its records and
giving instructions to any transfer agent of the Preferred Stock in order
to implement the restrictions on transfer established in this Section 4.
4.4. The holder of Restricted Securities by acceptance thereof
agrees to comply in all respects with the provisions of this Section 4.4.
Prior to any proposed sale, assignment, transfer or pledge of any
Restricted Securities (other than (i) a transfer not involving a change in
beneficial ownership, (ii) in transactions involving the distribution
without consideration of Restricted Securities by Investor to any of its
partners, or retired partners or to the estate of any of its partners or
retired partners, or (iii) in transactions in compliance with Rule 144),
and unless there is in effect a registration statement under the
Securities Act covering the proposed transfer, the holder thereof shall
give written notice to V-ONE of such holder's intention to effect such
transfer, sale, assignment or pledge. Each such notice shall describe the
manner and circumstances of the proposed transfer, sale, assignment or
pledge in sufficient detail, and shall be accompanied, at such holder's
expense by either (i) a written opinion of legal counsel who shall be, and
whose legal opinion shall be, reasonably satisfactory to V-ONE addressed
to V-ONE, to the effect that the proposed transfer of the Restricted
Securities may be effected without registration under the Securities Act,
or (ii) a "no action" letter from the Commission to the effect that the
transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with
respect thereto, whereupon the holder of such Restricted Securities shall
be entitled to transfer such Restricted Securities in accordance with the
- 6 -
<PAGE>
terms of the notice delivered by the holder to V-ONE. Any certificate
evidencing the Restricted Securities transferred as above provided shall
bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in Section 4.3 above, except that
such certificate shall not bear such restrictive legend if in the opinion
of counsel for such holder and V-ONE such legend is not required in order
to establish compliance with any provision of the Securities Act.
4.5. Registration Right.
------------------
(a) Demand Registration Right on Two Occasions
------------------------------------------
(i) Pursuant to this Section 4.5, V-ONE will provide
Investors as a group and not individually, subject to underwriter
approval, with a right to register Registration Shares in underwritten
offerings on two occasions. Investor may exercise this right at any time
commencing the date of Closing and ceasing on the second anniversary
thereof, unless the holding period under Rule 144 shall be shorter, by
giving notice to V-ONE that Investor desires to have the Registration
Shares registered for sale under the Securities Act. Upon receipt of such
notice, on two and only two occasion, V-ONE promptly will file a
registration statement with the Commission so that the Registration Shares
may be publicly sold as promptly as practical thereafter and V-ONE will
use its best efforts to cause such registration statement to be declared
effective by the Commission promptly.
(ii) Within ten days after receiving any such notice, V-ONE
shall give notice to all other Investors advising that V-ONE is proceeding
with such registration statement and offering to include shares of the
other Investors provided that they notify V-ONE within ten days of receipt
of such notice that they desire to have their shares included in such
registration rights.
(iii) If Form S-3 (or its successor) is available for the
offering of the Registration Shares, then V-ONE will, promptly after
receipt of such notice from Investor, file a registration statement on
Form S-3 under the same procedures set forth above and shall use its best
efforts to cause such registration statement to be declared effective by
the Commission and to remain effective for a period of one year.
(iv) In connection with such underwriting, V-ONE shall
execute an appropriate underwriting agreement in customary form and supply
prospectuses to the Investors and shall use its best efforts to register
and qualify the Registration Shares for sale in such states as the
Investors shall reasonably request ("States"). The two-time registration
right provided for in this Section 4.5 shall not be deemed to be satisfied
if V-ONE (alone and not in conjunction with a determination by the
managing underwriter) unilaterally determines not to include any portion
of the Registration Shares in a registration statement filed pursuant to
this Section.
- 7 -
<PAGE>
(v) V-ONE shall bear all expenses relating to the filing of
a registration statement relating to the Registration Shares and the
States, except for underwriting discounts or commissions and shall have
the right to approve any underwriter, investment broker or adviser
retained by an Investor to effect a distribution of the Registration
Shares, which approval shall not be unreasonably withheld.
Notwithstanding anything to the contrary set forth herein, V-ONE may
postpone the filing of the registration statement for a period not to
exceed ninety days if the postponement will avoid the necessity of
preparing audited financial statements as of a date other than the end of
a fiscal year or the Chief Executive Officer of V-ONE determines in good
faith that the postponement is necessary to avoid serious jeopardy to V-
ONE, any significant business prospect of V-ONE or the security holders of
V-ONE considered as a group.
(b) Piggyback Registration Rights.
------------------------------
(i) If V-ONE determines that it will file a registration
statement, at any time after the date of Closing, for any public offering
of shares of Preferred Stock, either for its own account or the account of
any security holder, V-ONE shall give written notice to all Investors, at
least (30) days in advance of filing such registration statement, that
such filing is expected to be made. Upon the written request of any of
the Investors received by V-ONE at least fifteen (15) days in advance of
the filing, and subject to the limitations set forth in this Section
4.5(b), V-ONE shall include in such registration statement Registration
Shares for the purpose of registering such Registration Shares for sale by
or for the account of such Investors.
(ii) V-ONE shall have exclusive control over the filing,
amending, withdrawal and other actions regarding such registration
statement. V-ONE shall have no obligation to give notice to any Investors
with respect to the filing of, or to include any shares for any Investors
in, any registration statement on Form S-4 or Form S-8 (or successor forms
thereto) or on any other form that does not include substantially the same
information or is not in substantially the same format as would be
required for a registration statement for a sale of shares by Investors.
SECTION 5
Miscellaneous
-------------
5.1. Notwithstanding the place where this Agreement may be
executed by Investor, all the terms and provisions hereof shall be
construed in accordance with and governed by the internal laws of the
State of Delaware.
5.2. This Agreement constitutes the entire agreement of Investor
and V-ONE with respect to the subject matter hereof and may be amended
only by a writing executed by Investor and V-ONE. This Agreement shall
- 8 -
<PAGE>
inure to the benefit of and be binding upon each of the parties hereto and
their respective heirs and legal representatives.
5.3. Neither this Agreement nor any term or provision hereof shall
be modified, changed, discharged or terminated except by an instrument in
writing signed by the party against whom any modification, change,
discharge or termination is sought to be enforced.
5.4. This Agreement and the rights provided for herein may not be
transferred or assigned by Investor. Any attempted assignment of this
Agreement shall be null and void. All rights and obligations of Investor
shall survive Investor's death, permanent incapacitation, bankruptcy,
insolvency or dissolution.
* * *
Please review the following Notices concerning state securities
laws.
NOTICE TO NEW YORK RESIDENTS
----------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
NOTICE TO FLORIDA RESIDENTS
---------------------------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE FLORIDA SECURITIES
ACT. EACH FLORIDA RESIDENT HAS THE RIGHT, PURSUANT TO FLORIDA STATUTES
SECTION 517.061, TO VOID A PURCHASE OF THESE SECURITIES WITHIN THREE(3)
DAYS AFTER THE TENDER OF A SUBSCRIPTION AND THE CONSIDERATION THEREFOR.
NOTICE TO TEXAS RESIDENTS
-------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE TEXAS
SECURITIES ACT, TEXAS STATUTES, ARTICLE 581 AND ARE OFFERED AND SOLD
PURSUANT TO AN EXEMPTION THEREFROM. THE SECURITIES CANNOT BE SOLD OR
TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER THE TEXAS
SECURITIES ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT OR IN A TRANSACTION WHICH IS OTHERWISE IN COMPLIANCE WITH SUCH
ACT.
NOTICE TO NEW JERSEY RESIDENTS
------------------------------
THESE SECURITIES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION FROM
REGISTRATION UNDER SECTION 49:3-50(b)(9) OF THE NEW JERSEY UNIFORM
SECURITIES LAWS AND HAVE NOT BEEN REGISTERED UNDER THE NEW JERSEY UNIFORM
SECURITIES LAW. THE SECURITIES CANNOT BE SOLD OR TRANSFERRED EXCEPT IN A
TRANSACTION WHICH IS EXEMPT UNDER THE NEW JERSEY UNIFORM SECURITIES LAW OR
- 9 -
<PAGE>
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAW OR IN A
TRANSACTION WHICH IS OTHERWISE IN COMPLIANCE WITH SUCH LAW.
NOTICE TO CONNECTICUT RESIDENTS
-------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE BANKING
COMMISSIONER OF THE STATE OF CONNECTICUT NOR HAS THE COMMISSIONER PASSED
UPON THE ACCURACY OR ADEQUACY OF THE OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
NOTICE TO PENNSYLVANIA RESIDENTS
--------------------------------
THESE SECURITIES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION FROM
REGISTRATION UNDER SECTION 203(D) OF THE PENNSYLVANIA SECURITIES ACT AND
HAVE NOT BEEN REGISTERED UNDER THE PENNSYLVANIA SECURITIES ACT. THE
SECURITIES CANNOT BE SOLD OR TRANSFERRED FOR TWELVE MONTHS AFTER THE DATE
OF PURCHASE, EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SECTION 204.011
OF THE PENNSYLVANIA SECURITIES ACT OR PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT OR IN A TRANSACTION WHICH IS
OTHERWISE IN COMPLIANCE WITH SUCH ACT.
WITHIN TWO (2) BUSINESS DAYS FROM THE DATE OF RECEIPT BY V-ONE OF YOUR
WRITTEN, BINDING PURCHASE AGREEMENT, YOU MAY ELECT TO WITHDRAW FROM YOUR
PURCHASE AGREEMENT AND RECEIVE A FULL REFUND OF ALL MONIES PAID BY YOU.
YOUR WITHDRAWAL WILL BE WITHOUT ANY FURTHER LIABILITY TO ANY PERSON. TO
ACCOMPLISH THIS WITHDRAWAL, YOU NEED ONLY SEND A LETTER OR TELEGRAM TO THE
CORPORATION INDICATING YOUR INTENTION TO WITHDRAW. SUCH LETTER OR
TELEGRAM MUST BE SENT AND POSTMARKED PRIOR TO THE END OF THE
AFOREMENTIONED SECOND BUSINESS DAY. IF YOU ARE SENDING A LETTER, IT IS
PRUDENT TO SENT IT BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ENSURE
THAT IT IS RECEIVED AND ALSO TO EVIDENCE THE TIME WHEN IT WAS MAILED. IF
YOU MAKE THIS REQUEST ORALLY, YOU SHOULD ASK FOR AND OBTAIN WRITTEN
CONFIRMATION THAT YOUR REQUEST HAS BEEN RECEIVED.
NOTICE TO SOUTH CAROLINA RESIDENTS
----------------------------------
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS
OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE
SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES
LAW, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
- 10 -
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this
Agreement as of the __ day of ______, 1996.
NUMBER OF SHARES IN
EXCHANGE FOR NOTE AND
ACCRUED INTEREST
Line 1. _____________________
CASH PAYMENT IN LIEU OF
FRACTIONAL SHARES
Line 2. $ ____________________
PRO-RATA MINIMUM NUMBER
OF SHARES AVAILABLE TO
INVESTOR
Line 3. _____________________
MAXIMUM NUMBER OF ADDITIONAL
SHARES WILLING TO SUBSCRIBE
FOR AT $3.00 PER SHARE
Line 4. _____________________
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
by _________________________________________
James F. Chen, President
____________________________________________
Investor (Signature)
____________________________________________
Investor (Printed Name)
- 11 -
<PAGE>
<PAGE>
REGISTRATION RIGHTS AGREEMENT
June 18, 1996
JMI Equity Fund II, L.P.
1119 St. Paul St.
Baltimore, MD 21202
Dear Sirs:
This will confirm that in consideration of your agreement
on the date hereof to purchase Common Stock Purchase Warrants for the
purchase of an aggregate of 500,000 shares of Common Stock, $.001 par
value (the "Warrant Shares"), of Virtual Open Network Environment
Corporation, a Delaware corporation (the "Company"), pursuant to the
Senior Subordinated Note and Warrant Purchase Agreement of even date
herewith (the "Purchase Agreement") between the Company and you as
purchaser thereunder (the "Purchaser") and as an inducement to you to
consummate the transactions contemplated by the Purchase Agreement, the
Company covenants and agrees with each of you as follows:
1. Certain Definitions. As used in this Agreement,
the following terms have the following respective meanings:
"Commission" means the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities
Act.
"Common Stock" means the Common Stock, $.001 par value, of the
Company, as constituted as of the date of this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall
be in effect at the time.
"Registration Expenses" means the expenses described in Section 8
of this Agreement.
"Restricted Stock" means the Warrant Shares, excluding Warrant
Shares that (a) have been registered under the Securities Act
pursuant to an effective registration statement filed thereunder
and disposed of in accordance with the registration statement
covering them, (b) have been publicly sold pursuant to Rule 144
under the Securities Act, or (c) may be sold within the volume
limitations of Rule 144(e) under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the
time.
<PAGE>
Registration Rights Agreement - 2
"Selling Expenses" means the expenses described in Section 8 of
this Agreement.
2. Restrictive Legend. Each certificate
representing Warrant Shares shall, except as otherwise provided in this
Section 2 or in Section 3, be stamped or otherwise imprinted with a legend
substantially in the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED UNLESS
SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR
SOME OTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS IS AVAILABLE
WITH RESPECT THERETO, AS DEMONSTRATED BY OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY.
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company (it being agreed that Testa, Hurwitz &
Thibeault, LLP shall be satisfactory) the securities represented thereby
may be publicly sold without registration under the Securities Act and any
applicable state securities laws.
3. Notice of Proposed Transfer. Prior to any
proposed transfer of any Warrant Shares (other than under the
circumstances described in Sections 4, 5 or 6), the holder thereof shall
give written notice to the Company of its intention to effect such
transfer. Each such notice shall describe the manner of the proposed
transfer and, if requested by the Company, shall be accompanied by an
opinion of counsel satisfactory to the Company (it being agreed that
Testa, Hurwitz & Thibeault, LLP shall be satisfactory) to the effect that
the proposed transfer may be effected without registration under the
Securities Act and any applicable state securities laws, whereupon the
holder of such stock shall be entitled to transfer such stock in
accordance with the terms of its notice. Each certificate for Warrant
Shares transferred as above provided shall bear the legend set forth in
Section 2, except that such certificate shall not bear such legend if
(i) such transfer is in accordance with the provisions of Rule 144 (or any
other rule permitting public sale without registration under the
Securities Act) or (ii) the opinion of counsel referred to above is to the
further effect that the transferee and any subsequent transferee (other
than an affiliate of the Company) would be entitled to transfer such
securities in a public sale without registration under the Securities Act.
The restrictions provided for in this Section 3 shall not apply to
securities that are not required to bear the legend prescribed by
Section 2 in accordance with the provisions of that Section.
4. Required Registration. (a) At any time after
six months after any registration statement covering a public offering of
<PAGE>
Registration Rights Agreement - 3
securities of the Company under the Securities Act shall have become
effective, Purchaser may request the Company to register under the
Securities Act all or any portion of the shares of Restricted Stock held
by Purchaser for sale in the manner specified in such notice, provided
that the reasonably anticipated aggregate price to the public of such
public offering would exceed $500,000. Notwithstanding anything to the
contrary contained herein, no request may be made under this Section 4
within 120 days after the effective date of a registration statement filed
by the Company covering a firm commitment underwritten public offering in
which the holders of Restricted Stock shall have been entitled to join
pursuant to Sections 5 or 6 and in which there shall have been effectively
registered all shares of Restricted Stock as to which registration shall
have been requested.
(b) Following receipt of any notice under this Sec-
tion 4, the Company shall immediately notify all holders of Restricted
Stock from whom notice has not been received and shall use its best
efforts to register under the Securities Act, for public sale in
accordance with the method of disposition specified in such notice from
requesting holders, the number of shares of Restricted Stock specified in
such notice (and in all notices received by the Company from other holders
within 30 days after the giving of such notice by the Company). If such
method of disposition shall be an underwritten public offering, the
holders of a majority of the shares of Restricted Stock to be sold in such
offering may designate the managing underwriter of such offering, subject
to the approval of the Company, which approval shall not be unreasonably
withheld or delayed. The Company shall be obligated to register
Restricted Stock pursuant to this Section 4 on one occasion only,
provided, however, that such obligation shall be deemed satisfied only
when a registration statement covering all shares of Restricted Stock
specified in notices received as aforesaid, for sale in accordance with
the method of disposition specified by the requesting holders, shall have
become effective and, if such method of disposition is a firm commitment
underwritten public offering, all such shares shall have been sold
pursuant thereto (other than shares, if any, that may be sold in the
underwriters' overallotment option).
(c) The Company shall be entitled to include in any
registration statement referred to in this Section 4, for sale in
accordance with the method of disposition specified by the requesting
holders, shares of Common Stock to be sold by the Company for its own
account, except as and to the extent that, in the opinion of the managing
underwriter (if such method of disposition shall be an underwritten public
offering), such inclusion would adversely affect the marketing of the
Restricted Stock to be sold. Except for registration statements on
Form S-4, S-8, a combination S-8/S-3 relating to the resale of shares
issued under a stock plan only, or any successor thereto, the Company will
not file with the Commission any other registration statement with respect
to its Common Stock, whether for its own account or that of other
stockholders, from the date of receipt of a notice from requesting holders
pursuant to this Section 4 until the completion of the period of
distribution of the registration contemplated thereby.
<PAGE>
Registration Rights Agreement - 4
5. Incidental Registration. If the Company at any
time (other than pursuant to Section 4 or Section 6 or in the Company's
initial public offering) proposes to register any of its securities under
the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8, a combination S-8/S-3 relating
to the resale of shares issued under a stock plan only, or another form
not available for registering the Restricted Stock for sale to the
public), each such time it will give written notice to all holders of out-
standing Restricted Stock of its intention so to do. Upon the written
request of any such holder, received by the Company within 30 days after
the giving of any such notice by the Company, to register any of its
Restricted Stock, the Company will use its best efforts to cause the
Restricted Stock as to which registration shall have been so requested to
be included in the securities to be covered by the registration statement
proposed to be filed by the Company, all to the extent requisite to permit
the sale or other disposition by the holder of such Restricted Stock so
registered. In the event that any registration pursuant to this Section 5
shall be, in whole or in part, an underwritten public offering of Common
Stock, the number of shares of Restricted Stock to be included in such an
underwriting may be reduced (pro rata among the requesting holders based
upon the number of shares of Restricted Stock owned by such holders) if
and to the extent that the managing underwriter shall be of the opinion
that such inclusion would adversely affect the marketing of the securities
to be sold by the Company therein, provided, however, that such number of
shares of Restricted Stock shall not be reduced if any shares are to be
included in such underwriting for the account of any person other than the
Company or requesting holders of Restricted Stock. Notwithstanding the
foregoing provisions, the Company may withdraw any registration statement
referred to in this Section 5 without thereby incurring any liability to
the holders of Restricted Stock.
6. Registration on Form S-3. If at any time (i) a
holder or holders of at least 20% of the total shares of Restricted Stock
then outstanding request that the Company file a registration statement on
Form S-3 or any successor thereto for a public offering of all or any
portion of the shares of Restricted Stock held by such requesting holder
or holders, the reasonably anticipated aggregate price to the public of
which would exceed $500,000, and (ii) the Company is a registrant entitled
to use Form S-3 or any successor thereto to register such shares, then the
Company shall use its best efforts to register under the Securities Act on
Form S-3 or any successor thereto, for public sale in accordance with the
method of disposition specified in such notice, the number of shares of
Restricted Stock specified in such notice. Whenever the Company is
required by this Section 6 to use its best efforts to effect the
registration of Restricted Stock, each of the procedures and requirements
of Section 4 (including but not limited to the requirement that the
Company notify all holders of Restricted Stock from whom notice has not
been received and provide them with the opportunity to participate in the
offering) shall apply to such registration, provided, however, that there
shall be no limitation on the number of registrations on Form S-3 which
may be requested and obtained under this Section 6, and provided, further,
<PAGE>
Registration Rights Agreement - 5
however, that the requirements contained in the first sentence of
Section 4(a) shall not apply to any registration on Form S-3 which may be
requested and obtained under this Section 6.
7. Registration Procedures. If and whenever the
Company is required by the provisions of Sections 4, 5 or 6 to use its
best efforts to effect the registration of any shares of Restricted Stock
under the Securities Act, the Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration
statement (which, in the case of an underwritten public offering pursuant
to Section 4, shall be on Form S-1 or other form of general applicability
satisfactory to the managing underwriter selected as therein provided)
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for the period of
the distribution contemplated thereby (determined as hereinafter
provided);
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the period specified in paragraph (a) above and
comply with the provisions of the Securities Act with respect to the
disposition of all Restricted Stock covered by such registration statement
in accordance with the sellers' intended method of disposition set forth
in such registration statement for such period;
(c) furnish to each seller of Restricted Stock and to
each underwriter such number of copies of the registration statement and
the prospectus included therein (including each preliminary prospectus) as
such persons reasonably may request in order to facilitate the public sale
or other disposition of the Restricted Stock covered by such registration
statement;
(d) use its best efforts to register or qualify the
Restricted Stock covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the sellers of
Restricted Stock or, in the case of an underwritten public offering, the
managing underwriter reasonably shall request, provided, however, that the
Company shall not for any such purpose be required to qualify generally to
transact business as a foreign corporation in any jurisdiction where it is
not so qualified or to consent to general service of process in any such
jurisdiction;
(e) use its best efforts to list the Restricted Stock
covered by such registration statement with any securities exchange on
which the Common Stock of the Company is then listed;
(f) immediately notify each seller of Restricted
Stock and each underwriter under such registration statement, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event of which the Company has
<PAGE>
Registration Rights Agreement - 6
knowledge as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(g) if the offering is underwritten and at the
request of any seller of Restricted Stock, use its best efforts to furnish
on the date that Restricted Stock is delivered to the underwriters for
sale pursuant to such registration: (i) an opinion dated such date of
counsel representing the Company for the purposes of such registration,
addressed to the underwriters and to such seller, stating that such
registration statement has become effective under the Securities Act and
that (A) to the best knowledge of such counsel, no stop order suspending
the effectiveness thereof has been issued and no proceedings for that pur-
pose have been instituted or are pending or contemplated under the
Securities Act, (B) the registration statement, the related prospectus and
each amendment or supplement thereof comply as to form in all material
respects with the requirements of the Securities Act (except that such
counsel need not express any opinion as to financial statements, schedules
and other financial and statistical data contained therein) and (C) to
such other effects as reasonably may be requested by counsel for the
underwriters or by such seller or its counsel and (ii) a letter dated such
date from the independent public accountants retained by the Company,
addressed to the underwriters and to such seller, stating that they are
independent public accountants within the meaning of the Securities Act
and that, in the opinion of such accountants, the financial statements of
the Company included in the registration statement or the prospectus, or
any amendment or supplement thereof, comply as to form in all material
respects with the applicable accounting requirements of the Securities
Act, and such letter shall additionally cover such other financial matters
(including information as to the period ending no more than five business
days prior to the date of such letter) with respect to such registration
as such underwriters reasonably may request; and
(h) make available for inspection by each seller of
Restricted Stock, any underwriter participating in any distribution
pursuant to such registration statement, and any attorney, accountant or
other agent retained by such seller or underwriter, all financial and
other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to
supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such
registration statement.
For purposes of Section 7(a) and 7(b) and of Sec-
tion 4(c), the period of distribution of Restricted Stock in a firm
commitment underwritten public offering shall be deemed to extend until
each underwriter has completed the distribution of all securities
purchased by it, and the period of distribution of Restricted Stock in any
other registration shall be deemed to extend until the earlier of the sale
<PAGE>
Registration Rights Agreement - 7
of all Restricted Stock covered thereby and 90 days after the effective
date thereof.
In connection with each registration hereunder, the sel-
lers of Restricted Stock will furnish to the Company in writing such
information with respect to themselves and the proposed distribution by
them as reasonably shall be necessary in order to assure compliance with
federal and applicable state securities laws.
In connection with each registration pursuant to Sec-
tions 4, 5 or 6 covering an underwritten public offering, the Company and
each seller agree to enter into a written agreement with the managing
underwriter selected in the manner herein provided in such form and
containing such provisions as are customary in the securities business for
such an arrangement between such underwriter and companies of the
Company's size and investment stature; provided, however, that the
provisions of such agreement whereby each seller shall agree to indemnify
other parties to such agreement shall not exceed or be broader in scope
than the indemnification set forth in Section 9(b) hereof.
8. Expenses. All expenses incurred by the Company
in complying with Sections 4, 5 and 6, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for the Company, fees and
expenses (including counsel fees) incurred in connection with complying
with state securities or "blue sky" laws, fees of the National Association
of Securities Dealers, Inc., transfer taxes, fees of transfer agents and
registrars, costs of insurance and fees and disbursements of one counsel
for the sellers of Restricted Stock, but excluding any Selling Expenses,
are called "Registration Expenses." All underwriting discounts and
selling commissions applicable to the sale of Restricted Stock are called
"Selling Expenses."
The Company will pay all Registration Expenses in con-
nection with each registration statement under Sections 4, 5 or 6. All
Selling Expenses in connection with each registration statement under
Sections 4, 5 or 6 shall be borne by the participating sellers in
proportion to the number of shares sold by each, or by such participating
sellers other than the Company (except to the extent the Company shall be
a seller) as they may agree.
9. Indemnification and Contribution. (a) In the
event of a registration of any of the Restricted Stock under the
Securities Act pursuant to Sections 4, 5 or 6, the Company will indemnify
and hold harmless each seller of such Restricted Stock thereunder, each
underwriter of such Restricted Stock thereunder and each other person, if
any, who controls such seller or underwriter within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint
or several, to which such seller, underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
<PAGE>
Registration Rights Agreement - 8
statement of any material fact contained in any registration statement
under which such Restricted Stock was registered under the Securities Act
pursuant to Sections 4, 5 or 6, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, 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, and will reimburse each such
seller, each such underwriter and each such controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action, provided, however, that the Company will not be liable in any such
case if and to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with
information furnished by any such seller, any such underwriter or any such
controlling person in writing specifically for use in such registration
statement or prospectus.
(b) In the event of a registration of any of the
Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6,
each seller of such Restricted Stock thereunder, severally and not
jointly, will indemnify and hold harmless the Company, each person, if
any, who controls the Company within the meaning of the Securities Act,
each officer of the Company who signs the registration statement, each
director of the Company, each underwriter and each person who controls any
underwriter within the meaning of the Securities Act, against all losses,
claims, damages or liabilities, joint or several, to which the Company or
such officer, director, underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in the registration statement under which such
Restricted Stock was registered under the Securities Act pursuant to
Sections 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, 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, and will reimburse the Company and each
such officer, director, underwriter and controlling person for any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action, provided, however, that such seller will be liable hereunder in
any such case if and only to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and
in conformity with information pertaining to such seller, as such,
furnished in writing to the Company by such seller specifically for use in
such registration statement or prospectus, and provided, further, however,
that the liability of each seller hereunder shall be limited to the pro-
portion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the shares sold
by such seller under such registration statement bears to the total public
<PAGE>
Registration Rights Agreement - 9
offering price of all securities sold thereunder, but not in any event to
exceed the proceeds received by such seller from the sale of Restricted
Stock covered by such registration statement.
(c) Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party in writing
thereof, but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to such indemnified party
other than under this Section 9 and shall only relieve it from any
liability which it may have to such indemnified party under this Section 9
if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to parti-
cipate in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel satisfactory to such indemnified party, and,
after notice from the indemnifying party to such indemnified party of its
election so to assume and undertake the defense thereof, the indemnifying
party shall not be liable to such indemnified party under this Section 9
for any legal expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation and of liaison with counsel so selected, provided, however,
that, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the
indemnifying party or if the interests of the indemnified party reasonably
may be deemed to conflict with the interests of the indemnifying party,
the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the
defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed
by the indemnifying party as incurred.
(d) In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in
which either (i) any holder of Restricted Stock exercising rights under
this Agreement, or any controlling person of any such holder, makes a
claim for indemnification pursuant to this Section 9 but it is judicially
determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial
of the last right of appeal) that such indemnification may not be enforced
in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, or (ii) contribution under the Securities
Act may be required on the part of any such selling holder or any such
controlling person in circumstances for which indemnification is provided
under this Section 9; then, and in each such case, the Company and such
holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others)
in such proportion so that such holder is responsible for the portion
<PAGE>
Registration Rights Agreement - 10
represented by the percentage that the public offering price of its
Restricted Stock offered by the registration statement bears to the public
offering price of all securities offered by such registration statement,
and the Company is responsible for the remaining portion; provided,
however, that, in any such case, (A) no such holder will be required to
contribute any amount in excess of the public offering price of all such
Restricted Stock offered by it pursuant to such registration statement;
and (B) no person or entity guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
10. Changes in Common Stock. If, and as often as,
there is any change in the Common Stock by way of a stock split, stock
dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the
Common Stock as so changed.
11. Rule 144 Reporting. With a view to making avail-
able the benefits of certain rules and regulations of the Commission which
may at any time permit the sale of the Restricted Stock to the public
without registration, at all times after 90 days after any registration
statement covering a public offering of securities of the Company under
the Securities Act shall have become effective, the Company agrees to:
(a) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities
Act;
(b) use its best efforts to file with the Commission
in a timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act; and
(c) furnish to each holder of Restricted Stock forth-
with upon request a written statement by the Company as to its compliance
with the reporting requirements of such Rule 144 and of the Securities Act
and the Exchange Act, a copy of the most recent annual or quarterly report
of the Company, and such other reports and documents so filed by the
Company as such holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing such holder to sell any
Restricted Stock without registration.
12. Representations and Warranties of the Company.
The Company represents and warrants to you as follows:
(a) The execution, delivery and performance of this
Agreement by the Company have been duly authorized by all requisite
corporate action and will not violate any provision of law, any order of
any court or other agency of government, the Charter or By-laws of the
Company or any provision of any indenture, agreement or other instrument
<PAGE>
Registration Rights Agreement - 11
to which it or any or its properties or assets is bound, conflict with,
result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such indenture, agreement or other instrument or
result in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon any of the properties or assets of the Company.
(b) This Agreement has been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable in accordance with its terms.
13. Miscellaneous.
-------------
(a) All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the
parties hereto (including without limitation transferees of any Restricted
Stock), whether so expressed or not, provided, however, that registration
rights conferred herein on the holders of Restricted Stock shall only
inure to the benefit of a transferee of Restricted Stock if (i) there is
transferred to such transferee at least 20% of the total shares of
Restricted Stock originally issued pursuant to the Purchase Agreement to
the direct or indirect transferor of such transferee or (ii) such
transferee is a partner, shareholder or affiliate of a party hereto.
(b) All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered in
person, mailed by certified or registered mail, return receipt requested,
or sent by telecopier or telex, addressed as follows:
if to the Company or any other party hereto, at the
address of such party set forth in the Purchase Agreement;
if to any subsequent holder of Restricted Stock, to it at
such address as may have been furnished to the Company in writing
by such holder;
or, in any case, at such other address or addresses as shall have been
furnished in writing to the Company (in the case of a holder of Restricted
Stock) or to the holders of Restricted Stock (in the case of the Company)
in accordance with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland.
(d) This Agreement may not be amended or modified,
and no provision hereof may be waived, without the written consent of the
Company and the holders of at least two-thirds of the outstanding shares
of Restricted Stock.
<PAGE>
Registration Rights Agreement - 12
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(f) The obligations of the Company to register shares
of Restricted Stock under Sections 4, 5 or 6 shall terminate on the
earlier of the tenth anniversary of the date of this Agreement or the date
when all shares of Restricted Stock may be sold without limitation
pursuant to Rule 144(k) under the Securities Act.
(g) Each holder of Restricted Stock who is a party to
this Agreement shall agree not to sell publicly any shares of Restricted
Stock or any other shares of Common Stock without the consent of such
underwriters, for a period of not more than 180 days following the
effective date of the registration statement relating to the Company's
initial public offering.
(h) Notwithstanding the provisions of Section 7(a),
the Company's obligation to file a registration statement, or cause such
registration statement to become and remain effective, shall be suspended
for a period not to exceed 90 days in any 24-month period if there exists
at the time material non-public information relating to the Company which,
in the reasonable opinion of the Company, should not be disclosed.
(i) The Company shall not grant to any third party
any registration rights that would in any way hinder or prevent the
exercise of your rights hereunder.
(j) If any provision of this Agreement shall be held
to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any
manner affect or render illegal, invalid or unenforceable any other
provision of this Agreement, and this Agreement shall be carried out as if
any such illegal, invalid or unenforceable provision were not contained
herein.
<PAGE>
Registration Rights Agreement - 13
Please indicate your acceptance of the foregoing by
signing and returning the enclosed counterpart of this letter, whereupon
this Agreement shall be a binding agreement between the Company and you.
Very truly yours,
VIRTUAL OPEN NETWORK ENVIRONMENT
CORPORATION
By: /s/ James F. Chen
------------------------------
Title: President/CEO
------------------------------
AGREED TO AND ACCEPTED as of the
date first above written.
JMI EQUITY FUND II, L.P.
By: JMI Partners II, L.P.
Its General Partner
By: /s/ Harry S. Gruner
------------------------------
General Partner
<PAGE>
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE LAWS OR SOME
OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
OF 1933 AND APPLICABLE LAWS IS AVAILABLE WITH RESPECT THERETO, AS
DEMONSTRATED BY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY.
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
8% SENIOR SUBORDINATED NOTE DUE 2000
$1,500,000.00 June 18, 1996
FOR VALUE RECEIVED, Virtual Open Network Environment Corporation,
a Delaware corporation (the "Company"), hereby promises to pay to the
order of JMI Equity Fund II, L.P., or registered assigns (hereinafter
referred to as the "Payee"), on or before June 18, 2000, the principal sum
of One Million, Five Hundred Thousand Dollars ($1,500,000.00) or such part
thereof as then remains unpaid and to pay interest from the date hereof on
the whole amount of said principal sum remaining from time to time unpaid
at the rate of eight percent (8%) per annum, such interest shall be
payable quarterly in arrears on the last day of March, June, September and
December in each year, the first such payment to be due and payable on
September 30, 1996, and at maturity or prior prepayment of the Notes in
full; provided, however, that if an Event of Default (as defined in the
Agreement (defined below) has occurred and is continuing, from and after
the date such Event of Default occurred the entire outstanding unpaid
principal balance of this Note and any matured but unpaid interest from
time to time due thereon shall bear interest, payable on demand, at the
rate twelve percent (12%) per annum, or such lower rate as then may be the
maximum rate permitted by applicable law; and further provided, however,
that upon the cessation or cure of such Event of Default, if no other
Event of Default is then continuing, this Note shall again bear interest
at the rate of eight percent (8%) per annum. Principal and interest shall
be payable in lawful money of the United States of America, in immediately
available funds, at the principal office of the Payee or at such other
place as the legal holder may designate from time to time in writing to
the Company. Interest shall be computed on the basis of a 360-day year
and a 30-day month, counting actual days elapsed.
This Note is issued pursuant to, and is entitled to the benefits
of, (i) the Senior Subordinated Note and Warrant Purchase Agreement dated
as of June 18, 1996 between the Company and the Payee (as the same may be
amended from time to time, hereinafter referred to as the "Agreement"),
and (ii) the Subordination Agreement dated as of June 18, 1996 among the
Company, the Payee, James F. Chen and Hai Hua Cheng (as the same may be
amended from time to time, hereinafter referred to as the "Subordination
Agreement"). Each holder of this Note, by his acceptance hereof, agrees
to be bound by the provisions of the Agreement and the Subordination
Agreement. Capitalized terms used but not otherwise defined in this Note
shall have the meanings assigned to them in the Agreement.
Payments of principal, interest and premium, if any, on this Note
shall be made without setoff or counterclaim directly by check duly mailed
<PAGE>
or delivered to the Payee at its address referred to in Section 9.03 of
the Agreement, without any presentment or notation of payment, except that
prior to any transfer of this Note, the holder hereof shall endorse on
this Note a record of the date to which interest has been paid and all
payments made on account of principal of this Note. The Company shall
have no duty to pro rate interest payments with respect to this Note and
shall pay the entire amount of any interest payment on this Note solely to
the holder of this Note as reflected on the Company's transfer records as
of the date of such payment.
On the earliest to occur of: (1) a Qualified IPO; (2) a Change
in Control; or (3) sale of all or substantially all of the assets of the
Company, the Company shall prepay, without premium, this Note in whole,
together with interest due hereon through the date of prepayment. This
Note may also be prepaid in whole or in part at any time without premium
or penalty.
Nothing in the Agreement or in this Note shall require the
Company to pay interest at a rate in excess of the maximum rate permitted
by applicable law.
Whenever any payment to be made shall be due on a day that is not
a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of payment of interest due.
The indebtedness evidenced by this Note and the rights and
remedies of the Payee under the Agreement and the Operative Documents
shall be subordinate and junior to certain indebtedness of the Company to
the Bank. This Note will be senior subordinated indebtedness of the
Company ranking pari passu with all other existing and future senior
subordinated indebtedness and senior to all existing and future
subordinated indebtedness of the Company.
As further provided in, and provided by, the Agreement, upon
surrender of this Note for transfer or exchange, a new Note or new Notes
of the same tenor dated the date to which interest has been paid on the
surrender Note and in an aggregate principal amount equal to the unpaid
principal amount of the Note so surrendered will be issued to, and
registered in the name of, the transferee or transferees. The Company may
treat the person in whose name this Note is registered as the owner hereof
for the purpose of receiving payment and for all other purposes.
In case any payment herein provided for shall not be paid when
due, the Company promises to pay all cost of collection, including all
reasonable attorney's fees.
This Note shall be governed by, and construed in accordance with,
the laws of the State of Maryland, without giving effect to the principles
of conflicts of laws thereof.
The Company and all endorsers and guarantors of this Note hereby
waive presentment, demand, notice of nonpayment, protest and all other
<PAGE>
demands and notices in connection with the delivery, acceptance,
performance or enforcement of this Note.
IN WITNESS WHEREOF, the Company has executed this Note on the
date first above written.
VIRTUAL OPEN NETWORK ENVIRONMENT
CORPORATION
By /s/ James F. Chen
------------------------------
Name: James F. Chen
Title: President/CEO
405JGP4739/12.227116-3
<PAGE>
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES
LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE
WITH RESPECT THERETO, AS DEMONSTRATED BY OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY.
COMMON STOCK PURCHASE WARRANT
Warrant No. W-1 Number of Shares: 100,000
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
Void after June 18, 2006
1. Issuance. This Warrant is issued to JMI Equity Fund II,
L.P., a Delaware limited partnership, by Virtual Open Network Environment
Corporation, a Delaware corporation (hereinafter with its successors
called the "Company").
-------
2. Purchase Price; Number of Shares. Subject to the terms and
conditions hereinafter set forth, the registered holder of this Warrant
(the "Holder"), commencing on the date hereof, is entitled upon surrender
of this Warrant with the subscription form annexed hereto duly executed,
at the principal office of the Company, or such other office as the
Company shall notify the Holder of in writing, to purchase from the
Company at a price (the "Purchase Price") of $.01 per share, 100,000 fully
paid and nonassessable shares of Common Stock, par value $.001 per share,
of the Company (the "Common Stock"). Until such time as this Warrant is
exercised in full or expires, the Purchase Price and the securities
issuable upon exercise of this Warrant are subject to adjustment as
hereinafter provided.
3. Payment of Purchase Price. The Purchase Price may be paid
(i) in cash or by check, (ii) by the surrender by the Holder to the
Company of any promissory notes or other obligations issued by the
Company, with all such notes and obligations so surrendered being credited
against the Purchase Price in an amount equal to the principal amount
thereof plus accrued interest to the date of surrender, (iii) through
delivery by the Holder to the Company of other securities issued by the
Company, with such securities being credited against the Purchase Price in
an amount equal to the fair market value thereof, as determined in
accordance with Section 4, or (iv) by any combination of the foregoing.
The Board shall promptly respond in writing to an inquiry by the Holder as
to the fair market value of any securities the Holder may wish to deliver
to the Company pursuant to clause (iii) above.
<PAGE>
Warrant--Page 2
4. Net Issue Election. The Holder may elect to receive, without
the payment by the Holder of any additional consideration, shares equal to
the value of this Warrant or any portion hereof by the surrender of this
Warrant or such portion to the Company, with the net issue election notice
annexed hereto duly executed, at the office of the Company. Thereupon,
the Company shall issue to the Holder such number of fully paid and
nonassessable shares of Common Stock as is computed using the following
formula:
X = Y (A-B)
-------
A
where
X = the number of shares to be issued to the Holder pursuant
to this Section 4.
Y = the number of shares covered by this Warrant in respect
of which the net issue election is made pursuant to this
Section 4.
A = the fair market value of one share of Common Stock, as
determined in accordance with this Section 4, as at the
time the net issue election is made pursuant to this
Section 4.
B = the Purchase Price in effect under this Warrant at the
time the net issue election is made pursuant to this
Section 4.
The "fair market value" of a share of Common Stock shall be
determined as follows:
(a) If the Common Stock is publicly traded on a
particular measurement date, the fair market value of a share of Common
Stock on such measurement date shall be: (i) the average of the closing
sale prices for the Common Stock, as quoted on any national securities
exchange or the Nasdaq National Market on which such stock shall be listed
or designated for trading, or (ii) if the Common Stock is not then traded
on a national securities exchange or on the Nasdaq National Market, but is
quoted on the National Association of Securities Dealers, Inc. s Automated
Quotation System ("NASDAQ"), the average of the closing bid and asked
prices for the Common Stock as reported on NASDAQ, in each case for the
five trading days ending on the second trading day prior to the
measurement date; provided, however, that if the Company shall declare a
dividend or distribution (as discussed in Section 9) payable to holders of
the Common Stock of record on any date during the period (inclusive)
beginning with the first date of any period of trading days utilized to
determine a fair market value and ending on the date immediately prior to
the measurement date, then the calculation of fair market value shall be
appropriately discounted to remove the effect of the value of such
<PAGE>
Warrant--Page 3
dividend or distribution from the calculation of the fair market value for
dates prior to and including the record date.
(b) If the Common Stock is not publicly traded on a
particular measurement date, the fair market value of a share of Common
Stock as of such measurement date shall be determined by the Board of
Directors of the Company acting in good faith (taking into account any
recent corporate events involving a determination of value for the
Company's securities (e.g., the closing of an offering of securities or
the granting of incentive stock options)).
The Board shall promptly respond in writing to an inquiry by the
Holder as to the fair market value of one share of Common Stock.
5. Partial Exercise. This Warrant may be exercised in part, and
the Holder shall be entitled to receive a new warrant, which shall be
dated as of the date of this Warrant, covering the number of shares in
respect of which this Warrant shall not have been exercised.
6. Issuance Date. The person or persons in whose name or names
any certificate representing shares of Common Stock is issued hereunder
shall be deemed to have become the holder of record of the shares
represented thereby as at the close of business on the date this Warrant
is exercised with respect to such shares, whether or not the transfer
books of the Company shall be closed.
7. Expiration Date; Automatic Exercise. This Warrant shall
expire at the close of business on June 18, 2006, and shall be void
thereafter. Notwithstanding the foregoing, this Warrant shall
automatically be deemed to be exercised in full pursuant to the provisions
of Section 4, without any further action on behalf of the Holder, upon the
earliest of (i) June 30, 1996, (ii) immediately prior to the closing of
the Company s initial public offering of shares of Common Stock or (iii)
immediately prior to the time this Warrant would otherwise expire pursuant
to the preceding sentence.
8. Reserved Shares; Valid Issuance. The Company covenants that
it will at all times from and after the date hereof reserve and keep
available such number of its authorized shares of Common Stock, free from
all preemptive or similar rights therein, as will be sufficient to permit
the exercise of this Warrant in full. The Company further covenants that
such shares as may be issued pursuant to the exercise of this Warrant
will, upon issuance, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to
the issuance thereof.
9. Dividends. If the Company shall subdivide the Common Stock,
by split-up or otherwise, or combine the Common Stock, or issue additional
shares of Common Stock in payment of a stock dividend on the Common Stock,
the number of shares issuable on the exercise of this Warrant shall
forthwith be proportionately increased in the case of a subdivision or
stock dividend, or proportionately decreased in the case of a combination,
<PAGE>
Warrant--Page 4
and the Purchase Price shall forthwith be proportionately decreased in the
case of a subdivision or stock dividend, or proportionately increased in
the case of a combination. The Company shall not pay any dividend or make
any other distribution upon the Common Stock payable in cash, property or
securities of the Company other than Common Stock or in securities of a
corporation other than the Company.
10. Mergers and Reclassifications. If there shall be any
reclassification, capital reorganization or change of the Common Stock
(other than as a result of a subdivision, combination or stock dividend
provided for in Section 9), or any consolidation of the Company with, or
merger of the Company into, another corporation or other business
organization (other than a consolidation or merger in which the Company is
the continuing corporation and which does not result in any
reclassification or change of the outstanding Common Stock), or any sale
or conveyance to another corporation or other business organization of all
or substantially all of the assets of the Company, then, as a condition of
such reclassification, reorganization, change, consolidation, merger, sale
or conveyance, lawful provisions shall be made, and duly executed
documents evidencing the same from the Company or its successor shall be
delivered to the Holder, so that the Holder shall thereafter have the
right to receive, at a total price not to exceed that payable upon the
exercise of this Warrant in full, the kind and amount of shares of stock
and other securities and property receivable upon such reclassification,
reorganization, change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock which might have been
received by the Holder immediately prior to such reclassification,
reorganization, change, consolidation, merger, sale or conveyance if the
Holder had exercised this Warrant in full prior thereto, and in any such
case appropriate provisions shall be made with respect to the rights and
interest of the Holder to the end that the provisions hereof (including
without limitation, provisions for the adjustment of the Purchase Price
and the number of shares issuable hereunder) shall thereafter be
applicable in relation to any shares of stock or other securities and
property thereafter deliverable upon exercise hereof.
11. Adjustments for Issuances Below Purchase Price. In case the
Company shall at any time or from time to time issue or sell any shares of
Common Stock (other than (i) shares issued in transactions to which
Sections 9 or 10 of this Warrant apply, (ii) shares issuable pursuant to
obligations existing on the date hereof and (iii) up to 4,028,444 shares
of Common Stock (appropriately adjusted for subdivisions, combinations,
stock dividends and the like) issued to employees, officers, directors or
consultants of the Company in connection with their service to the
Company, plus such number of shares of Common Stock (as so adjusted) which
are repurchased by the Company from such persons pursuant to contractual
rights held by the Company and at repurchase prices not exceeding the
respective original purchase prices paid by such persons to the Company
therefor) for a consideration per share less than the Purchase Price in
effect for this Warrant immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale, the Purchase Price shall
(until another such issue or sale) be reduced to the price at which the
<PAGE>
Warrant--Page 5
Company issued or sold such shares of Common Stock. Further, the number
of shares purchasable hereunder shall be increased to a number determined
by dividing (i) the number of shares purchasable hereunder immediately
prior to such issue or sale, multiplied by the Purchase Price hereunder
immediately prior to such event, by (ii) the Purchase Price in effect
immediately after the foregoing adjustment.
For the purpose of this Section 11, the following provisions
shall also be applicable:
A. In case the Company shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such
warrants, rights or options being called "Options" and such
convertible or exchangeable stock or securities being called
"Convertible Securities"), at a price less than the Purchase
Price in effect immediately prior to the time of the offering of
such Options, all shares of Common Stock which the holders of
such Options shall be entitled to subscribe for or purchase
pursuant to such Options shall be deemed to be issued or sold as
of the date of the granting of such Options, as the case may be,
and the minimum aggregate consideration named in such Options for
the Common Stock or Convertible Securities covered thereby, plus
the consideration received by the Company for such Options, shall
be deemed to be the consideration actually received by the
Company (as of the date of the granting of such Options, as the
case may be) for the issue or sale of such shares.
B. In case the Company shall in any manner issue or sell
any Convertible Securities and the price per share for which
Common Stock is deliverable upon such conversion or exchange
(determined by dividing (i) the total minimum amount received or
receivable by the Company in consideration of the issue or sale
of such Convertible Securities, plus the total minimum amount of
premiums, if any, payable to the Company upon conversion or
exchange, by (ii) the total number of shares of Common Stock
necessary to effect the conversion or exchange of all such
Convertible Securities) shall be less than the Purchase Price in
effect immediately prior to the time of such issue or sale, then
such issue or sale shall be deemed to be an issue or sale (as of
the date of issue or sale of such convertible or exchangeable
shares or obligations) of the total maximum number of shares of
Common Stock necessary to effect the conversion or exchange of
all such Convertible Securities, and the total minimum amount
received or receivable by the Company in consideration of the
issue or sale of such Convertible Securities, plus the total
minimum amount of premiums, if any, payable to the Company upon
exchange or conversion, shall be deemed to be the consideration
actually received (as of the date of the issue or sale of such
<PAGE>
Warrant--Page 6
convertible or exchangeable shares or obligations) for the issue
or sale of such Common Stock.
C. If there shall be any change in (i) the minimum
aggregate consideration named in the Options, (ii) the
consideration received by the Company for such Options, (iii) the
price per share for which Common Stock is deliverable upon the
conversion or exchange of the Convertible Securities, (iv) the
number of shares which may be subscribed for or purchased
pursuant to the Options, or (v) the rate at which the Convertible
Securities are convertible into or exchangeable for Common Stock,
then the Purchase Price in effect at the time of such event shall
be readjusted to the Purchase Price which would have been in
effect at such time had such rights, options, or convertible or
exchangeable shares or obligations provided for such changed
consideration, price per share, number of shares, or rate of
conversion or exchange, as the case may be, at the time initially
offered, granted, issued or sold, but only if as a result of such
adjustment the Purchase Price then in effect hereunder is not
increased above $3.00 per share (appropriately adjusted to
reflect the occurrence of any event described in Section 9
hereto).
D. In case the Company shall declare a dividend or make
any other distribution upon any stock of the Company payable in
Common Stock (except for dividends or distributions upon the
Common Stock), Options or Convertible Securities, any Common
Stock, Options or Convertible Securities, as the case may be,
issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold at a price per share equal to
$.001.
E. In determining the amount of consideration received
by the Company for Common Stock, Options or Convertible
Securities, no deduction shall be made for expenses or
underwriting discounts or commissions paid by the Company. The
Board shall determine in good faith the fair value of the amount
of consideration other than money received by the Company upon
the issue by it of any of its securities. The Board shall, in
case any Common Stock, Options or Convertible Securities are
issued with other stock, securities or assets of the Company,
determine in good faith what part of the consideration received
therefor is applicable to the issue of the Common Stock, Options
or Convertible Securities.
F. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (i)
to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities or (ii) to subscribe for
or purchase Common Stock, Options or Convertible Securities, then
such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or
<PAGE>
Warrant--Page 7
sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
G. The disposition of any shares of Common Stock owned
or held by or for the account of the Company shall be considered
an issue or sale of Common Stock for the purpose of this
Section 11.
12. Fractional Shares. In no event shall any fractional share
of Common Stock be issued upon any exercise of this Warrant. If, upon
exercise of this Warrant as an entirety, the Holder would, except as
provided in this Section 12, be entitled to receive a fractional share of
Common Stock, then the Company shall issue the next higher number of full
shares of Common Stock, issuing a full share with respect to such
fractional share.
13. Certificate of Adjustment. Whenever the Purchase Price is
adjusted, as herein provided, the Company shall promptly deliver to the
Holder a certificate of a firm of independent public accountants setting
forth the Purchase Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
14. Notices of Record Date, Etc. In the event of:
(a) any taking by the Company of a record of the
holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or
other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right,
(b) any reclassification of the capital stock of
the Company, capital reorganization of the Company, consolidation
or merger involving the Company, or sale or conveyance of all or
substantially all of its assets, or
(c) any voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to
the Holder a notice specifying (i) the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right,
or (ii) the date on which any such reclassification, reorganization,
consolidation, merger, sale or conveyance, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of
which the holders of record in respect of such event are to be determined.
Such notice shall be mailed at least 20 days prior to the date specified
in such notice on which any such action is to be taken.
<PAGE>
Warrant--Page 8
15. Amendment. The terms of this Warrant may be amended,
modified or waived only with the written consent of the Company and the
Holder.
16. Warrant Register; Transfers, Etc.
---------------------------------
A. The Company will maintain a register containing the
name and address of the Holder. The Holder may change its
address as shown on the warrant register by written notice to the
Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may
be given by certified mail or delivered to the Holder at its
address as shown on the warrant register.
B. If this Warrant or the shares of Common Stock issued
or issuable upon exercise of this Warrant shall have been
registered under the Securities Act and applicable state
securities laws, or if such registration is not required, as
demonstrated by opinion of counsel satisfactory to the Company,
this Warrant may be transferred by the Holder with respect to any
or all of the shares purchasable hereunder. Upon surrender of
this Warrant to the Company, together with the assignment hereof
properly endorsed, for transfer of this Warrant as an entirety by
the Holder, the Company shall issue a new warrant of the same
denomination to the assignee. Upon surrender of this Warrant to
the Company, together with the assignment hereof properly
endorsed, by the Holder for transfer with respect to a portion of
the shares of Common Stock purchasable hereunder, the Company
shall issue a new warrant to the assignee, in such denomination
as shall be requested by the Holder hereof, and shall issue to
such Holder a new warrant covering the number of shares in
respect of which this Warrant shall not have been transferred.
C. In case this Warrant shall be mutilated, lost, stolen
or destroyed, the Company shall issue a new warrant of like tenor
and denomination and deliver the same (i) in exchange and
substitution for and upon surrender and cancellation of any
mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or
destroyed, upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft or destruction of such Warrant
(including a reasonably detailed affidavit with respect to the
circumstances of any loss, theft or destruction) and of indemnity
reasonably satisfactory to the Company, provided, however, that
so long as JMI Equity Fund, L.P. is the registered holder of this
Warrant, no indemnity shall be required other than its written
agreement to indemnify the Company against any loss arising from
the issuance of such new warrant.
17. No Impairment. The Company will not, by amendment of its
Amended and Restated Certificate of Incorporation or through any
reclassification, capital reorganization, consolidation, merger, sale or
<PAGE>
Warrant--Page 9
conveyance of assets, dissolution, liquidation, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at
all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in
order to protect the rights of the Holder.
18. Governing Law. The provisions and terms of this Warrant
shall be governed by and construed in accordance with the internal laws of
the State of Delaware.
19. Successors and Assigns. This Warrant shall be binding upon
the Company's successors and assigns and shall inure to the benefit of the
Holder's successors, legal representatives and permitted assigns.
20. Business Days. If the last or appointed day for the taking
of any action required or the expiration of any right granted herein shall
be a Saturday or Sunday or a legal holiday in Delaware, then such action
may be taken or right may be exercised on the next succeeding day which is
not a Saturday or Sunday or such a legal holiday.
Dated as of June 18, 1996 VIRTUAL OPEN NETWORK ENVIRONMENT
CORPORATION
By: /s/ James F. Chen
---------------------------
Attest: Title: President/CEO
___________________________
<PAGE>
Warrant--Page 10
SUBSCRIPTION
To:____________________ Date:_________________________
The undersigned hereby subscribes for __________ shares of Common
Stock covered by this Warrant. The certificate(s) for such shares shall
be issued in the name of the undersigned or as otherwise indicated below:
______________________________
Signature
______________________________
Name for Registration
______________________________
Mailing Address
NET ISSUE ELECTION NOTICE
To:____________________ Date:_________________________
The undersigned hereby elects under Section 4 to surrender the
right to purchase _______ shares of Common Stock pursuant to this Warrant.
The certificate(s) for the shares issuable upon such net issue election
shall be issued in the name of the undersigned or as otherwise indicated
below.
______________________________
Signature
______________________________
Name for Registration
______________________________
Mailing Address
<PAGE>
Warrant--Page 11
ASSIGNMENT
For value received ____________________________ hereby sells,
assigns and transfers unto
___________________________________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_______________________ its attorney to transfer the within Warrant on the
books of the within named Company with full power of substitution on the
premises.
Dated:_______________________
______________________________
In the Presence of:
_____________________________
<PAGE>
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES
LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS AVAILABLE WITH
RESPECT THERETO, AS DEMONSTRATED BY OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY.
COMMON STOCK PURCHASE WARRANT
Warrant No. W-2 Number of Shares: 400,000
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
Void after June 18, 2006
1. Issuance. This Warrant is issued to JMI Equity Fund II, L.P., a
Delaware limited partnership, by Virtual Open Network Environment
Corporation, a Delaware corporation (hereinafter with its successors
called the "Company").
-------
2. Purchase Price; Number of Shares. Subject to the terms and
conditions hereinafter set forth, the registered holder of this Warrant
(the "Holder"), commencing on the date hereof, is entitled upon surrender
of this Warrant with the subscription form annexed hereto duly executed,
at the principal office of the Company, or such other office as the
Company shall notify the Holder of in writing, to purchase from the
Company at a price (the "Purchase Price") of $3.00 per share, 400,000
fully paid and nonassessable shares of Common Stock, par value $.001 per
share, of the Company (the "Common Stock"). Until such time as this
Warrant is exercised in full or expires, the Purchase Price and the
securities issuable upon exercise of this Warrant are subject to
adjustment as hereinafter provided.
3. Payment of Purchase Price. The Purchase Price may be paid
(i) in cash or by check, (ii) by the surrender by the Holder to the
Company of any promissory notes or other obligations issued by the
Company, with all such notes and obligations so surrendered being credited
against the Purchase Price in an amount equal to the principal amount
thereof plus accrued interest to the date of surrender, (iii) through
delivery by the Holder to the Company of other securities issued by the
Company, with such securities being credited against the Purchase Price in
an amount equal to the fair market value thereof, as determined in
accordance with Section 4, or (iv) by any combination of the foregoing.
The Board shall promptly respond in writing to an inquiry by the Holder as
to the fair market value of any securities the Holder may wish to deliver
to the Company pursuant to clause (iii) above.
<PAGE>
Warrant - Page 2
4. Net Issue Election. The Holder may elect to receive, without
the payment by the Holder of any additional consideration, shares equal to
the value of this Warrant or any portion hereof by the surrender of this
Warrant or such portion to the Company, with the net issue election notice
annexed hereto duly executed, at the office of the Company. Thereupon,
the Company shall issue to the Holder such number of fully paid and
nonassessable shares of Common Stock as is computed using the following
formula:
X = Y (A-B)
-------
A
where
X = the number of shares to be issued to the Holder
pursuant to this Section 4.
Y = the number of shares covered by this Warrant in
respect of which the net issue election is made
pursuant to this Section 4.
A = the fair market value of one share of Common
Stock, as determined in accordance with this
Section 4, as at the time the net issue election
is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant
at the time the net issue election is made
pursuant to this Section 4.
The "fair market value" of a share of Common Stock shall be
determined as follows:
(a) If the Common Stock is publicly traded on a
particular measurement date, the fair market value of a share of Common
Stock on such measurement date shall be: (i) the average of the closing
sale prices for the Common Stock, as quoted on any national securities
exchange or the Nasdaq National Market on which such stock shall be listed
or designated for trading, or (ii) if the Common Stock is not then traded
on a national securities exchange or on the Nasdaq National Market, but is
quoted on the National Association of Securities Dealers, Inc.'s Automated
Quotation System ("NASDAQ"), the average of the closing bid and asked
prices for the Common Stock as reported on NASDAQ, in each case for the
five trading days ending on the second trading day prior to the
measurement date; provided, however, that if the Company shall declare a
dividend or distribution (as discussed in Section 9) payable to holders of
the Common Stock of record on any date during the period (inclusive)
beginning with the first date of any period of trading days utilized to
determine a fair market value and ending on the date immediately prior to
the measurement date, then the calculation of fair market value shall be
appropriately discounted to remove the effect of the value of such
<PAGE>
Warrant - Page 3
dividend or distribution from the calculation of the fair market value for
dates prior to and including the record date.
(b) If the Common Stock is not publicly traded on a
particular measurement date, the fair market value of a share of Common
Stock as of such measurement date shall be determined by the Board of
Directors of the Company acting in good faith (taking into account any
recent corporate events involving a determination of value for the
Company's securities (e.g., the closing of an offering of securities or
the granting of incentive stock options)).
The Board shall promptly respond in writing to an inquiry by the
Holder as to the fair market value of one share of Common Stock.
5. Partial Exercise. This Warrant may be exercised in part, and
the Holder shall be entitled to receive a new warrant, which shall be
dated as of the date of this Warrant, covering the number of shares in
respect of which this Warrant shall not have been exercised.
6. Issuance Date. The person or persons in whose name or names
any certificate representing shares of Common Stock is issued hereunder
shall be deemed to have become the holder of record of the shares
represented thereby as at the close of business on the date this Warrant
is exercised with respect to such shares, whether or not the transfer
books of the Company shall be closed.
7. Expiration Date; Automatic Exercise. This Warrant shall
expire at the close of business on June 18, 2006, and shall be void
thereafter. Notwithstanding the foregoing, this Warrant shall
automatically be deemed to be exercised in full pursuant to the provisions
of Section 4, without any further action on behalf of the Holder,
immediately prior to the time this Warrant would otherwise expire pursuant
to the preceding sentence.
8. Reserved Shares; Valid Issuance. The Company covenants that
it will at all times from and after the date hereof reserve and keep
available such number of its authorized shares of Common Stock, free from
all preemptive or similar rights therein, as will be sufficient to permit
the exercise of this Warrant in full. The Company further covenants that
such shares as may be issued pursuant to the exercise of this Warrant
will, upon issuance, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to
the issuance thereof.
9. Dividends. If the Company shall subdivide the Common Stock,
by split-up or otherwise, or combine the Common Stock, or issue additional
shares of Common Stock in payment of a stock dividend on the Common Stock,
the number of shares issuable on the exercise of this Warrant shall
forthwith be proportionately increased in the case of a subdivision or
stock dividend, or proportionately decreased in the case of a combination,
and the Purchase Price shall forthwith be proportionately decreased in the
case of a subdivision or stock dividend, or proportionately increased in
<PAGE>
Warrant - Page 4
the case of a combination. The Company shall not pay any dividend or make
any other distribution upon the Common Stock payable in cash, property or
securities of the Company other than Common Stock or in securities of a
corporation other than the Company.
10. Mergers and Reclassifications. If there shall be any
reclassification, capital reorganization or change of the Common Stock
(other than as a result of a subdivision, combination or stock dividend
provided for in Section 9), or any consolidation of the Company with, or
merger of the Company into, another corporation or other business
organization (other than a consolidation or merger in which the Company is
the continuing corporation and which does not result in any
reclassification or change of the outstanding Common Stock), or any sale
or conveyance to another corporation or other business organization of all
or substantially all of the assets of the Company, then, as a condition of
such reclassification, reorganization, change, consolidation, merger, sale
or conveyance, lawful provisions shall be made, and duly executed
documents evidencing the same from the Company or its successor shall be
delivered to the Holder, so that the Holder shall thereafter have the
right to receive, at a total price not to exceed that payable upon the
exercise of this Warrant in full, the kind and amount of shares of stock
and other securities and property receivable upon such reclassification,
reorganization, change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock which might have been
received by the Holder immediately prior to such reclassification,
reorganization, change, consolidation, merger, sale or conveyance if the
Holder had exercised this Warrant in full prior thereto, and in any such
case appropriate provisions shall be made with respect to the rights and
interest of the Holder to the end that the provisions hereof (including
without limitation, provisions for the adjustment of the Purchase Price
and the number of shares issuable hereunder) shall thereafter be
applicable in relation to any shares of stock or other securities and
property thereafter deliverable upon exercise hereof.
11. Adjustments for Issuances Below Purchase Price. In case the
Company shall at any time or from time to time issue or sell any shares of
Common Stock (other than (i) shares issued in transactions to which
Sections 9 or 10 of this Warrant apply, (ii) shares issuable pursuant to
obligations existing on the date hereof and (iii) up to 4,028,444 shares
of Common Stock (appropriately adjusted for subdivisions, combinations,
stock dividends and the like) issued to employees, officers, directors or
consultants of the Company in connection with their service to the
Company, plus such number of shares of Common Stock (as so adjusted) which
are repurchased by the Company from such persons pursuant to contractual
rights held by the Company and at repurchase prices not exceeding the
respective original purchase prices paid by such persons to the Company
therefor) for a consideration per share less than the Purchase Price in
effect for this Warrant immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale, the Purchase Price shall
(until another such issue or sale) be reduced to the price at which the
Company issued or sold such shares of Common Stock. Further, the number
of shares purchasable hereunder shall be increased to a number determined
<PAGE>
Warrant - Page 5
by dividing (i) the number of shares purchasable hereunder immediately
prior to such issue or sale, multiplied by the Purchase Price hereunder
immediately prior to such event, by (ii) the Purchase Price in effect
immediately after the foregoing adjustment.
For the purpose of this Section 11, the following provisions
shall also be applicable:
A. In case the Company shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such
warrants, rights or options being called "Options" and such
convertible or exchangeable stock or securities being called
"Convertible Securities"), at a price less than the Purchase
Price in effect immediately prior to the time of the offering of
such Options, all shares of Common Stock which the holders of
such Options shall be entitled to subscribe for or purchase
pursuant to such Options shall be deemed to be issued or sold as
of the date of the granting of such Options, as the case may be,
and the minimum aggregate consideration named in such Options for
the Common Stock or Convertible Securities covered thereby, plus
the consideration received by the Company for such Options, shall
be deemed to be the consideration actually received by the
Company (as of the date of the granting of such Options, as the
case may be) for the issue or sale of such shares.
B. In case the Company shall in any manner issue or sell
any Convertible Securities and the price per share for which
Common Stock is deliverable upon such conversion or exchange
(determined by dividing (i) the total minimum amount received or
receivable by the Company in consideration of the issue or sale
of such Convertible Securities, plus the total minimum amount of
premiums, if any, payable to the Company upon conversion or
exchange, by (ii) the total number of shares of Common Stock
necessary to effect the conversion or exchange of all such
Convertible Securities) shall be less than the Purchase Price in
effect immediately prior to the time of such issue or sale, then
such issue or sale shall be deemed to be an issue or sale (as of
the date of issue or sale of such convertible or exchangeable
shares or obligations) of the total maximum number of shares of
Common Stock necessary to effect the conversion or exchange of
all such Convertible Securities, and the total minimum amount
received or receivable by the Company in consideration of the
issue or sale of such Convertible Securities, plus the total
minimum amount of premiums, if any, payable to the Company upon
exchange or conversion, shall be deemed to be the consideration
actually received (as of the date of the issue or sale of such
convertible or exchangeable shares or obligations) for the issue
or sale of such Common Stock.
<PAGE>
Warrant - Page 6
C. If there shall be any change in (i) the minimum
aggregate consideration named in the Options, (ii) the
consideration received by the Company for such Options, (iii) the
price per share for which Common Stock is deliverable upon the
conversion or exchange of the Convertible Securities, (iv) the
number of shares which may be subscribed for or purchased
pursuant to the Options, or (v) the rate at which the Convertible
Securities are convertible into or exchangeable for Common Stock,
then the Purchase Price in effect at the time of such event shall
be readjusted to the Purchase Price which would have been in
effect at such time had such rights, options, or convertible or
exchangeable shares or obligations provided for such changed
consideration, price per share, number of shares, or rate of
conversion or exchange, as the case may be, at the time initially
offered, granted, issued or sold, but only if as a result of such
adjustment the Purchase Price then in effect hereunder is not
increased above $3.00 per share (appropriately adjusted to
reflect the occurrence of any event described in Section 9
hereto).
D. In case the Company shall declare a dividend or make
any other distribution upon any stock of the Company payable in
Common Stock (except for dividends or distributions upon the
Common Stock), Options or Convertible Securities, any Common
Stock, Options or Convertible Securities, as the case may be,
issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold at a price per share equal to
$.001.
E. In determining the amount of consideration received
by the Company for Common Stock, Options or Convertible
Securities, no deduction shall be made for expenses or
underwriting discounts or commissions paid by the Company. The
Board shall determine in good faith the fair value of the amount
of consideration other than money received by the Company upon
the issue by it of any of its securities. The Board shall, in
case any Common Stock, Options or Convertible Securities are
issued with other stock, securities or assets of the Company,
determine in good faith what part of the consideration received
therefor is applicable to the issue of the Common Stock, Options
or Convertible Securities.
F. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (i)
to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities or (ii) to subscribe for
or purchase Common Stock, Options or Convertible Securities, then
such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
<PAGE>
Warrant - Page 7
G. The disposition of any shares of Common Stock owned
or held by or for the account of the Company shall be considered
an issue or sale of Common Stock for the purpose of this
Section 11.
12. Fractional Shares. In no event shall any fractional share
of Common Stock be issued upon any exercise of this Warrant. If, upon
exercise of this Warrant as an entirety, the Holder would, except as
provided in this Section 12, be entitled to receive a fractional share of
Common Stock, then the Company shall issue the next higher number of full
shares of Common Stock, issuing a full share with respect to such
fractional share.
13. Certificate of Adjustment. Whenever the Purchase Price is
adjusted, as herein provided, the Company shall promptly deliver to the
Holder a certificate of a firm of independent public accountants setting
forth the Purchase Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
14. Notices of Record Date, Etc. In the event of:
---------------------------
(a) any taking by the Company of a record of the holders
of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other
distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right,
(b) any reclassification of the capital stock of the
Company, capital reorganization of the Company, consolidation or
merger involving the Company, or sale or conveyance of all or
substantially all of its assets, or
(c) any voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to
the Holder a notice specifying (i) the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right,
or (ii) the date on which any such reclassification, reorganization,
consolidation, merger, sale or conveyance, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of
which the holders of record in respect of such event are to be determined.
Such notice shall be mailed at least 20 days prior to the date specified
in such notice on which any such action is to be taken.
15. Amendment. The terms of this Warrant may be amended,
modified or waived only with the written consent of the Company and the
Holder.
<PAGE>
Warrant - Page 8
16. Warrant Register; Transfers, Etc.
---------------------------------
A. The Company will maintain a register containing the
name and address of the Holder. The Holder may change its
address as shown on the warrant register by written notice to the
Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may
be given by certified mail or delivered to the Holder at its
address as shown on the warrant register.
B. If this Warrant or the shares of Common Stock issued
or issuable upon exercise of this Warrant shall have been
registered under the Securities Act and applicable state
securities laws, or if such registration is not required, as
demonstrated by opinion of counsel satisfactorily to the Company,
this Warrant may be transferred by the Holder with respect to any
or all of the shares purchasable hereunder. Upon surrender of
this Warrant to the Company, together with the assignment hereof
properly endorsed, for transfer of this Warrant as an entirety by
the Holder, the Company shall issue a new warrant of the same
denomination to the assignee. Upon surrender of this Warrant to
the Company, together with the assignment hereof properly
endorsed, by the Holder for transfer with respect to a portion of
the shares of Common Stock purchasable hereunder, the Company
shall issue a new warrant to the assignee, in such denomination
as shall be requested by the Holder hereof, and shall issue to
such Holder a new warrant covering the number of shares in
respect of which this Warrant shall not have been transferred.
C. In case this Warrant shall be mutilated, lost, stolen
or destroyed, the Company shall issue a new warrant of like tenor
and denomination and deliver the same (i) in exchange and
substitution for and upon surrender and cancellation of any
mutilated Warrant, or (ii) in lieu of any Warrant lost, stolen or
destroyed, upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft or destruction of such Warrant
(including a reasonably detailed affidavit with respect to the
circumstances of any loss, theft or destruction) and of indemnity
reasonably satisfactory to the Company, provided, however, that
so long as JMI Equity Fund, L.P. is the registered holder of this
Warrant, no indemnity shall be required other than its written
agreement to indemnify the Company against any loss arising from
the issuance of such new warrant.
17. No Impairment. The Company will not, by amendment of its
Amended and Restated Certificate of Incorporation or through any
reclassification, capital reorganization, consolidation, merger, sale or
conveyance of assets, dissolution, liquidation, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at
all times in good faith assist in the carrying out of all such terms and
<PAGE>
Warrant - Page 9
in the taking of all such action as may be necessary or appropriate in
order to protect the rights of the Holder.
18. Governing Law. The provisions and terms of this Warrant
shall be governed by and construed in accordance with the internal laws of
the State of Delaware.
19. Successors and Assigns. This Warrant shall be binding upon
the Company's successors and assigns and shall inure to the benefit of the
Holder's successors, legal representatives and permitted assigns.
<PAGE>
Warrant - Page 10
20. Business Days. If the last or appointed day for the taking
of any action required or the expiration of any right granted herein shall
be a Saturday or Sunday or a legal holiday in Delaware, then such action
may be taken or right may be exercised on the next succeeding day which is
not a Saturday or Sunday or such a legal holiday.
Dated as of June 18, 1996 VIRTUAL OPEN NETWORK ENVIRONMENT
CORPORATION
By: /s/ James F. Chen
--------------------------
Attest: Title: President/CEO
___________________________
<PAGE>
Warrant - Page 11
SUBSCRIPTION
To:____________________ Date:_________________________
The undersigned hereby subscribes for __________ shares of Common
Stock covered by this Warrant. The certificate(s) for such shares shall
be issued in the name of the undersigned or as otherwise indicated below:
______________________________
Signature
______________________________
Name for Registration
______________________________
Mailing Address
NET ISSUE ELECTION NOTICE
To:____________________ Date:_________________________
The undersigned hereby elects under Section 4 to surrender the
right to purchase _______ shares of Common Stock pursuant to this Warrant.
The certificate(s) for the shares issuable upon such net issue election
shall be issued in the name of the undersigned or as otherwise indicated
below.
______________________________
Signature
______________________________
Name for Registration
______________________________
Mailing Address
<PAGE>
Warrant - Page 12
ASSIGNMENT
For value received ____________________________ hereby sells,
assigns and transfers unto ______________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_______________________ its attorney to transfer the within Warrant on the
books of the within named Company with full power of substitution on the
premises.
Dated:_______________________
______________________________
In the Presence of:
_____________________________
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
COMPUTATION OF PRIMARY LOSS PER SHARE
For the period
February 16,
1993 (date of
inception) to Year Ended Three Months Ended
December 31, December 31, March 31,
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net (loss) . . . . . . . . . . . . . . (35,684) (406,288) (1,032,311) (132,291) (994,660)
Weighted average common shares
outstanding . . . . . . . . . . . . . . 7,265,753 10,003,143 12,388,918 11,794,710 12,797,032
Stock options issued within one year of
initial filing (using the treasury
stock method and the anticipated public 51,347 58,682 58,682 58,682 58,682
offering price of $6.00 per share) . . --------- ---------- ---------- ---------- ----------
Weighted average number of common 7,317,100 10,061,825 12,447,600 11,853,392 12,855,714
shares outstanding . . . . . . . . . . ========= ========== ========== ========== ==========
Net (loss) income per common share and (.00) (.04) (.08) (.01) (.08)
common share equivalent ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION
COMPUTATION OF FULLY DILUTED LOSS PER SHARE
For the period
February 16,
1993 (date of Years Ended Three Months Ended
inception) to December 31, March 31,
December 31, ----------------------- --------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net (loss) . . . . . . . . . . . . . (35,684) (406,288) (1,032,311) (132,291) (994,660)
Weighted average common shares
outstanding . . . . . . . . . . . . . 7,265,753 10,003,143 12,362,847 11,794,710 12,795,134
Stock options issued within one year
of initial filing (using the treasury
stock method and the anticipated
public offering price of $6.00 per 51,347 58,682 58,682 58,682 58,682
share) . . . . . . . . . . . . . . . --------- ---------- ---------- ---------- ----------
Weighted average number of common 7,317,100 10,061,825 12,421,529 11,853,392 12,853,816
shares outstanding . . . . . . . . . ========= ========== ========== ========== ==========
Net (loss) income per common share and (.00) (.04) (.08) (.01) (.08)
common share equivalent . . . . . . . ========= ========= ========= ========= ==========
</TABLE>
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on
Form S-1 of our report dated June 7, 1996, on our audits of the balance
sheets of Virtual Open Network Environment Corporation ("the Company"), as
of December 31, 1994 and 1995, and March 31, 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows
for the period from February 16, 1993 (date of inception) to December 31,
1993 and for each of the two years in the period ended December 31, 1995,
and the three month period ended March 31, 1996 and the related financial
statement schedule. We also consent to the references to our firm under
the caption "Experts" in the Prospectus.
Coopers & Lybrand L.L.P.
Washington, D.C.
June 20, 1996
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE ACCOMPANYING REGISTRATION
STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 MAR-31-1996
<PERIOD-START> JAN-1-1995 JAN-1-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 1,328 1,446
<SECURITIES> 0 0
<RECEIVABLES> 266 957
<ALLOWANCES> (23) (100)
<INVENTORY> 258 192
<CURRENT-ASSETS> 1,842 2,561
<PP&E> 234 719
<DEPRECIATION> (35) (48)
<TOTAL-ASSETS> 2,051 2,946
<CURRENT-LIABILITIES> 2,011 3,857
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> (152) (1,147)
<TOTAL-LIABILITY-AND-EQUITY> 2,051 2,946
<SALES> 1,104 1,022
<TOTAL-REVENUES> 1,104 1,022
<CGS> 377 322
<TOTAL-COSTS> 1,697 1,613
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 62 81
<INCOME-PRETAX> (1,032) (995)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,032) (995)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,032) (995)
<EPS-PRIMARY> (0.08) (0.08)
<EPS-DILUTED> (0.08) (0.08)
<PAGE>
</TABLE>
