<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996
REGISTRATION NO. 333-5419
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TRUSTED INFORMATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7372
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
51-0375640
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
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3060 WASHINGTON ROAD
GLENWOOD, MD 21738
(301) 854-6889
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN T. WALKER
TRUSTED INFORMATION SYSTEMS, INC.
3060 WASHINGTON ROAD
GLENWOOD, MD 21738
(301) 854-6889
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
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EDWIN M. MARTIN, JR., ESQUIRE GERALD S. TANENBAUM, ESQUIRE
PIPER & MARBURY L.L.P. CAHILL GORDON & REINDEL
1200 NINETEENTH STREET, N.W. 80 PINE STREET
WASHINGTON, DC 20036 NEW YORK, NY 10005
(202) 861-3900 (212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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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.
PROSPECTUS Subject to Completion
Dated August 30, 1996
2,900,000 Shares
tis LOGO
TRUSTED INFORMATION SYSTEMS, INC.
Common Stock
(par value $.01 per share)
All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being offered by Trusted Information Systems, Inc., a Delaware
corporation (the "Company"). See "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price of the Common
Stock will be between $11.00 and $13.00 per share. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. Upon completion of the Offering, the directors and executive
officers of the Company and trusts for the benefit of members of their families
will beneficially own approximately 43.0% of the Company's outstanding Common
Stock. See "Risk Factors -- Control by Directors and Officers" and "Principal
Stockholders."
The Common Stock has been submitted for approval for quotation on the Nasdaq
National Market under the symbol "TISX."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION 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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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Per Share $ $ $
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Total (3) $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $925,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 435,000 shares of Common Stock, on the same terms set forth above,
solely to cover over-allotments, if any. If such option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are being offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by Cahill
Gordon & Reindel, counsel for the Underwriters. It is expected that delivery of
the shares of Common Stock will be made against payment therefor on or about
, 1996 at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ
, 1996
<PAGE> 3
(GRAPHIC: DIAGRAM OF TODAY'S ELECTRONIC INFORMATION SECURITY CHALLENGES)
(GRAPHIC: DIAGRAM OF TIS'S ELECTRONIC INFORMATION SECURITY SOLUTIONS)
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person has been authorized to give any information or make any
representations not 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 or any Underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation.
No action has been or will be taken in any jurisdiction by the Company or any
Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Common Stock and the distribution of this Prospectus.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 27
Management............................ 44
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PAGE
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Certain Relationships and Related
Party Transactions.................. 50
Principal Stockholders................ 51
Description of Capital Stock.......... 52
Shares Eligible for Future Sale....... 54
Underwriting.......................... 55
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 56
Glossary of Terms..................... 57
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Company intends to furnish stockholders with annual reports containing
financial statements audited by its independent auditors and quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
The Trusted Information Systems, Inc. logo and Trusted Mach are registered
trademarks or servicemarks of the Company. Trademark registrations are pending
for TIS, Gauntlet, CKE, KRT, Key Recovery Technology and Building A World of
Trust. This Prospectus also includes trademarks, servicemarks and tradenames of
other companies.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
included elsewhere in this Prospectus. As used herein, the terms "Company" and
"TIS," unless otherwise indicated, refer to Trusted Information Systems, Inc.
and its subsidiary. Except as otherwise noted or the context otherwise requires,
all information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option and (ii) reflects an effective 24.538-for-1 stock split of
the Common Stock.
THE COMPANY
Trusted Information Systems, Inc., founded in 1983, provides comprehensive
security solutions for protection of computer networks, including global
Internet-based systems, internal networks and individual workstations and
laptops and is a leading provider of firewall products. The Company develops,
markets, licenses and supports the Gauntlet family of firewall products. These
products allow customers to create "trusted" networks that are protected from
access, theft and damage by unauthorized users from "untrusted" networks such as
the Internet and also enable the creation of virtual private networks ("VPNs")
through the encrypted transmission of information across untrusted networks. The
Company emphasizes the robustness of its security solutions, its long experience
with computer security and cryptography issues and its ability to provide
comprehensive solutions to customers. The Company also emphasizes its strong
reputation with corporate and government computer security professionals in the
United States and abroad as a pioneer in the field of computer network security.
The Company's Gauntlet Internet Firewall, introduced in 1994, was derived from
the TIS Internet Firewall Toolkit which has been available on the Internet since
1993 and has been downloaded more than 34,000 times to more than 15,000 discrete
locations worldwide. To date, more than 1,700 Gauntlet Internet Firewalls have
been licensed to customers, including the following or subsidiaries thereof:
Chrysler Corporation, Microsoft Corporation, NationsBank Corporation, Royal
Dutch Petroleum Co. and Swiss Bank Corporation. In January 1996, the Company
initiated a telemarketing program to upgrade TIS Internet Firewall Toolkit users
to the Gauntlet family of firewall products. These products use a proxy-based
application gateway system rather than a filtering gateway system, thus assuring
a higher level of security by prohibiting direct connections between networks
and by permitting only specifically approved application data to flow into and
out of the trusted network. Additionally, the Gauntlet family of firewall
products is built on an operating system that has been modified or "hardened"
for greater system security. TIS employs a "Crystal Box" approach in which
source code is distributed to allow for assurance reviews by the Company's
customers, resellers and other experts. The Gauntlet Internet Firewall is
available on an Intel Pentium-based platform as well as other platforms such as
Hewlett-Packard, Silicon Graphics and Sun Microsystems workstations. The Company
expects that its Gauntlet Internet Firewall versions supporting Sun
Microsystems' Solaris and Microsoft's Windows NT Server will be commercially
available by the end of 1996. The Gauntlet family of firewall products also
includes the recently introduced Gauntlet Intranet Firewall for internal
networks, Gauntlet Net Extender for remote sites and Gauntlet PC Extender for
desktop or mobile computer users.
Initially, the Company focused on consulting to major corporations such as
Digital Equipment Corporation, International Business Machines Corporation and
MCI Communications Corporation, and it has continued to provide computer
security consulting to major corporations throughout its history. The Company's
commercial consulting practice offers expert technology research services,
consultation on security issues associated with products and services, corporate
information security policy development, architectural and diagnostic security
analysis, firewall configuration and maintenance support and training for
corporate network and security administration personnel. These services are
carried out by a staff of 12 persons who average more than 15 years of
information security experience in both commercial and government organizations.
The Company believes that full commercial utilization of the Internet has been
hampered by lack of security and the vulnerability of the Internet and private
networks connected to the Internet. The very openness of the Internet means that
transmitted information and data stored in connected hosts are exposed to other
users who are able, in the absence of effective security measures, to gain
access to, manipulate and divert the data. This fundamental weakness requires
that organizations and individuals weigh security concerns against the perceived
commercial opportunities presented by millions of Internet users.
4
<PAGE> 6
To satisfy an organization's desire both to conduct commerce on public networks
and to keep hackers and viruses outside of its trusted network, firewalls are
designed to monitor and regulate the traffic passing into and out of the trusted
network. Organizations are vulnerable not only to unauthorized access to
information resources by outsiders, but also to abuse by employees within their
own organizations. The Company believes that firewalls and encryption are key
elements in providing solutions to these security issues. International Data
Corporation has recently forecast that revenues from new licenses of firewall
software will grow from approximately $160 million in 1995 to approximately $980
million in 2000.
To capitalize on this opportunity, the Company is pursuing a focused marketing
strategy to achieve greater market penetration through complementary domestic
and international distribution channels, including direct sales, resellers and
telesales. The Company's direct sales force markets its products and services to
Fortune 500 corporations and organizations with complex information security
needs, such as telecommunications companies, finance and banking institutions,
petrochemical companies and pharmaceutical companies. The Company's more than 50
resellers include Internet service providers such as BBN Internet Service Corp.,
Demon Internet Limited, PSINet, Inc., Unipalm Limited and UUNet Technologies,
Inc.; value added resellers and hardware vendors such as Bull Enterprise
Systems, Data General Corporation, HITACHI Ltd., Silicon Graphics, Inc. and
Sumitomo Electric Systems Company, Ltd.; system integrators such as AvantComp
Oy, Conjungi Corporation, Fujitsu Systems Business of Canada, Inc. and Media
Communications STM AB; and security product vendors such as Hanil Telecom Co.,
Ltd., Mergent International, Inc. and Virtual Open Network Environment
Corporation ("V-One").
Prior to founding TIS in 1983, Stephen T. Walker spent 20 years working on
computer security issues at the National Security Agency ("NSA"), the Advanced
Research Projects Agency ("ARPA") and the Office of the Secretary of Defense.
While working for the U.S. Department of Defense, Mr. Walker was responsible for
the development of network security standards and policies, as well as for the
establishment of the Department of Defense Computer Security Initiative, the
first comprehensive attempt in the Department of Defense at managing computer
security systems solutions. Mr. Walker is widely recognized as a pioneer in the
field of computer network security. He has testified before Congress as an
expert witness on these issues on numerous occasions and has played an
instrumental role in assisting the U.S. government to formulate encryption
export policy. Mr. Walker's experience is complemented by other members of the
Company's senior management team who average over 20 years of experience working
on computer security and networking issues in industry and government.
In 1987, TIS began to perform consulting and research and development projects
for government agencies, including the NSA and ARPA. These activities have
contributed to the Company's in-depth understanding of the technologies, threats
and user requirements in computer security and have contributed to the
development of the TIS Internet Firewall Toolkit and the Gauntlet family of
firewall products. The Company continues to provide research and development and
consulting services to government agencies in areas such as next generation
firewalls, distributed trusted operating systems, Internet domain name services,
international cryptography and advanced cryptographic key handling and recovery
techniques.
The Company's position as an adviser and supplier to industry and the government
has enabled it to become a leader in developing a key escrow solution, based on
its proprietary Key Recovery Technology ("KRT"), to permit the export of
products with strong cryptography while protecting the interests of security and
law enforcement agencies. The Clinton administration policy, as outlined by the
Vice President on July 12, 1996, would link the relaxation of export controls to
systems that include key escrow. The Company has incorporated its Commercial Key
Escrow ("CKE") solution into its Gauntlet Internet Firewall. In January 1996,
the U.S. government granted the Company an export license for a particular
transaction involving the Gauntlet Internet Firewall using the DES algorithm (56
bits). This is the first export license granted because the encryption is
combined with a key escrow system. In June 1996, the U.S. government granted the
Company several export licenses to sell the Gauntlet Internet Firewall in order
to provide Global Virtual Private Network services.
The Company was incorporated in Maryland in 1983 and was reincorporated in
Delaware in 1996. The Company's principal executive offices are located at 3060
Washington Road, Glenwood, Maryland 21738. Its telephone number is (301)
854-6889. The Company's home page on the World Wide Web is www.tis.com.
5
<PAGE> 7
THE OFFERING
COMMON STOCK OFFERED................ 2,900,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING............................ 10,442,531 shares(1)
USE OF PROCEEDS..................... Working capital and other general
corporate purposes including expansion
of distribution capabilities, further
development of products and technology,
expansion of service and support
capabilities, repayment of short-term
borrowings and potential acquisitions.
DIVIDEND POLICY..................... The Company intends to retain its
earnings to fund development of its
business and does not anticipate paying
cash dividends in the foreseeable
future. See "Dividend Policy."
RISK FACTORS........................ For a discussion of certain
considerations relevant to an
investment in the Common Stock, see
"Risk Factors."
PROPOSED NASDAQ NATIONAL MARKET
SYMBOL.............................. "TISX"
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(1) Excludes 1,314,355 shares of Common Stock reserved for issuance under
outstanding stock options as of August 28, 1996. See "Management -- Employee
Stock Options Plans" and "-- Directors' Stock Option Plan" and Note 5 of Notes
to Consolidated Financial Statements.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data derived from the
consolidated financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements and notes thereto and
other financial information included elsewhere in this Prospectus.
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FISCAL YEAR(1) FIRST HALF(1)
In thousands, except per share data 1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA
Revenues
Government contracts......................... $5,191 $6,262 $8,343 $11,258 $12,327 $6,042 $5,352
Commercial products.......................... -- -- -- 1,003 4,271 1,412 3,732
Commercial consulting services............... 834 568 448 856 1,492 835 534
------ ------ ------ ------- ------- ------ ------
Total revenues............................. 6,025 6,830 8,791 13,117 18,090 8,289 9,618
Gross profit................................... 2,343 2,454 2,972 4,914 7,225 2,931 4,226
Income (loss) from operations.................. 213 262 192 1,271 2,353 787 (1,459)
Net income (loss).............................. 38 74 35 675 1,344 471 (920)
Net income (loss) per share.................... $ -- $ .01 $ -- $ .08 $ .15 $ .05 $ (.11)
Weighted average shares outstanding............ 8,563 8,419 8,369 8,526 8,885 8,750 8,110
</TABLE>
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JUNE 28, 1996
DECEMBER 29, AS
1995 ACTUAL ADJUSTED(2)
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(UNAUDITED)
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BALANCE SHEET DATA
Cash, cash equivalents and marketable securities.................. $ 54 $ 5,653 $33,412
Working capital................................................... 210 1,278 32,717
Total assets...................................................... 10,222 19,424 47,184
Total debt........................................................ 3,264 6,799 3,119
Shareholders' equity.............................................. 2,407 5,089 36,528
</TABLE>
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(1) The ending dates of these fiscal years are December 27, 1991, December 25,
1992, December 31, 1993, December 30, 1994 and December 29, 1995. The ending
dates of these first halves are June 30, 1995 and June 28, 1996.
(2) Adjusted to reflect the sale of 2,900,000 shares of Common Stock offered
hereby (assuming an initial public offering price of $12.00 per share) and the
application of a portion of the estimated net proceeds therefrom to repay
short-term borrowings. See "Use of Proceeds" and "Capitalization."
7
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered in evaluating the Company and its business before
purchasing shares of the Common Stock offered hereby.
TRANSITION TO COMMERCIAL PRODUCT VENDOR
Historically, the Company's principal business had been contract research and
development, primarily for U.S. government agencies or companies engaged in work
for U.S. government agencies. In addition, the Company performed consulting for
major companies. The Company introduced its Firewall Toolkit on the Internet in
October 1993 and announced its first commercial firewall product, the Gauntlet
Internet Firewall, in April 1994. The transition to a commercial product vendor
requires the Company to significantly expand its self-funded research and
development, to continually introduce new products and add features to existing
products, to enhance its domestic and international sales force and establish
additional distribution channels and to further expand its management team. In
addition, the Company must adapt to the demands of an emerging and rapidly
changing commercial market, intense competition and changing technology and
industry standards. There can be no assurance that the Company can make this
transition successfully or that the Company will be able to penetrate the
commercial markets in a manner sufficient to assure its success in the future.
The Company believes it is likely that, as a result of its transition from
government contract research and development to a commercial product vendor, its
historical financial performance will not be indicative of future performance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- TIS Strategy."
MANAGEMENT OF GROWTH
The Company has experienced changes in its operations which have placed
significant demands on the Company's administrative, operational, technical and
financial resources. The General Manager of the Commercial Division, the Chief
Financial Officer and the Vice President, Sales of the Commercial Division have
been with the Company for less than eight months. To compete effectively, both
in its domestic and international operations, and to manage future growth, if
any, the Company must continue to strengthen its operational, financial and
management information reporting systems, controls and procedures on a timely
basis and expand, train and manage its work force. There can be no assurance
that the Company will be able to take such actions successfully. The failure of
the Company's management team to effectively manage growth, should it occur,
could have a material adverse effect on the Company's financial condition or
results of operations.
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND LENGTHY
SALES CYCLE
The Company anticipates significant quarterly fluctuations in its operating
results in the future. The Company generally ships orders for commercial
products as they are received and, as a result, has little backlog for
commercial products. Quarterly revenues and operating results therefore depend
on the volume and timing of orders received during the quarter, which are
difficult to forecast. The Company may, like many companies in businesses
similar to the Company, receive a disproportionate share of orders late in the
fiscal quarterly period, which makes forecasting quarterly results even more
difficult. In addition, government contracts revenues and consulting services
revenues tend to fluctuate as projects, which may continue over several
quarters, are undertaken or completed. Operating results may also fluctuate on a
quarterly basis due to factors such as the demand for the Company's products,
the introduction of new products and product enhancements by the Company or its
competitors, market acceptance of new products introduced by the Company or its
competitors and the size, timing, cancellation or delay of customer orders,
including cancellation or delay in anticipation of new product introduction or
enhancement. The Company's quarterly operating results are also affected by the
budgeting cycles of customers, changes in the proportion of revenues
attributable to licenses and consulting fees, changes in the mix of products
sold, changes in the percentage of products sold through the Company's direct
sales force, changes in product pricing, changes in the development of the
Company's direct and indirect distribution channels, competitive conditions in
the industry and changes in general economic conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Due to 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. Regardless of the general outlook for the Company's
business, the announcement of quarterly operating results below analyst and
investor expectations could have a material and adverse effect on the price of
the Company's Common Stock.
SALES AND DISTRIBUTION RISKS
The Company currently has over 35 employees in direct commercial sales and
marketing, many of whom have been employed by the Company for less than a year.
In order to increase its direct sales effort, the Company will need to increase
the size of its internal sales and marketing staff and increase the staff's
productivity. 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 operation will
successfully compete against the more extensive and well funded sales and
marketing operations of many of the Company's current and future competitors.
The Company has approximately 50 resellers worldwide. There can be no assurance
that the Company will be able to retain its resellers or attract additional
resellers or that its resellers 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's resellers may carry competing product
offerings. There can be no assurance that any reseller will continue to
represent the Company's products. The inability to recruit, or the loss of,
important sales personnel or resellers could materially adversely affect the
Company's financial condition or results of operations. See
"Business -- Competition" and "-- Sales and Marketing."
RISKS ASSOCIATED WITH INFORMATION SECURITY MARKET
The market for the Company's software products is in an early stage of
development. 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,
could have a material adverse effect on the Company's financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
A well-publicized actual or perceived breach of network or computer security
could trigger a heightened awareness of computer abuse, resulting in an
increased demand for security products such as those offered by the Company.
Similarly, an actual or perceived breach of network or computer security at one
of the Company's customers, regardless of whether such breach is attributable to
the Company's products, could adversely affect the market's perception of the
Company and the Company's financial condition or results of operations. In
addition, although the effectiveness of the Company's products is not dependent
upon the secrecy of its proprietary technology or licensed technology, the
public disclosure of its proprietary technology could result in a perception of
breached security and reduced effectiveness of the Company's products, which
could have an adverse effect on the Company's financial condition or results of
operations.
NEW PRODUCT INTRODUCTIONS
The Gauntlet Internet Firewall was released commercially in April 1994, and the
other firewall products in the Gauntlet family were introduced in April 1996.
Each of the Gauntlet Internet Firewall, the Gauntlet Intranet Firewall, the
Gauntlet Net Extender and the Gauntlet PC Extender supports SunOS,
Hewlett-Packard and Berkeley Software Design, Inc. operating systems. Although
the Company's Gauntlet firewall products do not currently support Sun
Microsystems Solaris, Windows NT Server or Microsoft Windows 95, the Company
expects that its firewall products supporting these operating systems will be
commercially available by the end of 1996. See "Business -- Commercial Products
and Services." The Company is currently devoting significant resources toward
the development of versions of Gauntlet Internet firewall products that operate
on additional hardware platforms and operating systems, the development of Key
Recovery Technology ("KRT") products and the development of enhancements to
these families of products. There can be no assurance that the Company will
successfully complete the development of these products in a timely fashion,
that the Company will be able to develop versions of its products that operate
on the range of hardware platforms and operating systems currently anticipated
or that the Company's current or future products will satisfy the needs of the
information security market or achieve market
9
<PAGE> 11
acceptance or, if market acceptance is achieved, that the Company will be able
to maintain such acceptance for a significant period of time. Any inability of
the Company to develop products on a timely basis that address changing customer
requirements may require the Company to substantially increase development
expenditures or may result in a loss of market share to a competitor. There can
also be no assurance that security-related products or technologies developed by
others will not adversely affect the Company's competitive position or render
its products or technologies noncompetitive or obsolete. See
"Business -- Commercial Products and Services" and "-- Competition."
CHANGES IN TECHNOLOGY
The information security industry is characterized by rapid changes, including
frequent new product introductions, continuing advances in technology and
changes in customer requirements and preferences. The introduction of new
technologies or advances in techniques for gaining unauthorized network access
could render the Company's existing products obsolete or unmarketable. The
development cycle for the Company's new products may be significantly longer
than the Company's historical product development cycle, resulting in higher
development costs or a loss in market share. 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 require the Company to invest
resources in products that may not become profitable. There can be no assurance
that (i) the Company will be able to counter challenges to its current products;
(ii) the Company's future product offerings will keep pace with the
technological changes implemented by competitors or persons seeking to breach
information security; (iii) the Company's products will satisfy evolving
preferences of customers and prospects; or (iv) 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 financial condition or
results of operations. See "Business -- Commercial Products and Services."
DEPENDENCE ON THE INTERNET
The success of the Company's products and services will depend in large part
upon the development of an infrastructure for providing Internet access and
services. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be a
viable commercial marketplace. The Internet has experienced, and is expected to
continue to experience, significant, geometric growth in the number of users and
amount of traffic. There can be no assurance that the Internet infrastructure
will continue to be able to support the demands placed on it by this continued
growth. In addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols (for example, the
next-generation Internet Protocol) to handle increased levels of Internet
activity, or due to increased governmental regulation. If the necessary
infrastructure or complementary services or facilities are not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
results of operations or financial conditions could be materially adversely
affected. See "Business -- Industry Background."
RISKS OF DOING BUSINESS WITH THE U.S. GOVERNMENT
Historically, the Company has derived substantially all of its revenues from
contracts with departments and agencies of the U.S. government and government
contractors. The Company expects to continue to rely on existing and future
research and development contracts with agencies of the U.S. government for a
substantial part of the Company's revenues in the near future. The Company
believes that future government contracts will in part be dependent upon the
continued favorable reaction of government agencies to the research, development
and consulting capabilities of the Company. The Company's development contract
with the NSA, which accounted for approximately 36.8% and 41.9% of the Company's
government contracts revenues in 1995 and the first half of 1996, respectively,
is scheduled to expire in early 1997. There can be no assurance that the Company
will be able to procure an extension of this contract or additional contracts of
a similar magnitude. The NSA contract permits the NSA to award a fee as low as
1% of the Company's costs of development, and is subject to cancellation for the
convenience of the agency. Although the Company has been awarded more than 1%
and there have been no terminations of the
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<PAGE> 12
Company's government contracts in the past, there can be no assurance that
minimum fee awards or cancellations will not occur in the future. Reductions or
delays in federal funds available for projects the Company is performing could
also have an adverse impact on the Company's government 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. Any of the foregoing events could have
a material adverse effect on the Company's financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Advanced Research and Engineering."
COMPETITION
Competition in the information security market is intense and constantly
evolving, and the Company expects such competition to increase in the future.
The Company believes that significant competitive factors affecting this market
are depth of product functionality, product quality and performance, product
price, customer support, conformance to protocols and industry standards and
breadth of platform support. In addition, the ability to rapidly develop and
implement new products and features for the market is critical. The Company's
competitors include organizations that provide information security products
based upon approaches similar to and different from those employed by the
Company. There can be no assurance that the market for information security
products will not ultimately be dominated by approaches other than the
approaches marketed by the Company. See "Business -- Industry Background" and
"-- Competition."
Many of the Company's competitors and potential competitors have longer
operating histories, greater name recognition, a larger customer base and
significantly greater financial, marketing, technical and other competitive
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 can
the Company. There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements. Competition could
increase if new companies enter the market or if existing competitors expand
their product lines, including the addition by operating system vendors such as
Microsoft Corporation of firewalls in their operating system software products.
An increase in competition could result in price reductions and loss of market
share. Any resulting reduction in gross margins could have a material adverse
effect on the Company's financial condition or results of operations. Although
the Company believes it has certain technological and other advantages over its
competitors, maintaining such advantages will require continued investment by
the Company in research and development and sales and marketing. There can be no
assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological advances
necessary to maintain such competitive advantages. In addition, current and
potential competitors have established or may in the future establish
collaborative relationships among themselves or with third parties, including
third parties with whom the Company has strategic relationships, to increase the
ability of their products to address the security needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. If this were
to occur, the Company's financial condition or results of operations could be
materially adversely affected. See "Business -- Competition."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company intends from time to time to evaluate potential acquisitions of
businesses, products and technologies that could complement or expand the
Company's business. At the current time, the Company has no plans, agreements or
commitments for any such acquisitions and is not engaged in any negotiations
with respect thereto. In the event the Company identifies an appropriate
acquisition candidate, there is no assurance that the Company would be able to
successfully negotiate the terms of any such acquisition, finance such
acquisition and integrate such acquired business, products or technologies into
the Company's existing business and operations. Furthermore, the integration of
an acquired business could cause a diversion of management time and resources.
There can be no assurance that a given acquisition, when consummated, would not
materially adversely affect the Company's
11
<PAGE> 13
financial condition or results of operations. See "Use of Proceeds." If the
Company proceeds with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of the Company's available
cash (including proceeds of the Offering) could be used to consummate the
acquisitions. If the Company consummates one or more significant acquisitions in
which the consideration consists of stock, or is financed with the proceeds of
the issuance of stock, stockholders of the Company could suffer a significant
dilution of their interests in the Company.
RISKS OF ERROR OR FAILURES
Products as complex as those offered by the Company may contain undetected
errors, failures or bugs when first introduced or when new versions are
released. Many companies offering software products have in the past discovered
failures and bugs in certain of their product offerings and have experienced
delays or lost revenues during the period required to correct these errors. The
computer technology environment is characterized by a wide variety of standard
and non-standard configurations that make pre-release testing for programming or
compatibility errors very difficult and time-consuming, especially with the many
configurations and variations of equipment and operating systems in computer
networks. Furthermore, there can be no assurance that, despite testing by the
Company and by others, errors, failures or bugs will not be found in new
products or releases after commencement of commercial shipments by the Company.
Errors, failures or bugs in the Company's products could result in adverse
publicity, in product returns, in loss of or delay in market acceptance of the
Company's products or in claims by the customer or others against the Company.
Alleviating such problems could require significant expenditures of capital and
resources by the Company and could cause interruptions, delays or cessation of
service to the Company's customers. The Company attempts to limit its liability
to customers, including liability arising from a failure of the security
features contained in the Company's products, through contractual limitations of
warranties and remedies. However, some courts have held similar contractual
limitations of liability, or the "shrink-wrap licenses" in which they sometimes
are embodied, to be unenforceable. Accordingly, there can be no assurance that
such limitations will be enforced. The Company does not currently carry product
liability insurance. The consequences of errors, failures or bugs in the
Company's products could have a material adverse effect on the Company's
financial condition or results of operations. See "Business -- Commercial
Products and Services."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product development
personnel. These key personnel include Stephen T. Walker, Martha A. Branstad,
Ronald W. Kaiser, Steven B. Lipner, Homayoon Tajalli and Harvey L. Weiss. The
Company has no employment agreement with any of its employees. The loss of the
services of any key employee could adversely affect the Company's financial
condition or results of operations. The Company believes that its future success
will depend in large part upon its ability to attract and retain highly skilled
managerial, sales, marketing and product development personnel. The Company
requires consulting services and product development personnel who are highly
technically trained in the field of information security and the competition for
such individuals is intense. The Company has at times experienced, and continues
to experience, difficulty in recruiting qualified personnel. Competition for
qualified personnel in the software industry is intense, and there can be no
assurance that the Company will be successful in retaining its key employees or
that it can attract or retain additional skilled personnel as required. See
"Management."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales outside North America accounted for approximately 2.4%, 7.9% and 8.5% of
the Company's total revenues in 1994, 1995 and the first half of 1996,
respectively. Management expects that in the future sales outside North America
will generate a larger portion of the Company's total revenues. The Company's
international business may be subject to a variety of risks, including costs
relating to the start-up of direct operations in certain countries or regions,
delays in expanding its international distribution channels, difficulties in
collecting international accounts receivable from distributors or resellers and
increased costs associated with maintaining international marketing efforts.
Some of the Company's international sales are denominated in the local currency
of the country in which the sale was made, and in those cases the Company is
subject to the risks associated with fluctuations in currency
12
<PAGE> 14
exchange rates. A decrease in the value of any of these foreign currencies
relative to the U.S. dollar could affect the profitability in U.S. dollars of
the Company's products sold in these markets. In addition, the Company is
subject to the usual risks of doing business abroad, including increases in duty
rates, the introduction of non-tariff barriers and difficulties in enforcement
of intellectual property rights. There can be no assurance that these factors
will not have an adverse effect on the Company's financial condition or results
of operations. See "Business -- Sales and Marketing."
EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS
The Company's international sales and operations may be subject to risks such as
the imposition of governmental controls, new or changed export license
requirements, restrictions on the export of critical technology, trade
restrictions and changes in tariffs. While the Company believes its products are
designed to meet the regulatory standards of foreign markets, any inability to
obtain foreign regulatory approvals on a timely basis could have a material
adverse effect on the Company's financial condition or results of operations.
Certain of the Company's products are subject to export controls under U.S. law,
and the Company believes it has obtained all necessary export approvals when
required. There can be no assurance, however, that the list of products and
countries for which export approval is required, and the regulatory policies
with respect thereto, will not be revised from time to time. The inability of
the Company to obtain required approvals under these regulations could
materially adversely affect the ability of the Company to make international
sales. For example, because of U.S. governmental controls on the exportation of
encryption technology, the Company is unable to export some of its products with
the most robust information security encryption technology. As a result, foreign
competitors facing less stringent controls on their products may be able to
compete more effectively than the Company in the global information security
market. There can be no assurance that these factors will not have a material
adverse effect on the Company's financial condition or results of operation. See
"Business -- Industry Background," "-- Commercial Products and Services" and
"-- Regulatory Matters."
The Company has been a leader in developing a key escrow solution to enable the
interests of security and law enforcement agencies to be protected while
permitting the export of products with strong cryptography. The U.S. government,
both in the context of executive branch decision-making and pending legislation
in the Congress, is actively considering a variety of decisions regarding
cryptography export policy. The Clinton administration policy, as outlined by
the Vice President on July 12, 1996, would link the relaxation of export
controls to systems that include key escrow. However, certain parties, including
companies in the computer industry and members of the U.S. Congress, and a
recent report prepared for the National Research Council of the National Academy
of Sciences call for removing export controls on cryptographic products that use
the industry standard DES algorithm (56 bits). To the extent that the government
either decides not to permit the export of such products with key escrow or
decides to permit the export of such products without key escrow, those
decisions could have an adverse impact on the development of a market for the
CKE products the Company plans to introduce in the future.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is dependent in part on its proprietary technology. TIS
relies on a combination of patent, trade secret, copyright and trademark laws,
non-disclosure agreements and contractual provisions to establish and protect
its proprietary rights. The Company has received one patent and has three
pending domestic patent applications and two pending international patent
applications pursuant to the Patent Cooperation Treaty (PCT) on its KRT and
computer security technology. The Company has received notice from the U.S.
Patent and Trademark Office that two of the three pending domestic patents will
issue in September 1996. The Company has not selected any particular foreign
countries in which to file patent applications based upon these PCT applications
and intends to make such selections as appropriate in the future. The Company
uses a printed "shrink-wrap" license for users of its products in order to
protect certain of its copyrights and trade secrets. The Company attempts to
protect its trade secrets and other proprietary information through agreements
with suppliers, non-disclosure and non-competition agreements with employees and
consultants and other security measures.
There can be no assurance that the Company will seek patents on aspects of its
technology relating to its information security products, that any such patents
will issue or that any such additional patents will be sufficiently broad to
protect the Company's technology relating to its information security products.
The status of computer-related
13
<PAGE> 15
patents involves complex legal and factual questions and the breadth of claims
allowed is uncertain. Accordingly, there can be no assurance that patent
applications filed by the Company will result in patents being issued or that
its existing patent, and any patents that may be issued to it in the future,
will afford protection against competitors with similar technology; nor can
there be any assurance that patents issued to the Company will not be infringed
upon or designed around by others or that others will not obtain patents that
the Company would need to license or design around. If existing or future
patents containing broad claims are upheld by the courts, the holders of such
patents might be in a position to require companies to obtain licenses. There
can be no assurance that licenses that might be required for the Company's
products would be available on reasonable terms, if at all.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult, and, while the Company is unable to
determine the extent to which piracy of its software products exists, such
piracy can be expected to be a persistent problem, particularly in international
markets and as a result of the growing use of the Internet. Some courts have
held that shrink-wrap licenses, because they are not signed by the licensee, are
not enforceable. The laws of Maryland, which the shrink-wrap licenses purport to
make the governing law, are unclear on this subject. There can also be no
assurance that the Company's trade secrets or confidentiality agreements will
provide meaningful protection of the Company's proprietary information.
Furthermore, 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 or other
rights owned by others. The Company's inability to protect its proprietary
rights could have a material adverse effect on the Company's financial condition
or results of operations.
As the number of information security products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to claims of infringement or
misappropriation of the intellectual property or proprietary rights of others.
There can be no assurance that third parties will not assert infringement or
misappropriation claims against the Company in the future with respect to
current or future products. Further, the Company may be subject to additional
risk as it 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 such countries, and technology developed
in such countries may not be protectable in jurisdictions where protection is
ordinarily available.
Any claims or litigation, with or without merit, to defend or enforce the
Company's intellectual property could be costly and could result in a diversion
of management's attention, which could have a material adverse effect on the
Company's financial condition or results of operations. Adverse determinations
in such claims or litigation could also have a material adverse effect on the
Company's financial condition or results of operations. See "Business --
Proprietary Information and Intellectual Property."
CONTROL BY DIRECTORS AND OFFICERS
Upon completion of this Offering, the Company's officers and directors and
trusts for the benefit of members of their families will beneficially own
approximately 43.0% of the Company's outstanding Common Stock. As a practical
matter, these stockholders, if acting together, would have the ability to elect
the Company's directors and to determine the outcome of corporate actions
requiring stockholder approval. This concentration of ownership may have the
effect of delaying or preventing a change in control of the Company. See
"Management" and "Principal Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop or be
sustained or that the purchasers of the Common Stock will be able to resell
their Common Stock at prices equal to or greater than the initial public
offering price. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Representatives of
the Underwriters and may not reflect the market price of the Common Stock after
the Offering. See "Underwriting" for a discussion of factors considered in
determining the initial public offering price. The trading price of the Common
Stock could be subject to wide fluctuations in response to quarterly variations
in operating results,
14
<PAGE> 16
announcements of technological innovations or new products by the Company or its
competitors, changes in financial estimates by securities analysts, market
conditions and general trends in the technology industry and other events or
factors. In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Common Stock. See "Underwriting."
SUBSTANTIAL AND IMMEDIATE DILUTION
Investors participating in the Offering will incur immediate, substantial
dilution of $8.50 per share in the net tangible book value of their shares as
the Offering at an assumed offering price of $12.00 will increase the net
tangible book value per share from $0.68 to $3.50, as compared with the average
price paid by existing stockholders of $0.0497. To the extent outstanding
options to purchase the Common Stock are exercised, there will be further
dilution. See "Dilution."
EFFECT OF CERTAIN CHARTER PROVISIONS
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of preferred stock (the "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 stockholders. 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 outstanding voting stock of the Company. The Company has no
current plans to issue shares of Preferred Stock. Further, certain provisions of
the Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. The Company is subject to the anti-takeover provisions of Section
of 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
See "Description of Capital Stock -- Preferred Stock," "-- Certain Provisions of
the Company's Certificate of Incorporation and Bylaws" and "-- Section 203 of
Delaware General Corporation Law."
In addition, the Company's Certificate of Incorporation contains other
provisions that may have the effect of delaying or preventing a change in
control of the Company: (i) a classified Board of Directors and (ii) a
limitation on stockholder action by written consent. See "Description of Capital
Stock -- Certain Provisions of the Company's Certificate of Incorporation and
Bylaws." All of these factors may negatively affect the price of the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock and the Company's ability to raise capital. Upon completion of the
Offering, the Company will have outstanding 10,442,531 shares of Common Stock,
assuming no exercise of outstanding options. In addition to the shares offered
hereby, approximately 1,499,049 shares will be available for immediate sale in
the public market as of or shortly following the date of this Prospectus.
Beginning 90 days after the date of this Prospectus, approximately 678,412
additional shares will become eligible for sale in the public market, subject to
the provisions of Rule 144 or Rule 701 under the Securities Act of 1933, as
amended (the "Securities Act"). Beginning 180 days following the date of this
Prospectus, unless sooner released from contractual "lock-up" agreements with
the Underwriters, approximately 5,309,858 additional shares will become
available for sale in the public market pursuant to Rule 144 or Rule 701,
subject in certain cases to volume and other resale limitations under Rule 144.
See "Shares Eligible for Future Sale." The Company is unable to estimate the
number of shares which may be sold under Rule 144 or Rule 701 since this will
depend upon the market price of the Common Stock, the individual circumstances
of the sellers and other factors.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being offered
hereby (after deducting the underwriting discounts and estimated offering
expenses) are estimated to be $31.4 million ($36.3 million if the Underwriters'
over-allotment option is exercised in full) (assuming an initial public offering
price of $12.00 per share).
Such net proceeds will be used for working capital and other general corporate
purposes including expansion of the Company's distribution capabilities, further
development of products and technology, expansion of the Company's service and
support capabilities, repayment of short-term borrowings (all of which are
guaranteed by Mr. Walker and of which $3.7 million was outstanding as of June
28, 1996 with an interest rate of 9.25%) and potential acquisitions. Short-term
borrowings would also include any borrowings under a $2.0 million credit
agreement (of which no amounts were outstanding as of August 29, 1996) which
will bear interest at the lender's prime rate plus 3%.
Pending such uses, the Company intends to invest the net proceeds in short-term,
investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its common stock.
In addition, the agreements relating to certain of the Company's borrowings from
Mercantile-Safe Deposit & Trust Company ("Mercantile Bank") restrict the
Company's ability to pay cash dividends without Mercantile Bank's consent. The
Company intends to retain its earnings to fund development of its business and
does not anticipate paying cash dividends in the foreseeable future.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June 28,
1996, and as adjusted to give effect to the sale of 2,900,000 shares of Common
Stock offered hereby (assuming an initial public offering price of $12.00 per
share) and the application of a portion of the estimated net proceeds therefrom
to repay short-term borrowings. See "Use of Proceeds."
<TABLE>
<CAPTION>
---------------------
JUNE 28, 1996
Dollars in thousands, except per share ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Lines of credit and current portion of long-term debt(1)................ $ 3,973 $ 293
======= =========
Long-term debt, excluding current portion............................... $ 2,826 $ 2,826
------- -----------
Shareholders' equity:
Preferred stock, $.01 par value (5,000,000 shares authorized; no
shares outstanding)................................................ -- --
Common stock, $.01 par value (40,000,000 shares authorized; 7,535,170
shares issued and outstanding, actual; 10,435,170 shares issued and
outstanding, as adjusted)(2)....................................... 75 104
Additional paid-in capital............................................ 1,405 32,815
Unrealized gains, net of income taxes of $2,197....................... 3,278 3,278
Foreign currency translation adjustment............................... (10) (10)
Retained earnings..................................................... 1,423 1,423
Deferred stock compensation........................................... (1,082) (1,082)
------- -----------
Total shareholders' equity......................................... 5,089 36,528
------- -----------
Total capitalization............................................... $ 7,915 $39,354
======= =========
</TABLE>
- ---------------
(1) Does not reflect future borrowings or repayments pursuant to a new $2.0
million credit facility with Mercantile Bank as of August 27, 1996. Any
borrowings which may be made under this facility must be repaid upon the
consummation of the Offering.
(2) Does not include 1,314,355 shares reserved for issuance upon exercise of
stock options outstanding as of August 28, 1996 (of which options for 1,178,848
shares were outstanding as of June 28, 1996). Also does not include 654,640
additional shares available for future issuance under the Company's Stock Option
Plans. See "Management -- Employee Stock Option Plans" and "-- Directors' Stock
Option Plan."
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<PAGE> 19
DILUTION
The net tangible book value of the Company at June 28, 1996 was $5,089,498, or
$.68 per share of Common Stock. After giving effect to (i) the sale of the
2,900,000 shares of Common Stock of the Company offered hereby at an assumed
initial public offering price of $12.00 per share, and (ii) the deduction of
underwriting discounts and estimated expenses of the Offering, the net tangible
book value of the Company at June 28, 1996 would have been $36,528,498, or $3.50
per share of Common Stock. This represents an immediate increase in net tangible
book value of $2.82 per share to existing stockholders and an immediate dilution
of $8.50 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock.............. $12.00
Net tangible book value per share at June 28, 1996........................... $ .68
Increase in net tangible book value per share of Common Stock attributable to
new investors.............................................................. 2.82
-----
Pro forma net tangible book value per share of Common Stock after the
Offering................................................................... 3.50
------
Dilution per share to new investors.......................................... $ 8.50
======
</TABLE>
The following table summarizes, as of June 28, 1996, the number of shares of
Common Stock purchased by existing stockholders from the Company, the total
consideration paid and the average price per share paid to the Company for such
shares and by new investors in the Offering (assuming an initial public offering
price of $12.00 per share):
<TABLE>
<CAPTION>
--------------------------------------------------------------
TOTAL CONSIDERATION
SHARES PURCHASED AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 7,535,170 72.2% $ 374,654 1.1% $0.0497
New investors.......................... 2,900,000 27.8 34,800,000 98.9 12.00
---------- ------- ----------- -------
Total................................ 10,435,170 100.0% $35,174,654 100.0%
========= ====== ========== ======
</TABLE>
As of August 28, 1996, there were outstanding options to purchase 1,314,355
shares of Common Stock at a weighted average exercise price of $.91 per share
(of which options to purchase 1,178,848 shares were outstanding as of June 28,
1996 at a weighted average exercise price of $.67 per share). The foregoing
tables do not give effect to the exercise of stock options and, to the extent
they are exercised, there will be further dilution to new investors. See
"Management -- Employee Stock Option Plans" and "-- Directors' Stock Option
Plan."
18
<PAGE> 20
SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below for the fiscal
years ended December 31, 1993, December 30, 1994, and December 29, 1995 and the
consolidated balance sheet data at December 31, 1993, December 30, 1994 and
December 29, 1995 are derived from, and should be read in conjunction with, the
audited consolidated financial statements of the Company which are included
elsewhere in this Prospectus. The consolidated statements of operations data for
the fiscal years ended December 27, 1991 and December 25, 1992 and the
consolidated balance sheet data at December 27, 1991 and December 25, 1992 are
derived from unaudited consolidated financial statements of the Company not
included herein. The selected financial data at June 30, 1995 and June 28, 1996
and for the six months ended June 30, 1995 and June 28, 1996 are derived from
unaudited consolidated financial statements included elsewhere in this
Prospectus. The unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments and accruals) that
in the opinion of management are necessary for a fair presentation of the
financial information set forth therein. Operating results for the six months
ended June 28, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 27, 1996. The selected financial
data set forth below are qualified in their entirety by, and should be read in
conjunction with, the consolidated financial statements, the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
-----------------------------------------------------------
FISCAL YEAR FIRST HALF
In thousands, except per share data 1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Government contracts......................... $5,191 $6,262 $8,343 $11,258 $12,327 $6,042 $5,352
Commercial products.......................... -- -- -- 1,003 4,271 1,412 3,732
Commercial consulting services............... 834 568 448 856 1,492 835 534
------ ------ ------ ------- ------- ------ ------
6,025 6,830 8,791 13,117 18,090 8,289 9,618
Cost of revenues:
Government contracts......................... 3,332 4,108 5,512 7,377 8,845 4,521 3,864
Commercial products.......................... -- -- -- 333 1,142 410 1,198
Commercial consulting services............... 350 268 307 493 878 427 330
------ ------ ------ ------- ------- ------ ------
3,682 4,376 5,819 8,203 10,865 5,358 5,392
------ ------ ------ ------- ------- ------ ------
Gross profit................................... 2,343 2,454 2,972 4,914 7,225 2,931 4,226
Operating expenses:
Selling, general and administrative.......... 1,578 1,612 2,198 2,997 3,727 1,568 4,678
Research and development..................... 552 580 582 646 1,145 576 1,007
------ ------ ------ ------- ------- ------ ------
2,130 2,192 2,780 3,643 4,872 2,144 5,685
------ ------ ------ ------- ------- ------ ------
Income (loss) from operations.................. 213 262 192 1,271 2,353 787 (1,459)
Other income (expense):
Interest income.............................. 23 7 8 44 50 12 14
Interest expense............................. (172) (145) (128) (134) (159) (66) (163)
------ ------ ------ ------- ------- ------ ------
(149) (138) (120) (90) (109) (54) (149)
------ ------ ------ ------- ------- ------ ------
Income (loss) before income taxes.............. 64 124 72 1,181 2,244 733 (1,608)
Income tax provision (benefit)................. 26 50 37 506 900 262 (688)
------ ------ ------ ------- ------- ------ ------
Net income (loss).............................. $ 38 $ 74 $ 35 $ 675 $ 1,344 $ 471 $ (920)
====== ====== ====== ======== ======== ====== ======
Net income (loss) per share.................... $ -- $ .01 $ -- $ .08 $ .15 $ .05 $ (.11)
====== ====== ====== ======== ======== ====== ======
Weighted average shares outstanding............ 8,563 8,419 8,369 8,526 8,885 8,750 8,110
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
FISCAL YEAR END FIRST HALF END
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities...... $ 12 $ 29 $ 37 $ 262 $ 54 $ 348 $ 5,653
Working capital....................................... 150 100 (68) 400 210 742 1,278
Total assets.......................................... 3,330 3,852 4,412 5,229 10,222 6,638 19,424
Total debt............................................ 1,707 1,970 1,835 973 3,264 1,542 6,799
Shareholders' equity.................................. 738 755 793 1,467 2,407 1,935 5,089
</TABLE>
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Prospectus contain forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Risk Factors."
OVERVIEW
Trusted Information Systems, Inc., founded in 1983, provides comprehensive
security solutions for protection of computer networks, including global
Internet-based systems, internal networks and individual workstations and
laptops and is a leading provider of firewall products. The Company currently
has two operating divisions: the Commercial Division and the Advanced Research
and Engineering ("AR&E") Division.
The Commercial Division
The Commercial Division derives revenues from the Company's Gauntlet family of
firewall products and from its commercial consulting services. The Commercial
Division accounted for 5%, 14%, 32% and 44% of the Company's total revenues in
1993, 1994, 1995 and the first half of 1996, respectively. The Company expects
that the Commercial Division will account for an increased percentage of total
revenues over the remainder of the current year and in future years.
Prior to 1996, the Company distributed its only revenue producing product, the
Gauntlet Internet Firewall which was introduced in 1994, exclusively through
resellers and a sales administration staff. The Company presently has more than
80 persons to develop, promote, sell and deliver its network security products
and services, including the Gauntlet family of firewall products. Prior to 1996,
the Company's Gauntlet Internet Firewall was licensed as software or as software
and hardware on one platform, frequently combined (or "bundled") with
installation for pricing purposes. Since April 15, 1996, installation for the
Gauntlet family of firewall products has been offered as a separate (or
"unbundled") optional service provided to customers.
During 1996 the Company has begun to incur and expects to continue to incur
substantial increases in its selling, general and administrative expenses as it
builds its marketing and sales efforts to support sales of the Gauntlet Internet
Firewall product and of its three products introduced in 1996: the Gauntlet
Intranet Firewall, the Gauntlet Net Extender and the Gauntlet PC Extender. In
addition, the Company expects to further expand its research and development
organization and make additional investments in its general and administrative
infrastructure. As a result, the Company expects operating margins to decrease
from historical levels. The amount and timing of these additional expenditures
are likely to result in fluctuations in operating margins. Any material
reduction in gross or operating margins could materially adversely affect the
Company's operating results.
The Company offers a full range of consulting in information security planning
and product support. The Company's commercial consulting practice offers expert
technology research services, consultation on security issues associated with
products and services, corporate information security policy development,
architectural and diagnostic security analysis services, firewall configuration
and maintenance support, and training for corporate network and security
administration personnel. These services are carried out by a staff of 12
persons who average more than 15 years of information security experience in
both commercial and government organizations.
The Advanced Research and Engineering Division
The Advanced Research and Engineering Division consists primarily of research,
development and consulting in computer and related security systems, currently
including major contracts with three agencies of the U.S. government: the NSA,
Air Force Rome Laboratories ("RL") and Defense Advanced Research Projects Agency
("DARPA"), formerly ARPA. Revenues from the AR&E Division increased consistently
through 1995, but decreased in the first half of 1996. The aggregate award value
of the Company's nine major active government contracts is approximately
$36,135,000. In October 1993, the Company began providing services under the
largest
20
<PAGE> 22
of these current contracts, with the NSA, which is valued at $14,823,000 and is
expected to expire in early 1997. Of the five contracts with ARPA, which range
in value from $741,000 to $9,114,000 and have all commenced in the preceding
four years, one expires during 1997 and four expire during 1998. While the
Company expects to continue to obtain government contracts for its AR&E
Division, it does not anticipate that revenues from such contracts will attain
the levels realized in 1995.
Most of the Company's government contracts provide for compensation to the
Company in the form of reimbursement of costs plus a fee. Gross profit under
government contracts generally represents the fee plus recovered operating
expenses. Under these government contracts, the Company is entitled to recover
associated direct labor costs, overhead and selling, general and administrative
expenses, including allowable research and development expenses. Selling,
general and administrative expenses allowable under government contracts include
salaries and benefits, marketing, bid and proposal costs, management,
accounting, legal and contract administration and certain other administrative
expenses.
Under its government contracts, the Company bears the risk that recoverable
expenses billed by the Company are subject to review and audit by the Defense
Contract Audit Agency (the "DCAA"). The DCAA has audited the Company's contracts
through 1990, without any significant disallowances. Pursuant to their terms,
these contracts are also subject to termination at the convenience of the
applicable governmental agency. If the contract is terminated, the Company would
typically be reimbursed for its costs to the date of termination plus the cost
of any orderly termination and would be paid a portion of the fee.
RESULTS OF OPERATIONS
The following table presents for the periods indicated certain statement of
operations data as a percentage of the Company's revenues:
<TABLE>
<CAPTION>
FISCAL YEAR FIRST HALF
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues
Government contracts............................................. 94.9% 85.8% 68.1% 72.9% 55.6%
Commercial products.............................................. -- 7.7 23.6 17.0 38.8
Commercial consulting services................................... 5.1 6.5 8.3 10.1 5.6
----- ----- ----- ----- -----
Total revenues..................................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues................................................... 66.2 62.5 60.1 64.6 56.1
----- ----- ----- ----- -----
Gross profit....................................................... 33.8 37.5 39.9 35.4 43.9
----- ----- ----- ----- -----
Operating expenses
Selling, general and administrative.............................. 25.0 22.9 20.6 18.9 48.6
Research and development......................................... 6.6 4.9 6.3 7.0 10.5
----- ----- ----- ----- -----
Income (loss) from operations...................................... 2.2 9.7 13.0 9.5 (15.2)
Interest income (expense).......................................... (1.4) (0.7) (0.6) (0.6 ) (1.6 )
Income (loss) before income taxes.................................. 0.8 9.0 12.4 8.9 (16.8)
Income tax provision (benefit)..................................... 0.4 3.9 5.0 3.2 (7.1 )
----- ----- ----- ----- -----
Net income (loss).................................................. 0.4% 5.1% 7.4% 5.7% (9.7 )%
===== ===== ===== ===== =====
</TABLE>
The following table presents for the periods indicated costs of revenues and
gross profits as a percentage of the related revenues:
<TABLE>
<CAPTION>
FISCAL YEAR FIRST HALF
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cost of Revenues
Government contracts............................................. 66.1% 65.5% 71.7% 74.8% 72.2%
Commercial products.............................................. -- 33.1 26.7 29.0 32.1
Commercial consulting services................................... 68.6 57.6 58.9 51.1 61.7
Gross profit
Government contracts............................................. 33.9 34.5 28.3 25.2 27.8
Commercial products.............................................. -- 66.9 73.3 71.0 67.9
Commercial consulting services................................... 31.4 42.4 41.1 48.9 38.3
</TABLE>
21
<PAGE> 23
First Half of Fiscal 1996 Compared to First Half of Fiscal 1995
Revenues. The Company's total revenues increased 16.0% to $9,617,695 in the
first half of 1996 from $8,288,512 in the first half of 1995. Commercial product
revenues increased 164.4% to $3,732,042 in the first half of 1996 from
$1,411,711 in the first half of 1995, because of an increase in shipments of the
Company's Gauntlet firewall products and sales of licenses of Gauntlet Internet
Firewalls directly to customers and through the Company's resellers. Commercial
consulting services revenues decreased 36.1% to $533,977 in the first half of
1996 from $835,004 in the first half of 1995, primarily because of the Company's
completion of a substantial number of commercial consulting contracts in the
first half of 1995. Government contract revenues decreased 11.4% to $5,351,676
in the first half of 1996 from $6,041,797 in the first half of 1995, primarily
because of the Company's reallocation of personnel to its commercial activities.
Gross Profit. Gross profit increased 44.2% to $4,225,785 in the first half of
1996 from $2,931,174 in the first half of 1995, due to the increase in the
Company's commercial product sales. The gross profit on commercial products
increased 152.9% to $2,534,165 in the first half of 1996 from $1,002,222 in the
first half of 1995 because of the increase in shipments of Gauntlet firewall
products. Gross profit from the Company's commercial consulting services
decreased 49.9% to $204,327 in the first half of 1996 from $407,905 in the first
half of 1995, and gross profit from the Company's government contracts decreased
2.2% to $1,487,293 in the first half of 1996 from $1,521,047 in the first half
of 1995, in each case primarily because of lower related revenues. As a
percentage of related revenues, gross profit on commercial products decreased to
67.9% in the first half of 1996 from 70.1% in the first half of 1995, because of
a higher percentage of revenues during the first half of 1996 which were from
sales of the Company's package systems, which sales are accompanied by lower
margins than software only firewall revenues. As a percentage of related
revenues, gross profit on commercial consulting services decreased to 38.3% in
the first half of 1996 from 48.9% in the first half of 1995, because of the
substantially higher margin on a number of contracts in the first half of 1995.
As a percentage of related revenues, gross profit on government contracts
increased to 27.8% in the first half of 1996 from 25.2% in the first half of
1995, because of greater revenues received in 1996 from contracts with
proportionately higher fees.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 198.4% to $4,677,648 in the first half of 1996
from $1,567,578 in the first half of 1995, due primarily to the substantial
increase in personnel and related operating costs associated with the increase
in the Company's commercial products sales, as well as the Company's efforts
towards developing the infrastructure to support future commercial product
revenue growth.
Research and Development Expenses. The Company's research and development
expenses, which do not include such expenses directly reimbursed under
government contracts, increased 74.8% to $1,006,752 in the first half of 1996
from $576,078 in the first half of 1995. This increase primarily resulted from
the Company's efforts in developing the new members of the Gauntlet family of
firewall products announced in April 1996.
Interest Expense. Interest expense increased 147.3% to $162,910 in the first
half of 1996 from $65,873 in the first half of 1995, due primarily to the
increase in borrowings under the Company's revolving and other credit lines.
Fiscal 1995 Compared to Fiscal 1994
Revenues. The Company's total revenues increased 37.9% to $18,090,087 in 1995
from $13,117,152 in 1994. Commercial product revenues increased 325.6% to
$4,270,924 in 1995 from $1,003,498 in 1994, primarily because of increased sales
of licenses of Gauntlet Internet Firewalls directly to customers and through the
Company's resellers. Commercial consulting services revenues increased 74.3% to
$1,491,661 in 1995 from $855,638 in 1994 primarily because of the Company's
completion of a substantial number of commercial consulting contracts during
1995. Government contract revenues increased 9.5% to $12,327,502 in 1995 from
$11,258,016 in 1994.
Gross Profit. Gross profit increased 47.0% to $7,225,140 in 1995 from
$4,914,495 in 1994. This increase was primarily the result of higher gross
profit associated with the Gauntlet Internet Firewall, which increased 366.3% to
$3,128,642 in 1995 from $670,994 in 1994. The gross profit on commercial
products as a percentage of related revenues increased to 73.3% in 1995 from
66.9% in 1994 because of increased margins on the Gauntlet Internet
22
<PAGE> 24
Firewall overall and an increase in the percentage of sales through resellers at
higher margins than for direct sales. The gross profit on commercial consulting
services decreased slightly to 41.1% in fiscal 1995 from 42.4% in fiscal 1994.
Gross profit from the Company's government contracts decreased 10.3% to
$3,482,783 in 1995 from $3,881,084 in 1994, primarily because the Company
shifted resources to its commercial products. As a percentage of related
revenues, the gross profit for government contract revenues decreased to 28.3%
in 1995 to 34.5% in 1994 because certain of the Company's government contracts
provided for higher fees on the earlier installments under those contracts,
generating higher margins in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 24.3% to $3,727,701 in 1995 from $2,997,806 in
1994, primarily due to the Company's overall increase in operations and to the
Company's efforts in late 1995 to initiate dedicated commercial marketing and
sales efforts.
Research and Development Expenses. Research and development expenses increased
77.2% to $1,144,737 in 1995 from $646,001 in 1994, primarily because the Company
increased its budget for funding research and development efforts and began to
commit substantial resources to developing its commercial products, including
activities in encryption and additional platform applications for the Gauntlet
Internet Firewall.
Interest Expense. Interest expense increased 18.3% to $158,778 in 1995 from
$134,236 in 1994, due primarily to an increase of approximately $2.2 million
during 1995 in the Company's borrowings under its revolving and construction
credit lines.
Fiscal 1994 Compared to Fiscal 1993
Revenues. The Company's total revenues increased 49.2% to $13,117,152 in 1994
from $8,791,478 in 1993. Commercial product revenues commenced with the
introduction of the Company's Gauntlet Internet Firewall in April 1994, and
totaled $1,003,498 in 1994. Commercial consulting services revenues increased
91.0% to $855,638 in 1994 from $448,054 in 1993, primarily because of the
Company's increased efforts in establishing commercial activities. Government
contract revenues increased 34.9% to $11,258,016 in 1994 from $8,343,424 in
1993, primarily as a result of a research and development contract with the NSA
which commenced during October 1993 and two contracts with ARPA, one of which
commenced in August 1993 and the other of which commenced in March 1994.
Gross Profit. Gross profit increased 65.4% to $4,914,495 in 1994 from
$2,971,742 in 1993. Gross profit from the Company's government contracts
increased 37.1% to $3,881,084 in 1994 from $2,830,926 in 1993, because of the
year-to-year increase in the revenues from government contracts. As a percentage
of related revenues, gross profit from government contracts was relatively
stable. The gross profit associated with the Gauntlet Internet Firewall product,
which was $670,994 in 1994, and the 157.4% increase in the gross profit on
commercial consulting services to $362,417 in 1994 from $140,816 in 1993, also
contributed to the increase in overall gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 36.4% to $2,997,806 in 1994 from $2,198,011 in
1993, due primarily to the Company's overall growth in operations and revenues.
Research and Development Expenses. Research and development expenses increased
11.0% to $646,001 in 1994 from $582,075 in 1993, as a result of the Company's
increased funding of its research and development efforts.
Interest Expense. Interest expense increased 5.1% to $134,236 in 1994 from
$127,711 in 1993, due primarily to the Company's increased borrowings during
1994.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statement of
operations data for each of the four quarters in 1995 and the first half of
1996, as well as the percentage of the Company's revenues represented by each
item. The unaudited consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements contained herein and
include all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of such information when
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this
23
<PAGE> 25
Prospectus. The Company believes that quarter-to-quarter comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. See "Risk Factors -- Transition to
Commercial Product Vendor" and "-- Potential Significant Fluctuations in
Quarterly Operating Results and Lengthy Sales Cycle."
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 29, MARCH 29, JUNE 28,
Dollars in thousands 1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Government contracts............. $ 3,041 $3,001 $ 3,425 $2,860 $ 2,432 $2,920
Commercial products.............. 424 988 1,219 1,640 1,497 2,235
Commercial consulting services... 481 354 284 373 247 287
-------- --------
-- --
-------- --
3,946 4,343 4,928 4,873 4,176 5,442
Cost of revenues:
Government contracts............. 2,119 2,402 2,506 1,818 1,774 2,090
Commercial products.............. 187 223 277 455 472 726
Commercial consulting services... 178 249 202 249 166 164
-------- --------
-- --
-------- --
2,484 2,874 2,985 2,522 2,412 2,980
-------- --------
-- --
-------- --
Gross profit....................... 1,462 1,469 1,943 2,351 1,764 2,462
Operating expenses:
Selling, general and
administrative................. 988 580 836 1,323 2,044 2,634
Research and development......... 295 281 244 325 375 632
-------- --------
-- --
-------- --
1,283 861 1,080 1,648 2,419 3,266
-------- --------
-- --
-------- --
Income (loss) from operations...... 179 608 863 703 (655) (804)
Other income (expense):
Interest income.................. 8 4 13 25 6 8
Interest expense................. (23) (43) (33) (60) (89) (74)
-------- --------
-- --
-------- --
(15) (39) (20) (35) (83) (66)
-------- --------
-- --
-------- --
Income (loss) before income
taxes............................ 164 569 843 668 (738) (870)
Income tax provision (benefit)..... 66 196 355 283 (315) (373)
-------- --------
-- --
-------- --
Net income (loss).................. $ 98 $ 373 $ 488 $ 385 $ (423) $ (497)
========== ========== ==========
SELECTED PRODUCT LINE INFORMATION:
Gross profit by product line:
Government contracts............. $ 922 $ 599 $ 919 $1,043 $ 658 $ 830
Commercial products.............. 237 765 942 1,184 1,025 1,509
Commercial consulting services... 303 105 82 124 81 123
-------- --------
-- --
-------- --
Total..................... $ 1,462 $1,469 $ 1,943 $2,351 $ 1,764 $2,462
========== ========== ==========
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 29, MARCH 29, JUNE 28,
1995 1995 1995 1995 1996 1996
---------- ---------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
AS A PERCENTAGE OF REVENUES:
Revenues:
Government contracts..................... 77.1% 69.1% 69.5% 58.7% 58.2% 53.7%
Commercial products...................... 10.7 22.7 24.7 33.7 35.9 41.1
Commercial consulting services........... 12.2 8.2 5.8 7.6 5.9 5.2
---------- ---------- ----------
100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Government contracts..................... 53.7 55.4 50.9 37.3 42.5 38.5
Commercial products...................... 4.7 5.1 5.6 9.4 11.3 13.3
Commercial consulting services........... 4.5 5.7 4.1 5.1 4.0 3.0
---------- ---------- ----------
62.9 66.2 60.6 51.8 57.8 54.8
---------- ---------- ----------
Gross profit............................... 37.1 33.8 39.4 48.2 42.2 45.2
---------- ---------- ----------
Operating expenses:
Selling, general and administrative...... 25.0 13.3 17.0 27.1 48.9 48.4
Research and development................. 7.6 6.5 4.9 6.7 9.0 11.6
---------- ---------- ----------
32.6 19.8 21.9 33.8 57.9 60.0
---------- ---------- ----------
Income (loss) from operations.............. 4.5 14.0 17.5 14.4 (15.7) (14.8)
Other income (expense):
Interest income.......................... .2 .1 .3 .5 .1 .1
Interest expense......................... (.6) (1.0) (.7) (1.2) (2.1) (1.3)
---------- ---------- ----------
(.4) (.9) (.4) (.7) (2.0) (1.2)
---------- ---------- ----------
Income (loss) before income taxes.......... 4.1 13.1 17.1 13.7 (17.7) (16.0)
Income tax provision (benefit)............. 1.6 4.5 7.2 5.8 (7.6) (6.9)
---------- ---------- ----------
Net income (loss).......................... 2.5% 8.6% 9.9% 7.9% (10.1)% (9.1)%
========== ========== ==========
SELECTED INFORMATION AS A
PERCENTAGE OF RELATED REVENUES:
Gross profit by product line:
Government contracts..................... 30.3% 20.0% 26.8% 36.5% 27.1% 28.4%
Commercial products...................... 55.9 77.4 77.3 72.2 68.5 67.5
Commercial consulting services........... 63.0 29.7 28.9 33.3 32.8 42.9
---------- ---------- ----------
37.1% 33.8% 39.4% 48.2% 42.2% 45.2%
---------- ---------- ----------
</TABLE>
The Company's future revenues and operating results are uncertain and may
fluctuate from quarter to quarter and from year to year due to a combination of
factors, including the demand for the Company's products, the volume and timing
of orders and the ability to fulfill orders, changes in product pricing, changes
in the percentage of products sold through the Company's direct sales force, the
introduction of new products and product enhancements by the Company, market
acceptance of new products introduced by the Company, the Company's ability to
attract and retain key technical, sales and managerial employees, the mix of
distribution channels through which product is sold, the mix of products sold,
the budgeting cycles of customers, changes in the proportion of revenues
attributable to licenses and consulting fees, competitive conditions in the
industry, the growth in the acceptance of, and activity on, the Internet and
World Wide Web, the growth of Intranets and general economic factors.
The Company operates with little backlog for commercial products and therefore
the timing and volume of orders within a given period and the ability to fulfill
such orders determines the amount of revenues within a given period. Certain of
the Company's sales are derived through indirect channels, which makes revenues
from such sales difficult to predict. Furthermore, the Company's expense levels
are based, in part, on expectations as to future revenues. If revenue levels are
below expectations, operating results are likely to be adversely affected. Net
income may be disproportionately affected by a reduction in revenues because of
the relatively small amount of the Company's expenses which vary with its
revenues. As a result, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results may 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.
25
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and the purchase of
property and equipment through the issuance of common stock, borrowings under
short-term lines of credit, secured notes payable and stockholder loans and the
generation of cash from operations. Cash and cash equivalents were $53,859 at
December 29, 1995 and $177,686 at June 28, 1996. The Company provided cash from
operations of $332,505, $1,279,505 and $1,237, respectively, for the fiscal
years 1993, 1994 and 1995, but used cash in operations of $146,183 and
$1,156,652, respectively, for the six months ended June 30, 1995 and June 28,
1996. Net cash provided by or used in operations for the fiscal years 1993, 1994
and 1995 and for the six months ended June 30, 1995 consisted primarily of net
income, plus growth in the Company's accounts payable, accrued expenses and
deferred revenues, offset by growth in the Company's accounts receivable. For
the six months ended June 28, 1996, the Company used cash to fund its net loss
of $920,217, which was the primary component of the net cash used in operating
activities for the period. The decline in cash provided by operations in 1995 as
compared to previous years and in the six months ended June 30, 1995 was
primarily the result of funds consumed as the Company began to expand its
commercial activities and introduce new products.
During 1994, the Company used cash in investing activities of $192,165 to
purchase property and equipment and used cash in financing activities of
$854,889 to repay borrowings, primarily through the generation of cash from
operations. During 1995 and the first half of 1996, the Company used cash in
investing activities of $2,095,829 and $2,555,335, respectively, as the Company
substantially completed construction of its facilities in Glenwood, Maryland,
primarily to purchase $4,640,284 of property and equipment. During 1995 and the
first half of 1996, the Company's financing activities provided $1,885,931 and
$3,840,199, respectively, primarily as a result of (i) net short-term borrowings
of $1,523,000 and $2,156,500, respectively, (ii) net issuance of notes payable
of $767,218 and $1,378,381, respectively, and (iii) a net cost of $404,287 in
1995 relating to the repurchase of common stock and the issuance of common stock
upon exercise of stock options and an increase in the first half of 1996 of
$305,318 for the issuance of common stock upon exercise of stock options. In
1989, the Company established a mortgage on its Glenwood facility, which at
December 29, 1995 and June 28, 1996, was outstanding in the amounts of $902,656
and $860,735, respectively.
At December 30, 1994 and December 29, 1995, the Company had various short-term
line of credit arrangements with Mercantile Bank aggregating $1,000,000 and
$2,000,000, respectively, of which $1,000,000 and $477,000, respectively, were
available for further borrowing. During the first five months of 1996, the
Company entered into an agreement with Mercantile Bank to increase certain of
its lines of credit to $3,250,000 and negotiated a separate $2,000,000 credit
line for its product development needs, including the development of the three
Gauntlet firewall products introduced in 1996. At June 28, 1996, approximately
$1,300,000 was available for borrowing under these facilities under the limits
imposed at that time. Subsequent to June 28, 1996, these lines of credit were
increased to $4,000,000 and $3,000,000, respectively. Additionally, on August
27, 1996, the Company entered into a $2,000,000 credit facility with Mercantile
Bank, of which no amounts are outstanding. The credit facility includes a
$100,000 commitment fee, and any borrowings thereunder become due upon
consummation of the Offering. As of June 28, 1996, the Company had no material
commitments for capital expenditures.
In 1995, the Company negotiated a construction loan in the amount of $1.8
million to provide for the expansion of its facilities at its Glenwood, Maryland
location. At the end of May 1996, the Company had completed its expansion and
substantially drawn down the total amount of its construction loan. The
Company's bank borrowings are secured by substantially all of the Company's
tangible assets.
The Company intends from time to time to evaluate potential acquisitions of
businesses, products and technologies that could complement or expand the
Company's business. At the current time, the Company has no plans, agreements or
commitments for any such acquisitions and is not engaged in any negotiations
with respect thereto.
The Company has not engaged in any hedging activities to date. See Notes to
Consolidated Financial Statements.
While the Company may require additional financing to fund development of new
products and expansion of its domestic and international operations, it believes
that the net proceeds from the Offering, together with existing cash and cash
equivalents, cash generated from operations and cash available through its
credit and note payable arrangements, will be sufficient to finance its product
development and operating needs through December 1997.
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BUSINESS
In addition to the historical information contained herein, this Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the sections entitled "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed in this section and elsewhere in this
Prospectus.
GENERAL
Trusted Information Systems, Inc. provides comprehensive security solutions for
protection of computer networks, including global Internet-based systems,
internal networks and individual workstations and laptops and is a leading
provider of firewall products. TIS, which was founded in 1983 to engage in
computer security consulting, draws upon the expertise of a senior management
team with an average of more than 20 years of experience in computer security
and networking issues in industry and government. The Company emphasizes the
robustness of its security solutions, its long experience with computer security
and cryptography issues and its ability to provide comprehensive solutions to
customers. The Company also emphasizes its strong reputation with corporate and
government computer security professionals in the United States and abroad as a
pioneer in the field of computer network security. The Company's customers
include the following or subsidiaries thereof: Chrysler Corporation, Microsoft
Corporation, NationsBank Corporation, Royal Dutch Petroleum Co. and Swiss Bank
Corporation.
The Company develops, markets, licenses and supports the Gauntlet family of
firewall products. These products allow customers to create "trusted" networks
that are protected from access, theft and damage by unauthorized users from
"untrusted" networks such as the Internet and also enable the creation of
virtual private networks ("VPNs") through the encrypted transmission of
information across untrusted networks. The Company's Gauntlet Internet Firewall,
introduced in 1994, was derived from the TIS Internet Firewall Toolkit which has
been available on the Internet since 1993 and has been downloaded more than
34,000 times to more than 15,000 discrete locations worldwide. To date, more
than 1,700 Gauntlet Internet Firewalls have been licensed to customers. In
January 1996, the Company initiated a telemarketing program to upgrade TIS
Internet Firewall Toolkit users to the Gauntlet family of firewall products. To
build, maintain and enhance customer relationships, TIS also offers a full range
of consulting in information security policies and planning to its customers.
The Company further provides research and development and consulting to
government agencies, including the NSA and DARPA, in areas such as next
generation firewalls, distributed trusted operating systems, Internet domain
name services, international cryptography and advanced cryptographic key
handling and recovery techniques.
Prior to founding the Company in 1983, Stephen T. Walker, Chairman and Chief
Executive Officer, spent over 20 years working on computer security issues for
the U.S. government at the NSA and ARPA.
INDUSTRY BACKGROUND
The Internet
The Internet, derived from ARPA research in the 1970s, is a global web of
inter-connected computer networks which enables commercial organizations,
educational institutions, government agencies and individuals to freely
communicate, access and share information and conduct business remotely. The
networks that constitute the Internet are connected in a variety of ways,
including by the public switched telephone network and by high speed, dedicated
leased lines.
While there has been significant media interest in the consumer potential of the
Internet, business and professional organizations also account for a significant
percentage of Internet usage. The recent growth in the Internet has been driven
primarily by the increasing popularity of two applications: the World Wide Web
and e-mail. The emergence of the World Wide Web allows commercial organizations
a new medium in which to publish multi-media documents and other information for
public access and to advertise or provide products and services to users. Many
such commercial enterprises have established a "home page" to enhance these new
market opportunities. Customer service, electronic commerce, advertising and
market data generation are all being conducted across the World Wide Web. The
growth of e-mail usage on the Internet is being driven by ease-of-use and
standardization. Today,
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there are a number of commercially available e-mail programs that an
organization or individual may use to facilitate Internet communications.
The Company believes that full commercial utilization of the Internet has been
hampered by lack of security and the vulnerability of the Internet and private
networks directly connected to the Internet. The very openness of the Internet
means that transmitted information and data stored in connected hosts are
exposed to other users who are able, in the absence of effective security
measures, to gain access to, manipulate and divert the data. This fundamental
weakness mandates that organizations and individuals weigh security concerns
against the perceived commercial opportunities presented by millions of Internet
users.
Private Networks and Intranets
As network technology has advanced, enterprise computing has evolved from
mainframe computers supporting a number of terminals toward networks of
inter-connected personal computers. Organizations have developed local-area
networks ("LANs") to share data and applications within work groups.
Increasingly, businesses are using the Internet's non-proprietary TCP/IP
protocol for internal network communications which facilitates corporate
communications using Internet tools and applications. Internal networks that
employ TCP/IP as a network protocol are known as "Intranets."
Organizations are increasingly dependent on electronic communications among
geographically dispersed internal operations, customers, suppliers and other
partners. Many organizations have connected together LANs, including
geographically dispersed networks, into wide-area networks ("WANs"), and further
connect multiple LANs and WANs, including remote networks and mobile PCs, over
dedicated leased lines or other costly telecommunication links. Private networks
can support remote access from other private networks to provide customer
support bulletin board services, electronic data interchange ("EDI") and
database sharing. Organizations can use the Internet as a low-cost, if less
secure, communications "backbone" for a WAN, thereby extending internal
information systems and enterprise applications to geographically dispersed
facilities, remote offices and mobile employees.
The increasing number of authorized users having direct access to expanding
networks and the data contained on such networks has increased the need to
provide protection for sensitive data on such networks from unauthorized users
with general access to a system. Network administrators face the challenge of
creating accessible, shared LANs and Intranets while protecting the integrity
and confidentiality of the information being shared.
Network Security
As a result of the increased use of the Internet and Intranets, unauthorized
access to organization networks and corporate data is an increasingly costly
business problem. Sensitive data that require protection from unauthorized use
include financial results, medical records, personnel files, research and
development projects, marketing plans and other business information.
Unauthorized access to this information may go undetected by the computer user
or network administrator, especially if the information is read but not altered
by the unauthorized party. Organizations are vulnerable not only to unauthorized
access to information resources by outsiders, but also to abuse by employees
within their own organizations.
TIS believes the requirements for information security in these complex
communications systems can be described in terms of three major requirements:
Confidentiality: controlling who gets to read information
Integrity: assuring that information is changed only in a specified and
authorized manner, and
Availability: assuring that authorized users have continued access to
information and resources.
The relative importance of these requirements differs depending upon the
application. For example, funds transfer systems require strong integrity
controls, while automotive design or petroleum exploration systems may focus
chiefly on confidentiality.
These information security requirements typically are stated in a security
policy -- a concise statement of information sensitivities, protection
responsibilities and organizational commitment. The Company believes that a
strong
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security policy must state specific security needs in terms which balance the
system's risks and vulnerabilities with the need to operate. An organization
must consider the following in establishing a system security policy:
the value of the asset being protected;
the vulnerabilities of the system -- what damage can insiders/outsiders do
to the system;
the threats to the system -- can adversaries exploit these vulnerabilities;
and
the risks to the system -- what are the costs of recovery if an adversary
exploits a system's vulnerability.
These policies then need to be implemented by the organization at a number of
levels, for example, (a) between sections or particular groups within a site,
(b) for each site, (c) throughout the organization with its many sites and (d)
between the organization, its customers and suppliers. Each level of
communications requires the implementation of information security technology to
carry out these security policies.
Firewalls
Without any firewall protection, a computer on an untrusted network can easily
exploit any weaknesses in the software on a computer on a trusted network.
Figure 1 shows two computers on networks communicating over the Internet without
any firewall protection.
(Figure 1: Typical Host-to-Host Computer Communications)
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Firewalls have developed as key elements in implementing different security
policies at the different levels within networks. The growth in Internet users
and Intranets, as well as the growing concerns about network security, are
fueling increasing demand for firewalls. A report released in February 1996 by
International Data Corporation projects that firewall product licenses will grow
from 10,000 units in 1995 to 1,500,000 units in 2000, while revenue from such
licenses will grow from approximately $160 million to approximately $980 million
over the same period.
Firewalls provide strong points of defense and controlled, audited access to
services at all levels of communications -- both from within and without an
organization's private network. A firewall is a computer system that is
interposed between two networks, generally an organization's internal or private
computer network and a more public or untrusted network. The private, or
trusted, network can be as large as the internal network of a Fortune 500
company, or as small as a network serving a single department at a single site.
The public or untrusted network can be as specific as the enterprise's network
or as general and open as the Internet. One "firewalled" private network can
exist inside another. A firewall can restrict the access to a trusted network by
user, by application and by location. A firewall can also require users to
provide authentication based on cryptography that is much less vulnerable than
the simple passwords that have been historically used in computer systems. Thus,
any organization linking a trusted network to an untrusted network, either
internal or external, will generally and increasingly require a firewall to
enforce network security and protect the trusted network.
The two major types of firewalls are filtering gateways and application
gateways. Both gateway types work to enforce a network security policy without
adversely limiting flexibility or affecting performance. However, each design
strikes a different balance between these three goals: filtering gateways
sacrifice aspects of security in order to be more flexible and generally provide
for performance, and application gateways provide higher security at the expense
of some flexibility and performance.
Filtering Gateway Firewalls. Filtering gateway firewalls are either "static" or
"dynamic" packet filters. Dynamic filtering is sometimes referred to as
"Stateful Multi-Layer Inspection." All filtering gateways make routing decisions
based on information contained in each network "packet." If a packet's content
meets the security policy criteria, it is forwarded to the destination.
Otherwise, it is blocked at the gateway. Static filters, which are typically
implemented in routers, examine each packet as it arrives at the gateway and
make a routing decision based on the packet's header (information such as source
and destination address, protocols, and port numbers) and sometimes on portions
of the packet's contents. Dynamic filters can make forwarding decisions based on
the application protocols contained within the packets, by maintaining the state
of the application program. Filtering gateways are limited in the amount of
content filtering that may be done for a given session.
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Since filtering gateways operate by routing traffic, they provide direct
connectivity between untrusted and trusted networks. This direct connection
places a large burden for the network's security policy on internal systems
because they are directly exposed for all services the firewall lets through. A
typical example is electronic mail: if the filtering gateway is configured to
permit inbound e-mail, the security of the e-mail server becomes critical -- if
it is running an insecure mail server such as the UNIX "sendmail" program,
history has shown that the system will be vulnerable to penetration, and could
then be used as a starting place to attack the rest of the computers on the
network intended to be protected by the firewall.
Figure 2 shows a filtering gateway firewall imposed between an untrusted network
and a trusted network. The filtering gateway screens incoming and outgoing
traffic and decides whether to allow a communication. If the communication is
allowed, software on the trusted system must itself process all traffic
generated by the untrusted system, leading to a greater potential for
exploitation. As in Figure 1, the computer on the untrusted network can exploit
any weakness in the software on the computer on the trusted network. Even
dynamic filtering gateways that inspect the state of a connection allow direct
connections between computers on the untrusted and trusted networks and offer
limited application level filtering.
(Figure 2: Filtering Gateway Firewall)
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Application Gateway Firewalls. Application gateways, also known as proxy
gateways, control network connections rather than individual packets. At the
point where a connection is requested, the proxy for the given protocol will
check the firewall's security policy and decide whether the connection is
permitted. If it is, the proxy will then mediate all future traffic for that
connection and verify that it conforms to the given protocol and security
policy. Application gateways permit or deny connections and mediate traffic
based on security policy considerations such as user name, addresses, protocols,
and protocol-specific functions (e.g., download data but not upload, e-mail
scanning, Java filtering).
Figure 3 shows an application gateway firewall imposed between an untrusted
network and a trusted network. The application gateway interrupts the
communication between computers on the two networks. Depending upon the
particular application, various checks are made at the application proxy level.
If the connection is allowed, a second link between the firewall and the trusted
network is established and all data is passed through the application proxy.
This design prevents a direct connection between computers on the two networks,
thereby significantly reducing the ability to directly exploit a weakness in the
software on the computer on the trusted network and increasing the ability to
perform filtering specific to the application.
(Figure 3: Application Gateway Firewall)
TIS's Gauntlet firewall products are application gateway firewalls.
Virtual Private Networks (VPNs)
Once firewalls are in place at multiple sites on a WAN, the ability to establish
encrypted communications links over WANs becomes practical. These VPNs provide
complete protection among networks, whether among a corporation's internal
information systems at different locations or among those locations and widely
dispersed customers and suppliers. VPNs permit the safe commercial use of the
Internet, thereby providing significant cost savings by reducing reliance on
more costly dedicated telecommunications alternatives. A report prepared by an
industry consultant indicates that for the set of applications covered, such
cost savings could provide a full payback of the VPN investment within the first
year of its operation.
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Export controls imposed by most governments are a significant impediment to the
establishment of Global VPNs ("GVPNs"). Recent initiatives by the U.S. and other
governments to allow export of cryptography when combined with some form of key
recovery system offer an excellent opportunity to realize the full potential of
GVPNs on an international basis. The Company believes that once appropriate
government policies are in place, the combination of application gateway
firewalls and key recovery enabled encryption (such as the Company's Key
Recovery Technology ("KRT")) will radically alter the landscape of today's
private networks, providing reliable, protected communications through public
networks such as the Internet. See "-- Commercial Products and Services --
Cryptographic Products/Key Recovery Technology (KRT) System."
TIS STRATEGY
The Company's objective is to be the leading provider of comprehensive security
products and services for corporate and government information systems.
Essential elements of the Company's strategy include:
Provide Comprehensive Security Solutions. The Company's approach is to
develop, market and support a broad range of network security software
products for the protection of computer networks, including global
Internet-based systems, internal networks and individual workstations and
laptops. The Company believes that its integrated approach to network
security products and services provides a more comprehensive security
solution than the single product offerings marketed by many of its
competitors. The Gauntlet family of firewall products currently includes
the Gauntlet Internet Firewall, the Gauntlet Intranet Firewall, the
Gauntlet Net Extender and the Gauntlet PC Extender. Additionally, the
Company offers a full range of expert consulting services in information
security policies and planning to commercial enterprises and governments.
With the support of government-funded and independent research and
development, the Company is developing extensions and enhancements to
current firewall technology and applications of cryptography to maintain
its position as a leader in providing comprehensive security solutions. The
Company is currently developing enhancements to the Gauntlet family of
firewall products, including an enhanced graphical user interface ("GUI"),
and expects that its Gauntlet versions supporting Sun Microsystems' Solaris
Version 2 and Microsoft's Windows NT Server Version 4.0 will be
commercially available by the end of 1996. The Company intends to extend
its leading positions in network firewalls and encryption technology,
including KRT, to enable companies to establish global virtual private
networks.
Increase Market Penetration Through Multiple Channels. The Company's
marketing strategy for TIS network security products and services focuses
on utilizing both a direct sales force and reseller channels to target
large corporations and organizations. The Company intends to expand its
current direct sales force to both increase initial market penetration and
to pursue follow-on sales for TIS network security products and services.
The Company intends to continue to focus its direct sales efforts on
Fortune 500 companies, particularly those which have a strong need for
secure communications within workgroups and among geographically dispersed
networks through the Internet. For example, the Company has targeted
companies in the telecommunications, finance and banking, petrochemicals
and pharmaceuticals industries as those most likely to require network
security solutions. The Company intends to emphasize the use by such
organizations of the Gauntlet family of firewall products and related
services together with cryptography, for enhanced security for sensitive
communications. The Company has established customer relationships with the
following or subsidiaries thereof: Chrysler Corporation, Microsoft
Corporation, NationsBank Corporation, Royal Dutch Petroleum Co. and Swiss
Bank Corporation.
The Company has established a significant global reseller channel
consisting of over 50 Internet service providers, value added resellers and
hardware vendors, system integrators and security product vendors. The
Company's resellers are primarily located in the United States, Europe and
the Pacific Rim. The Company intends to greatly expand these channels for
its network security products and for its cryptographic products,
particularly in Europe and the Pacific Rim.
A significant portion of the Company's Gauntlet firewall products customers
consist of organizations which have sought upgrades to and support for the
TIS Internet Firewall Toolkit available on the Internet. The Company has
established a program to identify and pursue entities which have installed
firewalls based on the TIS Internet Firewall Toolkit for follow-on sales of
Gauntlet firewall products and related services.
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Expand Consulting Services. The Company intends to focus on expanding its
provision of consulting services to large organizations with respect to the
establishment of information security policies and of trusted
communications systems, including GVPNs. The Company believes these
consulting services will assist companies in enhancing security while
reducing communication costs through the effective deployment of the
Company's products. In building its consulting services, the Company
intends to emphasize the reputation and experience of its senior management
and technical staff. The Company also intends to utilize the relationships
it establishes through its expanding consulting efforts to generate
additional customers for TIS network security products and services.
Leverage Government Research and Engineering. The Company believes its
extensive U.S. government-funded research activities can yield major short
and long-term product concepts as well as enhance current network security
product offerings. Government funding contributes to the Company's ability
to maintain a research and engineering staff of over 130 scientists and
engineers. With the Gauntlet family of firewall products, the Company has
demonstrated its ability to create and market commercial products based on
government-funded research results and believes that similar efforts will
enable it to implement new advanced products in the future.
TIS SOLUTION
TIS offers a comprehensive set of products and services for the protection of
computer networks, including global Internet-based systems, internal networks
and individual workstations and laptops. As part of this complete solution, TIS
provides consulting services to evaluate and design information security
policies and firewall and other network security products that address the major
requirements of confidentiality, integrity and availability.
The TIS Trusted System Design Principles, derived from decades of computer
security experience, include:
Simplicity in mechanisms and services provided.
Simplicity in software design, development and implementation.
A "Crystal Box" approach, in which source code is distributed to allow for
assurance reviews by the Company's customers, resellers and other experts.
Logging every event that can be logged; the customer can then customize a
complete and appropriate security audit trail.
Supporting all forms of user authentication methods and mechanisms.
Enforcing an organization's security policy, instead of imposing one of its
own.
Management believes that the integrity of the Company's security solutions, the
simplicity and brevity of its Gauntlet code, the transparency of its "Crystal
Box" approach and the experience and expertise of its management team and
consultants attract customers to purchase the Company's products and services.
In addition, the Company believes that the encryption technology of its firewall
products, which allows organizations to establish secure communication between
geographically dispersed sites through VPNs and GVPNs, further attracts
customers due to the potential cost savings which may be achieved by
communicating over the Internet rather than over more expensive, private lines.
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(Graphic: Example of the Gauntlet Internet and Intranet Firewall products
protecting a trusted network)
COMMERCIAL PRODUCTS AND SERVICES
Gauntlet Firewall Products
The following table sets forth certain information regarding certain of the
current TIS product offerings.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
DATE OF
ENVIRONMENT PRODUCT NAME DESCRIPTION INTRODUCTION
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Internet Internet Firewall A research-based collection of modules, available Q4 1993
Toolkit free on the Internet for use but not for resale,
from which one can build a firewall and serves as
the foundation for the Company's Gauntlet family
of firewall products.
Internet Gauntlet Internet Application gateway firewall that protects Q2 1994
Firewall internal networks from external intrusion.
Intranets Gauntlet Intranet Distributed firewall technology that protects Q2 1996
Firewall departmental Intranets from unauthorized access
by internal users.
Remote Sites Gauntlet Net Distributed firewall technology that provides Q2 1996
Extender secure communications over the Internet and WANs
to and from remote networks through the use of
encryption.
Mobile PC Users Gauntlet PC Provides secure communications over the Internet Q2 1996
Extender and other public networks to and from mobile PC
users.
</TABLE>
Internet Firewall Toolkit. The Company introduced its Internet Firewall Toolkit
on the Internet in 1993, free for use but not for resale. The TIS Internet
Firewall Toolkit, which has been downloaded more than 34,000 times to more than
15,000 discrete locations worldwide, is a collection of computer programs from
which a skilled programmer can build an application gateway firewall to secure
communications over public networks such as the Internet. To build a firewall
from the TIS Internet Firewall Toolkit, the toolkit programs must be compiled on
the programmer's hardware and operating systems and must configure the operating
system on which the firewall is housed to be a suitably secure base for the
firewall software. A firewall compiled from the TIS Internet Firewall Toolkit
provides basic protection for common Internet applications including e-mail and
the World Wide Web browsers and supports user authentication. Compared to the
Gauntlet family of firewall products, such a firewall will provide limited
management features and lacks firewall-to-firewall encryption that allows the
construction of a VPN. Additionally, a firewall built from the TIS Internet
Firewall Toolkit generally must be maintained and
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enhanced by the programmer who constructed it. The Company has initiated a
program to upgrade TIS Internet Firewall Toolkit users to the Gauntlet family of
firewall products.
Gauntlet Internet Firewall. The Gauntlet Internet Firewall is an application
gateway firewall which is the cornerstone of the Company's comprehensive
security solution. The Gauntlet Internet Firewall functions as a barrier between
the user's trusted network and untrusted networks such as the Internet and is
based on the TIS Internet Firewall Toolkit. The Gauntlet Internet Firewall
enables secure communications over public networks such as the Internet,
including firewall-to-firewall encryption that allows a firewall owner to
construct a VPN. In addition to standard encryption and VPN capabilities,
authentication and proxy services, the Gauntlet Internet Firewall includes a
secure GUI for management and includes audit and alert capabilities and tools.
The Company introduced a new GUI for the Gauntlet Internet Firewall in January
1996 and is currently developing additional enhancements for ease of use and
administration. The Gauntlet Internet Firewall software operates on a number of
popular versions of the UNIX operating system. The Company has developed and
packages as part of the Gauntlet Internet Firewall selective modifications to
the operating systems to increase the Gauntlet Internet Firewall's usability and
to harden the operating systems to make them more resistant to attack. Because
of these modifications, the Gauntlet Internet Firewall is "transparent" and
supports network services without requiring action by individual end users or
modifications to their client software. Also because of these modifications, the
Gauntlet Internet Firewall prevents "spoofing" attacks in which a computer on
the untrusted network pretends to be on the trusted network, and it detects
attempts from either network to probe for unprotected services or points of
access. To date, more than 1,700 Gauntlet Internet Firewall products have been
installed.
The Gauntlet Internet Firewall currently supports SunOS Versions 4.1.3 and
4.1.4, Hewlett-Packard's HP-UX Versions 10.0 and 10.01 and Berkeley Software
Design, Inc.'s BSD/OS Versions 1.1, 2.0 and 2.1. The Company expects that its
Gauntlet versions supporting Sun Microsystems' Solaris Version 2 and Microsoft's
Windows NT Server Version 4.0 will be commercially available by the end of 1996.
Gauntlet Intranet Firewall. The Gauntlet Intranet Firewall was designed for
improving the internal security of a LAN or Intranet. The Gauntlet Intranet
Firewall provides protection against unauthorized access to network resources by
internal users, and protects communications among individual PCs within and
across workgroups. The Gauntlet Intranet Firewall also currently supports Sun,
Hewlett-Packard and BSDI operating systems. The Company expects that its
Gauntlet Intranet Firewall product supporting Sun Microsystems' Solaris Version
2 and Windows NT Server Version 4.0 will be commercially available by the end of
1996.
Gauntlet Net Extender. Extending the capabilities of the Gauntlet firewall, the
Gauntlet Net Extender is a remote Gauntlet firewall that network administrators
can manage from another Gauntlet firewall. The Gauntlet Net Extender's target
customers are enterprises with multiple divisions and remote locations. Using
encryption, the Gauntlet Net Extender works in conjunction with a Gauntlet
Internet Firewall to provide remote site network security and remote management
and control from a centralized location. The Gauntlet Net Extender also
currently supports Sun, Hewlett-Packard and BSDI operating systems. The Company
expects that its Gauntlet Net Extender product supporting Sun Microsystems'
Solaris Version 2 and Windows NT Server Version 4.0 will be commercially
available by the end of 1996.
Gauntlet PC Extender. The Gauntlet PC Extender provides multiple levels of
security for remote users utilizing a PC running on Microsoft Windows 3.1 or
Microsoft Windows for Workgroups 3.11 to connect to an internal network or
communicate within an Intranet. The encryption provided by the Gauntlet PC
Extender protects passwords, provides user authentication to prevent
unauthorized access to internal network resources and provides data encryption
to protect the confidentiality and integrity of information transmitted over the
Internet or other public or private networks. The Company expects that its
Gauntlet PC Extender product for PCs supporting Microsoft Windows 95 will be
available by the end of 1996.
The specific uses and applications of the Company's network security products
vary significantly among market sectors and business organizations. Examples of
actual uses by customers of the Company's products include:
- A U.S. company that is a provider of software solutions for electronic
commerce has installed multiple Gauntlet Internet Firewalls at the
organization's sites in the United States and abroad to create a GVPN
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utilizing encryption. This enables personnel at the various domestic and
overseas sites to share proprietary software product development and
business information securely over the Internet.
- A multi-national banking institution has installed multiple Gauntlet
Internet Firewalls on corporate Intranets to enforce the bank's security
policies that require isolation of different organizations within the
bank located throughout the world. Each Gauntlet Internet Firewall is
configured to allow only selected applications to pass financial and
other important information onto the appropriate internal system. The
Company's "Crystal Box" approach and the ability to log all Internet
Firewall activities are essential to enforcement of bank security policy.
- A software industry leader uses a number of Gauntlet Internet Firewalls
in a parallel configuration which enables responsive Internet access for
internal and external users of its major World Wide Web site. The
Gauntlet Internet Firewalls enforce the company's security policies and
procedures and protect the company's internal systems and networks, which
process over 100,000 e-mail messages a day.
The Gauntlet Internet Firewall is offered by the Company at a U.S. list price of
approximately $11,500 for software only and approximately $15,000 for a
software/hardware bundle. The Company's U.S. list price for the Gauntlet Net
Extender is approximately $10,000, for the Gauntlet Intranet Firewall is
approximately $7,500 and for the Gauntlet PC Extender is approximately $100.
Volume discounts are generally available. The Company provides initial on-site
installation, testing and training and offers a variety of continuing
maintenance and support options to customers of the Gauntlet family of firewall
products.
The Company plans to extend its firewall products to include new proxies for new
services and to defend against new threats. Customer input will be an important
part of the Company's continued development of improvements in ease of use and
management functions. In addition, the Company is developing products which will
be compatible with Microsoft's Internet Security Framework. This framework
provides an open, interoperable and cross-platform set of technologies and
enables the effective interface of products developed and marketed by a variety
of software companies which will allow individuals to exchange information
securely, control access to their systems and conduct secure financial
transactions across public networks.
Cryptographic Products/Key Recovery Technology (KRT) System
The Company's cryptographic products are currently under development and the
Company is in negotiations with a number of companies regarding sales of the KRT
toolkit and the Data Recovery Centers ("DRCs"). However, no significant revenues
from the sale of such products are anticipated prior to 1997.
Key Recovery Technology (KRT) Toolkit. The KRT toolkit consists of software and
a license to the Company's KRT technology to enable companies to incorporate KRT
into their products either to enable their cryptographic functions to satisfy
U.S. (and possibly other) government requirements for general export to foreign
markets (Commercial Key Escrow, or CKE) or more generally to provide emergency
access to encrypted data in case an encryption key is lost or unavailable for
any reason (Commercial Key Recovery, or CKR). Using the KRT toolkit, the vendor
can encrypt any user secret (e.g., a key used to encrypt a file) using the
public key of a DRC and storing it in a Data Recovery Field ("DRF"). This DRF
permits future access to that secret for any reason through the designated DRC.
Data Recovery Centers. DRCs are an essential part of the Company's KRT. A DRC
is a system (hardware and software) with a set of public and private keys for
the recovery of encrypted data. A DRC receives and records user registrations
which include the access information required for future recovery requests. Upon
registration, the user's KRT-enabled application can create a Data Recovery
Field which will be recognized by the DRC. If a user needs to recover an
encrypted file or message, the DRF is sent to the DRC, the user's identity is
authenticated and the DRC provides the key required to decrypt the file or
message.
Microsoft CAPI Compliant Cryptographic Service Provider (CSP). The Company is
developing a Microsoft Cryptographic Application Programming Interface (CAPI)
compliant CSP with a domestic and exportable version for which an application
for export has been filed with the U.S. government. Both versions will be based
on RSA's BSAFE version 3.0 toolkit technology. The exportable version will use
the Data Encryption Standard ("DES") algorithm (56 bits) in conjunction with
CKE. The domestic version will use triple DES as its standard mode of
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operation, but will also be able to interoperate with the exportable version.
Both versions will use the Company's Key Recovery Technology (KRT) and will have
optional, user selected, key recovery features.
The Company has been a leader in developing a key escrow solution to enable the
interests of security and law enforcement agencies to be protected while
permitting the export of products with strong cryptography. The U.S. government,
both in the context of executive branch decision-making and pending legislation
in the U.S. Congress, is actively considering a variety of decisions regarding
cryptography export policy. The Clinton administration policy, as outlined by
the Vice President on July 12, 1996, would link the relaxation of export
controls to systems that include key escrow. However, certain parties, including
companies in the computer industry and members of the U.S. Congress, and a
recent report prepared for the National Research Council of the National Academy
of Sciences call for removing export controls on products that use the industry
standard DES algorithm (56 bits). To the extent that the government either
decides not to permit the export of such products with key escrow or decides to
permit the export of such products without key escrow, those decisions could
have an adverse impact on the development of a market for the CKE products the
Company plans to introduce in the future.
In January 1996, the U.S. government granted the Company an export license for a
particular transaction involving the Gauntlet Internet Firewall using the DES
algorithm (56 bits). This is the first export license granted because the
encryption is combined with a key escrow system. In June 1996, the U.S.
government granted the Company several export licenses to sell the Gauntlet
Internet Firewall in order to provide Global Virtual Private Network services.
Commercial Consulting
TIS offers a full range of consulting in information security policies and
planning. TIS's Commercial Consulting Practice grew out of the Company's
original consulting practice founded by Stephen T. Walker. It is currently led
by members of senior management and carried out by TIS's staff of experts who
average more than 15 years of information security experience in both commercial
and government communities. TIS offers the following commercial consulting
services: technology research services; consultation on security issues
associated with products and services, corporate information security policy
development, architectural and diagnostic security analysis and firewall
configuration; and training for corporate network and security administration
personnel. TIS's consulting customer base includes a wide range of institutions
from financial, industrial, regulatory, entertainment, research, information
systems and telecommunications organizations.
Management believes that the Commercial Consulting Practice has and will
continue to play a key role in generating follow-on sales of the Company's
security products. Corporations with the most complete information security
needs, such as those in industries targeted by the Company, often look to
outside consultants to assist them in designing, maintaining and improving
network security systems and policies. The Company believes that its reputation
in the field of computer security along with its team of experienced consultants
attracts customers to engage TIS's services in solving their complex security
needs.
The Commercial Consulting Practice continuously evaluates emerging network
services and technologies, the security vulnerabilities inherent in new
offerings and evolving methods employed by hackers and professional system
penetrators to exploit system vulnerabilities. The findings from this effort not
only enable more effective consultation and the development of automated
analysis tools, but also feed into the ongoing network security product
development and enhancement activities of TIS.
ADVANCED RESEARCH AND ENGINEERING
The Company engages in research and development of computer and communications
security technology under contracts with departments and agencies of the U.S.
government. The Company provides security technology analysis and consulting
under contracts both directly and indirectly with the U.S. government and the
governments of other countries. Historically, the principal source of the
Company's revenues was from government contracts. In 1993, 1994 and 1995 and the
first half of 1996, approximately 95%, 86%, 68% and 56%, respectively, of the
Company's total revenues were derived directly or indirectly from government
contracts. These revenues, along with the Company's reputation as a pioneer in
the field of computer and network security, have permitted the Company to
assemble a group of renowned scientists and engineers.
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The government research and development efforts include Trusted Mach technology,
a high assurance operating system base that controls access to all system
resources and enforces security policies based upon labels associated with the
sensitivity of the resources and access privileges of the users. High-Assurance
Firewalls, World Wide Web servers and file servers built on the Trusted Mach
technology will provide strong protection for data that is to be shared, either
within an organization or externally, but which must also be protected from
unauthorized reading or writing. Another operating system security technology
derived from government-funded research enforces a broad spectrum of security
policies, including those tailored to the user's individual role in an
organization. This technology can greatly improve the security of existing
operating systems by partitioning their capabilities into various domains. The
Company has demonstrated significant improvements to UNIX systems security using
this technology.
Other government research and development efforts include the development of
prototype secure distributed systems, the incorporation of cryptographic
services into various applications and the enhancement and broader application
of access control techniques. Under government contracts, the Company has
incorporated cryptography into e-mail to provide the ability to digitally sign
e-mail in addition to protecting the contents from change or perusal. The
Company is developing techniques to improve the security of Internet
infrastructure, such as Domain Name Service and routing, by digitally signing
communications between cooperating elements. Security services are being
incorporated into distributed systems using access control techniques that work
with Common Object Request Broker Architecture (CORBA), an emerging
international standard.
Government-related consulting has focused primarily upon security assessment and
design assistance for security features and attributes of the systems and
applications of the U.S. Department of Defense. The Company's consulting has
helped to discover approaches that provide both the security and functionality
that is needed to support the defense mission. Many of the security issues and
architectures have commercial counterparts, and the Company has generally
reserved the rights to develop such related technologies for commercial uses.
The Company's backlog for direct and indirect U.S. government contracts as of
June 28, 1996 was approximately $14.4 million. The government-related backlog
represents firm orders or contracts for research, development and consulting
analysis with performance and delivery schedules that extend up to 30 months.
Funded backlog represents the portion of the backlog for which agencies,
departments or companies have actually obligated payment. As of June 28, 1996,
approximately $7.3 million of the government-related backlog is funded. The
Company's U.S. government contracts are subject to audit by the DCAA. The DCAA
has audited the Company's cost accounting system through 1990 without material
cost disallowances and is currently performing a similar audit of the Company's
cost accounting system for the years 1991 through 1994.
Most of the Company's government-related contracts require the Company to
perform specified services for which the Company is paid its costs incurred and
a negotiated fee. Two contracts for the development of the Trusted Mach
technology accounted for approximately 33% of the Company's total revenues
during 1995. The smaller contract ended in December 1995. The larger contract,
with the NSA, accounted for approximately 25% of the Company's total revenues
during 1995 and is currently scheduled to complete in early 1997. Security
technology research and development contracts with ARPA accounted for
approximately 17% of the Company's 1995 revenues. During 1995, 8% of the
Company's total revenues came from security technology research and development
contracts with the RL.
SALES AND MARKETING
The Company intends to pursue a focused marketing strategy to achieve greater
market penetration for TIS network security products and services by utilizing
complementary domestic and international distribution channels, including direct
sales, resellers and telesales. The Company believes these channels will provide
broad customer coverage while maintaining a highly cost-effective effort. The
Company has organized its direct sales, resellers and telesales teams, currently
consisting of over 30 employees, on a regional basis in order to approach the
market in a coordinated manner. The Company has initiated a strategy of directly
marketing to its current base of users who have downloaded the TIS Internet
Firewall Toolkit and seeks to convert them into users of Gauntlet products. In
addition, the Company's Fortune 500 marketing strategy with large organizations
is to establish relationships through consulting assistance in the architectural
design, installation and operational phases of their major security
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initiatives. The Company plans to attend the popular Internet and network shows,
advertise in trade journals and submit articles that will deliver its message to
decision makers and to the people who make information security recommendations.
Direct Sales. The Company's direct sales force markets its products and
services to large corporations and organizations with complex information
security needs, such as telecommunications companies, finance and banking
institutions, petrochemical companies and pharmaceutical companies. The
Company's direct sales staff solicits these customers and provides strategy and
solutions as well as insights into security architecture alternatives while
gathering insight into customers' future requirements.
Resellers. The Company currently maintains a worldwide network of over 50
resellers which can be categorized into four areas based on business
segmentation and end user focus: Internet service providers, value added
resellers and hardware vendors, system integrators and security product vendors.
The Company views these reseller partners as an extension of its direct sales
force and supports these relationships with on-going training in security
planning, installation and maintenance as well as by providing such resellers
with updated information, software enhancements and advance notice of
announcements of future products through a TIS World Wide Web site designed
specifically for that purpose. The following are some of the Company's resellers
in each of the designated categories:
- Internet Service Providers: In the United States, these include BBN
Internet Service Corp., PSINet, Inc. and UUNet Technologies, Inc.
Unipalm Limited is the Company's Internet service provider in Europe.
Internet Initiative Japan is one of the Company's Internet service
provider resellers in the Pacific Rim.
- Value Added Resellers and Hardware Vendors: In the United States,
these include Data General Corporation and Silicon Graphics, Inc. In
Europe and the Pacific Rim, these include Bull Enterprise Systems,
HITACHI Ltd. and Sumitomo Electric Systems Company, Ltd.
- System Integrators: These include AvantComp Oy, Conjungi Corporation,
Fujitsu Systems Business of Canada, Inc. and Media Communications STM
AB.
- Security Product Vendors: These include Hanil Telecom Co., Ltd. in the
Pacific Rim and Mergent International, Inc. and V-One in the United
States.
The Company's agreements with its resellers generally provide the reseller with
a limited license to market, distribute and install the Company's Gauntlet
family of firewall products in a particular territory and to make such
modifications to the Company's Gauntlet family of firewall products as may be
required to serve the customer's needs. The agreements obligate the Company to
provide its resellers with updates to the licensed Gauntlet family of firewall
products and with ongoing maintenance and support. The reseller is required to
provide the Company with periodic reports regarding its activities in connection
with such products and to pay related license fees to the Company. The
agreements also contain confidentiality, indemnification and warranty disclaimer
provisions.
Telesales. The TIS Telesales Team maintains frequent and open communications
with customers. The TIS Telesales Team is geographically focused to develop,
service and transact business. The 1993 decision to make the Company's firewall
technology available via the Company's World Wide Web page proved very
successful and of strategic importance. It is currently estimated that there
have been more than 34,000 downloads of the TIS Internet Firewall Toolkit to
more than 15,000 discrete locations worldwide. The Telesales Team targets
members of this user community as potential customers for the Gauntlet family of
firewall products. TIS also provides these prospects with information through a
Firewall Toolkit user group and Birds of a Feather sessions at conferences.
Other leads for the Telesales Team are generated through trade shows, an 800
number, e-mail and direct mailings.
For information regarding the Company's revenues from outside North America, see
Note 1 of Notes to Consolidated Financial Statements.
CUSTOMER SERVICE AND SUPPORT
The Company offers extensive training to customers and resellers for firewall
installation and management. As part of the training program, the Company
provides onsite or offsite classroom instruction and related instructional
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materials which enable customer and reseller personnel to deliver the first
level of support and to tailor a support scenario for a client's unique
requirements.
The Company offers support services by e-mail and telephone for its Gauntlet
family of firewall products. These services encompass diagnosing problems in the
network associated with the firewall and answering questions about configuration
and operation alternatives. Most customers purchase support services in the form
of a support contract covering a single firewall or in the form of a corporate
support agreement. The Company offers a variety of support contracts, including
one offering support seven days a week, 24 hours per day (7 X 24).
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on core information
security technologies, enhancements to existing technologies and products and
development of new products. The Company's information security products
research and development program has focused primarily on feature and
performance enhancements, expansion of the family of scaleable firewall and
cryptographic security products and development of applications of cryptography,
in particular those associated with cryptographic key recovery. The Company's
government research and development program focuses on extensions and
enhancements to current firewall technology, access control techniques for
operating systems and networks, the application of cryptography within operating
systems, network components and network infrastructure and security for
distributed systems. See "-- Advanced Research and Engineering." Through a
combination of independent and government-funded research and development
efforts, the Company is able to maintain a broad base of computer and network
security technology expertise and to remain a leader in information security
technology development.
As of August 28, 1996, the Company's research and development staff included
more than 130 scientists and engineers. Of these, nine have PhDs, 62 have
master's degrees and 61 have bachelor's degrees. The Company believes that its
ability to attract and retain a highly qualified technical staff will continue
to be essential to the success of its research and development programs. The
market for such personnel is highly competitive and the Company's research and
development activities could be adversely affected if the Company is unable to
attract and retain skilled technical personnel.
In addition to amounts directly funded by the U.S. government, the Company spent
approximately $582,000, $646,000 and $1.14 million on research and development
during the years ended 1993, 1994 and 1995, respectively, and approximately
$1.01 million during the first half of 1996. The Company expects to continue to
fund research and development efforts independently, through internally
generated funds and proceeds from the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company believes that the continued scope and
progressiveness of its security technology research and development are
essential in ensuring the Company's future success in the information security
field.
COMPETITION
Competition in the information security market is intense and constantly
evolving, and the Company expects such competition to increase in the future.
The Company believes that significant competitive factors affecting this market
are depth of product functionality, product quality and performance, product
price, customer support, conformance to protocols and industry standards and
breadth of platform support. In addition, the Company believes that the ability
to rapidly develop and implement new products and features for the market is
critical. There can be no assurance that the Company can maintain or enhance its
competitive position against current and future competitors. Significant factors
such as the emergence of new products, fundamental changes in computing
technology and aggressive pricing and marketing strategies may also affect the
Company's competitive position. Many of these factors are out of the Company's
control. See "Risk Factors -- Competition."
The principal competitors for the Company's government-funded research and
development are BBN Corporation, Open Software Foundation Research Institute,
Secure Computing Corporation and SRI International.
The Company's principal current competitors for its network security products
include America Online, Inc.'s Advanced Network and Services subsidiary, Bay
Networks Inc., Border Network Technologies, Inc., Check Point
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Software Technologies Ltd., Cisco Systems, Inc., Digital Equipment Corporation,
Harris Computer Systems Corporation, International Business Machines
Corporation, Microsoft Corporation, Milkyway Networks Corporation, Morningstar
Technologies, Inc., Network Systems Corporation, Raptor Systems, Inc., Secure
Computing Corporation, Sun Microsystems, Inc. and V-One. Secure Computing
Corporation recently announced the signing of a definitive agreement for the
acquisition of Border Network Technologies, Inc. Due to the rapid expansion of
the network security market, the Company may face competition from new entrants
in the network security industry, possibly including the Company's resellers.
PROPRIETARY INFORMATION AND INTELLECTUAL PROPERTY
The Company's success is dependent in part on its proprietary technology. TIS
relies on a combination of patent, trade secret, copyright and trademark laws,
non-disclosure agreements and contractual provisions to establish and protect
its proprietary rights. The Company has received one patent and has three
pending domestic patent applications and two pending international patent
applications pursuant to the Patent Cooperation Treaty (PCT) on its KRT and
computer security technology. The Company has received notice from the U.S.
Patent and Trademark Office that two of the three pending domestic patents will
issue in September 1996. The Company has not selected any particular foreign
countries in which to file patent applications based upon these PCT applications
and intends to make such selections as appropriate in the future. The Company
uses a printed "shrink-wrap" license for users of its products in order to
protect certain of its copyrights and trade secrets. The Company attempts to
protect its trade secrets and other proprietary information through agreements
with suppliers and non-disclosure agreements with employees and consultants and
other security measures.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult, and, while the Company is unable to
determine the extent to which piracy of its software products exists, such
piracy can be expected to be a persistent problem, particularly in international
markets and as a result of the growing use of the Internet. Some courts have
held that shrink-wrap licenses, because they are not signed by the licensee, are
not enforceable. The laws of Maryland, which the shrink-wrap licenses purport to
make the governing law, are unclear on this subject. In addition, there can be
no assurance that patent applications filed by the Company will result in
patents being issued or that its existing patent, and any patents that may be
issued to it in the future, will afford protection against competitors with
similar technology; nor can there be any assurance that patents issued to the
Company will not be infringed upon or designed around by others or that others
will not obtain patents that the Company would need to license or design around.
For additional information see "Risk Factors -- Limited Protection of
Intellectual Property and Proprietary Rights."
The Company licenses encryption and other portions of the software included in
its products from third parties and its success will depend in part on its
continued ability to use technology that is important to the functionality of
its products licensed from these or other parties. If its licenses were to be
terminated and the Company were unable to obtain licenses to similar software
from others there could be a material adverse effect on its financial condition
or results of operations.
FACILITIES
The Company's principal administrative, research, sales, marketing and
consulting facility is located in 44,681 square feet of office space in
Glenwood, Maryland which is owned by the Company. The Company leases other
domestic research, sales, marketing and consulting offices, including
approximately 27,000 square feet in Rockville, Maryland and 1,371 square feet in
Lisbon, Maryland. The Company has also entered into a lease for 6,271 square
feet in McLean, Virginia. Additional domestic offices are located in Mountain
View and Los Angeles, California, where the Company leases 4,472 and 3,874
square feet, respectively. The Company also maintains a sales, marketing and
consulting office located in 2,675 square feet of leased space in the United
Kingdom. The Company also owns a 1,700 square foot building adjacent to its main
facility in Glenwood, Maryland which is currently leased to a local small
business. The Company believes that its existing facilities are adequate for its
needs and that alternative or additional space will be available as needed.
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EMPLOYEES
As of August 28, 1996, the Company employed 206 people on a full-time basis and
27 people on a temporary or part-time basis. Although the Company has no
employment agreement with any of its employees, all employees are required to
sign agreements containing confidentiality and non-disclosure provisions.
Additionally, the Company hires independent contractors and temporary employees
on an as-needed basis to assist with specialized assignments in certain areas,
including commercial product development, advanced research and engineering,
customer support and installations.
None of the Company's employees is represented by a labor union or is subject to
a collective bargaining agreement. The Company considers its relations with its
employees to be good.
REGULATORY MATTERS
Certain of 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. In
addition, these U.S. export laws prohibit the export of encryption products to a
number of hostile countries. U.S. export regulations regarding the export of
encryption technology require either a transactional export license or the
granting of Department of Commerce commodity jurisdiction. To date, the Company
has been able to secure all required U.S. export licenses, including the first
two, and the Company believes the only, export licenses for transactions
involving a network security product using the industry standard DES algorithm
(56 bits), which were granted because they included a key recovery system.
Additionally, the Company currently has a number of export license applications
pending before the U.S. government, including two commodity jurisdiction
applications, with respect to the export of products utilizing KRT. 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. The Company does not expect that
such KRT products will generate significant revenues prior to 1997. See
"-- Commercial Products and Services -- Cryptographic Products/Key Recovery
Technology (KRT) System." 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.
LITIGATION
The Company is not currently engaged in any legal proceedings and is not aware
of any pending or threatened litigation that could have a material adverse
effect on the Company's business, financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
NAME AGE POSITION WITH THE COMPANY
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen T. Walker(1) 52 President, Chief Executive Officer, Chairman of the Board
and Director
Martha A. Branstad 55 Executive Vice President and Chief Operating Officer,
President of Advanced Research and Engineering Division and
Director
Harvey L. Weiss 53 Executive Vice President, President of the Commercial
Division, Secretary and Director
Steven B. Lipner 52 Executive Vice President and Network Security Product Line
Manager
Homayoon Tajalli 37 Executive Vice President and Cryptographic Product Line
Manager
Ronald W. Kaiser 42 Executive Vice President and Chief Financial Officer
Gerald J. Popek(1)(2) 49 Director
Charles W. Stein(1)(2) 56 Director
</TABLE>
(1) Member, Compensation Committee
(2) Member, Audit Committee
STEPHEN T. WALKER founded the Company in May 1983 and has continuously served as
President, Chief Executive Officer, Chairman of the Board and a Director. From
1980 to 1983, Mr. Walker was the Director of Information Systems for the Office
of the Assistant Secretary of Defense for Communications, Command, Control and
Intelligence (C3I), Pentagon. In recognition of Mr. Walker's contributions, he
was awarded the Secretary of Defense Meritorious Civilian Service Medal in 1984,
and the first National Computer System Security Award in 1988. Mr. Walker holds
a B.S. degree in electrical engineering from Northeastern University and an M.S.
degree in electrical engineering from the University of Maryland.
MARTHA A. BRANSTAD has been Executive Vice President and a Director of the
Company since 1986, Chief Operating Officer of the Company since 1993 and
President of the AR&E Division since January 1996. From August 1984 to August
1985, Dr. Branstad served as the Program Director, Software Engineering for the
National Science Foundation, and was responsible for directing academic research
grants in software engineering and computational mathematics. During the period
from September 1978 to September 1985, Dr. Branstad worked in various positions
within the National Bureau of Standards, including Manager, Software for
Parallel Processing and Manager, Software Engineering. Prior to that time, Dr.
Branstad managed a software research group for the NSA. Dr. Branstad holds a
B.S. in mathematics from Iowa State University, an M.S. degree in mathematics
from the University of Wisconsin and a Ph.D. in computer science from Iowa State
University.
HARVEY L. WEISS has been Executive Vice President of the Company, President of
the Commercial Division and a Director of the Company since March 1996, and has
been Secretary of the Company since May 1996. Prior to that time, from February
1994 to March 1996, Mr. Weiss served as President of Public Sector Worldwide
Division for Unisys Corporation. From July 1991 to December 1993, Mr. Weiss was
the Vice President of Sales and the President and Chief Operating Officer of
Thinking Machines Corporation. Prior to that time, Mr. Weiss served in various
senior capacities in Digital Equipment Corporation. Thinking Machines
Corporation sought bankruptcy protection under Chapter 11 of the Bankruptcy Code
in August 1994. Mr. Weiss holds a B.S. degree in mathematics from the University
of Pittsburgh.
STEVEN B. LIPNER has been Executive Vice President and Network Security Product
Line Manager of the Company since February 1994. From February 1992 to February
1994, Mr. Lipner served as the Director of Information Systems, Center for
Information Systems of The MITRE Corporation. Prior to that time, Mr. Lipner
held various engineering management positions with Digital Equipment Corporation
("DEC") from March 1981 to February 1992. From 1987 to 1992, Mr. Lipner was
Engineering Group Manager of DEC's Secure Systems Group with responsibility for
secure systems product development and business strategy. Mr. Lipner received
S.B. and S.M. degrees in Civil Engineering from the Massachusetts Institute of
Technology.
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HOMAYOON TAJALLI has been an Executive Vice President of the Company since
December 1993, and from October 1987 until December 1995 was responsible for all
aspects of the Company's Trusted Mach operating system development activities.
Since January 1996, Mr. Tajalli has served as the Cryptographic Product Line
Manager. From February 1983 to October 1987, Mr. Tajalli held various management
positions with Digital Equipment Corporation, including Senior Technical
Software Manager, Technical Software Manager/Software Consultant and Principal
Software Specialist. Mr. Tajalli holds B.S. and M.S. degrees in electrical
engineering from the University of Maryland.
RONALD W. KAISER joined the Company in May 1996 as Executive Vice President and
Chief Financial Officer. From November 1994 through January 1996, Mr. Kaiser
served as Chief Financial Officer of American Communications Services Inc.
("ACSI"), a regional competitive access provider of telecommunications services,
and from February 1996 through July 1996, Mr. Kaiser served as a consultant to
ACSI. Mr. Kaiser is a certified public accountant with over 15 years of
experience in accounting and financial management of both publicly held and
private companies. From April 1993 to November 1994, Mr. Kaiser served as Vice
President of Finance, Treasurer and Chief Financial Officer at ADAK
Communications Corporation, a manufacturer and distributor of telecommunications
digital access controllers. ADAK Communications Corporation sought bankruptcy
protection under Chapter 11 of the Bankruptcy Code in February 1996. From 1990
through 1993, Mr. Kaiser served as Vice President - Finance and Treasurer of a
subsidiary of George Fischer AG, a Swiss corporation. Mr. Kaiser received B.A.
degrees in accounting and pre-law from Michigan State University.
GERALD J. POPEK has been a Director of the Company since May 1996. He has served
as Chief Technology Officer of Platinum technology, inc. ("Platinum") since
August 1995 and is responsible for participating in the setting of overall
corporate technology and product strategy, enterprise security and open systems
issues. From January 1982 to August 1995, Dr. Popek was the founder and Chairman
of Locus Computing Corporation, an organization dedicated to open systems based
distributed computing which was recently acquired by Platinum. Additionally,
since 1987 Dr. Popek has been a senior faculty member in the Computer Science
Department at UCLA, conducting research on computer security, distributed UNIX
systems, replication and mobile computing. Dr. Popek holds a B.S. degree in
nuclear engineering from New York University and S.M. and Ph.D. degrees in
applied mathematics from Harvard University.
CHARLES W. STEIN has been a Director of the Company since May 1996. Mr. Stein
has over 35 years of experience in the computer and communications industry and
since February 1987 has served as the President, Chief Executive Officer and
Director of Netrix Corporation, an electronic components company. Prior to that
time, Mr. Stein was a Vice President with BBN Communications Corporation where
he was responsible for marketing and later the Professional Services Division.
Mr. Stein holds a B.S. degree in mathematics from Tufts University.
Officers of the Company are elected by the Board of Directors on an annual basis
and serve until their successors have been duly elected and qualified. The
Company's Certificate of Incorporation provides for a classified Board of
Directors consisting of three classes of directors with each class required to
be as nearly equal in number as possible. The number of directors is determined
from time to time by the Board of Directors and is currently fixed at 5 members.
A single class of directors is elected each year at the Company's annual meeting
of stockholders. Subject to transition provisions, each director elected at each
such meeting will serve for a term ending on the date of the third annual
meeting of stockholders after his or her election and until his or her successor
has been elected and duly qualified. Mr. Weiss is serving for a term expiring on
the date of the Company's 1997 Annual Meeting of Stockholders, Mr. Stein and Dr.
Branstad are serving for terms expiring on the date of the Company's 1998 Annual
Meeting of Stockholders and Mr. Walker and Dr. Popek are serving for terms
expiring on the date of the Company's 1999 Annual Meeting of Stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors currently has two committees, the Audit
Committee and the Compensation Committee. The Audit Committee, among other
things, recommends the firm to be appointed as independent accountants to audit
the Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the
45
<PAGE> 47
Company and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Dr. Popek and Mr.
Stein. The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's stock
option plans. The members of the Compensation Committee are Mr. Walker, Dr.
Popek and Mr. Stein.
DIRECTOR COMPENSATION
Directors who are not currently employees of the Company are entitled to receive
a fee of $750 per meeting attended in person, are reimbursed for certain
reasonable expenses incurred in attending each meeting of the Board of Directors
and receive awards of stock options under the 1996 Directors' Stock Option Plan.
See "Management -- Directors' Stock Option Plan."
EXECUTIVE COMPENSATION
The following table shows information concerning compensation for the Chief
Executive Officer and each of the other most highly compensated executive
officers other than the Chief Executive Officer of the Company (the "Named
Officers") for 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
----------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------ SECURITIES OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) UNDERLYING OPTIONS COMPENSATION($)(2)
---- --------- ----------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Stephen T. Walker 1995 195,952 146,026 -- 4,472
President and Chief Executive 1994 180,055 141,274 2,454 9,931
Officer 1993 162,262 49,923 12,269 4,831
Martha A. Branstad 1995 147,538 41,840 -- 11,170
Executive Vice President and 1994 137,187 38,497 2,454 11,392
Chief Operating Officer 1993 121,182 21,263 12,269 8,587
Steven B. Lipner 1995 138,445 29,191 -- 864
Executive Vice President 1994 109,430 21,397 49,077 720
1993 -- -- -- --
Homayoon Tajalli 1995 136,571 29,484 -- 198
Executive Vice President 1994 126,874 24,424 2,454 198
1993 112,653 13,306 12,269 198
</TABLE>
- ---------------
(1) The Company's executive officers are eligible for annual cash bonuses. Such
bonuses are based upon achievement of individual or corporate performance
objectives determined by the Board of Directors.
(2) Includes the payment by the Company of the annual premium for certain term
life coverage pursuant to a benefit program, and in the case of Mr. Walker and
Dr. Branstad includes payment by the Company of the premium for buy-sell life
insurance.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options to purchase Common Stock granted in the year ended
December 29, 1995 to any of the Named Officers.
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<PAGE> 48
FISCAL YEAR-END OPTION VALUES
The following table sets forth the value of outstanding options held by the
Named Officers as of December 29, 1995.
<TABLE>
<CAPTION>
------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen T. Walker............................ 14,723 -- $28,158 --
Martha A. Branstad........................... 14,723 -- 28,158 --
Steven Lipner................................ 49,077 -- 95,424 --
Homayoon Tajalli............................. 14,723 -- 28,158 --
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the Common Stock at
December 29, 1995, $2.45 per share (as determined by the Company's Board of
Directors), less the exercise price payable for such shares, multiplied by the
number of shares underlying the option.
EMPLOYEE STOCK OPTION PLANS
Under the Company's Amended and Restated Employee Stock Option Plan (the
"Employee Option Plan"), at August 25, 1996, options for 143,329 shares of
Common Stock were outstanding. No further options will be granted under the
Employee Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Option Plan") authorizes the issuance of 1,625,667 shares of Common Stock
pursuant to the exercise of stock option grants. At August 25, 1996, no shares
had been issued under the 1996 Option Plan, options for 1,152,623 shares were
outstanding and 473,044 shares remained available for future grant under the
1996 Option Plan. The Employee Option Plan and the 1996 Option Plan are
collectively referred to as the "Option Plans."
The Employee Option Plan provides for grants of options to employees of the
Company, and the 1996 Option Plan provides for grants to employees, officers and
consultants of the Company. Each stock option granted under the Option Plans is
evidenced by a written stock option agreement between the Company and the
optionee. The Option Plans provide for the granting of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and non-statutory stock options. The Option Plans are administered by
the Compensation Committee which has sole discretion and authority, consistent
with the provisions of the Option Plans, and has the right, among other things,
to determine which eligible participants will receive options, the time when
options will be granted, the terms, including the exercise price, of options
granted and the number of shares that will be subject to options granted under
the Option Plans.
For any option intended to qualify as an incentive stock option, the exercise
price must be not less than 100% of the fair market value of the Common Stock on
the date the option is granted (110% of the fair market value of such Common
Stock with respect to any optionee who immediately before any option is granted,
directly or indirectly, possesses more than 10% of the total combined voting
power of all classes of stock of the Company ("10% Owners")). The Compensation
Committee has the authority to determine the time or times at which options
granted under the Option Plans become exercisable; provided that, for any option
intended to qualify as an incentive stock option, such option must expire no
later than ten years from the date of grant (five years with respect to options
granted to 10% Owners). Options are non-assignable and non-transferable, unless
a stock option agreement provides that such option may be transferred by the
optionee upon death, by will or the laws of descent and distribution. Options
generally may be exercised only while the optionee is either employed by, or
rendering service to, the Company or within a specified period of time
thereafter. The Compensation Committee may accelerate the vesting of any option
or waive any condition or restriction pertaining to such option at any time.
Unless terminated sooner by the Board of Directors of the Company, the Employee
Option Plan will terminate in 2006, or the date on which all shares available
for issuance shall have been issued pursuant to the exercise of options granted
under the Employee Option Plan. Unless terminated sooner by the Board of
Directors of the Company, the 1996 Option Plan will terminate in 2006, or the
date on which all shares available for issuance shall have been issued pursuant
to the exercise of options granted under the 1996 Option Plan.
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<PAGE> 49
Unless otherwise provided in a particular stock option agreement, upon a "Change
in Control of the Company" as defined in the 1996 Option Plan, any outstanding
options issued pursuant to the 1996 Option Plan prior to the date of such Change
in Control of the Company shall vest and be exercisable as to 50% of the number
of shares of Common Stock that remain unvested on the date of such Change in
Control of the Company.
DIRECTORS' STOCK OPTION PLAN
The 1996 Directors' Stock Option Plan (the "Director Plan") was adopted in May
1996. Under the terms of the Director Plan, directors of the Company who are not
employees of the Company are eligible to receive non-statutory options to
purchase shares of Common Stock. A total of 200,000 shares of Common Stock may
be issued upon exercise of options granted under the Director Plan. On August
15, 1996, each of Dr. Popek & Mr. Stein were granted options to purchase 9,202
shares of Common Stock at an exercise price of $7.04 per share. Unless
terminated sooner by the Board of Directors, the Director Plan will terminate in
2006, or the date on which all shares available for issuance under the Director
Plan shall have been issued pursuant to the exercise of options granted under
the Director Plan.
Upon a member's initial election or appointment to the Board of Directors after
the date of this Prospectus, such member will be granted options to purchase
6,135 shares of Common Stock. Annual options to purchase 1,227 shares of Common
Stock will be granted to each eligible director, including those eligible
directors currently on the Board, on the date of each annual meeting of
stockholders commencing in 1997. Such annual options will vest in full at the
earlier of (i) the first anniversary of the date of the grant or (ii) the date
of the next annual meeting of stockholders. The exercise price of options
granted under the Director Plan will equal the closing price per share of the
Common Stock on the date of grant (or in the case of grants on the Effective
Date the public offering price for the Offering).
Options granted under the Director Plan are not transferable by the optionee
except by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order. In the event an optionee ceases to serve as
a director, each option may be exercised by the optionee for the portion then
exercisable at any time within 60 days after the optionee ceases to serve as a
director; provided, however, that in the event that the optionee ceases to serve
as a director due to his death or disability, then the optionee, or his or her
administrator, executor or heirs, may exercise the exercisable portion of the
option for up to 180 days following the date the optionee ceases to serve as a
director. No option is exercisable after the expiration of five years from the
date of grant.
Upon a "Change in Control of the Company" as defined in the Director Plan, any
outstanding options issued pursuant to the Director Plan prior to the date of
such Change in Control of the Company shall vest and be exercisable as to 50% of
the number of shares of Common Stock that remain unvested on the date of such
Change in Control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 3, 1996, the Company did not have a Compensation Committee, and
all matters concerning executive officer compensation were addressed by the
entire Board of Directors. The Compensation Committee is currently comprised of
Mr. Walker, Dr. Popek and Mr. Stein. Neither Dr. Popek nor Mr. Stein was at any
time during the fiscal year ended December 29, 1995, or at any other time, an
officer or employee of the Company. Mr. Walker is the President and Chief
Executive Officer of the Company. No member of the Compensation Committee of the
Company serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that to the fullest extent
permitted by Delaware law a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under current Delaware Law, liability of a
director may not be limited (i) for any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or purchases
and (iv) for any transaction from which the director derives an
48
<PAGE> 50
improper personal benefit. The effect of this provision of the Company's
Certificate of Incorporation is to limit or eliminate the rights of the Company
and its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of such
director's fiduciary duty of care as a director (including breaches resulting
from negligent or grossly negligent behavior) except in those circumstances
described in clauses (i) through (iv) above. This provision does not limit or
eliminate the rights of the Company or any stockholder to seek nonmonetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. In addition, the Company's Certificate of Incorporation
and Amended and Restated Bylaws (the "Bylaws") provide that the Company shall
indemnify its directors, officers, employees and agents to the fullest extent
permitted by Delaware Law, including circumstances in which indemnification is
otherwise discretionary under Delaware law, and the Company has entered into
indemnification agreements with its directors and officers to that effect. The
Company maintains officer and director liability insurance providing coverage of
up to $10 million with respect to liabilities arising out of certain matters,
including matters arising under the Securities Act.
At present, there is no pending litigation or proceeding involving any officer
or director, employee or agent of the Company where indemnification will be
required or permitted. The Company is not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
49
<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In June 1996, the Company purchased the real property and improvements located
adjacent to the Company's Glenwood, Maryland headquarters (the "Adjacent
Property") from Glenwood Associates Limited Partnership ("Glenwood Associates")
for a purchase price of $360,000. Stephen T. Walker is the general partner of
Glenwood Associates. The limited partners of Glenwood Associates are Martha A.
Branstad and Stephen D. Crocker. The purchase price was determined based on a
valuation of the property prepared by the Company based primarily upon an
independent appraisal. Prior to such transaction, the Company leased the
Adjacent Property from Glenwood Associates pursuant to an oral lease agreement
which provided for monthly rent of $3,929 plus payment of operating expenses.
Annual rent expense under the Adjacent Property lease agreement for fiscal 1995
was $47,148.
In July 1995, in connection with a $1.8 million construction loan (the
"Construction Loan") from Mercantile Bank for improvements to the Company's
Glenwood, Maryland headquarters, Mr. Walker entered into a personal guaranty
agreement (the "Personal Guaranty Agreement") with Mercantile Bank. Under the
Personal Guaranty Agreement, Mr. Walker unconditionally and irrevocably
guaranteed the obligations of the Company under the Construction Loan agreements
and related documents. Mr. Walker has also entered into a Security Agreement
with the Company and Mercantile Bank in connection with the Construction Loan.
In July 1995, Mr. Walker and the Company executed a certain Deed and
Confirmatory Deed pursuant to which Mr. Walker and the Company confirmed the
boundaries of the adjacent parcels of land owned by Mr. Walker and the Company,
respectively.
In August 1995, the Company issued a Promissory Note (the "Promissory Note") for
the benefit of Mr. Crocker in the principal amount of $307,520, representing the
balance of monies due to Mr. Crocker in connection with the repurchase by the
Company of 588,921 shares of Common Stock from Mr. Crocker. This Promissory Note
was paid in full in September 1995.
The Company believes that all transactions set forth above were made on terms no
less favorable to the Company than would have been obtained from unaffiliated
third parties. The Company has adopted a policy whereby all future transactions
between the Company and its officers, directors and affiliates will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties and will be approved by a majority of the disinterested members of the
Board of Directors.
50
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of
the Company's Common Stock as of August 15, 1996, and as adjusted to reflect the
sale of the Common Stock offered hereby, for (i) each person known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each of the Named Officers, and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated (i) the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable,
and (ii) the address for the persons named in the table is 3060 Washington Road,
Glenwood, Maryland 21738.
<TABLE>
<CAPTION>
-------------------------------------------
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
THE OFFERING(1) AFTER OFFERING(1)
-------------------- --------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Martha A. Branstad(2).................................. 1,434,022 19.0% 1,434,022 13.7%
Stephen D. Crocker(3).................................. 479,480 6.4 479,480 4.6
Ronald W. Kaiser(4).................................... -- * -- *
Steven B. Lipner(5).................................... 49,077 * 49,077 *
Gerald J. Popek........................................ -- * -- *
Marvin Schaefer(6)..................................... 392,614 5.2 392,614 3.8
Charles W. Stein....................................... -- * -- *
Homayoon Tajalli(7).................................... 51,531 * 51,531 *
Stephen T. Walker(8)................................... 2,959,328 39.2 2,959,328 28.3
Harvey L. Weiss(9)..................................... -- * -- *
All directors and executive officers as a group
(8 persons)(10)...................................... 4,493,958 59.5% 4,493,958 43.0%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment power
with respect to shares. Shares of Common Stock subject to options currently
exercisable or exercisable within 60 days after August 15, 1996 are deemed
outstanding for computing the percentage ownership of the person holding such
options, but are not deemed outstanding for computing the percentage of any
other person.
(2) Includes 460,094 shares held in a trust over which Dr. Branstad is the
Trustee, and includes 460,094 shares held in a trust over which Dr. Branstad's
husband is the Trustee and over which Dr. Branstad exercises voting and
investment power. Also includes 20,244 shares held by members of Dr. Branstad's
family over which Dr. Branstad exercises voting and investment power.
(3) The address for Mr. Crocker is Reston Parkway, Suite 430, Reston, Virginia
22091.
(4) Excludes 92,019 shares issuable upon exercise of unvested stock options.
(5) Excludes 129,195 shares issuable upon exercise of unvested stock options.
(6) The address for Mr. Schaefer is Arca Systems, Inc., 10320 Little Patuxent
Parkway, Suite 1005, Columbia, Maryland 21044.
(7) Includes 2,454 shares issuable upon the exercise of outstanding options.
Also includes 12,269 shares, and 2,454 shares issuable upon exercise of
outstanding options, held by Mr. Tajalli's wife. Excludes 214,564 shares
issuable upon exercise of unvested stock options.
(8) Includes 147,230 shares held in a trust over which Mr. Walker is the
Trustee, and includes 147,230 shares held in a trust over which Mr. Walker's
wife is the Trustee and over which Mr. Walker does not exercise voting or
investment power. Mr. Walker disclaims beneficial ownership of the latter
147,230 shares.
(9) Excludes 258,365 shares issuable upon exercise of unvested stock options.
(10) See footnotes (4), (5), (7) and (9) above. Includes 4,908 shares issuable
upon the exercise of outstanding options. Excludes 694,143 shares issuable upon
exercise of unvested stock options.
51
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock,
$.01 par value (the "Preferred Stock"). There are no shares of Preferred Stock
outstanding. The following summary description of the capital stock of the
Company does not purport to be complete and is subject to the detailed
provisions of, and qualified in its entirety by reference to, the Company's
Certificate of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part, and
to the applicable provisions of the General Corporation Law of the State of
Delaware. However, such description describes all material matters relating to
the Common Stock and the Preferred Stock.
COMMON STOCK
At June 28, 1996, there were 7,535,170 shares of Common Stock outstanding and
held of record by approximately 100 stockholders. Each holder of Common Stock is
entitled to one vote for each share held on all matters submitted to a vote of
stockholders. The holders of Common Stock, voting as a single class, are
entitled to elect all of the directors of the Company. The Common Stock does not
provide for cumulative voting. Matters submitted to stockholder approval
generally require a majority vote.
Holders of Common Stock are entitled to receive, subject to the preferential
rights of holders of outstanding stock having preferential rights as to
dividend, such dividends as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
would be entitled to share in the Company's assets remaining after the payment
of liabilities and the satisfaction of any liquidation preference granted the
holders of any outstanding shares of preferred stock, if any. Holders of Common
Stock have no preemptive or other subscription rights. The shares of Common
Stock are not convertible into any other security and have no redemption rights.
The outstanding shares of Common Stock are, and the shares being offered hereby
will be, upon issuance and sale, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
The Company has the authority to issue up to 5,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue, without any further
action by the stockholders (except as may be required by applicable law or stock
exchange regulations), the Preferred Stock in one or more series, to establish
from time to time the number of shares to be included in each series, and to fix
the designations, powers, preferences and rights of the shares of each series
and the qualifications, limitations or restrictions thereof. Although the
ability of the Board of Directors to designate and issue Preferred Stock
provides desirable flexibility, issuance of Preferred Stock may have adverse
effects on the holders of Common Stock including restrictions on dividends on
the Common Stock if dividends on the Preferred Stock have not been paid;
dilution of voting power of the Common Stock to the extent the Preferred Stock
has voting rights; or deferral of participation in the Company's assets upon
liquidation until the satisfaction of any liquidation preference granted to
holders of the Preferred Stock. In addition, issuance of Preferred Stock could
make it more difficult for a third party to acquire a majority of the voting
power of the outstanding capital stock and accordingly may be used as an
"anti-takeover" device. The Board of Directors, however, currently does not
contemplate the issuance of any Preferred Stock and is not aware of any pending
transactions that would be effected by such issuance.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation or By-laws, as applicable, among
other things, (i) provide that the number of directors shall be determined from
time to time by resolution adopted by a majority of the Board of
52
<PAGE> 54
Directors; and (ii) provide for a classified Board of Directors consisting of
three classes of directors having staggered terms of three years each, with each
of the classes being as nearly equal in number as possible.
The Company's Certificate of Incorporation provides that, upon the closing of
the Offering, any action required or permitted to be taken by the stockholders
of the Company may be taken only at a duly called annual or special meeting of
the stockholders, and may not be effected by any consent in writing by such
stockholders, unless such consent is unanimous, and does not provide for
cumulative voting in the election of directors. The Certificate of Incorporation
and Bylaws restrict the right of stockholders to change the number of directors
or to fill vacancies on the Board of Directors. The amendment of any of these
provisions would require approval by 66-2/3% of the voting power of the
outstanding shares of the Company.
These and other provisions could have the effect of making it more difficult for
a third party to effect, or of discouraging a third party from trying to effect,
a change in the control of the Board of Directors. Such provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, including offers at a premium over the market price of the Common
Stock, and might result in a delay in changes in control of management. In
addition, these provisions could have the effect of making it more difficult for
proposals favored by the stockholders to be presented for stockholder
consideration.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware Law, as amended ("Section 203"), provides that,
subject to certain exceptions specified therein, a Delaware corporation shall
not engage in any business combination, including any merger or consolidation
with, or any transaction which results in the acquisition of additional shares
of the corporation by, an "interested stockholder" for a three-year period
following the time at which the stockholder became an "interested stockholder"
unless (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an "interested stockholder," (ii) upon consummation of
the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time that the transaction commenced
(excluding certain shares), or (iii) at or subsequent to such time, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66-2/3% of the outstanding voting
stock which is not owned by the "interested stockholder." Except as otherwise
specified in Section 203, an "interested stockholder" is defined to include any
person that (i) is the owner of 15% or more of the outstanding voting stock of
the corporation, or (ii) is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within three years immediately prior to the date on which it is sought
to be determined whether such person is an "interested stockholder" and the
affiliates and associates of any such person. The Company's stockholders, by
adopting an amendment to its Certificate of Incorporation or Bylaws, may elect
not to be governed by Section 203, effective twelve months after adoption.
Neither the Company's Certificate of Incorporation nor its Bylaws presently
exclude the Company from the restrictions imposed by Section 203.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer and Trust Company.
53
<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 10,442,531 shares of
Common Stock outstanding (assuming no exercise of outstanding options). Of this
amount, 2,900,000 shares offered hereby will be available for immediate sale in
the public market as of the date of this Prospectus. Approximately 1,499,049
additional shares will be available for immediate sale in the public market
pursuant to Rule 144(k). Approximately 678,412 additional shares will be
available for sale in the public market beginning 90 days after the date of this
Prospectus and approximately 5,309,858 additional shares will be available in
the public market following the expiration of 180-day lockup agreements with the
Representatives of the Underwriters, subject in some cases to compliance with
the volume and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least two years
is entitled to sell within any three-month period commencing 90 days after the
date of this Prospectus a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of the Common Stock (approximately 104,443
shares immediately after the Offering) or (ii) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of
Form 144 with respect to such sale and certain other requirements. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days immediately preceding the sale who
has beneficially owned his or her shares for at least three years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. Persons deemed to be affiliates must comply with Rule 144, even
after the applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold under
Rule 144, since this will depend on the market price for the Common Stock of the
Company, the personal circumstances of the sellers and other factors. Prior to
the Offering, there has been no public market for the Common Stock, and there
can be no assurance that a significant public market for the Common Stock will
develop or be sustained after the Offering. Any future sale of substantial
amounts of Common Stock in the open market may adversely affect the market price
of the Common Stock offered hereby.
The Company, its directors, executive officers and certain other stockholders
have agreed pursuant to the Underwriting Agreement and other agreements that
they will not sell any Common Stock without the prior consent of J.P. Morgan
Securities Inc. for a period of 180 days from the date of this Prospectus (the
"180-day Lockup Period"), except that the Company may, without such consent,
grant certain options to purchase stock pursuant to the Option Plans and the
stockholders may, without such consent, transfer stock to immediate family
members or trusts for their benefit, to a guardian or conservator, by way of
bequest or inheritance upon death and for purposes of paying estate taxes.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. As of the date of this Prospectus, the holders of exercisable
options for 143,329 shares of Common Stock will be eligible to sell their Rule
701 shares commencing 90 days after the date of this Prospectus.
54
<PAGE> 56
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom J.P. Morgan
Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Furman
Selz LLC are acting as representatives (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the underwriting
agreement among the Company and the Representatives (the "Underwriting
Agreement"), to purchase from the Company, and the Company has agreed to sell to
the Underwriters, the respective number of shares of Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
----------------
UNDERWRITERS NUMBER OF SHARES
----------------
<S> <C>
J.P. Morgan Securities Inc..................................................
Donaldson, Lufkin & Jenrette Securities Corporation.........................
Furman Selz LLC.............................................................
----------------
Total..................................................................... 2,900,000
=============
</TABLE>
The nature of the Underwriters' obligations under the Underwriting Agreement is
such that all of the Common Stock being offered, excluding shares covered by the
over-allotment option granted to the Underwriters, must be purchased if any are
purchased.
The Representatives have advised the Company that the several Underwriters
propose to offer the Common Stock to the public initially at the public offering
price set forth on the cover page of this Prospectus and may offer the Common
Stock to selected dealers at such price less a concession not to exceed $
per share. The Underwriters may allow, and such dealers may reallow, a
concession to other dealers not to exceed of $ per share. After the public
offering of the Common stock, the public offering price and other selling terms
may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to 435,000 additional shares
of Common Stock from the Company at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to the option, each of the Underwriters will
be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of the Common Stock offered hereby.
Prior to the Offering, there has been no public market for the Common Stock. The
initial public offering price will be determined by negotiations between the
Company and the Representatives. Among the factors to be considered in
determining the initial offering price are the prevailing market conditions, the
market valuations of certain publicly traded companies, revenue and earnings of
the Company and comparable companies in recent periods, estimates of the
business potential and prospects of the Company, the experience of the Company's
management and the position of the Company in its industry.
The Representatives have informed the Company that the Underwriters will not
confirm, without customer authorization, sales to their customer accounts as to
which they have discretionary trading power.
The Company and its directors and executive officers and certain other
stockholders have agreed not to offer, sell or otherwise dispose of any Common
Stock or any securities convertible into Common Stock or register for sale under
the Securities Act any Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of J.P. Morgan Securities
Inc., except that the Company may, without such consent, grant options pursuant
to the Option Plans and the stockholders may, without such consent, transfer
stock to immediate family members or trusts for their benefit, to a guardian or
conservator, by way of bequest or inheritance upon death and for purposes of
paying estate taxes. See "Shares Eligible for Future Sale."
55
<PAGE> 57
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Company's Common Stock has been submitted for approval for quotation on the
Nasdaq National Market, under the trading symbol "TISX".
At the Company's request, the Underwriters have reserved up to 145,000 shares of
Common Stock for sale at the initial public offering price to the Company's
employees and other persons having business relationships with the Company. The
number of shares of Common Stock available for sale to other members of the
public will be reduced to the extent that these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters on
the same basis as the other shares offered hereby.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Piper & Marbury L.L.P., Washington, D.C. Certain legal matters in
connection with the Common Stock offered hereby will be passed upon for the
Underwriters by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The consolidated financial statements of Trusted Information Systems, Inc. at
December 30, 1994 and December 29, 1995, and for each of the three years in the
period ended December 29, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement, and have been included herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement on Form S-1 (the "Registration Statement")
under the Securities Act with respect to the shares of the Common Stock offered
by this Prospectus. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules to the
Registration Statement. For further information with respect to the Company and
the Common Stock, reference is made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements made in this
Prospectus concerning the contents of any contract, agreement or any other
document referred to herein are not necessarily complete; reference is made in
each instance to the copy of such contract, agreement or other document filed as
an exhibit to the Registration Statement. Each such statement is qualified in
all respects by such reference to such exhibits. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from such office after payment
of fees prescribed by the Securities and Exchange Commission. The Registration
Statement is also publicly available through the Securities and Exchange
Commission's World Wide Web site located at http://www.sec.gov.
56
<PAGE> 58
GLOSSARY OF TERMS
APPLICATION GATEWAY
FIREWALL................... A system that screens communications at a network
gateway according to a security policy by running a
separate software program and acts as a proxy for
each application protocol allowed through the
gateway.
AUTHENTICATION............. The process of determining the identity of a user
that is attempting to access a system.
CRYSTAL BOX................ The opposite of "black box." With a crystal box,
the source code and algorithms that implement
security are examinable. Phrase coined by Trusted
Information Systems, Inc., originally describing
the TIS Internet Firewall Toolkit.
ELECTRONIC MAIL OR
E-MAIL..................... An application that allows a user to send or
receive messages to or from any other user with an
Internet address, commonly termed an e-mail
address.
FILTERING GATEWAY
FIREWALL................... A system that screens communications at a network
gateway according to a security policy based on the
information contained in each packet. Filtering
gateway firewalls are also known as a packet
filters.
FIREWALL................... A system or combination of systems that enforces a
boundary between two or more networks.
GUI........................ Graphical User Interface. A method of interfacing
with a computer by manipulating graphical icons and
windows (usually by pointing and clicking a mouse)
rather than using text commands.
GLOBAL VIRTUAL PRIVATE
NETWORK (GVPN)........... A VPN that operates on a global basis through the
use of exportable encryption.
INTERNET................... An open global network of interconnected
commercial, educational, governmental and other
computer networks.
INTRANET................... An organization's private network which utilizes
Internet data formats and communications protocols
and which may use the Internet's facilities as the
backbone for network communications.
LOCAL AREA NETWORK (LAN)... A group of one or more computers connected together
within a localized environment for the purpose of
sharing data and network resources such as
printers, modems or fax servers.
LOGGING.................... The process of storing information about events
that occurred on the firewall or network.
MICROSOFT WINDOWS;
MICROSOFT WINDOWS NT..... Computer operating systems providing graphical user
interfaces and, in the case of Windows NT, which is
optimized for use as a network server.
OPERATING SYSTEM........... A master control program for a computer that
manages the computer's internal functions and
provides a means for control of the computer's
operation. An operating system provides commonly
used functions and a uniform, consistent means for
all software applications to access the same
machine resources.
PROTOCOL................... A formal description of message formats and the
rules two or more machines must follow in order to
exchange such messages.
57
<PAGE> 59
PROXY...................... A software agent that acts on behalf of a user.
Typical proxies accept a connection from a user,
make a decision as to whether or not the user or
client IP address is permitted to use the proxy,
may perform additional authentication and then
establishes a connection on behalf of the user to a
remote destination.
ROUTER..................... A device that receives and transmits data packets
between segments in a network or different
networks.
SERVER..................... Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. In addition, such term means the computer
on which server software runs.
SHRINK-WRAP LICENSE........ A printed agreement included in product packaging
which typically provides that opening the package
indicates the users' acceptance of its terms and
conditions.
SYSTEM INTEGRATOR.......... An organization that specializes in delivering
solutions to end-user organizations by combining a
variety of software components and integrating them
into a complete end-user solution.
TRANSMISSION CONTROL
PROTOCOL/INTERNET
PROTOCOL (TCP/IP)........ A compilation of network- and transport-level
protocols that allows computers with different
architectures and operating system software to
communicate with other computers on the Internet.
VIRTUAL PRIVATE
NETWORK (VPN)............ An encrypted connection allowing privacy for all
network traffic between two gateways.
WIDE AREA NETWORK (WAN).... A communications network which connects
geographically dispersed users.
WORLD WIDE WEB............. A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.
58
<PAGE> 60
TRUSTED INFORMATION SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Shareholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Trusted Information Systems, Inc.
We have audited the accompanying consolidated balance sheets of Trusted
Information Systems, Inc. as of December 30, 1994 and December 29, 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 29, 1995. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Trusted
Information Systems, Inc. at December 30, 1994 and December 29, 1995 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 29, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Vienna, Virginia
April 29, 1996, except Note 10
as to which the date is
September , 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital accounts for the reverse stock split as described
in Note 10 to the consolidated financial statements.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Vienna, Virginia
August 29, 1996
F-2
<PAGE> 62
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------------------
DECEMBER DECEMBER
30, 29, JUNE 28,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 261,538 $ 53,859 $ 177,686
Marketable securities............................. -- -- 5,475,000
Accounts receivable, net of allowance of $24,000,
$44,000 and $79,000 for 1994, 1995 and 1996,
respectively................................... 2,157,343 4,304,536 4,252,357
Unbilled receivables.............................. 417,554 1,401,418 1,079,887
Prepaid expenses and other current assets......... 138,609 258,438 429,472
Deferred financing costs.......................... -- -- 465,628
Refundable income taxes........................... -- -- 907,299
Deferred income taxes............................. 290,004 426,390 --
----------- ----------- -----------
Total current assets................................ 3,265,048 6,444,641 12,787,329
Property and equipment, net......................... 1,880,281 3,715,090 6,096,827
Other assets........................................ 84,137 62,072 540,328
----------- ----------- -----------
Total assets........................................ $ 5,229,466 $10,221,803 $19,424,484
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 470,438 $ 689,537 $ 899,302
Accrued payroll and related expenses.............. 1,051,968 1,384,738 2,485,881
Other accrued expenses............................ 856,089 1,342,421 1,469,767
Income taxes payable.............................. 398,720 122,174 --
Deferred income taxes............................. -- -- 1,762,788
Deferred revenue.................................. 12,286 1,011,992 918,705
Short-term borrowings............................. -- 1,523,000 3,679,500
Notes payable, current portion.................... 75,916 160,662 293,458
----------- ----------- -----------
Total current liabilities........................... 2,865,417 6,234,524 11,509,401
Notes payable, net of current portion............... 897,528 1,580,000 2,825,585
----------- ----------- -----------
Total liabilities................................... 3,762,945 7,814,524 14,334,986
Commitments
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding.... -- -- --
Common stock, $.01 par value; 40,000,000 shares
authorized; 7,516,079, 6,933,611 and 7,535,170
shares issued and outstanding at December 30,
1994, December 29, 1995 and June 28, 1996,
respectively................................... 75,161 69,336 75,352
Additional paid-in capital........................ 359,200 -- 1,404,802
Unrealized gains, net of income taxes of
$2,196,528..................................... -- -- 3,278,472
Foreign currency translation adjustment........... (6,103) (5,121) (9,506)
Retained earnings................................. 1,038,263 2,343,064 1,422,847
Deferred stock compensation....................... -- -- (1,082,469)
----------- ----------- -----------
Total shareholders' equity.......................... 1,466,521 2,407,279 5,089,498
----------- ----------- -----------
Total liabilities and shareholders' equity.......... $ 5,229,466 $10,221,803 $19,424,484
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 63
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Government contracts........ $8,343,424 $ 11,258,016 $ 12,327,502 $6,041,797 $ 5,351,676
Commercial products......... -- 1,003,498 4,270,924 1,411,711 3,732,042
Commercial consulting
services.................. 448,054 855,638 1,491,661 835,004 533,977
---------- ----------- ----------- ---------- ----------
8,791,478 13,117,152 18,090,087 8,288,512 9,617,695
Cost of revenues:
Government contracts........ 5,512,498 7,376,932 8,844,719 4,520,750 3,864,383
Commercial products......... -- 332,504 1,142,282 409,489 1,197,877
Commercial consulting
services.................. 307,238 493,221 877,946 427,099 329,650
---------- ----------- ----------- ---------- ----------
5,819,736 8,202,657 10,864,947 5,357,338 5,391,910
---------- ----------- ----------- ---------- ----------
Gross profit.................. 2,971,742 4,914,495 7,225,140 2,931,174 4,225,785
Operating expenses:
Selling, general and
administrative............ 2,198,011 2,997,806 3,727,701 1,567,578 4,677,648
Research and development.... 582,075 646,001 1,144,737 576,078 1,006,752
---------- ----------- ----------- ---------- ----------
2,780,086 3,643,807 4,872,438 2,143,656 5,684,400
---------- ----------- ----------- ---------- ----------
Income (loss) from
operations.................. 191,656 1,270,688 2,352,702 787,518 (1,458,615)
Other income (expense):
Interest income............. 7,517 44,635 50,276 12,240 13,715
Interest expense............ (127,711) (134,236) (158,778) (65,873) (162,910)
---------- ----------- ----------- ---------- ----------
(120,194) (89,601) (108,502) (53,633) (149,195)
---------- ----------- ----------- ---------- ----------
Income (loss) before income
taxes....................... 71,462 1,181,087 2,244,200 733,885 (1,607,810)
Income tax provision
(benefit)................... 36,794 505,646 900,137 262,459 (687,593)
---------- ----------- ----------- ---------- ----------
Net income (loss)............. $ 34,668 $ 675,441 $ 1,344,063 $ 471,426 $ (920,217)
========== =========== =========== ========== ==========
Net income (loss) per share... $ -- $ .08 $ .15 $ .05 $ (.11)
========== =========== =========== ========== ==========
Weighted average shares
outstanding................. 8,368,765 8,525,910 8,884,755 8,750,096 8,110,496
========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 64
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
COMMON STOCK FOREIGN
------------------- ADDITIONAL CURRENCY DEFERRED
NUMBER PAID-IN UNREALIZED TRANSLATION RETAINED STOCK
OF SHARES AMOUNT CAPITAL GAINS ADJUSTMENT EARNINGS COMPENSATION TOTAL
---------- ------- ---------- ---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993...................... 7,501,871 $75,019 $ 351,822 $ -- $ -- $ 328,154 $ -- $ 754,995
Net income for 1993......... -- -- -- -- -- 34,668 -- 34,668
Exercise of stock options... 2,405 24 1,116 -- -- -- -- 1,140
Translation adjustment...... -- -- -- -- 1,702 -- -- 1,702
---------- ------- ---------- ---------- ------- ---------- ------------ ----------
Balance at December 31,
1993...................... 7,504,276 75,043 352,938 -- 1,702 362,822 -- 792,505
Net income for 1994......... -- -- -- -- -- 675,441 -- 675,441
Exercise of stock options... 11,803 118 6,262 -- -- -- -- 6,380
Translation adjustment...... -- -- -- -- (7,805) -- -- (7,805)
---------- ------- ---------- ---------- ------- ---------- ------------ ----------
Balance at December 30,
1994...................... 7,516,079 75,161 359,200 -- (6,103) 1,038,263 -- 1,466,521
Net income for 1995......... -- -- -- -- -- 1,344,063 -- 1,344,063
Exercise of stock options... 6,453 64 3,169 -- -- -- -- 3,233
Repurchase of common
stock..................... (588,921) (5,889) (362,369) -- -- (39,262) -- (407,520)
Translation adjustment...... -- -- -- -- 982 -- -- 982
---------- ------- ---------- ---------- ------- ---------- ------------ ----------
Balance at December 29,
1995...................... 6,933,611 69,336 -- -- (5,121) 2,343,064 -- 2,407,279
Net loss for the six months
ended June 28, 1996....... -- -- -- -- -- (920,217) -- (920,217)
Exercise of stock options... 601,559 6,016 299,302 -- -- -- -- 305,318
Change in unrealized gain on
available-for-sale
securities, net of tax.... -- -- -- 3,278,472 -- -- -- 3,278,472
Deferred stock
compensation.............. -- -- 1,105,500 -- -- -- (1,105,500 ) --
Amortization of deferred
stock compensation........ -- -- -- -- -- -- 23,031 23,031
Translation adjustment...... -- -- -- -- (4,385) -- -- (4,385)
---------- ------- ---------- ---------- ------- ---------- ------------ ----------
Balance at June 28, 1996
(unaudited)............... 7,535,170 $75,352 $1,404,802 $3,278,472 ($9,506) $1,422,847 ($1,082,469 ) $5,089,498
========= ======= ========== ========== ======= ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 65
TRUSTED INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................. $ 34,668 $ 675,441 $ 1,344,063 $ 471,426 $(920,217)
Adjustments:
Depreciation..................... 152,974 191,615 261,020 121,297 162,718
Deferred income taxes............ (63,287) (102,456) (136,386 ) (41,746) 3,530
Amortization of deferred stock
compensation................... -- -- -- -- 23,031
Changes in operating assets and
liabilities:
Accounts receivable and
unbilled receivables......... (431,462) (383,461) (3,131,057 ) (1,107,918) 373,710
Prepaid expenses and other
current assets............... (33,518) (53,857) (119,829 ) (12,287) (636,662)
Other assets................... 15,011 (52,218) 22,065 55,054 (478,256)
Accounts payable............... 145,489 172,593 219,099 23,640 209,765
Accrued payroll and related
expenses..................... 198,733 272,096 332,770 707,094 1,101,143
Other accrued expenses......... 332,664 185,500 486,332 (51,891) 127,346
Income taxes
payable/refundable........... (18,710) 378,835 (276,546 ) (401,831) (1,029,473)
Deferred revenue............... (57) (4,583) 999,706 90,979 (93,287)
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in)
operating activities............. 332,505 1,279,505 1,237 (146,183) (1,156,652)
INVESTING ACTIVITIES
Purchases of property and
equipment........................ (191,881) (192,165) (2,095,829 ) (333,991) (2,544,455)
Purchase of marketable
securities....................... -- -- -- -- (10,880)
------------ ------------ ------------ ----------- -----------
Net cash used in investing
activities....................... (191,881) (192,165) (2,095,829 ) (333,991) (2,555,335)
FINANCING ACTIVITIES
Proceeds from exercise of stock
options.......................... 1,140 6,380 3,233 -- 305,318
Repurchase of common stock......... -- -- (407,520 ) -- --
Net borrowings (repayments) of
short-term borrowings............ 40,000 (390,000) 1,523,000 513,000 2,156,500
Proceeds from issuance of notes
payable.......................... 10,000 -- 1,036,299 100,000 1,447,467
Repayments of notes payable........ (185,664) (471,269) (269,081 ) (44,026) (69,086)
------------ ------------ ------------ ----------- -----------
Net cash (used in) provided by
financing activities............. (134,524) (854,889) 1,885,931 568,974 3,840,199
------------ ------------ ------------ ----------- -----------
Effect of exchange rate changes on
cash............................. 1,702 (7,805) 982 (2,735) (4,385)
------------ ------------ ------------ ----------- -----------
Net change in cash and cash
equivalents...................... 7,802 224,646 (207,679 ) 86,065 123,827
Cash and cash equivalents at
beginning
of period........................ 29,090 36,892 261,538 261,538 53,859
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period........................... $ 36,892 $ 261,538 $ 53,859 $ 347,603 $ 177,686
============= ============= ============= =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid during the period.... $ 120,083 $ 129,119 $ 162,724 $ 63,912 $ 161,031
============= ============= ============= =========== ===========
Income taxes paid during the
period........................... $ 55,504 $ 126,811 $ 1,176,683 $ 673,886 $ 325,537
============= ============= ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 66
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Description of Business
Trusted Information Systems, Inc. (the Company) provides comprehensive security
solutions for the protection of computer networks, including global
Internet-based systems, internal networks and individual workstations and
laptops and is a leading provider of firewall products. The Company sells to a
broad range of companies located throughout North America and Europe, as well as
various government agencies.
Fiscal Periods
The Company's fiscal year is based on a 52-53 week year ending on the last
Friday in December. The year ended December 31, 1993 was a 53 week year and the
years ended December 30, 1994 and December 29, 1995 were 52 week years. The
Company's fiscal quarter consists of a 13 week period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Trusted Information Systems (U.K.)
Limited ("TIS UK"). The subsidiary was established in 1992 to conduct the
Company's activities in the United Kingdom. All material intercompany accounts
and transactions have been eliminated upon consolidation. Revenues from TIS UK
were insignificant prior to 1996. In the six months ended June 28, 1996,
revenues from TIS UK amounted to 4.6% of total revenues.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Other Information Regarding Basis of Presentation
The Company performs periodic credit evaluations of the financial condition of
its customers and typically does not require collateral from its customers.
Amounts receivable, directly and indirectly, from government agencies
approximated 67%, 54% and 53% of total accounts receivable at December 30, 1994,
December 29, 1995 and June 28, 1996, respectively. Sales to these agencies
accounted for approximately 95%, 86%, 68%, 73% and 56% of total revenues for the
years ended December 31, 1993, December 30, 1994 and December 29, 1995 and for
the six months ended June 30, 1995 and June 28, 1996, respectively.
Export sales, primarily to Europe, were 4.8% of total revenues for the year
ended December 29, 1995 and 3.9% of total revenues for the six months ended June
28, 1996. Export sales were insignificant in all other periods.
SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-7
<PAGE> 67
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable Securities
Marketable securities are classified as available-for-sale and are carried at
fair market value with unrealized gains and losses, net of taxes, reported in a
separate component of shareholders' equity. Realized gains and losses and
declines in value judged to be other-than-temporary are included in investment
income. Interest and dividends are included in investment income. At June 28,
1996, marketable securities consisted of 100,000 shares of common stock of
Cybercash, Inc., which the Company purchased in connection with the formation of
such company, with a cost basis of approximately $10,000 and an unrealized gain
and estimated fair value of approximately $5.5 million. The Company may sell
such shares subject to the limitations of Rule 144 under the Securities Act of
1933.
Property and Equipment
Property and equipment is stated at cost and depreciated on accelerated methods
based on estimated useful lives of 31 years for buildings and improvements and
5-7 years for furniture and equipment. Leasehold improvements are amortized over
the lesser of the estimated useful life of the asset or the lease term.
In 1995, the Company adopted the provisions of Financial Accounting Standards
Board Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The adoption
of this Statement did not have a material impact on the reported results of
operations of the Company.
Deferred Financing Costs
Deferred financing costs at June 28, 1996 consist of direct costs related to the
initial filing of a registration statement for the sale of common stock with the
Securities and Exchange Commission.
Stock Options Granted to Employees
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, Accounting for Stock-Based
Compensation, which encourages companies to recognize expense for stock-based
awards based on their estimated fair value on the date of grant. Statement No.
123, effective for 1996, does not require companies to change their existing
accounting for stock-based awards, but if the new fair value method is not
adopted, pro forma income and earnings per share data should be provided in the
footnotes to the financial statements. The Company intends to continue to
account for stock-based compensation plans using the intrinsic value method, and
will supplementally disclose in its 1996 annual financial statements the
required pro forma information as if the fair value method had been adopted.
Revenue Recognition
Government Contracts -- The Company enters into research and development
contracts with government agencies under various pricing arrangements. Revenue
from "cost-plus-fixed-fee" contracts is recognized on the basis of reimbursable
contract costs incurred during the period, plus a percentage of the fixed fee.
Revenue from "time and material" contracts is recognized on the basis of hours
utilized, plus other reimbursable contract costs incurred during the period.
Revenue from "firm-fixed-price" contracts is recognized on the percentage of
completion method. Under this method, individual contract revenues are recorded
based on the percentage relationship that contract
F-8
<PAGE> 68
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
costs incurred bear to management's estimate of total contract costs. Losses, if
any, are accrued when their occurrence becomes known and the amount of the loss
is reasonably determined.
Under its government contracts, the Company is subject to audit by the Defense
Contract Audit Agency which could result in the renegotiation of amounts
previously billed. Management believes that the results of such audits will not
have a material adverse effect on the Company's financial position or results of
operations.
Revenues recognized in excess of amounts billed to government agencies and
retainage related to long-term contracts have been recorded as unbilled
receivables in the accompanying balance sheets.
Commercial Products and Services -- Revenues from the sale of goods, including
software products, are recognized upon shipment, when collection of the
receivable is probable and the Company has no significant remaining obligations.
In instances where the Company directly installs its products, revenues are
recognized upon completion of installation. Commercial consulting services are
provided on a time and materials basis. The Company accounts for obligations
under customer support and maintenance agreements by deferring a pro rata
portion of revenue and recognizing it either ratably as the obligations are
fulfilled or upon completion of performance.
Research and Development
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standard No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant. The distribution of products incorporating encryption technology
may be subject to U.S. government export restrictions.
Advertising Costs
All advertising costs are expensed when incurred. Costs which are included in
expense for the years ended December 31, 1993, December 30, 1994 and December
29, 1995 and the six months ended June 30, 1995 and June 28, 1996 approximated
$14,700, $11,800, $28,700, $19,500 and $37,600, respectively.
Earnings Per Share
The Company's net income per share calculations are based upon the weighted
average number of shares of common stock outstanding during each period,
adjusted for the dilutive effect of common stock equivalents.
Pursuant to the requirements of the Securities and Exchange Commission, common
stock and options to purchase common stock issued at prices below the initial
public offering price during the twelve months immediately preceding the
contemplated initial filing of the registration statement relating to the
initial public offering (IPO), have been included in the computation of net
income per share as if they were outstanding for all periods presented (using
the treasury method and assuming repurchase of common stock at the estimated IPO
price with the proceeds of assumed exercise of the options), even if
antidilutive.
F-9
<PAGE> 69
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unaudited Interim Statements
The consolidated financial statements for the six months ended June 30, 1995 and
June 28, 1996 have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. These statements are
unaudited but, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments and accruals) necessary for a fair
presentation of the financial information set forth herein. The operating
results for the six months ended June 28, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 27, 1996.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
-------------------------------------------
DECEMBER 30, DECEMBER 29, JUNE 28,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Land.................................................. $ 123,681 $ 232,926 $ 322,926
Buildings and building improvements................... 1,762,738 1,762,738 4,529,100
Furniture and equipment............................... 1,029,794 1,656,097 2,605,791
Leasehold improvements................................ 20,688 45,211 119,368
Construction-in-progress.............................. -- 1,335,758 --
----------- ----------- -----------
2,936,901 5,032,730 7,577,185
Less: accumulated depreciation and amortization....... (1,056,620) (1,317,640) (1,480,358)
----------- ----------- -----------
$ 1,880,281 $ 3,715,090 $ 6,096,827
=========== =========== ==========
</TABLE>
3. SHORT-TERM BORROWINGS
At December 30, 1994 and December 29, 1995, the Company had various short-term
line of credit arrangements with a bank which allowed for aggregate borrowings
of $1 million and $2 million, respectively. Borrowings under these arrangements
are due upon demand and bear interest at the bank's prime rate plus 1% per annum
(weighted average rate of 9.5% during 1994 and 1995). At June 28, 1996, these
short-term line of credit arrangements allowed aggregate borrowings of $5.0
million. The weighted average borrowing rate at June 28, 1996 was 9.25%.
F-10
<PAGE> 70
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
4. NOTES PAYABLE
Notes payable to banks and others consist of the following:
<TABLE>
<CAPTION>
----------------------------------------
DECEMBER 30, DECEMBER 29, JUNE 28,
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
Small Business Administration mortgage note due in
monthly principal and interest (10.1% per annum)
installments of approximately $5,000.................. $ 435,345 $ 420,962 $ 413,208
Notes payable to a bank:
Construction note; maximum aggregate borrowings of
$1.8 million; principal due in monthly installments
of $10,000 beginning September 1996; callable by
the bank in August 2001 or August 2006; balance due
September 2011; personally guaranteed by a
shareholder/officer................................ -- 684,170 1,746,358
Mortgage note; principal due in monthly installments
of $5,128; balance due September 2003.............. 538,099 481,694 447,527
Mortgage note; principal due in monthly installments
of $1,722; balance due December 2008............... -- -- 258,333
Furniture and equipment notes; principal due in
monthly installments of $3,583 in 1995 and $5,667
in 1996 and thereafter; maturing on various dates
through 2000....................................... -- 153,836 253,617
---------- ---------- ----------
973,444 1,740,662 3,119,043
Less current portion.................................... 75,916 160,662 293,458
---------- ---------- ----------
$ 897,528 $1,580,000 $2,825,585
========== ========== =========
</TABLE>
All of the notes payable to a bank described above and the short-term line of
credit arrangements discussed in Note 3 are payable to the same bank, bear
interest at the bank's prime rate plus 1% per annum (9.5% at December 30, 1994
and December 29, 1995 and 9.25% at June 28, 1996), are secured by essentially
all of the Company's assets and contain cross default provisions.
Under the terms of the agreements in connection with the Construction note, the
Company is subject to certain restrictions which include, among other things,
restrictions on: (i) incurrence of additional indebtedness, (ii) distributions
of dividends and capital and (iii) selling or encumbering property and
equipment.
Other than amounts due under the Small Business Administration note, the Company
believes that the carrying amount reported in the balance sheet of its other
financial assets and liabilities approximates their fair value. The fair value
of the Small Business Administration note at December 29, 1995 is estimated,
using discounted cash flow analyses, to be approximately $480,000.
F-11
<PAGE> 71
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
4. NOTES PAYABLE (CONTINUED)
Aggregate maturities of all notes payable at December 29, 1995 are as follows:
<TABLE>
<S> <C>
1996.......................................... $ 160,662
1997.......................................... 242,128
1998.......................................... 243,996
1999.......................................... 227,916
2000.......................................... 205,353
Thereafter.................................... 660,607
----------
Total......................................... $1,740,662
=========
</TABLE>
5. STOCK OPTIONS
The Company has adopted the Amended and Restated Employee Stock Option Plan
(Employee Option Plan) and the 1996 Stock Option Plan (1996 Option Plan) which
provide for the grant of incentive stock options and non-statutory stock options
to executives, employees and consultants. The Employee Option Plan and 1996
Option Plan authorize the issuance of options to acquire 6,134,593 and
1,625,667, respectively, shares of common stock.
The vesting period and the exercise price of each option shall be determined by
the respective plan administration committee. However, for incentive stock
options, the exercise price shall not be less than the fair market value of the
common stock on the date of the grant. No future options will be issued under
the Employee Option Plan.
The option activity under the plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING PRICE PER
UNDER THE STOCK PLANS SHARE
--------------------- ---------
<S> <C> <C>
Balance at December 31, 1993................................... 907,920 $ .50
Options granted.............................................. 1,091,958 .50-.69
Options exercised............................................ (11,803) .50
Options canceled............................................. (870,033) .50-.69
--------------------- ---------
Balance at December 30, 1994................................... 1,118,042 .50-.69
Options granted.............................................. -- --
Options exercised............................................ (6,453) .50-.69
Options canceled............................................. (122,693) .50-.69
--------------------- ---------
Balance at December 29, 1995................................... 988,896 .50-.69
Options granted.............................................. 1,028,158 2.66
Options exercised............................................ (601,559) .50-.69
Options canceled............................................. (236,647) .50-.69
--------------------- ---------
Balance at June 28, 1996....................................... 1,178,848 $.69-2.66
================ ========
</TABLE>
The Company recorded deferred compensation of $1,105,500 as a separate component
of shareholders' equity, related to the issuance in June 1996 of options for
92,019 shares of the Company's common stock. This deferred compensation will be
amortized evenly over the four-year vesting period of the options. At June 28,
1996, none of these options were exercisable.
F-12
<PAGE> 72
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
5. STOCK OPTIONS (CONTINUED)
The Company has also adopted the 1996 Directors' Stock Option Plan (Director
Plan) which provides for the grant of non-statutory stock options to
non-employee directors of the Company. The Director Plan authorizes the issuance
of options to acquire 200,000 shares of common stock. Options to purchase 6,135
shares of common stock will be granted to each director upon initial election to
the board of directors after the date of the Company's initial public offering.
The options vest ratably over three years. Additionally, commencing in 1997,
each director will annually be granted options to purchase 1,227 shares of
common stock. Such annual options will vest in full at the earlier of (i) the
first anniversary of the date of the grant or (ii) the date of the next annual
meeting of stockholders. The exercise price of options granted under the
Director Plan will equal the closing price per share of the common stock on the
date of grant. As of June 28, 1996, no options were granted under the Director
Plan.
Upon a change in control of the Company, as defined by the plans, 50% of any
outstanding unvested options under the 1996 Option Plan or the Director Plan
prior to the date of such change in control shall vest and be immediately
exercisable.
6. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
-----------------------------------------
DECEMBER DECEMBER
30, 29, JUNE 28,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................ $ 9,624 $ 16,905 $ 28,512
Other accrued expenses................................. 280,181 343,877 345,798
Accrued vacation....................................... 131,907 172,231 165,215
Other.................................................. 7,757 -- --
----------- ----------- -----------
Total deferred tax assets.............................. 429,469 533,013 539,525
Deferred tax liabilities:
Unbilled receivables................................... 132,298 86,257 75,339
Property and equipment................................. 7,167 6,929 6,929
Unrealized gain on marketable securities............... -- -- 2,196,528
Other.................................................. -- 13,437 23,517
----------- ----------- -----------
Total deferred tax liabilities......................... 139,465 106,623 2,302,313
----------- ----------- -----------
Net deferred tax asset (liability)..................... $ 290,004 $ 426,390 ($1,762,788)
========== ========== ==========
</TABLE>
At December 30, 1994, December 29, 1995 and June 28, 1996 no valuation allowance
was required for the deferred tax assets.
F-13
<PAGE> 73
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 28,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Current:
Federal........................ $ 81,924 $ 475,575 $ 855,775 $267,674 ($480,315)
State.......................... 18,158 132,526 180,748 56,535 (101,447)
------------ ------------ ------------ -------- ---------
100,082 608,101 1,036,523 324,209 (581,762)
Deferred:
Federal........................ (49,434) (80,026) (125,518) (48,900) (87,376)
State.......................... (13,854) (22,429) (10,868) (12,850) (18,455)
------------ ------------ ------------ -------- ---------
(63,288) (102,455) (136,386) (61,750) (105,831)
------------ ------------ ------------ -------- ---------
Total income tax provision
(benefit)...................... $ 36,794 $ 505,646 $ 900,137 $262,459 ($687,593)
=========== =========== =========== ======== ========
</TABLE>
The Company's provision for income taxes resulted in effective tax rates that
varied from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, JUNE 30, JUNE 29,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Expected federal income tax
provision at 34%............... $ 24,297 $401,570 $763,028 $249,520 ($546,655)
Expenses not deductible for tax
purposes....................... 11,193 14,748 13,336 5,950 10,683
State income taxes, net of
federal benefit................ 2,840 72,664 112,121 28,832 (79,135)
Surtax exemption................. (4,100) -- -- -- --
Other............................ 2,564 16,664 11,652 (21,843) (72,486)
------------ ------------ ------------ -------- ---------
$ 36,794 $505,646 $900,137 $262,459 ($687,593)
=========== =========== =========== ======== ========
</TABLE>
7. PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan covering all permanent employees
who work at least 20 hours per week. Participants may make voluntary
contributions to the plan and the Company matches these contributions, up to 5%
of the employee's salary. In addition, the Company may make a discretionary
contribution based on each eligible participant's compensation. Participants
contributions vest immediately and Company contributions vest over a six-year
period. Contributions to the plan charged to operations for the years ended
December 31, 1993, December 30, 1994 and December 29, 1995 and the six months
ended June 30, 1995 and June 28, 1996 totaled $363,570, $410,629, $532,170,
$271,048 and $377,364, respectively.
F-14
<PAGE> 74
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
8. COMMITMENTS
The Company has embarked upon a significant renovation and expansion program to
its corporate headquarters building. This program is expected to cost
approximately $2.2 million and will be financed primarily with the proceeds of
the construction note (see Note 4.) As of June 1996, all costs associated with
the renovation and expansion program had been incurred.
The Company leases certain office space in California, Maryland and Virginia
under non-cancelable operating lease agreements. Certain leases contain
escalation clauses and require the Company to pay its share of any increases in
operating expenses and real estate taxes. Rent expense was $175,491, $220,615,
$281,381, $128,373 and $237,437 for the years ended December 31, 1993, December
30, 1994 and December 29, 1995 and the six months ended June 30, 1995 and June
29, 1996, respectively. Future minimum lease payments under all non-cancelable
operating lease arrangements are as follows:
<TABLE>
<S> <C>
Six months ending December 27, 1996..................... $ 185,065
1997.................................................... 295,292
1998.................................................... 252,905
1999.................................................... 207,383
2000.................................................... 126,668
Thereafter.............................................. 64,704
----------
Total................................................... $1,132,017
==========
</TABLE>
The Company maintains a self-insurance program for health care and short-term
disability costs with stop-loss insurance. Expense incurred for group medical
claims, program premiums and stop-loss limit charged to operations for the years
ended December 31, 1993, December 30, 1994 and December 29, 1995 and the six
months ended June 30, 1995 and June 28, 1996 totaled $341,749, $497,090,
$621,378, $332,209 and $421,675, respectively.
9. RELATED PARTY TRANSACTIONS
In 1994, the Company entered into an oral agreement to lease real property
located adjacent to the Company's Glenwood, Maryland headquarters from Glenwood
Associates Limited Partnership (Glenwood Associates), a limited partnership
controlled by certain shareholders of the Company. The lease provides for
monthly rent of $3,929 plus payment of operating expenses. Rent expense under
the lease agreement for the years ended December 30, 1994 and December 29, 1995
and the six months ended June 30, 1995 and June 28, 1996 was approximately
$44,000, $47,000, $24,000 and $24,000, respectively. The Company purchased the
aforementioned property from Glenwood Associates on June 28, 1996 for $360,000.
The purchase of the property was financed primarily by the assumption of a
mortgage note payable (see Note 4) and the elimination of a receivable.
In August 1995, the Company issued a promissory note for the benefit of a
shareholder and former officer (Mr. Crocker) in the principal amount of $307,520
representing the balance of monies due to Mr. Crocker in connection with the
repurchase by the Company of 588,921 shares of common stock from Mr. Crocker.
This promissory note was paid in full in September 1995.
10. SUBSEQUENT EVENTS
Effective May 31, 1996, the Company consummated a tax-free reorganization for
the purposes of becoming a Delaware corporation by issuing 40 shares of a new
class of $.01 par value common stock in exchange for each share of the then
outstanding no par value Class A (voting) and Class B (non-voting) common stock.
The effect of this reorganization is reflected as if it had occurred at the
beginning of the earliest period presented.
F-15
<PAGE> 75
TRUSTED INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 28, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED)
During July 1996, the Company entered into various agreements with the bank
which increased the aggregate available borrowings under its non-mortgage credit
arrangements to $7.0 million. Additionally, on August 27, 1996, the Company
entered into a new $2.0 million credit facility with the bank. Borrowings under
this new facility bear interest at the prime rate plus 3% and are due upon the
earlier of a successful initial public offering of the Company's common stock or
December 31, 1996.
In August 1996, the Company granted options for the purchase of 141,096 shares
of common stock to new employees pursuant to the 1996 Option Plan. Additionally,
in August 1996, the Company granted options pursuant to the Director Plan for
the purchase of 18,404 shares of common stock. These options have an exercise
price of $7.04 per share.
As of August 28, 1996, the fair value of the Company's shares of Cybercash, Inc.
common stock is estimated to be approximately $2.9 million.
On August 30, 1996, the Board of Directors approved a 1-for-1.6301 reverse stock
split of the Company's common stock, which will become effective in September
1996 upon stockholder approval. All references in the accompanying financial
statements to the number of shares of common stock and per share amounts have
been restated to reflect the reverse stock split.
F-16
<PAGE> 76
TRUSTED INFORMATION SYSTEMS, INC.
"Building A World of Trust"
tis LOGO
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities offered hereby, other than underwriting
discounts and commissions. All of the amounts shown are estimated except the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NASDAQ listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee..................... $ 15,863
National Association of Securities Dealers, Inc. filing fee....... 5,100
NASDAQ listing fee................................................ 43,606
Transfer agent's and registrar's fees............................. 3,500
Printing expenses................................................. 285,000
Legal fees and expenses........................................... 250,000
Accounting fees and expenses...................................... 250,000
Blue Sky filing fees and expenses................................. 35,000
Miscellaneous expenses............................................ 36,931
--------
Total........................................................ $925,000
========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Company's Certificate of Incorporation and Bylaws include provisions to require
the Company to indemnify its directors and officers to the fullest extent
permitted by Section 145, including circumstances in which indemnification is
otherwise discretionary. Section 145 also empowers the Company to purchase and
maintain insurance that protects its officers, directors, employees and agents
against any liabilities incurred in connection with their service in such
positions.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought
nor is the Company aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
The Underwriting Agreement filed as Exhibit 1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and certain officers, and by the Company of the Underwriters, for
certain liabilities arising under the Securities Act of 1933, as amended (the
"Act"), or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued unregistered securities
in the transactions described below. Securities issued in such transactions were
offered and sold in reliance upon the exemption from registration under Section
4(2) of the Act, relating to sales by an issuer not involving any public
offering, or under Rule 701 under the Act. The sales of securities were made
without the use of an underwriter and the certificates evidencing the shares
bear a restrictive legend permitting the transfer thereof only upon registration
of the shares or an exemption under the Act.
(1) From January 1, 1993 through August 28, 1996, the Company issued an
aggregate of 629,582 shares of Common Stock to various employees for aggregate
consideration of $319,752 upon exercise of options granted pursuant to the
Company's Amended and Restated Employee Stock Option Plan.
II-1
<PAGE> 78
(2) From January 1, 1993 through August 28, 1996, the Company granted to
various employees stock options under the Company's Amended and Restated
Employee Stock Option Plan, 1996 Stock Option Plan and Directors' Stock Option
Plan for an aggregate of 3,187,536 shares of Common Stock exercisable at prices
ranging from $.50 to $7.04 per share, of which options for 629,582 shares have
been exercised and options for 1,314,355 shares are outstanding.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
1.1+ -- Form of Underwriting Agreement.
3.1* -- Certificate of Incorporation of the Company.
3.2* -- Bylaws of the Company.
4.1** -- Specimen stock certificate for shares of Common Stock of the Company.
5.1** -- Opinion of Piper & Marbury L.L.P. regarding legality of securities
being registered.
10.1* -- Amended and Restated Employee Stock Option Plan.
10.2* -- 1996 Stock Option Plan.
10.2.1* -- Form of Incentive Stock Option Agreement pursuant to 1996 Stock Option
Plan.
10.2.2* -- Form of Non-Qualified Stock Option Agreement pursuant to 1996 Stock
Option Plan.
10.3* -- 1996 Directors' Stock Option Plan.
10.4* -- Form of Employee Agreement Regarding Confidentiality and Inventions.
10.5* -- Form of Software License and Reseller Agreement.
10.6* -- Form of Consulting Services Agreement.
10.7** -- Form of Indemnification Agreement by and between the Company and its
directors and executive officers.
10.8* -- Construction Loan Agreement dated July 26, 1995, by and between the
Company and Mercantile-Safe Deposit and Trust Company.
10.9* -- Construction Loan Promissory Note dated July 26, 1995, by and between
the Company and Mercantile-Safe Deposit and Trust Company.
10.10* -- Deed of Trust and Security Agreement dated July 26, 1995, by and
between the Company and Mercantile-Safe Deposit and Trust Company.
10.11* -- Security Agreement, dated July 26, 1995, by and among the Company,
Mercantile-Safe Deposit and Trust Company and Stephen T. Walker.
10.12* -- Personal Guaranty Agreement dated July 26, 1995, by and between Stephen
T. Walker and Mercantile-Safe Deposit and Trust Company.
10.13* -- Revolving Note issued by the Company on April 4, 1996 to
Mercantile-Safe Deposit and Trust Company.
10.14* -- Security Agreement dated April 4, 1996, by and between the Company and
Mercantile-Safe Deposit and Trust Company.
10.15* -- Revolving Note issued by the Company on April 4, 1996 to
Mercantile-Safe Deposit and Trust Company.
10.16** -- Security Agreement dated April 4, 1996, by and between the Company and
Mercantile-Safe Deposit and Trust Company.
10.17* -- Office Building Lease dated February 1, 1990, by and between the
Company and Perini Investment Properties, Inc.
10.18* -- Lease Amendment I dated May 26, 1994, by and between the Company and
Robert R. Walker, Jr., Receiver (relating to exhibit 10.17).
10.19* -- Standard Lease dated April 12, 1989, by and between the Company and R&B
Property Holding Company.
10.20* -- Amendment to Lease effective November 1, 1992, by and between the
Company and R&B Property Holding Company (relating to exhibit 10.19).
10.21* -- Lease Agreement dated as of October 3, 1995, by and between Trusted
Information Systems (UK) Limited and Theale Estates Limited.
</TABLE>
II-2
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
10.22+ -- Deed dated July 17, 1996, by and between the Company and Glenwood
Associates Limited Partnership.
10.22.1+ -- Promissory Note issued by the Company on July 17, 1996 to Glenwood
Associates Limited Partnership.
10.22.2+ -- Deed of Trust and Security Agreement dated December 1, 1993, by and
between Glenwood Associates Limited Partnership and Mercantile-Safe
Deposit and Trust Company.
10.22.3+ -- Promissory Note issued by Glenwood Associates Limited Partnership on
December 1, 1993 to Mercantile-Safe Deposit and Trust Company.
10.23* -- Deed and Confirmatory Deed dated July 26, 1995, by and between the
Company and Stephen T. Walker.
10.24* -- Agreement and Plan of Merger dated May 30, 1996.
11.1+ -- Statement of computation of earnings per share.
21.1* -- Subsidiaries of the Company.
23.1+ -- Consent of Ernst & Young LLP.
23.2** -- Consent of Piper & Marbury L.L.P. (to be included as part of Exhibit
5.1 hereto).
24.1* -- Power of Attorney (included in signature pages)
27+ -- Financial Data Schedule
</TABLE>
(b) Financial Statement Schedules
None required.
- ---------------
+ Filed herewith.
* Previously filed pursuant to the Company's Registration Statement
(Registration No. 333-5419), filed June 7, 1996 with the Commission.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
A. The undersigned Company hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company 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 Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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 Company 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 of 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 Company 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 a form of prospectus filed by the Company pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a
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-3
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Glenwood, County of Howard, State of Maryland, on the 30th day of August,
1996.
TRUSTED INFORMATION SYSTEMS, INC.
By: /s/ STEPHEN T. WALKER
------------------------------------
STEPHEN T. WALKER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------- ----------------
<C> <S> <C>
/s/ STEPHEN T. WALKER President, Chief Executive August 30, 1996
- ------------------------------------------ Officer, Chairman of the Board
STEPHEN T. WALKER and Director
* Executive Vice President and August 30, 1996
- ------------------------------------------ Chief Operating Officer,
MARTHA A. BRANSTAD President of the Advanced
Research and Engineering
Division and Director
* Executive Vice President, August 30, 1996
- ------------------------------------------ President of the Commercial
HARVEY L. WEISS Division, Secretary and Director
/s/ RONALD W. KAISER Executive Vice President and August 30, 1996
- ------------------------------------------ Chief Financial Officer
RONALD W. KAISER (Principal Financial and
Accounting Officer)
* Director August 30, 1996
- ------------------------------------------
GERALD J. POPEK
* Director August 30, 1996
- ------------------------------------------
CHARLES W. STEIN
*By: /s/ STEPHEN T. WALKER
- ------------------------------------------
STEPHEN T. WALKER
ATTORNEY IN FACT
</TABLE>
II-4
<PAGE> 81
EXHIBIT INDEX
TRUSTED INFORMATION SYSTEMS, INC.
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
</TABLE>
<TABLE>
<C> <S> <C>
1.1+ Form of Underwriting Agreement. ......................................
3.1* Certificate of Incorporation of the Company. .........................
3.2* Bylaws of the Company. ...............................................
4.1** Specimen stock certificate for shares of Common Stock of the
Company. .............................................................
5.1** Opinion of Piper & Marbury L.L.P. regarding legality of securities
being registered. ....................................................
10.1* Amended and Restated Employee Stock Option Plan. .....................
10.2* 1996 Stock Option Plan. ..............................................
10.2.1* Form of Incentive Stock Option Agreement pursuant to 1996 Stock Option
Plan. ................................................................
10.2.2* Form of Non-Qualified Stock Option Agreement pursuant to 1996 Stock
Option Plan. .........................................................
10.3* 1996 Directors' Stock Option Plan. ...................................
10.4* Form of Employee Agreement Regarding Confidentiality and
Inventions. ..........................................................
10.5* Form of Software License and Reseller Agreement. .....................
10.6* Form of Consulting Services Agreement. ...............................
10.7** Form of Indemnification Agreement by and between the Company and its
directors and executive officers......................................
10.8* Construction Loan Agreement dated July 26, 1995, by and between the
Company and Mercantile-Safe Deposit and Trust Company. ...............
10.9* Construction Loan Promissory Note dated July 26, 1995, by and between
the Company and Mercantile-Safe Deposit and Trust Company. ...........
10.10* Deed of Trust and Security Agreement dated July 26, 1995, by and
between the Company and Mercantile-Safe Deposit and Trust Company. ...
10.11* Security Agreement, dated July 26, 1995, by and among the Company,
Mercantile-Safe Deposit and Trust Company and Stephen T. Walker. .....
10.12* Personal Guaranty Agreement dated July 26, 1995, by and between
Stephen T. Walker and Mercantile-Safe Deposit and Trust Company. .....
10.13* Revolving Note issued by the Company on April 4, 1996 to
Mercantile-Safe Deposit and Trust Company. ...........................
10.14* Security Agreement dated April 4, 1996, by and between the Company and
Mercantile-Safe Deposit and Trust Company. ...........................
10.15* Revolving Note issued by the Company on April 4, 1996 to
Mercantile-Safe Deposit and Trust Company. ...........................
10.16** Security Agreement dated April 4, 1996, by and between the Company and
Mercantile-Safe Deposit and Trust Company. ...........................
10.17* Office Building Lease dated February 1, 1990, by and between the
Company and Perini Investment Properties, Inc. .......................
10.18* Lease Amendment I dated May 26, 1994, by and between the Company and
Robert R. Walker, Jr., Receiver (relating to exhibit 10.17). .........
10.19* Standard Lease dated April 12, 1989, by and between the Company and
R&B Property Holding Company. ........................................
10.20* Amendment to Lease effective November 1, 1992, by and between the
Company and R&B Property Holding Company (relating to exhibit
10.19). ..............................................................
10.21* Lease Agreement dated as of October 3, 1995, by and between Trusted
Information Systems (UK) Limited and Theale Estates Limited. .........
10.22+ Deed dated July 17, 1996, by and between the Company and Glenwood
Associates Limited Partnership. ......................................
10.22.1+ Promissory Note issued by the Company on July 17, 1996 to Glenwood
Associates Limited Partnership. ......................................
</TABLE>
II-5
<PAGE> 82
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.22.2+ Deed of Trust and Security Agreement dated December 1, 1993, by and
between Glenwood Associates Limited Partnership and Mercantile-Safe
Deposit and Trust Company. ...........................................
10.22.3+ Promissory Note issued by Glenwood Associates Limited Partnership on
December 1, 1993 to Mercantile-Safe Deposit and Trust Company. .......
10.23* Deed and Confirmatory Deed dated July 26, 1995, by and between the
Company and Stephen T. Walker. .......................................
10.24* Agreement and Plan of Merger dated May 30, 1996. .....................
11.1+ Statement of computation of earnings per share. ......................
21.1* Subsidiaries of the Company. .........................................
23.1+ Consent of Ernst & Young LLP. ........................................
23.2** Consent of Piper & Marbury L.L.P. (to be included as part of Exhibit
5.1 hereto). .........................................................
24.1* Power of Attorney (included in signature pages).......................
27+ Financial Data Schedule...............................................
</TABLE>
- ---------------
+ Filed herewith.
* Previously filed pursuant to the Company's Registration Statement
(Registration No. 333-5419), filed with the Commission on June 7, 1996.
** To be filed by amendment.
II-6
<PAGE> 1
EXHIBIT 1.1
UNDERWRITING AGREEMENT
3,335,000 Shares
TRUSTED INFORMATION SYSTEMS, INC.
Common Stock
(Par Value $.01 per share)
September , 1996
J.P. MORGAN SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ LLC
as Representatives of the
several Underwriters
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Dear Sirs:
Trusted Information Systems, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters listed in
Schedule I hereto (the "Underwriters"), for whom you are acting as
representatives (the "Representatives"), an aggregate of 2,900,000 shares (the
"Underwritten Shares") of common stock, par value $.01 per share, of the
Company (the "Common Stock") and for the sole purpose of the covering
over-allotments in connection with the sale of the Underwritten Shares, at the
option of the Underwriters, up to an additional 435,000 shares of Common Stock
(the "Option Shares"). The Underwritten Shares and the Option Shares are
herein referred to as the "Shares."
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Securities Act"), a registration
statement on Form S-1 (File No. 333-05419), including a prospectus, relating
to the Shares which may be amended. The registration statement as amended at
the time when it becomes effective, or, if post-effective amendments are
<PAGE> 2
-2-
filed with respect thereto, as amended by such post-effective amendments at
the time of their effectiveness, including in each case information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Securities Act, is referred to in this
Agreement as the "Registration Statement"; the prospectus constituting a part
of the Registration Statement in the form first used to confirm sales of
Shares is hereinafter referred to as the "Prospectus."
The Company hereby agrees with the Underwriters as follows:
1. On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees to
issue and sell the Underwritten Shares to the several Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company
the respective number of Underwritten Shares set forth opposite such
Underwriter's name on Schedule I hereto at a purchase price of $______________
per share (the "Purchase Price").
In addition, on the basis of the representations and warranties
contained in this Agreement, and subject to its terms and conditions, the
Company agrees to issue and sell the Option Shares to the several
Underwriters, and the Underwriters shall have the option to purchase,
severally and not jointly, from the Company all or a portion of the Option
Shares at the Purchase Price, for the sole purpose of covering over-allotments
(if any) in connection with the offering of Underwritten Shares by the several
Underwriters.
If any Option Shares are to be purchased, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Option Shares which bears the same ratio to the aggregate number of Option
Shares being purchased as the number of Underwritten Shares set forth opposite
the name of such Underwriter on Schedule I hereto (or such number increased as
set forth in Section 10 hereof) bears to the aggregate number of Underwritten
Shares being purchased from the Company by the several Underwriters, subject,
however, to such adjustments to eliminate any fractional Shares as the
Representatives in their sole discretion shall make.
The Underwriters may exercise the option to purchase the Option
Shares at any time (but not more than once) on or before the thirtieth day
following the date of this Agreement, by written notice from the
Representatives to the Company. Such notice shall set forth the aggregate
number of Option Shares as to which the option is being exercised and the date
and time when such Option Shares are to be delivered and paid for. The date
specified in any
<PAGE> 3
-3-
such notice shall be a Business Day (as hereinafter defined) (i) no earlier
than the Closing Date (as hereinafter defined) and (ii) no later than the
tenth full Business Day (as hereinafter defined) after the date of such notice
(unless such time and date are postponed in accordance with the provisions of
Section 10 hereof). Any such notice shall be given at least two Business Days
prior to the date and time of delivery specified therein.
2. The Company understands that the Underwriters intend (i) to
make a public offering of the Shares after the Registration Statement and this
Agreement have become effective as in the judgment of the Representatives is
advisable and (ii) initially to offer the Shares upon the terms set forth in
the Prospectus.
3. Payment for the Shares shall be made by wire transfer in
immediately available funds to the account specified by the Company to the
Representatives no later than noon the Business Day (as defined below) prior
to the Closing Date (as defined below). In the case of the Underwritten
Shares, on __________, 19__, or at such other time or date, not later than the
fifth Business Day thereafter, as the Representatives and the Company may
agree upon in writing. In the case of the Option Shares, such payment shall
be made on the date and time specified by the Representatives in the written
notice of the Underwriters' election to purchase such Option Shares. The time
and date of such payment for the Underwritten Shares are referred to herein as
the "Closing Date" and the time and date for such payment for the Option
Shares, if other than the Closing Date, are herein referred to as the
"Additional Closing Date". Each of the Closing Date and the Additional
Closing Date and the locations of delivery of and the form of payment for each
of the Underwritten Shares and the Option Shares may be varied by agreement
between the Representatives and the Company. As used herein, the term
"Business Day" means any day other than a day on which banks are permitted or
required to be closed in New York City.
Payment for the Shares to be purchased on the Closing Date or the
Additional Closing Date, as the case may be, shall be made against delivery to
the Representatives for the respective accounts of the several Underwriters of
the Shares to be purchased on such date registered in such names and in such
denominations as the Representatives shall request in writing not later than
two full Business Days prior to the Closing Date or the Additional Closing
Date, as the case may be, with any transfer taxes payable in connection with
the transfer to the Underwriters of the Shares duly paid by the Company. The
certificates for the Shares will be made available for inspection and
packaging by the Representatives at the office of J.P. Morgan Securities Inc.
set forth above not later than 1:00 P.M., New York City time, on the Business
Day prior
<PAGE> 4
-4-
to the Closing Date or the Additional Closing Date, as the case may be.
4. The Company represents and warrants to each of the Underwriters
that:
(a) no order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission, and each preliminary
prospectus filed as part of the Registration Statement, as originally
filed or as part of any amendment thereto, or filed pursuant to Rule 424
under the Securities Act, complied when so filed in all material respects
with the Securities Act, and 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; provided that
this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by such
Underwriter expressly for use therein;
(b) 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 the Company, threatened by the
Commission; and the Registration Statement and the Prospectus (as amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) comply, or will comply, as the case may be, in all
material respects with the Securities Act and as of the date of filing
thereof, did not, and did not and will not, as of the applicable
effective date of the Registration Statement and any amendment thereto
and as of the date of the Prospectus and any amendment or supplement
thereto, 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 at the Closing Date and the Additional Closing Date, as the
case may be, will not contain any 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; provided that this representation
and warranty shall not apply to statements or omissions in the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by such Underwriter expressly for use therein;
<PAGE> 5
-5-
(c) the financial statements, and the related notes thereto,
included in the Registration Statement and the Prospectus, present fairly
(i) the consolidated financial position of the Company and its
subsidiaries as of the dates indicated and (ii) the results of their
operations and changes in their consolidated cash flows for the periods
specified; such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis throughout and the supporting schedules included in the
Registration Statement present fairly the information required to be
stated therein;
(d) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
change in the capital stock or long-term debt of the Company or any of
its subsidiaries, or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, business, prospects, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or
contemplated in the Prospectus, and neither the Company nor any of its
subsidiaries has entered into any transaction or agreement (whether or
not in the ordinary course of business) material to the Company and its
subsidiaries taken as a whole;
(e) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation, with power and authority (corporate and other) to own or
lease its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a material
adverse effect on the general affairs, business, prospects, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, taken as a whole;
(f) each of the Company's subsidiaries has been duly incorporated
and is validly existing as a corporation under the laws of its
jurisdiction of incorporation, with power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws
<PAGE> 6
-6-
of each jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a material
adverse effect on the general affairs, business, prospects, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries taken as a whole; and all the outstanding
shares of capital stock of each subsidiary of the Company have been duly
authorized and validly issued, are fully-paid and non-assessable, and
(except, in the case of foreign subsidiaries, for directors' qualifying
shares) are owned by the Company, directly or indirectly, free and clear
of all liens, encumbrances, security interests and claims;
(g) this Agreement has been duly authorized, executed and delivered
by the Company;
(h) the Company has an authorized capitalization as set forth in
the Prospectus and such authorized capital stock conforms as to legal
matters to the description thereof set forth in the Prospectus, and all
of the outstanding shares of capital stock of the Company have been duly
authorized and validly issued, are fully paid and non-assessable and are
not subject to any preemptive or similar rights; and, except as described
in or expressly contemplated by the Prospectus, there are no outstanding
rights (including, without limitation, preemptive rights), warrants or
options to acquire, or instruments convertible into or exchangeable for,
any shares of capital stock or other equity interest in the Company or
any of its subsidiaries, or any contract, commitment, agreement,
understanding or arrangement of any kind relating to the issuance of any
capital stock of the Company or any such subsidiary, any such convertible
or exchangeable securities or any such rights, warrants or options;
(i) the Shares have been duly authorized, and, when issued and
delivered to the Underwriters against payment therefor in accordance with
the terms of this Agreement, will be validly issued, fully paid and
non-assessable and will conform to the descriptions thereof in the
Prospectus; and the issuance of the Shares is not subject to any
preemptive or similar rights;
(j) neither the Company nor any of its subsidiaries is (i) in
violation of its respective charter or by-laws, or (ii) is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default in the performance or observance of any obligation, agreement,
covenant or condition under any indenture, mortgage, deed of trust, loan
agreement
<PAGE> 7
-7-
or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them or any of their
respective properties is bound or of any permit, order, decree, judgment,
statute, rule or regulation applicable to the Company or any of its
subsidiaries, except for violations and defaults which individually and
in the aggregate are not material to the Company and its subsidiaries
taken as a whole; the issue and sale of the Shares and the execution of
this Agreement and the performance by the Company of its obligations
hereunder and the consummation of the transactions contemplated herein
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor will
any such action result in any violation of the provisions of the
Certificate of Incorporation or the By-Laws of the Company or any
applicable law or statute or any order, decree, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company, its subsidiaries or any of their respective properties; and no
consent, approval, authorization, order, license, registration or
qualification of or with any such court or governmental agency or body is
required for the issue, sale and delivery of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except such consents, approvals, authorizations, orders,
licenses, registrations or qualifications as have been obtained and are
in full force and effect under the Securities Act and as may be required
under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(k) other than as set forth or contemplated in the Prospectus,
there are no legal or governmental investigations, actions, suits or
proceedings pending or, to the knowledge of the Company, threatened
against the Company or any of its subsidiaries or any of their respective
properties or to which the Company or any of its subsidiaries is or may
be a party or to which any property of the Company or any of its
subsidiaries is or may be the subject which, if determined adversely to
the Company or any of its subsidiaries, could individually or in the
aggregate have, or reasonably be expected to have, a material adverse
effect on the general affairs, business, prospects, management, financial
position, stockholders' equity or results of operations of the Company
and its subsidiaries, taken as a whole, and, to the Company's knowledge,
no such proceedings are threatened or contemplated
<PAGE> 8
-8-
by governmental authorities or threatened by others; and there are no
statutes, regulations, contracts or other documents that are required to
be described in the Registration Statement or Prospectus or to be filed
as exhibits to the Registration Statement that are not described or filed
as required;
(l) the Company and its subsidiaries have good and marketable title
in fee simple to all real property and to all personal property owned by
them, in each case free and clear of all liens, encumbrances and defects,
except liens for taxes not yet due and payable and except such as are
described or referred to in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made
or proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, existing and
enforceable leases with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or its subsidiaries;
(m) no relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company
or any of its subsidiaries, on the other hand, which is required by the
Securities Act to be described in the Registration Statement and the
Prospectus which is not so described;
(n) no person has the right to require the Company to register any
securities for offering and sale under the Securities Act by reason of
the filing of the Registration Statement with the Commission or the issue
and sale of the Shares;
(o) the Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company
Act");
(p) the Company has complied with all provisions of
Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida)
relating to doing business with the Government of Cuba or with any person
or affiliate located in Cuba;
(q) Ernst & Young LLP who have certified certain financial
statements of the Company and its subsidiaries are
<PAGE> 9
-9-
independent public accountants as required by the Securities Act;
(r) the Company and its subsidiaries have filed all federal, state,
local and foreign tax returns which have been required to be filed and
have paid all taxes shown thereon and all assessments received by them,
to the extent that such taxes have become due and are not being
contested in good faith; and, except as disclosed in the Registration
Statement and the Prospectus, there is no tax deficiency which has been
or might reasonably be expected to be asserted or threatened against the
Company or any subsidiary;
(s) the Company has not taken nor will it take, directly or
indirectly, any action designed to, or that might be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Common Stock;
(t) except as set forth in the Prospectus, each of the Company and
its subsidiaries owns, possesses or has obtained all licenses, permits,
certificates, consents, orders, approvals and other authorizations from,
and has made all declarations and filings with, all federal, state, local
and other governmental authorities (including foreign regulatory
agencies), all self-regulatory organizations and all courts and other
tribunals, domestic or foreign, necessary to own or lease, as the case
may be, and to operate its properties and to carry on its business as
conducted as of the date hereof, except to the extent that the failure to
declare or file would not, individually or in the aggregate, have a
material adverse effect on the general affairs, business, prospects,
management, financial position, stockholders' equity or results of
operations of the Company and its Subsidiaries taken as a whole, and
neither the Company nor any such subsidiary has received actual notice of
any proceeding relating to revocation or modification of any such
license, permit, certificate, consent, order, approval or other
authorization, except as described in the Registration Statement and the
Prospectus; and each of the Company and its subsidiaries is in compliance
in all material respects with all laws and regulations relating to the
conduct of its business as conducted as of the date hereof;
(u) there are no existing or, to the knowledge of the Company,
threatened labor disputes with, or slowdowns, strikes or work stoppages
involving the employees of the Company or any of its subsidiaries which
are likely to have a material adverse effect on the general affairs,
business, prospects, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries taken as a
whole;
<PAGE> 10
-10-
(v) the Company and its subsidiaries (i) are 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"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are 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 general
affairs, business, prospects, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole;
(w) each employee benefit plan, within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), that is maintained, administered or contributed to by the
Company or any of its affiliates for employees or former employees of the
Company and its affiliates has been maintained in compliance with its
terms and the requirements of any applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"), except where such noncompliance
would not, singly or in the aggregate, have a material adverse effect on
the general affairs, business, prospects, management, financial position,
stockholders' equity or results of operation of the Company and its
subsidiaries taken as a whole. No prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code has occurred
with respect to any such plan excluding transactions effected pursuant to
a statutory or administrative exemption. For each such plan which is
subject to the funding rules of Section 412 of the Code or Section 302 of
ERISA no "accumulated funding deficiency" as defined in Section 412 of
the Code has been incurred, whether or not waived, and the fair market
value of the assets of each such plan (excluding for these purposes
accrued but unpaid contributions) exceeded the present value of all
benefits accrued under such plan determined using reasonable actuarial
assumptions;
(x) the statistical and market-related data included in the
Registration Statement and the Prospectus are based on or derived from
sources which are believed by the Company to be reliable and accurate;
<PAGE> 11
-11-
(y) except for compensation to be paid to the Underwriters under
this Agreement, the Company knows of no outstanding claims for services,
either in the nature of a finder's fee or origination fee, with respect
to any of the transactions contemplated hereby;
(z) the Company is the surviving corporation of a merger (the
"Merger") with Trusted Information Systems, Inc., a Maryland corporation,
effective as of May 31, 1996, and has the status, rights and liabilities
of a surviving corporation set forth in Section 259 of the Delaware
General Corporation Law ("DGCL"). The Merger was duly authorized by all
necessary corporate and shareholder action on the part of each
constituent corporation and complies with all applicable provisions of
the DGCL and the Maryland General Corporation Law;
(aa) except as set forth in the Prospectus, each of the Company and
each of its subsidiaries owns or possesses the patents, patent rights,
licenses, inventions, trademarks, service marks, trade names, copyrights
and know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures) (collectively, the "Intellectual Property") reasonably
necessary to carry on the business conducted by each as of the date
hereof, except to the extent that the failure to own or possess such
Intellectual Property would not have a material adverse effect on the
general affairs, business, prospects, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, and, except as described in the
Registration Statement and the Prospectus, neither the Company nor any
subsidiary has received any notice of infringement of or conflict with
asserted rights of others with respect to any Intellectual Property,
except for notices the content of which if accurate would not have a
material adverse effect on the general affairs, business, prospects,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a whole; and
(ab) the Company has delivered to the Underwriters written
agreements, in form and substance satisfactory to the Underwriters, of
each of its directors, officers and certain other shareholders, pursuant
to which each has agreed not to sell, offer, agree to sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock, any
options, warrants or rights to purchase Common Stock, or any securities
exercisable for or convertible into Common Stock for a period of 180 days
after the date of this Agreement, without the
<PAGE> 12
-12-
prior written consent of J.P. Morgan Securities Inc; provided that such
persons may, without such consent, make such dispositions pursuant to the
terms and conditions of such agreements.
5. The Company covenants and agrees with the several Underwriters
as follows:
(a) to use its best efforts to cause the Registration Statement to
become effective (if the Registration Statement shall not have been
declared effective prior to the execution hereof) at the earliest
possible time and, if applicable, to file the Prospectus with the
Commission within the time periods specified by Rule 424(b) and Rule 430A
under the Securities Act and to furnish copies of the Prospectus to the
Underwriters in New York City prior to 10:00 A.M., New York City time, on
the Business Day next succeeding the date of this Agreement in the
quantities as the Representatives may reasonably request;
(b) to deliver, at the expense of the Company, to the
Representatives three signed copies of the Registration Statement (as
originally filed) and each amendment thereto, in each case including
exhibits, and to each other Underwriter a conformed copy of the
Registration Statement (as originally filed) and each amendment thereto,
in each case without exhibits, and, during the period mentioned in
paragraph (e) below, to each of the Underwriters and to dealers effecting
transactions in the Shares as many copies of the Prospectus (including
all amendments and supplements thereto) as the Underwriters and such
dealers may reasonably request;
(c) before filing any amendment or supplement to the Registration
Statement or the Prospectus, whether before or after the time the
Registration Statement becomes effective, to furnish to the
Representatives a copy of the proposed amendment or supplement for review
and not to file any such proposed amendment or supplement to which the
Representatives reasonably object;
(d) to advise the Representatives promptly, and, if required by the
Representatives, to confirm such advice in writing, (i) when the
Registration Statement shall have become or becomes effective, (ii) when
any amendment to the Registration Statement shall have become effective,
(iii) when any supplement to the Prospectus or any amended Prospectus has
been filed and to furnish the Representatives with copies thereof,
(iv) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus
or for any additional
<PAGE> 13
-13-
information, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any preliminary prospectus or
the Prospectus or the initiation or threatening of any proceeding for
that purpose, (vi) the occurrence of any event, within the period
referenced in paragraph (e) below, as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of
material fact or omit to state any material fact necessary in order to
make the statements therein in light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, and (vii) of the
receipt by the Company of any notification with respect to any suspension
of the qualification of the Shares for offer and sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose; and
to use reasonable best efforts to prevent the issuance of any such stop
order, or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or of any order suspending any
such qualification of the Shares, or notification of any such order
thereof and, if issued, to obtain as soon as possible the withdrawal
thereof;
(e) if, during such period of time after the first date of the
public offering of the Shares as, in the reasonable opinion of counsel
for the Company or the Underwriters, a prospectus relating to the Shares
is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus
is delivered to a purchaser, not misleading, or if it is necessary to
amend or supplement the Prospectus to comply with law, forthwith to
prepare and furnish, at the expense of the Company, to the Underwriters
and to the dealers (whose names and addresses the Representatives will
furnish to the Company) to which Shares may have been sold by the
Underwriters and to any other dealers upon written request, such
amendments or supplements to the Prospectus as may be necessary so that
the statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus will comply with law;
(f) to use its best efforts to register or qualify the Shares for
offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives shall reasonably request and to
continue such registration or qualification in effect so long as
reasonably required for
<PAGE> 14
-14-
distribution of the Shares; provided that the Company shall not be
required to file a general consent to service of process in any
jurisdiction;
(g) to make generally available to its stockholders as soon as
practicable an earnings statement covering a period of at least twelve
months beginning with the first fiscal quarter of the Company occurring
after the effective date of the Registration Statement, which shall
satisfy the provisions of Section 11(a) of the Securities Act and
Rule 158 of the Commission promulgated thereunder;
(h) During the period of five years after the date of this
Agreement, to furnish to the Representatives copies of all reports or
other communications (financial or other) furnished to holders of the
Shares, and copies of any reports and financial statements furnished to
or filed with the Commission, the National Association of Securities
Dealers, Inc. (the "NASD") or any national securities exchange;
(i) for a period of 180 days after the date of this Agreement, not
to issue, sell, offer, agree to sell, or otherwise dispose of, directly
or indirectly, any shares of Common Stock, any options, rights or
warrants to purchase Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock without the prior written
consent of J.P. Morgan Securities Inc.; provided that, without such prior
written consent, the Company may grant options under its director and
employee stock option plans described in the Prospectus;
(j) to file with the Commission reports on Form SR as may be
required by Rule 463 under the Securities Act;
(k) whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all costs and expenses incident to the performance of its
obligations hereunder, including without limiting the generality of the
foregoing, all costs and expenses (i) incident to the preparation,
issuance, execution and delivery of the Shares, (ii) incident to the
preparation, printing and filing under the Securities Act of the
Registration Statement, the Prospectus and any preliminary prospectuses
(including in each case all exhibits, amendments and supplements
thereto), (iii) incurred in connection with the registration or
qualification of the Shares under the laws of such jurisdictions as the
Representatives may designate (including fees of counsel for the
Underwriters and their disbursements related to such registration or
qualification), (iv) in connection with the qualification for quotation
of the
<PAGE> 15
-15-
Shares on the Nasdaq National Market, (v) related to any filing with, and
review by, the NASD, (vi) in connection with the printing (including word
processing and duplication costs) and delivery of this Agreement, all
other agreements relating to underwriting and syndication arrangements,
the Blue Sky Survey and the furnishing to the Underwriters and dealers of
copies of the Registration Statement and the Prospectus, including
mailing and shipping, as herein provided, (vii) any expenses incurred by
the Company in connection with a "road show" presentation to potential
investors, (viii) the cost of preparing stock certificates and (ix) the
cost and charges of any transfer agent and any registrar;
(l) to use its best efforts to cause the Common Stock to be
qualified for quotation on the Nasdaq National Market; and
(m) to use the net proceeds of the offering of the Shares as set
forth in the Registration Statement and the Prospectus under the caption
"Use of Proceeds."
6. The several obligations of the Underwriters hereunder to
purchase the Shares on the Closing Date or the Additional Closing Date, as the
case may be, are subject to the performance by the Company of its obligations
hereunder and to the following additional conditions:
(a) the Registration Statement shall have become effective (or if a
post-effective amendment is required to be filed under the Securities
Act, such post-effective amendment shall have become effective) not later
than 5:00 P.M., New York City time, on the date hereof; and no stop order
suspending the effectiveness of the Registration Statement shall be in
effect and no proceedings for such purpose shall be pending before or
threatened by the Commission; the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the rules and regulations under the
Securities Act and in accordance with Section 5(a) hereof; and all
requests for additional information by the Commission shall have been
complied with to the satisfaction of the Representatives;
(b) the representations and warranties of the Company contained
herein shall be true and correct on and as of the Closing Date or the
Additional Closing Date, as the case may be, as if made on and as of the
Closing Date or the Additional Closing Date, as the case may be, and the
Company shall have complied with all agreements and all conditions on its
part to be performed or satisfied hereunder at or prior to the Closing
Date or the Additional Closing Date, as the case may be;
<PAGE> 16
-16-
(c) since the respective dates as of which information is given in
the Prospectus there shall not have been any change in the capital stock
or long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, business,
prospects, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, taken as a
whole, otherwise than as set forth or contemplated in the Prospectus, the
effect of which in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares on the Closing Date or the Additional Closing
Date, as the case may be, on the terms and in the manner contemplated in
the Prospectus; and neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest audited financial
statements included in the Prospectus any material loss or interference
with its business from fire, explosion, flood or other calamity, whether
or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus;
(d) the Representatives shall have received on and as of the
Closing Date or the Additional Closing Date, as the case may be, a
certificate of an executive officer of the Company, with specific
knowledge about the Company's financial matters, satisfactory to the
Representatives to the effect set forth in subsections (a) through (c)
(with respect to the respective representations, warranties, agreements
and conditions of the Company) of this Section and to the further effect
that there has not occurred any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, business, prospects, management, financial
position, stockholders' equity or results of operations of the Company
and its subsidiaries, taken as a whole, from that set forth or
contemplated in the Registration Statement;
(e) Piper & Marbury L.L.P., counsel for the Company, shall have
furnished to the Representatives their written opinion, dated the Closing
Date or the Additional Closing Date, as the case may be, in form and
substance satisfactory to the Representatives and their counsel, to the
effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as
described in the Prospectus;
<PAGE> 17
-17-
(ii) the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties, or conducts any business, so as to require such
qualification, other than where the failure to be so qualified or in
good standing would not have a material adverse effect on the
general affairs, business, prospects, management, financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries taken as a whole;
(iii) each of the Company's subsidiaries has been duly
incorporated and is validly existing as a corporation under the laws
of its jurisdiction of incorporation with power and authority
(corporate and other) to own its properties and conduct its business
as described in the Prospectus and has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns
or leases properties, or conducts any business, so as to require
such qualification, other than where the failure to be so qualified
and in good standing would not have a material adverse effect on the
general affairs, business, prospects, management, financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries taken as a whole; and all of the
outstanding shares of capital stock of each subsidiary have been
duly authorized and validly issued, are fully paid and
non-assessable, and (except, in the case of foreign subsidiaries,
for directors' qualifying shares and except as otherwise set forth
in the Prospectus) to such counsel's knowledge are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, security interests or claims;
(iv) except as to matters arising under any patent or patent
application or any instrument or document relating thereto (as to
which such counsel need not express an opinion), other than as set
forth or contemplated in the Prospectus, there are no legal or
governmental investigations, actions, suits or proceedings pending
or, to the best of such counsel's knowledge, threatened against or
affecting the Company or any of its subsidiaries or any of their
respective properties or to which the Company or any of its
subsidiaries is or may be a party or to which any property of the
Company or its subsidiaries is or may be the subject which, if
determined adversely to the Company
<PAGE> 18
-18-
or any of its subsidiaries, could individually or in the aggregate
have, or reasonably be expected to have, a material adverse effect
on the general affairs, business, prospects, management, financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries taken as a whole; to such counsel's
knowledge, except as to matters arising under any patent or patent
application or any instrument or document relating thereto (as to
which such counsel need not express an opinion), no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others; and such counsel does not know of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement that are
not described or filed as required;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the
Prospectus;
(vii) the shares of capital stock of the Company outstanding
prior to the issuance of the Shares to be sold by the Company have
been duly authorized and are validly issued, fully paid and
non-assessable;
(viii) the Shares to be issued and sold by the Company hereunder
have been duly authorized, and when delivered to and paid for the
Underwriters in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable and the issuance of
the Shares is not subject to any preemptive or similar rights;
(ix) the statements in the Prospectus under "Description of
Capital Stock", "Shares Eligible for Future Sale" and
"Business--Regulatory Matters", and in the Registration Statement in
Items 14 and 15, insofar as such statements constitute a summary of
the terms of the Common Stock, legal matters, documents or
proceedings referred to therein, fairly present the information
required with respect to such terms, legal matters, documents or
proceedings;
(x) neither the Company nor any of its subsidiaries is (i) in
violation of its respective charter or by-laws, or (ii) is, or with
the giving of notice or lapse of time
<PAGE> 19
-19-
or both would be, in violation of or in default in the performances
or observances of any obligations, agreement, covenant or condition
under any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which it or any
of them or any of their respective properties is bound or of any
permit, order, decree, judgment, statute, rule or regulation
applicable to the Company or any of its subsidiaries, except for
violations and defaults which individually and in the aggregate are
not material to the Company and its subsidiaries taken as a whole;
the issue and sale of the Shares being delivered on the Closing Date
or the Additional Closing Date, as the case may be, and the
execution of this Agreement and the performance by the Company of
its obligations hereunder and the consummation of the transactions
contemplated herein will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company
or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor
will any such action result in any violation of the provisions of
the Certificate of Incorporation or the By-Laws of the Company or
any applicable law or statute or any order, decree, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company, its subsidiaries or any of their
respective properties;
(xi) no consent, approval, authorization, order, license,
registration or qualification of or with any court or governmental
agency or body is required for the issue and sale of the Shares or
the consummation of the other transactions contemplated by this
Agreement, except such consents, approvals, authorizations, orders,
licenses, registrations or qualifications as have been obtained
under the Securities Act and as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(xii) the Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company"
or entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act;
<PAGE> 20
-20-
(xiii) to such counsel's knowledge, each of the Company and its
subsidiaries owns, possesses or has obtained all material licenses,
permits, certificates, consents, orders, approvals and other
authorizations from, and has made all material declarations and
filings with, all federal, state, local and other governmental
authorities (including foreign regulatory agencies), all
self-regulatory organizations and all courts and other tribunals,
domestic or foreign, necessary to own or lease, as the case may be,
and to operate its properties and to carry on its business as
conducted as of the date hereof, and neither the Company nor any
such subsidiary has received any actual notice of any proceeding
relating to revocation or modification of any such license, permit,
certificate, consent, order, approval or other authorization, except
as described in the Registration Statement and the Prospectus; and
to such counsel's knowledge, each of the Company and its
subsidiaries is in compliance with all material laws and regulations
relating to the conduct of its business as conducted as of the date
of the Prospectus;
(xiv) to such counsel's knowledge, the Company and its
subsidiaries have good and marketable title in fee simple to all
real property and good and marketable title to all personal property
owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described or referred to
in the Prospectus and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and to such counsel's knowledge, any real property and
buildings held under lease by the Company and its subsidiaries are
held by them under valid, existing and enforceable leases with such
exceptions as are not material and do no interfere with the use made
or proposed to be made of such property and buildings by the
Company or its subsidiaries;
(xv) the Registration Statement has been declared effective
under the Securities Act and, to such counsel's knowledge, no stop
order proceedings with respect thereto are pending or threatened
under the Securities Act; and
(xvi) the Company is the surviving corporation of the Merger and
has the status, rights and liabilities of a surviving corporation
set forth in Section 259 of the DGCL. The Merger was duly
authorized by all necessary corporate and shareholder action on the
part of each constituent corporation and complies with all
applicable
<PAGE> 21
-21-
provisions of the DGCL and the Maryland General Corporation Law.
Such opinion shall also contain a statement that such counsel
believes that the Registration Statement and the Prospectus and any
amendments and supplements thereto (other than the financial statements
and related schedules therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the requirements
of the Securities Act and (other than the financial statements and
related schedules therein, as to which such counsel need express no
belief) the Registration Statement and the prospectus included therein at
the time the Registration Statement became effective did not contain any
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 that the Prospectus, as amended or supplemented, if
applicable, does not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
In rendering such opinions, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United
States and the States of Maryland, Delaware and New York, to the extent
such counsel deems proper and to the extent specified in such opinion, if
at all, upon an opinion or opinions (in form and substance reasonably
satisfactory to Underwriters' counsel) of other counsel reasonably
acceptable to the Underwriters' counsel familiar with the applicable
laws; (B) as to matters of fact, to the extent such counsel deems proper,
on certificates of responsible officers of the Company and certificates
or other written statements of officials of jurisdictions having custody
of documents respecting the corporate existence or good standing of the
Company. The opinion of such counsel for the Company shall state that
the opinion of any such other counsel is in form satisfactory to such
counsel and, in such counsel's opinion, the Underwriters and they are
justified in relying thereon. With respect to the matters to be covered
in subparagraph (x) above counsel may state their opinion and belief is
based upon their participation in the preparation of the Registration
Statement and the Prospectus, any amendment or supplement thereto and
review and discussion of the contents thereof, but is without independent
check or verification except as specified.
<PAGE> 22
-22-
The opinion of Piper & Marbury L.L.P. described above shall be
rendered to the Underwriters at the request of the Company and shall so
state therein.
(f) The Underwriters shall have received on the Closing Date (i) a
signed opinion of Sterne, Kessler, Goldstein & Fox, as special patent
counsel for the Company, substantially in the form of Exhibit A hereto
and (ii) a signed opinion of Cleary & Komen, as special intellectual
property counsel for the Company, substantially in the form of Exhibit B
hereto, dated the Closing Date and addressed to the Underwriters and
satisfactory to Cahill Gordon & Reindel, counsel for the Underwriters.
(g) On the effective date of the Registration Statement (the
"Effective Date") and the effective date of the most recently filed
post-effective amendment, if any, to the Registration Statement and also
on the Closing Date or the Additional Closing Date, as the case may be,
Ernst & Young LLP shall have furnished to you letters, dated the
respective dates of delivery thereof, in form and substance satisfactory
to the Representatives, containing statements and information of the type
customarily included in accountants' "comfort letters" to underwriters
with respect to certain financial information relating to the Company and
the subsidiaries contained in the Registration Statement and the
Prospectus.
(h) The Representatives shall have received on the Closing Date, an
opinion of Cahill Gordon & Reindel, counsel for the Underwriters, with
respect to the validity of the Shares, the Registration Statement, the
Prospectus and other related matters as the Representatives may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon
such matters.
(i) The Shares shall have been qualified for quotation on the
Nasdaq National Market, subject to official notice of issuance.
(j) The "lock-up" agreements, each substantially in the form of
Exhibit C hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of stock or certain other securities, delivered to you on or
before the date hereof, shall be in full force and effect on the Closing
Date or Additional Closing Date, as the case may be.
(k) On or prior to the Closing Date, the Company shall have
furnished to the Representatives such further
<PAGE> 23
-23-
certificates and documents as the Representatives shall reasonably
request.
The several obligations of the Underwriters to purchase Option
Shares are subject to the conditions set forth in paragraphs (a)-(k) above on
and as of the Additional Closing Date (references therein to the Closing Date
shall be deemed references to the Additional Closing Date for this purpose),
except that the certificate called for by paragraph (d), the opinions called
for by paragraphs (e), (f) and (h) and the letter called for by paragraph (g)
shall be dated as of, and delivered on, the Additional Closing Date.
7. The Company agrees to indemnify and hold harmless each
Underwriter, its officers and directors, and each person, if any, who controls
any Underwriter within the meaning of either Section 15 of the Securities Act
or Section 20 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, the legal fees and other expenses
incurred in connection with any suit, action or proceeding or any claim
asserted) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by such Underwriter, through the
Representatives, expressly for use therein; provided, however, that the
foregoing indemnity shall not inure to the benefit of any Underwriter from
whom the person asserting such losses, claims, damages, liabilities and
judgments purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (including any amendment or supplement thereto) was not
sent or given by or on behalf of such Underwriter to such person at or prior
to the written confirmation of the sale of the Shares to such person, and if
the Prospectus (including any amendment or supplement thereto) would have
cured the defect giving rise to such losses, claims, damages, liabilities or
judgments, unless such failure to deliver a copy of the Prospectus was a
result of the failure of the Company to provide as many copies of such
Prospectus as such Underwriter may reasonably request in a timely manner.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its
<PAGE> 24
-24-
officers who sign the Registration Statement, and each person who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company to each Underwriter, but only with reference to information
relating to such Underwriter furnished to the Company in writing by such
Underwriter through the Representatives, expressly for use in the Registration
Statement, the Prospectus, any amendment or supplement thereto, or any
preliminary prospectus.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted
against any person in respect of which indemnity may be sought pursuant to
either of the two preceding paragraphs, such person (the "Indemnified Person")
shall promptly notify the person or persons against whom such indemnity may be
sought (each an "Indemnifying Person") in writing, and such Indemnifying
Person, upon request of the Indemnified Person, shall retain counsel
reasonably satisfactory to the Indemnified Person to represent the Indemnified
Person and any others the Indemnifying Person may designate in such proceeding
and shall pay the reasonable fees and expenses incurred by such counsel
related to such proceeding. In any such proceeding, any Indemnified Person
shall have the right to retain its own counsel, but the fees and expenses of
such counsel shall be at the expense of such Indemnified Person unless (i)
such Indemnifying Person and such Indemnified Person shall have mutually
agreed to the contrary, (ii) such Indemnifying Person has failed within a
reasonable time to retain counsel reasonably satisfactory to such Indemnified
Person or (iii) the named parties in any such proceeding (including any
impleaded parties) include an Indemnifying Person and an Indemnified Person
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is understood
that an Indemnifying Person shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel) for
all Indemnified Persons, and that all such fees and expenses shall be
reimbursed as they are incurred. Any such separate firm for the Underwriters
and such control persons of Underwriters shall be designated in writing by
J.P. Morgan Securities Inc.; any such separate firm for the Company, its
directors, its officers who sign the Registration Statement and such control
persons of the Company shall be designated in writing by the Company. The
Indemnifying Person shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, such Indemnifying Person agrees
to indemnify each Indemnified Person from and against any loss or liability by
reason of such settlement or judgment.
<PAGE> 25
-25-
Notwithstanding the preceding sentence, if at any time an Indemnified Person
shall have requested an Indemnifying Person to reimburse the Indemnified
Person for fees and expenses incurred by counsel as contemplated by the third
sentence of this paragraph, such Indemnifying Person agrees that it shall be
liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30 days after receipt
by such Indemnifying Person of the aforesaid request and (ii) such
Indemnifying Person shall not have reimbursed the Indemnified Person in
accordance with such request prior to the date of such settlement. No
Indemnifying Person shall, without the prior written consent of the
Indemnified Person, effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Person is or could have been a
party and indemnity could have been sought hereunder by such Indemnified
Person, unless such settlement includes an unconditional release of such
Indemnified Person from all liability on claims that are the subject matter of
such proceeding.
If the indemnification provided for in the first and second
paragraphs of this Section 7 is unavailable to an Indemnified Person in
respect of any losses, claims, damages or liabilities referred to therein,
then each Indemnifying Person under such paragraph, in lieu of indemnifying
such Indemnified Person thereunder, shall contribute to the amount paid or
payable by such Indemnified Person as a result of such losses, claims, damages
or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares 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 on
the one hand and the Underwriters on the other hand 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 on the one hand and the Underwriters
on the other hand shall be deemed to be in the same respective proportions as
the net proceeds from the offering and sale of the Shares (before deducting
expenses) received by the Company and the total underwriting discounts
received by the Underwriters bear to the aggregate public offering price of
the Shares, in each case as set forth in the table on the cover of the
Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand 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 or by the Underwriters and the
<PAGE> 26
-26-
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
Each of the Company and the Underwriters agrees that it would not be
just and equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation (even if the Company on the one hand and the
Underwriters on the other were each treated as one entity for such purpose) or
by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Person as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses incurred by such Indemnified Person in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, (i) in no event shall an Underwriter be required
to contribute any amount in excess of the amount by which the total price at
which the Shares 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 alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7 are several in proportion to the respective number
of shares of Common Stock constituting Underwritten Shares set forth opposite
their names in Schedule I hereto, and not joint.
The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company as set forth
in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation
made by or on behalf of any Underwriter or any person controlling any
Underwriter or by or on behalf of the Company, its officers or directors or
any other person who controls the Company and (iii) acceptance of and payment
for any of the Shares.
8. Notwithstanding anything herein contained, this Agreement or
the obligations of the several Underwriters with respect to the Option Shares
may be terminated in the absolute
<PAGE> 27
-27-
discretion of the Representatives, by notice given to the Company, if after
the execution and delivery of this Agreement and prior to the Closing Date
(or, in the case of the Option Shares, prior to the Additional Closing Date)
(i) trading generally shall have been suspended or materially limited on or
by, as the case may be, any of the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market, (ii) trading of any securities of or
guaranteed by the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by Federal or New York State
authorities, or (iv) there shall have occurred an outbreak of hostilities or
an escalation of hostilities or any change in financial markets or any
calamity or crisis that, in the judgment of the Representatives, is material
and adverse and which, in the judgment of the Representatives, makes it
impracticable or inadvisable to market the Shares being delivered on the
Closing Date or the Additional Closing Date, as the case may be, on the terms
and in the manner contemplated in the Prospectus.
9. If this Agreement shall be terminated by the Representatives
because of any failure or refusal on the part of the Company to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its respective obligations under
this Agreement or any condition of the Underwriters obligations can not be
fulfilled, the Company agrees to reimburse the Underwriters or such
Underwriters who have so terminated this Agreement with respect to themselves,
severally, for all out-of-pocket expenses (including the fees and expenses of
their counsel) incurred by the Underwriters in connection with this Agreement
or the offering contemplated hereunder.
10. This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement (or, if
applicable, any post-effective amendment) by the Commission.
If, on the Closing Date or the Additional Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
the Shares which it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the number of Shares to be purchased on such date by all
Underwriters, the other Underwriters shall be obligated severally, in the
proportions that the numbers of Underwritten Shares set forth opposite their
respective names in Schedule I hereto bears to the aggregate number of
Underwritten Shares set forth opposite the names of all such nondefaulting
Underwriters, or in such other proportions as the
<PAGE> 28
-28-
Representatives may specify, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Shares that any
Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant
to this Section 10 by an amount in excess of one-ninth of the number of Shares
which such Underwriter is obligated to purchase on such date hereunder without
the written consent of such Underwriter. If, on the Closing Date or the
Additional Closing Date, as the case may be, any Underwriter or Underwriters
shall fail or refuse to purchase Shares which it or they have agreed to
purchase hereunder on such date, and the aggregate number of Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Shares to be purchased on such date, and arrangements satisfactory
to the Representatives and the Company for the purchase of such Shares are not
made within 36 hours after such default, this Agreement (or the obligations of
the several Underwriters to purchase the Option Shares, as the case may be)
shall terminate without liability on the part of any non-defaulting
Underwriter or the Company. In any such case either the Representatives or
the Company shall have the right to postpone the Closing Date (or, in the case
of the Option Shares, the Additional Closing Date), but in no event for longer
than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
11. Any action by the Representatives hereunder may be taken by the
Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of
the Representatives, and any such action taken by J.P. Morgan Securities Inc.
alone shall be binding upon the Representatives. All notices and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if mailed or transmitted by any standard form of telecommunication.
Notices to the Underwriters shall be given to the Representatives, c/o J.P.
Morgan Securities Inc., 60 Wall Street, New York, New York 10260 (facsimile
(212) 648-5705), Attention: Syndicate Department. Notices to the Company
shall be given to it at 3060 Washington Road, Glenwood, Maryland 21738
(facsimile (301) 854-5755), Attention: Stephen T. Walker
12. This Agreement shall inure to the benefit of and be binding
upon the Underwriters and the Company and any controlling person referred to
herein and their respective successors, heirs and legal representatives.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person, firm or corporation, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision
<PAGE> 29
-29-
herein contained. No purchaser of Shares from any Underwriter shall be deemed
to be a successor by reason merely of such purchase.
13. This Agreement may be signed in counterparts, each of which
shall be an original and all of which together shall constitute one and the
same instrument.
14. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to the conflicts
of laws provisions thereof.
<PAGE> 30
-30-
If the foregoing is in accordance with your understanding, please
sign and return four counterparts hereof.
Very truly yours,
TRUSTED INFORMATION SYSTEMS, INC.
By:
------------------------
Name:
Title:
Accepted: , 1996
J.P. MORGAN SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ LLC
For themselves and as the
Representatives of the several
Underwriters named in
Schedule I hereto.
By: J.P. MORGAN SECURITIES INC.
By:
---------------------------
Name:
Title:
<PAGE> 31
SCHEDULE I
Number of Shares of
Common Stock Constituting
Underwritten Shares
Underwriter To Be Purchased
- ----------- -------------------------
J.P. Morgan Securities Inc. . . . . . .
Donaldson, Lufkin & Jenrette
Securities Corporation . . . . . . .
Furman Selz LLC . . . . . . . . . . . .
Total . . . . . . . . . .
<PAGE> 32
ANNEX A
Direct and Indirect Subsidiaries
Percentage
Subsidiary Name Owned
- --------------- ----------
Trusted Information Systems (UK) Ltd. %
---
<PAGE> 33
EXHIBIT A
[FORM OF OPINION OF STERNE, KESSLER, GOLDSTEIN & FOX]
1. We have reviewed the statements in the Registration Statement and
Prospectus, and any amendment or supplement thereto, set forth in "Risk
Factors -- Limited Protection of Intellectual Property and Proprietary
Rights" and "Business -- Proprietary Information and Intellectual
Property", and insofar as such statements concern patents, patent
applications and patent rights, such counsel does not believe that (A)
the information set forth in the Registration Statement, or in any
amendment thereto, under the sections referred to above as of the time
the Registration Statement became effective under the Securities Act of
1933 (the "Act"), and as of the Closing Date, contained an untrue
statement of material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and (B) the information set forth in the Prospectus, or in
any supplement thereto, under the captions referred to above as of its
issue date and the Closing Date contained an untrue statement of material
fact or omitted to state a material fact required to be stated therein,
in light of the circumstances in which they were made, not misleading.
2. We have no knowledge of any facts that would form the basis for the
belief that the Company lacks any rights or licenses to use all patents
to conduct its business as described in the Prospectus.
3. No facts have come to our attention that would form a basis for the
belief that any of the patents owned by the Company is unenforceable or
invalid. We are not aware of any patent held by others that is infringed
by the activities of the Company described in the Prospectus or by the
manufacture, use or sale of any product, device, or instrument by the
Company and we are not aware of any pending or threatened action, suit,
proceeding or claim by others that the Company is infringing or otherwise
violating any patent or proprietary information or materials of others.
4. Other than as set forth or contemplated in the Prospectus, there are no
legal or governmental investigations, actions, suits or proceedings or
interference proceedings pending relating to patents, foreign patents,
applications and foreign applications or proprietary information or
materials of the Company, except for examination of patent applications
in the ordinary course of application prosecution, and to our knowledge
no such proceedings are threatened or contemplated by such governmental
authorities or others.
<PAGE> 34
-2-
5. To our knowledge, there has not been any action taken by or against the
Company that would in any way impair its ability to protect its patents
or enforce its rights thereto.
<PAGE> 35
EXHIBIT B
[FORM OF OPINION OF CLEARY & KOMEN]
1. We have reviewed the statements in the Registration Statement and
Prospectus, and any amendment or supplement thereto, set forth in "Risk
Factors -- Limited Protection of Intellectual Property and Proprietary
Rights" and "Business -- Proprietary Information and Intellectual
Property", and insofar as such statements concern licenses, inventions,
trademarks, service marks, trade names, copyright and know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) (collectively, the
"Intellectual Property"), such counsel does not believe that (A) the
information set forth in the Registration Statement, or in any amendment
thereto, under the sections referred to above as of the time the
Registration Statement became effective under the Securities Act of 1933
(the "Act"), and as of the Closing Date, contained an untrue statement of
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(B) the information set forth in the Prospectus, or in any supplement
thereto, under the captions referred to above as of its issue date and
the Closing Date contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein, in light
of the circumstances in which they were made, not misleading.
2. We have no knowledge of any facts that would form the basis for the
belief that the Company lacks any rights or licenses to use all
Intellectual Property to conduct its business as described in the
Prospectus.
3. We are not aware of any pending or threatened action, suit, proceeding or
claim by others that the Company is infringing or otherwise violating any
trade secret, trademark, service mark or other right to Intellectual
Property or proprietary information or materials of others.
4. Other than as set forth or contemplated in the Prospectus, there are no
legal or governmental investigations, actions, suits or proceedings or
interference proceedings pending relating to trade secrets, trademarks,
service marks or other right to Intellectual Property or proprietary
information or materials of the Company, except for examination of
trademark applications in the ordinary course of application prosecution,
and to our knowledge no such proceedings are threatened or contemplated
by such governmental authorities or others.
5. To our knowledge, there has not been any action taken by or against the
Company that would in any way impair its ability
<PAGE> 36
-2-
to protect its Intellectual Property or enforce its rights thereto.
6. To our knowledge, no government contract to which the Company is a party
inhibits the Company's commercial use of any product developed
thereunder.
<PAGE> 37
EXHIBIT C
Form of Lock-Up Agreement
[TRUSTED INFORMATION SYSTEMS, INC. LETTERHEAD]
_____________, 1996
J.P. Morgan Securities Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Furman Selz LLC
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
The undersigned owns and/or has the right to acquire and/or has the
right to direct the disposition of ____________ shares of common stock, par
value $.01 per share (the "Common Stock"), of Trusted Information Systems,
Inc., a Delaware corporation (the "Company"). The undersigned understands
that the Company has filed a registration statement on Form S-1 (the
"Registration Statement) under the Securities Act of 1933, as amended, with
respect to, among other things, shares of Common Stock proposed to be issued
and sold by the Company (the "Shares") to the several underwriters to be named
on Schedule I to the underwriting agreement (the "Underwriting Agreement")
proposed to be entered into by the Company and J.P. Morgan Securities Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Furman Selz LLC, for
themselves and as representatives of the several underwriters (collectively,
the "Underwriters").
In order to induce the Company and the Underwriters to proceed with
the proposed public offering of the Shares and to enter into the Underwriting
Agreement, the undersigned agrees for the equal benefit of the Company and
each of the Underwriters that the undersigned will not, other than as set
forth below, directly, or indirectly, offer to sell, contract to sell, sell,
register the sale of, pledge, grant any option to purchase or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, owned on the date hereof or
hereafter acquired by the undersigned, or in any manner transfer all or a
portion of the economic consequences associated with the ownership of the
Common Stock (a "Transfer"), for a period
<PAGE> 38
-2-
of 180 days from the date of the effectiveness of the Registration Statement,
without the prior written consent of J.P. Morgan Securities Inc.
Notwithstanding the foregoing, the restrictions set forth herein
shall not apply to the following:
(i) a Transfer of the Common Stock, either during the undersigned's
lifetime or on his death by will or intestacy, to a member of
the undersigned's immediate family or to a trust the
beneficiaries of which are exclusively the undersigned and/or
one or more members of the undersigned's immediate family (for
purposes hereof, the undersigned's "immediate family" shall
mean his spouse, lineal descendants, father, mother, brother or
sister) or to a charitable trust;
(ii) a Transfer between any person and a guardian or conservator for
such person;
(iii) a Transfer by way of bequest or inheritance upon death; and
(iv) where no other assets of the estate are available for sale, a
sale of the undersigned's Common Stock by an estate solely for
the purposes of paying estate taxes.
provided, however, that prior to any such Transfer the transferee shall
execute and deliver to each of the addressees hereto an agreement in form and
substance identical to this agreement.
Sincerely,
Signature:
Printed Name:
<PAGE> 1
EXHIBIT 10.22
PREPARED WITHOUT TITLE EXAMINATION ON INFORMATION SUPPLIED BY THE PARTIES. NO
TITLE LIABILITY IS ASSUMED.
THIS DEED, made this 17th day of July, 1996, by and between GLENWOOD
ASSOCIATES LIMITED PARTNERSHIP, a Maryland limited partnership, party of
the first part, and TRUSTED INFORMATION SYSTEMS, INC., a Delaware corporation,
party of the second part.
WITNESSETH, that in consideration of the sum of Three Hundred Sixty
Thousand Dollars ($360,000.00), being the actual consideration paid for the
within conveyance including the existing principal balance due and owing on
account of the Deed of Trust Note hereinafter mentioned assumed by the party of
the second part, the receipt whereof is hereby acknowledged, the said party of
the first part does hereby grant and convey unto the said party of the second
part, its successors and assigns, in fee simple, all that lot or parcel of
ground located, lying and being situate in Howard County, State of Maryland and
being more particularly described in Exhibit "A" attached hereto and made a
part hereof.
BEING the same lot or parcel of ground described in a Deed dated
December 1, 1993 and recorded among the Land Records of Howard County in Liber
M.D.R. No. 3111, folio 51 from William C. Howard and Sandra F. Howard to
Glenwood Associates Limited Partnership, the within named party of the first
part.
SUBJECT TO the legal operation and effect of a Deed of Trust and
Security Agreement dated December 1, 1993 and recorded among the Land Records
of Howard County in Liber M.D.R. No. 3111, folio 54 from Glenwood Associates
Limited Partnership to Philip G. Enstice and Robert C. Barclay, Trustees,
securing a Note dated December 1, 1993 to Mercantile-Safe Deposit and Trust
Company in the original principal amount of Three Hundred Ten Thousand Dollars
($310,000.00), the balance of the principal sum in the amount of $258,333.00
and interest accruing thereon the said party of the second part hereby
covenants and agrees to pay and further covenants and agrees to comply with the
terms, conditions and provisions of the Deed of Trust as evidenced by the
joinder of Trusted Information Systems, Inc. herein.
-1-
<PAGE> 2
TOGETHER WITH the building thereupon, and the rights, alleys, ways,
waters, privileges, appurtenances and advantages to the same belonging or in
anywise appertaining.
TO HAVE AND TO HOLD the said described lot of ground and premises,
together with the rights, privileges, appurtenances and advantages thereto
belonging or appertaining unto and to the proper use and benefit of the said
Trusted Information Systems, Inc., its successors and assigns, in fee simple.
AND the said party of the first part hereby covenants that it has done
or suffered to be done any act, matter or thing whatsoever, to encumber the
property hereby conveyed, except as to the Deed of Trust hereinabove mentioned;
that it will warrant specially the property hereby granted and that it will
execute such further assurances of the same as may be requisite.
IN WITNESS WHEREOF, Glenwood Associates Limited Partnership has caused
the within Deed to be executed by Stephen T. Walker, its duly authorized
General Partner, and Trusted Information Systems, Inc. has caused the within
Deed to be executed by Stephen T. Walker, its duly authorized President.
WITNESS OR ATTEST: GLENWOOD ASSOCIATES LIMITED PARTNERSHIP
/s/ BY: /s/ STEPHEN T. WALKER (SEAL)
- ------------------- --------------------------------------
Stephen T. Walker
General Partner
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TRUSTED INFORMATION SYSTEMS, INC.
/s/ BY: /s/ STEPHEN T. WALKER (SEAL)
- ------------------- --------------------------------------
Stephen T. Walker
President
STATE OF MARYLAND, COUNTY OF HOWARD, TO WIT:
I HEREBY CERTIFY, that on this 17th day of July, 1996, before me, the
subscribed, a Notary Public of the State of Maryland, personally appeared
Stephen T. Walker and he, being known to me (or satisfactorily proven)
acknowledged that he executed the within and aforegoing Deed in his capacity as
the General Partner of Glenwood Associates Limited Partnership as the act and
deed of the said Limited Partnership for the uses and purposes therein
contained, and in my presence signed and sealed the same.
AS WITNESS, my hand and Notarial Seal.
/s/ MARY E. LEISHEAR MARY E. LEISHEAR
---------------------------- NOTARY
Notary Public PUBLIC
SEAL
HOWARD COUNTY, MD
My Commission Expires: SEPTEMBER 1, 1997
----------------------------
Pursuant to the provisions of the Real Property Article of the
Annotated Code of Maryland, this is to certify that the within Deed was
prepared under the supervision of the undersigned attorney at law.
----------------------------
Laurence B. Raber
AFTER RECORDING RETURN TO:
REESE AND CARNEY, LLP
10715 Charter Drive
Columbia, MD 21044
File No. 46363/8004
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<PAGE> 1
EXHIBIT 10.22.1
PROMISSORY NOTE
$26,946.00 Glenwood, Maryland
July 17, 1996
FOR VALUE RECEIVED, the undersigned promises to pay to GLENWOOD
ASSOCIATES LIMITED PARTNERSHIP, a Maryland limited partnership, or order, the
Principal Sum of Twenty-Six Thousand Nine Hundred Forty-Six Dollars
($26,946.00), with interest at the rate equal to one percent (1.0%) per annum
plus the highest prime rate of interest shown in the "Money Rates" section of
the Wall Street Journal on the unpaid principal balance until paid. Interest
only shall be paid to the Lender at 3060 Washington Road, Glenwood, Maryland
21733, or such other place as the holder hereof may designate in writing, in
monthly installments of interest at the rate aforesaid commencing on the 16th
day of August, 1996 and in consecutive monthly payments thereafter until the
principal and interest are fully paid, except that the final payment of
principal and interest, if not sooner paid, shall be due and payable on the
16th day of January, 1997.
This Note may be prepaid at any time, in whole or in part, by the
undersigned without penalty, all interest abating on all sums so prepaid from
the date of prepayment thereof.
In the event that the undersigned fails to make any payment due
hereunder within fifteen (15) days of the date on which such payment is due,
the undersigned shall pay to the holder hereof a late charge in the amount of
five percent (5.0%) of the amount of such delinquent payment.
If default be made in the payment of any installments under this Note,
and if such default is not made good prior to the due date of the next such
installment, the entire principal sum and accrued interest shall at once become
due and payable, without notice, at the option of the holder of this Note.
Failure to exercise this option shall not constitute a waiver of the right to
exercise the same in the event of any subsequent default.
Presentment, protest and notice are hereby waived.
TRUSTED INFORMATION SYSTEMS, INC.
BY: /s/ STEPHEN T. WALKER (SEAL)
--------------------------
Stephen T. Walker
President
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<PAGE> 1
EXHIBIT 10.22.2
DEED OF TRUST AND SECURITY AGREEMENT
THIS DEED OF TRUST AND SECURITY AGREEMENT is made as of this 1st day of
December 1993, from Glenwood Associates Limited Partnership, a Maryland
corporation (hereinafter referred to as the "Grantor"), to Philip G. Enstice
and Robert C. Barclay, as Trustees (hereinafter referred to as "Trustees"), for
the benefit of Mercantile-Safe Deposit and Trust Company (hereinafter referred
to as "Beneficiary"), and any successor holder of the Note secured by this Deed
of Trust.
SECTION 1. RECITALS
1.01 The Loan. Grantor is indebted to Beneficiary for a loan in the
principal sum of Three Hundred Ten Thousand Dollars ($310,000.00) (the "Loan"),
evidenced by a Note of Grantor of even date.
1.02 Obligations Secured. This Deed of Trust secures (a) the full and
punctual payment of the Loan according to the terms of the Note, (b) the
payment of all sums due to Beneficiary or Trustees according to the terms of
any of the Loan Documents, (c) future advances, which may be made by
Beneficiary for any reason, and (d) the performance of, and compliance with,
all of the obligations of the Grantor (express or implied) contained in the
Loan Documents.
SECTION 2. DEFINITIONS. Whenever capitalized in this Deed of Trust, the
following terms shall have the meaning given in this Section 2, unless the
context clearly indicates a contrary intent.
2.01. Beneficiary. "Beneficiary" means Mercantile-Safe Deposit and
Trust Company, its successors and assigns and any subsequent holder of the
Note.
2.02 Deed of Trust. "Deed of Trust" means this instrument, including
all current and future supplements, amendments and attachments thereto.
2.03 Default. "Default" means: (a) the failure of Grantor to perform,
cause to be performed, abide by, comply with, or observe any duty or obligation
imposed upon Grantor by the Loan Documents; (b) the breach of any of Grantor's
warranties or covenants contained in any of the Loan Documents; (c) a
misrepresentation by Grantor, its counsel, or any other person on behalf of
Grantor, in any of the Loan Documents; and (d) any event, happening or
condition that would constitute an Event of Default, as described herein, if
not cured within any applicable grace period.
2.04 Encumbrances. "Encumbrances" includes all liens, mortgages,
rights, leases, restrictions, easements, deeds of trust, covenants, agreements,
rights of way, rights of
<PAGE> 2
redemption, security interests, conditional sales agreements, land installment
contracts, options, and all other burdens or charges.
2.05 Environmental Requirements. "Environmental Requirements" means
any federal, state or local law, statute, ordinance or regulation; or court or
administrative order or decree; or private agreement which requires special
handling, collection, storage, treatment, disposal or removal of any materials
located in or on or about the Property.
2.06 Event of Default. "Event of Default" has the meaning given and
provided in Section 10.
2.07 Expense Account. "Expense Account" means the Account which may be
maintained pursuant to Section 6.02.
2.08 Grantor. "Grantor" means the party identified as such in the
introductory paragraph of this Deed of Trust, its successors and assigns,
including any subsequent owner of all or any portion of Grantor's interest in
the Trust Property.
2.09 Land. "Land" means the Land more particularly described in
Exhibit A to this Deed of Trust.
2.10 Lease. "Lease" means each lease which purports to convey any
interest of Grantor in any portion of the Trust Property, as defined in Section
3.06, and includes subleases and assignments of leases.
2.11 Loan Documents. "Loan Documents" means this Deed of Trust, the
Note, the Assignment of Rents and Leases executed by Grantor in favor of
beneficiary dated of even date herewith, and any and all certificates,
opinions, assignments and other documents executed in connection herewith or
therewith, and all current and future supplements, amendments, and attachments
thereto.
2.12 Note. "Note" means the Note of even date herewith payable to the
Beneficiary by Grantor evidencing the loan made pursuant to the Loan Documents
in a principal sum not to exceed Three Hundred Ten Thousand Dollars
($310,000.00), including all current and future replacements, supplements,
amendments and attachments thereto.
2.13 Permitted Encumbrances. "Permitted Encumbrances" shall mean those
exceptions, if any, listed in the title policy insuring the interest of the
Trustees and Beneficiary hereunder, as accepted and approved by the
Beneficiary.
2.14 Rents. "Rents" includes all rents, profits, royalties, issues,
revenues, income, proceeds, earnings and products generated by and arising out
of the Trust Property.
2.15 Taking. "Taking" includes any taking by condemnation or eminent
domain, any sale in lieu of condemnation under threat thereof, the alteration
of the grade of any street, or any
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other injury to or decrease in the value of the Trust Property by any public or
quasi-public authority or corporation or any other person having the power of
eminent domain.
2.16 Taxes. "Taxes" includes all taxes, excises, documentary stamp and
transfer taxes, recording taxes, assessments, water rents, sewer rents,
metropolitan district charges, sanitary district charges, public dues, and
other public charges levied or assessed upon the Trust Property, upon the Loan,
or upon any Loan Document.
2.17 Tenant. "Tenant" means any lessee of Grantor under any Lease, and
any sub-lessee or assignee of a Lease.
SECTION 3. GRANT
3.01 Lien on Real Property. The Grantor, in consideration of the Loan
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, grants and assigns to the Trustees all the Land situate in
Howard County, Maryland, described more particularly in Exhibit A attached
hereto as a part hereof, together with (a) all buildings and improvements now
or hereafter located thereon, (b) all rights, rights of way, air rights,
riparian rights, franchises, licenses, easements, tenements, hereditaments,
appurtenances, accessions and other rights and privileges now or hereafter
belonging to the Land or the buildings and improvements thereupon, now owned or
hereafter acquired by the Grantor (hereinafter collectively referred to as the
"Real Property").
3.02 Lien on Fixtures and Personal Property. The Grantor further
grants and assigns to the Trustees all of the machines, apparatus, equipment,
fixtures and articles of personal property now or hereafter located on the Land
or in any improvements thereon (other than that owned by any Tenant), including
without limitation all furniture, fixtures, equipment and building materials
acquired with the proceeds of this Loan, and all the right, title and interest
of the Grantor in and to any of such property which may be subject to any title
retention or security agreement or instrument having priority over this Deed of
Trust.
3.03 Property. All of the property described in Sections 3.01 and 3.02
is hereinafter collectively called the "Property."
3.04 Lien on Rents and Other Rights. The Grantor further grants and
assigns to the Trustees (a) all Rents, including, without limitation, all cash
or security deposits to secure performance by Tenants (whether such cash or
securities are to be held until the expiration of the terms of Leases or are to
be applied to one or more of the installments of rent coming due immediately
prior to the expiration of such terms), (b) all of the estate, right, title,
use, claim and demand of every nature whatsoever, at law or in equity, which
the Grantor may now have or may hereafter acquire in and to the Property, and
(c) all right, title and interest of the Grantor in and to all extensions,
betterments, renewals, substitutes and replacements of, and all additions and
appurtenances to, the Property, hereafter acquired by or released to the
Grantor, or constructed,
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<PAGE> 4
assembled or placed by or for the Grantor on the Property, and all in
conversion of the security constituted thereby.
3.05 Lien on Insurance Policies and Condemnation Awards. The Grantor
further grants and assigns to the Trustees all insurance policies and insurance
proceeds pertaining to the Property and all awards or payments, including
interest thereon and the right to receive the same, which may be made with
respect to any of the Property as a result of any taking or any injury to or
decrease in the value of the Property.
3.06 The Trust Property. All of the property described in this Section
3 is collectively called the "Trust Property."
3.07 Security Interest Under the Uniform Commercial Code. Any portion
of the Trust Property which by law is or may be real property shall be deemed
to be a part of the Real Property for the purposes of this Deed of Trust. The
remainder of the Trust Property shall be subject to the Uniform Commercial Code
and this Deed of Trust shall constitute a Security Agreement with respect
thereto. Grantor hereby grants to the Beneficiary a security interest in that
portion of the Trust Property not deemed a part of the real property for the
purpose of securing performance of all of Grantor's obligations under the Loan
Documents. With respect to such security interest (a) the Beneficiary may
exercise all rights granted or to be granted a secured party under the Uniform
Commercial Code and (b) upon the occurrence of an Event of Default the
Beneficiary shall have a right of possession superior to any right of
possession of the Grantor or any person claiming through or on behalf of the
Grantor.
SECTION 4. HABENDUM CLAUSE AND DEFEASANCES
4.01 Habendum Clause. The Trustees shall have and hold the Trust
Property in fee simple, upon the terms and trust herein set forth.
4.02 Termination of the Trust. If all obligations of Grantor under
this Deed of Trust and the other Loan Documents are paid and satisfied in
accordance with the terms hereof and thereof, the estate hereby granted shall
cease and the Trust Property shall be released to the Grantor, at the cost of
the Grantor.
SECTION 5. REPRESENTATIONS AND WARRANTIES
5.01 Warranty of Title and Further Assurances. The Grantor warrants
that it has the right and authority to convey the Trust Property and warrants
specially title to the Trust Property and that it will execute such further
assurances as may be requested.
5.02 Purpose of the Loan. The Grantor warrants that the Loan is a
"commercial loan" as defined in Section 12-101(c) of the Commercial Law Article
of the Annotated Code of Maryland.
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<PAGE> 5
5.03 Existence, Good Standing, Power and Authority of Grantor. Grantor
is a limited partnership organized under the laws of the State of Maryland, is
in good standing in the State of Maryland, and in every other state in which it
transacts business, and will maintain its good standing and existence until all
of the Grantor's obligations under the Loan Documents have been performed and
satisfied. The execution and delivery of the Loan Documents, the carrying out
of the transactions contemplated by the Loan Documents, and the performance of
Grantor's obligations under the Loan Documents, have been duly authorized by
all necessary action and will not conflict with or result in a breach of law or
any agreement or other instrument to which Grantor is bound, subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
heretofore or hereafter enacted affecting creditors' rights generally, to the
extent constitutionally applicable, and subject to general equitable principles
as applied by a court of law or a court of equity. The Loan Documents are
valid and binding on Grantor and are enforceable against Grantor in accordance
with their respective terms, as applicable.
SECTION 6. COVENANTS, RIGHTS AND DUTIES OF GRANTOR GENERALLY
6.01 Covenant to Pay Loan and to Perform Obligations Under the Terms of
the Loan Documents. The Grantor covenants that it will punctually (a) pay to
the Beneficiary the principal and interest of the Loan and all other costs and
indebtedness secured hereby according to the terms of the Note and other Loan
Documents, and (b) perform and satisfy all other obligations of the Grantor
under the Loan Documents.
6.02 Compliance With Laws. The Grantor shall comply with all laws a
breach of which would adversely affect (a) the financial conditions of the
Grantor, (b) the ability to use buildings and other improvements on the Land
for the purposes for which they were designed or intended, (c) the value or
status of the Trust Property, or (d) the value or status of the Trustees' title
to the Trust Property.
6.03 Notice With Respect to Ownership and Control of Grantor.
Grantor will at all times promptly notify Beneficiary of all changes in the
partnership interests of Grantor. At any time Beneficiary may request, Grantor
shall furnish a complete statement, certified by the general partner of
Grantor, setting forth all of the partners of Grantor, and the extent of their
respective partnership interests.
6.04 Statement of Amount Owning. Within ten (10) days after request
from the Beneficiary, the Grantor shall certify, in writing, the amount of
principal and interest then owing on the Loan.
6.05 Changes in Applicable Tax Laws. In the event (a) any law is
hereafter enacted which imposes a tax upon the Loan, any of the Loan Documents,
or the transactions evidenced or contemplated by any of the Loan Documents, or
(b) any law now in force governing the taxation of deeds of trust, debts
secured by deeds of trust, or the manner of collecting any such tax shall be
changed or modified, in any manner, so as to impose a tax upon the Loan, any of
the Loan Documents, or the transactions evidenced or contemplated by any of the
Loan Documents,
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<PAGE> 6
(including, without limitation, a requirement that revenue stamps be affixed to
any or all of the Loan Documents), the Grantor will promptly pay any such tax.
If the Grantor fails to make prompt payment, or if any law either prohibits the
Grantor from making the payment or would penalize the Beneficiary if Grantor
makes the payments, then the failure, prohibition, or penalty, shall entitle
the Beneficiary to declare the entire unpaid principal balance of the Loan,
together with all accrued interest and any other amounts due, immediately due
and payable, provided that no Event of Default has occurred, and the Grantor
shall thereupon have thirty (30) days to pay the entire amount due without
penalty. If an Event of Default has occurred or if the Grantor fails to make
payment in full within thirty (30) days, then the Beneficiary shall be entitled
to exercise all rights hereunder as though an Event of Default had occurred.
6.06 Further Assurances and Continuation Statements. The Grantor from
time to time will execute, acknowledge, deliver and record, at the Grantor's
sole cost and expense, all further instruments, deeds, conveyances,
supplemental deeds of trust, assignments, financing statements, transfers, and
assurances as in the opinion of the Beneficiary's counsel may be necessary (a)
to preserve, continue, and protect the interest of the Trustees or the
Beneficiary in the Trust Property, (b) to perfect the grant to the Trustees of
every part of the Trust Property, (c) to facilitate the execution of this
trust, (d) to secure the rights and remedies of the Trustees and the
Beneficiary under this Deed of Trust and the other Loan Documents, or (e) to
transfer to any new Trustees or purchaser at a sale hereunder the Trust
property, funds, and powers now or hereafter held in trust hereunder. The
Grantor, at the request of the Beneficiary, shall promptly execute any
continuation statements required by the Uniform Commercial Code to maintain the
lien on any portion of the Trust Property subject to the Uniform Commercial
Code.
6.07 Expenses. The Grantor shall reimburse the Beneficiary and the
Trustees for any sums, including attorney's fees and expenses, incurred or
expended by them (a) in connection with any action or proceeding to sustain the
lien, security interest, priority, or validity of any Loan Document, (b) to
protect, enforce, interpret, or construe any of their rights under the Loan
Documents, (c) for any title examination or title insurance policy relating to
the title to the Trust Property, or (d) for any other purpose contemplated by
the Loan Documents. The Grantor shall, upon demand, pay all such sums together
with interest thereon at the Default Interest Rate defined in the Note accruing
from the time the expense is paid. All such sums so expended by the
Beneficiary and/or the Trustees shall be secured by this Deed of Trust. In any
action or proceeding to foreclose this Deed of Trust or to recover or collect
the Loan, the provisions of law allowing the recovery of costs, disbursements,
and allowances shall be in addition to the rights given by this Section 6.08.
6.08 Environmental Requirements. The Grantor hereby covenants and
agrees that, if at any time it is determined that there are materials
(hereinafter, "Environmental Materials") located on the Property which under
any Environmental Requirements require special handling in collection, storage,
treatment, disposal or removal, the Grantor shall, within thirty (30) days
after written notice thereof, take or cause to be taken, at its sole expense,
such actions as may be necessary to comply with all Environmental Requirements.
If the Grantor shall fail to take such action, the Beneficiary may make
advances or payments towards performance or satisfaction of
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<PAGE> 7
the same but shall be under no obligation to do so; and all sums so advanced or
paid, including all sums advanced or paid in connection with any judicial or
administrative investigation or proceeding relating thereto, including, without
limitation, reasonable attorneys' fees, fines, or other penalty payments, shall
be at once repayable by Grantor and shall bear interest at the Default Interest
Rate defined in the Note or at the maximum interest rate which the Grantor may
by law pay, which ever is lower, from the date the same shall become due and
payable until the date paid, and all sums so advanced or paid, with interest as
aforesaid, shall become a part of the indebtedness secured hereby. Failure of
the Grantor to comply with all Environmental Requirements shall constitute and
be a default under this Deed of Trust. Grantor shall defend, indemnify and hold
harmless the Beneficiary and Trustees against any loss, cost or expense
incurred by the Beneficiary or Trustees resulting from the presence on the
Property at any time of any Environmental Materials.
SECTION 7. RIGHTS AND DUTIES OF GRANTOR WITH RESPECT TO MANAGEMENT AND USE
OF THE TRUST PROPERTY
7.01 Control by the Grantor. Until the happening of an Event of
Default, the Grantor shall have the right to possess and enjoy the Trust
Property and, except as prohibited by the Loan Documents, to receive the Rents
(as defined hereinafter in Section 7.07).
7.02 Management. At all times the Grantor shall provide competent and
responsible management to maintain and operate the Trust Property.
7.03 Financial Statements; Books and Records. The Grantor shall
furnish to the beneficiary annual financial and operating statements of the
Grantor and of the Trust Property. Such statements shall show all items of
income and expense for the operation of the Trust Property, shall be certified
by the Grantor and shall be prepared in accordance with generally accepted
accounting principles applied on a consistent basis. All such financial and
operating statements shall be supplied not later than ninety (90) days after
the close of Grantor's fiscal year. At the request of Beneficiary, Grantor
shall provide audited financial statements prepared by an independent
certified public accountant approved by Beneficiary. The Grantor agrees to
make its books and records relating to the operation of the Trust Property
available for inspection by the Beneficiary, upon request at any reasonable
time, at Grantor's principal place of business or at such other location in the
State of Maryland as Beneficiary may reasonably request. This paragraph shall
be superseded by the financial reporting provisions, if any, set forth in the
Loan Documents.
7.04 Leases. All leases affecting any portion of the Property
("Leases") shall be subject to the prior written approval of the Beneficiary,
and shall contain a provision prohibiting subleasing or assigning by any Tenant
without the prior written approval of the Beneficiary, which approval shall not
be unreasonably withheld. Upon the execution of any Leases, the Grantor shall
provide the Beneficiary with a subordination and attornment agreement executed
by the Tenant in a form acceptable to the Beneficiary. Upon demand by the
Beneficiary, Grantor will transfer and assign to the Beneficiary or the
Trustees, in a form satisfactory to the Beneficiary, Grantor's interest in any
specific lease as further
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<PAGE> 8
security for the obligations secured hereby. No such assignment shall impose
upon the Trustees or the Beneficiary any liability to perform the Grantor's
obligations under any Lease.
7.05 Enforcement of Leases, Amendment, Waiver, etc. The Grantor will
enforce all Leases according to their terms and shall take such action to that
end as may be requested by the Trustees or the Beneficiary, regardless of
whether any such Lease has been assigned to the Beneficiary or the Trustees.
The Grantor shall not, without the prior written consent of the Beneficiary (a)
cancel or terminate, or consent to or accept any cancellation, termination or
surrender of any Lease, or permit any event within the Grantor's control to
occur which would cancel or terminate any Lease, (b) amend or modify
any Lease, (c) waive any default under or breach of any Lease, (d) consent to
or permit any prepayment or discount of rent or advance rent under any Lease,
or (e) give any consent, waiver, or approval under any Lease or take any other
action with respect to any Lease which may impair the value of the
Beneficiary's interest in the Trust Property or the position or interest of the
Trustees with respect to the Trust Property. Grantor shall comply with and
perform all duties and obligations imposed upon or assumed by it in all Leases.
7.06 Subordination and Attornment. In the event of a foreclosure sale
pursuant to this Deed of Trust, each tenant under a Lease ("Tenant") shall,
upon request, attorn to and acknowledge any purchaser at foreclosure or grantee
in lieu of foreclosure as landlord and the purchaser will not be required to
credit any Tenant under any Lease with rent paid more than one (1) month in
advance. All Leases shall be subject and subordinate to modifications of and
amendments to the Loan Documents and any additional financing or refinancing of
the Trust Property by or for the Beneficiary. At the request of the Grantor,
the Beneficiary agrees that it will execute and deliver a non-disturbance
agreement, in a form acceptable to the Beneficiary, in connection with any
Lease which has been entered into by Grantor in accordance with the provisions
of this Deed of Trust.
7.07 Restriction of Assignment of Rents. The Grantor shall not assign
the Rents arising from the Trust Property or any part thereof or any interest
therein ("Rents") without the prior written consent of the Beneficiary. Any
attempted assignment, pledge, hypothecation, or grant without such consent
shall be null and void.
7.08 Alterations and Improvements. The Grantor shall not make any
alterations or improvements on the Property without the prior written consent
of the Beneficiary. All alterations or improvements shall be erected (a) in a
good and workmanlike manner strictly in accordance with all applicable law, (b)
entirely on the Land (c) without encroaching upon any easement, right of way,
or land of others, (d) so as not to violate any applicable use, height,
set-back or other applicable restriction, and (e) without permitting any
mechanic's lien to attach to the Trust Property which is not being contested as
permitted in Section 7.13. All alterations, additions, and improvements to the
Trust Property shall automatically be a part of the Trust Property and shall be
subject to this Deed of Trust.
7.09 Restrictions on Sale and Transfer of the Trust Property. The
Grantor shall not permit the Trust Property, or any part or portion thereof or
any interest therein, to be transferred
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(whether by voluntary or involuntary conveyance, merger, operation of law, or
otherwise) without the prior written consent of the Beneficiary. Any
transferee of the Trust Property or any part or portion thereof or any interest
therein, by virtue of its acceptance of the transfer, shall (without in any way
affecting Grantor's liability under the Loan Documents) be conclusively deemed
to have agreed to assume primary personal liability for the performance of the
Grantor's obligations under the Loan Documents. This section shall not apply to
any condemnation, any disposition permitted by Section 7.12, any Lease entered
into in compliance with Section 7.04, or any disposition by the Trustees or the
Beneficiary by foreclosure hereunder or as otherwise permitted by the Loan
Documents.
7.10 Restriction and Encumbrances. The Grantor shall not allow any
Encumbrances on the Trust Property except the Permitted Encumbrances. The
Grantor shall give the Beneficiary prompt notice of any default in or under any
Permitted Encumbrances and any notice of foreclosure or threat of foreclosure.
The Grantor shall comply with its obligations under all Permitted Encumbrances.
The Beneficiary may, at its election, satisfy any Encumbrance (other than a
Permitted Encumbrance not then in default), and the Grantor shall, on demand,
reimburse the Beneficiary for any sums advanced for such satisfaction together
with interest at the Default Interest Rate stated in the Note accruing from the
date of satisfaction, which sums shall be secured hereby.
7.11 Maintenance, Waste, Repair and Inspection. Grantor shall: (a)
keep and maintain the Trust Property in good order, condition, and repair and
make, in a prompt manner, all equipment replacements and repairs necessary to
insure that the security for the Loan is not impaired; (b) not commit or suffer
any waste of the Trust Property; (c) promptly protect and conserve any portion
of the Trust Property remaining after any damage to, or partial destruction of,
the Trust Property; (d) promptly repair, restore, replace or rebuild any
portion of the Trust Property which is damaged or destroyed; (e) promptly
restore the balance of the Trust Property remaining after any Taking; (f)
permit the Beneficiary or its designee to inspect the Trust Property at all
reasonable times; and (g) not make any material change in the grade of the
Trust Property or permit any material excavation of or on the Trust Property,
except as required for utility easements.
7.12 Removal and Replacement of Equipment and Improvements. No part of
the Trust Property, except supplies consumed or raw materials, work in progress
and finished goods sold or transferred in the ordinary course of business and
operations as they are currently conducted, shall be removed from the Land,
demolished, or materially altered without the prior written consent of the
Beneficiary. The Grantor may, without consent and free from the lien and
security interest of this Deed of Trust, remove and dispose of any worn out or
obsolete fixtures or equipment which are a part of the Trust Property, provided
that prior to or simultaneously with their removal, such fixtures and equipment
shall be replaced with fixtures or equipment of equal or greater value. The
replacement fixtures or equipment shall be free of all Encumbrances, shall
automatically be subject to the lien and security interest of this Deed of
Trust, and shall automatically be subject to the granting clauses hereof. Upon
the sale of any removed fixtures and equipment which are not replaced, the
proceeds shall, at the election of the Beneficiary, be
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applied as a prepayment of the Loan, to be applied in inverse order of
maturity. All sales shall be conducted in a commercially reasonable manner.
7.13 Taxes and Permitted Contests. The Grantor shall pay: (a) all
Taxes on or before the date any interest or penalty begins to accrue or attach
thereto; and (b) all lawful claims which, if unpaid, might become a lien or
charge upon the Trust Property to such an extent as to materially and adversely
affect the Grantor's ability to use the Trust Property for the purposes for
which it was designed or intended; provided, however, that the Grantor shall
not be required to pay any Taxes or claim the amount, validity or payment of
which is being contested, in good faith, by appropriate legal proceedings, and
so long as, in the sole opinion of the Beneficiary, no part of the Trust
Property is in danger of being sold, forfeited or lost and the contest is not
impairing the Security for the Loan. Upon payment thereof, the Grantor shall
promptly supply the Beneficiary with receipts showing the payment of the Taxes
or claim.
7.14 Restrictive Covenants, Zoning, etc. No restrictive covenant,
zoning change, or other restriction affecting the Trust Property may be entered
into, requested by or consented to by Grantor without the prior written consent
of the Beneficiary.
7.15 Preservation of Appurtenances. The Grantor will do all things
necessary to preserve intact and unimpaired, all easements, appurtenances, and
other interests and rights in favor of, or constituting any portion of, the
Trust Property.
SECTION 8. INSURANCE AND COMPENSATION
8.01 Casualty and Liability Insurance. The Grantor shall at all times
keep the Trust Property insured for the benefit of the Grantor, the Trustees
and the Beneficiary against loss or damage by fire by fire insurance and
extended coverage insurance and against such other hazards, casualties, and
contingencies, all as Beneficiary may require from time to time. Such
insurance shall be written in amounts equal to one hundred percent (100%) of
the replacement value of the Property or such other amount as may be approved
by Beneficiary. Such insurance shall be written in forms and by companies
satisfactory to the Beneficiary, and the losses thereunder shall be payable to
the Beneficiary alone and not to the Grantor and the Beneficiary or the
Trustees, jointly. The policy or policies of such casualty insurance shall,
if requested by Beneficiary, be delivered to and retained by the Beneficiary,
and the Grantor shall provide the Beneficiary with receipt evidencing the
payment of all premiums due on such policies. The Grantor shall give the
Beneficiary prompt notice of any loss covered by such casualty insurance, and
the Trustees or the Beneficiary shall have the right (subject to the approval
of Grantor, so long as no Event of Default has occurred) to adjust any loss
covered by an insurance policy. All monies received as payment for a loss
covered by an insurance policy ("Insurance Proceeds") shall be paid over to the
Beneficiary to be applied, at the option of the Beneficiary, either to the
prepayment of the indebtedness secured by the Deed of Trust or to the payment
of other charges or expenses actually incurred by the Grantor in the
restoration, reconstruction, repair, renovation or replacement of the Trust
Property; provided, however, that the application of Insurance Proceeds shall
be made at the option of the Grantor so long as no default or Event of Default
has
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occurred and so long as the Insurance Proceeds are sufficient, together with
other funds deposited for this purpose with the Beneficiary by Grantor, to
restore the Trust Property to a condition and value satisfactory to the
Beneficiary.
The Grantor may not take out separate insurance concurrent in form or
contributing in the event of loss with that required to be maintained under the
above paragraph unless the Beneficiary is included thereon as a named insured
with losses payable to the Beneficiary as above provided. The Grantor shall
immediately notify the Beneficiary whenever any such separate insurance is
taken out and shall promptly deliver to the Beneficiary the policy or policies
of such insurance.
If any of the Trust Property is located in an area which has been
identified as a flood hazard area, the Grantor will keep the Trust Property
covered by flood insurance in an amount at least equal to the full amount
secured by this Deed of Trust or the maximum limit of coverage available for
the Property.
Unless a written waiver from Beneficiary is obtained, Grantor shall (a)
keep all of its insurable properties insured against all risks usually insured
against by persons operating like properties in the localities where the
properties are located; (b) maintain public liability insurance against claims
for personal injury, death or property damage suffered by others upon or in or
about any premises occupied by it or occurring as a result of its maintenance
or operation of any automobiles, trucks or other vehicles or airplanes or other
facilities or as a result of the use of products sold by it or services
rendered by it; and (c) maintain all such worker's compensation or similar
insurance as may be required under the laws of any state or jurisdiction in
which it may be engaged in business.
8.02 Business Interruption Insurance. If requested by Beneficiary, the
Grantor shall also carry and maintain business interruption insurance on the
Trust Property in an amount equal to six (6) months projected income, as
approved by Beneficiary.
8.03 Condemnation and Allocation of Condemnation Awards. Grantor,
immediately upon obtaining knowledge of the institution of any proceeding for a
condemnation, will notify the Trustees and the Beneficiary of such proceedings.
The Trustees or the Beneficiary may participate in any such proceedings, and
Grantor will, from time to time, deliver to the Trustees or the Beneficiary all
instruments requested by them to permit such participation. Any award or
payment made as a result of any Taking shall be paid to the Beneficiary, to be
applied (a) if funds sufficient to restore the remainder of the Trust Property
are available from such award or payment (together with other funds supplied or
caused to be supplied by Grantor) and no Event of Default is then outstanding,
to the restoration of the remainder of the Trust Property, or (b) if sufficient
funds are not available to restore the remainder of the Trust Property, or an
Event of Default is then outstanding, to prepayment of amounts due under the
Note in inverse order of maturity. All moneys not utilized for the repair or
restoration of the remainder of the Trust Property shall be applied as a
prepayment of amount due under the Note, in inverse order of maturity. The
application of any award or payment as a prepayment of amounts due under the
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<PAGE> 12
Note shall take effect only on the actual date of the receipt of the payment or
award by the Trustees and the Beneficiary. In the event any payment or award
is used to restore the Trust Property, as aforesaid, neither the Trustees nor
the Beneficiary shall be obligated to see to the proper allocation thereof nor
shall any amount so used be deemed a payment of any indebtedness secured by
this Deed of Trust. Payments or awards to be used for restoration purposes, as
aforesaid, shall be held by the Beneficiary and disbursed under such terms and
conditions, to such persons, and at such times, as Beneficiary may determine.
SECTION 9. THE TRUSTEES
9.01 Endorsement and Execution of Documents. Upon the written request
of the Beneficiary, the Trustees shall, without liability or notice to the
Grantor, execute, consent to, or join in any instrument or agreement in
connection with or necessary to effectuate the purposes of the Loan Documents.
The Grantor hereby irrevocably designates the Trustees as its attorneys-in-fact
to execute, acknowledge, and deliver, on the Grantor's behalf and in the
Grantor's name, all instruments or agreements necessary to implement the
provisions of Section 3.07, contemplated by Section 6.06, or necessary to
further perfect the lien created by this Deed of Trust on the Trust Property.
This power of attorney shall be deemed to be coupled with an interest and shall
survive any disability of the Grantor.
9.02 Substitution of Trustees. The Beneficiary may, by filing a deed
of appointment in the office where this instrument is recorded, appoint
additional or replacement trustees and may remove the Trustees, from time to
time, without notice to the Grantor or the Trustees and without specifying any
reason.
9.03 Multiple Trustees. Any Trustee, individually, may exercise all
powers granted to the Trustees collectively, without the necessity of the
joinder of the other Trustees.
9.04 Terms of Trustees' Acceptance. The Trustees accept the trust
created by this Deed of Trust upon the following terms and conditions:
9.04.1 The Trustees may exercise any of their powers through
appointment of attorneys-in-fact or agents.
9.04.2 The Trustees shall not be liable for any matter or cause
arising under this Deed of Trust or in connection therewith except by reason of
their own willful misconduct.
9.04.3 After giving notice to the Grantor, the Trustees may
select and employ legal counsel in connection with the Loan at the expense of
Grantor; provided, however, that no notice shall be necessary after a default.
9.04.4 The Trustees shall be under no obligation to take any
action upon any Event of Default unless they are furnished security or
indemnity, in a form satisfactory to the Trustees, against costs, expenses, and
liabilities which may be incurred by the Trustees.
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9.04.5 A Trustee may resign upon five (5) days written notice to
the Beneficiary.
9.05 Trustees' Reimbursement. The Grantor shall reimburse the Trustees
for all reasonable disbursements and expenses incurred by reason of this Deed of
Trust.
9.06 Save Harmless Clause. The Grantor shall indemnify and save
harmless the Beneficiary and the Trustees, singularly and jointly, from all
costs and expenses, including reasonable attorneys' fees, incurred by them or
any of them by reason of this Deed of Trust, including any legal action to
which Beneficiary or the Trustees shall become a party. Any money so paid or
expended by Beneficiary or the Trustees shall be due and payable upon demand
together with interest at the Default Interest Rate stated in the Note from the
date incurred and shall be secured by this Deed of Trust.
SECTION 10. DEFAULT
10.01 Event of Default. The occurrence of any of the following shall
constitute an Event of Default.
10.01.1 Monetary Defaults. The failure of the Grantor to pay any
amounts due under the Loan Documents when due and payable, whether at maturity
by obligation or election to prepay, or otherwise, unless such payment is made
within fifteen (15) days from the date such payment became due and payable.
10.01.2 Breach of Representations and Warranties. Any
representation or warranty made by the Grantor herein or any statement or
representation made in any of the Loan Documents shall prove to have been
incorrect in any material respect when made or shall be breached.
10.01.3 Insurance Provisions. The failure of Grantor to perform
its obligations set forth in Section 8.01 and 8.02.
10.01.4 Receiver; Bankruptcy. If the Grantor (a) applies for, or
consents in writing to, the appointment of a receiver, trustee, or liquidator
for it of the Trust Property, or of all or substantially all of its assets, (b)
files a voluntary petition in bankruptcy or admits in writing its inability to
pay its debts as they become due, (c) makes an assignment for benefit of
creditors, (d) files a petition or an answer seeking a reorganization,
composition, adjustment arrangement with creditors, or takes advantage of any
insolvency law, (e) files an answer admitting the material allegations of a
petition filed against it in any bankruptcy, reorganization, composition,
adjustment, arrangement, or insolvency proceeding, or (f) is dissolved as a
result of an adversary suit or preceding.
10.01.5 Receiver; Bankruptcy (Involuntary). If (a) any execution
or attachment levied against the assets of the Grantor is not set aside,
discharged, or stayed within forty-five (45) days, (b) an order, judgment, or
decree is entered by any court of competent jurisdiction on the application of
a creditor, adjudicating the Grantor a bankrupt or insolvent, or appointing a
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receiver, trustee, or liquidator for the Grantor of all or substantially all of
its assets, or (c) an order of relief is entered against the Grantor pursuant
to any bankruptcy statute or law and such order, judgment, or decree continues
unstayed and in effect for a period of forty-five (45) days.
10.01.6 Assignment of Rents. Any attempted assignment by the
Grantor of the whole or any part of the Rents in contravention of Section 7.07,
which shall not be cured in full within fifteen (15) days after Beneficiary
gives Grantor written notice thereof.
10.01.7 Prohibited Transfer or Encumbrance. Any transfer or
event in violation of Section 7.09, 7.10, or 7.11.
10.01.8 Loss of License. The loss of any franchise agreement,
license or permit necessary for the operation, occupancy, or use of the Trust
Property, if the same is not restored within fifteen (15) days after the loss.
10.01.9 Judgments. Any judgment against the Grantor remains
unpaid, unstayed, undischarged, unbonded or undismissed for a period of
forty-five (45) days following the date on which the judgment becomes final or
any appeal thereof is finally determined.
10.01.10 Other Defaults. The failure of the Grantor to perform
or observe any of its obligations or covenants under this Deed of Trust not
previously specifically referred to in this Article 10, which failure continues
for a period of fifteen (15) days after written notice to Grantor.
10.01.11 Default Under Other Loan Documents. The failure of the
Grantor to perform or observe any of its obligations or covenants in any Loan
Document other than this Deed of Trust, which failure is not remedied within
any applicable grace or cure period specified in such other Loan Document.
10.01.12 Event of Default Under Other Loan Documents. An "Event
of Default" (if so defined) occurs under a Loan Document other than this Deed
of Trust.
10.02 Payment or Performance by Trustees or Beneficiary. Upon the
occurrence of any Default, the Trustees or the Beneficiary may, at their
option, make any payments or take any other actions they deem necessary or
desirable to cure the Default or conserve the Trust Property. The Grantor
shall, upon demand, reimburse the Trustees or the Beneficiary for all sums so
advanced or expenses incurred by them, together with interest at the Default
Interest Rate stated in the Note from the date of advance or payment of the
same; which sums shall be secured by this Deed of Trust. The Trustees or the
Beneficiary may enter upon the Trust Property without prior notice to the
Grantor or judicial process and may take any action to enforce its rights under
this Section 10.02 without liability to the Grantor.
10.03 Possession by Trustees or Beneficiary. Upon the occurrence of an
Event of Default, the Trustees or the Beneficiary may enter upon and take
possession of the Trust Property with notice to the Grantor, but without
judicial process or the appointment of a receiver. The
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<PAGE> 15
Trustee or the Beneficiary may exclude all persons from the Trust Property and
may proceed to operate the Trust Property and receive all Rents. The Trustees
or the Beneficiary and the Trustees shall have the right as agent for the
Grantor to operate the Trust Property and carry on the Business of the Grantor,
either in the name of the Grantor or otherwise. Neither the Trustees nor the
Beneficiary shall be liable to the Grantor for taking possession of the Trust
Property, as aforesaid, nor shall they be required to make repairs or
replacements, and they shall be liable to account only for Rents actually
received by them. All Rents collected by the Trustees or the Beneficiary
shall be applied (a) first, to pay all expenses incurred in taking possession
of the Trust Property, (b) second, to pay costs and expenses to operate the
Trust Property and/or to comply with the terms of the Loan Documents, including
reasonable attorney's fees, (c) third, to pay all sums secured by the Loan
Documents in the order of priority selected by Beneficiary, and (d) fourth,
with the balance, if any, to the Grantor or such other person as may be
entitled thereto. Neither the assignment of Rents and Leases hereunder nor any
other assignment of Leases shall impose upon Trustees or Beneficiary any
liability to perform Grantor's obligations under any Lease.
10.04 Acceleration of the Note. Upon the Event of Default, Beneficiary
may, at its option and by written notice to the Grantor, declare the entire
balance of the Note and all other amounts due under the Loan Documents,
immediately due and payable. Acceleration of maturity, once claimed by the
Beneficiary, may at the option of the Beneficiary, be rescinded by written
acknowledgment to that effect by the Beneficiary, but the tender and acceptance
of partial payments alone shall not in any way affect or rescind such
acceleration of maturity.
10.05 Collection of Rents. Upon the occurrence of an Event of Default
and the failure of the Grantor to cure the same within any notice and cure
periods set forth herein, and upon written demand by the Beneficiary to the
Tenants, all Rents shall be payable directly to the Beneficiary. Any Tenant
may rely upon such demand by Beneficiary pursuant to this Section 10.04 and
Grantor hereby consents to such payment of Rents to Beneficiary.
10.06 Power of Sale and Asset to a Decree. The Grantor assents to the
passage of a decree for the sale of the Trust Property upon the occurrence of
an Event of Default, by any court having jurisdiction and the grantor
authorizes and empowers the Trustees, upon the occurrence of an Event of
Default, to sell the Grantor's interest in the Trust Property, in accordance
with the Maryland Rules of Procedure or any other applicable law. The Trust
Property or any interest therein may be sold upon such terms and in as many
parcels as the person conducting the sale may, in its sole discretion, elect.
No readvertisement of any sale shall be required if the sale is adjourned by
announcement, at the time and place set therefor, of the date, time, and place
to which the same is to be adjourned.
10.07 Application and Proceeds of Sale. Upon a sale by the Trustees
under Section 10.06, the purchaser shall receive that portion of or interest in
the Trust Property purchased by it free from any claims of the Grantor and
without any liability to see to the application of the purchase money. The net
proceeds from the sale, after deduction of all costs of the sale, shall be
applied (a) first, to pay all expenses incurred in taking possession of the
Trust Property,
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(b) second, to pay costs and expenses to operate the Trust Property, including
attorney's fees, (c) third, to pay all sums secured by or due under the Loan
Documents in the order of priority determined by the Beneficiary, and (d)
fourth, the balance, if any to the Grantor or to other persons entitled
thereto.
10.08 Deficiency of Proceeds. If, after a sale by the Trustees under
Section 10.06, a deficiency exists in the net proceeds of such sale, the
Beneficiary shall be entitled to a deficiency judgment or decree for such
deficiency which shall bear interest at the Default Interest Rate stated in the
Note.
10.09 Trustee's Commission. Upon a sale by the Trustees under Section
10.06 of any portion of or interest in the Trust Property, the Trustees shall
be entitled to a commission equal to the commission allowed trustees for making
sales of property under decrees of the court having equity jurisdiction. In
the event any portion of the Trust Property is advertised for foreclosure sale
and not sold, the Trustees shall be entitled to a commission equal to one-half
(1/2) of the commission provided in case of foreclosure sale. The person
making the sale shall not be required to accept payment of the amounts secured
hereby unless accompanied by all expenses of the proceedings and one-half (1/2)
of the commission.
10.10 Insurance or Condemnation After Deficiency. If the Trust Property
is sold by the Trustees under Section 10.06 prior to receipt of a condemnation
award or payment, the Beneficiary shall receive and apply the proceeds of the
award or payment toward the satisfaction of any deficiency resulting from the
sale, whether or not a deficiency judgment is sought, recovered, or denied.
10.11 Rights of the Beneficiary to Bid. The Beneficiary and/or the
Trustees may bid and become the purchaser at a foreclosure sale under this Deed
of Trust.
10.12 Trustee's Bond. The Grantor waives any right to require the
person authorized to make the sale hereunder to post a bond.
10.13 Appointment of a Receiver. Upon the occurrence of an Event of
Default and the failure of the Grantor to cure the same within any applicable
notice and cure periods set forth herein, the Beneficiary shall be entitled to
the immediate appointment of a receiver for the Trust Property, without regard
to the value of the Trust Property or the solvency of any person liable for
payment of the amounts due under the Loan Documents.
10.14 Remedies Cumulative. All rights, powers, and remedies of the
Beneficiary or the Trustees provided for in the Loan Documents are cumulative
and concurrent and shall be in addition to and not exclusive of any appropriate
legal or equitable remedy provided by law or contract. Exercise of any right,
power, or remedy shall not preclude the simultaneous or subsequent exercise of
any other by the Beneficiary or the Trustees.
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<PAGE> 17
10.15 Consent to Jurisdiction and Venue. The Grantor consents to be
sued in any jurisdiction where any of the Trust Property is located.
10.16 Rights Under the Uniform Commercial Code. Upon the occurrence of
an Event of Default, the Grantor shall assemble and make available to the
Beneficiary and the Trustees those portions of the Trust Property which consist
of personal property at a place to be designated by the Trustees, and the
Beneficiary and the Trustees may exercise all the rights and remedies of a
secured party under the Uniform Commercial Code. Any notices required by the
Uniform Commercial Code shall be deemed reasonable if mailed certified mail,
return receipt requested, postage prepaid, by the Beneficiary or the Trustees
to the Grantor. Disposition of the Trust Property shall be deemed commercially
reasonable if made pursuant to a public offering advertised at least twice in a
newspaper of general circulation in the County (or Baltimore City) where the
Trust Property is located.
10.17 Right to Determine Which Leases Survive. If disclosed in the
advertisement of sale, a sale by the Trustees may be made subject to one or
more Leases of the Trust Property.
SECTION 11. MISCELLANEOUS
11.01 Waivers. No term of any Loan Document shall be deemed waived
unless the waiver shall be in writing and signed by the parties making the
waiver. Any failure by the Beneficiary or the Trustees to insist upon the
Grantor's strict performance of any of the terms of the Loan Documents shall
not be deemed or construed as a waiver of those or any other terms. Any delay
in exercising or enforcing any rights with respect to a Default or an Event of
Default shall not bar the Beneficiary or the Trustees from exercising any
rights under the Loan Documents, or at law or in equity.
11.02 Consents.
11.02.1 The Beneficiary may (a) release any person liable under
the Loan Documents, (b) release any part of the security, (c) extend the time
of payment of the Loan, and/or (d) modify the terms of the Loan Documents,
regardless of consideration and without notice to or consent by the holder of
any subordinate lien on the Trust Property. No release, extension or
modification of the security held under the Loan Documents shall impair or
affect the lien of this Deed of Trust or the priority of such lien over any
subordinate lien.
11.02.2 Regardless of whether a person has been given notice or
has given its prior consent, it shall not be relieved of any obligation under
any Loan Documents by reason of (a) the failure of the Beneficiary, the
Trustees, or any other person to take any action, foreclose, or otherwise
enforce any provision of the Loan Documents, (b) the release of any other
person liable under any Loan Document, (c) the release of any portion of the
security under the Loan Documents, or (d) any agreement or stipulation between
any subsequent owners of the Trust Property and Beneficiary extending the time
of payment or modifying the terms of any Loan Document.
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<PAGE> 18
11.03 Headings. All section headings are for convenience only and shall
not be interpreted to enlarge or restrict the provisions of this Deed of Trust.
11.04 Notices. All notices shall be in writing and, unless otherwise
specified in a written notice, shall be sent to the respective addresses of the
parties as follows:
Beneficiary: Mercantile-Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21201
Attention: Philip G. Enstice
Trustees: Philip G. Enstice
Mercantile-Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21201
Grantor: Glenwood Associates Limited Partnership
c/o Trusted Information Systems, Inc.
P.O. Box 45
Glenwood, Maryland 21738
Attention: Stephen T. Walker
A notice may be hand-delivered, sent by any overnight delivery service or
mailed, postage prepaid, by first class, registered or certified mail. Any
notice sent by mail shall be deemed to have been received on the second
business day following the date of mailing.
11.05 Binding Effect. No transfer of any portion of the Trust Property
or any interest thereon shall relieve any transferor of its obligations under
the Loan Documents. No transferor of any obligation under any Loan Document
shall be relieved of its obligations by any modification of any Loan Document
subsequent to the transfer.
11.06 Amendment. This Deed of Trust may not be modified except in
writing signed by (a) the Beneficiary, (b) the Trustees, and (b) Grantor.
11.07 Severability. In the event any provision of this Deed of Trust
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
11.08 Notice from Governmental Authorities Affecting The Trust Property.
Any notice from any governmental or quasi-governmental authority or corporation
with respect to the Trust Property sent to or known by the Grantor shall be
promptly transmitted to the Beneficiary and the Trustees.
11.09 Applicable Law. All Loan Documents shall be governed by the Laws
of the State of Maryland.
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11.10 Time of the Essence. Time is of the essence with respect to the
Loan Documents.
11.11 Effect of Payments. Any payment or other performance made in
accordance with the Loan Documents by any person other than Grantor shall not
entitle such person to any right of subrogation under the Loan Documents,
unless expressly consented to in writing by the Beneficiary.
11.12 Word Forms. The use of any gender, tense, or conjugation herein
shall be applicable to all genders, tenses and conjugations. The use of the
singular shall include the plural and the plural shall include the singular.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the Grantor
has executed this Deed of Trust and Security Agreement as of the day and year
first above written.
WITNESS: THE GRANTORS:
GLENWOOD ASSOCIATES LIMITED
PARTNERSHIP
/s/ /s/ STEPHEN T. WALKER (SEAL)
- --------------------------------- ------------------------------
Stephen T. Walker,
General Partner
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<PAGE> 20
STATE OF MARYLAND, CITY/COUNTY OF PRINCE GEORGE'S, to wit:
I HEREBY CERTIFY that on this 6th day of December, 1993, before
me, the undersigned Notary Public of the State of Maryland, personally
appeared Stephen T. Walker, General Partner of Glenwood Associates Limited
Partnership, known to me (or satisfactorily proved) to be the person who
executed the foregoing Deed of Trust and Security Agreement and acknowledged
that he executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/
----------------------------------
Notary Public
My Commission Expires: 1/1/97
------------
I hereby certify that this document was prepared by or under the
supervision of an attorney admitted to practice before the Court of Appeals of
the State of Maryland.
Date: /s/ KEVIN J. DAVIDSON
---------------------- ---------------------------------
Kevin J. Davidson, Esquire
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<PAGE> 21
EXHIBIT "A"
BEGINNING for the same at an iron pipe heretofore set at 285.00 feet on the
fifth or North 1-1/4 degrees West 39-1/4 perches line of that land, the land
herein described being a part thereof, which by deed dated December 13, 1919
and recorded among the Land Records of Howard County in Liber No. 108, Folio
543, etc., was granted and conveyed by John H. Elliott, Trustee to Roland C.
Pindell, thence running with a part of the said fifth line, as now surveyed.
(1) North 62 degrees 50' East 107.82 feet to an iron pipe heretofore
set at the end of the third or South 01 degrees West 10-2/5 perches line of the
secondly described parcel of land which by deed dated August 22, 1922 and
recorded among the said Land Records in Liber No. 155, Folio 489, etc., was
granted and conveyed by Roland C. Pindell and Nellie W. Pindell, his wife, to
Richard S. Pindell, and running with the fourth and fifth lines of the said
conveyance.
(2) South 73 degrees 20' East 307.74 to an iron pipe heretofore set.
(3) South 16 degrees 40' West 73.26 feet to an iron pipe heretofore
set at the end of the first or North 70 degrees 52' West 181.54 foot line of
that land which by deed dated July 25, 1967 and recorded among the said Land
Records in Liber No. 475, Folio 390, etc., was granted and conveyed by Henry
Marshall Clark, et al., to William W. Pindell and Elizabeth T. Pindell, his
wife thence running reversely with the first line of the said conveyance to
William W. Pindell and wife.
(4) South 70 degrees 20' East 181.54 feet to a concrete monument
heretofore set on the Western margin of the sixty foot wide right-of-way of
Maryland State Route No. 97., thence running with the said road margin.
(5) South 21 degrees 51' West 116.93 feet to an iron pipe heretofore
set at the end of the second or South 72 degrees 12' East 436.84 foot line of a
1.192 acre parcel heretofore surveyed, thence leaving the said road and running
reversely with the said fourth line.
(6) North 72 degrees 12' West 436.34 feet to the point of the
beginning, containing 1.774 acres of land, more or less.
<PAGE> 1
EXHIBIT 10.22.3
December 1, 1993 $310,000
NOTE
FOR VALUE RECEIVED, the undersigned, GLENWOOD ASSOCIATES LIMITED
PARTNERSHIP (the "Borrower"), promises to pay to the order of Mercantile-Safe
Deposit and Trust Company (the "Bank") at the Bank's offices at 2 Hopkins
Plaza, Baltimore, Maryland 21201, at such other place as the holder of this
Note may from time to time designate, the principal sum of Three Hundred Ten
Thousand Dollars ($310,000.00), or such amount as may be advanced from time to
time, together with interest thereon at the rate hereinafter provided and any
and all other sums which may be owing to the holder of this Note by the
Borrower, according to the repayment schedule set forth in Section 2 hereof,
but in no event later than December 1, 2008, which is the final and absolute
due date of this Note, or on such earlier date in the event that this Note is
accelerated pursuant to Section 6 hereof. The following items shall apply to
this note.
1. Interest Rate. Until all sums due and owing hereunder have been
paid in full, interest shall accrue on the unpaid balance hereunder at a
floating rate, adjusted daily, which shall equal that rate obtained by adding
one percentage point (1%) to the prime rate of interest of the Bank in effect
from time to time. The prime rate of interest as used herein refers to that
interest rate set by the Bank from time to time as an interest rate base for
borrowings. The prime rate is one of several interest rate bases used by the
Bank. The Bank lends at rates above and below the prime rate.
2. Repayment. Interest accrued on the unpaid balance hereof shall be
paid monthly beginning on January 1, 1994 and continuing on the first day of
each succeeding calendar month until all sums due hereunder have been paid in
full. The Borrower shall repay the principal balance hereof in 180 equal
monthly installments of One Thousand Seven Hundred Twenty-Two Dollars and
Twenty-Two Cents ($1,722.22) commencing on January 1, 1994, and continuing on
the first day of each subsequent month until the final and absolute due date of
this Note. The entire unpaid principal balance, and any other sums due
hereunder, shall be paid in full on December 1, 2008.
3. Calculation of Interest. Interest shall be calculated on the
basis of a three hundred sixty (360) days per year factor applied to the actual
days on which there exists an unpaid principal balance.
4. Application of Payments. All payments made hereunder shall be
applied first to late penalties or other sums owing the holder, next to accrued
interest, and then to principal, or in such other order of application as the
holder may elect.
5. Optional Prepayment. The Borrower shall have the option of
prepaying all or any portion of the amounts due hereunder at any time without
penalty.
<PAGE> 2
6. Acceleration Upon Default. At any time after a default in the
payment when due of any installment of interest or of principal and interest,
or in the payment of any other sums due hereunder, unless such payment is made
within fifteen (15) days from the date such payment became due and payable, or
upon a default in the performance of any of the covenants, conditions or terms
of the Deed of Trust and Security Agreement executed by the Borrower in favor
of the Bank of even date herewith (the "Deed of Trust") or of any of the Loan
Documents (as defined in the Deed of Trust), the Bank may, in the Bank's sole
and absolute discretion and without notice or demand (unless otherwise
specifically required under an applicable document), declare the entire unpaid
balance of principal plus accrued interest and any other sums due hereunder
immediately due and payable.
7. Late Payment Penalty. Should any payment of interest, or
principal and interest, due hereunder be received by the holder of this Note
more than fifteen (15) days after its due date, the Borrower shall pay a late
payment penalty equal to five percent (5%) of the amount overdue for each month
or portion of a month until paid, beginning with the due date of the late
payment.
8. Default Interest Rate. Upon a default in the payment of any
amount due under this Note, or in the performance of the covenants, conditions,
or terms of the Deed of Trust or other Loan Documents, and after the expiration
of the specifically provided grace period, and unless and until cured, the Bank
may raise the rate of interest accruing on the disbursed unpaid principal
balance by two (2) percentage points above the rate of interest otherwise
applicable, independent of whether Bank elects to accelerate the unpaid
principal balance as a result of such default.
9. Confession of Judgment; Jurisdiction and Venue. Upon any default
hereunder and after the expiration of any specifically provided grace or cured
period, the Borrower authorizes any attorney admitted to practice before any
court of record in the United States to confess judgment on behalf of the
Borrower against the Borrower in the full amount due on this Note plus
attorneys' fees of fifteen percent (15%) of such amount. In any action brought
on this Note, whether a confessed judgment proceeding or otherwise, the
Borrower hereby consents to the exercise of personal jurisdiction over it by
any state or federal court located in the State of Maryland, and agrees that
venue shall be proper in any County of the State of Maryland or in Baltimore
City, in addition to any other court where jurisdiction and venue may be
proper. The Borrower waives the benefit of any and every statute, ordinance,
or rule of court which may be lawfully waived conferring upon the Borrower any
right or privilege of exemption, stay of execution, or supplementary
proceedings, or other relief from the enforcement or immediate enforcement of a
judgment or related proceedings on a judgment.
10. Interest Rate After Judgment. If judgment is entered against the
Borrower on this Note, the amount of the judgment entered (which may include
principal, interest, default interest,
-2-
<PAGE> 3
late charges, fees and costs) shall bear interest at the highest rate
authorized under this Note as of the date of entry of the judgment.
11. Expenses of Collection. Should this Note be referred to an
attorney for collection, whether or not judgment has been confessed or suit has
been filed, the Borrower shall pay all of the Bank's actual costs, fees
(including actual attorney's fees) and expenses resulting from such referral.
These costs shall include the actual expense of counsel incurred at any time by
the Bank in enforcing its rights hereunder.
12. Waiver of Protest; Waiver of Jury Trial. The Borrower, and all
parties to this Note, whether maker, indorser, or guarantor, waive presentment,
notice of dishonor and protest. The Borrower, and all parties to this Note,
whether maker, endorser, or guarantor, waive any right to a jury trial in any
action brought at any time or from time to time on this Note or any other Loan
Document.
13. Extensions of Maturity. All parties to this Note, whether maker,
indorser, or guarantor, agree that the maturity of this Note, or any payment
due hereunder, may be extended at any time or from time to time without
releasing, discharging, or affecting the liability of such party.
14. Commercial Loan. The Borrower warrants that the Note is the
result of a commercial loan transaction.
15. Security. This Note is secured as provided in the Deed of Trust
and Loan Documents.
16. Waiver. No waiver of any power, privilege, right or remedy
(hereinafter collectively referred to as "Rights") hereunder shall be effective
unless in writing. No delay on the part of the Bank in exercising any Rights
hereunder, or under any other instrument executed by the Borrower or any other
party in connection with the transaction (including the Loan Documents) shall
operate as a waiver thereof, and no single or partial exercise of any such
Rights (including acceptance of late payments by the Bank) shall preclude other
or further exercise thereof, or the exercise of any other Rights. Waiver by
the Bank of any default by the Borrower, or any other party, shall not
constitute a waiver of any subsequent defaults, but shall be restricted to the
default so waived. All Rights of the Bank hereunder are irrevocable and
cumulative, and not alternative or exclusive, and shall be in addition to all
Rights given hereunder or in or by any other instrument or any laws now
existing or hereafter enacted.
17. Notices. Any notice required or permitted hereunder, without
implying the obligation to provide any such notices, shall be in writing and
made by hand delivery or express mail or other overnight delivery service or by
registered or certified mail to the parties at the appropriate addresses set
forth below or to such other addresses set forth below or to such other
addresses as may be hereafter specified by written notice by the Bank or the
Borrower and shall
-3-
<PAGE> 4
be considered given as of the date of hand delivery or as of one (1) day after
the date of mailing by express mail or other overnight delivery service, as the
case may be, independent of the date of mail delivery or whether delivery is in
fact made (provided that in the event that written notice is sent by some other
means it shall be presumed to have been received within two (2) days after
sending) which date shall be the effective date.
If to the Bank:
--------------
Mercantile-Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21201
Attention: Philip G. Enstice
With a copy to:
Christopher J. Fritz, Esquire
Gallagher, Evelius & Jones
Park Charles - Suite 400
218 North Charles Street
Baltimore, Maryland 21201
If to the Borrower:
------------------
Glenwood Associates Limited Partnership
c/o Trusted Information Systems, Inc.
P.O. Box 45
Glenwood, Maryland 21738
Attention: Stephen T. Walker
With a copy to:
Paul M. Nussbaum, Esquire
Reichelt, Nussbaum, Brown, Dukes & LaPlaca
P.O. Box 627
Greenbelt, Maryland 20770
Either party may change the address to which notices are to be sent by a
writing directed to the other party in the manner aforesaid.
18. Choice of Law. This Note shall be governed, construed and
enforced in accordance with the law of the State of Maryland.
-4-
<PAGE> 5
19. Invalidity of Any Part. If any provision or part of any provision
of this Note shall for any reason be held invalid, illegal, or unenforceable in
any respect, such invalidity, illegality, or unenforceability shall not affect
any other provisions of the Note and this Note shall be construed as if such
invalid, illegal, or unenforceable provision or part thereof had never been
contained herein, but only to the extent of its invalidity, illegality, or
unenforceability.
20. Assignment. This Note may be assigned by the Bank at any time
without the approval of the Borrower.
21. Cross-Default. Any default or Event of Default by the Borrower or
by Trusted Information Systems, Inc. in connection with any other indebtedness
or obligation to the Bank, whether now owing or incurred in the future, shall
constitute a default hereunder.
WITNESS: THE BORROWER:
GLENWOOD ASSOCIATES
LIMITED PARTNERSHIP,
a Maryland limited partnership
/s/ By: /s/ STEPHEN T. WALKER (SEAL)
- ---------------------------- -------------------------------
Stephen T. Walker
General Partner
By: (SEAL)
- ---------------------------- -------------------------------
Martha A. Branstad
Limited Partner
By: (SEAL)
- ---------------------------- -------------------------------
Stephen D. Crocker
Limited Partner
-5-
<PAGE> 1
EXHIBIT 11.1
TRUSTED INFORMATION SYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION> SIX MONTHS ENDED
YEAR ENDED JUNE 30,
------------------------------------------------------------ ----------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Outstanding 7,696,632 7,553,029 7,502,589 7,507,748 7,333,676 7,516,079 7,244,320
Dilutive effects of Stock Options 151,987 684,903 367,841
Issuance of Cheap Stock (1) 866,176 866,176 866,176 866,176 866,176 866,176 866,176
------------------------------------------------------------ ----------------------
Weighted average shares outstanding 8,562,808 8,419,205 8,368,765 8,525,911 8,884,755 8,750,096 8,110,496
============================================================ ======================
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common equivalent shares issued during the twelve month period
prior to the effective date of the Company's Registration Statement
at exercise prices below the assumed initial public offering price of
$12.00 have been included in the calculation of cheap stock using the
treasury method, as if they were outstanding for all periods presented,
even if antidilutive.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and to the
use of our report dated April 29, 1996 (except Note 10, as to which the date is
September , 1996), in Amendment No. 2 to the Registration Statement (Form S-1
No. 333-5419) and related Prospectus of Trusted Information Systems, Inc. for
the registration of 2,900,000 shares of its common stock.
ERNST & YOUNG LLP
Vienna, Virginia
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the restatement of the capital accounts for the reverse stock split as described
in Note 10 to the Consolidated Financial Statements.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Vienna, Virginia
August 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 29,
1995 AND THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTH PERIOD ENDED JUNE 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-29-1995 DEC-29-1996
<PERIOD-START> DEC-31-1994 DEC-30-1995
<PERIOD-END> DEC-29-1995 JUN-28-1996
<CASH> 53,859 177,686
<SECURITIES> 0 5,475,000
<RECEIVABLES> 4,348,536 4,331,357
<ALLOWANCES> 44,000 79,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,444,641 12,787,329
<PP&E> 5,032,730 7,577,185
<DEPRECIATION> 1,317,640 1,480,358
<TOTAL-ASSETS> 10,221,803 19,424,484
<CURRENT-LIABILITIES> 6,234,524 11,509,401
<BONDS> 1,580,000 2,825,535
0 0
0 0
<COMMON> 69,336 75,352
<OTHER-SE> 2,337,943 5,014,146
<TOTAL-LIABILITY-AND-EQUITY> 10,221,803 19,424,484
<SALES> 18,090,087 9,617,695
<TOTAL-REVENUES> 18,090,087 9,617,695
<CGS> 10,864,947 5,391,910
<TOTAL-COSTS> 10,864,947 5,391,910
<OTHER-EXPENSES> 4,872,438 5,684,400
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 158,778 162,910
<INCOME-PRETAX> 2,244,200 (1,607,810)
<INCOME-TAX> 900,137 (687,593)
<INCOME-CONTINUING> 1,344,063 (920,217)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,344,063 (920,217)
<EPS-PRIMARY> .15 (.11)
<EPS-DILUTED> .15 (.11)
</TABLE>
